Why Sharing Equity Is A Big Deal

The announcement last week that Warner Music will share the proceeds of its equity stakes in digital music services with its artists, quickly followed by a similar announcement from Sony Music is hugely significant. The artist community has been in the dark about these equity positions for years and it has taken a great deal of persistence to reach this point. Universal Music is the only major not to formally state its position on equity but one would hope it is only a matter of time before it does so.

A number of commentators most notably Mark Mulligan and Tim Ingham have made the point that the net value of these equity stakes to the artist may not be that significant and that the real battle lies elsewhere. Mark suggests that streaming is not a license or a sale and that the correct remuneration for artists’ lies somewhere between the 50% rate for a license and the (roughly) 15% an artist might receive for a sale. The midway point between those two figures is roughly double what most artists currently get paid on streaming income. His point is this argument is worth more than the fight over equity.

 

EQUITY – THE BACKSTORY

Coming back to equity, it is worth remembering the reason major labels took equity in start-up music services in the first place. During the first dot.com boom, founders were exiting at huge valuations either by sale or IPO, very often without generating any revenue. It made sense to grab as much equity as possible as part of the music licensing negotiation and Jay Samit and other label digital executives at the time quickly set a precedent that has continued to this day.

In the case of Spotify, it was reported at the time by Techcrunch that the majors and Merlin collectively received a 17.3% shareholding on the Series A funding round and paid an aggregate €8,808 for that shareholding. It is worth pointing out that Techcrunch questioned this number at the time believing the amount paid was ten times that amount had the music companies matched what other Series A investors actually paid for their shareholdings. Clearly the majors did not do that and these were peppercorn payments as part of a broader licensing negotiation.

What also needs to be understood is the extent to which those original shareholdings have been diluted through subsequent funding rounds, of which there have been eleven. Further clarity is needed on this.

Where equity is a more valuable element for artists are companies such as Soundcloud in its present circumstances. Soundcloud is striking deals with music companies, but it has a long way to go to generate the sort of revenue numbers Spotify is already achieving. Accordingly, if Soundcloud is acquired, which is a strong possibility, then equity will form a greater part of the total value accounted back to the artist relative to advances and earnings.

 

ALIGNMENT OF INTERESTS – is what it is about

Equity is still hugely important for artists. Start-ups will come and go and each takes their own path. In certain circumstances, the equity piece will derive the greatest value, in other cases not. What is most important – and which Stephen Cooper of Warner Music stresses – is that the interests of the label and the artist are aligned whatever the outcome. This is an important step in the right direction and is greatly welcomed.

@andyedwardsbiz