What Sony and Spotify's secret deal really looks like

The nitty-gritty details of Sony's deal with Spotify paint a picture of a very lopsided negotiation indeed, with Sony commanding an unbelievable "most favored nation" status from the streaming music provider that entitles it to top-up payments to match other labels whose music is more popular on the service.

The Verge obtained and published a copy of the contract — possibly from the Sony email dump — but subsequently removed it after a copyright complaint (presumably from Sony, though it's possible that Spotify, or law-firms working for either company, could have asserted copyright in the documents).

The copyright complaint is at least as eyebrow raising as anything in the contract. Copyright is only attracted to creative, not factual or functional works, meaning that any copyright in the contract will be "thin." In addition, there are strong, recent precedents for the idea that posting entire newsworthy documents for the purpose of discussion and criticism is fair use.

Digital Music Review has called for copies from anyone who may have saved them.

Even without the contract itself, there's one clear conclusion from the details revealed in the article: the labels do not lack for revenue from the streaming music companies. If artists are getting shafted on payouts for streams of their music — and it's clear that they are — it's because the labels are screwing them, not because the streaming companies aren't paying out.

Sony Music's Most Favored Nation clause is the most intriguing piece of its contract with Spotify. Section 13 essentially makes every major aspect of the contract amendable if any other label has a better deal or interpretation of that aspect than Sony Music. Section 13(2) lists the provisions which can be amended in Sony Music's contract if a better deal is obtained by another music label, including what constitutes an "active user," the definition of gross revenue, and any improved security provisions. Sony Music can call on an independent auditor once a year to determine whether Spotify has struck a more agreeable deal with any other labels.

Having an MFN clause in a contract is standard for music licensing contracts, according to multiple sources. MFNs have garnered scrutiny in the past, and as part of its merger with EMI in 2012, Universal Music Group had to stop using the clauses in Europe for 10 years. But they remain legal in the US.

Where the MFN clause truly comes in handy for Sony Music is when it's used in conjunction with section 5, the "annual true-up of advances" clause. This clause makes sure Sony Music's yearly advances from Spotify are on par with the best deal negotiated by any other label based on the percentage of market share. That means if another music label is getting paid $1 million by Spotify for each percentage of market share it has, and Sony Music is getting $600,000 per market share percentage, Spotify must pay Sony Music the $400,000 difference — known as the adjusted contract period advance — at the end of each contract year.

This was Sony Music's contract with Spotify [Micah Singleton/The Verge]

(Thanks, Pteryxx!)

(Icon: Sony, CC-BY-SA)