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Sony Music’s $750 Million Spotify ‘Windfall’ Leaves Some Lingering Questions

Among the unknowns: Who's the check made out to?

Now that checks are on their way to thousands of artists in the Sony Music system, the result of the company’s plan to share the $750 million in profit it collected from the April sale of 50% of its Spotify stock (the company held a 5.7% share when the streaming service went public), some lingering questions remain, chief among them: Who is the check made out to? Conversations with multiple music industry insiders offer some answers.

Is Sony obligated to share this money? No. The investment was Sony’s and, while the company states that it “obtained Spotify equity by in part balancing the strength of over 100 years of Sony Music Entertainment’s success, both in the past and present,” it specifically characterizes the payment as “a gesture of good will … without recovery of outstanding advances and recording costs or other recoupable sums and regardless of whether specifically required by contract.” In contrast, Warner Music took its $126 million in profit and proportionally credited it to artist accounts, but against unrecouped balances and owed expenses (WMG had a 1.9% stake in Spotify and sold all of its equity earlier this month for just over $500 million). Universal Music Group still holds a 3.5% share of Spotify and has stated: “UMG’s approach to sharing with artists any proceeds of an equity sale also applies to distributed artists and labels, consistent with the terms of their agreements with UMG.”

Who gets the check? According to people familiar with the payout structure, the “voluntary payment” will go directly to the artist, or whoever the artist designates as authorized to collect on their behalf. For top-tier acts, that’s likely a business manager, a manager or attorney, who will then distribute the funds according to agreed-upon commission structures or a letter of direction previously set by the artist. “Wherever your normal royalties go, the payment would go to the same place,” says one participant. And, while Sony isn’t counting these proceeds against unrecouped balances, an artist could opt to apply the fee, or any part of it, to its account.

Are distributed labels required to share all of the proceeds with their artists? No. Sony can’t dictate what the labels do with the money, though it has encouraged all profit participants to pay the windfall forward. In the case of RED-distributed label Thirty Tigers, co-founder David Macias says his company is “making the choice” to pay certain artists who are no longer on the label a portion of the proceeds. Thirty Tigers will also “be keeping a small and representative piece” of the payout “in accordance with the way we split our proceeds.”

What if a label was distributed by Sony between 2008 and 2018 and contributed to profits but is no longer in the Sony system? “[They’re] f—ed,” says one skeptical label chief, noting that there could be legal issues that come up concerning what constitutes “proceeds,” as designated in Sony’s June letter, and how that may affect existing distribution agreements. But for labels that left the Sony system with their catalogs in tow, they may not qualify as “eligible” participants in this go-round. That includes labels like Glassnote Records (which left for Universal in 2015) and Razor & Tie (acquired by Concord Music earlier this year). Says Glassnote’s Daniel Glass, whose company was distributed by Sony for the better part of seven years during the decade-long Spotify investment: “In all fairness, we helped build that business. We brought in huge profits to [Sony’s] bottom line and were up front in embracing streaming and the DSPs.” Is Glass expecting a piece of the pie? “We haven’t been contacted,” he says, “but I’m cautiously optimistic.” Worth noting: since Sony isn’t designating the payment as anything other than “voluntary,” contractual arguments may be moot.

What if an act has had multiple managers during the 10-year period? Unless the manager had a specific sunset clause that allows for “continuing commissions,” the person may not necessarily be on the receiving end of a payout. For those situations, and there are plenty as management churn is fairly common with music artists, the onus will be on the artist to decide who should get what.

Won’t this trigger lawsuits by those who feel they’ve contributed to Sony’s bottom line or to an artist’s career and aren’t on the distribution list? “This entire thing is about good faith,” says Maverick’s Larry Rudolph, whose clients include Britney Spears, Aerosmith and Pitbull. “I’m certainly not going to sue a client over it or even gonna ask an ex-client for it.” Still, it’s tricky terrain. As another prominent manager notes, “No one is accountable for this money except the people who are involved when they get the gift?” Rudolph counters: “People are just gonna do what they feel is right. I’m not even using the words ‘do the right thing,’ because that almost implies like, you ‘should’ be doing this or that. Whatever an artist feels is the right thing to do.”

What happens to the other 50% of Spotify stock that Sony currently owns? Profits from the future sale of equity will also be shared by “eligible” artists and distributed labels in the same way. A timeline of when Sony might liquidate, however, is unspecified. But that, in a way, may be an incentive for a distributed label to stay put, knowing that if it falls out of eligibility, it may not qualify for the next payout.

Is the payment considered a royalty? Kobalt’s recorded music division AWAL, in disbursing its artists’ share of Spotify profits earned through its affiliation with indie label consortium Merlin, labeled its payouts to artists as “‘Pro Rata Share of One-Off Income’ commissioned at the same rate as digital distribution income (15 percent).” AWAL too is issuing payments this month. But another prominent business manager suggests it will be “treated as a royalty payable to the artist” similar to how damages are awarded in class action legal settlements.

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