by Michelle Davis, FMC Legal Intern

Let’s say you’re approached by David Copperfield (it’s OK, don’t run!), and he asks you to be an audience plant for his next big televised spectacle. You’ll be privy to some behind-the-scenes secrets, and outing his magic as merely illusion could be a disaster for his career—other magicians will cop his tricks, his performances will lose their coveted mystique, etc. That’s no good. So to make sure you keep your lips zipped, he presents to you (pulled out of a hat, probably) a non-disclosure agreement. This is a contract that says your discussions regarding this particular event are strictly confidential, and if you go blabbing he can sue you for breach of contract.

Non-disclosure agreements (NDAs) in this context seem pretty straightforward, but what about all the NDAs that pervade the music industry? Why all the smoke and mirrors obfuscating the terms of agreement between streaming services and major record labels, or deals between aggregators/distributors and YouTube?

Well, generally speaking, corporations use non-disclosure agreements because in the process of negotiating a deal, parties may need to reveal intricacies of their business models that they would rather not expose to the public or to competitors. Non-disclosure agreements can be mutual, restricting both parties’ use of information, or they can be one-sided. These terms are often determined well before the actual deals are struck or money changes hands.

And while non-disclosure agreements certainly can be rationalized, serious problems arise when key stakeholders are kept in the dark. Take, for example, the terms that govern what musicians get paid on certain digital platforms. Here, a lack of transparency can be corrosive to trust and participation.

On-demand streaming services’ direct deals with major labels offer a real-world look at the problems around NDAs. When label execs met behind closed doors with Spotify, artists were left out of the conversation entirely. Most likely had no sense of what their plays would be worth until their statements came in the mail, and then they could only deduce the amount, not the full scope of terms that resulted in that amount. Meanwhile, indie labels have no way of knowing whether the services are paying them less than the majors for the same number of plays. Or whether a favorable deal struck by an indie (or their aggregator) would result in an automatic opportunity for a major to have the same arrangement. (That’s known as “most favored nation” status.)

So the question is, do new services provide a level playing field for different kinds of artists, or are they designed to allow major labels to lock up control of the new distribution pipeline (while cutting them into piles of venture capital money)? NDAs prevent us from knowing.

To be clear—there are multiple parties to blame. It’s hard to tell whether NDAs are being insisted upon by digital services or by major labels—or both! Each party would want to preserve their competitive advantages. Unfortunately, this happens at the expense of artists and consumers being informed; it’s almost impossible to determine the true market value of streaming when the determining factors are obscured by non-disclosure agreements. Artists deserve a say in their compensation and, at the very least, a clear understanding of how those revenues are calculated.

Non-disclosure agreements can also provide cover for anti-competitive behavior that’s potentially deceptive to consumers. For example, what kind of favoritism could Clear Channel-owned radio stations be providing bigger labels and superstar artists as a result of their recent revenue sharing deal? If you attend the iHeart Radio Music Festival, what are the reasons a particular is featured on stage? Is it a curatorial choice, or a way for Clear Channel to get a break on digital royalty payments?

Certainly some fans would be more attracted to digital services that clearly delineate how their plays or subscriptions compensate artists. In the same way that shining sunlight on the different kinds of contracts offered by different kinds of record labels (something we’ve been doing since 2001) can help consumers understand what kind of business models they want to support, and help artists think through their options, transparency encourages accountability. This in turn helps musicians make informed choices about how they want their music to be available. Instead, artist advocates are left to rely on leaked contracts and reverse-engineered arithmetic based on play counts and payouts—an error-prone process that further muddles the debate around the viability of streaming business models for different kinds of artists.

Explained in meme terms, non-disclosure agreements are the question marks in this scenario:

1. Step one, record a song.
2. Step two, put song on Spotify.
3. ????
 4. PROFIT!

Of course, when “profit” equals fractions of cents, it’s even more important to understand how and why those rates were arrived at. This doesn’t mean that per-stream rates and revenue will go up, or that there aren’t a bunch of other things that can be considered to make streaming music a more viable proposition for artists. But it does frustrate any discussion about alternative models or tweaks to existing systems. And that frankly sucks.

That’s why FMC strongly advocates for transparency at all levels of the music business and the more judicious application of non-disclosure agreements.