At the height of the frenzy over a leaked licensing contract between Sony Music and Spotify, Sony's leading digital executive, Dennis Kooker, issued to Sony employees a multi-point rebuttal that defended standard business practices and challenged assertions the company doesn't share some revenue with artists.
The May 22nd company wide email from Kooker came three days after The Verge posted the leaked contract, creating waves of controversy throughout the industry, prompting an open letter from the International Music Managers Forum and attracting legal action by 19 Recordings. The rare insight into legal dealings between a label and a digital service added to existing anger about the lack of transparency in music streaming.
In his email Kooker, first published at Music Business Worldwide and presented in its entirety below (the email was subsequently provided to Billboard by Sony), defends the common practice of requiring advances from digital services. He writes advances help guarantee Sony and its artists "are paid appropriately" when market rates might not be fully established for new business models. He also believes advances help ensure new digital services "are properly committed and incentivized" to build a successful business.
The notion that advances limit financial risk isn't new. Back in 2012, Universal Music Group executive vp of business development & affairs David Ring explained an example of a music startup that went out of business owing $2 million in royalties. When a service without a revenue model can't afford to pay a small streaming royalty, "that's not the record industry's or the artist's or the writer's fault," said Ring.
Some of the most controversial aspects of the leaked contract were provisions for Sony Music to collect revenue other than activity-based streaming royalties. For example, Spotify was required to pay Sony Music if certain revenue thresholds were not reached. Kooker stresses Sony Music "fairly and equitably" shares non-royalty revenue such as "unallocated income from advances, non-recoupable payments and minimum revenue guarantees" received in distribution deals.
Regarding advances specifically, Kooker claims "virtually all of the advances" -- everything except $263,000 from advances of $42.5 million -- was recouped as normal royalties. In other words, breakage for the three-year contract of $263,000 was processed at the end of the contract's term in 2014 and allocated to Sony Music artists.
Another controversial deal point was an allocation of Spotify's display advertising. Sony was given display ad inventory at discounted rates as well as the right to keep the proceeds from their resale. The Music Managers Forum singled out this clause in the leaked contract, asking if it should "alter the basis upon which royalties are shared between labels and artists."
But Kooker bluntly called criticism of receiving ad inventory as misguided. "Contractually ensuring access to ad inventory from our digital service partners enables us to more effectively promote our artists by expanding our marketing scope," Kooker wrote. He also flatly denied Sony Music re-sells digital services' ad inventory and claimed access to such inventory does not impact Sony Music's spending in support of its artists.
Kooker's email echoes a Sony Music statement given to Billboard the day before Kooker sent the email. That statement claimed Sony Music has "historically" shared with artists digital breakage stemming from "unallocated income from advances, non-recoupable payments and minimum revenue guarantees" with digital service providers. What's more, Sony stated it shares these revenues "can be associated with individual master transactions."
And yet Sony Music believes it's not always required to share non-royalty revenues with artists. In a court filing in the 19 Recordings lawsuit, Sony argued revenue not tied to specific master recordings may not be shared with artists. In support of its claim, Sony pointed to an earlier court decision that Sony was not entitled to share with artists settlement proceeds from copyright infringement lawsuits. The filing does not indicate whether or not contracts with other Sony-distributed labels contain the same language and terms.
One area not mentioned in Kooker's email was Sony's 6 percent stake in Spotify. Labels often require equity from new digital services in addition to advances and stiff contractual terms. Critics of the practice call it a "quid pro quo" arrangement in which equity is traded for lower royalties. They worry labels are not contractually obligated to share the proceeds from a sale of that equity. Given Spotify's current $8.4-billion valuation, Sony's 6-percent stake amounts to roughly $504 million.
TO: Sony Music Entertainment Employees
FROM: Dennis Kooker, President, Global Digital Business and U.S. Sales, Sony Music Entertainment
DATE: May 22, 2015
As you may be aware, there has been a significant amount of discussion in the media and elsewhere lately regarding how record companies, including Sony Music, negotiate contracts with digital music services and share money from these services with artists. Unfortunately, much of the conversation around this issue distorts and mischaracterizes the legitimate business relationships between Sony Music, its artists and digital services. It also is creating much misinformation and confusion throughout the industry.
In order to promote a better educated marketplace, we want to arm you with some key facts to keep in mind as we interact on this topic with artists, their managers, and other key constituents in the industry:
1. Sony Music fairly and equitably shares revenue from all digital services with its artists. This is a core mission of our company and includes digital “breakage”, which covers all unallocated income from advances, non-recoupable payments and minimum revenue guarantees that Sony Music receives under its digital distribution deals.
2. In our 2011 deal with Spotify, virtually all of the advances paid under that agreement were recouped under normal service usage and allocated to our artists. Breakage on the agreement totaled $263,000, which was processed in 2014 and paid out to artists under our normal course of business according to Sony Music’s breakage policy.
3. Suggestions that we are not paying breakage on our current deals with digital partners are incorrect, because we don’t process breakage until after a deal term ends. We typically do not have all of the information necessary to allocate the breakage until we receive the final reporting at the conclusion of the contract’s term.
4. Sony Music requires advances from digital services for a reason—to promote a vibrant marketplace that engages in responsible experimentation. In order to guarantee that Sony Music and its artists are paid appropriately, we may require “non-returnable” advances, guarantees or “flat” payments from our partners. We do this in situations where the business model or market pricing are not fully established, as well as to ensure that new entrants to the market are properly committed and incentivized to build a healthy business that fairly compensates both the service and the rightholders.
5. Any implication that there is something inappropriate about Sony Music receiving ad inventory as part of an agreement with a digital partner is misguided. Marketing our artists is at the core of what we do. Contractually ensuring access to ad inventory from our digital service partners enables us to more effectively promote our artists by expanding our marketing scope. Sony Music does not sell ad inventory provided by its service partners, and access to service ad inventory has had no impact on SME’s overall marketing spend in support of its artists’ projects.
If you have any questions regarding our Breakage Policy or the recent leak, please reach out to Julie Swidler, our General Counsel, or me.