Details regarding a recent lawsuit filed by several artists associated with American Idol have revealed some rather alarming details about the manner in which Sony is able to negotiate its contracts with third parties such as Spotify, effectively stating that Sony has the right to act in the interest of its own profit, regardless of potential financial detriment to artists.
By Mike Masnick of Techdirt.com
For quite some time now, we've been pointing out that the hatred directed at Spotify and other music streaming services in some circles is misplaced. Spotify is paying out a ton of money to the copyright holders (approximately 70% of its revenue). The problem is that much of that money is staying with the labels rather than being passed on to the artists. Earlier this year, in fact, we wrote about a detailed report by Ernst & Young, in cooperation with a European music label trade group, that revealed just how lopsided some of these deals end up being:
That's the breakdown of how subscription fees are distributed. The vast majority goes to the labels and only a small portion goes to artists and songwriters directly. Now, some of that label money may make it to artists through other means -- eventual royalty payments should an artist ever recoup, but we all know how rare that is.
And that brings us to an interesting lawsuit that was actually first filed last year from a bunch of artists associated with American Idol, filed by "19," a management company connected to the show. Originally, the lawsuit had been a typical one concerning the question of whether online streaming counts as a license or a sale for the purposes of the contracts (music contracts pay much higher rates to artists for licensing rather than "sales" and there have been a bunch of lawsuits around that). However, once the Sony-Spotify 2010 contract was leaked a couple of months back, the lawsuit was amended to specifically argue that Sony chose to structure its deal with Spotify in a way that purposely kept revenue from artists.
Sony has filed its response, which pretty much directly admits that it has every right to negotiate contracts with third parties that screw over artists:
The implied covenant does not require SME to structure its affairs in whatever way yields the greatest royalties for 19
It further cites an earlier ruling in this very case, in which the judge said that Sony Music is under no obligation to maximize revenue for artists if it benefits Sony:
...as Judge Abrams already has held, SME can “act on its own interests in a way that may incidentally lessen the other party’s anticipated fruits from the contract.”
Furthermore, Sony points to the details in the contract that it signed with 19, which flat out says that Sony is free to receive revenue in other forms that don't lead to royalties.
19 cannot claim that the parties intended that SME would not receive consideration on a general or label basis (such as in the form of an advertising credit), rather than on a basis tied to the use of a particular sound recording, because 19 expressly agreed that it “shall not be entitled to a share of income received by or credited to [SME] on a general or label basis."
The filing from Sony also (rightly) mocks the claim that Sony did some "self-dealing" because it has "control" over Spotify and wanted to benefit Spotify. Noting that it holds approximately 6% of the equity in Spotify, it points out how that is a rather small equity position, and not one that gives it any real control.
Sony Music is absolutely right here. 19 signed a contract that handed over control to Sony Music, and Sony Music appears to be living up to that contract exactly. That the contract itself has a bunch of ways in which Sony can screw over the artists isn't Sony breaking the contract. It's the artists and 19 agreeing to a bad contract that they no longer like -- something that all too frequently happens in the recording industry. Sony's actions in its dealings with the artists and with Spotify may be morally questionable on the issue of whether it's really helping artists, but from a legal and contractual standpoint, it's difficult to see how 19's argument has much of a chance in court. It seems likely to get tossed out pretty quickly.
But, the big point remains: in the end it's not the music services that are to blame for small royalty checks to artists. It's the bad deals that artists themselves continue to sign with labels.