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The major labels are paid huge advances or guarantees for Spotify's use of their artists' music. But do their artists get any of that money? Here to address that issue is music industry attorney Steve Gordon, who brings specific contract language and terms to the table. Steve was assisted in writing this piece by Emily Borich and Ariel Greenberg.
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Much ink has been spilled that Spotify pays a pittance to indie artists. As reported in these pages, the average payout for an indie label is about $0.005 per stream (half a penny). But for artists signed to labels, the situation is even more frustrating; they must wait until the label receives its money from Spotify first, because almost every record contract states that the label receives ALL the income generated from the commercial exploitation of their recordings. Of course, the label is supposed to turn around and pay the artist their contractually defined royalty.
Most artists signed to major record companies are 'unrecouped,' that is, they owe their labels money. Major labels spend a great deal on production costs, including hefty and sometimes huge producer fees, not to mention videos, indie marketing, and other contractually defined expenses. The artists are responsible for paying all these costs back, and until the label 'recoups' these expenses, they do not pay the artist any record royalties. Only the superstars, who sell millions of records, avoid this unrecouped status. So whatever Spotify pays the majors rarely trickles down to the non-superstar artists.
It is generally well known that on-demand streaming services such as Rhapsody pay huge upfront monies to the labels for the use of their music. For years, those services have complained that the upfront payments are so high they threaten their very existence. Spotify could not even open their doors in the US until they agreed to pay a great deal of upfront money to the majors; there's speculation these payouts were in the tens of millions of dollars.
But, again, do the artists on the majors see any of these monies? Aside from the recoupment issue, there is a more evil clause that works in tandem with the concept of recoupment to deny most major label artists the monies that the labels receive from Spotify.
The language quoted below is from a major label contract with a now famous artist who signed it before becoming famous. In other words, this is typical language in any new artist recording agreement with a major label. The specific provision deals with income received by the label from other uses than normal physical or digital sales. In the old days, it would apply mostly to licenses of the Artist's Masters in movies and TV. Now, it also applies to licenses granted by the major labels to audio on-demand services such as Rhapsody and Spotify.
"If Record company authorizes the use of any Master Recording made under this agreement on a flat fee basis, royalty rate or cent rate basis for any type of use not specifically covered elsewhere in this Article 9, (such as, but not limited to use in a commercial or motion picture), it will credit your royalty account with an amount equal to fifty percent (50%) of its net receipts attributable directly to that use. "Net receipts," in the preceding sentence, means Record Company’s gross receipts as computed after deduction of all payments required to be made by Record Company to others in connection with those uses (for example, re-use payments under Record Company’s agreements with the American Federation of Musicians). If another recording artist, a Producer, or any other Person is entitled to royalties on such uses, the amount to be credited under this paragraph will be apportioned in the same ratio as that among your respective basic royalty percentages. If any item of such receipts is attributable to Master Recordings made under this Agreement and other Master Recordings, the amount of that item includible in gross receipts under this paragraph will be computed by apportionment on the basis of the number of Master Recordings involved."
(emphasis added).
Under this language, the label may not owe any of the upfront monies paid to it by Spotify to most of its artists. First, the clause states that the monies attributable to licenses for the Artist's Masters must be "directly" attributable to the use of that Master. But the advances from Spotify are for the use of the entire catalog of the label, not "directly" for particular Masters. Second, even if the labels were to pro-rate the advance and "credit" their artists’ accounts, the manner in which they pro-rate that amount is designed to pay the fewest artists the least money possible.
Here's how it works: the language states that the label will pay "by apportionment on the basis of the number of Master Recordings involved." Suppose the major label licenses its entire catalog to Spotify and that catalog includes 10,000 tracks. Suppose further the advance is three million dollars. Under this formula, the label would "apportion" $300 for each master (that is, three million divided by 10,000 tracks). Assuming 90 percent of the Masters are by artists who are unrecouped, that would leave only 1,000 tracks for which the label would actually have to pay royalties, that is, 1,000 x $300 = $300,000. That $300,000 would then be paid out to the superstar artists who are recouped.
The label retains $2.7 million. And the only artists who get paid are the superstars.
