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Dissecting The Streaming Inquiry #05: User-centric royalty distribution

By | Published on Friday 29 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.

Our review of the submissions to date has focused on the digital pie debate – how streaming monies 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.

Streaming is a revenue share business. Labels, distributors, publishers and collecting societies all have revenue share deals with the services. And artists then have revenue share arrangements with the labels and distributors, and songwriters with the publishers and societies. The digital pie debate centres on whether those revenue share arrangements are fair.

However, there is a different debate over how streaming monies are shared out. That second debate focuses not on the revenue share deals that have been put in place, but how monies are allocated to individual songs and recordings each month based on usage.

Streaming is actually a revenue share based on consumption share model.

Under the current system, a service like Spotify begins the monthly royalty payment process by identifying how much money it made selling subscriptions in any one market in that time period and how many streams were delivered in total to all those subscribers over that month.

It then identifies what percentage of all the streams delivered were streams of any one track. After that, it allocates that percentage of revenue to that track. So if there was £1,000,000 of revenue and one track accounted for 0.1% of total streams, the track would be allocated £1000.

Once a track has a revenue allocation the revenue share deals kick in. If a track is allocated £1000, the label or distributor that controls the track will receive 50-55% of that money, so as much as £550. Whichever publishers or societies control the song contained in the track will then get 10-15% of that allocation, so up to £150. The service then keeps the £300 that is left on the table.

That’s the current system. However, an alternative approach has been proposed. It would still be a revenue share based on consumption share model, but the maths would be done for each individual subscriber rather than the total subscriber base. And that’s user-centric royalty distribution.

Under that system, allocations would be made separately for each subscriber. So if you’re a Spotify premium subscriber in the UK you pay about £8.33 into the system each month (once VAT is removed). If 1% of all your listening was one track, then 1% of the £8.33 would be allocated to that track, so 8.3p. That would then be shared with the label/distributor that controls the track and the publisher/society that controls the song as above.

Some people argue that the user-centric approach is a fairer way of distributing the money and more in line with what most subscribers probably assume happens to their subscription money anyway.

Certainly, under the current system, artists whose fans are higher users of streaming services – so they stream a lot of music every month – are basically being subsidised by artists whose fans are low users of steaming services – so they stream relatively few tracks per month.

Deezer, of course, is a supporter of user-centric royalty distributions and has been busy trying to persuade the record industry to allow it to start making payments that way on the recordings side in its home market of France.

There is plenty of support for shifting to user-centric within the music community, but not universal support. As is seen in the submissions made to the select committee.

In its submission, the Hipgnosis Songs Fund states: “A more user-centric model that divided the royalties proportion of a user’s monthly subscription between the rightsholders of the artists listened to by the user would be fairer”.

Meanwhile, in its submission, BMG says of a shift to user-centric, “we acknowledge that the impact overall on artists’ incomes may not be significant, but we believe its greatest value would be in strengthening the bond between artist and fan, increasing the transparency of the streaming ecosystem and, above all, satisfying a desire among musicians for fairness”.

“Too often the status quo gives the impression it was designed for the convenience of industry players, rather than with a view to the perceptions of artists and fans”, it adds.

In its submission, the Musicians Union says that a recommendation by the committee that the record industry should seriously consider user-centric would be useful.

Under the current system, it notes, “90% of a user’s payment could go to tracks they did not listen to”. That current approach “could favour major labels and their artists over independent labels and artists with a niche but dedicated following. We believe [user-centric] is a model that should be examined more closely by platforms with a view to make the economics of streaming fairer for artists and consumers”.

However, there are also criticisms of the user-centric approach within the submissions. Former PRS and Spotify economist Will Page, in his submission, raises logistical concerns about shifting to user-centric, while also cautioning against the assumption it would significantly redistribute monies from majors and superstars to indies and grassroots artists.

“[User-centric] arguably increases administrative and operational costs for the numerous intermediaries, not least due to the hugely-increased complexity introduced by the variance of the value of each individual stream”, he writes.

The impact of increased administrative and operational costs would likely have a bigger impact on the songs side of the business, and therefore the songwriter community who already say that streaming isn’t working for them. This is because, for various reasons, on the songs side the rights owners play a bigger role in royalty processing and therefore incur more admin costs.

Page goes on: “Another common misapprehension is that the user-centric system would make the rich worse off and the poor better through progressive redistribution of wealth. On the contrary: industry analysis suggests that [user-centric] would have only a minor impact on the allocation of net distributable revenue among different tiers of artists. Under [user-centric], a subscriber who listens solely to a blockbuster artist’s new album would make that artist even richer”.

“What would increase, however, is the cost – to streaming services, labels, publishers and [collecting societies] – of developing and deploying new accounting and IT systems to implement a user-centric model”, he adds, returning to the logistical concerns. “Moreover, the sunk costs and marginal costs of this would disadvantage smaller players in the value chain who lack economies of scale”.

