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Dissecting The Streaming Inquiry Extra Edition: More from the majors

By | Published on Monday 1 March 2021

Houses Of Parliament

As reps for the streaming services answered the questions of MPs as part of Parliament’s ongoing inquiry into the economics of streaming last week, the culture select committee also published written submissions recently received from all three major record companies.

The UK heads of Universal Music, Sony Music and Warner Music answered the questions of MPs in person back in January, of course, in what was definitely the most notable of the oral hearings. The written submissions respond to an assortment of questions MPs still wanted answered in the wake of that oral session.

The questions cover topics like the investments the majors make into new music and new talent; how royalty and recoupment clauses usually work in record and distribution contracts; how many streams artists need to go into profit; and the impact of the termination right in US copyright law on British record contracts.

Though the answers to those questions mainly summarise what we already knew about how the majors work with their artists, and the kind of investments those companies claim to make.

Perhaps more interesting, therefore, were the three companies’ respective comments regarding the proposal that performer equitable remuneration be paid on streams, and that streaming monies be allocated to individual tracks on a user-centric rather than service-centric basis.

Both could well be recommendations made by the select committee at the end of this inquiry. We know that the majors oppose Performer ER on streams, but it’s interesting to see their rationale for that position. And on user-centric, the position of the major players has been less clear cut of late.

Performer ER, of course, is currently paid on broadcast and public performance income. It means that, in those scenarios, any performer who appears on a recording, including session musicians, have a statutory right to payment at industry standard rates, oblivious of any deal they may or may not have with whoever owns the copyright in that recording, which was traditionally a label.

The performer’s ER payments flow through the collective licensing system, which means it is administered by PPL in the UK.

This system does not currently apply to streaming income in the UK, nor in other markets, with just a couple of exceptions. However, a number of people presenting as part of the inquiry have proposed that paying ER on streams would overcome various issues with the current streaming model.

That includes new artists not seeing any streaming royalties because they haven’t recouped on their record deals yet; legacy artists receiving below market standard streaming royalty rates because of old record contracts; and session musicians not earning any royalties from streams at all, even though the ongoing streaming boom will likely result in the radio industry – and therefore broadcast revenues – ultimately peaking.

It’s because of the proposal that ER be paid on streams that so much time has been spent by MPs discussing whether or not a stream is more like a broadcast (aka a communication) or a rental of music. Under current UK copyright law, ER is due when the performance, communication or rental elements of the copyright are exploited. But not when the reproduction, distribution, adaptation or making available elements are in play.

The labels insist that a stream exploits the so called making available element of the copyright instead of communication or rental, which is why ER isn’t due. And all three majors restate this position in their new submissions.

“In the streaming world you can access any song on that service at the time and place of your choosing and you can skip, pause or cancel any stream you receive”, says Sony. “Accordingly, streaming clearly falls within the legal definition of the making available right. Broadcasts do not afford any interactivity to the end user because the user cannot influence the transmission of the music which can be listened to at a given time; he or she can only choose to turn off the station if the piece broadcast is not to his or her liking”.

“On streaming services, a sound recording is made available to the consumer electronically in a way that they can choose which track to listen to, when to start listening to it, whether to listen to the whole song, skip it, pause it, rewind it, or save it and re-listen to it”, writes Universal, also basically taking the legal definition of making available and applying it to the streaming experience.

“The reason for introducing the exclusive making available right at the international level in the first place was to ensure that rights-holders can authorise online uses that have the same commercial effect as the distribution of copies in the off-line world”, Universal goes on. “The making available right as expressed in the treaties and implemented in national laws reflect that intention”.

“Because of its interactive nature, streaming clearly falls within the definition of the ‘making available’ right”, adds Warner. “From the perspective of the user’s experience, the making available right is essentially the internet age form of what was previously a sale”.

That latter point actually takes the argument beyond just the ER debate, justifying why – when old record deals make a distinction between sales income and licensing income, paying a lower royalty on the former – labels have treated streaming as a sale for royalty purposes.

But for all the time spent by MPs in this inquiry trying to define a stream so that it could qualify for ER under existing UK copyright rules, what if Parliament just changed the law to pay ER on making available in general, or specifically for streams? However things are technically defined, the performers would then be due at least some payment directly via the collective licensing system.

“If streaming was treated as broadcast and artists received direct a material share of the fees payable”, Sony argues, “the balance payable to the label would not be sufficient to maintain investment in new signing, A&R and marketing and so would materially reduce the opportunity to mitigate its risk on the majority of signings which do not succeed and in respect of which we are unable to break even”.

Now, while it’s been repeatedly proposed that ER be paid on streams during this inquiry, there has been little debate – in the oral sessions at least – regarding what ER on streams would actually involve. With broadcast and public performance, any monies generated by the recording are split 50/50 between copyright owners and performers. So would that system just be applied to streaming? If so, that’s a significant re-slicing of the pie, hence Sony’s concerns.

