With all of the recent chatter around the launch of Apple Music, it’s easy to forget what the music business (and MBW) was obsessed with before its arrival: ‘breakage’ payments from digital services to major labels… and that leaked Sony and Spotify contract.
The contract, which dated back to 2011 and covered the major’s deal for North America with Daniel Ek‘s streaming platform, kicked off a number of talking points.
A refresher of three main details:
- Spotify agreed to pay Sony Music up to US $42.5m in advances over a three-year period. This included a $25 million advance across 2011 and 2012 plus a $17.5 million advance for the optional third year;
- Spotify gave Sony up to $9m of advertising spots on its service over the three-year term: $2.5m in the first year, $3m in the second and $3.5m in the final year;
- Sony was paid a revenue share of Spotify income that equated to 60% of Spotify’s monthly gross revenue, which was then multiplied by Sony Music’s percentage of overall streams.
Despite Sony’s public assertion that it “shares with its artists all unallocated income from advances” some have remained sceptical over how this money is being divided.
Others have also criticised those advertising spots on Spotify – suggesting that, despite requiring no charge, they are being allocated by Sony against agreed marketing spends for artists.
An internal email from Sony Music Entertainment, dated May 22, has now come MBW’s way.
It reveals some more crucial details of the Spotify deal… as well as predictably, and vehemently, arguing the major’s side of the story.
Addressed to Sony staff from Dennis Kooker (pictured), President, Global Digital Business and U.S. Sales, Sony Music Entertainment, the email confirms that the total breakage from the three-year 2011 Spotify contract totalled just $263,000 – which Kooker claims was “paid out to artists under our normal course of business”.
The reason for this relatively small sum is simple: Spotify, scale-wise, has been a success story.
With lots of people listening – and 20m+ people now paying for the privilege – the gap between what Sony demanded as a payment guarantee and what Spotify could actually deliver in royalties was no great shakes.
Another interesting revelation: while some allege that the majors take big advances from streaming services in exchange for lower royalty rates, Kooker argues for their necessity.
His quote on this matter will no doubt get tongues wagging across the business today: “Sony requires [these advances] for a reason – to promote a vibrant marketplace.”
Kooker says these minimum revenue guarantees are put in place as standard practice with new services to “ensure that new entrants to the market are properly committed and incentivized to build a healthy business that fairly compensates both the service and the rightholders”.
And then there’s the question of those free Spotify ads.
Kooker claims criticisms over how these are allocated in Sony’s marketing budgets have simply been “misguided”, adding that “access to service ad inventory has had no impact on SME’s overall marketing spend in support of its artists’ projects”.
Read the email in full below.
As you may be aware, there has been a significant amount of discussion in the media and elsewhere lately regarding how record companies, including Sony Music, negotiate contracts with digital music services and share money from these services with artists.
Unfortunately, much of the conversation around this issue distorts and mischaracterizes the legitimate business relationships between Sony Music, its artists and digital services. It also is creating much misinformation and confusion throughout the industry.
In order to promote a better educated marketplace, we want to arm you with some key facts to keep in mind as we interact on this topic with artists, their managers, and other key constituents in the industry:
1. Sony Music fairly and equitably shares revenue from all digital services with its artists.
This is a core mission of our company and includes digital “breakage”, which covers all unallocated income from advances, non-recoupable payments and minimum revenue guarantees that Sony Music receives under its digital distribution deals.
2. In our 2011 deal with Spotify, virtually all of the advances paid under that agreement were recouped under normal service usage and allocated to our artists.
Breakage on the agreement totaled $263,000, which was processed in 2014 and paid out to artists under our normal course of business according to Sony Music’s breakage policy.
3. Suggestions that we are not paying breakage on our current deals with digital partners are incorrect, because we don’t process breakage until after a deal term ends.
We typically do not have all of the information necessary to allocate the breakage until we receive the final reporting at the conclusion of the contract’s term.
4. Sony Music requires advances from digital services for a reason—to promote a vibrant marketplace that engages in responsible experimentation.
In order to guarantee that Sony Music and its artists are paid appropriately, we may require “non-returnable” advances, guarantees or “flat” payments from our partners.
We do this in situations where the business model or market pricing are not fully established, as well as to ensure that new entrants to the market are properly committed and incentivized to build a healthy business that fairly compensates both the service and the rightholders.
5. Any implication that there is something inappropriate about Sony Music receiving ad inventory as part of an agreement with a digital partner is misguided. Marketing our artists is at the core of what we do.
Contractually ensuring access to ad inventory from our digital service partners enables us to more effectively promote our artists by expanding our marketing scope.
Sony Music does not sell ad inventory provided by its service partners, and access to service ad inventory has had no impact on SME’s overall marketing spend in support of its artists’ projects.
If you have any questions regarding our Breakage Policy or the recent leak, please reach out to Julie Swidler, our General Counsel, or me.
Meanwhile, Sony is facing a landmark royalties lawsuit from Simon Fuller’s 19 Entertainment – which is being represented by the lawyer who triumphed in the historic Blurred Lines vs. Marvin Gaye estate case, Richard Busch.
One of 19’s allegations is that Sony’s stake in Spotify (believed to be around 6%) is unfair on artists; essentially, 19 argues, artists are being paid poorly from streaming services, while building the value of Spotify et al.
When these companies are sold or float, it says, Sony will make a big profit from its investment but artists won’t receive a share.Music Business Worldwide
