CMU Trends Digital Labels & Publishers Legal

Trends: Music licensing – explained at last!

By | Published on Friday 29 May 2015

Crumpled Copyright

The team from CMU Insights began the proceedings of each conference strand at The Great Escape this year by reviewing the part of the business under the spotlight. Taking those insights beyond the room, here we present in detail the digital licensing presentation.

Whereas iTunes was, in essence, simply a digital version of the record shop experience – meaning the record industry’s relationship with Apple had many parallels to the way it worked with old fashioned CD sellers – the emergence of the ad-funded and subscription-based streaming platforms required a totally different approach from the music rights industry.

And while most streaming services are now licensed according to the same model, not everyone in the wider music community understands how it works (indeed many people working for the labels, publishers and collecting societies which negotiated these deals are still a little confused). But understanding the basics is important as artists, songwriters, labels and publishers review, debate and consider the rapidly growing streaming music market, which could soon be the recorded music sector’s most important revenue stream.

If you were to set up a Spotify-style streaming service today, the first thing to remember is that there is copyright in both songs and recordings, that your business needs to exploit both sets of rights, and that song and recording rights are usually controlled by different players. Labels and artists control the rights in recordings, while publishers and songwriters control the rights in songs. The digital service provider (DSP) needs permission – so licences – from all the rights owners. And it will soon discover that the record and publishing industries have a different approach to licensing.

It’s worth noting that, even with iTunes, this is a key difference between the physical and digital music markets. In the CD domain, the label exploits its own copyright in the sound recording when pressing disks, and it’s the label that gets permission from the publisher to release a recording of its song, usually via the collective licensing system.

So the CD arrives at the record shop ‘rights-ready’, and the retailer doesn’t have to worry too much about copyright, providing it sources its disks from a legitimate supplier. In digital, the DSP is the licensee and it needs permission from both the labels and the publishers, ie the label doesn’t sort out the publishing (there are some exceptions to this, iTunes in the US being the most notable, but generally the DSP must deal with both parties directly).

Most DSPs begin with the sound recording rights, because once you have deals in place with the labels they will give you access to the content you need to get going. In the main the record industry licenses streaming services directly, rather than via the collecting societies that provide sound recording licenses to traditional radio stations (so PPL in the UK).

There are some exceptions – mainly digital services which have similarities to radio, which may be licensed through the societies – but most DSPs need to do deals directly with the copyright owners, which means the majors (Universal, Sony and Warner), Merlin (which represents a consortium of indie labels), and then a bunch of independent distributors which represent both labels and self-releasing artists (including Believe, INgrooves, The Orchard, TuneCore and so on).

The record industry’s deals with streaming services are usually – at their core – revenue share arrangements. The label will receive a cut of any advertising and subscription revenue the DSP generates each month, based on how much of the DSP’s overall consumption comes from the label’s repertoire and what revenue share split has been agreed. The actual revenue share splits are usually secret, though are likely between 55-60%, varying from label to label, and DSP to DSP. The assumption is that the bigger the rights owner the bigger the share.

This means that if a DSP brings in £10 million in a month (after VAT) and 10% of all tracks streamed are controlled by Label X, then £1 million of revenue is attributed to that label. If the label has a 55% revenue share arrangement, it would then receive £550,000 of that money. The DSP keeps £450,000, though has only so far covered the recording rights, and must pay royalties to the owners of the publishing rights out of that £450,000, as well as covering all its own costs.

So far so simple. But there are complications.

Most start-up DSPs have minimal revenues at launch, and 55% of nothing is nothing. Knowing this, and not wanting to take on any of the risk generated by the new venture, the label will ask for guaranteed minimum payments, which might include a minimum payment per stream, a minimum payment per subscriber and/or a minimum payment per time period.

Which means that as a streaming service starts to take off in terms of users and streams, it must start paying sizeable sums to the rights owners oblivious of its revenues. The hope, of course, is that revenue share payments soon exceed the minimum guarantees, making this part of the deal irrelevant. This may or may not actually happen.

In addition to the minimum guarantees, the labels will also likely seek an upfront advance, may also charge administration or technical fees, and with start-ups might ask for equity in the business.

The label would justify the advances by saying that some streaming services never actually get off the ground, meaning all the time and resource spent on negotiating the deal and providing the content is wasted. A cash advance on the day the deal is signed overcomes this concern. Though really, well, who doesn’t want the money upfront if they can get it?

As for the equity, rights owners argue that many of the early investors in streaming services bank on making their money back not when the service becomes profitable (which may be many years away), but when the company – if successful in building user-base and hype – is sold, to a web or media giant, or via an IPO. For some start-ups, this first sale may be the single biggest pay-day, and so the labels want a cut of that action. They are minority stakes that will be subsequently watered down as the start-up raises future venture capital, though the labels could still make millions when the big sale occurs.

And that’s your labels deal done. Though you’ll often need a different deal for each territory, and for each iteration of your service, so one for freemium, one for premium, one for the Vodafone bundle, one for the student discount and so on. But each deal will have the same basic components: revenue share, minimum guarantees and an advance. And once done, the labels will pump their content into your servers, and you start reporting usage each month, paying over royalties based on your deal (or deducting royalties owed from the advance paid).