The Association Of Independent Music also raises concerns about user-centric. It states in its submission: “In our analysis, we are concerned that [user-centric] prejudices new artists and independent artists and would create a market in which discovery is devalued with a knock-on negative impact on the democratisation of the market”.

“New artists and independent artists tend to be discovered by streaming platform users that listen to the highest number of tracks in any month”, it goes on. “They are keen listeners and actively seek out the next great artist. Therefore each of their individual streams under [user-centric] would be worth much less than say an un-engaged music listener who listens to one album or a handful of tracks per month. Trials run by platforms illustrate these outcomes”.

AIM also hones in on the costs associated with shifting over to user-centric. Noting that research to date on who the winners and losers of any shift to user-centric would be has not been conclusive, the trade group adds that what “we do know [is] that the costs for implementation would be high and would ultimately be borne by the artists”.

Some of those supporting user-centric do concede that research to date on the impact of shifting to such as system hasn’t been conclusive, sometimes adding that not everybody in the music community has even got to see the results of the more extensive studies. And some of those people support further research on user-centric more than an immediate shift to the alternative approach.

Such research has actually been underway for a while now in France commissioned by the country’s National Music Centre and it’s just published its first set of findings. Those initial results do seem to confirm the narrative that user-centric would see less money going to the biggest artists and more to lower-level artists. However, in real terms, the financial boost to many of those more grassroots acts would be nominal – like, a few euros extra a year.

That said, some user-centric supporters echo BMG’s remarks, ie that the actual impact might be nominal, but user-centric just seems fairer. In its submission Hipgnosis quotes the founder of French label Because Music, Emmanuel de Buretel, who said in an interview in 2019 “some services may like to say [user-centric] won’t make too much difference, but that does not matter as much as being able to tell artists ‘this system is fair, and this is how it works'”.

Another argument in favour of user-centric is that it would stop certain stream manipulation scams. Currently, scammers can upload their own music, buy a load of premium subscriptions, set up machines listening to their own music 24/7, and get more out in royalties than they paid in through subscriptions. Under user-centric, they’d lose money if only their own accounts were listening to their music.

AIM admits that that would be a benefit, though cautions that other scams exist or will exist and that the answer to stream manipulation schemes is for the streaming services to put more systems in place to spot and stop them.

“Whilst some types of fraud might be mitigated using [a user-centric] approach”, it writes, “by no means all are and, as with any system, new loopholes will be found in due course. The platforms must be incentivised to invest further in anti-manipulation systems and to ensure the streaming economy is protected from abuse, but there is as yet no compelling evidence that [user-centric] would eliminate fraud or manipulation in the streaming market”.

Elsewhere, in a supplementary submission, AIM makes a very interesting alternative proposal to both the current system and user-centric – what it calls the ‘artist growth model’.

Both the current and user-centric models, it says, “singularly fail to solve the main problem with streaming – that new, emerging and niche artists find it increasingly difficult to get to scale on the platforms and that that digital market has become an increasingly ‘winner takes all’ proposition. We believe an ‘artist growth model’ would solve this fundamental issue”.

That model, it then explains, “proposes a so-called ‘degressive’ or ‘log’ scale approach to the value of streams. That is to say that the first tier of streams should be the most valuable, and that the more streams achieved by an artist, the less valuable each stream would become incrementally. This is not dissimilar to the way we view fairness for income tax – the more pounds you earn, the less each pound becomes worth to you net of tax, incrementally as you pass various thresholds”.

“We believe that this approach would foster a fairer market by diluting the earnings of the biggest players, in order to distribute the wealth more broadly to the long tail of early-stage and niche artists who struggle to achieve scale”, it goes on. “This approach would ensure better chances of success for mid-tier artists with solid fanbases, whilst also rewarding investment in higher-risk projects, which would ensure ongoing cultural diversity”.

“Whilst the major labels might argue that this would decrease their profitability on the most successful 1% of releases”, it concludes, “it would in fact reward them proportionately for risk they take in newer artists, and encourage more adventurous signings”.

Interesting stuff. But what do the streaming services – beyond Deezer – think about all this? Given that neither the user-centric approach nor the artist growth model would result in the services handing over any more money to the music industry, on one level the services are agnostic. Senior execs at the services are sometimes informally heard saying something along the lines of “the industry can split up its 70% however it likes”.

However, in its submission, the Entertainment Retailers Association – speaking for the platforms – echos some of the concerns expressed by AIM and Page. “ERA members are open to providing data to enable the industry to analyse the effects of adopting user-centric [royalty distribution]”, it writes, “although test data suggests the impact varies service by service dependent upon the nature of their users”.

And, it adds, “a number of streaming services feel there is considerable complexity in producing royalty statements on a user-centric basis which could hamper transparency as well as increase processing and supply chain costs”.

That said, ERA also says “it is ultimately for record labels and music publishers to decide how they divide the pot they receive with artists and songwriters”.

You can follow all our full coverage of the Parliamentary inquiry into the economics of streaming via this CMU timeline here.

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