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Artists Will Receive Nothing from the $3 Billion Beats Acquisition, Sources Say…

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The three major labels secured an equity share in Beats Music as part of their licensing agreements with the service.  But according to multiple sources close to those negotiations and Beats’ subsequent sale, artists on those labels will receiving nothing at all from the roughly $3 billion acquisition by Apple.

The reason is that acquisition earnings aren’t tied to actual sales or streams, and therefore are not accounted at all to label artists.  “They will get nothing,” one industry attorney flatly told Digital Music News, while insisting on anonymity.

“There’s nothing in the [artist] contracts that says the label has to share those earnings.  They draft it like that so the artists get nothing.”

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May 28th: “Apple: ‘We’re Buying Beats for $3 Billion‘”

In order for a service like Beats Music to license major artists, they first have to trudge through negotiations with the three major labels: Universal Music Group, Warner Music Group, and Sony Music Entertainment.  They then pursue deals with smaller independents, publishers, and other rights owners before launching.

The licensing agreements typically involve large upfront payments, equity shares, per-play payments, or all three.  In the case of Beats Music, launched this year, a pair of sources involved in the negotiations noted that the emphasis was on percentage shares, not upfront payments.  In all, labels received a collective 5%, which translates into about $200 million from the Apple sale.

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June 6th: “Why Apple’s Acquisition of Beats Is Bad for Indie Labels, Artists, and the Industry…

Incidentally, the sources noted that this pales in comparison to a roughly 20 percent share in Spotify, though longtime Interscope and Universal Music Group executive Jimmy Iovine may have negotiated the softer deal.  Indeed, Iovine was instrumental in negotiating licenses between the major labels and Apple’s iTunes Music Store back in the early 2000s, and remains a de-facto representative for the majors.  Spotify, on the other hand, lacked this advantage and waited far longer to secure its deals.

Meanwhile, one source has agreed to leak a portion of a major label artist contract — involving one of the largest artists in the world — to prove that not only are acquisition earnings like these excluded from artist payouts, but so are all other royalties from streaming services.

In other words, major label artists are effectively screwing themselves out of all streaming revenues – acquisition-related or otherwise – when they sign on the dotted line.

 

More details ahead.  We now bring you back to your regularly-scheduled coverage on Billboard.  

Written while listening to Zebra Katz.  

 

 

 

 

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Comments (37)
  1. David

    Excuse my incredulity, but if major artists were receiving no royalties at all from streaming services I think we would have heard by now. Their managers and accountants would have noticed.


    Reply
    1. Paul Resnikoff

      Yes, they have. There’s a lot more to this story.

      So basically, the biggest artists are the ones that can demand a piece, because the labels need them. According to one source, an attorney tied into these deals, the largest artists – Gaga, Mars, Perry, etc. – basically demand a payment, and it isn’t a per-play half-a-penny bullshit thing. It’s a massive payment, and if the artist doesn’t receive it, they aren’t playing ball (ie, licensing Spotify, releasing a new album, etc.)

      Anyway, keep reading. All these details are coming out now.


      Reply
      1. David

        So in fact they are getting a lump sum payment that (with expert advice) they think is better than royalties? If that’s what you mean, shouldn’t you say so, rather than wait for someone to smoke you out?


        Reply
        1. Paul Resnikoff

          I don’t think you’re understanding the dynamic here. Based on the executives and attorneys I’m talking to, and these are knowledgeable people close to the deals, a vast majority of signed artists are not getting paid anything at all. In fact, it’s a contractual default that they will not get paid. Only the tiny percentage of artists that are at the top and have clout with the major can make these demands, and it supersedes the language of the contracts.

          I’m securing a copy of a major artist contract that will shed more light on this aspect.

          So if you think that’s a good system, ie, paying the top 0.5% who come in demanding it with threats, then okay.


          Reply
          1. David

            OK, I await your further revelations, but I hope you’re not just saying that most signed artists never recoup their advances, because that would not be new, and there is no reason to suppose that it changes with streaming.


            Reply
            1. Jeff Robinson

              After much tergiversation, a former CEO of WEA told me that they tried to re-write/re-work artist contracts accordingly with these equity deals. I asked, “Do you do that one at a time or just when the artist complains about it?” He tried to make it sound like it was pro-active, but in reality it just doesn’t happen. This was lip-service to the concern to try and make them sound sympathetic.


              Reply
              1. just a reader

                True that some artists aren’t receiving payment from streaming. But that is because of the artist’s agreement with their label, and not the streaming service. Get it straight.


