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Check’s in the Mail: Sony Music Disburses $750 Million to Artists in ‘Spotify Windfall’ (EXCLUSIVE)

The "completely voluntary" payment will not count against unrecouped earnings.

Sony Music has begun to distribute the $750 million in profit it collected from the April sale of 50% of its Spotify shares to the artists and distributed labels within the Sony system, Variety has confirmed. As previously reported, Sony, which held 5.7% of Spotify’s stock when the streaming service went public, will not count the funds against the artists’ and label’s unrecouped earnings.

Rather, the “Spotify windfall,” as SME insiders are calling the disbursement, will be apportioned according to individual artist and label contract terms and based on earnings over the last 10 years — or since Sony’s initial investment in the Swedish streaming upstart — divisible against Sony’s own revenues from the Spotify stock gain for that time period.

What does this mean to the thousands of artists, representatives and some two million titles involved? The checks are in the mail, and set to arrive by the end of August. Sony had previously stated its commitment to sharing the sum with artists and distributed labels. Music Business Worldwide caught wind of the plan back in June.

The “Herculean task” of crunching the numbers, says an insider, has been a round-the-clock operation for most of the summer and comes at the directive of Sony Music CEO Rob Stringer and his team. It applies to all Sony-affiliated artists and labels in all territories globally and also includes producers and featured guests entitled to profit-sharing.

Sony’s payout contrasts with that of competitor Warner Music Group, which 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). That means an artist that is operating in the red and technically still owes the company money will see that balance shrink, but may not pocket any funds: The proceeds would end up back with Warner as part of the recoupment.

The majority of major label artists, particularly developing ones, are in an unrecouped position. But those artists signed to Columbia, RCA, Epic and Legacy, the big four of Sony’s recorded music subsidiaries, will also get a check in the coming days, so long as their information is current in the Sony system. The company utilized its breakage allocation system to apportion the payments.

The formula Sony used is fairly straightforward: the company looked at the 10-year period during which it owned equity in Spotify, then looked at its revenue from Spotify and overall revenue for the time and divided it up by revenue generated by the artist or label.

So if an artist had $5 million in sales over that period, and Sony registered $30 billion in revenue, that contribution (.016%) would be allocated to its portion of the Spotify payout and paid to the artist according to the act’s contract terms for digital royalties. Not surprisingly, the biggest checks seem to align with the most successful artists on the roster — here’s looking at you, Adele — though steady catalog sellers also fare well. The company opted for what was more fair in terms of not weighting those artists who have been stronger in streaming.

Is this “off-cycle” payment essentially a gift? “It’s a completely voluntary payment,” says Maverick’s Larry Rudolph, whose management clients include Britney Spears, Aerosmith and Pitbull. “In other words, had Sony not done this, nobody really could have complained. Theoretically, Sony got this equity on its own. But of course, they’ve recognized the fact that they couldn’t have gotten it but for the artists. And they made a wonderful decision to voluntarily share the wealth, which is rare in the music industry. So, I commend them highly on their decision.”

“To their credit, it seems like they didn’t even think twice about recognizing that that there is value in the relationship between Sony and the creators of the music,” says Thirty Tigers’ co-founder David Macias. His RED-distributed label has been in business with Sony for 16 years and is home to such artists as Jason Isbell, Lucinda Williams and Lupe Fiasco. “There’s a reason I haven’t gone anywhere else,” he adds. “There’s a compensatory relationship there. I’ve always felt like they treated us incredibly fairly and it didn’t surprise me that they chose to take what I felt was a moral stance on this. I know the artists we work with appreciate it a lot. And I appreciate it immensely and certainly in turn we’re sharing those proceeds with our artists.”

In Thirty Tigers’ instance, the artists own their own work and it will be left up to the label to distribute the funds. The labels are under no obligation to turn over all of the proceeds, though in its letter to participants, Sony Music encouraged distributed labels to pay the windfall forward. For a label like Thirty Tigers, it does leave open the question of what the obligation is to pay acts that are no longer on the label but generated money during the 10-year period. Macias says that, in his case, they will be honoring those relationships too. “We are making the choice to pay our artist that helped contribute to that,” he says, adding that Sony’s gesture will right what many artists have been complaining about since the arrival of streaming. “A lot of artists out there were super angry, or you could say upset in advance, that this incredible amount of wealth was being conferred and not necessarily to them.”

So how much are we talking about? “It’s a significant amount of money,” says Rudolph, though he declines to divulge the exact number. Using Sony’s own calculations, first outlined in the company’s June letter, an act with a 16% royalty rate and .5% of overall revenues and .33% of Spotify gain revenues could see a payment of $498,000 minus outlays to producers and other royalty participants. “This is all in good faith, and having Rob Stringer there, I’m sure had a lot to do with it,” adds Rudolph. “Rob is a very stand-up guy, and a guy who does the right thing and is very earnest and he’s taking care of artists. That certainly is a huge vote of confidence to artists and managers of his good faith and a desire to work with him and his company in the future.”

For his part, Thirty Tigers’ Macias says, “They let it be known very quickly after the IPO that they were going to share this windfall and come up with a plan. It’s a lot of money. I’m just glad it wasn’t a gift set of steak knives.”

Will the world’s biggest music company, Universal Music Group, follow Sony’s lead? So far, UMG hasn’t stated its intention but it’s believed they hold $1 billion in Spotify profit from its 3.5% share. Considering parent Vivendi recently floated the idea of selling off up to 50% of UMG, hanging on to it may be the more attractive option. A spokesperson for the company confirmed only an earlier statement that “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.”

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