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Trends: Five contenders for music’s enemy number one

By | Published on Monday 30 January 2017


As 2017 gets fully underway, the music industry continues to evolve as rapidly as ever. It can be hard to keep up with which challenges and opportunities you should focus on, which tools and tactics you should employ, and which services you should be courting the most. But more importantly, who we can blame when it all goes wrong? CMU Trends presents five contenders for enemy number one of the music industry in 2017.

For the music industry’s lobbyists, 2016 was dominated by a one big issue, and that issue was safe harbours. The International Federation Of The Phonographic Industry had already put safe harbours at the top of its agenda in 2015, though last year’s copyright review in Europe and the specific safe harbour review Stateside meant that this topic continued to dominate the conversation last year too.

The safe harbours – which originate in copyright law in the US and an e-commerce directive in the European Union – say that internet companies cannot be held liable for copyright infringement when their customers use their servers and networks to distribute copyright material without licence, provided said net firms give rights owners a system via which to remove infringing content.

Originally intended for internet service providers and server hosting companies, the safe harbours are also used by user-upload platforms which routinely host publicly available content without the permission of the relevant copyright owners. Said rights owners could only sue said user-upload platforms if they failed to operate some kind of takedown system, the specifics of which aren’t particularly well defined in the law.

The music industry argues that user-upload platforms – or at least some kinds of user-upload platforms – should not qualify for safe harbour protection, and that instead these services should be obliged to ensure themselves that they do not stream unlicensed content, rather than providing some kind of takedown system and then pushing that obligation onto the copyright owner.

When the music industry talks about user-upload platforms exploiting a copyright loophole enabled by an overly wide definition of safe harbours in US and European law, they might be talking about a number of different services. But really they are talking about YouTube. And while the industry’s lobbying efforts sometimes skirt around that fact, in 2016 the music community’s campaigning against safe harbours tended to more overtly target the Google-owned video site.

The reason for this is pretty simple: YouTube is the biggest streaming music platform in the world, yet it pays nominal royalties when compared to Spotify and Apple Music. The reason for this is twofold: first, YouTube is a predominantly ad-funded set-up, despite the launch of subscription service YouTube Red in the US; and second, unlike the audio streaming services, YouTube won’t commit to pay rights owners a minimum rate per stream, instead only agreeing to share revenues where ads are sold and streamed.

The majors, of course, agreed to these less favourable terms in the early days of YouTube, and most music rights owners continue to have licensing arrangements with the video site despite the Google firm’s enemy number one status.

Though those original deals were mainly done because back then the subscription streaming market was only just emerging, the labels were keen to capitalise on the new potential of ad income, and YouTube had become a key marketing platform to promote download sales in those markets where iTunes had just taken off big time.

Fast forward to 2015, and the subscription streaming market is booming, the labels have become disheartened with the potential of advertising revenue, and iTunes sales are tanking, meaning a play of a new track on YouTube too often promotes merely another play on YouTube, with no opportunity to upsell a more lucrative product, especially for labels who aren’t necessarily cut into an artist’s other revenue streams.

Today the record companies and music publishers are convinced that YouTube and Google are getting unfairy rich – in data as well as revenue – from their content, while the existence of the free video site is hindering the growth of the more lucrative (for the music industry) audio streaming services, especially amongst the youth demographic.

Meanwhile, because YouTube continues to refuse to commit to pay minimum guarantees, the music industry’s kickback from the video site is linked to ad sales not video views. Hence the stats to the effect that while the rapid growth in users and streams on Spotify results in an equivalent growth in royalties for the music industry, YouTube’s viewing figures can double while the music community’s pay out remains more or less static.

The safe harbours are key here because they greatly weaken the music industry’s negotiating hand. In a bid to force YouTube into a better deal (for the rights owners), the majors could threaten to pull all their music off the video platform.

Except YouTube’s users would continue to upload the labels’ music, and because of the safe harbours it would be up to the labels to constantly monitor the YouTube platform and request that user-uploaded content be removed. YouTube’s rights management platform Content ID would help to an extent, but it would still require a resource spend by the music companies, who in return would see zero revenue.

If only those safe harbours could be rewritten, so that a YouTube-type service no longer qualified for protection, meaning that the obligation to ensure the majors’ music was no longer on the Google site fell to YouTube itself. Unlikely to want to take on such a task, YouTube would be forced to sign up to more favourable terms (for the labels).