If the label did the apportionment based on plays, rather than the number of Masters licensed, then the recouped artists would get credited the vast majority of the three million. That is because the superstars get vastly more hits than the less successful and less well-known artists. If the label paid on the basis of the number of streams rather than the number of Masters submitted, then they might have to pay a serious proportion of the three million dollars to artists who generated a serious number of hits.
(Steve Gordon is a music attorney practicing in New York, and author of the book series, The Future of the Music Business.)
@mattadownes Monday, July 09, 2012
Paul,
Maybe I'm missing this, but does the 2.7m count as a credit towards the unrecouped artists advance? (hence, lowering the recoupable amount at least?)
Visitor Tuesday, July 10, 2012
It does, but the point is: money gets divided equally irrespective of the number of streams.
So, for eg, Foster The People were signed on a major label & owed that label $1m as unrecouped money, they would only be credited with $300 for their hit single 'Pumped Up Kicks'; while in reality, that song would have made much more than any other average song. So Foster The People lose out on bucks, & other bands benefit. Either way, the record company gets to pocket all of the money.
paul Tuesday, July 10, 2012
I'd add that based on my conversations on the topic, unrecouped pools are often regarded as black holes. The majors aren't known for their diligent and honest accounting, meaning, they're not likely to call up a cut artist 12 years later to announce that their unrecouped position is now recouped.
More likely, the scenario is that the major will only respond to a serious legal threat, audit, or other action to reclaim money.
Here's an article worth reading about the unrecouped position by OK Go at EMI:
Why OK Go Will Never See a Dime from EMI...
/paul
(written while listening to Freakhouze on Turntable.fm)
lifer Thursday, July 12, 2012
Yep
Visitor Tuesday, July 10, 2012
I was wondering the same thing....
Paradox Tuesday, July 10, 2012
Is this any different from Itunes and CD sales?
The Major Labels also "recoup" expenses from Itunes/CD sales.
No?
Download pays indie artists around $0.65 per download
Spotify pays $0.005 per stream.
130 streams = 1 download.
An indie artists with 2 CD (with 10 songs each) just need each song streamed 1,000 times a day to make $3,000 a month.
Which mean if you have a fan base of 1,000 people who listen to your (2 CDs/20 songs) 1 time a day, you will make $3000 each month.
patrick Tuesday, August 14, 2012
the half penny per stream is paid to the label, who, if the artist is not a major superstar, do not pay it to the artist until after they recoup there expenses, and if there are cross - collateralization clauses, it means never, in practical terms.
Visitor Tuesday, July 10, 2012
The question is how many indie artist have 1,000 hardcore fans who are willing to listen to the 2 CD once a day.
1,000 listens x 20 songs x $0.005 x 30 days = $3,000
Spotify has something like 25 millions users. Can you find 1,000 out of that 25 millions?
Cliff Baldwin Tuesday, July 10, 2012
Itunes seems to pay labels big and small every month like clockwork. It's really easy to understand. You sell songs and albums, you get paid your wholesale and publishing. You put the money in the bank. It might be $1M a month it might be $1 a month, but it's clear. Take a look at your play counts in iTunes over the last five years. Factoring out runaway play counts from endless loop playlist accidents (doesn't happen on Spotify) see how many spins your favorite artists have gotten over years. Then do the simple math. Not only are middle of the pack artists not getting paid, there isn't enough money flowing to pay anyone in the food chain enough to make it a viable business. Spotify is an investment gamble by the labels. It is the new last ditch winner take all music business strategy. Everyone will probably wind up with nothing on this one. Unless some company in Silicon Valley buys it.
steveh Tuesday, July 10, 2012
The big question is:- do Spotify count these big upfront advances to majors as part of their "65-70%" of their income paid out for content?
Visitor Tuesday, July 10, 2012
It does, but the point is: money gets divided equally irrespective of the number of streams.
So, for eg, Foster The People were signed on a major label & owed that label $1m as unrecouped money, they would only be credited with $300 for their hit single 'Pumped Up Kicks'; while in reality, that song would have made much more than any other average song. So Foster The People lose out on bucks, & other bands benefit. Either way, the record company gets to pocket all of the money.
