Music Streaming’s Hidden Fees

Apart from precise dollar figures, there’s little in Sony Music’s original licensing contract with Spotify, uncovered by The Verge, that would surprise anyone familiar with how the major media companies do business with service providers (the full contract, which ran from 2011 to 2013, is here). Most of the money due to the label is payable upfront, in the form of a recoupable advances ($42.5 million over the three year term of the deal in this case), it includes a per-play minimum fee irrespective of Spotify’s own income, and it contains most-favored-nation (MFN) language assuring Sony that none of its competitors gets a better deal — all standard stuff.

Nonetheless, the contract provides a pretty good roadmap to where the money from streaming actually goes (hint: it’s not to artists).

spotify_1200x630_bThe advances payable by Spotify to Sony under the contract were recoupable (using a complex formula based on a fixed percentage of Spotify’s gross revenue, Sony artists’ aggreate share of total streams during the payment period and the minimum per-stream royalty) but non-refundable. If the actual payments due to Sony, as calculated under the formula, were less than the advance Sony kept 100 percent of the advance anyway.

That is, the advances were structured as fixed, lump-sum payments, contractually unmoored from the actual popularity of Sony artists. Sony had little incentive, therefore, and likely no obligation, to credit any portion of those advances to individual artists in those artists’ respective royalty statements.

The contract also includes provision for annual “true-up advances,” which required Spotify to calculate the cash value of a single percentage point of Sony’s share of Spotify’s gross label payments. If Sony’s “One Point Value” came in less than its competitors’ during the payment period Spotify had to make-good the difference, further divorcing the payments due to Sony from the actual performance of Sony’s content library.

The contract further granted Sony a certain amount of advertising inventory on Spotify’s ad-supported free tier, which the label was free to sell for whatever it could. Once again, Sony’s revenue from advertising was unrelated to the popularity of Sony artists and thus likely excluded from artist royalty calculations.

Given Spotify’s user base and estimated gross revenue in the years covered by the contract, in fact, it’s likely that nearly all of the money Sony earned under the deal came in the form of payments that could legally be excluded (or at least easily hidden) from artists’ royalty calculations.

All this, too, is standard stuff. Hiding the money from the talent is a time-honored tradition in the entertainment business, especially when it comes to money from new technologies.  Just ask the actors, writers and directors who found out too late that 80 percent of the DVD revenue was not being counted toward their residuals or backend “points.”

The one new-ish element in the contract, relative to historical licensing agreements, is language governing the use of data on Spotify users and their behavior. Under the deal, Spotify is obligated to make “reasonable efforts,” to obtain “informed consent” from its users to share their contact details paired with usage data with the label and to receive direct communications from Sony. The contract stipulates that such user data will be jointly owned by Sony and Spotify and that Sony is entitled “to exploit unilaterally” the data “including for commercial gain.”

Spotify is also required to provide Sony with quarterly reports containing data on all streams and playbacks of cached downloads of Sony’s content, including playbacks through Spotify of users’ own copies of any Sony tracks.

Needless to say, there is no indication that Sony planned to share that valuable usage data with its artists or any monies derived from its exploitation by Sony “for commercial gain.”

As it happens, Spotify is now in a race, along with other streaming media services, to provide artists and labels with more robust data and analytics on how fans are engaging with their music. In theory at least, those new tools could increase the value artists derive from having their music streamed on those services, by enabling new, commercial forms of engagement.

The labels might want to think about what it would mean for artist relations should the value of the data captured from streaming activity ultimately exceeds the value of the royalties artists receive under their recording contracts.

Update: It seems Sony and Spotify have been aggressively seeking to prevent coverage of the leaked contract (which I guess confirms its authenticity). So far they have not contacted Concurrent Media regarding our story. But the link to the full text of the contract above is no longer working).