Music Streaming Revisited – the Problem of Income Distribution

The Rethink Music initiative recently published a report on “Fair Music: Transparency and Money Flows in the Music Industry”. The report identifies barriers in the money flows to artist and states:”[O]nly a small proportion of the money beyond the initial recording advances ultimately makes its way to artists as ongoing revenue.” (Rethink Music, 2015: 3). Especially in the digitized recorded music business the revenue streams are often obscure and non-transparent. And if it comes to music streaming, artists are sceptical about the underlying business model. Based on the report’s finding, the revenue streams from music streaming and the structures behind the business are analysed.

 

Music Streaming Revisited – the Problem of Income Distribution

The IFPI Recording Industry in Numbers for 2014 reports a global revenue from music streaming of US $2.2bn (US $1.57bn from subscription services and US $641m from ad-supported platforms), which is an increase of 39 per cent compared to 2013. Thus, the question arises, how the streaming cake is divided among the different right holders. Therefore, we have to distinguish two different copyrights: (1) the copyright of a musical work created by a composer and/or songwriter (musical copyright = MC) and (2) for the sound recording (= SR) created by a performer for a record label. A music streaming service needs both rights and has to approach the different right holders for licensing.

 

Figure 1: Licensing structures for a music streaming service in the US

Source: After Rethink Music (2015: 11-13)

 

Revenues from licensing sound recording rights

Since the sound recording rights are usually controlled by the record labels, Spotify & Co. have to license these rights directly from the labels. This is always the case for the record majors Universal Music Group, Sony Music Entertainment and Warner Music Group. Indie labels, however, usually do not directly license their sound record catalogues to the streaming but through so-called content aggregators such as The Orchard, Believe Digital and Rebeat or by a music licensing agency such as MERLIN.

The performers’ share of the licensing income from sound recording rights depends on the terms of contract with the record label. In older contracts digital sales are treated like physical sales and the artist gets a share 10-20 per cent of the revenue, but recoupable with advances. In current contracts with a digital sales clause the artists’ share might rise to 50 per cent, but also recoupable with advances. If a recording does not break-even, the artist won’t see any money from record and download sales as well as from streaming revenue.

In an Ernst & Young/SNEP study that was already discussed in the blog, it was highlighted that 73 per cent of the royalty payments for a EUR 9.99 premium service account of a French streaming service such as Deezer are kept by the major record companies. 10 per cent of the subscription fee is split among the creators and the publishers and roughly 7 per cent end up with the interpreters.

To circumvent the record labels, performers can withhold their digital rights from label contracts to commission content aggregators to distribution their music to all streaming and download services worldwide. In such a case, the artists get 100 per cent of the streaming revenue.

 

In the US, webcasters such as Pandora, Sirus XM and iHeartRadio are treated differently. Since they are not interactive on-demand streaming services the digital performance rights are licensed from the digital collecting society SoundExchange. The tariffs are defined by the Copyright Royalty Board (CRB): 50 per cent for the record labels and 45 per cent for the performers. The rest of 5 per cent are distributed by the American Federation of Musicians (AFM) as well as the Screen Actors Guild (SAG) and the American Federation of Television and Radio Artists (AFTRA) to background singers and studio musicians.

 

Revenues from licensing the copyright of the musical work

Whereas the licensing rates for the sound recording rights are defined in market contracts, the copyrights of the underlying musical works are managed by collecting societies. The on-demand streaming services (Spotify, Deezer, rdio etc.) as well as the webcasters (Pandora, Sirius XM and all Internet radios) have to license the performance rights of a composition from a Performance Rights Organisation (PRO) and the mechanical rights from a Mechanical Rights Organisation (MRO) In the US, PROs such as ASCAP and BMI are separated from MROs such as the Harry Fox Agency.[1] In Europe, the tasks of PROs and MROs are usually bundled in a single colleting society such as GEMA in Germany and PRS for Music in the UK. However, PROs and MROs distribute the collected money to creators (composers & songwriters) and to publishers after deducting a handling fee. If creators establish their own publishing company instead of licensing their works to a publisher, they can earn 100 per cent of the licensing revenue from performance and mechanical rights.

 

The “Black Box” of music streaming revenue

Advance Payments by Streaming Services

Beyond recoupable advances and a contractual share in recorded music sales and streaming revenue, there are money flows in the music streaming business artists are not involved in. Streaming services pay upfront payments or guarantee payments to the major record labels but also to the indie licensing agency MERLIN to get access to the sound recording catalogues. The recently leaked Sony-Spotify 2011 contract teaches us that the Swedish music streaming company had to pay advances of US $42.5m to Sony Music in three years. Exhibit 4(a) of the contract stipulates advance payments of US $9m for the first year, US $16m for the second year and US $17.5m for an optional third year.

