CMU Trends

Trends: Five contenders for music’s enemy number one – update!

By | Published on Friday 12 January 2018

YouTube

A year ago, CMU Trends identified five contenders for enemy number one of the music industry. This week we review what has happened in the subsequent twelve months, and ask whether relations between the music community and its potential enemies improved or worsened in 2017.

1. YOUTUBE
It didn’t feel like much changed during 2017 when it came to the music industry’s ever strained relations with the world’s biggest streaming platform. ‘Safe harbour’ and the ‘value gap’ still topped the lobbying agenda of the music business, while its trade bodies publicly sparred with the former record industry exec hired by YouTube to build some bridges. Though behind the scenes negotiations continued regarding new licensing deals and, as the year ended, Universal Music boss Lucian Grainge said that the outcome of those talks constituted an “important step forward”.

YouTube has been a top contender for enemy number one of the music industry for a few years now. Despite it having licensing deals in place with most music companies. And despite most artists maintaining active channels on the video platform. And despite YouTube being a key marketing channel for many record labels. And a key route to market for Vevo, the music video service owned by Sony Music and Universal Music.

But the music industry doesn’t like its deals with YouTube, which are much less lucrative than its deals with Spotify and Apple Music, even though arguably the Google-owned video site and the audio streaming services are in direct competition. Why did the music industry sign up to deals it didn’t like? Because YouTube is an opt-out streaming service, a set-up enabled by the so called safe harbour. That reduces the strength of the music industry’s negotiating hand, hence all the lobbying for safe harbour reform.

That safe harbour – which originates in copyright law in the US and an e-commerce directive in the European Union – says that internet companies cannot be held liable for copyright infringement when their customers use their servers and networks to distribute copyright material without licence, provided said net firms give rights owners a system via which to remove infringing content.

Originally intended for internet service providers and server hosting companies, the safe harbours are also used by user-upload platforms which routinely host publicly available content without the permission of the relevant copyright owners. Said rights owners could only sue said user-upload platforms if they failed to operate some kind of takedown system, the specifics of which aren’t particularly well defined in the law.

The music industry argues that user-upload platforms – or at least some kinds of user-upload platforms – should not qualify for safe harbour protection, and that instead these services should be obliged to ensure themselves that they do not stream unlicensed content, rather than providing some kind of takedown system and then pushing that obligation onto the copyright owner.

If YouTube could no longer rely on the safe harbour, the music industry would have a stronger negotiating hand.

Currently, if a record company walks away from YouTube negotiations, it still has to take responsibility for removing every user-uploaded video containing its music. YouTube’s Content ID system helps with that process, but it still requires effort on the record company’s part. So, better to do a mediocre deal with the Google company, so at least your interactions with the Content ID system result in a share of ad income to help pay for your efforts.

But without safe harbour, it would become YouTube’s responsibility to remove every user-uploaded video containing the record company’s music. Which would mean that, either, YouTube would need to make Content ID much more efficient, or it would likely agree to more of the record company’s demands in order to ensure it had an active licensing deal in place to avoid any liability for copyright infringement. Or both.

Although the US Copyright Office began a review of the safe harbour contained in American copyright law at the very end of 2015, there has been no real progress there. However, in the European Union a new copyright directive is being written, and in 2016 the music industry managed to get an article inserted into the first draft of that proposed new legislation restricting the safe harbour and increasing the liabilities of user-upload sites.

But the law-making process is slow-going, and law-makers in Brussels spent all of 2017 debating the copyright directive. A significant number of amendments to the wider proposals have been made, and they are still to be voted on. The safe harbour clause in the first draft of the directive seems sufficiently ambiguous that it could provide YouTube a get out, so the music industry really needs to have that article beefed up. YouTube, meanwhile, is trying to get it further watered down.

Though, at a panel discussion on safe harbour reform at Midem in June, representatives of the record companies and the song right collecting societies argued that, even if the safe harbour clause was passed in its current form, they felt that clarifications contained in the directive’s preamble already helped their cause. And could be helpful the next time YouTube’s copyright liabilities are tested in an EU member state court.

Which may or may not be true. Either way, we await to see what the final draft of the directive says about safe harbour, and how useful that long-awaited safe harbour reform proves to be.

Meanwhile, throughout 2017 the music industry continued to frequently and loudly bemoan the ‘value gap’ between the royalties paid by opt-in streaming services like Spotify and opt-out services like YouTube. The recorded music business is very much back in growth, the labels would say, but revenues are still much much lower today than at the peak of the CD boom, and the ‘value gap’ is hindering the industry’s bid to return to its former glories.

