Sony Music Entertainment has released a statement in response to the leak of its 2011 North American contract with Spotify. And now the dust has settled, it warrants a little further examination.

As has been widely reported, the major label’s deal with Spotify, which likely expired two years ago, contained some key – but ultimately unsurprising – details:

• Spotify agreed to pay Sony Music up to US $42.5m in advances over a three-year period. This included a $25 million advance across 2011 and 2012 – $9m the first year and $16m the second – plus a $17.5 million advance for the optional third year;
• A Most Favoured Nation clause was agreed which essentially ensured that Sony’s advances from Spotify were equal with the best deal negotiated by its rivals per percentage of market share. (So if Universal was getting $Xm per % of market share, Sony would be paid the same.);
• Spotify gave Sony up to $9m of advertising spots on its service over a three-year term: $2.5m in the first year, $3m in the second and $3.5m in the final year;
• Sony was paid a revenue share of Spotify income that equated to 60% of Spotify’s monthly gross revenue, which was then multiplied by Sony Music’s percentage of overall streams.

The contract also covered a talking point which is dominating digital music discussion right now: breakage.

Pretty much every digital streaming service’s deal with labels (including indies) will contain a combination of a per-stream royalty rate, plus revenue sharing, an advance and minimum guaranteed revenue.

(As well as equity in the service, but let’s not go there for now.)

If either the advance or minimum guaranteed revenue exceeds the amount earned by royalties/revenue sharing during the licensing period, then the label is protected thanks to “breakage” – it ensures that the digital service will pay out the shortfall.

It’s that minimum guaranteed revenue coming into play, but it means that labels can easily end up with more cash than is strictly attributable to individual streams and artists.

Sony’s leaked 2011 contract stated that Spotify must pay $0.00225 per stream as a royalty on its free service (the premium tier’s payout was presumably a good chunk higher).

When it comes to Spotify, the service’s rampant growth – and therefore its increasing payouts to labels – probably means that ‘breakage’ is less important than with smaller or less successful music services.

The big criticism of ‘breakage’ regards how it is reported and allocated by the labels after they receive it… and, of course, if artists ultimately see any of it.

Some whisper that majors place this revenue, alongside advances, into a ‘black box’ which is then not distributed from the artist royalty pot.

In response to the contract leak last week, Sony released an important statement that directly addressed this doubt.

It said:

“Sony Music historically has shared digital breakage with its artists, and voluntarily credits breakage from all digital services to artist accounts.

“Under the Sony Music ‘Breakage Policy,’ SME shares with its recording artists all unallocated income from advances, non-recoupable payments and minimum revenue guarantees that Sony Music receives under its digital distribution deals.

“This applies to all revenue under digital catalogue distribution agreements, whether or not the guarantees, advances or ‘flat’ payments can be associated with individual master transactions.”

So there you have it.

Sony Music Entertainment categorically says that it doesn’t keep all of the advances and/or ‘breakage’ it receives from digital services for itself.

But it’s worth noting the careful language: “SME shares with its recording artists all unallocated income.”

Quite how much of that share ends up in the artist’s pocket naturally remains open for debate…

[Sony Music Entertainment encompasses Sony’s recorded music operation as well as its 50% stake in the world’s biggest music publisher, Sony/ATV.]