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Free money all round, say Warner and Sony on Spotify IPO payouts

By Chris Cooke and Andy Malt | Published on Friday 5 February 2016

Hey, so Warner Music and Sony Music are going to share any cash they get from selling their shares in Spotify and other streaming services with all their bloody artists. Perhaps they’ve worked out that, in the wider scheme of things, it’s not going to be that much money.

There has been much speculation about Spotify launching its initial public offering for a while now, of course, though recent moves – not least the service’s reported bid to raise another half billion through debt financing – suggests that the company could now float in the next year. And it’s not just going to pretend to float like Deezer. No, it’ll actually go through with the damn thing.

It’s no secret that the major record companies – and, via Merlin, many of the indies – have a stake in Spotify, and other streaming music start-ups, which stem from their original licensing deals with these companies. This equity demand became the norm in label negotiations with digital music start-ups on the basis that – if, for the founders and early backers of said start-ups, the real payday would come when the business was sold – then the record companies should benefit from that first big sale too.

However, the label equity stakes have proven controversial in the wider music community, and especially among artists and managers. Few question the logic employed by the labels in demanding shares from digital start-ups, but there has been much debate over what would happen to the money generated if and when those shares were sold, ie would it be shared with the artists signed to the equity-holding labels?

Technically under the classic record contract, artists are only due a share of income that can be directly attributed to their recordings. Many managers and lawyers suspected that the labels would cite such clauses if artists made a claim for some of that equity money. Or, indeed, any of the other lump sums the labels receive from streaming companies, like set-up fees, unrecouped advances and miscellaneous kickbacks.

Said managers and lawyers argued that, if the labels did go that route – and for some time the majors, in particular, seemed to imply that they would – that would be unfair. Because all those upfront goodies from the streaming services could only be demanded because of the value of the amassed recordings made by all the artists any one record company had ever worked with. Moreover, some speculated that the majors may have agreed to less favourable revenue share and minimum guarantee rates – money that would definitely have to be shared with the artists – in return for better upfront kickbacks – which they could just keep.

This debate has been running for years, and came to a head last year over the so called ‘breakage’ element, that is to say the money advanced to labels by services in any one year which exceeds what the record company is then due based on usage.

Warner Music had introduced a policy early on to share this extra cash with artists, while many indies had signed up to the Fair Digital Deals Declaration via which they promised to “account to artists a good-faith pro-rata share of any revenues and other compensation from digital services that stem from the monetisation of recordings but are not attributed to specific recordings or performances”.

“But what about Universal and Sony?” everyone started to muse, loudly. Loudly enough that both mega-majors subsequently put out statements saying, “Yeah, breakage, we’ll share that, have some breakage cash, have it in a gift-wrapped box”. Or words to that effect. “But what about the equity?” everyone then started to say. “Ah, for God’s sake, we just gave you breakage, will you never be happy?” at least one major label exec mumbled.

Then yesterday, Warner Music announced it would take the lead here once again, in terms of the majors. Midway through the firm’s latest earnings call, CEO Stephen Cooper noted that “streaming is on a trajectory to become our primary source of revenue”, before adding: “While the main form of compensation we receive from streaming services is revenue based on actual streams, there are some services from which we receive additional forms of compensation … in the event that we do receive cash proceeds from the sale of equity stake [in streaming services], we will also share this revenue with our artists”.

He then reminded everyone that his company had a policy of sharing breakage with artists since way back in October 2009. “This policy stems from our desire to build deep and lasting partnerships with our artists”, Cooper concluded. “We strongly believe that aligning our interests with those of our artists is not only good for our artists, but also good for us and the health of the music industry”.

Ah, what a guy! And to be fair, there does seem to be a consensus in the management community that Warner is much more proactive than the other majors in this kind of artist relations. Possibly because – as by far the smallest of the majors – it sees it as a way to compete. Or because Warner – unlike Sony and Universal – has one single shareholder in Access Industries, rather than being ultimately owned by a publicly listed company with lots of investors to placate.

But hold on there everybody, don’t be tarnishing Sony Music with the ‘big evil corporate’ brush, whatever you do. Oh no. It juddered into action overnight, like it had been nudged in the ribs, telling media: “As we have previously shared with our artists and their representatives, net proceeds realised by Sony Music from the monetisation of equity interests that were provided to Sony Music as part of the consideration for a digital license will be shared with our artists on a basis consistent with our breakage policy”.

Which is interesting, given in a legal battle with management firm 19, where the major’s Spotify equity was raised, Sony Music’s lawyers were pretty adamant that the company had no obligation to share anything with artists that wasn’t directly derived from their recordings. Though that isn’t necessarily a change in policy, in that Sony could argue it has no obligation to share such income with artists, but it’s going to do it anyway, because it’s that nice.

Either way, these commitments are all good news for the artist community, and for the labels, who desperately need subscription services to become profitable successful businesses, and who desperately need artists to join them on that journey. Though, as any lawyer will tell you, the devil is in the detail, and not just because the detail is time consuming and lawyers charge by the hour.

The commitments made by the indies, and Warner, and subsequently Sony and, on breakage, Universal, are all good news. Though speak to most artist managers today and rampant confusion remains as to what these commitments actually mean, how payments will be calculated, and when they will be paid. And beyond breakage and equity, what about those mysterious set-up fees?

Which brings you back to bad label/artist communication, NDA culture and the fundamental need for more transparency across the supply chain of music. Of course artists and their reps would like more money. Breakage, brilliant! Equity, yes please!

But actually, most managers would rather have a clear understanding of what deals are being done on what terms; the fact that the label is keeping the majority of the cash may be just a commercial necessity, but not knowing what money is coming in and how it is being shared is the real frustration.

As the UK’s Music Managers Forum recently noted, when new kid on the streaming block Cür Music went live last month, the only information available to artists and managers on the deals the labels had done came from the start-up’s own company filings, not from their business partners within the music industry. Though, that doesn’t mean the MMF isn’t welcoming the latest developments in the streaming deal domain.

Its CEO Annabella Coldrick said last night: “Record companies taking an equity stake in streaming services has become increasingly prevalent and it is essential artists see the value as well. Warner and Sony are demonstrating industry leadership and aligning their interests with artists by committing to share proceeds from the sale of Spotify shares. This is a positive development for the longterm health of the industry. We call upon Universal to follow suit. And see our ‘Dissecting The Digital Dollar’ report for a full exploration of the issues around streaming”.

What, this ‘Dissecting The Digital Dollar’ report? Why not take a read? Maybe the section on the digital pie debate. Yeah, Steve, if you really want to pioneer, be the first major music rights owner with interests in both recordings and songs to declare that the digital pound should be shared a little more equally between the two music rights.

Given contractual conventions means music rights companies usually get to keep the majority of recording revenue – while publishing contracts are tipped in the songwriter’s favour – the major that nevertheless recognises that the current recording/song split in streaming isn’t fair will be the real radical in town.