A 2011 contract between Sony Music and Spotify has been leaked online and published by technology website The Verge. The contract, which has since been removed from the Verge’s website, gives insight on the approach of major labels to digital streaming services and the freemium model, favoured by consumers but disliked by rights holders. To summarise the contract as succinctly as possible, Sony Music was in a stronger bargaining position when the terms were being thrashed out and the leaked document reflects this.
The Spotify model was praised in 2011 for being innovative and for encouraging changes in the way consumers purchased music. Sony, however, were clearly more cautious in dealing with an untested business model and this is reflected in the inclusion of minimum guarantees and upfront advance payments from Spotify. The intention was clear; Sony wanted to profit from this venture and successfully negotiated upfront advances against which future income would be deducted. The minimum guarantee clauses also acted to ensure Spotify would continue to do all it could to ensure the longevity of the service, thereby continuing to make the venture financially viable for Sony. Sony further negotiated growth targets to ensure Spotify continued to grow, requiring Spotify to pay $0.00225 per minimum stream, rising to $0.0025 per stream if growth targets were missed.
The upfront advance payments comprised $9 million payable to Sony for the first year of the contract, $16 million payable in the second year, each of which were payable in quarterly instalments. The parties also included a $17.5 million advance in the event of Sony exercising its option to extend the deal for a further year. Spotify would recoup these advances by offsetting income due to Sony against the advances agreed at the outset. However, in the event that Spotify’s income was less than the advances paid to Sony, then Sony was entitled to keep the difference for itself. Such practices are criticised by artists, whose music forms the basis of these contracts but who do not receive a share from any retained advance payments.
Spotify further agreed to provide Sony with free advertising on its freemium offering, which Sony could then assign to third parties, thereby profiting and depriving Spotify of the income it could have received if it had retained the right to sell the advertising directly.
The points above show that Sony clearly had stronger bargaining power when entering into negotiations. Spotify knew that it would be difficult to attract mainstream consumers without Sony’s catalogue being part of its digital offering, thereby forcing it to concede to Sony’s contract demands. Sony would undoubtedly seek to justify its practices on the basis that it is a business and is entitled to push for protective clauses when negotiating a contract for an untested business model. One thing is clear, however; the commercial interests of artists were clearly not a key factor in negotiations.
