There have been numerous reports that SoundCloud is in discussions with the major record labels in relation to acquiring equity in the streaming music service provider.

What?

SoundCloud is a huge operation with more than 250 million users per month.  It offers access to a huge quantity and variety of music, most of which is subject to copyright protection.  To date, SoundCloud has operated without licences from content owners.  Content owners seem to have taken the view that the promotional value of content freely available on SoundCloud outweighed the value of any royalties ordinarily payable.

Recently Twitter considered purchasing SoundCloud (for around US$2 billion) but walked away reportedly because, without appropriate licensing arrangements, SoundCloud was vulnerable to numerous and substantial copyright infringement claims if the content owners’ position on licensing changed.

If the deal currently under discussion goes ahead, speculation is that Twitter would in future buy out the major’s stake, resulting in a potential windfall for the majors.

So what?

A key issue for artists and labels would be how, if at all, the labels should account to their artists for that windfall.  Often the terms of artists’ contracts provide that lump sum payments from streaming services are retained by the label, not passed through. Artists will likely argue that had their labels licensed SoundCloud in the usual way previously royalties/licence fees would have been payable by SoundCloud to the labels, and royalties paid by the labels through to the artists.  In lieu of those royalties, and on the basis that any equity deal will include favourable licensing terms and/or a waiver of historic infringement claims, should artists receive a portion of a label’s profit as and when the label sells its shares? 

It is the same debate which took place in relation to the purchase of Universal’s stake in Beats by Apple and there is no straightforward answer.  For the labels, the obvious difficulty would be how to apportion what the label receives between its artists in the expected absence of detailed information from SoundCloud (in addition to determining the question of whether labels are obliged to account at all to artists under existing agreements).  Artists are likely to view that difficulty as not insuperable, given that labels could request information as a condition of entering into an arrangement with SoundCloud.  Further, artists and their advisors are likely to view the waiver or settlement of historic infringement claims as a retrospective licence fee (in relation to which royalties would, in the usual course of things, be payable).