Steve Gordon Tuesday, July 10, 2012
I think you got it!
Central Scrutinizer Tuesday, July 10, 2012
I am no fan of major labels and their accounting practices but do you really think anyone would have heard of Foster The People or heard their "hit" single if it wasn't promoted by the label.
Also, major label business practices have been known for decades. If a band signs a contract with them and thinks that they will become rich off of one hit single they are crazy.
Finally, the odds of getting a hit single today are much worse than 20,30, 40 years ago. Yes it's much easier to DIY these days but that means the market is flooded with DIY musicians. How will you be heard? By signing a deal with the dev....ahem...major labels.
Devil's Advocate Tuesday, July 10, 2012
I'm not sure this is right. Advances are not flat fees. They are advances against per use payments. Suspect the majors treat advances from digital services like advances from any catalog licensing deal - the artist's (recouped or unrecouped) royalty account only gets credited in the accounting period after an actual sale of his track is reported to the label. The amount of the advance itself is not any individual artist's business, it's purely a function of the major's negotiation power, a function of their market share.
Terminology Tuesday, July 10, 2012
A digital service provider pays *royalties* to distributors and labels. Earnings are distributed to shareholders, retained or (most likely for a digital music service) don't even exist in the first place (since earnings are basically the same thing as net profit).
Mike Facer Tuesday, July 10, 2012
Word to all young artist; make sure you get your stream money.
Stay indie!
@create_legal Tuesday, July 10, 2012
Perfect example of why we need fair contracts for artists.
@tyr Tuesday, July 10, 2012
Spotify c'est pas mieux que Megaupload pour la rémunération des créateurs réels
@bwingobango Tuesday, July 10, 2012
Great article, Steve Gordon
@tampa_rick Tuesday, July 10, 2012
Good Read!
@yumawray Tuesday, July 10, 2012
In conclusion? FUCK Spotify - you should probably go back to illegally downloading music online.
@future_of_music Tuesday, July 10, 2012
An example of why we need fair and transparent compensation structures for musicians.
@bemuso Tuesday, July 10, 2012
Good points (note: USA biz)
@thepropermood Tuesday, July 10, 2012
Interesting. Seen a lot of in-depth articles on the act of streaming and it's payouts. Has Spotify retorted?
@raresound Tuesday, July 10, 2012
You are better off as an indie artist when it comes to getting paid from online streams
@splashFM Tuesday, July 10, 2012
amazing article...
@vertigo_media Tuesday, July 10, 2012
If it all begins with a song, why is the artist the last to get paid if at all?…
Paradox Wednesday, July 11, 2012
Indie route: You get 70% of revenue from Itunes/Spotify etc.. (after a small distributor fee)
Label route: How much you get depending on your contract and the "recoupable" expenses.
CBQ Wednesday, July 11, 2012
Major route - they pay for everything with money you've not yet earned - your advance is a loan with no interest - you (may) get somewhere but you have no money
Indie Route - you have no cash - you (usually) get nowhere and you have no money
Summary - don't bother
The Insider Wednesday, July 11, 2012
Great article Steve,
LOL sounds like language from either an EMI or Sony Agreement!
The main takeaway from this article is quite contrary to thread of comments thus far.
Artists - Your lawyer is a very important and key piece of team YOU.
Many artists have little or know clue wtf their attorney knows about these scenarios/clauses or how to negotiate subsequent agreements containing such on their behalf. Despite the decline in sales, entities that will always make $$$$ in the "NEW" music business, include lawyers, UPS and Fed Ex. Yes, UPS and Fed While he/she/it may know legalese and have great connections , there are lawyers out there who cannot add two pennies and a dime to save themselves. Some of them artists pay a lot of $$$, often twice.
upfront $$$ ain't always good $$.
Learn math
Erik Mendelson Wednesday, July 11, 2012
Let me first thank Steve Gordon for shedding some insight into the contract language that impacts Spotify royalties. With that being said I believe a correction should be made to Steve's mathematical calculations.
