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Spotify Scoops Up Loudr to Strengthen Royalty Payments

Evan Niu, CFA, The Motley Fool

Freshly public Spotify (NYSE: SPOT) doesn't have the greatest track record of accurately paying royalties to music artists. The company has been hit with numerous lawsuits over the years over its payouts, most recently by Wixen Music Publishing in January.

Wixen's suit is seeking $1.6 billion in damages after alleging that Spotify failed to properly compensate artists. The Swedish music streamer is looking to strengthen its ability to properly pay out royalties.

Daniel Ek speaking on stage

Spotify CEO Daniel Ek. Image source: Spotify.

Scooping up Loudr

Spotify announced this morning that it has acquired Loudr, a San Francisco-based start-up that makes it easier for content creators, aggregators, and digital music services to "identify, track and pay royalties to music publishers." The company says the purchase will help it be more transparent and efficient in the music publishing industry.

The news comes approximately a year after Spotify acquired start-up Mediachain, which created an open-source peer-to-peer database (yes, it's technically considered blockchain technology) for registering, identifying, and tracking when their content is being used. Mediachain made it easier for content creators to prove that they own their content, entitling them to royalty payments. Spotify had also, last March, acquired Sonalytic, a young start-up developing music identification technology, which would help both with royalty compliance and with the company's discovery algorithms.

No financial terms were disclosed.

Why artists want Apple to beat Spotify

Spotify's payouts have been contentious within the music industry for years, particularly for independent artists. It's also a department where Spotify lags its most important competitor, Apple (NASDAQ: AAPL). Apple's per-stream royalty rate for 2017 was approximately $0.00783, which is nearly twice Spotify's effective rate of $0.00397, according to estimates from The Trichordist. These are gross estimates before distribution fees. Directionally, Apple's rate increased slightly compared to 2016, while Spotify's declined.

It goes without saying that artists need to be fairly compensated for their work in order for the music industry to thrive. Apple Music's stronger payouts, combined with its model of offering only a paid version with no ad-supported tier, has won the Mac maker many friends in the music industry. For this very reason, many artists would highly prefer that Apple gain market share at Spotify's expense.

Artists supply Spotify with content, and you never want your suppliers hoping your most important rival beats you. Improving royalty payouts to artists should alleviate some of this tension.

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Evan Niu, CFA owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.