The biggest source of growth for the music industry may be online streaming. But, as Sony has learned the hard way, if the business terms behind it are revealed to the public, it can cause a serious rift. Being the second-largest record company in the world, Sony discovered that part of its business strategy was exposed last week when a contract with Spotify, which is now outdated, was leaked online. The company was harshly criticized by one of its own artists, the French D.J. Madeon, for its approach to another popular streaming site called the SoundCloud. Technology news site, The Verge, had published the contract.
Representatives of both companies had signed the contract in January 2011 and it had been written on Sony’s letterhead, a short while before Spotify had opened in the United States. Two years had been covered in the 41-page document, with an option for third and it had exposed terms that been speculated over in the music industry for years. Longstanding debates were also intensified about the amount of control exercised by major record labels over Spotify and how much money is finally given to the artists. According to experts, the leak of this contract reveals how much record companies like Sony are benefitting from other services like Spotify.
The contract granted Sony with $9 million advertising credit and demanded advance payments about $42.5 million. A complex formula was also mentioned, which would be used for calculation of royalty payments. Common in most digital contracts, there was also a ‘most favored nation’ clause, which obligated Spotify to pay higher rates if more favorable deals were made by other labels. Spotify didn’t comment whereas Sony said that they wouldn’t say anything about a document that was outdated and illegally obtained. Since then, it has been taken down.
With 45 million free listeners and 15 million paid subscribers, Spotify is often criticized for the economics behind digital music. The company has said that it pays about 0.6 to 0.84 cents for every stream, which has been deemed unacceptable by several artists. The leaked contract shows that Sony was promised about 0.225 cents for every stream. Last year, popular singer Taylor Swift removed her music from Spotify because it wasn’t keeping it only in the paid level. The contract doesn’t just shed light on how much Spotify pays Sony; it also focuses attention on how much artists are paid by their record labels.
Groups are demanding more transparency in deals between streaming services and record labels so there are no mystery deals that are hidden for artists whose copyrighted creations are used. Sony has said that it gives its artists all income from minimum revenue guarantees, non-recoupable payments and income from advances. Privately owned Spotify is valued at $8 billion and Universal, Sony and Warner are a few that own minority stakes in the company. Sony and SoundCloud are also having problems because latter hosts unlicensed songs so no royalties are paid by users, causing Sony to remove tracks from it.