Copyright Flaw is a column by our Editor which discusses current events on the legal side of the music industry involving copyrights, royalties, and government action.

Let’s be clear, I’m in no way claiming that artists should not be paid for their work, whether they’re the recording artist or the composing artist. They must be compensated. As consumers, we must also pay for the music we hear, as well. The problem is that established industry tycoons have the influence to lobby for legislation that protects their own business interests, and these interests should never be construed as the interests for the artists who work for them, or the music lovers who consume their product. As I’ve demonstrated, there are a number of factors here, and they all need to be reevaluated. As technology has drastically changed our culture, we need to take a second look at the entire business and cash flow in the music industry, but we cannot do it simply based on protecting revenue streams of major record labels.

I wrote that a few months ago because I was tired of people vilifying services like Spotify and acting like record labels and their musicians were victims of technological changes that are robbing them blind.

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In the article, (which surprisingly got some respect within the legal and academic fields) I lay out a very basic understanding of the incredibly complex and annoyingly antiquated royalty system that ensures (ish) that artists are financially rewarded for their work. This system is government regulated because of course it is and thus, changes within it are subject to big business lobbyists, and the glacial pace of legislation.

Anyway, I remind you of all that to bring you this piece on The Verge by Micah Singleton which contains the alleged contract negotiated between Sony Music (the world’s largest music publishers) and Spotify. Full disclosure, this contract is old by tech business standards, having been signed in January 2011, and has since been renegotiated, but it has most certainly shed some light on what goes into these super secret contracts between Spotify and record labels and music publishers, which I imagine get signed in rooms that look like this:

This is the first image that appears when you google “secret society meeting places”

The Verge points out some very notable pieces of information and stipulations contained within the contract that are simultaneously shocking, yet, also kind of not. Now, naturally, within the contract there are a few complex formulas that help determine the royalty payments Spotify must doll out to Sony each time a song is streamed. Fair is fair, of course. However, did you know that along with those royalty payments, Sony’s big-balled lawyers convinced Spotify’s smaller-balled lawyers to be totally cool with their client paying Sony $42.5 million in advances, broken down, according to The Verge, like this:

In section 4(a), Spotify agrees to pay a $25 million advance for the two years of the contract: $9 million the first year and $16 million the second, with a $17.5 million advance for the optional third year to Sony Music. The contract stipulates that the advance must be paid in installments every three months, but Spotify can recoup this money if it earns over that amount in the corresponding contract year.

But what the contract doesn’t stipulate is what Sony Music can and will do with the advance money. Does it go into a pot to be divided between Sony Music’s artists, or does the label keep it to itself? According to a music industry source, labels routinely keep advances for themselves.

If you’re confused as to why it’s necessary that Spotify not only pay royalties, but also pay Derek Jeter salary numbers for the privilege of paying those royalties… well… join the club. And note that those advance fees don’t necessarily go to artists. Each artist negotiates a different contract with major labels and I’m sure the more powerful artists maybe get parts of that, but I promise you most artists see none of that advance money.

Oh, also, every year, Sony gets to hire an “independent auditor” to determine whether or not Sony has the best deal with Spotify, or if another record or publishing company has perhaps renegotiated something better. Yes, Sony has a contract stipulation that they must have the best deal with Spotify. It’s called an MFN or “Mother F*cking Nonsense” “Most Favored Nation” clause.

Finally, the last thing I’ll point out from The Verge’s dissecting of the contract is the whole issue of ad revenue. Spotify at this point can really only take in revenue two different ways: ad sales, and subscriber fees. Well, apparently, according to this contract, Spotify was allowed to take 15% of its ad revenue from third parties before having to split 70/30 with the labels & publishers. That might not seem fair to the publishers and record labels, and it isn’t. However, Sony was also given, per the contract, free ad space on Spotify worth a total of $9 million. They could use this ad space for their own use or resell it for their own gains. Oh, Sony can buy ad space, as well, but not at a fair market value. Instead, Sony can purchase ad space for heavy discounts.

You can read all of that and much, much more, including an embedded pdf of the actual contract, over at The Verge. There’s another wave of publishing and royalty issues coming so I’m sure I’ll have a bit more in the coming days and weeks and possibly forever and ever and ever and ever….

 

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