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Trends: The push for digital transparency gets political

By | Published on Monday 6 March 2017

Houses Of Parliament

Last year CMU Insights led a series of roundtable debates for the UK’s Music Managers Forum involving artists, songwriters, labels, publishers, lawyers, accountants and many, many artist managers to inform part two of the ‘Dissecting The Digital Dollar’ project.

The aim of the sessions was to talk through the various issues that had been raised in part one of the ‘Digital Dollar’ report with regard to the evolution of the streaming music market, the business model that most streaming services now employ, and the way streaming income is shared among labels, publishers, artists and songwriters.

For the managers taking part in the debates one issue repeatedly topped the list of concerns, and that was ‘transparency’, or the lack thereof. Which is to say the secrecy that surrounds the deals that have been done between the streaming services and the record companies and music publishers, and the lack of clarity in the way artist royalties are calculated and reported by their business partners.

The MMF was already aware that this was a key concern, and as the ‘Digital Dollar’ roundtables were ongoing it was already working with the trade organisations that represent music creatives in the UK – the Featured Artists Coalition; the Musicians’ Union; the British Academy Of Composers, Songwriters & Authors; and the Music Producers Guild – to attempt to negotiate a voluntary code of conduct with British record companies and music publishers. The code, among other things, would seek to provide artists and songwriters, and their representatives, with a little more clarity over the way digital royalties are collected and distributed.

All sides participated in the discussions around that code over an eighteen month period, though in the end no agreement could be reached. With that in mind, the various organisations representing music creatives and their managers have now called on the UK government to get involved, to put pressure on record companies and music publishers – and especially the majors – to provide artists and songwriters with more clarity over how their recordings and songs are being exploited in the streaming domain. As that call is made, CMU Trends reviews the debate so far.

‘Transparency’ is a wide-ranging term that probably needs better defining – who needs to be more transparent about what, exactly?

For most managers, question one is how each record company calculates what streaming royalties are due to each artist each month. There are two elements to this question: first, what monies did the streaming services pay the label, and second, how did the label decide what portion of that money was owed to the artist?

The quantity and quality of information shared with managers in this domain varies greatly from label to label and distributor to distributor. Where information provision is poor, that’s not necessarily a sign that the label is unwilling to provide the information the manager requires, it may simply be down to resource – is the label set up to provide this information in a user-friendly and timely fashion?

In theory it should be easy for a label to tell a manager what monies were paid by any one streaming service in any one month for the use of any one artist’s music.

That information can be complex, because the royalties paid by any one platform may vary according to subscription type (eg premium, freemium, bundle, family-package etc) and according to territory. Simply presenting one total figure isn’t helpful (it’s by merging premium and freemium royalties that artists often then declare a streaming service is paying super low royalties across the board), but presenting every variation results in lots of data to process.

Reporting standards across the industry could go a long way to addressing this issue. If all streaming services were to report to the record companies in a similar way, and then all labels were to report to all artists and managers in a similar way, all parties could learn to navigate the complexities. This in itself would be a considerable move forward; simply being able to clearly see what the record company received from each streaming service would help build trust between label and management. Indeed, those labels already doing this are generally more trusted.

Of course, beyond seeing what a streaming service paid a record company, there is then the issue of what happens to the money as it flows through the label to the artist.

First, does money move between regional divisions of the record company? So a US division collects American streaming royalties for British artists and then passes them onto the UK division. If so, does the US division share a full breakdown of those streaming royalties, covering the complexities outlined above? And does it charge a commission before handing the money over to the UK?

Secondly, how does the label work out what cut the artist is due? Is there a specific royalty rate for streams in the artist’s record contract? If not, how does the label know what royalty rate to pay – does it pay the CD rate, or the CD rate plus a few per cent, or a label-wide streaming rate, or a bespoke rate it agreed with the artist? And does the label apply any deductions or discounts before calculating the artist’s split?

Managers need this process to be explained really clearly. Of course, for labels with thousands of artists in their catalogue this is a challenge, especially if there is considerable variation in the way the process is applied to different acts. Realistically many of the artists in that catalogue are probably generating nominal streaming royalties, meaning labels will be wary of investing too much time into explaining what the act is being paid, as the cost of that work may exceed the royalties the artist is ever going to generate.

That said, the process being applied to each artist should be the same each month and therefore it only needs to be explained once. Given the exploitation of catalogue in the digital domain is so much cheaper for labels than in the physical domain, it could be argued that communicating that information to each and every artist is simply a cost of sale of being in the streaming business.

Beyond seeking more transparency about the way individual artists are paid, there are then the specifics of the deals done between each record company and each streaming service.

The specifics include the revenue share arrangements that are at the heart of each streaming deal, plus the minimum guarantees and advances the streaming service must pay, and any equity or fees that the labels receive in addition to royalties directly linked to music consumption.

There are various reasons why managers want access to the information outlined above. First, to audit their artists’ income. Secondly, to better understand the streaming business. And thirdly, to better advise their artists on which streaming services to endorse and which business partners to work with.

The audit is perhaps the most important area. Managers need to know that their acts are being paid what they are due by their business partners. Managers should audit streaming income anyway – doing so is just good practice – plus, of course, there is decades of distrust between artists and labels when it comes to the latter paying the former their cut of money generated by their recordings.

Simply providing complete information on what money the label was paid by each streaming service and a clear outline of how each artist’s cut was calculated goes a long way to enabling managers to do their audits. With this information an accountant can cross-reference the label’s stated royalty calculation process with the artist’s contact – deal with any contractual disputes – and then simply check the label’s sums.

