Sony Music's Deal With Spotify Leaked Online
May 19, 2015 at 1:18 PM (PT)
SONY MUSIC's contract with SPOTIFY was leaked online today by the tech website THE VERGE, and it contains some juicy morsels to chew over in the current battle between online streaming and the labels. There is much speculation that SPOTIFY offered the site the documents to put pressure on the major music companies, who want to eliminate the freemium model of the service in the wake of the expected start-up of APPLE's competing BEATS streaming model.
The 42-page contract was signed in JANUARY 2011, just a few months before SPOTIFY launched in the U.S. Written by SONY MUSIC, the two-year deal — with an optional third year that SONY could pick up — reveals how much SPOTIFY must pay in yearly advances to the label, the subscriber goals that SPOTIFY must hit, and how streaming rates are calculated.
SONY MUSIC has invoked a MOST FAVORED NATION clause to ensure that its yearly advances do not fall behind those of other music labels, how SPOTIFY can keep up to 15% of revenues "off the top" from ad sales made by third parties, and the complex formula that determines how much labels get paid per stream.
The contract raises serious issues about how much of the money paid to SONY MUSIC by streaming services like SPOTIFY, actually make it into artists' pockets aside from the still-paltry royalty rate generated by streams
In section 4(a), SPOTIFY agrees to pay a $25 million advance for the two years of the contract: $9 million the first year and $16 million the second, with a $17.5 million advance for the optional third year to SONY MUSIC. The contract stipulates that the advance must be paid in installments every three months, but SPOTIFY can recoup this money if it earns over that amount in the corresponding contract year.
What the contract doesn’t stipulate is what SONY MUSIC (and presumably UMG and WMG) can and will do with the advance money. According to a music industry source, a large majority of those funds never find their way into the hands of artists.
SONY MUSIC’s Most Favored Nation allows them to change the particulars of the deal if any other label has a better arrangement or interpretation of that aspect than SONY MUSIC. If a better deal is obtained by another music label, including what constitutes an "active user," the definition of gross revenue, and any improved security provisions, SONY MUSIC can call on an independent auditor once a year to determine whether SPOTIFY has struck a more agreeable deal with any other labels.
Where the MFN clause truly comes in handy for SONY MUSIC is when its yearly advances from SPOTIFY are on par with the best deal negotiated by any other label based on the percentage of market share. If another music label is getting paid $1 million by SPOTIFY for each percentage of market share it has, and SONY MUSIC is getting $600,000 per market share percentage, SPOTIFY must pay SONY MUSIC the $400,000 difference — known as the adjusted contract period advance — at the end of each contract year.
Another clause in the contract allows SPOTIFY to keep up to 15% of all advertising revenues generated by ad sales that are handled by third parties hired by the streaming service.
SPOTIFY’s gross revenue total is split 70/30, with 70% going to the labels and publishers, while they get to keep 30%. SPOTIFY pulled in €98.8 million ($110M) in advertising revenue in 2014. SONY MUSIC has received up to $9 million in ad inventory ($2.5 million in the first year, $3 million and $3.5 million in years two and three) on SPOTIFY which it can sell for profit. And those ads are figured on a heavily discounted rate. SPOTIFY is also requred to offer an additionial $15 million of ads at a discounted rate available for SONY MUSIC to purchase, as well as portion of its available unsold ad inventory for free to allow the label to promote its own artists.
The issue of how much SONY MUSIC gets paid per stream is complex, with its fees separated into three tiers -- ad-supported free tier, online day passes (now defunct) and the premium tier. SONY MUSIC can pull in a revenue share fee that is equal to 60% of SPOTIFY’s monthly gross revenue multiplied by its percentage of overall streams. (If SPOTIFY earned $100 million in gross revenue, the labels would would get $60 million. If SONY MUSIC made up 20% of the streams, it would take home $12 million.) If the royalties from usage in any particular month are greater than what is paid out by the revenue share, SONY MUSIC gets that amount instead.
The premium tier’s per subscriber minimum takes SONY MUSIC’s label usage percentage and multiplies it by the number of premium subscribers on SPOTIFY, multiplied by $6.00. Once again, this model is used only if the total payout exceeds the revenue share.
So, while artists like TAYLOR SWIFT and others have directed their ire at SPOTIFY, this contract showss their beef should be with the labels. Some artists have clauses in their contracts to get a larger share of the streaming revenue, and some artists are still operating under CD-era contracts that only give them 15–20% of their streaming revenues, according to sources.
So, this all has to be taken into account as SPOTIFY begins renegotiating its deals in a highly charged atmsophere. Most expect major label militants like UMG's LUCIAN GRAINGE and SONY's DOUG MORRIS to demand an even larger advance from SPOTIFY.
According to its financial records, SPOTIFY pays up to 80% of its revenue to rights holders.
"You can’t squeeze blood from a stone," former eMUSIC CEO and current venture capitalist DAVE PAKMAN warned artists. "Your beef can’t be with SPOTIFY anymore."