After Spotify went public on Tuesday (April 3rd) artists are set to get a piece of the pie from the IPO (initial public offerings) launch. Sony Music parent, Sony Corp, that holds a total stake of 5.7% in Spotify sold a fifth of its shares or 1.4% on the stocks opening day netting a whopping $260 million, a smart move for the company considering that Sony was one of its early investors. After the sale, Sony’s stake is now down to 4.8%, which is a good amount to hold a seat on the board.
This gets interesting because the conglomerate corporation is forecasting a 980m-ish profit from the entirety of its Spotify stake once the trading day comes to a close (Tuesday). We start with Sony’s Corp forecast gain of almost 1bn from Sony Music’s total 5.7% stake in Spotify as of its Tuesday closing stock price of $149.01 a share. In total Sony’s stake in Spotify during that time was worth $1.5 billion. This translates to a profit of 3x from its initial investment. With a wide profit margin, the label plans to pay it forward as well with royalties to artists on their roster.
So how much will the profit from Sony pass on to their artist and distributed labels? Let’s do the math: it’s estimated that the average streaming royalty rate across major labels range from 18%-19%. This takes into consideration of high margin catalog deals and modern low-margin artist deals. Warner Music Group committed to distributing their profits to artists on the same basis as Sony.
Now let’s assume that Sony profit policy is in line with Warner’s. With Sony banking nearly $1 billion from Spotify IPO, based on a share worth $1.5bn. %18 of $1 billion equates to %180 million. %180 million is what Sony signed artist can expect to receive when the label has realized all its Spotify profit. (Based on the stock closing price on Tuesday)
Working across all three major labels, sources suggest that Universal’s pre-DPO (Direct Public Offering) Spotify holding stood at around %4, with Warner at around 2-3%. Combined with Sony’s 5.7%, this results in a total major label equity stake of 12%-13%. This translates to a total holding of $3.3 billion based on Spotify closing price of $149.01 on Tuesday. Visiting back of Sony Corp projected 3x profit return ($1 billion vs. $1.5 billion equity value). The labels total profit from$3.3 billion figure of $2.2 billion. This translates with the 18%-19% typical royalty package rate would equate to $400 million – $420 million. A $400 million one-time payout to the labels would be the profit that has to be divided amongst the artists in each label, estimated. But $400 doesn’t go a long way, considering that thousands of artists hold contracts with the labels. When divided amongst the top tier, a $400 million split becomes just $18,000 each, pre-tax.
Concluding, only heavy hitters such as Drake and Ed Sheeran who have tracks with over a billion streams are the ones to benefit. For the vast majority of artists, this Spotify payout serves as another example of a cruel fact: the streaming economy doesn’t favor them and only reserves its riches to a chosen few.
Enter your email and stay on top of things,