Spotify Misstep: Direct Licenses With Managers For Rights They Don’t Control

There have been rumblings over at Spotify HQ of a plan for the streaming platform to pay advances for direct deals with artists and artist managers. Chris Castle explains why this shift is a wrong turn for the music streamer

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Guest post by Chris Castle of Music Tech Policy

Billboard reports that Spotify’s latest and greatest is paying a minimum guarantee (aka an advance against royalties) for direct deals for artists:

"Under the terms of some of the deals, management firms can receive several hundred thousand dollars as an advance fee for agreeing to license a certain number of tracks by their independent acts directly to Spotify."

That is an odd sentence for a number of reasons.

Management Agreement:  Crucially, managers typically do not (or should not) own the rights to either songs or recordings created by their artist clients.  They also typically do not (and should not) have the right to sign license agreements in the name of their artist clients.

Both these points are usually the subject of some agita in the negotiation of management agreements.  Smart managers want nothing to do with signing agreements or cashing checks in the name of their clients.  If you look at some of the prominent artist-manager disputes over the years, they almost always revolve around some version of this story (see Richard Pryor, Billy Joel, Amy Lee).

I also find it hard to believe that the artist’s lawyer would allow the client to get into one of these situations if the lawyer knew about it.

If a manager is receiving “several hundred thousand dollars” there’s also the question of double dipping or other conflict of interest if the manager is also commissioning the advance and perhaps royalties after a theoretical recoupment point.  Again, smart managers usually stay away from this kind of thing.  If you try hard enough, payments like this can look like an umm…uh…a whatchamacallit.  A bribe.

Cross-Recoupment:  Let’s say that Spotify somehow gets around these wrinkles in the management agreement, there’s a simple question of calculating recoupment since the advance will be recouped from different artists at different rates.  Let’s say that Manager X signs artists A, B and C to this arrangement, and allocates an equal portion of the advance to each artist (after commissions).  Then the algorithmically fortunate Artist C lucks out and gets into the super-popular Men of Rock playlist and recoups Artist C’s share of the allocated advance.   Artists A and B are not so lucky and are unrecouped.

Artist C will be payable, but Spotify will say not so fast…your manager is unrecouped so no cheese for you.  How is that going to go over if Artist C cares about the $0.0003 per stream?

Or what if Artist C is so algorithmically blessed that they recoup the entire advance to A, B, C and the manager’s commission.  Since Artist C only got their allocated share of the advance, Artist C’s earnings applied to Artist A and B are actually payable royalties to Artist C (as the earned royalties exceed the advance paid to C.)  Spotify will say, sorry, no cheese for you, go to your manager we already paid.  How is that going to go over?

Pre-Existing Distribution Agreements:  If an artist distributes through an indie (either digital only or full service) the artist has already given away the rights that Spotify purports to license from the manager.  Pulling tracks out of that distribution agreement is probably a breach of the exclusivity clause, particularly if the distributor already paid an advance for the recordings.

That may sound like intentional interference in a contract–but of course Spotify’s deal is with the manager, not the artist, and any distribution agreement will likely not be with the manager but with the artist.  So Spotify probably has no provable knowledge of the distribution agreement.

Future Term Recording Artist Agreements:  If Artist C gets an offer to sign to a major label during the term of this Spotify license, the label is probably going to expect these “prior masters” to be included in their deal.  No matter how impressive the algorithms, there are some basic deal points to satisfy, and the label is going to expect to see those streams show up on their account.  This can be solved pretty easily as long as no one gets greedy–the label simply buys out the unrecouped balance.

But–Spotify doesn’t have to agree to those terms and may not.  Artist C may never have had a chance to negotiate such a clause in “their deal” because the manager–who was supposed to be looking out for their client–may have “forgotten” to raise the point with Spotify and the artist is not under contract with Spotify.

If the artist is also simultaneously firing their manager as they sign with the major (which certainly has been known to happen), the manager may not be too terribly inclined to modify the terms of the manager’s deal with Spotify after the fact.

Yes, it’s sheer genius from the Spotify A&R Department (does that stand for “Algorithms and Redirects”?).

Again.