WHAT DOES "BREAKAGE" MEAN IN THE STREAMING AGE?

When Spotify goes public, the so-called “breakage” will be shared by the majors. Breakage was a standard part of recording contracts back in ancient times, when records were made from shellac and actually did break. During the wild and wooly indie days of the 1950s and ’60s, the story goes, some employed it as a way to avoid paying artist royalties by inflating the number of broken records. But how is this hoary term defined in 2018?

“Breakage” means either (a) nonrecoupable monies for a license by the record company of their catalog (e.g., to Spotify, Apple Music, etc.) or (b) the unrecouped amount of an advance at the end of that license. First, the breakage is allocated to each artist based on the streams accumulated during the term of the license. If it’s a three-year deal, they look at three years’ worth of streams. Each artist then gets a piece of that allocation based on their royalty rate.

If there’s $1m advance, $800k is earned at the end of the deal, so the breakage is $200k.

If Artist A has 10% of the record company’s total streams for all artists during the three years, 10% of the breakage ($20k) is allocated to Artist A, who then gets his or her royalty share of that $20k. If the act has a 20% royalty, they’d get $4k. Got it?