Here’s How The Labels Might Share Their Spotify Stock Windfall

Apr 06, 2018

Sony Music Sold 17.2% of Its Spotify Shares, Worth $250M+ (Music Business Worldwide)

As Spotify Trading Begins, Labels Fret Over When to Sell, And How To Share Profits (Billboard)

This week brings us to the crossroads of an issue long debated in the music industry:

When Spotify goes public - when, how, and with whom will the major labels share their profits?

The answer is beginning to unfold, as it was reported Sony Music cashed out $250 million of their 5.71% ownership in Spotify.

After this sale, Sony is now said to have approximately 4.7% in Spotify (estimated around $1 billion), while both Universal and Warner Music Group have approximately 4% each (estimated around $900 million each). It is also important to note that all three majors have publicly declared they will share these profits with their artists and independent label distribution partners.

The major music publishers did not obtain Spotify equity, so unfortunately, the songwriters are not part of this profit sharing conversation.

So then, who gets what from the labels profits?

The Billboard article gives some great insights and questions that I will attempt to answer and speculate on:

“How do you pay an artist who might have been generating a lot of streams when the label first got the shares, but isn't streaming at all nowadays?”

“Do artists who signed after the label negotiated for and received shares of Spotify deserve a share of the proceeds?”

“What do you do with artists that have left the labels?”

"It's a highly complicated situation. We might need to go out and find an independent third party who is seen as objective and fair to come up with the fairest way to proceed with how to share these funds."

“...some sources suggested that the funds should basically be treated the same way streaming revenue is treated in each artist or label contract.”

First, no one knows exactly what is in each artist’s contract except those with the privileged information. However, we do know that revenue generated under “licenses” is split 50/50 between the label and artist. The labels signed “licensing” agreements with Spotify, so streaming revenue could be paid as such, but that’s not necessarily true for all.

Treating this the same way as streaming revenue under the artist contract could cause problems, because these Spotify equity profits are not attributed to individual artists, streams, etc.  

An independent third party administrator with their own fair and transparent distribution method of the profits is more likely in my opinion. For example, a big name that comes to mind is the alternative dispute resolution attorney, Kenneth Feinberg. Mr. Feinberg is best known for distributing victim settlements in tragedies like 9/11, the gulf oil spill, and Virginia Tech massacre.

In 2010, Mr. Feinberg was also an impartial third party hired to distribute a massive, multi-million royalty settlement between the major record labels and the music publishers. Under this settlement, the record labels were sitting on millions of dollars in publishing royalties that needed to be cleared off their books. The way this money was distributed was by analyzing the record company books and attributing a market share or pro rata percentage, to every payee relevant to the settlement. So, if a publishing company came out to be 2.5% of the label payments found on the books, they got 2.5% of the settlement funds.

With that in mind, let’s just pretend Sony Music set aside 50% of these Spotify profits as an “artist profit sharing” pool (approximately $125 million based on today’s news). Sony then analyzes their Spotify artist and indie label income data from the date Spotify shares were acquired. If Beyonce recordings were to make up 2.5% of Sony Music’s Spotify revenue during this time period, Beyonce gets 2.5% of the pool (which works out to approximately $3.1 million for Queen Bee).

Some object to this model arguing that it just makes the rich richer, and in some cases, that may be hard to argue against. However, the industry usually gravitates toward this “market share” or “pro rata” model for big royalty pool payments. For example, the current streaming royalty model is pro rata, in which the labels and artists with the most listening time get most of the on-demand streaming royalties. It worked the same way under the 2010 label-publisher settlement administered by Mr. Feinberg, therefore it would be no surprise if Spotify profit sharing were treated in a similar fashion.

And now other headlines from the week...

Benom Plumb, Assistant Professor of Music Industry Studies at the University of Colorado Denver, reviews the biggest stories of the week affecting music royalties. He is a music industry professional, not an accountant or attorney. For more info about Benom, visit his website at www.professorplumbmusic.com.