CMU Trends Digital Labels & Publishers Legal The Great Escape 2015

Trends: Tackling the Digital Pie Debate

By | Published on Friday 29 May 2015

Digital Pie

While Spotify took the brunt of Thom Yorke’s now legendary verbal assault on the streaming music platforms and the royalties they pay, since then the debate around streaming monies has shifted.

It has become more inward looking within the music community, with the focus being slightly less on how much Spotify et al are paying into the music industry, and more on what is happening to that money once it has been paid over. We call this the Digital Pie Debate, and it was one of the liveliest parts of CMU Insights @ The Great Escape this year.

There are, of course, multiple stakeholders within the music industry who ultimately share in the streaming money. For starters, there are the different copyrights that a streaming service exploits, ie the copyright in the song and the copyright in the recording, represented by the music publishing sector and the record industry respectively. And then there is the split between the creator and the corporate rights owner, the songwriter and the publisher, and the featured artist (and any session musicians) and the record company.

As each new digital business model has evolved, the start-ups developing these services have usually started by talking to the labels, who generally control the copyright in sound recordings, and who – unless you have a user-upload business model like YouTube – the start-up relies on to actually provide the content.

Deals with the music publishers come next, though not always before the service goes live, much to the annoyance of the music publishing community. Moreover, because the independent publishers generally licence digital services via their collecting societies, even once these deals are in place, there is often a middleman between the digital service provider and the actual publisher. But at least a relationship exists, even if it’s once removed.

It’s only after these deals are in place – and the service is live – that digital service providers (DSPs) usually start trying to speak directly to artists. Digital services don’t usually need this relationship to access content or pay royalties, because that is done via the labels. But they might want or need artist relationships to secure exclusive content or marketing partnerships, or simply as a PR initiative to prevent there being any tricky ‘Yorke Moments’, when the DSP is suddenly positioned as the bad guy by a Twitter happy popstar.

The songwriters who are not also featured artists always come last. Indeed, few DSPs have as yet reached out to this community at all. Spotify – a leader on the artist relationships front – is now engaging with the Fair Trade Music initiative, a new organisation set up by the songwriter community to try and secure direct relationships with the digital platforms. Those who write the songs are paid, of course, by their publishers and/or collecting societies, but will likely feel most disconnected from the new music providers.

This timeline is relevant when it comes to the digital pie debate, because many feel that the earlier on the DSP engages with a stakeholder, the more favourably they are likely to be treated. So as streaming continues to boom, concerns about royalty payments seem greater as you work your way through the list: labels, publishers, artists, songwriters.

But what are the key elements of the Digital Pie Debate? Well, after that lively discussion at CMU@TGE this month, we summarise the three key talking points.

Although we began by setting the Digital Pie Debate apart from this discussion, it is worth giving a few moments of consideration to this split.

We know that, in the main, the Spotify-style streaming services are keeping about 30% of their revenues, paying over the other 70% to the music rights industry. This is very much an approximate figure, and in the early days a streaming service will likely be paying more to the labels and publishers than it’s total revenues, as it pays out minimum guarantees and advances before the revenue share element of its deals kick in. But in the main, the 70/30 split is the arrangement.

There are some in the music community who reckon that the streaming services, being so reliant on songs and recordings, should actually pay more than 70% of their revenues over to the music rights owners.

In the main, the DSPs are resistant to this proposal. And a report published earlier this year by the UK’s Entertainment Retailer’s Association, which counts the key digital firms among its membership, contained the quote: “70% is tough enough, but at 80%, we would have to shut up shop. Somebody should explain that 80% of nothing is… nothing”.

That said, since Jay-Z led the acquisition of Tidal, he has indicated that his streaming platform plans to pay 75% of its income to the rights owners, so perhaps there is some room for manoeuvre. Though as Spotify and Deezer start to expand their consumer offer to include speech and video content, and programming commissioned by the DSP themselves, it could be that down the line the streaming firms actually seek to push the split the other way.

Within the music community itself the increasingly big debate centres on how streaming money is split between those who control the recording rights and those who control the song rights.

Of course, most of the deals done between labels, publishers and collecting societies and the streaming platforms are secret, but we know in the main that the labels are taking 55-60% of the DSP’s revenues, while the publisher is taking 10-15%. Which means the label could be earning six times what the publisher gets.

