The MBW Review offers our take on some of the music biz’s biggest recent goings-on. This time, we pick through Sony’s revelation that it sold nearly a fifth of its Spotify stake on Tuesday – and forecast what that might mean for artists signed to major labels everywhere. The MBW Review is supported by FUGA.
Rob Stringer will be a popular man in Tokyo right now.
Sony Music’s parent, Sony Corp, confirmed yesterday that its subsidiary sold 17.2% of its Spotify stake on Tuesday (April 3) – the streamer’s first day on the New York Stock Exchange.
A quick run through the numbers reveals what that meant: 17.2% of Sony’s 5.71% stake in Spotify equals 0.98% of the whole of Daniel Ek’s firm.
Judging by Spotify’s closing stock price on Tuesday ($149.01), that 0.98% meant that Sony cashed in over $250m (approximately $260m) during the Swedish company’s opening day on the NYSE.
Now, Spotify recently revealed that its low and high share price between Jan 1 and March 14 this year – based on private trades – was $48.93 and $132.50, respectively.
The average share price betwixt those two points: $90.70.
Had Sony cashed in a 0.98% Spotify stake at this price, it would have made around $158m – that’s over $100m less than it secured on Tuesday.
Even at the high point of Spotify’s pre-NYSE trading, $132.50 per share, Sony’s now-sold 0.98% Spotify stake would have been worth around $30m less than the $260m it banked.
Instead, Rob Stringer and co held out, not trading until Spotify was fully floated on a public market – an educated gamble which made tens of millions of dollars.
This move also had a strategic bonus: by ditching a 0.98% stake in Spotify, Sony subsequently holds around 4.7% of the streaming company – sufficiently under the 5% threshold that will result in the major’s activities being mentioned in future public Spotify filings.
What’s even more interesting, however, is a little secret given away by Sony Corp in its note to shareholders yesterday.
The Japanese giant revealed that it’s forecasting a 105bn yen ($980m-ish) profit from the entirety of its Spotify stake once it’s done trading.
(Again, that’s based on Spotify’s final stock price on Tuesday.)
This is a bit of a leap, but a worthwhile one: from this small nugget of information, we can glean rather a lot about the windfall that artists can expect to receive from the major labels once they cash in their ownership holdings in Spotify.
Sneak preview: it’s not a small number.
These calculations get a little hairy, but – trust us – they’re worth keeping up with.
For simplicity’s sake, let’s start with just Sony.
Sony Corp expects to post a gain of nearly $1bn from Sony Music’s total 5.7% stake in Spotify as per Tuesday evening’s stock price ($149.01).
In total, Sony’s stake in Spotify at that point was worth $1.51bn.
In other words, Sony Corp is saying that it expects it profits from its Sony stake to represent a return on investment of around 3X.
There is a question mark to deal with here over how many of Sony’s shares in Spotify were acquired as bartering in licensing deals, and how many were subsequently purchased.
Luckily, Sony has made this easy for us: a spokesperson for the company said this week that the firm would ‘share with their artists and distributed labels any net gain they may realize from a sale of Sony Music’s equity stake in Spotify’. [Emphasis there is MBW’s.]
You won’t hear a cavalcade of praise for the major labels come cash-in day at Spotify, but think about what this actually means: Sony is committing to sharing all profits with its artists, even those that are a result of it acting like a VC – buying additional equity in Spotify out of its own pocket.
That rather lays down the gauntlet to Warner and Universal, no?
Onto the biggest question of all, then: how much of these profits will Sony (and the other majors) pass the way of their artists and distributed labels?
For now, let’s stick with just artists (rather than indie labels) for the sake of a simpler hypothesis.
It is broadly estimated that an artist’s average streaming royalty rate across the modern major labels’ contract haul is 18%-19%.
This takes into account past high-margin catalogue deals, as well as modern low-margin frontline artist deals.
