Navigating the Minefield: Intellectual Property Risks and Regulatory Challenges for Spotify's Business Model

The digital music streaming industry has long been a battleground for intellectual property (IP) disputes, with Spotify at the center of a contentious debate over royalty calculations, regulatory compliance, and the sustainability of its business model. Between 2023 and 2025, the company has faced a series of high-stakes lawsuits and regulatory actions that underscore the fragility of its financial structure and the broader systemic flaws in music rights distribution. While Spotify has secured notable legal victories, these wins mask deeper vulnerabilities that investors should scrutinize.

The MLC Lawsuit: A Strategic Reprieve or a Flawed Precedent?

In January 2025, Spotify dodged a significant financial blow when a U.S. federal judge dismissed a $150 million lawsuit brought by the Mechanical Licensing Collective (MLC). The MLC had accused Spotify of underpaying songwriting royalties by reclassifying its Premium subscription as a "bundled offering" that included audiobook access according to Reuters. The court ruled that the inclusion of audiobooks gave the bundle "more than token value," allowing Spotify to report lower royalty obligations under U.S. copyright law as research shows. This reclassification saved the company an estimated $150 million in 2024 alone according to IPWatchdog.

While this legal victory appears to strengthen Spotify's short-term margins, it also highlights a critical regulatory gap: the lack of clear guidelines for defining "bundled services" in the context of music licensing. According to Bloomberg Law, the ruling "exposes a loophole in the Music Modernization Act that could incentivize other platforms to adopt similar strategies." For investors, this raises concerns about the durability of Spotify's cost-saving measures if regulators or courts later reinterpret the law to close the loophole.

The Eminem Case: Shifting Blame in a Fractured Ecosystem

Spotify's second major legal win in 2025 came in a $40 million lawsuit from Eminem's music publisher, Eight Mile Style LLC. The court ruled that Kobalt Music Group, the royalty collection agency,-not Spotify-was responsible for the unpaid royalties as reported by World Lawyers Forum. This outcome underscores the complexity of the music rights ecosystem, where multiple intermediaries (publishers, labels, collection societies) create opportunities for accountability gaps.

However, this victory is a double-edged sword. As noted by World Lawyers Forum, the case "reveals how Spotify's reliance on third-party partners to manage royalty payments could expose it to reputational and legal risks if those partners fail." Investors should note that while Spotify may avoid direct liability in individual cases, the broader perception of a broken royalty system could fuel regulatory scrutiny or calls for reform.

Regulatory Enforcement and the MLC's Expanding Reach

The MLC's legal actions against Spotify and Pandora are part of a broader enforcement campaign under the Music Modernization Act (MMA), which aims to streamline mechanical licensing and improve royalty transparency according to IPWatchdog. While the MMA was intended to benefit creators, its implementation has created new compliance challenges for platforms. The MLC's aggressive stance-targeting both large and mid-sized streaming services-suggests that regulatory pressure will remain a persistent headwind for Spotify.

According to IPWatchdog, the MLC's enforcement efforts have already led to settlements totaling tens of millions of dollars in 2024. While Spotify has so far avoided such penalties, the company's reliance on legal technicalities to minimize payments could backfire if regulators push for stricter interpretations of the MMA.

The Unseen Risks: Artist Dissatisfaction and Systemic Instability

Despite its legal successes, Spotify continues to face criticism from artists and advocacy groups who argue that the per-stream royalty model is inherently flawed. Even if the company complies with current laws, the perception that it underpays creators could drive regulatory changes or pressure from lawmakers to impose higher royalty rates. For example, proposals to increase mechanical royalty rates in the U.S. and EU have gained traction among politicians aligned with artist unions and independent creators.

Moreover, the MLC's lawsuits and the Eminem case illustrate how Spotify's business model depends on a fragile network of legal precedents and third-party actors. A single regulatory shift-such as a court ruling against the "bundled offering" defense or a mandate for higher royalty rates-could erode the company's profit margins and force a restructuring of its pricing strategy.

Conclusion: A House of Cards?

Spotify's recent legal victories are significant, but they should not be mistaken for long-term immunity. The company's ability to reclassify its services and deflect liability reflects the current state of a fragmented and underregulated IP landscape. However, as the MLC's enforcement actions and artist advocacy gain momentum, the risk of systemic reform grows. For investors, the key question is whether Spotify can adapt its business model to a future where royalty rates are higher, compliance standards are stricter, and the "bundled offering" loophole is closed. Until then, the platform remains exposed to litigation, regulatory penalties, and the reputational costs of being perceived as an adversary to music creators.