Inside Music Media

This time Spotify which is the new music radio to listeners under 40 is being sued by a listener who alleges Spotify’s popular playlists are deceptive.

The company claims Spotify users forfeited their right to sue them when they signed up.
In November, a class-action lawsuit (Capolongo v. Spotify USA Inc.) was filed in Manhattan federal court, alleging that Spotify’s "Discovery Mode" is a modern form of payola that deceives paying subscribers.

Between the lines

Plaintiffs argue they pay $11.99/month for "personalized" recommendations they believe are neutral -- instead, they claim the algorithm is "quietly driven" by financial deals.
In Discovery Mode artists and labels agree to take a lower royalty rate (30% less) in exchange for Spotify’s algorithm prioritizing their tracks in "Radio" and "Autoplay" feeds.
Spotify is accused of marketing these feeds as "made for you," while failing to explicitly label which individual tracks have been "boosted" via royalty cuts.
By comparison, radio payola may have been deceptive but because listeners were not charged as monthly Spotify subscribers are, payola was an issue of fairness and control rather than consumer damage.
Paying radio jocks for airplay is illegal under the Communications Act of 1934 and FCC rules because the airwaves are public.
While radio faced massive scandals (most notably in the 1950s and 2000s), those scandals resulted in fines and "consent decrees" but rarely fundamentally changed the industry's reliance on major label influence.
The Internet Loophole: Streaming services are private platforms and do not fall under FCC jurisdiction.
Current FTC "Endorsement Guides" generally require disclosure for "sponsored" content, but "Discovery Mode" operates as a royalty discount rather than a direct cash payment, creating a legal gray area.
Lead plaintiff Genevieve Capolongo argues that unlike free radio, Spotify "charges listeners for the privilege of being deceived," violating state consumer protection laws.

The court case

Consent is a contract -- Spotify’s primary legal shield is its Terms of Service, which include a mandatory arbitration clause and a class-action waiver.
The Waiver Defense -- Spotify’s lawyers argue that by signing up, users waived their right to sue in court, meaning the case should be moved to private, individual arbitration where high-stakes "class" rulings are impossible.
Operational Denial -- Spotify claims Discovery Mode is not used in "flagship" playlists like Discover Weekly or the AI DJ, and that it actually helps independent artists gain reach without upfront marketing budgets.
Disclosure Defense -- The company maintains it already discloses that "commercial considerations may influence recommendations" within its app and website.

What it means

Spotify risks credibility perhaps even more so than when radio faced payola scandals.

The music industry which is cringing at the unknown repercussions from AI-infused artists will have to fight authenticity issues which are very important to today’s younger music lovers.

The lawsuit could set a bad precedent -- The suit seeks to represent over 100 members with damages exceeding $5 million so far.

A judge must decide if the class-action waiver is enforceable – if so, the lawsuit will likely be dismantled into individual arbitrations, effectively ending the threat of a massive payout.

The bottom line: Payola allegations are another way Spotify has become the new hit radio but this time for all the wrong reasons.

Jerry Del Colliano is a professor at NYU Steinhardt Department of Music and Performing Arts Professions Music Business Program. His background includes Clinical Professor of Music Industry at the University of Southern California, TV, radio, program management, publishing and digital media.

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Motivation & Inspiration to Start the Day (free to all)

What does “superfandom” mean? – Larry Miller from the music business program at NYU Steinhardt and the Sony Audio Institute focuses on the next big thing – features Mag Rodriguez, founder of EVEN, one of the leading platforms of superfan engagement and MIDIA Olivia Dean’s research – Listen here.

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The financiers who bought the radio industry and drove it into bankruptcy with little prospect for a turnaround are showing what is likely next by a change in strategy that is beginning to emerge in their other investments.

Shutting down companies – taking the loss, getting whatever they can but exiting businesses that cannot be salvaged effectively handing their investments back to creditors.
Transformco is effectively exiting the physical Sears retail business, having drastically reduced the number of stores from hundreds to just a handful (around 5) by late 2025, focusing instead on redeveloping and selling off the valuable real estate assets.
Rite-Aid has closed all its stores and is liquidating instead of running them.
The largest provider of portable sanitation systems in the U.S. -- United Site Services -- filed for bankruptcy with a plan that will wipe out Platinum Equity’s ownership and transfer control to lenders — effectively PE walking away from equity stakes.
These cases are technically Chapter 11 restructurings as they have been in the past for failing radio companies, but they include significant liquidation and store shutdown components that amount to sponsors walking away from parts/all of the business: Claire’s, At Home, Party City, Hooters, Instant Brands.
American Freight — Controlled by Franchise Group’s PE lenders, the brand was liquidated outright, signaling a decision to shut down rather than operate post-bankruptcy. Since then it has reopened under a new entity, AF Newco I.
Red Lobster — PE sponsor allowed bankruptcy, mass closures, and loss of control, effectively walking away from the investment.

What it means

Radio groups some of whom have been through bankruptcy and some who are soon to file are open to PE-owned groups walking away from a losing investment that they can no longer operate.
Many are already selling assets in a whatever-they-can-get manner with little regard to how it effects their companies.
Beasley is among the most vulnerable as its prospects are dim and it wouldn’t take much for them to lose their entire company – they have already sold markets off including Naples, their headquarters.
Cumulus is headed in the wrong direction – their creditors could take their losses, run and leave the company exposed.
PE investors see no way out of a linear industry that is failing to compete in a digital world – a major change from when they overpaid for station assets.
Until now, kicking the can down the road (securing financing with higher interest rates and delayed repayment dates) has been an option – now the money has dried up and the penalty fees are too high to handle.
A triggering event such as a recession or worse could set off a multiple move to walk away from a money losing business.
One exception: Locally owned radio stations with little debt usually in smaller markets but they too will be negatively affected by a move by investors to abandon their radio investments.

The bottom line: Private equity is now walking away when leverage stops working.

Email me here.

Upgrade to an annual subscription and save $80.88 here.

Motivation & Inspiration to Start the Day (free to all)

What does “superfandom” mean? – Larry Miller from the music business program at NYU Steinhardt and the Sony Audio Institute focuses on the next big thing. One of my students, Mariel Darling interviews Mag Rodriguez, founder of EVEN, one of the leading platforms of superfan engagement. Plus, MIDIA researcher Olivia Dean’s research – Listen here.

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The Return of Payola

Private Equity on the Run

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