Source: AP Photo

Warner, Sony Say They'll Share Potential Spotify Windfall With Artists

Major record labels have been criticized for negotiating ownership stakes of streaming services without a plan to cut artists in. Now they're doing so.

Many musicians feel like they’re getting screwed in the age of streaming music so Warner Music Group wants to spread a little love. The company said Thursday it would include artists in any cash windfall Warner might get from the ownership stakes it holds in streaming services like Spotify in the event those businesses go public or are sold. Within hours of Warner's announcement, Sony Music said that it's doing the same. 

The gestures of goodwill from major record labels point to a wider shift in the music industry to make the economics of streaming a bit more friendly for performers and songwriters. Warner saw the offer as a chance to get ahead of other major record labels on a hot-button issue. Stephen Cooper, Warner’s chief executive, gets to pitch his shop as a friendly place for musicians to sign. "We strongly believe that aligning our interest with those of our artists is not only good for our artists, but also good for us and at helping the music industry,” he told investors. 

There has been plenty of ink spilled on the dismal economics of streaming music, and much of it has focused on the tiny amount of money artists make each time their songs are played. But the economics have actually been even worse. Record labels often take less-generous royalty rates in exchange for equity in the streaming services themselves, which could turn into a lot of cash when those services go public. In addition, some money streaming services pay the labels isn't assigned to a specific song, and artists haven't consistently gotten their share. Critics have been slamming the record industry on these issues in recent years. 

It’s not surprising that Warner was the first major label to address the equity issue. Because it’s smaller than Sony Music and Universal Music Group,  the label has had to adopt a scrappier approach to digital music. Warner led its peers in signing licensing agreements with new streaming services like Soundcloud. It was also one of the first to give artists a cut of breakage, the money that streaming services pay labels that isn’t assigned to a specific stream. 

Sony's decision to issue a statement saying it was on board as well shows the growing pressure the labels are facing to appear artist-friendly. "It's part of a larger shift that's happened in the last year and a half  towards more transparency and fair compensation to creators," said Allen Bargfrede, the executive director of the Rethink Music Project at Berklee College of Music.

Universal Music Group didn’t immediately respond to requests for comment. 

Indie labels have generally been more generous. Merlin, an organization that negotiates digital licensing deals for thousands of independent labels, has already committed to distributing cash it makes from equity stakes in streaming services, divvied up based on how often songs get played. 

The first time that labels may have to make good on their commitments will probably be when Spotify goes public, which could happen within the next year. But Warner’s artists shouldn’t expect to become tech millionaires. The label's stake in Spotify is probably worth about $200 million, given Spotify's value at its last investment round. When it does distribute a portion of that to artists, it will do so based on activity on the platform, meaning it’ll mostly serve to make its rich musicians richer. Because labels only pay artists after they have made enough money to offset the advances they’re paid before albums are released, many artists probably won’t get anything at all. 

Artists' finances are likely to be much more affected by two other potential developments: the continued growth of streaming, which would increase the overall amount of money flowing through the system; and deals that give artists a bigger portion of the money that the labels get. Agreeing to share cash from ownership stakes in streaming services is a way for Warner to tell artists it’s on their side in the meantime, says Mark Mulligan, an analyst with MIDiA Research who follows the industry closely. “It’s even more than a gesture or a token of good will,” he says. “It’s almost a statement of ideology.”