Going off of his example of 10,000 catalog songs, the actual per song payout is less than the $300 calculated. The actual payout in his example should have been $150 per song as the labels who own the master rights would only be giving 50% of the overall collected 3 million dollar advance leaving 1.5 million dollars to be divided by the 10,000 songs. Otherwise, under the example, if those 10,000 songs were hypothetically fully recouped than the fully collected 3 million license advance would be fully paid out to the artists which we know the labels would NEVER do. The labels only share 50% of the licensing fee( Spotify, synch fees) with the artist knowing that the majority of their artists as Steve pointed out, are unrecouped anyway and would never see that share.
On the same topic, since this crafty accounting practice is used by the majors, artists would feel somewhat more at ease on Spotify if the $150 is reflected and credited in their royalty statements which I doubt it is. And of course, if the labels, as Steve pointed out accounted for the plays instead of the catalog. The transparency issue between Spotify/labels and the artists could be resolved but neither company cares about the artists. Period.
In closing, my question to Steve would be, has he seen royalty statements from major labels artists where their share of the Spotify licensing amount has been credited to them whether they're recouped or not?
Musically,
Erik Mendelson
@erikanswerman
(written while listening to MIMS "Fuck My Life")
Steve Gordon Wednesday, July 11, 2012
Erik,
Thank you for your correction. You are exactly right the labels would only credit $150 not $300 (50% not 100%). In answer to your question I was a business affairs executive and lawyer for a major record label for 10 years. Although I don't recall seeing the royalty statements, a friend who was in the royalties department told me that for our license to MTV for which we received several million dollars each year, the label credited the artists in exactly the same way that I set forth in the article. That is, if we submitted 250 videos in one year to MTV, we would divide the license fee paid by MTV by 250. Then we would credit that amount (actually 50% of that amount) to each artist for each video. The accounting statement received by the artist may or may not have been transparent.
Steve
@danielstone Thursday, July 12, 2012
Can someone remind me why we're meant to feel bad for these rubes?
@michealstjames Thursday, July 12, 2012
Think Spotify is the answer?
You're kinda right, not for artists, but for labels.
Great Article
Rohhit Pasi Saturday, July 14, 2012
Indeed its no different from any other industry. Specifically indie artists will have to bear the shit these record companies throw at them under their T&C clauses. The article clearly highlights - Its my way or Highway for Indie artists.
I often wonder what happens when an artist goes "Recouped" say after 10 years. No record company can prove that they paid his due credit. No & never. Not a surprise that several producers have come up with their own record labels & private funding only to help them afloat in industry.
Plus comparing payouts by spotify streams & iTunes/Digital media sales, iTunes stands tall among all of them.
In a nutshell, if somebody thinks about being an artist only for the sake of frequent flying & crazy fan following should think thrice as artists work their butts off for several years as underground performers with almost nothing in their bank accounts.
visitor Tuesday, July 17, 2012
While your point is well taken, I think it's a stretch to say that the language is "designed to give the least amount of royalties possible."
It seems more accurate to say that this is old standard language that was not designed for the specifics of the Spotify deal. It was designed to handle things like sync licensing and re-issue deals.
Presumably, if this old language was bad for labels, they would probably have changed it. But this langauge is open enough to at least allow for the interpretation made in this articule.
That said, it also seems arguable to me that the language quoted above says the following: that label should be apportioning the money earned from the license on a track by track basis to the extent the income derived from the deal is attributable to each master in the deal (essentially on a stream by stream basis in a deal like this).
Is that a slam dunk interpretation? No. With respect to streaming income, this clause is at best fuzzy. Fuzziness will always favor the party with more power. Here, that's likely to be the label not the artist.
Therefore, artist attorneys need to be aware of the ambiguities in a clause like this and make efforts to close them.
But let's not get sensationalist here. As others have said, most artists will never recoup with or without this language.
But that doesn't mean that artists walk away with nothing when they do a deal like this. As others have said, the label pays for a lot of stuff. If the venture is a failure, the artist typically walks away and doesn't have to pay that money back.
There are plenty of artists who have never recouped on major label deals but have nevertheless had long careers.
Owning 100% of something that nobody knows about can be worth a lot less than owning a smaller part of something that lots of people know about.
If I have to choose between being Foster the People or some band nobody has ever heard of that owns 100% of everything, I think I choose being Foster the People, even if I got ripped off.
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