Five years after the issue of "breakage" became a big issue in the music business, all three majors are now on board, saying they will take care of their artists by sharing unrecouped advances and liquidated equity stakes from digital services that they gain through licensing deals.
But whether Universal Music Group, Sony Music Entertainment and Warner Music Group will share with their independent label partners any funds from, say, the shares they own from Spotify when the streaming service goes public, is an up-to-now-unanswered question.
If Sony sells shares of Spotify, the company tells Billboard it will share some of the proceeds with its indie labels, although how that process would unfold is still being worked out. Meanwhile, the other two majors are tap dancing around the issue, with the Warner Music Group and Universal Music Group declining to comment.
The question came up again Tuesday (March 6) when the Worldwide Independent Network (WIN) trade group said it was starting a new initiative to add signatories to its 2014 Fair Digital Deals Declaration, whereby independent label signatories promise to treat their artists fairly in agreements with third parties relating to the digital exploitation of their music.
In a statement WIN said, "All three major labels have committed to sharing revenues from the sales of Spotify shares with the artists directly signed to their companies but WIN has further called on Sony Music Entertainment, Warner Music and Universal Music Group to give the independent labels distributed by them, and therefore those artists they represent, their corresponding share of any payout received."
But the independent artist community signed to labels distributed by the majors have "expressed growing concern about their share of these revenues following the forthcoming listing," according to WIN.
With Spotify planning to be a publicly-traded stock maybe as soon as late March through a listing on the New York Stock Exchange that will allow current shareholders to sell stocks publicly, it looks like the three major labels could experience a windfall if they decide to sell their shares, and if the price holds its current perceived value.
Because this is not a traditional initial public offering, it is not being underwritten by investment banks that protect against rapid pricing fluctuations, and it's unclear how many of the nearly 177 million shares will be offered on the opening day of the listing.
Unlike in traditional IPOs -- and leaving aside Tencent’s 7.5 percent stake, which they have agreed not to trade for the three years beginning Dec. 17, 2017 -- none of the other shares in Spotify are locked up. That means that all Spotify owners could try and sell all of their shares, if they choose -- admittedly an unlikely scenario -- as soon as the listing occurs. As it stands now, shares are trading privately at about $125 a share, and has traded as high as $132.50 a share this year, according to Spotify’s F-1 filing with the SEC. But if too many shares were offered at the opening bell, pricing could fall; or if not enough owners choose to sell their Spotify stock, prices could inflate and potentially create even bigger windfalls for Spotify stockholders that choose to hold on.
With both WMG and UMG believed to have stakes in Spotify in the 5 percent range, while Sony has a 5.7 percent stake, they stand to collectively make more than $3 billion if they choose to sell and if the pricing remains stable and retains its current value. (It is unclear how Sony got a larger share -- is it because they are better negotiators than the other two majors or has the company been privately buying shares and adding to its stake?)
With 5.7 percent, Sony's stake currently is worth $1.27 billion while if the others have stakes valued at $1.106 billion each, so combined, that's $3.39 billion in total. Some wonder why the indies are working themselves up. "Spotify is not public yet and we haven't sold any shares," says one major label insider. "There is no windfall so its premature to speculate on how the allocation of funds would work."
Some indie owners have long maintained they are entitled to their market share extrapolated against whatever monies the majors are getting.
Of the 20.5 percent market share that the Warner Music Group finished with in 2017 in the U.S., its labels owned 16.56 percent and the indie labels distributed by WEA and the Alternative Distribution Alliances had 3.94 percent share, Billboard estimates. That means by some indie labels owners and their trade group's reckoning -- if those market shares were extrapolated and held true for the globe -- the indie labels are entitled to 19.2 percent (that’s what the indies' 3.94 percent comprises of WMG’s 20.5 percent) of the $1.106 billion from possible Spotify trades, or $212.6 million to be divided among those labels by market share.
Meanwhile, Sony's distributed releases had 27 percent market share, of which 5.76 percent, Billboard estimates, was distributed by the major's distribution operation or its The Orchard operation which distributes a few thousand indie labels, and as such are entitled to 21.33 percent of Sony's possible $1.27 billion from Spotify stock trades, equalling $344.1 million.
Lastly, UMG had 36.67 percent market share, of which its major distribution operation and its Caroline, Capitol Christian Music Group and its minority owned INgrooves distributed 11.05 percent, Billboard further estimates. As such, those combined entities are entitled, some indies believe, to 30.1 percent of UMG's $1.106 billion from possible stock trades, totaling $333.3 million.
(In the U.S., indie labels comprising another 15.78% in market share are completely unaffiliated with the majors and wouldn’t have a case for claiming any Spotify payout.)
Collectively that means the majors could potentially share $890 million with the indie labels, if they were so inclined, and which indie labels -- or at least those that have signed the Fair Digital Deals Declaration -- say they would then in turn share with their artists.
In the past indie label executives have argued that the majors have misled services by claiming the distributed indie labels market share in order to get bigger advances, or in Spotify’s case, a bigger slice of equity, which is why some indie labels and their artists say they feel entitled to some of the potential Spotify windfall..
That’s probably why WIN said it is re-affirming commitments made under The Fair Digital Deals Declaration, which shows it has adopted a clear stance that amplifies its continuing adherence to fairness and transparency.
"The Fair Digital Deals Declaration is a voluntary initiative launched in 2014 and is a clear statement of those labels' commitment to their artists," WIN CEO Alison Wenham said in a statement. "With the forthcoming Spotify listing, which will value the company at an estimated $19 billion, they have the perfect opportunity to reiterate their position and more labels are expected to sign up over the coming weeks. We are fully focused on ensuring a sustainable economic relationship between the independent recorded music industry and the artists it represents."
But if indie labels think the majors should share monies from sold shares with the indie labels they distribute, say some sources in the major camp, they're missing one thing: When Spotify negotiated the majors' shares, it was the major-owned catalogs packed with superstar artists and classic catalog titles that the streaming service wanted and the indie labels were seen as a convenient bonus, in the form of one-stop deal making. Thus, some major label executives feel they don't have to share anything with the indie labels and if they decide to do so, its only because it's good business sense to treat distributed labels fairly.
Also, despite the above percentages estimated by Billboard, many indie labels actually cut their own deals with Spotify or are a part of Merlin, the licensing collective that negotiates with digital services on behalf of labels. Merlin actually claims about a 10 percent market share while indie labels using Merlin for digital deals or which have cut their own direct deals with large services like Spotify may only use the major-owned distribution company for physical product and some smaller digital services. As such, these indie labels should have no claim on any Spotify money from the majors, these major label sources have argued in the past.
Finally, some sources suggest that some indie labels are so strong and their owners so savvy that they already have negotiated a piece of the breakage pie, should their major label distributor begin to liquidate its Spotify holdings. In this case, depending on the deal struck, those indies can already plan on their own windfall.