Music streaming giant Spotify has confidentially filed to go public — moving forward with an unusual plan to list its shares directly on the New York Stock Exchange — even as it faces a new $1.6-billion lawsuit alleging copyright infringement.
Calabasas music publisher Wixen Music Publishing Inc. is suing Spotify, alleging that the company violated its copyright on more than 10,000 songs — including titles by Tom Petty, Neil Young and Stevie Nicks.
A high-stakes lawsuit of this nature could scare potential investors, upset existing investors and tank the company's market value.
Spotify confidentially filed paperwork for an initial public offering with the Securities and Exchange Commission, a person familiar with the matter said Wednesday. Axios first reported news of the filing.
Instead of holding a traditional IPO, Spotify plans to list its shares directly on the New York Stock Exchange without raising capital or issuing new shares. That unusual move would enable Spotify to go public while saving money on the hefty underwriting fees that companies typically pay to investment banks when they hold an IPO.
The company could be worth as much as $20 billion when it goes public, according to recent reports.
Founded in Sweden in 2008, Spotify is one of the world's largest music streaming services. It boasts a catalog of more than 30 million songs, more than 60 million paying users and more than 140 million total users, and it is available in 61 countries.
In 2017, in preparation for going public this year, the company inked multi-year licensing agreements with record labels including Sony, Universal, Warner and Merlin.
But now it needs to deal with Wixen's lawsuit. At the heart of the suit, filed Friday in U.S. District Court in Los Angeles, is Wixen's allegation that Spotify failed to obtain one of two licenses required to distribute music.
Under the Copyright Act, there are two separate copyrights to every recorded song: one for the sound recording (this revenue typically goes to the record label) and one for the musical composition (this revenue typically goes to the publisher and songwriter). The lawsuit alleges that Spotify took a "shortcut" and did not obtain the musical composition copyright for some 10,784 songs published by Wixen.
The lawsuit alleges that Spotify outsourced its copyright responsibility to a third party, Harry Fox Agency, which was "ill-equipped to obtain all the necessary mechanical licenses." It also alleges that Spotify knew the agency "did not possess the infrastructure to obtain the required mechanical licenses," that it knew it didn't hold the licenses required to stream certain songs, and that it barreled ahead anyway.
Spotify did not respond to a request for comment.
Music licensing is notoriously complex, with each song having multiple rights holders who can be difficult to identify and locate. Unlike performance rights for musical compositions, which are typically administered through a handful of performing rights organizations, mechanical rights are not centrally administered and could belong to one of thousands of independent music publishers.
Wixen handles titles by Stevie Nicks, Neil Young, Tom Petty, the Doors, and Weezer's Rivers Cuomo, among others. In its lawsuit, it said its songs have been downloaded or streamed billions of times through Spotify, and that it received no revenue for that.
"Spotify has built a billion dollar business on the backs of songwriters and publishers whose music Spotify is using, in many cases without obtaining and paying for the necessary licenses," the lawsuit says. "Spotify brazenly disregards United States copyright law and has committed willful, ongoing copyright infringement."
Wixen demands injunctive relief, as well as payment of $150,000 per song whose copyright it says Spotify infringed, or at least $1.6 billion.
In May, Spotify paid $43.4 million to settle a class-action lawsuit filed by musicians Melissa Ferrick and David Lowery, who accused the digital music service of streaming their songs without a license. The settlement has yet to be finalized; if it goes through, the $43.4 million will go into a fund to compensate rights holders for past infringement.
In its own lawsuit, Wixen described the 2017 settlement as "grossly insufficient."
As digital downloads and streaming have increased and album sales have plummeted, services such as Spotify have found themselves at the heart of a debate about how musical artists should be compensated.
In 2014 Taylor Swift pulled her music from Spotify, taking umbrage with the fact that her music was offered free on the service. (Spotify offers paid subscriptions and an ad-supported version that's free of charge.)
"I think there should be an inherent value placed on art," Swift told Time at the time. "I didn't see that happening, perception-wise, when I put my music on Spotify. Everybody's complaining about how music sales are shrinking, but nobody's changing the way they're doing things. They keep running towards streaming, which is, for the most part, what has been shrinking the numbers of paid album sales."
Swift made her music available on Spotify again last year.