If you’ve been paying attention to the ‘streaming wars’, you’ll know that the industry, which up to this point has been dominated by Swedish giant Spotify, is currently bracing itself for Apple’s impending Beats launch.
Meanwhile, up-and-comers like Tidal are trying desperately to shout over their competitors, who have more subscribers, more capital, and more brand recognition. It doesn’t help that Apple have reportedly been attacking Spotify behind the scenes.
However, if you ask musicians and to a lesser extent, label executives, the real streaming war is the one that’s going on behind closed doors between streaming services and major labels. It’s this war that’s most impacting musicians and ultimately fans.
While musicians continue to criticise the meagre payouts they claim outlets like Spotify and Pandora give them, streaming services claim that in fact the majority of their revenue goes to royalty payouts and their real beef is with the labels.
Industry commentators say major labels have been in cahoots with the streaming services since day one and pen contracts that position them as the prime benefactors of the royalties that come from streaming.
This sounds about right, but is there any proof? While the contracts agreed to by streaming services and labels are naturally kept hidden from the public, The Verge have managed to acquire Spotify’s 2011 contract with Sony Music.
The contract details an agreement that was to last two or three years, depending on whether Sony exercised an optional extension. The contract was drawn up by Sony and went into effect in January 2011, a few months before Spotify launched in the US.
Taking a look at the contract, which readers can check out in full here, Sony benefits far more than Spotify from the arrangement. In fact, if anyone should be copping the blame for low payouts to Sony’s artists, it looks like the label is on the hook.
As The Verge notes, one of the most intriguing parts of the contract is a stipulation that Spotify pay as much as $42.5 million to Sony up front. None of this money, it should be noted, is guaranteed to go to artists.
Section 4(a) details 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.
According to the contract terms, the advance must be paid in instalments every three months, but Spotify can recoup the money if they earn over that amount in the corresponding contract year – something the company has struggled to do.
The biggest question raised by this clause is just what happens to all of this advance money. Is it divided amongst Sony’s artists or does the label keep it all? According to a music industry source who spoke to Stereogum, labels routinely keep advances for themselves.
The juicy details don’t stop there, either. Sony also had a Most Favored Nation clause written into the contract, which effectively forces Spotify to match the best deal it cuts with any other label, ensuring Sony does not fall behind any label in royalty payouts.
Furthermore, there’s a clause that allows Spotify to take 15 percent of select ad sales revenue “off the top”, money that’s not accounted for in Spotify’s publicly reported income. Sony, meanwhile, was given $9 million in Spotify ad spots that Sony could then sell for profit.
Of course, the question everyone wants the answer to is how much Sony Music receives per stream. Naturally, the answer is far from straightforward. Section 10 of the contract details how label fees are separated into three distinct tiers – the ad-supported free tier, the defunct online day passes, and the premium service.
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For each, Sony Music stands to pull in a revenue share fee that is equal to 60 percent of Spotify’s monthly gross revenue multiplied by Sony Music’s percentage of overall streams.
For example, if Spotify earned $100 million in gross revenue, the labels would get $60 million. If Sony Music make up 20 percent of the streams, they pocket $12 million.
The contract goes further, however. Due to a usage-based minimum and per subscriber minimum, which cover the free and paid tiers, respectively, if the royalties from usage in any particular month are greater than what is paid out by the revenue share, Sony Music pocket that sum instead.
For the free tier, Section 10(a)(1)(ii) stipulates Spotify must pay $0.00225 per stream. If Spotify somehow missed their growth targets in the preceding month, the number could jump to $0.0025 per stream. These rates come into play whenever the usage-based minimum exceeds the revenue sharing process.
However, this still doesn’t answer the question of how much artists get from this deal. Funnily enough, they don’t get too many mentions in the contract. According to The Verge, some artists have clauses in their label contracts that net them larger streaming revenue shares, while others are still on CD-era contracts.
While this is just one deal with one major label, if Spotify’s contracts with the rest of the big four are similar, it seems major record labels are doing just fine from streaming. Just how artists are doing seems to just be their problem.