However – on the songs side in the UK – it’s deemed that a stream is 50% reproduction and 50% communication/making available. Applying that to recordings might mean half the money is split 50/50 and the other half is split according to each artist’s record contract. Meanwhile, in Spain, where there is already a form of ER on streams, the performers’ collecting society negotiates is own royalty on top of what the labels receive, likely equalling a few percent of the total pot at most.

There’s also the question of exactly how ER would be managed, and quite what role the collective licensing system would play. Both Sony and Warner argue that if the licensing of streaming services moved towards a collective licensing model – rather than every label and distributor negotiating their own deals – there is a risk that the total amount earned by the record industry would go down.

“If streaming was treated as a broadcast and equitable remuneration applied, then this would be administered by collective licensing”, Sony writes. “Because of the restrictions placed upon collective licensing – making it significantly harder for [societies] to ‘walk away’ from a negotiation, and deferral to the copyright tribunal if there is a dispute – it is generally accepted that the rates that would be payable under a collective licensing regime would be significantly less than those that would be negotiated by the labels direct, where we can choose to license or not license our catalogue, or specific recordings, if necessary”.

“Accordingly, whilst the artist may receive a bigger share under that regime, it would be a bigger share of a much smaller pie”, it goes on “which would also further reduce the label’s ability to invest in new artists. By way of example, in the UK broadcasters pay approximately 4% of their revenue to PPL for distribution to rights-holders and performers, whereas with direct licensing DSPs pay approximately 55% of their revenue to recorded music holders”.

That said, a shift to ER wouldn’t necessarily mean a total shift to collective licensing for streams. Under the UK system, a performer’s right to an ER payment is actually enforceable against the copyright owner rather than the user of music, so the label not the streaming service.

Therefore, it’s conceivable that a system could be put in place whereby labels and distributors continue to directly negotiate deals with the streaming services, but then a portion of the money those deals generate is collected by PPL and paid directly to performers. A similar system already exists on the songs side, where some music publishers do direct deals, but a portion of the writer’s share of that money is still paid via their collecting society PRS.

That would admittedly be quite a complicated system to implement. Indeed, applying ER to streams – whatever system you go for – is much more complicated than it first seems, and could result in inefficiencies, especially once you go global. This means any serious proposal that ER be applied to streams would really require some in-depth investigation first into how, exactly, it might work.

Quite how shifting over to a user-centric system for allocating monies to individual tracks would work also probably requires some in-depth investigation. Although, in that domain, that investigative work has already begun. However, the majors say, they now need time to investigate the outcome of that investigation.

“About one week after oral evidence, France’s Centre National De La Musique issued what is the most detailed analysis of user-centric pricing to date”, Universal writes in its new submission. “We are carefully reviewing it. Some of this report’s findings raise important questions about whether the bulk of artists would benefit materially and whether some artists and musical genres would be harmed”.

All three majors insist that they are up for considering alternative ways of allocating streaming revenues to individual tracks, given that such alternative approaches wouldn’t really impact on the total amount of money flowing into the record industry each month.

Although the majors also hone in on that French report, and its conclusion that shifting to user-centric wouldn’t have that big an impact on most artists. With that in mind, the majors question whether it is worth the upheaval and cost of shifting to a different model.

“We are agnostic as to whether a user-centric model is employed as it is not meant to change the pool of money available to the labels/artists”, Sony insists. “However, due to the practical implications of such change for various stakeholders, we think it would require thorough and concerted impact assessments in order to establish an industry-wide support”.

Interestingly Warner is probably the most critical of user-centric in the new submissions. That’s interesting, of course, because Warner’s majority owner Access Industries is also a key shareholder in Deezer, the streaming service that has been busy promoting the user-centric approach.

“We have explored the concept of a user-centric model and have frequent conversations with digital services about it”, says the Warner submission. “It is always our goal to ensure that any business model implemented is reliable, fair, transparent, and underpinned by accurate data for artists and rights-holders. A user-centric model would not change the overall royalty pool and our analysis suggests that any changes in the allocation of payments to artists would not be significant”.

“A user-centric model would be far more complex and administratively burdensome for digital services to implement as it would require a tremendous amount of data – it is likely that digital services would want to pass off some of the associated costs to rights-holders and therefore to artists”, it adds. “In addition, implementing a user-centric model would be very difficult because it would require all of the licensors to a digital service to modify their licence agreements”.

Also citing the French report, it goes on: “The study found that ‘beyond the 10,000th most streamed artists, all musical genres combined, the impact of the transition to the [user-centric model] would be a maximum of a few euros per year on average per artist’. The study also acknowledged the significant costs involved, which smaller digital services may not be able to absorb”.

And there you have it. You can follow all our coverage of the inquiry into the economics of streaming via this CMU timeline here.