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By Anne Steele 

LOS ANGELES -- Luis Ulloa keeps his Spotify account blasting at his Blackbird Pizza Shop, which he opened late last year in a former punk-rock clothing store on Melrose Ave.

The neighborhood native pays the standard $9.99 a month for his account, which he and his employees use to play punk tunes throughout the workday. He's never heard that businesses are supposed to pay licensing fees to play music -- or that Spotify's terms of service specify that the music is for noncommercial use.

"Everybody does it like this," says Mr. Ulloa, who has worked in the restaurant business for 25 years.

Services like Spotify and Apple Music have returned the music business to growth by getting consumers to pay again after years of rampant piracy. But those same services are being used in violation of usage policies in commercial settings like coffee shops and small retail stores at an estimated cost of $2.65 billion each year to artists, labels and publishers, according to a new report from Nielsen Music. The report was commissioned by Soundtrack Your Brand, a former subsidiary of Spotify Technology SA previously known as Spotify Business that sells a music streaming service for businesses.

The findings highlight a complication of the rapid rise of streaming as more people choose to pay for access to vast catalogs of music instead of owning it. They also may point toward a growth opportunity for the music industry -- if the market for music in these businesses can be properly captured.

While large retail chains with big budgets use in-store music providers like Mood Media Corp. (formerly known as Muzak), there are around 21 million smaller businesses globally that use consumer services without authorization, according to the report. It surveyed small and medium businesses across the U.S. and six countries in Europe.

Pandora Media Inc., Sirius XM Holdings Inc. and Soundtrack Your Brand, in which Spotify is still a key investor, offer music-streaming service options for businesses in the U.S. costing around $25 to $35 a month. Still, many businesses are using $9.99-a-month subscriptions to Spotify or Apple Inc.'s Apple Music, whose terms of service offer only personal, noncommercial uses.

As the music industry rebounds from an era of piracy among consumers, the commercial market represents a largely untapped site of future growth, according to Stockholm-based Soundtrack Your Brand, which has been discussing the report's findings with record labels and other rights-holders.

Playing music in businesses or other public settings requires permission from some of those rights-holders, but technology has sometimes gotten ahead of existing licensing mechanisms.

To play music from CDs, radio or live, most businesses in the U.S. are supposed to obtain a license from a performance-rights organization representing songwriters, who are entitled to compensation when music they have composed is played in a public setting. The two biggest such organizations in the U.S., Ascap and BMI, offer "blanket" licenses that pay songwriters and music publishers based on estimates of how often their work gets played in public.

To stream music, a business is supposed to pay for a subscription that includes the right to play it in a public setting; subscription services like Mood Media and Soundtrack Your Brand typically cover such rights. The terms of service on Apple's iTunes Store, for instance, don't permit commercial uses of songs downloaded from the site.

According to the report, which surveyed business owners who operate fewer than 10 physical store locations, around 83% of businesses across the countries surveyed pay for and use a personal music service in their stores. In the U.S., 71% incorrectly believe that is allowed under the services' terms. (Another 10% use Alphabet Inc.'s YouTube to play music in their stores, which is free but is also not authorized for commercial settings.)

A YouTube spokeswoman said this usage "clearly violates" the company's terms of service and it reserves the right to discontinue use of the service when notified.

Though 88% of all small and medium stores play music either daily or almost every day, less than half say they know there is even a difference between playing music for personal consumption and playing background music at a business.

Businesses included in the report ranged from nightclubs to fitness studios to hotels.

Based on the Nielsen study, Soundtrack Your Brand estimates there is some 7% to 8% of global music industry revenue that isn't being captured because of improper use of personal streaming services. With 29.4 million small and medium businesses globally, the total available market could be as much as $12.3 billion, the study suggests.

"This multibillion-dollar opportunity is immense but we're still a long way away from realizing it," says Willard Ahdritz, chief executive of independent music publisher Kobalt Music Group, which Soundtrack Your Brand estimates loses out on $169 million in revenue annually. "We, as an industry, need to do a better job informing these businesses what licenses they need to have and how to obtain them."

Write to Anne Steele at Anne.Steele@wsj.com

(END) Dow Jones Newswires

October 15, 2018 09:14 ET (13:14 GMT)

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