Technically before going live the DSP needs to sort out the publishing rights too. And here things are more complicated, both at the deal making stage, and beyond.

Music publishers and songwriters have always made a greater use of the collective licensing system than the record industry. There are various reasons for this, but the big reason is that lots of songs are co-written by different songwriters represented by different publishers, which means it’s very common for the copyright in a song to be co-owned by multiple parties. And because in most countries copyrights are not registered, it can be hard to know who has a stake in any one song, let alone what the respective ownership splits might be.

For this reason, whenever a licensee is making use of lots of music it is much easier if they can do so under a blanket license, where they pay a central body a fixed sum of money per play or per song or per month, and that central body then works out what is owed to each publisher and songwriter, ie collective licensing.

In the early days of digital, the publishers licensed most digital services through their collecting societies, as they always had done with radio. However in Europe the bigger publishers have now moved to direct licensing streaming platforms for all but smaller single-territory services, while the other publishers continue to license through their societies.

The big publishers would argue that multi-territory licensing is easier with direct deals, and most DSPs want multi-territory licenses. But it’s also worth noting that collective licensing is always subject to extra regulation, whereas direct deals are not, which means publishers can generally drive a harder bargain when negotiating direct.

That said, direct licensing of streaming services in Europe still involves the collecting societies, which can be confusing, but is necessary because of the way publishing rights are traditionally managed.

Whereas under a classic record contract, the artist assigns the copyrights in their recordings to the record company in their entirety, under a classic publishing contract some elements of the song copyright are assigned to the publisher, but control over other elements (in the UK, the so called ‘performing rights’) is given to the songwriter’s collecting society, with the publisher getting a simple 50% cut of any revenue generated by that component of the copyright.

So whereas the record industry’s collecting societies are in essence just agents for the copyright owners, ie the labels, the publishing sector’s collecting societies are themselves rights owners. And when music is delivered digitally there is both a reproduction of the song (exploiting the ‘mechanical rights’) and a communication of the song (‘exploiting the performing rights’). So, the societies can’t be cut out of the equation when it comes to digital licensing.

The solution to this was for the big five publishers (Sony/ATV, Universal, Warner/Chappell, BMG and Kobalt) to form joint ventures with one of the European collecting societies, and to license digital services via these JV entities. The publisher puts in its elements of the copyright and the society puts in its elements for the same songs, and then the publisher negotiates a deal not altogether unlike the label arrangement outlined above on behalf of both parties (though the revenue share here is more likely to be 10-15%).

The societies then separately negotiate deals with the DSPs for all and any repertoire that they control which are not linked to one of the big five. So to have everything covered (and because it’s hard to know who controls what song copyrights, really you need everything covered), the DSP needs to do deals with the big five via their JV vehicles, and then separate deals with the local collecting society in every country in which it operates.

And if you think that’s complicated, wait until the deals are done. Whereas with the labels, the DSP knows who provided it with each track, and therefore who to pay whenever that track is streamed, because there is no central database of song copyright ownership, the digital service doesn’t know who is due royalties for any one song.

So instead they have to provide every licensor (so in Europe, the big five and each society) with a list of every single stream from the previous month.

The publisher or society then crunches that list, and works out which songs it has a stake in and what stake, and therefore what payment it is due, based on the revenue share and minimum guarantee arrangements described above. Which is quite complex data crunching, and one of the reasons why data is such a big talking point in music publishing just now.

The publishers and societies then invoice the DSP for the money they believe they are owed, and everyone hopes that two publishers don’t both claim to own 60% of the same song (when they do the DSP is ready to block payments and force the societies and publishers involved to fight it out over who really has 60%, and who has just 40%).

There is then one extra layer of complication once the DSP has paid up. What percentage of the money should be attributed to the mechanical right, and what percentage to the performing right? That may have an impact on how the money is paid to the songwriter (so in the UK, mechanical income goes to the publisher who may then pay a royalty to the songwriter, whereas performing right income is paid out by the society to both publisher and songwriter on a 50/50 split).

All in all, while both labels and publishers will make big demands when deal making, the song licensing side is more complicated, and money tends to take longer to work its way through the system.

Which means that songwriters annoyed with their streaming royalties may be responding to money relating to streams that occurred many months ago. And because of the mechanical/performing right split, they may only be looking at half their streaming income.

If all of the above has confused you, we should mention that things are frequently different in the US, where compulsory licenses often apply (on sound recordings if the digital service is personalised radio, and across the board on the mechanical rights of songs) and where the publishers have not, as yet, been able to withdraw their digital rights from the collective licensing system, as they have in Europe.

Lobbying efforts are underway in the US to alter some of these rules and, if successful, it remains to be seen whether the American industry replicates what has happened in Europe, or finds a whole new way of doing its digital deals.

This is a free sample CMU Trends article – to get full access to CMU Trends, plus the CMU Digest and discounts on CMU Insights events, GO PREMIUM for just £5 a month