It is called a “breakage”[2] if an advance payment from a streaming service to a record label exceeds royalty payments in a given period. The record labels are criticized for not sharing this “breakage” money with the artists. All three major companies rejected the accusations and argued that they share advances with the artists. A spokesman of Warner Music Group is cited in Music Business Worldwide (MBW) with: “Warner Music shares all advances, minimum guarantees and ‘flat fees’ with its artists. (…) This policy has been in effect at Warner Music since 2009, purposely treating breakage like other digital revenue.”[3] In the same article also a Sony statement is cited that the company shares money from breakage and advances with its artists: “Sony Music historically has shared digital breakage with its artists, and voluntarily credits breakage from all digital services to artist accounts. (…) Under the Sony Music ‘Breakage Policy’, SME shares with its recording artists all unallocated income from advances, non-recoupable payments and minimum revenue guarantees that Sony Music receives under its digital distribution deals. This applies to all revenue under digital catalogue distribution agreements, whether or not the guarantees, advances or ‘flat’ payments can be associated with individual master transactions.”[4] A few day after the MBW-article was published, also a Universal Music Group spokesman confirmed that the company shares “(…) with artists minimum guarantees as well as unrecouped digital advances, where they exist.”[5] However, in a Billboard Magazine guest post, Darius Van Arman, who serves on the boards of the indie trade body A2IM, digital collecting society SoundExchange and indie licensing agency MERLIN critically commented on the majors’ ‘breakage’ policy: “Whereas the majors typically share breakage only when required to do so in their contracts with big artists or larger distributed labels (except for Warner Music Group, who has a more progressive stance and who sometimes volunteers to share breakage).”[6] The authors of the Rethink Music report also question the assurances of the major labels and state: “Our analysis of Universal’s accounting statements (…) show no evidence of the payment of breakage to artists” (Rethink Music, 2015: 16). However, the pros and cons highlight that there is still a need to bring more transparency into the business practices surrounding music streaming.

 

Equity Shares in Streaming Services

Since no streaming service is operated at a profit yet, it is a problem to license the majors’ music catalogues at a market rate. Therefore, labels accept a sub-market rate in exchange for an equity share in the music streaming company. It is reported (Hardy 2013: 285) that the three recorded music majors own 18-20 per cent of Spotify. Since Spotify is currently valued at US $10bn, the majors could cash in US $2bn (US $667m per company) in an initial public offering (IPO) of Spotify. When Beats Music was sold to Apple in 2014, a 13 per cent equity stake of Universal Music’ parent company Vivendi was monetized in a payoff of US $404m.[7] One can doubt if any money of this deal made its way to the Universal artists.

Therefore, the American-Idol affiliated label 19 Recordings recently filed a lawsuit against Sony Music Entertainment. In its complaint 19 Recording claims underpayment of streaming royalties to American Idol artists. In §44 of the complaint the plaintiff points at Sony Music’s equity stake in Spotify: “Sony owns an equity interest in Spotify to be in excess of five percent of the company. Thus, all of Sony’s negotiations with Spotify constitute self-dealing and are not arm’s length transactions. Each of the major record labels also own an interest in Spotify. On information and belief, those other record labels have engaged in the same self-dealing as Sony with respect to the diversion of payments to them, and the below market streaming royalty rates to artists. Together, and individually, Sony and the other major record labels therefore have significant power to exert control over Spotify in order to not only dictate how revenue will be paid, but wrongfully and in bad faith divert money from royalties that must be shared to other forms of revenue that they can keep for themselves.”[8] 19 Recordings claims a compensation of US $20m for damages, the cost of audits and interest.[9] Sony Music Entertainment (SME) countered in an opposition filed a few days later. SME argues that it did not agree “(…) to accept below-market royalty rates from Spotify” and has no obligation to share non-attributable income with the other parties, which contradicts Sony Music’s statement on its “breakage” policy cited above. And above all, a five per cent share in Spotify does not constitute a significant power to exert control over Spotify in order to dictate how revenue will be paid.[10] Therefore, the equity stake into Spotify does not imply any form of self-dealing. We will see how the court will decide and if out of court agreement of 19 Recordings with SME will be reached.

 

Conculsions

Despite all technological possibilities to track digital music streams at any time in any place on the Net, the money flows has become more obscure than ever before. It is nearly impossible for artists to control if their royalty payments are correct. They have to trust in the music streaming services and record labels reporting. The complex system of licensing different rights and the undisclosed contracts of artists with labels and publishers make it nearly impossible to assess how much money ends up with the creators and performers. An analysis of royalty statements by the Rethink Music team reveals that the average per stream rate differs between streaming services and is extremely modest.

