Streaming ahead in the music industry

The way we consume music is changing. According toUK music weekly NME, online music streaming behaviour doubled in 2013, while CD sales continue to fall. Billboard has reported that even digital downloads are on the decline as support grows for streaming services that promise any music, anywhere, at any time.

According to music streaming service Spotify, the global value of the recorded music industry has been falling steadily, from more than $25 billion in 1997 to less than $20 billion in 2013, as music consumers opt for formats that simply aren’t generating significant revenues for artists.

Streaming services including Spotify and personalised radio service Pandora have been criticised by some musicians for the amounts they pay artists and songwriters. Artists will receive royalties of between $0.00600 and $0.00840 per stream from Spotify, while Pandora pays $0.00137. For comparison, an artist will earn about about about £1.25 per £8 ($2 per $13) in the UK CD album sold.

Meanwhile, some artists complain that they’re not getting their fair share of revenues. But is it fair to blame the streaming services? Such is the digital music copyright licensing structure that despite their growing popularity, streaming services aren’t enjoying great revenues either.

French streaming service Deezer has five million users, and first became profitable in 2010, three years after its launch. Mark Foster, managing director of the company’s UK & Ireland arm, says it is now re-investing in its global expansion, with a view to returning to global profitability once again in 2014. Clearly, it’s a tough business to be in.

“We need the support of the streaming industry, and we all need to work with them to ensure that there’s enough revenue in the value chain to remunerate artists fairly, but also to leave enough margin to allow digital music companies to be sustainable,” Foster says.

How licensing works

Every song is protected by two types of copyright: one for the musical composition, which is held by the publishing company, and another for the sound recording, typically owned by the record label.

Paul Fakler, a partner at Arent Fox LLP in New York, says digital and analogue music services are treated differently in the US when songs are licensed. Terrestrial radio stations, for example, have to pay only the publisher, but radio stations with a digital service will have to pay both the publisher and the record label.

Similarly, non-interactive online music services, which mimic a radio broadcast and have very little user interaction, have to clear the copyright with both the publisher and the record label.

There’s a compulsory statutory licence for these non-interactive services, Fakler explains, where the rates have already been set. Interactive services that allow the user to choose what they’d like to listen to, such as on-demand streaming services, are excluded from the statutory licence. They have to negotiate with each of the record labels that own the copyright, which can be very expensive.

“The record labels essentially have absolute power in these negotiations and they can demand whatever they want,” Fakler says. He estimates that most digital services in the US pay 5 to 10 percent of their revenue to the music publishers, and between 50 and 65 percent to the record companies.

The situation is similar in the UK, where about 10 percent of revenues will go to the publishers, with 60 percent paid out to the record labels.

A tough marketplace

This licensing structure has seen off at least one start-up.

Launched in January 2011 and backed by Lady Gaga’s then-manager Troy Carter, and musician Questlove, social media platform turntable.fm turned its users into DJs who could broadcast their favourite tunes to other users in virtual ‘rooms’, all in real time.

It boasted a catalogue of more than 11 million tracks, and in the beginning, while having no licensing deals in place, kept everything above board by complying with the rules of the Digital Millennium Copyright Act.

By July 2011, turntable.fm had gone ‘legit’, signing licensing agreements with music publishers ASCAP and BMI. In March 2012 it announced that it had made deals with Universal, Sony, Warner and EMI, the four record major labels in the US (EMI has since been absorbed into the other three).

However, by December 2013, turntable.fm had to close its doors for good. “The cost of running a music service has been too expensive and we can’t outpace it with our efforts to monetise it and cut costs,” said the site’s administrators.

The service was undoubtedly innovative and popular with music enthusiasts—more than 400 million songs had been played in one million ‘rooms’ at the time of its demise—so why did it fail?

“They had a really amazing product,” says Gregor Pryor, a partner at Reed Smith LLP in London. “They weren’t too late to enter the market—they had a very compelling music experience—but the business (costs) didn’t stack up. The royalties were too high.”

Does turntable.fm’s fate point to a flaw in the licensing structure that means streaming services will always struggle to make money?

“The question is: are they making enough money in the first place?” Pryor says.

“Are they selling enough advertising and doing enough to monetise the content? And is £9.99 for a monthly subscription the right price point? I know some people would argue it’s far too cheap; I know others who would say it’s far too expensive.”

Most, if not all, streaming and download services would say that the royalties are too high, he adds. “There’s not a huge amount of margin … there’s what the consumer is prepared to pay and what the artist expects to be paid, and they’re often very different.”

However, Pryor says that the amount a songwriter can expect per stream far exceeds the royalties they receive per play on commercial radio.

“The economics of digital are far superior to the economics of tangible, good old-fashioned terrestrial radio. Digital, on a per user basis, is massively more remunerative to songwriters and artists than commercial radio.”

Futureproofing

If digital steaming services represent the future of how we consume music, and hold the potential to reimburse musicians in a fairer way, they’re going to need better protection on a governmental level.

In November last year, the European parliament (EP) and Council agreed on a directive that would make it possible for online music providers to get licences in countries across the EU, instead of negotiating with different organisations in each EU member state for national licences.

The directive would boost the creation of EU-wide music services, better protect the rights of creators and ensure that they receive royalty payments more quickly.

EP rapporteur Marielle Gallo said the new piece of legislation “clearly demonstrates that copyright can be easily adapted to the digital era”.

Sarah Byrt, a partner at Mayer Brown LLP in London, says negotiating rights in individual member states “makes little sense in today’s digital world”.

“These changes herald a revolution in the way that music licensing works and that new business models and new players will emerge,” she says.

“This should be better for rights owners, in that anything which makes licensing easier should in principle help reduce piracy, and in that making collecting societies more accountable to members should help maximise efficiency and royalties.”

Angus McLean, a managing associate at Simmons & Simmons LLP in London, says support for improvements in the area at a senior European level is a positive development. Such a directive will make licensing music for online platforms more transparent and democratic in the EU. But what about the wider picture?

Pryor says that in order to reach a solution for fixing a structure that doesn’t work for the artists or the service providers, we must first agree that there’s a problem: the songwriters’ concerns are not the same as those of the streaming service providers.

“I don’t think there’s any silver bullet that’s going to solve a straightforward commercial tension,” he says.

“Here’s where the problem lies: people don’t buy CDs any more. As people aren’t buying CDs, and piracy has taken such a huge amount of money off the table, there’s just less to go around. That’s the reality of it.”

Gina Durham, partner and DLA Piper LLP in San Francisco, says: “The industry is in flux—it’s difficult to point to one solution.

“Certainly players in the industry would say a government-supervised statutory licence would be a right solution, as there’s a public need for it. There should be some control on royalty rates that enables these types of services.

“However, others will say that this kind of situation will not fully recognise the contribution of the copyright holder. There’s still a lot of dispute, mostly because the revenue models aren’t necessarily born out in the industry and there are so many moving parts.”

Fakler says the rates demanded by the record labels are simply too high, and that things will change only when this is addressed: “The royalties scale up when the customers scale up—it’s not like a fixed cost.”

One thing is certain: online music streaming isn’t going anywhere, but is reaching a point where the royalties structure isn’t going to sustain itself for much longer, even as the EU proposes improvements to the structure. But as we’ve all got used to paying a certain price for the music, one of the main challenges is changing the model while keeping the music affordable so that consumers don’t start heading for illegitimate platforms.

With so many parties wanting a big slice of the same pie, something’s got to give.