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Spotify, Apple and Amazon face MPs in Parliament’s ongoing inquiry into streaming

By | Published on Wednesday 24 February 2021

Houses Of Parliament

Given much of Parliament’s inquiry into the economics of streaming has focused on the Spotify-style business model, it was good that yesterday’s oral hearing finally put in front of MPs three companies whose streaming operations are centred on that model, not least Spotify itself. However, in the end, there were few new revelations during the session, although it did result in Spotify and its rivals putting certain policy positions on the record.

When the music community debates the streaming business model, the conversation nearly always begins with plenty of Spotify dissing. But then the focus almost entirely shifts onto how the 70% of Spotify revenues handed over to the music industry is shared out. Spotify can then hide behind all the bickering between the different factions of the music industry, no longer the target of the disses.

That’s pretty much what’s happened with Parliament’s big old streaming inquiry. By the time the oral hearings began, the Spotify dissing had subsided, and much more attention had fallen on to how the so called digital pie is sliced between artists, songwriters, labels and publishers.

Yesterday, that particular digital pie discussion continued, even once the streaming services were in the virtual room, albeit disguised as the increasingly tedious “how do we define a stream?” debate. When music is streamed, is it a sale, is it a licence, is it a rental, is it a reproduction, is it a communication, is it a making available, is it more like retail or more like radio?

From a music industry perspective, these questions are potentially important. The music industry has traditionally split up the different elements of the copyright – the distinct controls – and managed and licensed them differently. The way the money gets shared out – and the royalty rates that are paid to artists – also often vary according to what control is exploited, or what particular product or deal generated the cash.

How we define a stream, therefore, has the potential to change the way the digital pie is sliced between artists, songwriters, labels and publishers. Or, at the very least, empower the various arguments for why and how the pie should and might be sliced up differently.

However, from a streaming service perspective, these questions are pretty much irrelevant. A stream is a stream. Everything else – is it a sale, a licence, a rental, a reproduction, a communication, a making available, retail or radio? – is just more music industry bullshit. And while streaming services have to navigate music industry bullshit, they don’t really have any interest in participating in it.

All a streaming service needs is a solid licence that gives it access to music, covers its back, ensures it will never be held liable for copyright infringement, and preferably guarantees there’ll never be a knock at the door from someone citing some long forgotten right or contract and demanding payment. What the services definitely don’t care about is how the music industry chooses to define a stream and slice up its pie.

“It’s hard to find analogues in the physical world for what streaming is”, Spotify’s Head of Global Affairs and Chief Legal Officer, Horacio Gutierrez, told the hearing yesterday, when forced to define a stream in conventional terms. “It is an ephemeral right to enjoy a stream – you have access to the full catalogue that is made available in exchange for a subscription fee”.

“Isn’t that just a form of rental?”, John Nicolson MP wanted to know. “Rental has certain economic and legal connotations that are not 100% applicable to our scenario”, Gutierrez responded.

“We see it has a licence”, Apple’s Global Senior Director Of Music Publishing Elena Segal said later in the session, clarifying that “we have a licence that entitles us to sub-licence to consumers”. Segal did good job of keeping her cool, despite the sense that there was some frustration that MPs wanted her to define what is clearly a licensing deal between Apple and each music company as anything other than what it actually is.

“It is more akin to a rental”, she ultimately but somewhat reluctantly conceded. “But it’s actually a fucking licence, and stop trying to draw us into a pointless fucking definition debate because of a bunch of music industry bullshit that’s nothing to do with us”, she definitely didn’t add. But she could have done.

A stream is neither a sale nor a rental, Amazon’s Director Of International Music Paul Firth again stressed, “a stream is clearly different” to discs and downloads, and – he agreed with Gutierrez and Segal – can’t really be defined in old school music industry or copyright law terms.

And he should know, given that Amazon is the one company that does discs, downloads and streams. Although, he added, again agreeing with Segal, “our agreements with the labels for the streaming services are licences”.

While it’s basically a waste of time trying to pull the streaming services into the core digital pie debate – even when it’s in its “how do we define a stream?” disguise – there are clearly legitimate related questions on which streaming service input is useful.

How does the service justify keeping 30% of its revenue? Why haven’t the prices gone up? Would they be happy to shift to a user-centric royalty distribution model? And if ER was due specifically on curated streams, could they handle that?

“30% is about in line with what we’ve taken as a retailer, when selling discs and downloads”, Firth confirmed. And although, he added, operating a streaming service is obviously different to selling discs and downloads, nevertheless there are considerable investments that a streaming service has to make.

Beyond tangible direct costs like servers and credit card transaction fees, a lot of that is about investing in the best possible customer experience, he added. And in that domain, he reckoned, streaming services play a much more proactive role than traditional retailers.

“We are very focused on customer experience”, he told MPs. “We are building a customer experience that the customer finds delightful”.

The basic slicing of the digital pie began when the record companies demanded a majority share of the revenue at the very start, Gutierrez added. The services then had to sort out licences covering the separate song rights while ensuring they could run the business with what was left.

The model has evolved since then, of course, with the allocation to the songs increasing slightly and the labels taking a slight cut on what they receive. However, Gutierrez went on, the labels have also enjoyed the benefit of lower distribution costs as a result of the big shift to digital.

