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Dissecting The Streaming Inquiry #03: The recording / song split

By | Published on Wednesday 27 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.

As noted, much of Parliament’s streaming inquiry to date has focused on the digital pie debate – how the monies generated by streaming services like Spotify are shared out between the services themselves and each stakeholder in the music industry, including artists, songwriters, session musicians, labels, distributors, publishers and collecting societies.

There are various elements to the digital pie debate, including the previously discussed question over how the monies allocated to the recording rights on a stream are shared out between the label and the artist. That depends on each artist’s specific label deal of course, though some argue that – on the whole – labels get too big a cut.

Another key element of this debate relates to how much songwriters earn from streams. This has less to do with the deals between songwriters and music publishers – which usually pay the writer a majority share anyway – and more to do with how much of streaming income is allocated from the start to the song copyright versus the recording copyright.

Every label, distributor, publisher and collecting society negotiates its own deals with the streaming services. Those deals are revenue share deals, with the streaming service committing to share a portion of its monthly revenues with each of its licensing partners. Quite what that revenue share arrangement is depends on the deal. However, labels and distributors are likely on a 50-55% revenue share, while publishers and societies will be getting 10-15%.

Many songwriters and music publishers argue that they are yet to really see the benefit of streaming and that’s principally because of the way the digital pie is sliced, so that nearly four times more money is allocated to the recording than the song.

That argument is presented in various submissions to the inquiry.

In its submission, Irish collecting society IMRO states: “Royalties available to composers, authors and their publishers is the single biggest issue facing the creative community. Record labels may be reporting large increases in revenues from streaming services, [but] songwriters and their publishers are not seeing this benefit”.

“This is due to the disproportionate sharing of the income”, it adds. “Only 15% of revenues go to publishers and their writers – this for the content that the entire ecosystem depends on. There needs to be a much fairer allocation of streaming revenues”.

Meanwhile, the Independent Music Publishers Forum, in its submission, says: “The streaming rates issue is the most important and urgent priority for the wider community to address. Rates for publishers have been low from the outset. While record labels are reporting dramatic increases in revenues from streaming services, the publishing sector (and thereby the songwriters and composers they represent) does not benefit from this growth”.

“The publishing sector receive rates of (approx) 15% for subscription services”, it goes on. “This is occurring at a time when the song is becoming more valuable as the business moves to a track-based model. Simply put songwriters, [collecting societies] and publishers need to generate a larger share of digital revenue”.

“The amount of revenue that streaming services make off the back of creators’ work and the gross disparity and inequality of what they pay out has become scandalous”, it concludes. “Streaming services need to better support composers and authors for their work – pay-up and pay fair”.

Music firm BMG makes this point too in its submission, stating simply: “The only realistic way for songwriters to increase their income from streaming is for them to receive a greater share of the total pot of money paid by streaming services for the music they use”.

So why do the song rights get so much less than the recording rights? Well, because when the original digital services were first evolving in the 2000s, the starting point was the CD business model.

With physical discs, the songs always took a minority share of any money generated by record sales. Quite what that share was varied from country to country, but was often a single figure percentage. So the top line rates in the UK were 8.5% of the wholesale price of a disc, or 6.5% of the retail price.

When digital came along, generally the platforms did their first deals with the labels and distributors, because those were the deals that would result in content being uploaded to their servers. The deals to license the song rights from publishers and collecting societies came later.

With labels and distributors involved sooner, it was perhaps unsurprising that it was assumed a CD style model would be adopted when it came to allocating monies to the song rights, because doing so benefited the recording rights owners. By comparison, when it comes to broadcast revenues, usually the song rights and the recording rights earn more or less the same.

That said, you’ll notice that 15% of streaming service retail revenues is somewhat higher than 6.5% of the retail price of a disc. There has been a re-slicing of the digital pie as the digital market has evolved, with publishers and collecting societies successfully increasing their rates as deals have come up for renewal.

With the streaming services adamant that they need a 30% cut to be viable businesses, the increase in the song royalty has generally resulted in a decrease of the recording royalty – with some labels having been on a 60% revenue share in their original Spotify deals.

