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Dissecting The Streaming Inquiry #02: The artist / label split

By | Published on Tuesday 26 January 2021

Houses Of Parliament

We are currently reviewing and dissecting submissions made to the UK Parliament’s ongoing inquiry into the economics of streaming.

Based on the five years of research CMU Insights has undertaken with the Music Managers Forum as part of the ‘Dissecting The Digital Dollar’ project, we explain the background to the key debates, helping you navigate and understand each issue and the proposed solutions.

While there are many different issues to be considered as part of the debate around the economics of streaming, much of the UK parliament’s investigation into the streaming music business so far has focused on how the digital pie is sliced.

Which is to say, how is the money generated by streaming services like Spotify shared out between artists, songwriters, session musicians, labels, distributors, publishers and collecting societies?

In many cases, the record label gets the biggest slice of the digital pie. There are two reasons for this. First, when streaming money is shared out between the the recording copyright and the song copyright, the former usually gets at least four times more than the latter. And secondly, with traditional record deals, the artist is usually paid a minority share, commonly around 20%.

Both of these factors originate in the physical era, where the song copyright usually got a single figure percentage of record sale income, and artists were paid royalty rates of around 15%.

When the original digital music services first emerged, the starting point was the physical product model in terms of revenue shares. As the digital market evolved there was a slight re-slicing of the digital pie to the advantage of the song and the artist. However, many songwriters and artists argue that the re-slicing that has occurred is nowhere near significant enough.

On the label/artist split first, artists and managers argue that one of the reasons labels got such a large slice of record sales income in the physical era was because of the costs and risks associated with manufacturing, storing and distributing physical discs.

Once those costs and risks are taken out of the equation, the argument goes, labels can no longer justify taking such a large slice of subsequent income.

Labels usually counter that, while the costs and risks of physical are indeed removed when an artist is fully digital, other costs and risks associated with releasing recorded music have gone up. In particular, marketing.

Release campaigns now run for longer, require unprecedented amounts of promotional content to be created, and involve managing relationships with an ever-expanded network of influencers.

And beyond each individual campaign, labels have invested in content-making and data-crunching machines that provide each artist with the knowledge, concepts, insight and reach they need to succeed.

Unsurprisingly, submissions made to the select committee’s inquiry by record label trade groups IFPI and BPI go big on the investments labels continue to make, in both individual artists and the label infrastructure those artists utilise to grow audience. Meanwhile, they add, the aforementioned re-slicing of the digital pie means that even artists who sign pretty traditional record deals earn more from streams than they did from discs.

In the BPI’s lengthy submission, it states: “The majors spend hundreds of millions of pounds every year in the UK on creative investment and artists, as well as providing employment to several thousand people directly, and support many thousands more jobs within the music ecosystem and in associated businesses involved in video production, music publicity and journalism, and other professional, marketing, creative advisory services etc”.

Majors and indies alike, it then argues, continue to take considerable risks when signing artists. “Developing talent, releasing new music and building artist careers is complex and challenging”, it says, “and recorded music always has been an unpredictable and hit-driven business”.

“Whether an artist or their tracks and albums will achieve commercial success and build fans has always featured an element of luck and timing, as well as talent and expertise, particularly for new and emerging talent … however brilliant the creative individual or the work itself, many recording artists and records will not achieve commercial success”.

“Launching an artist is also a complex and costly enterprise”, it goes on. “It is estimated that it costs on average between £400,000 and £1.5 million to break an artist globally; and it is often commented in the industry that approximately only one in ten investments made by record labels breaks even on the upfront label investment”.

“This inherent ‘cross-funding’ model is a key feature of record labels, whereby the successes fund investment in other output that may not achieve commercial success but has considerable cultural merit. However, labels make success much more likely and achievable. This ensures that British artists and voices continue to be heard on a global scale”.

In its submission, IFPI states: “While digital recording technology and new distribution channels have provided artists more choice and opportunities than they have ever had before, record companies continue to be the main investors in music and artists”.

“IFPI research shows that in year 2018 alone the industry invested $5.8 billion in ‘artists and repertoire’ and marketing (akin to research and development investment in traditional industries), amounting to 33.8% of the record companies’ revenues”.

“The record industry revenue growth has enabled record companies to invest more in artists and release more music, thereby generating job opportunities along the entire value chain”, it adds.

“At the same time recording artists royalty agreements guarantee that the artists benefit directly from the growing industry revenue. In fact, data shows that the growth in artists’ royalties has outpaced the growth of record companies’ sales revenue over the past five years”.

