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Major labels face tough questions and frank criticism at latest Parliamentary session on the economics of streaming

By Chris Cooke | Published on Wednesday 20 January 2021

The UK bosses of the three major record companies faced some tough questions and frank criticism when questioned by MPs over the economics of streaming yesterday. Some members of Parliament’s culture select committee suggested that the record industry chiefs were out of touch with the realities faced by most artists, after the Universal, Sony and Warner CEOs insisted that the streaming business – while still very much evolving – is nevertheless functioning well.

Since the culture select committee began its inquiry into the economics of streaming last year, the conversation has been less about the royalties that the streaming services pay to the music industry, and more about how that money is shared out between artists, labels, songwriters and publishers. As labels often get the biggest share of that money, the general narrative to date has been that a key reason many artists say streaming isn’t working is because the labels take too big a cut.

Of course, how big a cut the label takes depends entirely on the deal between the artist and the label, with a general rule that the more services a label offers and the bigger a risk it takes, the more it’s going to want in return in terms of rights and royalties.

The labels usually defend taking the biggest slice of the digital pie by focusing on the services and investment they provide artists, and the risks that they take.

Those services and risks provide a boost to the artist’s other revenue streams, they’ll state. And the profits the labels earn from successful releases allow investment in other artists and other releases, which may or may not prove to be successful down the line.

Plus, they usually add, in the digital age an artist doesn’t have to do a traditional label deal to get their music to market if they don’t need the services and risk taking a label traditionally provides.

Universal Music’s David Joseph, Sony Music’s Jason Iley and Warner Music’s Tony Harlow all basically presented those standard arguments yesterday.

While the shift to digital has removed the costs and risks of manufacturing and distributing physical discs, Iley insisted that a label’s other costs have all increased in a market where more artists and more music are competing for attention.

He said that Sony is investing more into A&R and marketing today than ever before, spending about £20 million a year on both those areas of activity. And Sony Music UK now employs 400 people involved in signing, developing, marketing and promoting new music.

As for choices now available to artists when picking a business partner to work with on their recordings, Iley continued: “There is more competition in the music industry now than ever before in my 30 years of doing this job. The independent sector is a brilliant sector and signs some of the best acts. There is more opportunity for artists to either sign to a major label, sign to an independent label or distribute their own records”.

Joseph concurred, adding: “I have never seen a more competitive environment between labels and do-it-yourself options”. That results in much more flexibility in deal terms when signing with a record company like Universal Music, he insisted, resulting in “the most competitive environment with so many choices”.

That artists have much more choice today when picking a business partner to work with on their recordings is definitely true. Though some argue that because the major labels are so dominant in the marketplace, and they exploit that dominance in a way that makes it harder for independent acts to be heard, that choice is restricted somewhat.

As a result, some new artists are forced into accepting life of copyright assignment of recording rights, 20% royalty rates and steep costs that need recouping – ie a more traditional label deal – in order to achieve success. And once that deal has been done, it’s hard for those artists to earn on the streams of their recordings, even if and when success is subsequently achieved.

However, the major label bosses did not agree with that argument. For starters, Harlow denied claims that the majors secure, through their licensing deals, preferential treatment when it comes to curation and playlists on the streaming platforms. Like everyone else, he insisted, the majors secure playlist placements and influence the streaming service algorithms through clever marketing and good storytelling around both new releases and catalogue.

“Three of the most culturally important acts of today – Jorja Smith, AJ Tracey and Skepta – have chosen to sign to a distribution company” instead of a label, Iley added, seeking to prove that significant success can still be achieved by artists who chose not to go the major label route.

“They wanted a bigger share of the revenue and that’s their choice – and respect to them and their management. I clearly would prefer them to sign to Sony Music, but they chose not to, and that’s the opportunity of choice”.

For those artists who are, for whatever reason, stuck in record deals that pay out lower royalties and/or who are still paying back past advances and expenditure, one way they could still benefit from the streaming of their music financially is equitable remuneration, of course. Which is to say, if the system that currently applies to radio – where artists are automatically paid 50% of any income – was applied to streams.

The debate over whether or not ER should be paid on streams often centres on how close the Spotify experience is, or is not, to the radio experience. Or – more specifically – which elements of the copyright are being exploited by a stream, because under law ER currently applies when music is rented, communicated or performed, but not when it is copied, distributed or made available.

This resulted in a discussion yesterday about the differences between Spotify and radio, and whether a stream actually exploits one of the copyright controls already subject to ER.

Given the labels oppose the idea that ER should be paid on streams, the major label bosses were predictably keen to stress that streaming is very different to radio, and that it’s definitely the making available element of the copyright being exploited.

