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

The term “breakage” dates back to a time when records were made of shellac and could break during transport. Of course, a label could no longer sell these records, and so clauses were included in the label contracts at the time to ensure that breakage was not considered when calculating the artists’ share. However, the term has survived into the digital age and is used to refer to a label’s revenue that does not have to be shared with artists. In this final part of the series on the economics of streaming music, we look at exactly what this revenue is and the controversies that have arisen around it.

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

In his standard work on the US music industry of the 1940s and 1950s – “Record Makers and Breakers” – John Broven describes the practice of record labels deliberately allowing shellac records to break so that a music production could not breakeven, to avoid paying the artists their royalties. In an interview with the author, the founder of De Luxe Records, Henry Stone, said that the company recovered the lost revenue from the insurance company because the deliveries were usually insured against breakage.

However, ‘breakage’ is still relevant in the digital age, albeit in a different form. This has to do with the contractual practices between labels and music streaming services, which we have discussed at length elsewhere. In a nutshell, Spotify & Co. make advance payments to the labels to be allowed to use their music catalogues. These advance payments are then recouped with the streaming revenues. However, if the revenue is less than the advance, the difference remains with the labels as “breakage”. If a streaming service pays a label US $1 million as an advance for the contract period, but the label’s catalogue is only streamed to the value of US $750,000, then the label has US $250,000 in additional revenue that does not have to be distributed to the artists. The same applies to the proceeds from the sale of equity that the majors have acquired from streaming services. They can turn it into cash when they are sold, e.g. in an IPO like Spotify, which does not have to be shared with the artists, although their creative achievements ultimately also contributed to the increase in the value of the streaming service. It is up to the record company to decide whether or not to share this amount with “its” artists.

Many artists and their managers have asked themselves whether their labels, especially the major labels, share digital “breakage” with them. In a much-noticed guest article for Billboard Magazine, Darius Van Arman, founder and operator of the Canadian label and music publishing company Secretly Group, criticised the majors’ “breakage” practice: “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.”

This was stated by Van Arman in advance of his testimony at the US Congressional “Music Licensing” hearings held on 10 and 25 June 2014 before the Subcommittee on Courts, Intellectual Property, and the Internet of the House Judiciary Committee. At the hearing, the Members of the House questioned representatives of music industry associations, collecting societies, streaming services and labels, as well as songwriter and Johnny Cash’s daughter and heiress Roseanne Cash, who testified about the unequal distribution of streaming revenues between rights owners and artists, in addition to calling for a broadcasting right for authors in the US. Darius Van Arman was more specific, criticising the major labels in his detailed written statement, which exploit their market power in order not to have to share “breakage” income with their artists: “[…] if the major uses all of its bargaining power to maximise just the guarantee – with the intention that the guarantee is so high that it can’t possibly be recouped in the period of time allotted for it – then the recouped portion of the guarantee is a significant boon to the major. It is revenue that cannot be attributed to specific recordings or performances, and thus the major does not have to share it with its artists, the independent labels distributed by the major, or publishing interests […].”

As a positive counterexample, Van Arman cited the indie label licensing association MERLIN, which distributes all “breakage” revenues to its members, although it should be added that MERLIN’s members are indie labels, not artists. However, in a “Labels’ Fair Digital Deal Declaration” 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 was triggered made the music majors to feel uncomfordable. However, they were only forced to act when a contract between Spotify and Sony Music Entertainment was leaked in May 2015, revealing the major labels’ business model of upfront payments and most-favoured clauses. The International Music Managers Form (IMMF) immediately stepped in with an open letter to labels and music publishers calling for more transparency in the accounting of streaming revenues, citing the Spotify-Sony deal and questioning the breakage practice of the music majors. In an interview, IMMF Vice-Chairman Volker May strongly criticised the way Sony & Co. handle these “collateral additional revenues”: “The labels are getting all manner of collateral benefits from supplying the artists music to digital platforms, benefits which are not shared with the artists (performers or writers).”

Sony was forced to respond to these accusations with a public statement in which it solemnly assured that the group’s labels would share all non-directly attributable revenues with their artists: “Under the Sony Music ‘Breakage Policy,’ SME shares with its recording artists all unallocated income from advances, non-recoupable payments and minimum revenue guarantees that Sony Music receives under its digital distribution deals. […] 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.”

It is probably no coincidence that shortly afterwards an anonymised royalty statement from Warner Music Group was leaked to the online industry portal Music Business Worldwide, showing that Warner does in fact share “breakage” 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.”

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. On 2 June 2015, Universal also clarified its handling of digital “breakage” revenues by asserting that “while the most significant source is comprised of royalty payments, we also choose to share with artists minimum guarantees as well as unrecouped digital advances, where they exist.”

What was not clear from the majors’ statements, however, was whether all signed musicians would share in the “breakage” revenue or only a few superstars who have the bargaining power to do so. It is also unclear whether the sharing provisions apply only to artists currently under contract, or also to those whose contracts have expired but whose music is still in the catalogue and generating revenue. In any case, we can only speculate about the artists’ share of the “breakage” revenues and the amount of compensation.

Finally, the question arises why the majors have implemented such a system of advances on music streaming services. In addition to the practice of recouping advances in label contracts, which was applied in the same way, risk avoidance plays a particularly important role. 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. From the majors’ point of view, the advances were a revenue guarantee and had the positive side effect of making the streaming services dependent on them.

Overall, the example of ‘breakage’ revenues highlights how multifaceted and complex the distribution issue is in music streaming. We have seen that revenue distribution models such as pro-rata and user-centric have an impact on the distribution of streaming revenues, and that a switch to alternative models such as equitable remuneration is met with fierce resistance from rights holders. However, research on the income situation of musicians shows that only a few superstars benefit from the streaming economy and that the majority of artists earn little or nothing 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 music rights (master and publishing rights) are the main factors on which the business model of music streaming services is based, 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

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

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.

These hearings were an important milestone on the way to the Music Modernisation Act 2018.

Testimony by Roseanne Cash before the “Subcommittee on Courts, Intellectual Property, and the Internet” of the House Judiciary Committee, 113^th Congress, 2^nd Session, Hearing on “Music Licensing under Title 17 (Part I & II) on June 10 & 25 2014, pp 240-242 of the hearing-transcript.

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

Ibid., p 275.

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

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

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.

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

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

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

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