The US Copyright Office’s review of safe harbours, announced at the end of 2015, provided an opportunity for the music community to shout loudly about the YouTube problem in 2016. Though, rather than reporting back on that review, in November the copyright body announced a second stage of investigation.

Meanwhile the creative industries’ champion at the top of the Copyright Office, Maria Pallante, was fired. And – even if that review did propose a radical overhaul of US safe harbour rules to YouTube’s disadvantage – the Copyright Office doesn’t write copyright law. The music industry would then have to take that conclusion and push for a statutory rewrite through a Congress that may well be distracted with other matters.

For that reason, despite a high profile artist-led “YouTube is evil” campaign Stateside last year, which forced the usually uncommunicative Google division onto the defensive in the public domain, the music industry is really focusing its lobbying efforts on the European Union and its draft new copyright directive.

Despite lawmakers in Brussels initially seeming reluctant to take on safe harbours as part of their big overhaul of copyright law – unclear on how to rewrite safe harbour rules in a way that limits the protection of sites like YouTube without having a big negative impact on social media and other popular internet services – in the end Article 13 of the draft copyright directive did have a stab. Which in itself was an achievement on the part of the music industry’s lobbying team.

Though, while YouTube expressed reservations about Article 13’s wording – a positive development in the eyes of the music business – as it’s currently written there is enough ambiguity that the Google site could have a good go at claiming to be compliant with the new obligations set out in the directive, and therefore still be protected by the safe harbour, without actually changing its operations.

That claim could be the challenged in the courts, but with the implementation of the final directive and any resulting lawsuit, we are likely talking years before there is any resolution on this matter. And where will the digital music market be by then?

With that copyright directive working its way through the motions this year – and with both Google and the music industry lobbying hard to revise Article 13 in a way that removes any ambiguities to their respective advantage – safe harbours will continue to be at the top of the music community’s lobbying agenda.

This means we can expect plenty more quiet briefings against YouTube from the music industry and – especially when releasing official stats and figures – some louder shouting against the Google site and the way it “distorts” the digital music market. Just last week musician Jean-Michel Jarre used his first speech of the year as President of collecting societies organisation CISAC, in front of Italian lawmakers, to hone in on this issue and express his hopes that the EU might find a solution.

Meanwhile, alongside its lobbying efforts against the labels and publishers, YouTube continues to try and placate the music industry. It remains to be seen if its hiring of record industry veteran Lyor Cohen last year as Global Head Of Music results in any bridge building, though at the same time the Google firm will likely continue to court younger artists and managers for whom YouTube is an incredibly important fan engagement tool, a fact that – for those artists – counters the low royalty payments.

If anything takes the heat off YouTube a little in 2017, it could be the music industry’s increasing concerns about Facebook, which utilises the same safe harbours as Google, but without paying any royalties at all to the music community.

The big shift at Facebook of late, of course, has been to video content. The social media giant sees video as key to its future consumer offer and advertising business, and prioritises video content in its users’ feeds. That has resulted in an ever increasing number of users uploading and sharing video content that is hosted on Facebook’s servers, putting it ever more closely in competition with the Google service.

As occurred with YouTube nearly a decade ago, Facebook’s shift to video has resulted in different responses from two different strands of the music industry. Music marketers have been quick to embrace the change, pushing video content from their artists into Facebook users’ feeds. Meanwhile those on the licensing side of the business have started to despair.

The social media firm formally unveiled Rights Manager – it’s rival to YouTube’s Content ID – last April, giving rights owners the power to remove their content from the Facebook platform when it is uploaded by users without permission. But, while big bad YouTube’s Content ID also provides rights owners with monetisation tools, Rights Manager is currently all about takedown. Which is to say, it’s a technology mainly designed to assure Facebook safe harbour protection.

That said, behind the scenes Facebook has been talking about and experimented with ways to enable rights owners – including music firms – to monetise their content on the social network, sharing in ad income just like with YouTube. Though progress has been slow going to date. And there remain practical issues such as – because Facebook drops ads into the recommended videos feed rather than employing YouTube-style pre-rolls and in-video-banners – how do you decide which rights owners to share ad income with?

With some music rights owners – especially publishers – employing Rights Manager more prolifically, so that user-generated content containing their songs is increasingly blocked, there is a new incentive for Facebook to finally sort out the monetisation side of its rights management system.

Though given its starting point will likely be a YouTube style revenue share model – ie the very model the music industry has spent the last two years slating – securing licensing deals from the labels and publishers will likely be challenging. Facebook has just headhunted a YouTube exec, Tamara Hrivnak, to help it rise to that challenge.

