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Dissecting The Streaming Inquiry #08: Royalty chains

By Chris Cooke | Published on Wednesday 3 February 2021

We are currently reviewing and dissecting submissions made to the UK Parliament’s ongoing inquiry into the economics of streaming.

Based on the five years of research CMU Insights has undertaken with the Music Managers Forum as part of the ‘Dissecting The Digital Dollar’ project, we explain the background to the key debates, helping you navigate and understand each issue and the proposed solutions.

The most recent phase of the ‘Digital Dollar’ project has put the spotlight on songwriter royalties and the complex royalty chains that songwriter payments from streaming services often flow down. This is important because delays, disputes and deductions that occur on these often mysterious royalty chains can impact how much a songwriter earns from their streams and how soon they get paid.

The debate continues, of course, as to how much of the digital pie should be allocated to the song rights. Currently 50-55% of streaming income is allocated to recording rights and only 10-15% to song rights. Some people argue that the digital pie needs re-slicing, so that less goes to the recording and more goes to the song.

However, there has already been a re-slicing of the pie during the shift from selling discs to monetising streams. In the UK, the song royalty on a disc is 8.5% of the wholesale price of the CD or 6.5% of the retail price. The song royalty on a stream is up to 15% of the retail price of a subscription, ie more than double.

Now, a much more significant re-slicing of the pie may still be required. But if the share allocated to the song on a stream is more than double that on a CD, and with streaming revenues having been booming for five years now, why do so many songwriters say they are yet to see any financial benefit from the streaming market?

There are various factors at play here, but a key factor is the complex royalty chains through which streaming money flows. How much money is lost to commissions and fees as it flows down the chains? How much money is stuck in the system because of disputes over rights ownership? And how much money ends up in the black box – distributed based on market share – because of bad data?

There are two main reasons the song royalty chains in streaming are so complex.

First reason. A stream exploits both the mechanical rights and the performing rights of the copyright. In Anglo-American markets, the music publishers control the mechanical rights and the collecting societies control the performing rights. As a streaming service needs a licence for both, how should the music industry handle the licensing of songs?

Should the publishers license the mechanical rights and the societies the performing rights, meaning the service needs two sets of deals?

Or should the publishers allow the societies to include their mechanical rights in with the deals those societies negotiate? In the UK, this would mean the publishers allowing mechanical rights collecting society MCPS to license streaming services, and then MCPS allowing PRS to including those rights in its streaming deals.

Another option would be for the societies to allow the publishers to include the performing rights in deals the publishers directly negotiate.

Although, industry convention dictates that writers should always receive their share of performing rights income through the collective licensing system. So in this scenario, the publishers and societies need to form joint ventures – called special purpose vehicles – so that the writer’s share of performing rights money never hits the publisher’s bank account.

At the moment all three of those options are employed, depending on the repertoire and the country. Which approach is employed then dictates what route a songwriter’s royalties take – ie what entities that money passes through between service and writer.

Most songwriters are unaware of what approach or approaches are being employed with their songs and therefore what royalty chains their money flows down.

Second reason. Music publishing was traditionally a very territorial business.

Collecting societies traditionally only issued licences in their home countries, allowing other societies to represent their repertoires in other markets. And many music publishers would allow other publishers to rep their catalogues in other countries where they didn’t have their own base and/or were not a direct member of the local collecting society.

But streaming is a global business. A UK society or publisher can have a global relationship with a service like Spotify. And yet, in many countries, a local collecting society and/or sub-publisher may still collect streaming royalties due in that market.

This may be because of existing reciprocal deals or sub-publishing agreements that give those other societies and publishers a right to collect. Or it might be the result of copyright law or collecting society rules in those other countries. Or it might be for other practical reasons.

Either way, while many societies and publishers do now work directly with streaming services in multiple and possibly many markets, there are likely other countries – including some of the biggest music markets and fastest growing emerging markets – where local societies or sub-publishers are also involved. This puts extra links in the royalty chain.

The more royalty chains in play – and the more links in those chains – the longer it will take for a songwriter to get paid, the more monies will be deducted along the way, and the higher chance of money getting stuck or lost.

Now, both collecting societies and music publishers have been working to simply all this as the streaming market has evolved. Sometimes that has worked. Sometimes it has actually made things even more complicated.

From a songwriter perspective, the real issue here is transparency again. It is really hard for songwriters – and their managers – to understand what royalty chains are being employed by their publisher and society; what impact that has on the royalties they receive; and how switching to another publisher or another society might save money and get them paid quicker.

All of this is explained in much more detail in the Music Managers Forum’s ‘Song Royalties Guide’. And, unsurprisingly, this particular issue is a key feature of the submission made to the select committee’s inquiry by the MMF and the Featured Artists Coalition.

MMF and FAC make a number of specific recommendations for addressing the royalty chain issues.

“All music publishers and collecting societies”, they write, “should publish royalty chain information for all services in all countries, explaining what delays and deductions occur at each link of the chain so we can see how much money is flowing through the system and how much is leaking out in admin payments”.

Publishers and collecting societies should also “seek to do truly global licensing deals – which are not currently the norm – so that the royalty chains are the same for each service on a global basis. This reduces the number of chains and the number of links in the chains”.

The MMF/FAC submission also talks about the music right data issues we summarised in a previous report. With no global, authoritative, publicly accessible, real time database of music rights ownership information, the streaming services cannot identify what song is contained in each recording, let alone who owns and controls that song.

Identifying the song and ownership of that song therefore falls to whatever entity is the first link in any one royalty chain. The songwriter often doesn’t have a direct connection with that entity or even know what that entity is. The music rights data problem, therefore, exacerbates the royalty chain problem, and the royalty chain problem exacerbates the music rights data problem.

Are the right songs being matched to each recording? Are the correct owners being identified? What if two entities both claim to control 60% of the same song? And, if songs – or the owners of a song – can’t be identified, what happens to the money due to that song and those songwriters once it has slipped into the infamous ‘black box’.

MMF/FAC have further recommendations in this domain.

“Collecting societies should routinely share data they hold relating to what songs are contained in what recordings, and who controls each song in each country”, they say.

Also, “streaming services, collecting societies and music publishers should have systems in place to alert artists and their managers to any data conflicts in the system which could result in payments being halted”.

And finally, “royalties that cannot be accurately allocated to specific songs should be used to fund data, educational and grassroots initiatives, rather than rewarding corporates and superstars who have already claimed, or should have claimed, all their royalties, thus motivating those corporates and superstars to tolerate a broken system”.

You can follow all our coverage of the Parliamentary inquiry into the economics of streaming via this CMU timeline here.