Sony Music has set out exactly how it will share profits from its Spotify equity with artists and distributed labels – and it’s better news than some might have expected.

MBW can reveal all of the details from managers and indie labels who received an official letter from Sony breaking down its payout formula.

First, a quick recap: at the time Spotify floated on the NYSE on April 3, Sony Music owned 5.707% equity in the platform (5.082% on a fully diluted basis).

According to MBW’s calculations, that 5.7% equity was not far off, size-wise, to the stake held by all other label rights-owners combined. (Warner, we estimate, had 1.9%; UMG had 3.5% and Merlin had 0.5%.)

Sony sold approximately 50% of this stake-holding in April, which netted it somewhere around $750m. This money (with the remaining 50% of Sony’s Spotify equity still in the tank) will now be shared with artists and partner labels.

Sony says this cash will officially be paid out by the end of August at the latest.

Now, on to the ‘better news than some might have expected’ part.

Ever since MBW broke the story that Sony had liquidated 50% of its Spotify stock – and had committed to sharing it with artists and indie labels – we have heard the same two concerns from the industry (particularly from lawyers):

• (i) The $750m won’t be shared with all Sony artists and distributed labels, it will depend on their contracts;
• (ii) This money will just come off unrecouped balances, meaning the vast majority of artists won’t see a penny of it anyway.

Now we know – having spoken to people in possession of Sony’s official letter – that both of these worries are unfounded. In fact:

• (i) Sony Music has committed to paying out its Spotify money to all eligible artists and partner labels, regardless of what is decreed in their individual contracts;
• (ii) Sony Music has committed to ignoring all unrecouped balances (for both artists and labels) in relation to its Spotify share money payouts.

To confirm: regardless of what artists/labels ‘owe’ Sony in unrecouped advances, a share of the major’s Spotify equity money will soon be winging its way to their bank accounts.

This approach from Sony rather lays down the gauntlet to Universal and Warner.

Warner, for example, has publicly said it will share its Spotify proceeds with artists and partner labels – but, in the case of the latter, will only do so when obligated by individual contracts.

Right, then. Let’s crunch some numbers.

MBW understands that Sony sent out two separate letters today (June 14) – one to the artist community, and one to the independent labels it distributes via The Orchard.

These letters explain to both parties that the payment of their Spotify share proceeds will be handled independently of their usual royalty accounting.

The letters also confirm the formula Sony is using to allocate this cash. (Sony says that nearly 100,000 artists, and 2m tracks, have been taken into account in total.)

The major has used an interesting weighting system to combat one obvious accountancy headache.

Here are two hypothetical examples so you can see exactly how this is being done.

Example 1 (Artists):

Let’s say Artist X contributed 0.33% of Spotify revenue that came into Sony during the near-ten years from Spotify’s 2008 launch to the moment Sony sold $750m of shares in April.

Let’s also say Artist X contribute 0.5% of Sony Music’s overall revenue from all formats (including Spotify) during this time.

In order to calculate their share of the Spotify profits, Sony is giving a 50/50 weighting to the above two % figures. (We’ll come onto why in a second.)

Small thing: Sony is only paying out based on its net proceeds from Spotify shares – so any money it paid to buy stock, or any charges incurred to sell stock, would be deducted.

For simplicity, let’s hypothetically say that Sony’s full $750m Spotify proceeds so far will be shared with artists and indie labels.

Here’s the crucial calculation:

• 0.33% of $750m is $2.475m;
• 0.5% of $750m is $3.75m;
• The mean average here (50/50 weighting) is ($2.475m + $3.75m) / 2 = $3.113m.

An artist’s contractual royalty rate will then be hung against this number.

Let’s say Artist X is on a 16% royalty – he or she would therefore end up with $498,000 (16% of $3.113m).

(The Sony payout covers the entire time the major has owned Spotify stock, stretching back to 2008 all the way up to – in the case of the $750m – April 2018.)

Question: Why has Sony decided to give equal weight to an artist’s label revenue contribution across all formats (including streaming/Spotify) vs. the money they’ve generated via Spotify alone in the same period?

Because, for one thing, some artists might have been very popular on Spotify back in 2008/2009/2010, when the service’s contribution to Sony’s bottom line was a fraction of what it is now.

So long as those artists were also generating cash from downloads or CDs back in the day, this gives them a fighting chance of a meaningful share of Sony’s Spotify success.

Example 2 (Distributed Labels):

Sony’s distributed labels calculation is pretty similar to the artist calculation, with a couple of important distinctions.

First, Sony has to calculate the overall contribution of its distributed indie label partners to Sony’s revenues (all formats) over the past 10 years (ie. since Spotify launched).

For argument’s sake, let’s hypothetically call this cumulative share 10% of the $750m.

This means that the indie labels would have a pot to play with of $75m.

Now, let’s say Indie Label X was responsible for 1% of the overall distributed-label revenues at Sony Music across this decade.

Let’s also say that Indie Label X was responsible for 0.5% of distributed-label Spotify revenues at Sony Music in the same period.

Once again, the 50/50 weighting system comes into play. So:

• 1% of $75m is $750,000
• 0.5% of $75m is $375,000
• The mean average here (50/50 weighting) is ($750,000 + $375,000) / 2 = $562,500

In very positive news for indie labels, Sony says it will subtract no distribution fees from this money.

That’s it! Phew!

Go and grab us both a drink; we deserve one.

Oh, and if you’re a successful Sony Music artist or distributed indie label, pick up the tab as well, yeah?

Congratulations: you can definitely afford it.

Originally Posted on MUSICBUSINESSWORLDWIDE.COM