This disparity is not new. Indeed in the CD domain the label/publisher split would be tipped even more to the former’s advantage. There are various reasons for this.

A sound recording copyright owner only earns from their one specific recording of a song, while the publisher earns on every version and variation of the work. The owner of the song also earns every time it is performed live, and so also enjoys a cut of the live sector’s income. Plus a sound recording copyright term lasts for a fixed time after release (seventy years), whereas the song term runs for 70 years after the songwriter’s death, which could mean a term twice as long in total.

But most importantly the sound recording owner – ie the label – does a lot more work in getting the CD to market. It pays for the recording to be made, for CDs to be pressed and distributed, and for the marketing campaign that will, if successful, result in sales. The publisher, while paying an advance to the songwriter, has none of this risk, and with risk comes reward. Which is principally why the label earned so much more from record sales than the publisher.

When it comes to other uses of music – such as the broadcast or public performance of sound recordings – in the main both rights owners receive more or less the same sum of money from licensees (if anything, the publisher likely sees slightly more). Arguably again it’s the labels that get the content to the radio station or club DJ, but they take a much smaller risk and so the rewards are shared out more equally.

Now, it could be argued that while iTunes was the digital evolution of the record shop, Spotify is actually the digital evolution of radio, and so perhaps a label/publisher split more akin to public performance would be fairer. And a few brave souls on the publishing side of the equation, mainly off the record, have mooted a 50/50 arrangement for streaming income.

But few on the songs side of the fence would actually go that far, while most labels will tell you a 50/50 arrangement would put them out of business. Because whether Spotify is the new radio or not, labels are still taking considerable risks every time they send an artist into the studio.

And while digital may be considerably cheaper than pressing and distributing CDs, there is still an administration cost to distributing content, and marketing costs, if anything, are higher. Labels have also had to invest in systems to pump their content into the DSPs, and have spent heavily digitally ingesting their catalogues.

So 50/50 isn’t an option. But, is the label’s risk really as high in the digital age as it was in physical? And won’t risks decline further as digital-only releases become the norm and the initial set-up costs of the shift to digital are paid off? And aren’t many labels now partly securing their investments in new talent by taking a cut of revenue streams beyond the sound recording copyright?

The publishers, in the main, are yet to go public on this issue. Some in the US have said current streaming royalties are too low, but haven’t gone as far as to say the problem is not just what the DSPs are paying, but the fact the lion’s share of the money goes to the label. And the situation in the US is slightly different anyway, given the compulsory licenses and restrictive collective licensing rules that often tie the hands of publishers when negotiating with digital services.

Behind the scenes some publishers are increasingly agitated on this issue, but the official line is more conciliatory. At The Great Escape, Jane Dyball, speaking for both the Music Publishers Association and collecting society MCPS, insisted that publishers shouldn’t obsess too much about what others are getting, and instead focus on securing the best possible deal for the catalogues they represent. She added that labels shouldn’t express an opinion on the publisher’s cut (some possibly have) and copyright law shouldn’t meddle either (in the US it does), but getting into a fight with the record industry would be a distraction, she feared. “Who even said there was a pie to start with?”

But the songwriters are now vocal. They believe the royalties they are receiving from the booming streaming services are unfair and unsustainable. And in the UK the British Academy Of Songwriters, Composers & Authors has put this issue at the heart of its The Day The Music Died campaign which launched earlier this year. BASCA chief Vick Bain also took part in the TGE debate, stressing that this had now become a major and urgent issue for her membership.

Says Bain of the problem: “Without songwriters and composers there is no music industry and it is, therefore, scarcely believable that writers are almost an afterthought when it comes to getting paid for their work from digital sources. It is not an exaggeration to say that unless things change and change soon the incredible legacy and future health of British songwriting is at real and immediate risk. They need better protection and better remuneration and action needs to happen swiftly”.

But what is the solution to the dispute over the recording/song split? In the US there are some legislative changes that will help, but in Europe the issue is more one for the industry itself to tackle.

The problem is exacerbated because the publishers and their collecting societies chose to license the DSPs directly, rather than licensing the labels and letting them provide content to the streaming platforms with all rights covered (in the CD domain, the label not the retailer was the publisher’s licensee).

