Labels to artists: You'll get a penny, so go away

And don't go spoiling Spotify's IPO for us

Music listener rasta

Two of the three major record labels last week promised to share some of the money from the windfall they may receive from a Spotify IPO with artists. Neither said how much will land in the busker's hat. But the implication was that this was an act of munificence, and whatever the amount is, they should be jolly grateful.

Warner's CEO promised to "share this revenue with our artists on the same basis as we share revenue from actual usage and digital breakage."

The Swedish streaming pioneer has reportedly been preparing for an IPO for at least two years, and according to leaked term sheets from its latest round of investment in the company, will reward investors $100m simply for advancing the money to Spotify (must-read).

Back when Spotify was getting going, the majors demanded and received equity in, and advances from, music startups. Indie label rep Merlin Network also has a stake, which may explain why it's more bullish about Spotify than your average indie musician. The deals are opaque, and under NDA, but the label stake is believed to be between 15 and 20 per cent. So if Spotify floated at last summer's valuation of $8.53bn – a big IF, as "unicorns" like Uber are shunning the IPO path – then the labels would pocket over $2bn.

The secret contracts have caused considerable angst among artists large and small. There's only so much revenue to spread around, so if equity and advances go up, leaving artists and songwriters squeezed, streaming rates go down.

Breakage is unattributed income, the classic example being gift cards that are never redeemed. In the streaming music context, it refers to sums above the minimum royalty guarantees. For example, if an exciting and disruptive new music streamer called DodgyMusic wanted LargeRecordCo's catalog, it would have been asked to pay an advance to the latter. If DodgyMusic then flopped, and minimums were not met, then LargeRecordCo kept the advance as breakage. Major labels say they no longer do this.

Whether the promise quells discontent remains to be seen. Spotify has been hit with two class action lawsuits over its accounting of mechanical royalties, one from activist songwriter and musician David Lowery. President of the music publishers trade group David Israelite reckons that as much as 25 per cent of royalties are not being paid out – or are being paid to the wrong people.

In each case, Spotify blames the music industry for its data, a reaction met with skepticism. Intermediaries more aligned with the industry seem to get almost all of the royalties to almost all of the right people almost all of the time. The trouble that dogs the streaming music business arises because both parties (majors and streamers) designed a model where the incentives favor a cash out, rather than a long-term investment in a healthy music market. ®

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