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Sony’s 2011 Spotify contract leaks

By | Published on Wednesday 20 May 2015

Sony Music

Given the interest in the deals done between major rights owners and the streaming platforms, not to mention the flurry of litigation over how the majors share digital income with artists, it’s amazing this hasn’t happened before. But yesterday The Verge published the 2011 contract between Sony Music and Spotify. It’s a deal that was previously shrouded in secrecy, so the leak unsurprisingly caused quite a stir online.

That said, while specifics of the music industry’s various deals with the streaming platforms are secret, the mechanics of the arrangements are widely known, and approximate figures have been doing the rounds for some time too. Indeed we shared all that information last week during the music licensing strand at CMU Insights @ The Great Escape (and a summary will appear in this month’s CMU Trends Report), so in the main the Sony contract confirms what we already sort of knew, rather than being full of big new revelations.

Most of the music industry’s deals with the streaming services are, at their core, revenue share arrangements, with labels and publishers earning a share of any advertising and subscription income generated by the digital service provider based on what percentage of overall streaming related to tracks or songs owned by each rights owner.

The actual split of revenue varies from rights owner to rights owner, but labels are usually getting somewhere between 55-60% and publishers 10-15%. The Sony contact unsurprisingly puts the world’s second biggest record company at the top end of the revenue share bracket, on a 60% split.

But with new streaming services being somewhat revenue-lite at the outset – especially ad-funded freemium set-ups – perhaps more important for the rights owners in their early contracts are the minimum guarantees and upfront advances. Labels and publishers will look for minimum payments per stream, or per subscriber, or per month, to reduce their risks, and will look for a chunk of money upfront, knowing that some digital services do the deals but never actually get off the ground, so even minimum guarantees may not be worth much.

It’s perhaps the sections of the Sony contract dealing with minimums and advances that are most interesting. Minimum guarantees on both freemium and premium are set out in the document, the former mainly of note because of the criteria controlling what rate is paid.

Rights owners have often said that they include clauses in their contracts to incentivise DSPs to grow their businesses according to pre-agreed targets, and this is seen in the minimum guarantees on freemium, whereby Spotify must pay $0.00225 per minimum stream, but this rises to $0.0025 per stream if growth targets are missed. Which seems like a tiny distinction, but if multiplied over millions of streams, can make quite a difference overall.

The advances are, of course, significant. Again we knew this already, but seeing the figures set out in black and white grabbed a lot of attention yesterday (plus this is arguably the simplest bit of the contract, which is perhaps why it’s the bit many people honed in on). In the Sony deal, Spotify agrees to pay a $25 million advance for the two years of the contract, which works out at $9 million the first year and $16 million the second, with a $17.5 million advance if Sony takes on an option to extend the deal for a third year. The money is paid in instalments every quarter.

The labels’ advances are controversial in the artist community of course, and for two main reasons. Some managers say they worry that such big demands on digital start-ups have prevented some from ever getting to market, which results in a market dominated by one or two main payers. But of more concern for artists is what happens to unallocated advance payments.

The advances are recoupable for Spotify, so subsequent payments come off the advance, but if over the year those payments don’t exceed the advanced sum, the label keeps the difference. And in most cases that means the label keeping unallocated advance money outright, in that while they have to share any income attributable to specific track usage with the artists, they don’t share unallocated advanced cash.

In the main, managers understand the need for advances, but don’t like labels keeping all unallocated monies, and worry that record companies might be incentivised to push for bigger advances in return for lower minimum guarantees, because unallocated advance income is most favourable to a record company’s bottom line. And this isn’t the only way in which labels might take kickbacks that don’t have to be shared with artists in return for offering a more preferential rate on those payments where artists do get a cut.

Managers will probably be most interested in the bit of the Sony deal that provides the major with a stack of free advertising on Spotify’s freemium platform, which it can then sell on to third parties for profit. Of course, seeing the contract alone can’t tell us what impact that freebie had on other parts of the deal, but it confirms there are kickbacks to be had beyond the core elements of any contract.

The final chunk of the Sony deal causing chatter yesterday was the most favoured nation clauses which ensure the major gets a better deal if a competitor negotiates more favourable terms down the line. Again, it’s no secret that MFNs are standard in most streaming contracts (though Universal agreed to forego them in Europe as part of its deal with the competition regulator over its EMI acquisition).

Amongst the MFN clauses in Sony’s contract is one that locks the major’s advances to those of its competitors based on market share. Which is one of the reasons why indie label rep Merlin has always honed in on the importance of market share figures. As previously reported, Merlin has in the past claimed that the majors often insist on using record industry wide market share stats in these scenarios, rather that their specific share of the streaming market, because doing so favours the majors over the indies.

There’s plenty to reaffirm the grievances of both artists and the indies in the leaked contract then. So that’s good. Sony and Spotify, needless to say, haven’t commented on The Verge’s scoop, though you can only assume much effort is being made behind the scenes to identify the source of the leak. Though on the up side, “we need more transparency” is the most used phrase in the music rights business today, from all parties, majors included, and the leakers have definitely done their bit to help the industry achieve that objective.