This was in no small part because publishers, probably rightly, reckoned they’d get paid quicker if they had a direct relationship with the digital firms, rather than relying on the labels to pass on the money. But this means that there is no direct commercial relationship between label and publisher when it comes to digital, leaving the DSP somewhat caught in the middle.

So, there’s no obvious solution for now. Labels likely hope that publishers and songwriters will be placated down the line as streaming revenues boom and even their minority split of the money becomes more lucrative. Though with the wider recorded music market still wobbling, it could take sometime for that to occur, and songwriters worldwide are likely to remain vocal on this issue in the months and years ahead.

While songwriters are increasingly angry with both DSPs and labels, in the main they are yet to hit out at their direct business partners – the publishers and collecting societies – mainly because in publishing the creator/corporate split is usually closer to 50/50, while the performing rights organisations are often not-for-profits (though their admin fees will nevertheless increasingly come under the spotlight).

But in the performer community there is plenty of tension between artists and their corporate partners, the record companies. And while some do continue to criticise the DSPs Thom Yorke style, often grabbing the headlines in the process, many more performers reserve their criticism for the labels when it comes to what slice of the digital pie artists see. This, of course, is not a new debate, because it began with iTunes.

Under traditional record contracts, and especially major label deals, artists would usually assign the copyrights in their recordings to the record company, and in return receive a cut of any revenue their records generated once the label had recouped its original upfront costs. In the main the label would keep the majority of the money on CD sales (routinely 85%), though would likely be more generous on other revenue streams like sync and public performance – what might be called ‘licensing income’ in the contract – where they might agree to a 50/50 split.

In the main, labels have treated digital revenues – both downloads and streams – as if they were CD sales, paying out the 15% split to artists, or maybe a few percent more on digital as compared to physical income. Plenty of artists have cried foul on this practice.

Partly based on the argument that digital revenues are licensing income, and so under heritage contracts the licensing rate of 50% should be paid. And partly based on the same argument as that given by the publishers above: yes the labels continue to be the big risk takers in music, but are their risks really as high as in the CD age?

Of course, with new artists, contracts will clearly state what cuts the label must pay on downloads and streams, and if an artist has signed that contract – the label might argue – what right do they now have to complain? Some managers would accept that argument, conceding that most new acts still need a label’s investment and marketing expertise, and if the deal is a 20% royalty on digital, well that’s the deal new artists may have to reluctantly accept.

Although, as any good lawyer will always ask, “20% of what?” Which brings us to the real bugbear of the management community, the digital deal secrecy that makes it impossible to know what fees the label takes and kickbacks it enjoys before it splits the loot with the artist. Which brings us back to the big fat transparency issue. Whatever slice of the pie the artist receives, has the pie been artificially shrunk before the knife is sharpened?

The need for more transparency comes up time and again at music conferences these days, and CMU@TGE was no different. Will market pressures force the hands of the labels and publishers in this domain? Or will legislation be required to force the corporate rights owners to bring artists and their managers inside the NDAs that surround digital dealing? Expect this issue to be loudly debated in the year ahead.

Though expect one other argument too from the artist community – performer rights. In many countries copyright law provides rights not only for those who own sound recordings, but also for those who performed on them.

The most important performer right is Performer Equitable Remuneration, a rule that says that whenever the ‘performing right’ element of a sound recording copyright is exploited, not only must the copyright owner be rewarded, but so too must the performers. Which is why money paid by traditional broadcasters to record industry collecting society PPL is split 50/50 between the labels and the artists, oblivious of record contract.

Performer ER is not currently paid on streaming income in most countries, including the UK. But remember that argument above, isn’t Spotify just the digital evolution of radio? If radio pays Performer ER, why not Spotify? The problem here is the ambiguity of copyright law, which often provides a get-out for labels on this point. Though that ambiguity is mainly possible because dated copyright legislation rarely defines a ‘stream’, and it’s therefore not clear which rules should apply. Perhaps if copyright law was updated, Performer ER could and should apply to streaming, empowering artists beyond their record contracts.

So to conclude, consider the Digital Pie Debate at this year’s CMU@TGE simply a launchpad. The various strands of this discussion could be occupying The Great Escape stage for several years still to come.