One thing Facebook may well rely on is that its video experience is different to that of YouTube, in that generally users watch videos pushed to them in their feeds, rather than rocking up to the Facebook website with a specific musical request in mind.

In that way, as it currently stands, Facebook is more of a marketing platform and less of a direct competitor to Spotify and Apple Music. Facebook, therefore, could argue that it is more proactive in promoting new artists and tracks, while less likely to take custom away from the more lucrative audio streaming services.

The music industry might buy that line – especially if it reduces the marketing power of YouTube – though with services like Facebook evolving so fast, who’s to say it won’t more directly compete with the on-demand streaming platforms in the near future?

That, combined with any tough negotiating on its licensing deals, could as yet make Facebook enemy number one for the music industry this year.

In the context of the debate around YouTube and Facebook, Spotify is the hero of the music industry. So how could it become enemy number one?

Well, remember, artists and labels always had a love/hate relationship with the major retailers and big media platforms back the heyday of the compact disc. The music industry is more than capable of despising the people which control its primary routes to market, while concurrently courting and schmoozing the same execs in a desperate bid to ensure its releases are put in front of customers first.

Whereas in the olden days a small number of major music retailers and media would dominate in each market, platforms like Spotify will dominate on a near global basis. With great power comes great resentment.

In 2017, of course, all eyes will be on Spotify’s march toward its Initial Public Offering, and its attempt to secure the most favourable new deals from the majors before heading to Wall Street for what, it’s hoped, will be a big cash-in for the firm’s founders, early backers and the record companies with equity in the streaming company.

Spotify is now a key business partner for the global recorded music industry, and in some markets by far the single biggest revenue generator. But it remains very much a loss-making business, shouldering the costs of aggressive growth and the minimum guarantees it promises rights owners oblivious of what revenues come in from its subscribers and advertisers.

Those pre-IPO licensing deals will put pressure on the firm’s relationship with the music industry – indeed they already are.

Demands from the music publishing sector to increase the revenue share deal offered to the owners of the song copyrights has forced Spotify – which remains adamant it ultimately needs to keep about 30% of its income to be a viable business long-term – to seek a better rate from the labels and distributors that control the recording rights.

Word is that Spotify is attempting to achieve this by offering other kickbacks to the labels, possibly exploiting its increased power as a curator and opinion former among its 40 million plus paying subscribers.

The record companies know that these pre-IPO deals could be their last chance to play hardball with Spotify, which is under pressure to get to a stock exchange sooner rather than later because of the way it structured some major money lending agreements. Though at the same time, the labels as much as Spotify’s backers need a successful IPO, the record industry’s recent return to growth now being so dependent on a small number of loss-making streaming services, Spotify being the most prominent.

Apple Music is the second major player in subscription streaming, of course, and some would argue it’s the only other global service with enough momentum to last the distance. It’s felt, at times, that some major label execs, especially in the US, prefer Apple Music to Spotify. Though no one in the music community would benefit from there being just one global player in streaming.

Also, while Apple’s future will seemingly increasingly rely on providing ‘services’ alongside selling ‘devices’, you do sometimes wonder whether that automatically means the tech giant is entirely committed to music services long-term. Apple launched iTunes so that it could sell iPods and – while it enjoyed its subsequent stint as the biggest player in digital music – that doesn’t mean the company is committed to always play the digital music game. Especially if it becomes obvious subscription streaming will always be a very risky business to be in.

All of which empowers Spotify at the pre-IPO negotiating table. Though the deal-making will remain tense, and that’s before you get to the inevitable moves by a post-IPO Spotify to limit its ongoing losses.

Add in the ongoing disputes over mechanical royalties Stateside and increased resentment over Spotify taking ever tighter control of curation on its platform – previously something it left to labels, opinion formers and bedroom DJs – and the music industry could become ever more critical of this key business partner as the years go by.

Talking about love/hate relationships, let’s talk about the American radio industry. The US music business has long resented the big broadcasters Stateside, who pay relatively nominal royalties into the music community, justifying that position on the basis airplay helps promote artists and records.

That’s a position the labels and publishers have never really liked, and one that they argue becomes ever less credible as music revenues increasingly come from streaming platforms that you could say compete head-on with radio. Meanwhile, despite plenty of research that says radio stations continue to play a key role in new music discovery, that is less true amongst a youth demographic that is much less likely to tune into AM or FM.

The music industry has a particularly tetchy relationship with the American radio industry, as opposed to the radio business worldwide, because of some peculiarities of US copyright law.

