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Trends: How do artists know if they’re getting a good deal from streaming? There are too many unknowns

By | Published on Monday 10 October 2016

Dissecting The Digital Dollar

Last week the Music Managers Forum launched Part Two of its ‘Dissecting The Digital Dollar’ report, summarising a series of roundtable debates it staged to discuss the issues raised in Part One. Once again CMU Insights produced the report, and here CMU’s Chris Cooke – who authored both editions – provides his take on the key findings in Part Two.

The MMF commissioned Part One of ‘Dissecting The Digital Dollar’ for two key reasons, firstly to educate artist managers on how the music industry was licensing the streaming services so that they could better advise their clients, and secondly to instigate a debate around some of the key issues within the emerging and evolving streaming market.

To help facilitate and document this debate, earlier this year the MMF staged a series of roundtable discussions, which I chaired. And although the ultimate aim of Part Two of the ‘Digital Dollar’ project was to assess the viewpoint of the management community, we felt it was important to get input from across the music rights industry in these debates.

To that end we staged roundtables involving labels and publishers, artists and songwriters, and lawyers and accountants, in addition to managers. We also ran a number of sessions with representatives from across the music community involved, and to get a perspective from beyond the UK we also staged roundtables of the latter format in the US, Canada and France.

Perhaps the first thing to say about these discussions is that, while the music industry is known for having many divisions and disagreements within, when you get managers, labels and publishers in the room it is perhaps surprising how much they agree on. There seemed to be quite a lot of consensus on where the recorded music business is now headed, with the disagreements being more about how we get there.

Nearly everyone we spoke to agreed that streaming is now the future of recorded music or, in the words of more than one participant, “streaming is ‘now’ of recorded music”. It’s no secret that the clear trend in the record industry for a few years now has been the continued decline of CD and download sales and the boom in streaming income.

The vast majority of participants were also clear that it is specifically the paid-for streaming services like Spotify, Apple Music, Tidal and Deezer that are driving both the growth in the streaming sector and the recent return to growth in the wider recorded music market. Therefore, it is ultimately in everyone’s interest – labels, publishers, artists, songwriters and managers – to encourage more consumers to sign up to these premium services.

Yet many artists remain nervous about potentially pushing their fans away from physical and download sales – where they, or at least their managers, understand the business model – over to subscription streaming, where there remain so many unknowns. In some cases those unknowns result in artists and songwriters – and especially heritage acts – being openly anti-streaming. Which sends out confused messaging to fans during a time when the real objective for the record industry is to sell more premium subscriptions.

Why are there so many unknowns about the streaming model? Some of it is simply because the shift from CD and downloads – a sales business model – to subscription streaming – a consumption business model – is a pretty radical shift, and inevitably not everything can be predicted about how things will turn out. From an artist’s perspective, many of the unknowns are the result of labels, publishers, digital platforms and collecting societies keeping key elements of the streaming business hidden. Those unknowns are, in fact, known, just not to everyone.

Need there be so many unknowns? Surely if the wider industry needs artists to help to turn as many consumers as possible into paying streamers, artists and their representatives need to fully understand the streaming business model, and be part of the conversation as that business model further evolves? Certainly the management community believes so.

The roundtable sessions covered seven topics, and each is covered by a chapter of the new report. Both the full report and an executive summary can be downloaded for free from the MMF and CMU Insights websites. But here is a very brief round up of the key findings.

It is probably unsurprising that all but the record labels taking part in the roundtables felt that the way streaming income is currently divided between the various stakeholders in the music community – label, publisher, artist and songwriter – is unfair. The label, of course, generally sees by far the biggest slice of the digital pie.

Those representing the record companies argued that they continue to take by far the biggest financial risk in putting out new music, and especially when that new music comes from new talent. Most of the other participants in the debates accepted that that was probably true.

However, there was a general belief that the labels’ risks were less in the streaming domain than in the physical era, and that this would become ever more so as digital-only releases become the norm and the initial costs of building infrastructure to deliver tracks to the streaming platforms and process the data and royalties they return fall away.

Some labels countered that manufacturing and physical distribution actually accounted for a relatively small part of the record company’s costs in the CD era, and that A&R, marketing and overheads were the bigger expenses, which remained unchanged. And while that did mean labels were spending slightly less now, songwriters and publishers were already seeing a slightly higher cut on streaming than CDs and downloads, and so were many artists (although that depends on their specific record contracts).

In the main managers were not entirely convinced by this argument, reckoning that the royalties artists and songwriters are paid on streams should more be than just “slightly” (ie a few percent) more than on physical releases.

Particular concern was expressed for heritage artists, many of whom are still earning on old record contracts that paid much smaller royalties to artists. This didn’t seem fair, managers reckoned, given that streaming had made it so much easier – and cheaper – to exploit catalogue.

It means that heritage musicians, many of whom still enjoy a connection with their fans, are particularly down on streaming, yet it is their probably older fanbases that need to be turned on to premium streams for the market to continue to boom.

