The ability to house data on the Internet and access it from anywhere online has revolutionized our ideas about the “ownership” and use of music. The increasing, nearly ubiquitous use of Cloud computing allows a large number of users to share one set of information.
Throw “cloud computing” into your mental blender and you start to realize it changes the fundamental behavior of buying and listening to music. Instead of choosing to purchase specific songs, one gets connected to the entire music universe accessible via a variety of devices such as a mobile phone, tablet, or a desktop computer.
Streaming music from the cloud is now the fastest growing segment of the music industry, with many predicting a 40% increase in the use of streaming services next year. But it is also the most complicated with respect to understanding streaming royalties and business models.
Music companies that stream fall into two basic groups—Webcaster or Interactive/On-Demand. Each has different royalty rules and fees. Interactive entities such as Spotify allow consumers to choose exactly the song they wish to hear. Webcaster companies, like Pandora or iHeart Radio, offer channels that may be customized, but not precisely programmed. For the sake of simplicity, we save the discussion of “cloud locker” models for a later date.
Radio-style Webcasters pay royalties to Label/Artists and Publisher/Songwriters and have various statutory rates to fit their precise model. As long as the Webcaster pays the proper fees they do not need additional permissions. The Label/Artist fees are collected by Sound Exchange and then distributed according to a government-mandated formula, which says 50%, go to labels, 45% to artists and 5% to musicians. The Publisher/Songwriter fees are collected by the Performing Rights Organizations (PROs), or in some cases by individual Publishers.
This process seems pretty direct, however there are a few caveats. For example, if the streaming entity also has a terrestrial radio component (iHeart Radio) they are allowed to pay a lower Label/Artist royalty rate. The radio exception is what led online-only Pandora to recently purchase a terrestrial station in hopes of qualifying to pay lower royalties.
On the Publisher/Songwriter side the rate is approximately 4% of revenues. Some publishers have elected to withdraw from the PRO blanket licenses in hopes of negotiating a better deal. Earlier this year Sony/ATV was able to leverage its tremendous catalog and reportedly secure a 5% rate for its copyrights. This of course has led to other large publishers doing the same.
Interactive streaming requires more setup to get started because, other than Sound Exchange Performance Royalties, there is not a statutory license for the sound recording, only for the songwriter copyright. Therefore new companies must obtain copyright permission and negotiate with each label before they can launch. This process is expensive, time consuming and usually involves advances to labels.
Once agreed upon, the Label/Artist payments represent a blended rate of mechanical revenues, which is collected by the Label with the Performance Royalty collected by Sound Exchange. These monies are then distributed to the Artists, labels and musicians.
The publishing side is also a complex process compared to physical product and straight downloads, but is made easier because there is a statutory rate. These performance revenues are collected by PROs or direct licensing publisher and sent on to Publishers and Songwriters. Harry Fox and other administrators collect the mechanical portion of the overall Publisher/Songwriter streams based on a three-tired formula, which determines the mechanical royalty component.
These flow charts help to identify the basic money trails, but there is a plethora of underlying factors which greatly complicates the process. For example, each of the Interactive companies negotiates a different non-public deal obscuring most attempts to quantify earnings. As a result it becomes extremely difficult to project exact per stream payouts. Rates are generally fractions of pennies and so there can be a large amount of micro-penny computations to define a disproportionately small amount of revenue. And finally, companies such as Spotify, for example, generate different payouts per stream for its paid subscribers vs. its free ad-supported users.
While most music industry observers seem to agree that streaming, aka the “access” model is “the next big thing,” they also agree that its licensing and royalty process neither earns fair compensation for creators nor supports and encourages business. Clearly the system needs updating. Many experts ask why, in fact, do we even cling to terms like mechanical and performance when dealing with digital streaming? Why not simply collect one unified royalty and divide it fairly amongst the creators? Change is complicated because in the process there are many legal and legislative constructs in place.
According to the RIAA, the retail value of the U.S. music industry has contracted from about $14 billion in 1999 to $7 billion in 2012. Currently there are about 6 million U.S. paid subscribers across all the streaming companies and Sound Exchange is expected to distribute to rights holders approximately $425 million this year. Clearly this new distribution technology has a long way to go in finding how to best attract consumers and fairly remunerate creators and music industry investors. Being informed about how it works is the first step in finding a solution. If you have any questions send them to firstname.lastname@example.org or email@example.com.
Steve Bogard was, until recently, the longest serving President of the Board of Directors in the history of the Nashville Songwriter’s Association International, the world’s largest not-for-profit songwriter advocacy group. He is now Director of The Copyright Forum and an active Professional Songwriter. www.stevebogard.com
David M. Ross is a media and music industry entrepreneur, heads BossRoss Media and serves as VP Marketing for HitShop Records. His most recent book, Secrets Of The List is available on Amazon. He is the founder of Nashville’s MusicRow magazine. @davidmross