 

YouTube (ad-supported):                  US $0.00111

Spotify (ad-supported):                     US $0.00121

Spotify Premium (subscription)          US $0.00653

Deezer Premium (subscription)         US $0.01500

Deezer Orange (subscription)           US $0.01508

TIDAL (subscription)                          US $0.01573

 

If an artist wants to earn a monthly minimum wage of US $1,260 in the US, her/his music has to be streamed on Tidal 80,102 times per month, on Spotify Premium 192,956 times per month, on Spotify’s Freemium tier 1,041,322 times per month and on YouTube 1,135,135 times per month. In the case of YouTube this means roughly 13.6m video-streams per year or annually 2.3m streams in the Spotify Premium subscription to earn the US minimum wage.[11]

It is evident that artists cannot afford a living from music streaming yet, but have to rely on other income streams from touring, merchandising, branding, publishing and synchronisation rights and still from record and downloaded music sales. Since the music streaming services suffer from high content acquisition costs and still run at loss, just the record companies, especially the record majors, benefit from the emerging music streaming economy – besides the music consumers who have the world’s music repertory on their fingertips.

 

Sources:

Billboard.biz, “‘We Want to Compete,’ Says Secretly’s Van Arman, Ahead of His Congressional Testimony Tomorrow (Guest Post)”, June 24, 2014 (retrieved 17.07.2015)

Forbes, “Apple Finalizes Beats Deal After Paying Vivendi $404 Million”, August 2, 2014 (retrieved 17.07.2015)

Hardy, Phil, 2013, Download! How the Internet Transformed the Record Business. London etc.: Omnibus Press.

IFPI, 2015, The Recording Industry in Numbers 2014. IFPI: London.

Information Is Beautiful, “Selling Out. How much do music artists earn online?”, April 2015 (retrieved 17.07.2015)

Music Business Worldwide, “Warner pays artists share of Spotify advances… and has for 6 years”, May 29, 2015 (retrieved 17.07.2015).

Music Business Worldwide, “Universal: Yes, we share digital breakage money with our artists”, June 6, 2015 (retrieved 17.07.2015)

Musikmarkt, “Sony Music antwortet auf Spotify-Klage von 19 Recordings”, July 10, 2015 (retrieved 17.07.2015)

New York Times, “Music Publishing Deal Driven by Shift From Sales to Streaming”, July 6, 2015 (retrieved 17.07.2015).

Rethink Music, 2015, “Fair Music: Transparency and Money Flows in the Music Industry”. Boston.

The Hollywood Reporter, “Sony’s Equity Stake in Spotify Challenged in Lawsuit Claiming Artists Are Robbed”, June 24, 2015 (retrieved 17.07.2015)

The Verge, This was Sony Music’s contract with Spotify, May 19, 2015 (retrieved 16.07.2015).

 

Endnotes

[1] In July 2015, the Performing Rights Organisation SESAC, originally representing European stage authors and composers in the US, announced a deal to buy the Mechanical Rights Organisation Harry Fox Agency from National Music Publishers’ Association. This units a PRO and MRO for the first time in the US. See New York Times: “Music Publishing Deal Driven by Shift From Sales to Streaming”, July 6, 2015 (retrieved 17.07.2015).

[2] “Breakage” refers to the practice of deductions by record labels if records are broken during shipment.

[3] Cited in Music Business Worldwide, “Warner pays artists share of Spotify advances… and has for 6 years”, May 29, 2015 (retrieved 17.07.2015).

[4] Ibid.

[5] Cited in Music Business Worldwide, “Universal: Yes, we share digital breakage money with our artists”, June 6, 2015 (retrieved 17.07.2015).

[6] Cited in Billboard.biz, “‘We Want to Compete,’ Says Secretly’s Van Arman, Ahead of His Congressional Testimony Tomorrow (Guest Post)”, June 24, 2014 (retrieved 17.07.2015).

[7] Forbes, “Apple Finalizes Beats Deal After Paying Vivendi $404 Million”, August 2, 2014 (retrieved 17.07.2015).

[8] The complaint of 19 Recordings can be downloaded from The Hollywood Reporter’s article “Sony’s Equity Stake in Spotify Challenged in Lawsuit Claiming Artists Are Robbed”, June 24, 2015 (retrieved 17.07.2015).

[9] Ibid.

[10] See Sony Music Entertainment’s opposition to 19 Recordings complaint in Musikmarkt’s article “Sony Music antwortet auf Spotify-Klage von 19 Recordings”, July 10, 2015 (retrieved 17.07.2015).

[11] Compare to Information Is Beautiful, “Selling Out. How much do music artists earn online?”, April 2015 (retrieved 17.07.2015).