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Understanding the economics of streaming in the digital age

I recently read Sammy Andrews’ dissection of the DCMS committee inquiry into the economics of streaming, which inspired me to finally get my head around the economics of streaming in our digital age. She identified 7 grey areas within the industry that require closer attention when attempting to navigate the royalties debate. Here I elaborate on Andrews’ poignant thoughts.

‘Personally, my concern is that, unless key stakeholders align on something achievable, there is a danger of an unseemly slanging match that leaves our industry looking like squabbling children in the digital playground. However, it’s necessary that these issues are aired publicly, in the hope that a forensic exploration might lead to significant progress.’

Sammy Andrews (Source: Music Week)

1. Black box income & accounting transparency

What is ‘black box’ income? These are the royalties named to a publisher or writer have not been claimed as they cannot be traced by a collection society. Additionally, writers who are owed royalties but cannot be found are known as ‘lost’ writers. The lack of clarity engulfing these royalties allows stakeholders to once again manipulate and continue profiting. Andrews emphasizes the importance of investigating the opacity and quality of data.

2. A new national Copyright Directive

Back in March, after years of campaigning for the infamous Article 13 from the likes of CISAC, Sir Paul McCartney and even a cover of Snow Patrol’s Just Say Yes from Crispin Hunt, MEPs voted in the EU Copyright Directive. Finally the monumental ‘value gap’ (the massive inequality of remuneration between upload platforms and DSPs, eg. YouTube versus Spotify) is being addressed in the EU. Axel Voss, the MEP encouraging the proposal, highlighted the importance of addressing how legislation should be evolving with global digital transformation, ‘this is a decisive issue, namely to what extent can we translate our concept of copyright into a digital age’ (source Music Week).

But there are concerns that the EU Copyright Directive sits on the shoulders of certain tech platforms and not getting close enough to squeezing shut that ‘value gap’. Brexit is seeing MPs to break away from the European mold and with their announcement that they have no plans to implement the EU legislation could they be giving us a UK Copyright Directive? We certainly hope so!

3. Equitable remuneration

Equitable remuneration are royalties that must be legally paid when recorded music is played on a publicly accessible location. This is remuneration proposed for the public use of the music repertoire of artists/producers. When recorded music is made public, the law requires that a remuneration must be paid. As equitable remuneration is similar to a tax it owes no reference to label contract, royalty rate or recoupment status, and performing artists are paid for broadcast.

Andrews draws us to how this does not quite work so smoothly with streaming services as these tend to be licensed directly and paid according to their own contracts. Rightly so, artists are voicing the need of equivalent remuneration rights for where music is not accessed ‘on demand’ on streaming services as DSPs are rising to radio status and becoming a broadcasting service in their own right.

4. Digital royalty rates for legacy artists

Heritage artists are receiving increasingly lower royalty rates which fail to collate to the digital age, their rates are applicable to the days when primary income was generated from CDs and vinyl. Another issue is recoupment.

For those not in the know, recoupment is the repayment of advances, recording costs and other expenses by an artist to their record company from the artist’s royalties. For example, if an artist is given a £50,000 advance in their contract and has recording/video costs of £200,000, then £250,000 will be recouped from the artist’s royalties. Generally, the artist will not accumulate any royalties until expenses have been recouped. For legacy artists, old expenditure is often still being recouped from royalties.

Andrews states that notable exceptions exist, particularly in the thriving indie label world or where an artist has renegotiated. The main problem here, as with so many other areas of the complex streaming model, is a failure to reach an agreement on a consistent policy throughout the industry.

5. Who owns what?

Major labels need to be held accountable for their equity stakes in services as well as those stakes acquired by companies owing to multiple rights holders. While the main form of compensation majors receive from streaming services is revenue based on actual streams, there are from digital services from which they receive additional forms of compensation - there is little transparency surrounding profits made by majors from their equity in digital services. Andrews notes the concerns around future deals and how distant these may be from honest profits.

6. User-centric vs pro rata market share payouts

There are endless unanswered questions surrounding user-centric payouts. What are they? These payouts are an alternative method of distributing streaming royalties to the current pro rata system.

In the pro rata model, revenues from all music by the artist are put together per month and shared between individual tracks according to the number of total streams. God forbid getting into maths but here’s a little calculation:

Total number of streams Track A

-------------------------------------------- X Total revenue

Total number of artist streams

The user’s monthly fees generate a total amount, from which the money is distributed in proportion to all listening times. The model, therefore, favors the rights holders of the most listened to tracks. However, in the user-centric model, the calculation is based on the listening habits of each individual user:

Total number of streams Track A listened by User 1

---------------------------------------------------------------------- X Total revenue

Total number of artist streams by User 1

The rights holder’s compensation is based on the number of listening times of an individual user - how many different tracks the user is listening to and how many times. Compared to the pro rata model, the user-centric method would, in principle, increase the compensation of the rights holders of less listened to tracks on the DSP as a whole.

For pro rata, if an artist got 2% of all streams on Spotify in that period, then his rights holders would get 2% of the royalties pool. This means that 2% of generated royalties by each individual subscriber are going to this particular artist even if they did not listen to them at all. However, for user-centric, the royalties amounted from their subscription are divided among the rights holders ONLY if they listen to the artist.

Research and testing of user-centric method to understand its impact on artists and labels has been taking place for a while, the most significant study being carried out by the Finnish Musicians’ Union based on data provided by Spotify, but this has not been done at a large enough scope for artists.

Deezer has attempted a move to a user-centric model but there are suggestions that movement has not progressed due to some of the rights-holders they are licensing from. Other DSPs are less enthusiastic as they are accountable to pay no matter which model is in place.

7. Global one-stop licensing

According to Andrews, global one-stop licensing is ‘another big, fat elephant in a room full of big, fat elephants!’ (Source Music Week).

If a piece of music has a ‘one-stop’ clearance, this means anyone who is wanting to licence a track only has to contact one party to clear both the Master and Publishing Rights. Global one-stop agreements tackle the problems that traditional licensing schemes have faced in light of digital advancement, particularly the impossibility to limit digital services by the notion of territoriality. These agreements seek to adapt the traditional licencing framework to the digital age by allowing each of the participating rights holders to grant ‘one-stop shop’ copyright licenses.

Evidently, attempting to establish a common and fair ground in terms of royalties with global one-stop licenses is more than difficult.

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