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The Economics of Music Streaming – Part Two

May 5, 2022

The second main issue raised by the DCMS Select Committee’s inquiry into ‘The Economics of Music Streaming’, was in relation to the lack of transparency over the deals between record labels and streaming services. A situation arising from the employment of non-disclosure agreements within these deals. Meaning that the artists whose catalogues are being licenced by the labels to the streaming services have no idea of the terms under which their music is being exploited.

WHAT IS MY MUSIC WORTH?
As Chic’s Nile Rodger’s stated, when giving oral evidence to the select committee, ‘the way the system is set up now, with all of these relationships between the labels under NDA … there is no way you can find out what a stream is worth. That is not a good partnership.’
In the written evidence provided by Hipgnosis Songs Fund Limited, the additional point is made that ‘NDAs also prevent the disclosure of proof of sales figures which, in turn, block an artist’s legal right to audit every three years. This makes it almost impossible to prove whether money is missing or has been incorrectly allocated.’

Whilst legal action in the United States has resulted in the removal of some NDAs, ‘the cost of legal action falls on the artist in full unlike regular audit costs, which are largely refunded to the artist.’ For most creators, this places them in an untenable situation.
As the songwriter Helienne Lindvall admitted in her written evidence, ‘I have no legal, affordable avenue to dispute … claims, and simply have to accept whatever royalty payments these huge corporations pay me for the use of my music.’

DIGITAL BREAKAGE
The issue with NDAs extends far beyond the value of a stream to an artist, and the right to effective auditing. Streaming services pay advances to labels and publishers, against which income earned from streaming is deducted. But, whilst these advances are recoupable, they are not returnable should the income earned fall short. When the advance exceeds the income earned, the label or publisher simply keeps the additional profit. This profit is known as breakage.

The leakage of the Sony Music contract with Spotify by The Verge back in 2015, highlighted, amongst other things, the extent of these advances. A two-year deal, with an optional third year, Spotify had to pay Sony Music $9 million in the first year and $16 million in the second, with $17.5 million being paid if the option for the third year was taken up. A Most Favored Nation clause also ensured that, should another label obtain a better deal with Spotify, the contract would be amended to match this deal.

At the time of the leaked contract, many indie labels had already signed up to the Worldwide Independent Network’s Fair Digital Deals Declaration, pledging to, ‘account to artists a good-faith pro-rata share of any revenues and other compensation from digital services that stem from the monetization of recordings but are not attributed to specific recordings or performances.’

The ‘Big Three’, however, were simply pocketing the breakage, and it was only after sustained pressure from artists and managers that they agreed to share the profit. Despite this agreement, as stated in the Featured Artists Coalition and Music Managers Forum White Paper, released in the wake of the select committee’s findings, ‘it is often not entirely clear how that money is being allocated and distributed.’

Chris Cooke also makes the point that ‘once a successful streaming service is established advances are nearly always recouped by the service, so there is no surplus. Therefore, it may be that some of the major record companies committed to share these surpluses with artists only once there wasn’t much money to share.’1

EQUITY SHARES
The ‘Big Three’ will usually structure their deals with streaming services to include shares in these companies, often by licencing their catalogues at sub-market rates. These lower rates are legitimised on the basis that streaming services couldn’t grow if they were licenced at the normal market rate.

Sony Music, when challenged in court by 19 Entertainment, stated that it ‘had no obligation to “structure its affairs in whatever way yields the greatest royalties” for artists represented by 19’s management unit.’ As the FAC stated at the time ‘Sony chose to ignore artists’ interests in favour of their own corporate ones.’

The Rethink Music Initiative’s report cited the case of the 13% stake Vivendi, Universal Music’s parent company, had in Beats Music. Vivendi subsequently received $404 million following Beats Music’s acquisition by Apple in 2014. As the report declared, ‘it is highly doubtful that any of this $404 million made its way back to artists, especially since the ownership was at the parent level, above Universal Music.
Since then, as with breakage, the majors have, under duress, agreed to share any profit from equity sales with their artists. However, as Chris Cooke points out, there is ‘no industry-wide consensus’ relating to how these profits will be shared.2

THE OTHER KICKBACKS THE MAJORS MAY, OR MAY NOT, RECEIVE!
The majors also receive other financial benefits, which should also be shared, but which, with contracts protected from scrutiny by NDAs, are not.

The Rethink Music Initiative declared that ‘labels are … rumored to negotiate multimillion-dollar annual “service payments,” charging streaming services for their catalogues as a whole, without attribution to individual works.’
Chris Cooke also believes that the labels ‘may be able to charge administration, technical or legal fees to the service, and may receive other benefits too.’3

More specifically, the leaked Spotify contract showed that Sony Music was granted $9 million in free advertising space over the course of the contract, that it could either use to promote its artists, or resell ‘at prices determined by the label in [the] label’s sole discretion.’ Another clause required Spotify to make available additional advertising space of $15 million, at a heavily discounted rate; whilst a further clause insisted that Spotify provide any unsold advertising inventory to Sony Music for free.

IN CONCLUSION: THE ABUSE OF NON-DISCLOSURE AGREEMENTS
As with the debate over the ‘making available right’, the dissatisfaction with this situation has rumbled on for years. Back in 2014, following the removal of her music from the Spotify platform by Taylor Swift, the MMF issued a statement which concluded that:
‘Non-disclosure agreements hide how the major music corporations license streaming services and we have grave concerns that the deals contain stipulations that both significantly reduce the amount artists ultimately get attributed and damage the growth of the streaming economy.’

The majors blame the streaming services for the situation, declaring that it is at their insistence that NDAs are inserted into the contracts between the two parties. However, whilst it is true that tech companies utilise NDAs in their contractual agreements, they do so to protect any unique technological information these contracts may reveal. As the contracts between record labels and streaming services are purely financial arrangements, the concept of protecting intellectual property need not apply.

The select committee acknowledged that, ‘creators and their representatives have a right to know about the terms on which their works are exploited and verify the outcome of these agreements.’ A right that is being trampled on, with typical arrogance, by the Big Three.
Despite declarations within sections of the industry, as well as from the Government itself, that ‘contractual obligations’ would undermine the desire for transparency, the select committee saw fit to ‘reaffirm … for the avoidance of doubt … [that] it is of course within the gift of Parliament to bring about … minimum statutory standards or rights that would apply irrespective of attempts by music companies or streaming services to shut artists out through non-disclosure agreements.’

References:
1. Cooke, Chris. 2020
    Dissecting The Digital Dollar, Third Edition
    Music Managers Forum, p. 102
2. Ibid, p. 101
3. Ibid, p. 102
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