Quite how you rebalance the way streaming income is split isn’t entirely clear, though there are three possible action points for the artist and management community.

Firstly, the ‘contract adjustment mechanism’ proposed in the recent draft European Copyright Directive could address the heritage artist issue if it could be made to work. Managers, therefore, need to input on this as the directive goes through the motions in Brussels, while also considering a UK option if we Brexit before the new copyright rules go live in Europe.

Secondly, the extension of performer equitable remuneration – the statutory royalties already paid to artists on broadcast and public performance income – to streaming would provide all performers with a minimum payment. Quite how this could be achieved would likely vary from copyright system to copyright system, and isn’t without its own complexities, though most managers felt it should be pursued as an option anyway.

Thirdly, many managers noted that the discounts and deductions labels apply to artist royalties are arguably as big a problem as top line revenue splits; in that even if an artist is technically on a 20% royalty on streams, once contractual discounts and deductions are applied they may actually receive a fraction of that sum.

How discounts and deductions are applied to streaming is one of the big unknowns, and a conversation around these is probably a good starting point if managers want to put pressure on the labels over what their artists earn from streaming.

Transparency also came up during the discussion over how other elements of the streaming deals – ie profits from unallocated advances, equity and upfront fees – should be shared with artists.

Many labels have now made commitments to share the value of these other kickbacks, though most managers – while welcoming those commitments – stressed there had been little clarity to date on exactly how those commitments were being met.

Another topic discussed during the roundtable discussions was whether streaming services are best licensed by the labels and publishers directly, or via the collective licensing system.

In the main, labels currently license most streaming services directly, while on the publishing side collective licensing is the starting point, though the big five increasingly license Anglo-American catalogue directly (albeit in partnership with the Anglo-American collecting societies).

Most of the artists and songwriters we spoke to would generally prefer more digital services to be licensed through the collective licensing system. That was partly because of belief expressed by many artists and songwriters, and some managers – especially the younger managers – that everyone should be paid the same rate per stream, so that what you earn is based on how often your music is streamed rather than what revenue share and minimum guarantees your label, distributor or publisher negotiated. That approach would only really be possible under collective licensing.

The labels, which are generally against more collective licensing of digital, raised various issues with the collective licensing approach, most of which most managers were willing to concede. Though that does raise the question – is the solution more direct licensing, or overcoming the limitations of the global collective licensing system?

The one area where many managers definitely felt that the collecting societies had a key role to play was in producing better music rights data. Pretty much everyone agreed that the music industry needs to get better at making good music rights data available to ensure more efficient royalty processing. The societies, who already have big databases, have a key role to play here, many managers reckoned, with some acknowledging that some societies are already doing some good work in this space.

Though, while labels, publishers and the collecting societies should take on responsibility for cleaning up legacy data, artists, songwriters and managers probably need to take on some responsibility for ensuring better data is inputted for new songs and recordings as they are created.

While we’re talking about licensing approaches, what about those services operating opt-out rather than opt-in streaming, the biggest being YouTube of course? That approach is possible because of the safe harbours in copyright law that the labels and publishers have been trying so hard of late to have reformed, to stop opt-out streaming from being an option for the tech sector.

Most of the artists and managers taking part in the discussions shared the concerns of the labels and publishers on this issue, and supported efforts to reform safe harbours, even if they weren’t all entirely optimistic tangible reform could actually be achieved. Though here again, transparency was raised as an issue, because managers don’t have the information available to truly compare the YouTube business with the Spotify business.

Throughout the discussions, transparency stood out above all the others as the key issue. Managers remain in the dark about many aspects of the deals that labels, publishers and the collecting societies do with the streaming services. And about how digital royalties are calculated and paid to artists and songwriters.

Managers insist that they need to better understand streaming deals so that they – and the accountants they employ – can audit their artists’ royalties. They also need that information to better advise clients on the best music industry business partners to work with in the digital age.

And, of course, as we said at the outset, without that information managers cannot make informed decisions about which streaming services – and which streaming business models – work best for their artists, so that those artists can confidentially encourage fans to become paying customers of the right streaming platforms.

Labels and publishers often cite non-disclosure agreements in their streaming contracts and competition law concerns as to why information cannot be shared. But this doesn’t cover all the transparency issues, some of which are simply down to poor communication.

Even where NDAs and competition law are the issue, managers reckoned they could work with the labels and publishers to tackle these problems – not least because many streaming services have insisted, albeit off the record to date, that they too want more transparency.

Most labels and publishers do acknowledge that there are transparency issues, and indeed the need for more transparency has been a common theme at music industry conferences in recent years. Nevertheless, there does often seem to be a reluctance to address the transparency problem, certainly on an industry-wide basis.

The conclusion of ‘Dissecting The Digital Dollar Part Two’ is clear, if the wider music community at large is going to collaborate to grow the digital pie, the wider music industry needs to recognise that artists, songwriters and their representatives need access to key information about the digital dollars and deals, and to be part of the conversation as the streaming market continues to evolve, mature and, hopefully, thrive.