Of course, whether or not you accept any of these arguments as to why labels still incur risks and costs that justify taking the biggest slice of the digital pie, new artists do at least get to decide whether they think what is on offer is fair when signing their streaming-era record deals.

Some might argue that the major labels are so dominant that, to achieve global success, you have to sign to one of those three companies, meaning artists have to accept deals they consider unfair. Although – as the labels have been keen to stress in their submissions and at last week’s oral hearing – artists now have plenty more choices when it comes to releasing their recorded music.

In its submission, the BPI talks about how labels – major and indie – now offer a wider range of deals to artists with more flexibility when negotiating terms. Plus artists can set up their own labels and make use of a distributor or artist services company.

“This plural environment means artists have enormous choice in the labels they choose to work with, the type of deal they wish to sign, and, indeed, in the era of streaming, whether to sign with a label at all”, the BPI writes. “This means that ‘DIY’ self-releasing artists can release their music on streaming platforms, either themselves where user-upload is permitted or using aggregator distribution services”.

However, while much of this inquiry to date has focused on what the economics of streaming means for new artists, what about heritage acts who signed record deals decades ago; whose recordings are still owned by their former labels; and who can’t capitalise on all the choices now available to new artists choosing a business partner for their recordings?

The submission from the Music Managers Forum and Featured Artists Coalition makes the distinction between new and heritage acts. “Artists who signed record deals in the pre-streaming age face the biggest problems”, it says. “These were often life of copyright deals paying royalties at much lower rates, and with additional deductions and discounts designed for physical sales. This could cut an already nominal royalty in half”.

“Artists locked into these deals may also still be paying off old advances and costs, sometimes because they were actively releasing new music in an era where labels were prone to overspend on things like recording costs or video costs and then pass that expenditure onto their artists”, it goes on.

“It’s also worth noting that, because of the way traditional deals are structured, the label often goes into profit on a record release – in that it has covered all the costs it incurred – long before an artist has paid back any recoupable costs”.

“Many artists locked into these unfavourable deals have seen their old recordings revitalised in the streaming age”, it adds. “Digital streaming has removed logistical and transactional barriers when it comes to monetising catalogue. This makes the record industry’s catalogue more valuable than ever”.

“Unfortunately, however, the artists who made those historical recordings are often paid much lower royalties, meaning that labels not artists are benefiting from this increased value in catalogue”.

Although the BPI’s submission says “commercially successful artists often renegotiate [old deals], obtaining additional advances and sometimes securing higher royalty rates in recognition of their success”, many managers argue that such renegotiations are, in fact, the exception rather than the norm. Superstar acts can always renegotiate of course. But for most middle-level heritage acts, even getting renegotiation talks started is a challenge.

MMF and FAC note that some independent labels – including Beggars and BMG – have voluntarily implemented policies to ensure that heritage artists enjoy royalties and/or contract terms more in line with what new deals provide in the streaming age. Such moves mean those artists get to benefit more from their reinvigorated catalogue.

All labels should pay modern royalties to all artists – MMF and FAC argue – and go above and beyond to ensure that no old fashioned discounts and deductions from the physical era are still impacting on streaming revenue. “After a set period of time, eg fifteen years, labels should write off any unrecouped costs that the artist is still paying off”, it also suggests.

In its submission, BMG talks about its work ensuring that older records contracts – all of which it inherited through a series of catalogue acquisitions – are implemented in a fair way.

“When streaming came along, in most cases existing record deal terms designed for the compact disc or vinyl LP were applied to the new revenue stream, including discounts on royalties for packaging costs, promotional copies and returns (from retailers). Because none of these are relevant in the digital age”, it adds, “BMG ceased applying such deductions in 2015”.

After referencing some other old fashioned record industry contractural norms it goes on: “BMG takes the view that in the context of today it is no longer desirable to prolong [these norms]. We are therefore paying out more money, more quickly than we are contractually obliged to do. We are clear we cannot make good all of the sins of the past, but we are committed to doing what we can to improve”.

MMF and FAC urge the culture select committee to call for a “government-led review of legacy contracts looking for and addressing common contract terms that only made sense in previous eras, or which were the result of institutionalised prejudice and discrimination in the record industry”.

It then adds that “if record labels are unwilling to address these inequities, the other solution is to introduce so called equitable remuneration on streaming”.

But more on that in a future economics of streaming update. Tomorrow, the song/recording split debate. Meanwhile, you can follow all our full coverage of the inquiry into the economics of streaming via this CMU timeline here.

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