CMU Trends Labels & Publishers Management & Funding

Trends: What one thing could the labels do to placate artists in 2014?

By | Published on Wednesday 15 October 2014


I’ve often thought that the music industry would have been a much simpler place had the standard artist royalty on a record deal been 0%. ie the label says “we’ll release and market your first album at our expense, including paying you an upfront fee, and then take all and any revenues those sound recordings generate for life of copyright, while you focus on the publishing, live, merch, brand and other money to be made once we find you a fanbase”.

For the majority of the acts who did record deals but never recouped (so the label never made back its costs), there’d be no tangible difference. Successful artists who did recoup would lose out, of course, and some would lose out big time.

Though it would be interesting to know how much of that income was spent by both sides calculating and monitoring royalty splits, and on the legal costs of drafting royalty agreements and pursuing the inevitable disputes. Perhaps the savings made on these accounting and legal costs could have been added to the advance.

And at least with no-royalty-contracts there would have been more trust between artists and their primary initial investors. After all, artist/label relations usually start off well, while the artist is directly working with enthusiastic A&Rs and marketers. It’s down the line, when the primary contact becomes business affairs and mysterious royalty statements, that distrust starts to build. Pretty much every manager has suspected, at one point or another (or constantly), that his or her artists’ labels are employing accounting tricks to reduce any pay-out (or deduction from the figure yet to be recouped).

And that 50 years of distrust between record companies and the artist/management community hasn’t helped as the former have sought to revamp their partnerships with the latter, now that the sound recording revenue stream around which traditional record deals were exclusively based has become less lucrative. And as multi-revenue stream deals have given the label a cut of of income traditionally controlled by management – publishing, live, merch – now it’s the accounts people in the record companies who are convinced they are being screwed over somehow.

Arguably the future of the music industry is even closer business partnerships between artists and labels, built not around shared ownership of content, but shared access to fanbase, which will only make the trust issues worse. And for their part the labels – and especially the majors – are, if anything, allowing distrust to grow through the ambiguities that exist over exactly how the labels’ deals with the streaming music companies work.

As CMU’s survey of the UK artist community earlier this year proved, while some high profile popstars are outwardly hostile to the rise of streaming music and some of the key players in the market, most music-makers think streaming is the future, and while that’s probably fine, they are just really, really confused about how royalties are paid. Their managers may know a little more, though much confusion remains across the board. And where there’s confusion in the music industry, artists and managers will assume something dodgy is going on.

There are at least three levels of confusion when it comes to the labels’ digital deals.

Per-play royalties
The first is quite simply what per-play royalties each streaming platform pays. Some of this information is available, not least from the digital distributors who – as simple service providers – have no reason to blur the figures. Though even when unblurred these per-play payments are pretty confusing because there are so many variables. Most streaming services licence on a revenue share basis, committing to pay about 70% of their revenues over to rights owners each month (a figure more or less borrowed from iTunes, and in turn from CD sales).

Which means how much any one artist earns for each play varies from month to month. Pro-rata figures may also vary depending on whether a track was played by a freemium or premium customer, what advertising was delivered, and what other rights owners are involved. So even if every label was 100% transparent on all this, most people would still be confused. Though some workshops run by the labels explaining to artists and managers how things work might nevertheless help.

Defining the stream
The second area of confusion is how, legally speaking, a stream should be defined. Pre-digital contracts won’t mention streaming, but will likely pay out different royalty splits depending on the kind of income. Which of the ‘income types’ listed in a record contract should apply? This, of course, has already proven controversial in the download space.

But even on newer record contracts, where the split on a stream will be specifically defined, what about the global dimension? Record contracts routinely allow labels to take extra fees when subsidiaries abroad are involved, but how does that work in the streaming space? Marketing of new releases will likely still be handled by regional divisions, but content delivery of both catalogue and new material could be fulfilled globally by an artist’s home label.

And finally in this domain, how does a stream relate to the different elements of any one copyright as defined in statute – which often refers to the separate rights to copy, communicate, hire, perform and adapt a creative work? Which of these occur in a stream? It’s an important distinction not just for interpreting each artist’s record contract, but also because under many copyright systems recording artists are due an automatic cut of revenue (oblivious of contract) generated by some but not all of those elements of the copyright. Does that statutory cut apply to streaming? It’s fair to say that managers and labels do not currently concur on this issue.

Kickbacks for the label
But for the management community today, perhaps the biggest concern is the third area of confusion. What sweeteners do the record companies receive when they do deals with streaming music platforms, and especially the streaming music start-ups? It’s no secret that the majors (and, through Merlin, many indies) make a number of demands of new entrants to the streaming market, which usually include a sizeable advance, some commitments on marketing support and, with the start-ups, equity. What is secret, however, are the specifics about the sweeteners received in each deal, because agreements between labels and digital service providers (DSPs) are nearly always laced with non-disclosure agreements (NDAs).

Of course the labels are entitled to do whatever deals they so wish. And it’s understandable that – having done favourable deals with some early digital music start-ups, only to watch the founders then sell their businesses for hundreds of millions more than the labels had received – that the record companies decided they should be cut into any action on this front. Not least because for the initial investors in these start-ups, it is the profit to be made from first sale or flotation that drives the business plan, rather than any long-term profitability, plans for which come later. Most labels have shareholders, and a fiduciary duty to those owners to secure the best possible deals from new business partners.

However, the suspicion of many a manager is that the labels are ensuring ‘the best possible deal’ not just by being very demanding of the DSPs, but also by structuring their streaming partnerships in such a way as to reduce how much of the resulting income needs to be shared with artists.

That is to say, offer reasonable rates on per-play royalties, at least some of which will have to be paid to each artist under the terms of their record contract, but in return make big demands elsewhere in the DSP deal creating income that is not directly attributable to specific tracks, and therefore can be kept by the label in its entirety.