“Those costs have been driven out of the equation”, he noted, and the benefits of that “have gone to the labels’ bottom line”. Although, he was quick to add, the labels have their own commercial pressures in the streaming age, perhaps aware that the lower distribution costs are a key argument from artists and songwriters as to why the labels are still getting too big a slice of the pie.

But what if the pie just got bigger? Why hasn’t the cost of a streaming subscription ever increased in the decade that the market has been growing? Indeed, the average revenue generated per user – or ARPU – has actually gone down. How the hell can that be justified?

“There’s a balance we have to strike, so that music doesn’t become unaffordable to consumers, so we are pushing them back into piracy scenarios”, argued Gutierrez, while also noting that price rises are now actually underway, mainly in relation to Spotify’s family plans.

The introduction of those family plans, Gutierrez also conceded, is one of the reasons why the ARPU has declined. However, offering various different packages at different price points was key for growing the market and the overall revenue pie, he argued, even if ARPU goes down as a result.

Firth agreed that a diversity of packages and price points is definitely required, perhaps unsurprisingly as Amazon has been most prolific in that domain. It offers a wider range of different services at different price points, including the higher quality audio option that actually increases the subscription fee (something Spotify is moving into soon, we now know, of course).

“We came into streaming with a different approach”, he told MPs. Yes, Amazon is competing head on with Spotify and Apple on one level, “but our focus was taking music streaming to different groups of customers. Can we extend the overall market segment and in doing so grow the overall pie. We take the view that you can take music streaming to a much more mainstream music fan”.

That means playing with the price point though. Firth has sight of music buying habits of a large number of consumers via the wider Amazon business, of course. “We can see that many customers are buying one, two, maybe three albums a year. It’s quite a big step for them to go to spending £120 a year”. Therefore, the argument goes, bringing those consumers into music streaming requires alternative products at lower price points.

As for increasing the price of the standard £9.99 subscription – to which other discounted and premium packages are ultimately linked, of course – there are two key issues, both raised by Segal. Unlike Netflix-type services, she noted, all the music platforms have more or less the same catalogue of content. So if one service hikes up the prices, what’s to stop customers switching to a rival?

Plus “it is challenging to compete with free”, she added. That’s partly a dig at Spotify’s ad-funded free service, something Gutierrez sought to defend during the session, stressing that the freemium-to-upsell-premium approach had been hugely successful for Spotify – and therefore the music industry, he reckoned – especially in emerging markets.

However, it was also a dig at YouTube and other safe harbour dwelling platforms, something Apple, Spotify and Amazon all have to deal with.

“It has always been challenging to compete with free services”, Segal continued, “whether those platforms are operating legitimately or illegitimately. It is challenging to compete on an unlevel playing field, where you have services that don’t necessarily have licences for all the music on their platforms, and don’t necessarily need to”.

Of course, beyond the basic digital pie debate, there is also the separate user-centric debate – which is less to do with how money is shared out between different stakeholders, and more about how monies are allocated to each individual track.

While Deezer has been actively campaigning for a switch to user-centric royalty distribution, it’s been generally believed that the other services are opposed to the idea. Although behind the scenes, that position has been shifting for a while now.

“We are definitely open to looking into alternative models and considering them”, Gutierrez said. “User-centric is a model we are open to”, he then confirmed, noting his company’s participation in a recent research project on the impact of user-centric in France.

Although he also stressed that that research has suggested that the impact wouldn’t be as dramatic as some people think.

And shifting to a new royalty distribution system would not be without its challenges, he added. “Every licence agreement with every rights-holder would have to be transitioned”, he said, “and that’s not a trivial transition. However, we are absolutely open-minded about the user-centric approach”.

Firth added that Amazon was also “willing”, and actually “very keen”, to explore alternative models for allocating monies to tracks. And he even acknowledged the alternative artist growth approach proposed by the Association Of Independent Music during this inquiry. These should definitely be investigated and modelled, he reckoned.

And Apple, too, is up for some investigating and modelling on different royalty distribution approaches, Segal confirmed, though any shift would require industry consensus, she then noted.

Finally, what about performer equitable remuneration being paid on streams? Implementing that would mean that artists would be paid royalties via the collective licensing system at industry standard rates, instead of or possibly as well as the royalties they receive from their labels and distributors.

Applying ER to streams has been a frequent topic of conversation during this inquiry, and is behind all that “surely a stream is a rental?!” chatter. As it currently stands under UK copyright law, performer ER is due when the rental, performance or communication elements of the copyright are exploited, but not the reproduction and making available components.

Of course, the services always insist that they don’t really care how the 70% of revenue allocated to the industry is shared out and processed. Though one element of the ER debate is the suggestion that maybe such payments should be paid when a stream more closely replicates the radio experience rather than the retail experience.

So maybe there’s no ER paid when a subscriber specifically picks a track, but there is if a track is serviced to a user via a playlist or algorithm. Could the streaming services distinguish between streams in this way, MPs wanted to know. Yes, of course they could, the services replied.

Although, Gutierrez noted, an algorithm may select a track for a user based specifically on the previous choices that user made. So are we saying that’s like radio because there’s curation, or like retail because the track was ultimately played based on consumer choice?

Is is radio or is retail? Ah, for fucks sake, how the hell did we get back to that?

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

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