Harlow: “It’s clear that streams are covered by the making available right – which is the internet equivalent to the sale – because streams are generated by deliberate choices. You can play what you want when you want it – and skip when you don’t want. And that’s the basis of the argument that streams are the equivalent of sales”.

When MPs suggested that playlists, personalised radio and auto-play functions within the streaming services are more like radio, Harlow insisted that experience was still distinct from traditional broadcast.

When an algorithm suggests music, it does so based on the previous choices the user made, he said, and – crucially – with streaming you can skip tracks you don’t like and cache tracks you do like on your device for offline listening. “That’s not like broadcast”, he insisted.

If ER was to be paid on streams, it would be PPL that would administer that for artists. The boss of the UK record industry collecting society, Peter Leathem, was also questioned by MPs yesterday. He declined to express an opinion on whether ER should be paid on streams, but confirmed his organisation could and presumably would administer any new ER revenue stream if it was to be introduced at any point.

A particularly tense part of yesterday’s session focused on why, if streaming is working, as the major label bosses insist, so many artists have told the select committee that the current model is broken.

Why have so many artists told MPs that they earn so little from streaming that they rely heavily on live income, which is why they faced such major financial hardship when COVID forced the live industry into shutdown last March? Why is the label view of streaming so disconnected from the artist view? Are the major label chiefs, as one MP suggested, living in “cloud cuckoo land”?

Of course, there are artists – both major label signed and independent – for whom streaming is definitely working, and their voices have tended not to be heard in this inquiry so far.

And with those artists for whom streaming definitely doesn’t work, there can be different reasons for that fact. It may be because of their label deal, which means they get a minority share of streaming income, and that is then used to pay off past advances and expenditure. But it might also be because their music doesn’t actually stream very well, with streaming only really becoming lucrative once you are achieving millions of streams a month.

Plenty of artists who have been pretty successful in their wider careers don’t actually achieve millions of streams each month. Though again, there are different reasons why that might be the case, depending on the artist.

It could be because the artist has a big enough fanbase to sell out a theatre tour but not a big enough fanbase to ensure millions of streams. Or it could be because the artist isn’t promoting and marketing their recordings in the right way. Or it could be because the artist’s average fan isn’t a heavy streamer. Or it could be that the way streaming services curate, recommend and suggest music is skewed against them.

Working out which of those factors are in play is actually quite important. For some artists, making streaming work might require more fanbase building or better marketing. But in other cases, the system is to blame. And in those latter cases, having the industry shift to a user-centric approach of distributing royalties, or reviewing the way the streaming services curate music, might be the solution.

Joseph insisted that he was actually up for reviewing the current system in that way, ie in terms of how royalties are distributed by the platforms and how the services recommend music. The former statement was interesting, given it’s generally thought that the majors have been resistant to the proposal that the streaming platforms shift over to a user-centric approach to royalty distribution.

As for the user-experience – and the way music is curated – he said “streaming is still in its early days and isn’t perfect yet. I’ve got tonnes of ideas of how to improve streaming for artists – I want liner notes, I want a focus on albums, I’d like a choice so that, rather than the algorithm, music is recommended by the artists I love and my friends”.

We all now await to find out more about Joseph’s grand plan for an alternative streaming experience. Although, in the meantime, and despite their various arguments and protestations, it’s fair to say that the major label chiefs did little to placate their critics in the artist or songwriter communities yesterday. Or on the select committee, for that matter.

That said, some artist and songwriter reps noted that – given Joseph, Iley and Harlow insisted that the streaming market is still evolving and future evolutions could address some of the issues raised by this inquiry – the major labels should now more proactively engage with artists, songwriters and their managers to map out future changes.

There was, at least, one topic on which the label chiefs and artist and songwriter communities can agree though, which is safe harbour reform.

The music community is pretty much united in arguing that the UK should seek to reform the copyright safe harbour that has allowed some digital companies to underpay – or not pay at all – for music on their platforms. That would mainly involve embracing and expanding on the safe harbour reforms already underway in Europe.

Harlow repeated the common argument that a key way to help artists – and labels – would be to grow the overall pool of digital royalties.

That would be easier, he said, if “YouTube and similar services were not able to use safe harbour provisions” in a way that allows them to negotiate deals that pay out lower royalties. “If the pool grew on the basis of platforms not being able to hide behind safe harbour – that’s the most effective thing we could ask for to improve the artist position”.

Safe harbours may well be discussed further as the inquiry into the economics of streaming continues, with the digital platforms themselves still to be publicly questioned by MPs. However, none of that is likely to distract the committee from the digital pie debate that has dominated this inquiry to date. And it has to be said, at yesterday’s session, the majors didn’t seem to successfully justify why they often get the biggest slice of that digital pie.