Yesterday the internet was abuzz with a report from The Verge sharing details of a leaked contract between Sony Music and Spotify from January 2011.
Whilst the leak is significant, the document didn’t actually cause any real embarrassment for the companies.
Amongst the deal points that emerged...
The contract contains a Most Favoured Nation clause that prevents Spotify from making a ‘better’ deal with another major - either by providing better advances or by giving a higher royalty rate per tracks.
This has long been a pain in the neck for digital services and startups seeking licenses from the music industry, but it is standard operating procedure for major labels. In fact the European Union specifically barred Universal Music from asking for MFN clauses in a contract for a decade in Europe as a condition of its approval of the EMI deal.
Yes, the contract stipulates a big advance. of $25 million over the two years of the contract.
At the same time, those advances are recoupable against label fees, which means that if Spotify earned the label $25 million in those two years (which it likely did) then it most likely recouped those advances.
As to the question of whether the label actually distributed those advances to artists, if they were recoupable against label fees it would stand to reason that the track plays that they are recouped against would show up in a royalty statement and artists would have to be paid the appropriate royalty depending on their individual deal with the labels.
Obviously, if Spotify had not generated $25 million for Sony over those two years the company would have probably pocketed the difference (as the label and other majors have done in countless occasions with startups that met a different fate than Spotify) and artists would not have seen a dime.
That pesky 15%
The contract states that Spotify can keep up to 15% of all advertising revenues generated by the ad sales made by third parties. The Verge points out that this percentage is never mentioned by Spotify when it talks about its 70/30 revenue model (70% of revenues going to content owners).
A likely reason why it didn’t is that those revenues are minimal. Spotify makes just 10% of its revenues from advertising on its freemium service - the main reason why Universal Music has been criticising the service - so it would be interesting to know how much that 15% of third party sales amounts to.
Whilst the leak of the contract between Sony and Spotify is not great for either party, it does not raise substantially new points or concerns from those that were already widely known. The contract doesn’t say what ends up in the artists’ pockets and is the simple result of a negotiation between two willing contracting parties leveraging their strengths to get the best possible deal.
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