30 May 2015

That Sony Spotify Contract

Two weeks ago, The Verge published a leaked contract between Spotify and Sony Music Entertainment, which detailed the US deal between those two parties. A lot has been written about that already, but here I will add a few more points that I haven't yet seen discussed.

The contracts contain various bits about IODA. At the time of the contract, IODA was partly owned by Sony. Since then, IODA has merged with The Orchard, and is now wholey-owned by Sony. Any indie labels that do their distribution through The Orchard, and wish to moan about this contract...: Be careful what you moan about!

The sections about IODA do seem reasonable though. Basically, IODA content will earn the same as original Sony content, but those earnings are treated separately and are excluded from advance recoupment. Sony simply doesn't want to have to pay IODA customers parts of their advances, and IODA (and their customers) will get paid, even if Sony hasn't recouped its advance.

The topic of whether Sony artists would see any benefit from the advances -whether recouped or unrecouped- has been debated at length, and Sony has publicly stated that they DO share such advances and breakage with the artists on the same basis as actual revenue, which is a good thing. For completeness: Warner has also publicly stated that they share such advances with artists, but Universal has yet to make any statement on this.

But the Sony/IODA link gets more interesting in light of the $9M of advertising credits that Sony received as part of the deal. I would expect that Sony's first point of use for those advertising credits is their own repertoire. When it comes to the option of re-selling the remaining advertising credits, it would be logical to think of IODA. Sony aren't in the business of selling online advertising, but that IS one of the things that IODA does. Are there any IODA-distributed labels who have bought Spotify advertising through IODA during 2011 or 2012, and would care to comment on the pricing thereof?

Whether Sony credited their artists with any of such advertising resale money is of course a totally separate point, which also comes after the question of whether -and how much- IODA paid Sony for those credits. We know details of neither of these, so I will leave that to others to investigate further.

Another interesting point is the 60% royalty rate that Sony receives. Spotify claim to pay out around 70% of their revenue to rightsholders, which is generally considered to be about 55% to labels and the rest to publishers. This 60% therefore raised a red flag here. But this contract is about the US and Canada only, and we all know that the publishing-side streaming royalties for the US are considerably lower than in the rest of the world due to those damned Consent Decrees and Rate Courts. I am curious about the rate Sony receives in other territories, but this contract does not necessarily imply anything on that matter.

The Verge made a rather weird comment about the per-stream minima in the contract. They made them sound somewhat irrelevant, because "these rates only come into play if the usage-based minimum exceeds the revenue sharing model". This is correct, but approached from the wrong direction: The minimum is fixed and the variation is in the amounts based on the sharing model. Sony will get paid on a revenue-share basis, unless that revenue share falls below the minimum, in which case they then get that per-stream minimum. Thus, Sony is protected from Spotify's potential failure to sell sufficient advertising, and Spotify is willing to give such protection. That's kind of fair on both sides, not? Furthermore, I have been reliably informed that all Spotify contracts with labels and aggregators contain such minima for the advertising-funded tiers. These minima do not give Sony an unfair advantage, except for perhaps the actual level of the minima, but I can't comment on how these compare to the minima for other content providers.

The most interesting part of the contract is how the revenue share is calculated. The contract shows that the revenue share is calculated separately for the different plans that Spotify offers. Actual earnings from the subscription tiers are therefore not brought down by any low per-stream rates for the advertising-funded tier. The free tier may bring down the average per-stream rate, but not the total. As I argued recently in my "Spotty Maths" post on this blog, the average is an irrelevant statistic. It's the total amont of money for the total mix that matters.

Finally, The Verge wrote about the MFN clause, and on the 15% on ad sales by third parties. But those comments were so dumb and ill-informed that I am not even going to get into these here. They may become the subject for another "Spotty Maths" post some other time.

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