Though record industry veteran and now YouTube music chief Lyor Cohen insisted that his new employer was actually helping in that bid to return to former glories. The problem, he reckoned, was that the record companies had given up on ad-funded streaming too quickly because, in the short term, premium subscription income was fuelling growth. But, he argued, long-term success required both ad-funded and paid-for services, and YouTube is an industry-leader when it comes to the former.

“Some think ads are the death of the music industry”, Cohen wrote in a blog post in August. “Ads are not death … my time at YouTube has me convinced that advertising is another powerful source of growth for the industry. YouTube’s ads hustle has already brought over a billion dollars in twelve months to the industry and it’s growing rapidly”. Though, he added, YouTube wasn’t only in the advertising game, what with its YouTube Red subscription service now active in multiple markets.

The music industry did not concur. Various trade groups responded with their own blog posts disputing Cohen’s maths and insisting YouTube was the problem not the solution.

In the words of Cary Sherman, boss of the Recording Industry Association Of America: “We are pleased that Lyor Cohen says he is making it his mission to direct some of YouTube’s revenues back to the music creators who drive its success. His optimism is encouraging. But to be honest, we’ve heard pretty much the same claims and arguments from YouTube before. So while Lyor’s heart may be in the right place, the numbers and YouTube’s actions tell a different story”.

Meanwhile, behind the scenes, talks continued between YouTube and the majors who were negotiating new licensing deals. Though when Cohen’s former employer Warner Music signed a new YouTube contract in May, the best the company’s CEO Stephen Cooper could say about the new deal was that at least it would run for a shorter time period than usual. He told employees: “We secured the best possible deals under very difficult circumstances. Our new deals are also shorter than usual, giving us more options in the future”.

So why, by December, was Universal chief Grainge able to be a little more optimistic when announcing his company’s new YouTube contract? Possibly because plans had progressed for Google to launch a new standalone paid-for music service under the YouTube brand that will be heavily promoted across the video platform.

Because as Cohen had noted in his August blog, the record companies are much bigger fans of paid-for streaming than ad-funded streaming, preferring it when the latter can be used as an up-sell platform to sign-up more customers to the former.

YouTube had plans to launch a standalone paid-for music service once before, but that service – YouTube Music Key – was morphed into the aforementioned YouTube Red, a subscription offer across the whole video site that has had only limited success.

But, insiders say, in 2018 YouTube will have another go at launching a subscription music product and, if the Google company can persuade at least some people to start paying for music on its platform, then that could placate the music industry. Making the record labels, music publishers and collecting societies less likely to try and test any reformed safe harbour in the European courts so to increase YouTube’s copyright liabilities.

But it remains to be seen what that standalone YouTube music product looks like and whether Google can actually persuade anyone to buy it. If it works, YouTube could return to being a friend rather than a foe of the music business. But in the meantime, despite Grainge’s “important step” remark, it seems likely that the music industry’s lobbyists will continue to fight in Europe for the strongest possible safe harbour reform, while continuing to bemoan the ‘value gap’ at every possible opportunity.

2. FACEBOOK
A year ago we noted that, if anything could take the heat off YouTube in 2017, it might be fellow safe harbour dweller Facebook. The social network had been pushing into video for some time and many of those videos contain music, yet Facebook – unlike YouTube – had no licensing deals at all with the music industry.

Though, with a few notable exceptions, the music industry was much less critical of Facebook in 2017. There were various reasons for this.

First, Facebook was busy negotiating its first ever licences from the music industry and – rumour has it – the promise of mega-bucks advances was being used to sweeten the deal. Everyone loves mega-bucks advances, especially from companies who previously paid you nothing, because that’s an immediate significant boost to your bottom line.

Second, music industry execs don’t see Facebook as a Spotify competitor in the same way they see YouTube as a Spotify competitor. Plenty of people go to YouTube to browse for specific tracks, and then set up playlists of music videos, press play and use the video website as if it was an audio streaming service. People tend to consume videos on Facebook when they pop up in their news feed, rather than browsing for and selecting specific content. Facebook should obviously be paying for the music its exploits, but that exploitation isn’t directly hindering the growth of subscription streaming.

And third, beyond safe harbour, YouTube’s negotiating hand is also strengthened by the fact it’s such a good marketing channel for labels. Even if a record company could remove all its music off YouTube with the single click of a button, would they really do it, given its own marketers rely on the video site to reach and engage fans? Though Facebook’s big push into video has meant that the music industry now has an alternative marketing channel to employ. Which potentially weakens YouTube’s position.

All of which means that, although Facebook exploits the exact same safe harbour as YouTube, while having no licensing deals in place, and paying no royalties into the music industry, the record companies and music publishers have tended not to publicly insult the social network. And that trend continued in 2017.