Now, consider this language from Warner Music Group: the first major to commit to sharing any spoils from its Spotify investment with the artist community.
“in the event we do receive cash proceeds from the sale of these equity stakes, we will also share this revenue with our artists on the same basis as we share revenue from actual usage and digital breakage.”
Stephen Cooper, Warner Music Group [speaking in 2016]
In 2016, the firm’s CEO Stephen Cooper said that WMG was committed to distributing these profits to artists “on the same basis as we share revenue from actual usage and digital breakage”.
And then, consider Warner’s breakage policy: in 2015, the firm revealed to MBW that it “purposely [treats] breakage like other digital revenue”.
Aka: the same as an artist’s typical digital royalty rate. Aka: 18%-19%.
Now, let’s assume that Sony’s breakage/Spotify profits policy is broadly in line with Warner’s.
Remember: Sony expects to bank a near-$1bn profit from Spotify, based on a share worth $1.5bn.
Eighteen percent of $1bn is $180m.
That, judging by the stats we have to play with, seems like a fair estimate of what Sony-signed artists can expect to receive a slice of when the major has realized all its Spotify stock.
(Once again – and sorry if this sounds like a stuck record – but this is dependent on a Spotify stock price in line with that seen on Tuesday.)
Now, the exciting bit: let’s try and work out an approximation across all three major labels.
There are quite a few ‘ifs’ here, but hopefully it’s worth it for the ballpark figure spat out at the end.
Sources suggest that Universal’s pre-DPO Spotify holding stood at around 4%, with Warner at around 2-3%.
Combined with Sony’s 5.7%, this would result in a total major label equity stake of around 12%-13%.
Based on Tuesday night’s Spotify share price ($149.01), this shareholding was therefore worth circa $3.3bn.
Going off Sony Corp’s projected 3X profit return (ie. $1bn profit vs. $1.5bn equity value), the majors would receive a total profit from this $3.3bn figure of $2.2bn.
Then, we just have to work out what 18%-19% (typical digital royalty/breakage rate) of this figure would equate to. Here goes:
Approximately $400m-$420m.
That, dependent on a number of feasible factors (Spotify’s share price hitting $149; all majors paying out profits based on similar breakage policies; all majors enjoying the same projected profit return as Sony) is a fair stab at what the total pool of money pushed back into the artist community at the end of this process will look like.
As promised: not a small number.
A $400m one-off payout to the artist community would be a historic jackpot for creators to divvy up.
(Sadly, such a bonanza doesn’t look like it will benefit the professional songwriting community; only major record companies, rather than publishers, appear to own stakes in Spotify.)
Yet before major-signed artists reach for the Courvoisier, they should remember that even $400m doesn’t go a long way these days.
Consider that tens of thousands of artists are believed to currently hold contracts with the majors.
And that Daniel Ek himself, last month on stage in New York, noted that 22,000 artists are now earning amongst the ‘top tier’ of Spotify royalty payouts.
Even just divided amongst this ‘top tier’, a $400m windfall suddenly becomes just over $18,000 each. Pre-tax.
Also, consider that this money, when handed out by the majors, will be divided on some sort of complex market share calculation – covering both artists and its indie label partners – and that the biggest hitters will inevitably gobble up the biggest checks.
Only Drake, The Chainsmokers, Louis Fonsi and Ed Sheeran have tracks which have attracted over a billion streams on Spotify to date.
For the vast majority of major-signed artists, the great Spotify profits payout of 2018 may serve as just another reminder of a cruel fact: the streaming economy reserves its sweetest riches exclusively for the chosen few.
The MBW Review is supported by FUGA, the high-end technology partner for content owners and distributors. FUGA is the number one choice for some of the largest labels, management companies and distributors worldwide. With a broad array of services, its adaptable and flexible platform has been built, in conjunction with leading music partners, to provide seamless integration and meet rapidly evolving industry requirements. Learn more at www.fuga.comMusic Business Worldwide
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