Should the manager trust that what the label says it was paid by the streaming service is correct though? Presumably paperwork could be provided to back this up or – even better – the labels could allow the streaming services to report this information directly to management, given Spotify in particular already provides usage data directly to artists and their managers in addition to the label.

Then of course, should the manager even trust the streaming services to correctly calculate what monies are owed to the label for any one artist’s streams. Actually, many managers trust the streaming services more than the labels to correctly calculate and report this figure. Though to truly audit how the streaming service worked out what the label was due, the manager – or the artist’s accountant – would need access to the specifics of each label’s deal with each streaming service.

Now, the labels may well argue that they also have a vested interest in the streaming service correctly calculating and reporting what each artist is due each month, and that they can audit the streaming service if necessary. Therefore, the artist’s audit need not go beyond seeing what the streaming service paid to the label. Some managers would probably accept that argument, though others would not.

Meanwhile some managers argue that, while it may be possible to do a decent audit without knowing the specifics of a label’s streaming deals – providing verifiable evidence of what the streaming platform paid the label is available – there are other reasons that artists and management need to know more about the agreements reached between the digital firms and an artist’s business partners.

First, there is the concern that labels may be profiting from their digital deals in ways beyond the royalties they receive from specific consumption of catalogue, and if they are managers believe artists should share in that extra income. Secondly, there is the challenge of properly assessing the benefits of working with different labels when you are not allowed to know quite how they will monetise your music in the streaming domain. And thirdly, there is the issue of artists not knowing which streaming services are working in their best interests.

As we noted at the launch of ‘Digital Dollar Part Two’, the latter issue is actually key to everyone in the music rights business. Everyone needs to persuade more consumers to sign up to premium streaming services, as it is these that are driving the new growth in the record industry. It’s artists, not labels, that have a direct channel to music fans, and so artists have a key role to play in taking streaming mainstream. But it is hard for artists to know what they should be telling their fans to do when their management teams are left in the dark about the specifics of each streaming service’s deals.

Finally, beyond practical and commercial considerations, there is also a moral element to all this. Surely the beneficiaries of a copyright should be allowed to know how their work is being exploited and monetised, even if they are not the owner of that copyright. And shouldn’t copyright law confirm such a moral right?

It is important once again to stress that when it comes to all of the transparency issues raised here, some labels and publishers already go much further than others in providing the information managers say they need.

Some are much more willing to share this information. And some have set up the infrastructure to make such information available. For most managers, the biggest transparency issues are with the major record companies, though there are still some industry-wide challenges, especially around achieving standards in reporting.

Many labels, including the majors, increasingly insist that they are being more transparent. In some cases that is true. Though in other cases, while it may be true that the label is providing the artist with more lines of data in their royalty statements, that isn’t necessarily helping those artists and their managers audit streaming income, let alone better understand the streaming business.

When it comes to managers knowing the specifics of the streaming deals themselves, the non-disclosure agreements routinely included within those deals are commonly cited. Both sides – ie labels and streaming services – routinely blame the other for the inclusions of these terms. Though arguably there is usually enough flexibility within these contract terms for key information to be shared with managers anyway, who could also be under NDA, so many feel this excuse is starting the fall apart.

Resource issues may be part of the problem too, especially for smaller labels and publishers who are in theory much more willing to share information with managers, but don’t always do so. Though there are now data solutions on the market that can help labels and publishers process and report streaming royalties, and arguably doing so is now simply a routine part of what it is to be a music rights company.

While there may be practical reasons why some labels and publishers are not providing artists and managers with the clarity they need, the consensus of the music creative community is that when it comes to the majors, the key problem isn’t the ability to share the required information, but a lack of willingness to make it available in the first place

The aforementioned organisations representing those music creatives in the UK feel that the code of conduct was an opportunity for the majors to show even a little willingness, and the fact no agreement could be reached proved that there isn’t any. Given the commercial and moral imperative to get the transparency artists and managers say they need, the music creatives are now looking to government for help.

The need for more transparency in the digital music domain is already on the political agenda of course, with one of the articles in the new draft European Copyright Directive seeking to provide music creatives with more clarity on how their work is being exploiting by streaming services. In its current form its debatable how far this article will actually go in practical terms, though it is a good starting point.

With the new Copyright Directive now going through the motions in Brussels, music creatives are calling on the UK government to lead, by bringing together music creatives, record companies, music publishers and collecting societies to discuss possible solutions, in much the same way the Intellectual Property Office facilitated meetings for the labels to put pressure on the search engines to do more to combat piracy.

At a debate on intellectual property in Parliament last month there was cross-party support for such an initiative. Noting that, the various music creative groups said in a joint statement: “We welcome the acknowledgement of parliamentarians that intervention is required to guarantee greater clarity to music-makers – and ensure that a fairer share of the commercial growth from services that use our music goes back to the artists, songwriters and producers that created it”.

They went on: “This has been an issue of internal industry discussion for some time, and we are therefore delighted that UK politicians are recognising the challenges faced by our members with the continued secrecy surrounding commercial licensing deals. The EU has accepted the need to legislate for transparency and it is imperative that the UK government commits to introduce back-stop powers in the event of Brexit”.

It remains to be seen if the British government chooses to intervene. In the short term it may well say it wants to see the outcome of the European Copyright Directive, which could come into effect prior to the UK exiting the European Union. Though implementing the transparency article of that Directive will likely require industry consultation anyway, and there is definitely support in parliament for the idea that the UK should be seen to lead on this issue, in much the same way as it has in pressuring search engines to act on piracy. Therefore – with the music creatives now actively lobbying on this issue – we could see developments much sooner.