First, the fact that, under US-wide federal law, AM/FM stations are not obliged to get a licence from or pay any royalties at all to recording artists and labels. Secondly, the fact that on the publishing side the collective licensing system is heavily regulated via the BMI and ASCAP consent decrees, with royalties set in the rate courts that, many songwriters and publishers reckon, distort the music rights market downwards.

There have been numerous attempts to bring US copyright law in line with the rest of the world by adding a full-on performing right as part of the sound recording copyright, which would oblige broadcasters to pay royalties to artists and labels. Record industry lobbying group musicFIRST wrote to the newly appointed Congress in Washington earlier this month again calling for a performing right for recordings.

It seems unlikely the current Congress will move on this issue, even if the music community maintains recent efforts to be vocal on the topic, in both the US and beyond. Of more interest is the slow shift of radio listening to online channels, where royalties are due to labels as well as publishers.

America’s biggest broadcaster, iHeart, continues to push listeners to its online service, which integrates traditional radio programming with a personalised radio and on-demand streaming experience.

While in some ways iHeartRadio now competes with Spotify and Apple Music, you could argue that it is skewed towards a different demographic, and therefore could help grow the subscription streaming market, pulling in a more mainstream audience who currently get most of their music from the radio. In doing so iHeart could help the streaming music market in the US evolve, while also ensuring that an increasing number of radio listeners shift to platforms where artists and labels earn.

On the song rights side – where royalties are due from AM/FM stations – all eyes will be on the legal stand off between Irving Azoff’s Global Music Rights and the Radio Music License Committee. By setting up a much smaller ‘performing rights organisation’ to compete with ASCAP and BMI, but not subject to the aforementioned consent decrees, veteran artist manager Azoff hopes to take the deal-making outside the rate courts and into the open market.

The RMLC is crying “monopoly”, despite GMR only representing the works of 73 songwriters, and hopes to force Azoff’s mini PRO to agree to third party mediation on royalty rates, similar to the commitment made by the other smaller PRO in the US, SESAC. Azoff is currently standing firm, and the resulting court case will be interesting to watch.

Meanwhile, back at BMI and ASCAP, the two big PROs continue to fight efforts to force them to offer music users so called 100% licences. It was the music publishing sector’s unsuccessful attempt to reform the draconian consent decrees that resulted in the US Department Of Justice saying that BMI and ASCAP had to operate a 100% licensing system.

That would mean a broadcaster could make use of a co-owned song under a BMI or ASCAP licence even if the society only repped 1% of the copyright. Such an arrangement would reduce the impact of AM/FM stations not being able to agree terms with GMR, because they would still be able to legally play any song by a GMR artist where there was a co-writer still allied to one of the bigger PROs.

The court that oversees the BMI consent decree almost immediately rejected the DoJ’s conclusion on 100% licensing last year, though the government department is appealing that ruling. Meaning yet another big court battle that pitches the music community against the US broadcasters in 2017.

Although the record labels and music publishers generally have the more prolific lobbying machine, the other big political issue in music last year came from the live sector: secondary ticketing.

Efforts to combat the continued growth of online ticket touting came from the artist and indie community, partly because the biggest corporate player in live music – Live Nation – also owns some key secondary ticketing sites, meaning its lobbyists are usually arguing for less rather than more regulation of the resale of tickets online for profit.

CMU Trends reviewed the increasingly vocal campaign against secondary ticketing last month, so there’s no need to discuss those efforts in great detail here again. Except to note that the campaign continues, and is spreading, with the Irish government announcing a review of secondary ticketing – and the country’s competition commission of the wider ticketing sector – just last week.

Of the various secondary ticketing sites, which continue to insist they offer more consumer protection and are therefore the lesser evil, eBay’s StubHub – arguably the highest profile resale operation – will likely continue to feel the most heat as artists continue to shout loudly about this issue, and politicians in at least some countries start to take notice and seek to regulate.

Though in some ways Live Nation’s involvement in the resale sector – while concurrently being the largest concert promoter, a global venue owner and primary ticketing agent, and a significant player in artist management – is perhaps more interesting. The live firm remains committed to its secondary ticketing business interests, but you still wonder whether that commitment would remain if major US artists followed the lead of their UK counterparts in becoming so vocal on this issue.

While the secondary ticketing campaign has tended to be fought on a country by country basis to date, if the various campaigns around the globe were to unite worldwide, it could be that music’s enemy number one in 2017 comes from the touting domain rather than the world of streaming and radio.

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