Major labels accept low royalty rates to enrich their own equity positions

Evidence

A lawsuit brought by 19 Recordings (an American Idol–affiliated record label representing artists such as Kelly Clarkson and Carrie Underwood) alleged that Sony acquired its equity stake and advertising income from Spotify in lieu of negotiating fair-market royalty rates. The allegations have broader implications, the lawsuit suggests, because “those other record labels have engaged in the same self-dealing as Sony with respect to the diversion of payments to them, and the below market streaming royalty rates to artists. Together, and individually, Sony and the other major record labels therefore have significant power to exert control over Spotify in order to not only dictate how revenue will be paid, but wrongfully and in bad faith divert money from royalties that must be shared to other forms of revenue that they can keep for themselves.” In essence, the Big 3 have a compelling financial incentive for accepting low royalty rates for their artists: it benefits the streaming services, which the labels have equity stakes in. Rather than sharing profit with their artists directly through royalty rates, they wait for a large payout through IPO or acquisition, which will not need to be shared with the artists. As is often the case in these matters, the lawsuit was settled out of court, preventing a broader legal ruling or precedent that might have helped others. — Andrew deWaard, Derivative Media, 216

Categorization

• XREF: This is the strongest direct evidence for the reader’s causal question — a named mechanism (self-dealing: low royalties to artists offset by equity gains to the label) tying financial structure to how streaming payouts are shaped.
• QUESTION: Settlement with no ruling kills the precedent — so the causal claim rests on allegation, not adjudication. Worth flagging to the reader as correlation-vs-causation caution.
• DEEPTHINKING: This is the structural payoff of the chapter: ownership of the distribution point systematically inverts the incentive to maximize artist pay, a mechanism that explains how a whole industry’s form gets shaped from the top.