And then, as the year ended, the first of those licensing deals – with Universal Music – was announced. And subsequently Sony/ATV, Kobalt and US collecting societies SESAC and GMR have all signed on the dotted line.

These multi-year arrangements cover Facebook itself and the social media firm’s Instagram and Oculus platforms, and will allow the music industry to start earning when its songs and recordings appear in videos posted on those services. Meanwhile there is talk of new opportunities and new future revenue streams.

Quite how these deals will work beyond the advance cheques isn’t yet clear. Does Facebook have ambitions in music beyond user-uploaded videos? Possibly. Though that doesn’t seem to currently include adding a straightforward streaming music service to its portfolio of products.

But it does seem likely that, in the short term at least, the music industry will refrain from dissing Facebook and, in fact, will start to talk the social media firm up as an important business partner. Much like it did with YouTube when it secured its initial advance-heavy deals. It remains to be seen whether, as with YouTube, the relationship with Facebook sours once the advances are long gone and the record companies and music publishers start monitoring more closely the royalties coming in per user and per stream long-term.

3. SPOTIFY
Spotify continued to boom in 2017 as its aggressive growth strategy pushed forward and behind the scenes the business prepared for its long-awaited stock market listing, which could now occur this quarter. As 2018 got underway it announced it now had over 70 million paying users. More subscribers mean more subscriptions which means more money for the music business. And we all know it is chiefly subscription streaming that has returned the record industry to growth.

So, let’s repeat the question we asked a year ago: How could Spotify possibly be the music industry’s enemy number one?

Well, as we also noted a year ago, artists and labels have always had a love/hate relationship with the major retailers and the big media platforms of they day, which they rely on to promote and monetise their music, but which they often resent for [a] not promoting and monetising the right music and [b] for making big bucks off other people’s songs and recordings. And, in the streaming age, Spotify has become both a major retailer and a big media platform.

But in addition to that there is the fact subscription streaming is a fundamentally different way of doing business to selling CDs and downloads, and everyone in the music industry is still adjusting to the new model. The new approach works for some artists and labels, and doesn’t work for others. The former are quietly happy, the latter are loudly annoyed. Meanwhile, many artists and labels had that new business model forced on them, which makes it all the more annoying if the model isn’t working for you.

It remains unclear exactly what the wider ramifications of the new model are for the wider music community, ie while there will be winners and losers, does the new approach mean less, more or about the same number of artists and songwriters can make a sustainable living out of their music? Many reckon it’s less, and that the new model is most favourable to superstars and major rights owners. They may be right.

With Spotify having the most success with this new model, it tends to feel the heat from those in the music industry who don’t like it. And those critics are likely to get ever more vocal as Spotify lists on the New York Stock Exchange, allowing early financial backers to sell their shares on the open market and cash in big time (probably), while ever more scrutiny will fall on the streaming firm’s own finances.

There has already been plenty of talk about the salaries received by Spotify employees, especially senior execs, compared to the income of the average artist. Though much the same could be said about the top guard at all the big music companies. Others have noted Spotify’s decision to move into lavish new offices in New York and London. Though again, similar criticism could be made of the majors.

Nevertheless, Spotify’s critics in the music community are likely to remain vocal in 2018. And even the streaming firm’s allies in the record companies and music publishers – of which there are many – are starting to fear the next round of Spotify licensing deals in a few years time.

By that point the streaming company could be hugely dominant worldwide, but with investors pushing for profitability. It seems likely that at that point Spotify will seek to reduce its financial obligations to the music industry in percentage terms. The question is, by how much?

But optimists hope that, by then, the digital pie will be so big, even with significant cuts, there’ll still be plenty go to round for all the music industry’s stakeholders.

And then, of course, there is the ongoing mechanical rights mess in the USA, which only worsened in 2017. There are other CMU Trends articles that review the issues around the way the mechanical rights in songs are licensed in America, and why that has resulted in many songwriters and publishers not getting the mechanical royalties they are due from the streaming services.

As with issues around the subscription streaming business model in general, the mechanical royalties problem affects all players in on-demand streaming, most of which have been sued over unpaid monies. Though it’s the lawsuits involving Spotify that have got the most attention.

In 2016 Spotify attempted to resolve this problem via settlements with both the National Music Publishers Association and a group of songwriters who had signed up to a big class action. But still new lawsuits were filed in 2017, leading to Spotify – at one point – to argue that maybe mechanical royalties weren’t even due on a stream. It was a controversial argument that ran contrary to Spotify’s own past description of how the licensing of streamed music worked.

