Ever since streaming music services gained a significant foothold in the market, there has been so much hand-wringing about them in the music industry — how much they pay artists, whether or not they decrease the value of music, if the services themselves will ever become profitable, and lots of other similarly business-minded questions. One helpful factor in understanding all that would be a look at the deals between streaming services and record labels, information that has been kept under strict lock and key for years. Not anymore! The Verge has acquired Spotify’s 2011 contract with Sony Music, a deal that was to last two or three years depending on whether Sony exercised an optional extension. The Verge broke down the highlights of the contract — which was drawn up by Sony and went into effect in January 2011, a few months before Spotify launched in the U.S. — and found that Sony benefits a lot more than Spotify from this arrangement. The takeaway? “Given the myriad ways Sony Music came out as the winner, it’s worth asking who really should shoulder the blame for the lackluster streaming payments that artists like [Taylor] Swift have been complaining about — the labels or the streaming service?”
One of the most fascinating facts is that Sony required Spotify to pay millions of dollars up front — as much as $42.5 million — and none of that money is guaranteed to go to the artists. The Verge explains:
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.
But what the contract doesn’t stipulate is what Sony Music can and will do with the advance money. Does it go into a pot to be divided between Sony Music’s artists, or does the label keep it to itself? According to a music industry source, labels routinely keep advances for themselves.
Furthermore, Sony has what’s called a Most Favored Nation clause, which forces Spotify to match the best deal it cuts with any other label, ensuring Sony does not fall behind any label in royalty payouts. The Verge has a detailed graphical breakdown of how this all works.
There’s also 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 gross revenue total (i.e. the income it reports to the public). Another ad-related tidbit: Spotify gave Sony $9 million in Spotify ad spots that Sony could then turn around and sell for profit. As for the actual royalties per stream, that’s complicated:
Of course, the biggest question is how much Sony Music gets paid per stream, and well, it’s complicated. Section 10 shows how Sony Music separated its label fees into three distinct tiers — the ad-supported free tier, online day passes (which no longer exist), and Spotify’s premium service. In each of those segments, Sony Music can 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. (So if Spotify earned $100 million in gross revenue, the labels would would get $60 million. If Sony Music made up 20 percent of the streams, it would take home $12 million.)
But there is another far more complex formula that can earn Sony Music even more money from Spotify. The contract has what’s known as the usage-based minimum and per subscriber minimum, covering 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 gets that amount instead.
Under the usage-based minimum for the free tier, section 10(a)(1)(ii) stipulates Spotify must pay $0.00225 per stream, thanks to a discount that lasts for the length of the contract. If Spotify somehow missed its growth targets in the preceding month, that number could jump to $0.0025 per stream. These rates only come into play if the usage-based minimum exceeds the revenue sharing model.
The Verge was unable to determine how much the artists get from this deal — “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 percent of their streaming revenues” — but this much is clear: If this is characteristic of other deals, it seems like the record labels are making bank off the streaming services. Maybe major labels, not streaming services, are the enemy? What a revolutionary concept! Peruse a PDF of the contract here and read more analysis at The Verge.