The question now is: does a more significant re-slicing of that digital pie still need to take place? In terms of specific arguments, the debate over the recording/song split is pretty much the same as the debate over the label/artist split.

The main argument goes like this: The justification for both songs and artists getting minority shares on CD sales was the cost and risk the label incurred in manufacturing, storing and distributing physical discs. Take away those costs and risks, the argument continues, and you can no longer justify the label taking by far the biggest slice of the pie.

Or, in the words of BMG’s submission, “a revenue split which awards the recording four times as much money as the song underlying the recording looks anachronistic now record labels no longer have the costs which initially justified their greater share”.

In its submission, songwriter group the Ivors Academy is even bolder. “The arguments that labels require such a high proportion of streaming royalties to fund A&R and risk are no longer valid. Label and publishing values are generally equivalent for broadcasting. This provides a much better model for streaming than the proportions based on the old physical sales model”.

The counter arguments in the recording/song debate are, unsurprisingly, the same as the counter arguments in the label/artist debate. Yes, the label no longer has the costs and risks of physical discs (assuming an artist is only releasing digitally). However, other costs associated with releasing recording have actually gone up, in particular marketing.

Another interesting question in this domain is as follows: if you side with the songwriters on the recording/song split, how do you go about forcing a more significant re-slicing of the digital pie?

With physical discs, the publishers and collecting societies license the labels directly, providing an official forum for fighting out how monies get split. With streaming, the labels and distributors, and the publishers and collecting societies, each negotiate their own deals with the streaming services, who then caught up in the middle of any digital pie argument.

However, some of the submissions suggest that the real problem here is the major music companies, which – it’s alleged – are happy with the status quo. That’s a problem, it’s argued, because, if the major music publishers really wanted significant change here, they could make it happen.

Universal, Sony and Warner are all major record companies and major music publishers. By industry convention, with record deals the labels tend to keep the majority of any money generated by the exploitation of an artist’s recordings. However, with publishing deals the songwriters tend to get a majority of the cash. Therefore, the argument goes, it’s in the major music companies’ interest to have more money going through their labels than their publishers.

In its submission, the Hipgnosis Songs Fund says: “The relationship between the three major record labels holding the master recording and the control they have over the major publishing companies holding song copyrights is, in our opinion, the issue”.

“The conflict of interest created by the three major record companies owning the three largest publishers is critically important to understand”, it goes on. “These three publishers are being prevented from advocating for songwriters’ interests as a result of being controlled by their parent companies who wish to push economic improvement towards recorded music where they make an 80% gross margin and a 40% net margin”.

The Ivors Academy is calling for the major music companies to be regulated in some way, and it reckons that such regulation could overcome this particular issue.

“Regulation of major music intermediaries would ensure adherence to minimum standards of disclosure on interests, policies, payments, and inkind benefits, including auditing rights for groups of creators”, it says. “Standardising regulation of the industry in these areas would restore trust and stability to the industry for creators and consumers. This should be a benefit for labels, publishers and collecting societies”.

More specifically, it goes on, “where there are financial benefits for major music groups to maintain a higher valuation of label rights in deals with [streaming services] over publishing rights, it is wrong for major music groups to operate without scrutiny or be compelled for these interests to be broken up. Suppression of the value of the song is hurting the ability for songwriters to sustain a living”.

Although the specific challenges facing songwriters have been mentioned, the recording/song split debate has had a lot less consideration in the oral hearings as part of the select committee’s inquiry.

Many songwriters were disappointed that the dominance of the majors over songs as well as recordings, and the possible impact that has on the value of song rights, was not raised when the major label chiefs were questioned by MPs last week. It remains to be seen if this particular element of the digital pie debate gets more air time as the inquiry ploughs on.

It’s also worth noting that there are other issues affecting how songwriters earn from streaming – both in terms of the songwriting community’s ability to negotiate better rates, and in how songwriters get paid once the deals have been done. Most of those are data issues and we’ll return to that in another streaming inquiry update.

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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