Warner & Sony Pledge to Share Potential Rewards of Spotify Sale With Artists

by Nicole Daley, policy intern

Think of your favorite song. Now think of how often you keep change in your pockets. Besides buying a record at retail, on-demand listening used to mean plunking cash money into a special machine called a jukebox. This bulky device, still found at dive bars and themed restaurants, would play your selection based on a combination of letters and numbers. These days, you can dial up music on-demand and on the go from the likes of Spotify, Rhapsody, Google Play, Apple Music and Tidal. These services offer huge catalogs of music, some of them for free, depending on whether a service has an ad-supported tier. This all sounds amazing, but it’s completely reshaped the way artists get paid.

Fully licensed, on-demand streaming (also known as “interactive”) has been around since 2006, when Rhapsody came online. As is often the case with experimental formats, at that point, no one was completely sure how adoption and economics would play out. Some predicted a new golden age for recorded music revenue; this may end up being the case for copyright owners with sizable catalogs (like major labels and some independents), but things look a lot different at the individual creator level. It’s not that the services are not paying out—according to Spotify, they deliver approximately 70 percent of their total earnings to copyright owners, which mirrors the percentages of most download stores—it’s more about deal structures, how pricing works, how it impacts other revenue streams, and how royalties are distributed.

Understanding unattributed income

Of course, bigger labels are able to get additional revenue from services that doesn’t necessarily make it back to the artists. This money comes in the form of large cash advances, monthly minimum guarantees (if actual plays don’t reach the guaranteed minimum, labels pocket the difference) and equity ownership in the service itself. All of the above falls under the “unattributed” or “non-plays related” income category—money that isn’t matched to any particular track—and therefore, individual artists aren’t going to be paid unless either their contract with the label stipulates as such, or there is a company-wide policy for distributing this money.

Most artists and managers don’t have insight into the terms their labels have entered with the services, as the deals are shielded by non-disclosure agreements (NDAs). The lack of transparency between record companies and the artists have resulted in frustration, and even lawsuits. Hundreds of independent labels, under the umbrella of the Worldwide Independent Network (WIN) have committed to a higher standard via the Fair Digital Deals Declaration. Labels who signed on have promised to provide a full accounting of non-plays related income, and a means through which to share these earnings with artists. 

Majors Following Indies’ Lead

Now, it looks like two of the three major labels are taking a similar step. Warner Music Group (WMG) is the first major to promise its artists that WMG will share some of the profit if and when Spotify goes public or is acquired. However, WMG has confirmed that they already have a standard of sharing “digital advances, minimum guarantees and non-recoupable payments with artists since 2009 as part of its internal ‘breakage policy.” WMG CEO Stephen Cooper stated, “In the event we receive cash proceeds from the sale of these equity stakes, we will share this revenue with artists.” Cooper admitted that although the main form of artist compensation is from streams (royalties likely only paid after recoupment), there are other areas where creators can be cut in. WMG suggests that its artists will receive a pro rata share of WMG’s equity stake in Spotify, estimated to be between 2 percent and 3 percent. 

Following WMG’s lead, major Sony Music has decided that it will also share the profits from a sale of their equity stake in Spotify with their artists. A Sony spokesperson stated, “net proceeds realized by Sony from the motorization of equity interests… will be shared with our artists on a basis consistent with our breakage policy.” Sony has a reported 6 percent equity shares in Spotify (though some claim higher); the service has an on-paper valuation of $8 billion. The three majors together reportedly hold approximately 15-20 percent equity in Spotify. Merlin, which aggregates many independents, is believed to own a 1 percent stake.

A Step In The Right Direction?

So is this a big deal, or just another example of music industry trickle-down economics? If Spotify does end up a publicly traded company, what do creators actually stand to gain? What exactly does a share in equity mean for artists who work with labels?

According to both WMG and Sony, if a cash value is obtained from the equity it will be shared with artists on the same scale that revenue from actual usage and digital breakage is calculated. Basically, breakage is a term that refers to any type of service that is unused by the customer; in this case, actual plays royalties that fall below the guaranteed minimum payout from service to labels. We take the “pro rata” condition as meaning that the largest shares of equity payouts will go to artists who have the most streams. However, there has not yet been any clarification as to what percentage of the labels’ equity in the service will be up for grabs in the first place. It seems certain that the majors will not distribute their entire equity profits to the artists, so the new question is how much of that rumored 15-20 percent stake in Spotify will be paid out to artists, and under what basis. 

The possibility of a share in equity is a promising first step toward transparency between record companies and their acts under contract. Of course, there are still other areas where labels make money, such as revenue from the advertising inventory Spotify has also given to the majors. According to the contract between Sony and Spotify, the label could ultimately choose to sell the free ads it had been given for millions and buy more ads at a reduced price thus bringing in even more lucre. Does advertising revenue fall within Sony’s breakage policy? Alternatively, labels can use ad revenue and other promotional placement perks within a service to promote their own acts.  But as we’ve pointed out before, there isn’t any way for this perk to accrue equitably across a pool of artists. In fact, because of the pro-rata nature of Spotify payouts, increased ad-driven listens for other artists as a result of promotional placements could mean lower per-stream rate for you. This is an area where labels’ interests and artists’ interests only align if you happen to be the artist receiving the promotional placement, and that’s true for majors and indies alike.

All perks received as a result of a music licensing deal between a record company and a streaming site should be equitably distributed to the artist, including advertising revenue. Without the creative work of the artist, the record company would not have the goods that the streaming sites require to operate. The accessibility of massive catalogs are a big part of what drives consumers to a service, which leads to huge valuations and eventual cash-outs. Since labels use artists’ recordings to leverage favorable deals on both ends—when including their catalog in a service’s library and when potentially selling—it’s only fair to pay some of that bounty to creators.

The major record companies’ decision to share equity revenue with artists will potentially build trust, which is absolutely necessary to a sustainable music industry that is fair to creators. However, it’s important to understand the limits of how renumerative this could be to artists. Sony and Warner both have huge pools of artists, so the amount of equity that could make it back to an individual artist could not be particularly meaningful. The same debates about royalty distribution apply here—a fear is pro-rata distribution of income on a per-play basis ends up disproportionately rewarding superstars and playlist jackpot winners, while leaving behind those not aiming for mass-market saturation. Plus, what about self-released artists who never got any equity from Spotify to begin with? They don’t stand to benefit at all. Songwriters may have their own sets of concerns. Other criticisms of the full-catalog, on-demand business model have yet to be substantively addressed, so the debate about streaming royalties and revenues is far from over.

Submitted by kevin on February 11, 2016 - 10:47am

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