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Sony Music on Spotify equity issue: no obligation to ensure “greatest yields” for artists

By | Published on Thursday 9 July 2015

Sony Music

When Sony Music’s original American contract with Spotify leaked in May, all eyes fell on the big advances paid by the streaming service to the major.

The big upfront payments are recoupable for Spotify, so that per-play royalties are deducted from the advance. If all the per-play royalties due in any one year come to less than the advance already paid, Sony gets to pocket the difference. But does the record company share that extra cash – often referred to as ‘breakage’ – with its artists?

Well, that time around Sony, and subsequently Universal, was quick to come to the table in consolatory mood shouting “of course we share breakage with our artists, hey artists, have some breakage, never seen it on your royalty statement, don’t worry, we’ve got your back, here, have some breakage, have all this breakage, we’ll put it in a bag for you, eat it, drink it, love it”. I mean I’m paraphrasing slightly, but that was the basic gist.

But what about the equity Sony and the other majors received in Spotify, which could be worth big bucks if and when the streaming service is sold? Will they share the profit in that with their artists? And did they agree to lower per-play royalties, which definitely have to be shared with talent, in return for equity and other kickbacks, which arguably do not?

As previously reported, 19 Entertainment, which owns the ‘American Idol’ format and still reps many of the finalists from the series, recently added the Spotify equity issue to its ongoing dispute with Sony over the various record contracts the major struck up with former American Idols.

19’s lawyers, in a recent legal filing, said that the majors had “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”.

Sony’s response to 19’s latest moanings was unsealed yesterday, and this time the major isn’t being so consolatory. There’s no “don’t worry, we’ve got your back, you’ll get your share” this time. Instead it’s a rather frank “we don’t have to structure our business deals to ensure the best pay out for artists, so you can all fuck off”. Again, I’m paraphrasing. But only just.

According to The Hollywood Reporter, the Sony court submission says that it’s not obliged to “structure its affairs in whatever way yields the greatest royalties for 19”, and that there is nothing in its contracts with 19-repped artists that stops it from acting “on its own interests in a way that may incidentally lessen the other party’s anticipated fruits from the contract”.

This response isn’t especially surprising. Artist contracts usually state that labels are only due to pay royalties to talent on income that is directly linked to specific recordings on which the artists feature. And it’s long been expected that said clauses would be cited if the majors were challenged to share income from selling any equity in a Spotify type company.

A similar argument could, in theory, have been used in the big breakage debate, though perhaps the labels feel that unallocated advances are more closely linked to the usage of specific recordings than lump sums generated by equity sales and other kickbacks.

Sony’s new submission also cites legal precedent in the US regarding what happens to big bucks legal settlements with piracy services like LimeWire, which have a parallel to the Spotify equity issue in terms of whether income is shared with artists, and are actually a separate gripe dealt with by 19’s lawsuit. Says Sony: “Because no royalty provision required Sony Music Entertainment to share settlement revenue recovered ‘on a general or label basis’, SME was free ‘to retain the full amount of any settlements such suits yield”.

As for the allegation Sony accepted less favourable ongoing terms from Spotify in return for upfront benefits, the major says that there is nothing to suggest it ever agreed to below-market rates from any streaming service, before reaffirming that it’s standard to negotiate up and down different elements of income from a streaming deal – so this strand goes down because this one goes up – and that the major is free to do so, even if 19 and their clients ultimately lose out because of the way any one deal is structured.

19’s latest claims are “futile” the Sony submission concludes, and should not be added to the ongoing litigation. And so the squabble continues.