The word “breakage” dates back to a day when information were made of acrylic and may break during travel. A label was obviously unable to continue selling these records, so clauses were written in the label contracts at the time to make sure that damage was not taken into account when determining the artists ‘ communicate. The phrase has survived into the modern era and is used to describe a band’s income that is not required to get shared with artists. In this final installment of the line on streaming music’s economics, we examine precisely what this profit is and the controversy that has arisen from it.

The Music Streaming Economy – Part 18:” Breaking” in the Digital Age

In” Record Makers and Breakers,” John Broven’s regular work on the US music business from the 1940s and 1950s exposes the deliberate use of record labels to break shellac records to prevent music productions from breaking even, avoiding paying the artists their profits. Henry Stone, the leader of De Luxe Records, claimed in an interview with the writer that the business was able to recover the lost revenue because the sales were typically covered by insurance against breakage. ]1 ]

But,’ breakage’ is also important in the modern age, albeit in a unique form. This has to do with the legal arrangements between music streaming services and brands, which we have covered extensively elsewhere. In a nutshell, Spotify &amp, Co. make progress payment to the categories to be allowed to use their song directories. These improve payments are therefore recouped using the streaming fees. Nevertheless, if the income is less than the progress, the change remains with the brands as “breakage”. A brand has US$ 25,000 in extra income that is not required to be distributed to the artists if a streaming company pays a label US$ 1 million as an advance for the contract period but the label’s catalogue is simply streamed to the value of US$ 750, 000 as an advance. The proceeds from the sale of the collateral that the degrees have acquired from streaming services are the same. They can convert it into dollars when they are sold, such as in an Investor like Spotify, where the designers are not required to disclose their artistic accomplishments, which in turn increased the value of the streaming service. The record label must determine whether or not to give “its” performers this money.

Many performers and their administrators have asked themselves whether their names, mainly the main labels, promote electronic “breakage” with them. Darius Van Arman, the founder and publisher of Secretly Group, criticized the majors ‘ “breakage” practice in a much-reported guest article for Billboard Magazine. He stated that” the majors typically share breakage only when required to do so in their contracts with big artists or larger distributed labels. ]… ] Unfortunately, this practice of maximizing breakage puts a downward pressure on the value of music ( i. e. in negotiations, major labels are requesting larger lump-sum payments, rather than pushing for higher royalty rates ), when really the whole music industry should be working together to increase the value of music, especially as large technology companies continue their assault on copyright”. ]2 ]

This was stated by Van Arman in advance of his evidence at the US Congressional” Music Licensing” sessions held on 10 and 25 June 2014 before the Subcommittee on Courts, Intellectual Property, and the Internet of the House Judiciary Committee. During the reading, the Members of the House interrogated representatives of the music industry, collecting societies, streaming services and labels, as well as Roseanne Cash, the daughter and heiress of singer and Johnny Cash, who testified about the disparate supply of streaming revenues between rights owners and artists, and called for a radio straight for authors in the US. In his detailed written statement, Darius Van Arman criticized the major labels, which “use their market power to maximize only the guarantee” [ …] with the intention that the guarantee cannot possibly be recouped within the time allotted for it. The major does not have to share the money with its artists, the independent labels that the major distributes, or publishing interests because it cannot be attributed to specific recordings or performances. ]5 ]

As a positive counterexample, Van Arman cited the indie label licensing association MERLIN, which distributes all “breakage” revenues to its members ,]6 ] although it should be added that MERLIN’s members are indie labels, not artists. However, in a” Labels ‘ Fair Digital Deal Declaration” ]7] drawn up by the Worldwide Independent Network ( WIN), the indies have agreed to share breakage revenues with their artists on a voluntary basis.

The public debate that ensued caused the music majors to feel uncomfortable. However, they were only made to comply when a contract between Spotify and Sony Music Entertainment was leaked in May 2015, disclosing the major labels ‘ business model of preferential treatment and terms of favor. [8 ] The International Music Managers Form ( IMMF) immediately responded by writing an open letter to music publishers and labels asking for more transparency in the reporting of streaming revenues, citing the Spotify-Sony deal, and voicing concerns about the music majors ‘ breakage practices. [9 ] In an interview, IMMF Vice-Chairman Volker May vehemently criticized Sony &amp, Co.’s handling of these” collateral additional revenues,” saying that” the labels are receiving all manner of collateral benefits from supplying the artists ‘ music to digital platforms, benefits that are not shared with the artists ( performers or writers )”. ]10]

Sony was forced to respond to these accusations by issuing a solemn statement in which it solemnly assured that the group’s labels would distribute all of its recording artists ‘ unallocated income from advances, non-recoverable payments, and minimum revenue guarantees as part of its digital distribution agreements. ]… ] This applies to all revenue under digital catalogue distribution agreements, whether or not the guarantees, advances or ‘ flat’ payments can be associated with individual master transactions”. ]11]

