The leaking of the 2011 agreement between Sony Music and Spotify may have been sensational, David Balfour argues, but the actual content is much less controversial

20 May 2015 - Editorial

No one at Sony Music or Spotify would be likely to have welcomed the leaking this week of the 2011 Digital Audio Distribution Agreement between the two parties. Yet, leak it did and unsurprisingly the contract is now attracting detailed attention from many quarters.

The wider industry – ourselves included – are accustomed to talking in general terms about major label licensing practices. Knowledge of such practices is often based on titbits of information such as smaller leaks, rumour and even hearsay. Never does anyone actually get to see the precise detail of a major label’s agreement with a significant service, until now. This new document has therefore provided an interesting opportunity to match up the perceived reality of major label licensing deals with the actual reality of them.

Whilst we respect how unwanted such a leak must have been for the parties to the agreement, now that the information is out in the public domain, it does feels necessary to make some examination both of the agreement itself, and of the reactions which other commentators have had to it.

It’s going to take a certain time for anyone to properly digest and understand the full detail of the 48 page contract. Nevertheless, commentators have already been quick to highlight key sections as being most interesting and notable. The Verge, which publicised the document in the first place, was quick to jump on the figure for advances which Spotify agreed to pay to Sony: up to $42.5m over a possible three year term. The Verge also placed particular emphasis on the Most Favoured Nation clause which entitles Sony Music to perform an annual audit Spotify’s accounts and ensure that no other licensor is being given more favourable terms, and to demand parity of terms if that proves to be the case.

Further focus was placed by on the aspects of the agreement relating to Spotify’s advertising-funded free tier. It was noted that Spotify is entitled to take an additional discount of up to 15% on royalties coming from the free tier, in order to pay for the work of third part ad sales houses. Furthermore, Sony was also given an extra $9m credit in advertising value which is was entitled to either use on the service or sell on to third parties.

Whilst the leak itself was sensational, none of the aspects of the agreement mentioned above seemed to be especially so. Whilst the recoupable advance figure does seem huge, when viewed in isolation, the artist-championing blog The Trichordist was quick to note that this actually wasn’t an unreasonable amount of money for Sony to legitimately earn over the period of the agreement. Commenting that Sony had let Spotify “get off cheap”, they noted:  “Given Sony’s huge market share and strong artist roster, this isn’t exactly chump change, but it’s pretty low. Reasonable, in fact.”

The biggest question raised around the size of the advances payable to Sony by Spotify has been whether the label would pay those sums out to artists according to the usage of their material on the service. Again, The Trichordist made a sober analysis, estimating that Sony would have to pay out the advance according to the usage on the platform (at least to recouped artists). They key point here is that this deal didn’t appear to provide a huge amount of “breakage” – aka upfront payments which will never be matched financially by actual use and where the remaining balance therefore goes straight into labels’ pockets.

The practice of using “breakage” to boost labels’ bottom lines was a major topic at last week’s Great Escape conference in Brighton. We heard managers, publishers, musicians’ representatives all complaining about the practice of labels making deals which take money from services in such a way that it can never be connected to actual music use and paid out accordingly. There’s little doubt that this pushing for “breakage” is a common practice in labels’ negotiations with services. In this case however, the terms would suggest that here the label was approaching a valued partner and trying to extract somehow reasonable terms – not hamstringing the serviced in the aim of extracting maximum breakage.

It’s crucial to note however that Spotify was already a partner of Sony Music when this leaked agreement was drawn up and signed – and that this agreement related to the US and Canada only. Had the contract related to a new and unproven service, the demands made by the label may have been much more burdensome. It’s also highly significant that this agreement reflected a deal between two companies where there is also believed to have been some common financial interest. If it’s accepted that Sony’s initial deal with Spotify entitled the record company to an equity share in the service – it stands to reason that the demands being made in this subsequent deal would be on the more reasonable end of the scale.

In summary, whilst the leak of this agreement may have been sensational, it doesn’t really tell us anything radically new. It displays a major label acting in a way that seeks to see its rights valued highly, to protect itself against the actions of its competitors, yet which also gives the service a reasonable chance of making a business. In some respects, this is more a case of “move along, nothing to see here,” than a real public display of dirty washing. That said, debate around breakage and non-attributable payouts are hardly likely to disappear as a result of this one document being made public. Furthermore, questions about ways in which major labels manage to keep artists in unrecouped status for long periods of time will persist undiminished.