As mentioned, many of the labels are shareholders in Spotify, which will almost certainly float in the next two years. Spotify’s IPO will be a big pay day for the labels. Managers argue that the record companies only secured equity in Spotify because of the sound recordings they control, that in turn only exist because of the efforts of recording artists. Therefore it is unfair to profit from that equity and not share the spoils with the creative talent.

Truth be told, if and, most likely, when the Spotify IPO happens, it may be difficult for artists and managers to force the labels to share their profits from the share sale, given how traditional record contracts are written. And to be fair to the labels, they are in control of the one music revenue stream that is 40% less lucrative now than in 1998, but are still the primary investors in new talent, so it may be entirely reasonable for the record companies to benefit in this way if it enables current and future new talent investment.

However, the situation is made all the worst because of the NDAs. So much secrecy surrounds the streaming deals, and given the existing distrust between artists and labels, the former naturally assume that means they are being mightily screwed over by the latter.

And the secrecy is counter-productive. For starters, it leads to major name artists speaking out against the streaming services that the labels support. And secondly, it increases that distrust, just as the industry needs artists and labels to work ever more in harmony, to capitalise on the potential of direct-to-fan. Artists and managers might not like the specifics of the labels’ streaming deals if and when they see them in full, but that reality would be better than the current secrecy and suspicion.

In recent months global representatives from both the indie label and management communities have spoken out on this matter, the latter vocalising their concern over the confusion surrounding the labels’ streaming deals, the former making some pledges to increase transparency.

The World Independent Network published its Fair Deals Declaration in July, which a long line of indie labels immediately signed, while the WIN leadership called on the majors to also participate (possibly aware of the PR win that could be achieved when they predictably declined). Key commitments in the declaration include clear explanations of how label/artist splits on streaming revenue is calculated, providing a good-faith pro-rata share of any revenues not attributed to specific recordings and better standards of digital reporting.

Meanwhile the recently revamped International Music Managers Forum published its own statement later the same month, calling for more transparency on pricing and usage data, and “fair remuneration” from all elements of the labels’ streaming partnerships. Then last month at the Reeperbahn conference in Hamburg, the IMMF issued a new statement more specifically focusing on the issue of the equity labels have in the streaming platforms, the impact this may have on their decision making, and what exactly will happen if and when shareholdings are cashed in.

Speaking to CMU after the publication of his group’s second statement, IMMF Vice Chair Volker May said: “The only reason that the label has the music is because artists have entered into deals to have it exploit their music. The only reason that the streaming services need the label is because the artist has given them their music. The relationship a label has with a DSP is simple, the label makes a deal with the service so that it can further exploit the music. If you gave a boy scout an apple from your apple tree and asked him to go to the market to sell it for you, and to then return to you with the money to divide between you both, you would expect to be able to know the details of the deal the boy scout did. Without transparency it is difficult to evaluate fairness and that is one of our priorities we are looking for”.

The NDA culture that has surrounded label/DSP deals limits the ability for both parties to be transparent with artists. Though May argues it is the labels who have the duty to be more transparent, because it is they who have the contractual relationships with the artists.

He continues: “This has less to do with the services, and more to do with the contract that exists between the artist and the label, the relationship of trust and responsibility that permits the label to take the music to market. The question raises another issue about auditing, the services generally have digitally native granular accounting. The services tend not to be vague about what has been used. They need to know so they can respond with recommendations to end-users. If one was to ask a service for data and detailed reports they could probably deliver. [But] the artists don’t have deals with the services, they have appointed labels to make deals for their music”.

Asked to comment on WIN’s Fair Deal Declaration, and whether it meant that the majors more than the indies were the problem here, May continued: “We like labels, indie and major. There are a lot of good people at labels, and a lot of resources are invested by labels in artists”.

But the IMMF is speaking out, he went on “to draw attention to the fact that transparency failures are failures of action not of sentiment. Broad statements of good intentions are only valuable if backed up with actions, otherwise they are meaningless. We haven’t issued a declaration of what we think should be done with the side payments and equity deals, we are simply asking for the artists partners at labels and at publishers to respond by acting to bring transparency on specific issues”.

And if transparency is achieved, what then for the “side payments and equity deals”? “Sharing the side profits is complicated by factors like the period of the label’s investment, the releases and catalogue tracks used during that period, by the deals between each artist and each label, it is so complicated that the labels can say with a straight face ‘we don’t know how to share this money’. But the first step would be for the labels to contact their artists and identify the problem, and ask for a dialogue on fixing it”.

“We are sure that there are enough clever folk at the labels, including those who built these deals, to come up with some idea on how to unwind them and share the value. Everyone getting behind the artists would make for better long term returns for investors in the labels and publishers”.

Interestingly, when you speak to labels and DSPs about the secrecy that surrounds these deals, it’s not uncommon for each side to blame the other for the NDAs. May agrees. “Each side can only shrug, when we ask them this, because… NDA’s. But we would rather not guess”.

And again, the onus lies on the music rights companies to fix the problem. “Regardless of who started the NDA cult, the artist signs a deal with the labels and the publishers. A starting point would be for them to recognise the trust and commitment made by artists, and to reciprocate. Not to point across the table at the services as a problem that somehow prevents us equitably dividing the money on our side. Lets deal collectively with the value of music as an industry, lets go and get more money, but first lets agree that the value will be shared, and what sharing actually involves”.

When Spotify, or any other streaming players, go to IPO or big sell-out, this debate is only going to increase in volume. There’s a strong argument that the music rights companies would be better served addressing the trust issues now. Not least because the real challenge of making streaming music work will begin post the IPOs, and at that point it would be good to have the whole music community working as one.