It’s probably not a coincidence that Warner Music Group leaked an anonymous royalty statement to Music Business Worldwide shortly afterward, revealing that Warner does indeed “break” revenues with its artists. To be fair, Van Arman specifically excluded Warner from his criticism. In any case, Warner Music Group felt obliged to issue the following statement:” Warner Music shares all advances, minimum guarantees and ‘ flat fees’ with its artists, ]…] This policy has been in effect at Warner Music since 2009, purposely treating breakage like other digital revenue”. ]12]

The statements from Sony and Warner have now put pressure on the third major music label, Universal Music Group, to also comment on its handling of “breakage” revenues. Universal also clarified its approach to digital “breakage” revenues on June 2 by stating that” we also choose to share with artists minimum guarantees as well as unrecouped digital advances, where they exist,” while the most significant source is composed of royalty payments. ]13]

However, the majors ‘ statements did not address whether all signed musicians would receive a portion of the “breakage” money or just a select few stars with bargaining leverage. Additionally, it’s unclear whether the sharing provisions only apply to artists who are currently under contracts or to those whose contracts have expired but whose music is still available and making money. In any case, we can only speculate about the artists ‘ share of the “breakage” revenues and the amount of compensation.

Finally, one might wonder why the majors have implemented such a system of improvements for music streaming services. Risk avoidance plays a particularly significant role in risk avoidance in addition to the same way that was used to recover advances from label contracts. In the early days of music streaming, there were many short-living players, with a high risk that they would generate little or even no streaming revenue. The advances were a revenue guarantee from the perspective of the majors, and they had the advantage of reducing the reliance on streaming services.

Overall, the example of “breakage” revenues highlights how multifaceted and complex the distribution problem in music streaming is. We have seen that rights holders are fiercely opposed to switching to alternative revenue distribution models like pro-rata and user-centric, and that revenue distribution models like pro-rata and user-centric have a negative impact on the distribution of streaming revenues. However, research on the musician’s income shows that only a select few stars profit from the streaming industry and that the majority of artists only make a small amount of money from music streaming. The big winners, on the other hand, are the labels and, secondarily, the music publishers, who were able to significantly improve their income situation in the US with the Music Modernization Act 2018. The main pillar of the business model of music streaming services is the music rights ( master and publishing rights ), which makes them structurally dependent on the rights holders, and, as we have seen with Spotify, makes it very difficult for them to operate their business model profitably.

Endnotes

]1 ] John Broven, 2010, Record Makers and Breakers. Voices of the Independent Rock ‘ n’ Roll Pioneers, Urbana and Chicago: University of Illinois Press, p 141.

]2 ] Billboard,” ‘ We Want to Compete,’ Says Secretly’s Van Arman, Ahead of His Congressional Testimony Tomorrow ( Guest Post )”, June 24, 2014, accessed: 2024-10-14.

]3 ] These hearings marked a significant step forward toward the Music Modernization Act of 2018.

]4 ] Testimony by Roseanne Cash before ^the” Subcommittee on Courts, Intellectual Property, a^{nd th}e Internet” of ^the House Judiciary Committee, 113^th Congress, 2^nd Session, Hearing on” Music Licensing u^nder Title 17 ( Part I &amp, II ) on June 10 &amp, 25 2014, pp 240-242 of ^the hearing-transcript.

]5 ] Written statement complementary to Darius Van Arman’s testimony before ^the” Subcommittee on Courts, Intellectual Property, a^{nd th}e Internet” ^the House Judiciary Committee, 113^th Congress, 2^nd Session, Hearing on” Music Licensing u^nder Title 17 ( Part I &amp, II ) on June 10 &amp, 25 2014, pp 270-286 of ^the hearing-transcript, cit. on p 274.

]6 ] Ibid., p 275.

]7 ] World Independent Network ( WIN),” Fair Digital Deals”, n. d., accessed: 2024-10-14.

]8 ] The Verge,” This was Sony Music’s contract with Spotify”, May 19, 2015, accessed: 2024-10-14.

]9 ] International Music Managers Forum ( IMMF),” Open letter on Record Label and Music Publisher Deals in the Digital Market”, May 21, 2015, accessed: 2024-10-14.

]10] Cited in Music Business Worldwide,” Managers react to leaked Sony and Spotify contract”, May 22, 2015, accessed: 2024-10-14.

]11] Cited in Music Business Worldwide,” Sony: We share Spotify advances with our artists”, May 27, 2015, accessed: 2024-10-14.

]12] Cited in Music Business Worldwide,” Warner pays artists share of Spotify advances… and has for 6 years”, May 29, 2015, accessed: 2024-10-14.

]13] Cited in Music Business Worldwide,” Universal: Yes, we share digital breakage money with our artists”, June 2, 2015, accessed: 2024-10-14.