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Insights Blog: Top five facts about digital licensing

By | Published on Wednesday 2 November 2016

Digital Marketing

Originally published to accompany the CMU Insights masterclass and primer course on digital licensing and the streaming business.

Streaming is rapidly becoming the single biggest revenue stream for the recorded music market. But do artists and songwriters, and their representatives – really understand how the licensing model works in the streaming domain – and how their royalties are calculated?

Streaming is a very different business to selling CDs and downloads, and the way services are licensed is complex, but it’s important everyone understands the basics about how things work. That’s why the UK’s Music Managers Forum commissioned CMU Insights to produce the ‘Dissecting The Digital Dollar’ reports to explain how digital licensing works and explore the issues with the current model.

You can access the Digital Dollar reports and guides here. But to get you started, here are the top five facts about digital licensing.

1. Labels and publishers license separately
With CDs, the record label usually owns the sound recording copyright, and then gets a licence from the relevant publishers (usually via the collective licensing system) to cover the separate song copyright. So the record shop gets its plastic discs ‘rights ready’ and doesn’t have to worry about licensing. With streaming, the digital service provider needs to get a licence to cover the label’s sound recording rights, but that doesn’t include permission to exploit the song rights. So it then needs to get a separate licence from the publishers (again, usually, though not always, via the collective licensing system) to have both sets of music rights sorted.

2. Streams exploit both the reproduction and performing rights of the copyright
Copyright law provides the copyright owner with a number of ‘controls’ over their content. The music industry often combines the ‘reproduction’ and ‘distribution’ controls and calls them the ‘reproduction’ or ‘mechanical’ rights. It then combines the ‘performance’ and ‘communication’ controls and calls them the ‘performing’ or ‘neighbouring’ rights. When you release a CD you just exploit the reproduction rights. A radio broadcast just exploits the performing rights. But a stream exploits both at the same time. This is particularly important on the publishing side, because in some countries the two elements of the song copyright are licensed separately, so the DSP might need two licences just to cover the song rights.

3. But that doesn’t mean Performer ER is paid
Copyright law also provides a number of ‘performer rights’ for recording artists, which apply even when the artist doesn’t own the copyright in a sound recording on which they appear (which is frequently the case). The key performer right is the right to ‘equitable remuneration’ when the ‘performing rights’ of the sound recording copyright are exploited. This means that, on this income stream, performers are paid an industry standard share of the money (50% is shared between the performers), rather than a share prescribed by their record contract. Now, you might think that, given a stream exploits the performing right, Performer ER should be due on at least some of the streaming income. But in the main the labels say “no”, by arguing that a stream actually exploits the ‘making available’ control, a sub-set of the ‘communication’ control, on which ER isn’t paid. Though not everyone agrees about that and this is currently a topic of much debate in the artist community.

4. The core streaming deal is revenue share based on consumption share
So, at the end of each month the DSP takes all the money it has earned and puts in on the table. It then works out how many tracks were streamed overall, and of those streams, how many were of recordings controlled by Label X. If it’s 10%, it then allocates 10% of its revenues to that label. It will then share that chunk of cash with the label, normally giving the rights owner 55-60% of the money. It then repeats that exercise with every rights owner, paying labels 55-60% of monies allocated to their catalogue, and publishers 10-15%. The DSP hopes that at the end of the process it is left with about 30% of the money. Though on top of the revenue share arrangement the DSP is likely also paying out certain ‘minimum guarantees’ to the labels and publishers, which often exceed the revenue share sums, and can eat heavily into the DSP’s 30%.

5. Key element of key deals are generally a secret
I can tell you how most streaming deals are structured – hey, I just did – but I can’t tell you the specifics of each deal, ie what the revenue share arrangement is, what kinds of minimum guarantees are being paid, whether the label or publisher got any advances or equity, and whether they charged the DSP any fees for IT, admin or legal work. More importantly, if an artist or songwriter asks their label, publisher or collecting society for that information, they are often told that they can’t have it because of NDAs in the contracts with the streaming firms and/or competition law concerns. Which means the beneficiaries of music copyright aren’t allowed to know how the copyrights from which they benefit are being exploited. Which makes it hard to audit the artists/songwriter’s royalty payments, and even harder to work out which labels, publishers, societies and – crucially – streaming services offer the best deals. In the roundtables on which ‘Dissecting The Digital Dollar Part Two’ is based, this was raised as the single biggest issue in the streaming domain.

For more details on the CMU Insights seminars and masterclasses click here. For more information on our in-house training services click here.