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19 adds the ‘Spotify equity issue’ to its big Sony Music legal battle

By | Published on Thursday 25 June 2015

American Idol

While America’s real pop idol took on Apple last weekend, the telly-show-made Idols are taking on the major record companies and tackling many of ongoing bones of contention between artists and labels.

And if this case ever gets to court, it could be one of the most significant music industry legal battles in years. Forget about Pharrell ripping off other people’s pop songs, this one could impact on every major label deal in the filing cabinet, in the US and possibly beyond. Which would be fun. Yes, it’s the ongoing 19 v Sony case, pulling apart the record deals of various ‘American Idol’ finalists who were signed to Sony Music but managed by ‘Idol’ format owners 19.

As previously reported, there are an assortment of gripes in the lawsuits filed by 19 on behalf of the former Idols it still represents, most of them relating to common areas where artists and labels fall out. That includes the fees Sony charges as money moves around the company, what happened to the cash Sony received from its LimeWire settlement, and the big post-iTunes squabble: whether digital income should be treated as a ‘sale’ or a ‘licence’, artists usually being due a much higher cut of the loot on the latter than the former.

In the latest development, 19 has amended its lawsuit to cover another tricky topic, the equity stakes Sony – and other labels – have in various streaming music start-ups, but mainly Spotify, as that’s the shareholding that could be worth millions if and when the streaming firm floats. According to The Hollywood Reporter, the revised 19 lawsuit expresses the concern of many in the artist and management community, that Sony took the equity stake, which it (arguably) doesn’t have to share with its artists, in return for accepting less favourable terms on royalty payments, a cut of which does go to talent.

And 19 isn’t just accusing its direct opponent here. Rather: “Each of the major record labels also own an interest in Spotify. On information and belief, those other record labels have engaged in the same self-dealing as Sony with respect to the diversion of payments to them, and the below market streaming royalty rates to artists. Together, and individually, Sony and the other major record labels therefore have significant power to exert control over Spotify in order to not only dictate how revenue will be paid, but wrongfully and in bad faith divert money from royalties that must be shared to other forms of revenue that they can keep for themselves”.

The majors are usually cagey about the size of their equity stakes in the likes of Spotify, and about what exactly will happen to the profits when those shares are sold down the line. But behind the scenes some label execs argue that the equity stakes do not have a big impact on the revenue share and minimum guarantee arrangements in their big streaming deals, because the value of that equity is totally unknown at the outset (shares in many start-ups could be ultimately worthless) and it could take years to have any opportunity to cash in.

But 19 argues that once a business like Spotify gains momentum – so that those shares do become valuable – companies like Sony have an interest in continuing to give the firm more favourable royalty rates, so to further boost the streaming firm’s growth, in order to maximise valuation at the point of sale. A similar logic would say that the majors wouldn’t really mess too much with Spotify’s freemium-to-premium business model – despite concerns about the number of free users and the low royalties that element pays – because why would you rock the boat this side of an IPO?

Whatever the rights and wrongs, the revision of 19’s lawsuit means yet another of the big talking points in the artist and management community could get discussed in court. And with the same lawyer who won for the Marvin Gaye family in the aforementioned ‘Blurred Lines’ legal battle with Pharrell Williams batting for the Idols so, yes, good times.

Meanwhile, for an explanation of how those streaming deals are structured, check out this CMU trends piece here.