                Reply
        2. Anonymous

          Nothing new. An advance for all intents and purposes is a lump sum payment with a tiny bonus on the top if your album is ridiculously successful. People don’t see it that way, but that’s really what an advance is.


          Reply
      2. Faza (TCM)

        Mmmkay, Paul, colour me interested. I really hope you’ll have something more concrete on this soon, ‘coz this is probably the biggest piece of news regarding streaming since Spotify.

        Let me just see if I understand you correctly:

        You’re saying that a standard new contract with a major label includes provisions that no royalties are payable on streams, unless we’re talking about a major league artist with considerable negotiating clout? We’re not talking about equity stakes here, or anything of that sort – just normal royalties paid for usage?

        Moreover, you are also saying that those artists who do have sufficient clout are taking massive upfront payments for allowing their new releases to be licensed to streaming services? Are we talking advances, one-off payments or one-off payments plus royalties?

        Neither of those scenarios would surprise me much, knowing what I do about major label contracts and the… ahem… financial attractiveness of streaming. I have to point out, however, that if the biggest acts are taking one-off payments in lieu of royalty entitlement (which is what you appear to be saying here) it would be the most overt condemnation of the streaming model we’ve seen to date, because it would basically mean that those artists (or rather, their business teams) think that even in the long run, streaming isn’t likely to generate as much revenue as that one-off payment; that streaming royalties are worth peanut shells, in fact.

        Again, not particularly surprising, but newsworthy all the same.

        I’m really looking forward to some details.


        Reply
  2. john

    why in the world would artists benefit directly from the buyout? That’s a ridiculous concept. Just because I uploaded a youtube video doesn’t mean I should have gotten money when google purchased youtube. So silly


    Reply
    1. oz

      agreed, there’s no real reason why anyone not central to the original deal and hence buyout would get anything.
      this appears a separate issue to payment of streaming royalties, without knowing the complexities of the deal – unless the fundamental deal structure actually precludes any potential streaming payouts to artists….


      Reply
      1. David

        The allocation of equity to the major labels is part of the package of value they received in exchange for licensing their content to Spotify. If they did not receive equity, they would require higher compensation in royalties to make up for it. If artists do not share in the equity value, then the labels are diverting value away from artists and into their own pockets. No big surprise there, but it is unethical if not illegal. Is there not a fiduciary duty of some kind in situations where revenue is divided between contractual parties (such as a record company and a recording artist)? Suppose, for comparison, that a business has a managing partner and a ‘sleeping’ partner who shares in the revenue according to some agreed formula. If the managing partner were found to be doing deals on the side, in which the sleeping partner was not sharing the profits, the managing partner would be heading for punitive civil damages if not jail time for fraud.


        Reply
        1. Anonymous

          Slippery slope. The mere act of signing a successful artist can create substantial market capitalization in the record label itself, which people with equity in the record label can then sell off for real $$$. When EMI got sold off for billions, most of that money went to real people remember. Artists are effectively contractors in a world where even employees aren’t usually entitled equity.


          Reply
        2. David

          To partly answer my own question about fiduciary relationships, the literature suggests that it varies according to the details of each case. For example, the Beatles won a case against one of their early record labels because there had been a breach of a fiduciary duty. On the other hand this article discusses some other cases, where the Court held (with some dissenting opinions) that there was not a fiduciary relationship in the full sense: http://www.ivanhoffman.com/fiduciary.html

          But what struck me most in this was the Court’s remark that ‘Every contract requires one party to repose an element of trust and confidence in the other to perform. For this reason, every contract contains an implied covenant of good faith and fair dealing, obligating the contracting parties to refrain from “‘doing anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract ..” ‘.

          Some of the alleged conduct of record labels seems to fall squarely under this description.


          Reply
    2. Anonymous

      Because it’s a damn crime if anyone but the artists in any way profit from music.


      Reply
      1. Stan

        I guess us radio DJ’s, promoters, venue owners, bars, marketplaces, streamers, distributors, etc etc etc should do what we do for free.


        Reply
        1. adapt, they said

          You can sell merchandise with your radio or venue logos on it. Sell some t-shirts.

          Adapt, don’t be a dinosaur.


          Reply
        2. Esolsek

          You can work for ten cents an hour like the artists do. Complain to those above you, not below.


          Reply
  3. simple question

    Who pays for ChillingEffects .org?

    I have asked 10 different music industry bloggers and no one bothered to investigate.

    Paul, want to be the one who does his job?


    Reply
    1. jw

      Well their postal address is the EFF office, so presumably anyone who donates to the EFF…


      Reply
    2. Think it through

      Of course artists see the money. What do you think the labels do, eat it? it goes back into the machine to sign and develop new acts. Unlike anything at Google / YouTube / Mega who simply trouser the lot of it. This deal is a GREAT deal for artists.


      Reply
    3. Anonymous

      It’s run by the Electronic Frontier Foundation of course. Quite frankly, Chilling Effects is an important service for keeping the system working honestly. Would you prefer if there was no way to independently verify what is being removed off the web?


      Reply
  4. Think it through!

    Of course artists get a share of that money.What do you think the labels do with it? Eat it? It goes to signing and developing new artists. Unlike Google / YouTube / Mega or any other hip pseudo ‘sticking it to the man’ company who simply trouser the profits. A windfall like this deal is exceptionally good news for artists.


    Reply
    1. Esolsek

      Who do you work for? PR dept at one of the players? Good Gawd.


      Reply
  5. smg77

    It’s nice to see that Paul has taken a break from race baiting to dabble in outright conspiracy theories.


    Reply
  6. Willis

    There is also no benefit to society from this acquisition, either.


    Reply
  7. Spoken X+Digital+Media+Group

    At the end of the digital music industry day, colossal technology companies pirated government issued copyright–patents to enhance the sales of their core products.


    Reply
  8. Musicservices4less

    Glad to see this is generating some interest. This is the type of music industry reporting that has been lacking forever. As the Syms commercial said “An educated consumer is our best customer.” Whenever I have negotiated on behalf of an artist or independent label with a major label, I first explained to my client that the key is to know what the contract says, what it doesn’t say and what it means to the client in terms of money, rights, etc. Artist contracts like all contracts are agreements between individuals and/or businesses. They control the terms and conditions under which those parties will operate with each other. The parties can agree to anything as long as it doesn’t violate public policy or any applicable law. Forget ethics, moral rights (in the US), etc. That is why disseminating the terms and conditions of these contracts to those who are considering being with a Major Label is very important.


    Reply
  9. WB Travis

    Why do you think the labels demand stock in Spotify? Why is Gaga’s ex manager a Spotify stockholder? Why did labels take stock in YouTube instead of bigger royalties? Why are streaming royalty payments so tiny? Because the labels traded high royalties for stock.

    Beats is just the beginning.


    Reply
  10. KS2 Problema

    Laughing out loud. These columns just get nuttier.

    Mind you, I’ve got no use for Beats Music, it’s truly awful as a service and the headphones are more than a bit of a joke in the actual recording industry. But I’m bewildered as to why, as an artist, I should participate in the acquisition profits from Apple’s purchase of Beats which had earlier purchased MOG, which, of course, was started with large investments FROM the labels.


    Reply
  11. WB Travis

    The reason you don’t understand the issue is because you do not understand distribution or licensing deals. The labels negotiated deals for artist recordings at a lower rates than they would have demanded if they hadn’t gotten the stock. This isn’t that different than if the labels got a nonrecoupable payment in return for a lower royalty rate in a distribution deal. It’s a way of disguising revenue that they would otherwise have to share with the artist.


    Reply
  12. Chancho

    Artists continue to lose within the music ecosystem that has fueled this business for decades. End of story. The so-called “We’re in this for the Artists” streaming company “execs” will line their pockets (as they’re doing) for the coming decades. The royalty payouts on these platforms are a joke. Yet, these type of dudes are buying mega-million mansions and cracking bottles of Moet.

    These guys only care about the less than 1% of artists out there, to pal around with.

    They tout Tech while Artists break their necks.

    Dumb and Greedy.


    Reply
  13. Michele Ari

    Well. Hm. Rather baffles the mind doesn’t it?

    Correct me if I’m wrong but the people doing these things sound like very horrible, horrible people. Like, as in criminals.

    At some point and by their own hands they will devour themselves I’m supposing. I’m not going to feel badly about it either. That they complain they would have to work hard and long to do the right thing is wow. Very. Just. God. They don’t want to do the work but want to feed of others so they can live. That’s in the dictionary under “parasite.”

    I’m going back to looking at kittens on Twitter.


    Reply
  14. Think it through!

    The labels took lower royalties because the streaming start ups pleaded poverty so labels took stakes in the company instead. And I refer you to my point re the Beats windfall, labels do no eat money. Any money that goes back into the labels funds new signings and developments. Start ups, streaming companies, file sharing sites and any other freeloader that coasts along on the sidelines all do. They keep the lot.


    Reply
  15. Rick Louie

    Can we please stop yelling at the value of recorded music (which has been effectively $0 for a decade now) and get back to writing music that has a cultural value of $∞? The horse has been beaten to a pulp, man.


    Reply

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