Spotify, and its rivals, are now hoping that the Music Modernization Act unveiled last month can finally sort out the mechanical rights mess. Just this week, the firm’s General Counsel, Horacio Gutierrez, said: “Spotify appreciates [these] efforts to fix the broken, outdated licensing system that does not serve the needs of music creators or digital music services. The Music Modernization Act increases the transparency and efficiency of licensing music, leading to faster and more accurate royalty payments to songwriters and more music available to consumers”.

It remains to be seen how quickly the Music Modernization Act can work its way through the law-making process in Washington. Meanwhile, it was one provision in that proposed legislation that resulted in American music publisher Wixen rushing to file the biggest mechanical royalties lawsuit against a streaming firm to date, seeking $1.6 billion in damages. Spotify will be hoping that, if nothing else, in 2018 – through lawsuit settlements and copyright reform – at least this one bone of contention between it and the music community can be dealt with once and for all.

4. AMERICAN RADIO
When it comes to the music industry’s ongoing beefs with the American radio industry, not a lot happened in 2017, though resentments continue.

On the sound recording side, the record industry continues to lobby in Washington for copyright reform so that American AM/FM stations – like their counterparts elsewhere in the world – have to pay royalties to record labels and recording artists. Meanwhile, the radio industry continues to argue that airplay is free promo for labels and artists, so why should they also pay for the privilege of playing records?

On the song rights side – where radio does pay royalties – the legal battle between the radio industry and Global Music Rights, the young boutique collecting society representing the performing rights of some premiere league songwriters, continued to go through the motions last year.

The radio industry reckons GMR should be regulated in the same way as the bigger American collecting societies. GMR founder Irving Azoff argues that his rights body is too small to be regulated in that way, and that the broadcasters should have to negotiate royalty rates with his society without being able to use the threat of taking the matter to a rate court or similar.

There was plenty of legal wrangling in 2017 regards the lawsuit on that dispute, but no real progress. Though there could as yet be a new battleground for the music industry and the broadcasters in 2018, relating to the aforementioned Music Modernization Act.

Although that legislation mainly seeks to solve America’s mechanical rights mess, it also reforms the way royalty rates are set whenever licences are negotiated by the larger regulated collecting societies, which means the new mechanical rights society the act will set up, but also the existing larger and regulated performing rights organsiations, ie BMI and ASCAP.

This is a kickback for the songwriters and music publishers to get their support for the Music Modernization Act. Most people in the music community believe that whenever a rate court intervenes in the royalties paid by music users to a PRO, the court undervalues the songs the collecting society represents. That, it’s argued, is because of the criteria the courts employ. Change the criteria, and the rates could go up.

For the likes of Spotify, if they can end the flood of lawsuits over unpaid mechanicals – through the creation of a new mechanical rights society that’s empowered to offer a blanket licence – it’s worth backing new criteria for the courts and bodies that set royalty rates. Even if that might mean a slight rise in royalties down the line.

But the new rate setting criteria might also increase the monies radio stations have to pay the next time their PRO licences come up for renewal. And radio stations – unless they also operate an on-demand streaming service – don’t exploit the mechanical rights in songs. So they won’t get the benefits of a better mechanical rights licensing system, but may see their PRO royalty obligations go up.

Which means the American broadcasters will be paying very close attention indeed to the Music Modernization Act. Big radio is a powerful lobby in Washington, and if the big radio firms reckon the proposed legislation could hit their bottom line, they are sure to lobby hard against the proposals.

Which means old school radio could block efforts to make licensing easier for new school streaming platforms. Which isn’t going to please those songwriters and music publishers who believe the Music Modernization Act is a solid solution to America’s mechanical rights problem.

5. THE SECONDARY TICKETING PLATFORMS
And finally, ticket touting. It felt like there was actually quite a lot of progress in this domain in 2017, and in multiple countries, as law-makers seemed increasingly willing to regulate the resale of tickets for profit via secondary ticketing sites, especially when the reselling is done by industrials-level touts.

In the UK, that partly means introducing new laws, such as the impending ban on the so called bots some touts use to buy up large numbers of tickets from primary ticketing sites. But also the enforcement of existing consumer protection laws that have not always been followed, by either the touts or the resale websites they employ.

National Trading Standards is now taking responsibility for forcing the individual touts to follow the law, while the Competition And Markets Authority has said that it plans to “take action against secondary ticketing websites suspected of breaking consumer rights laws – through the courts, if necessary”.

But it’s not just the UK where progress has been made. Governments in a number of other countries have either introduced or are considering new ticket touting regulations. New South Wales in Australia arguably went further than most in 2017, pretty much outlawing the unofficial resale of tickets for profit entirely.

Meanwhile, some players in the music industry also stepped up their own efforts in 2017 to stop the touting of tickets to their shows.

The terms and conditions on an average ticket allows a promoter to cancel it if it is resold. In the UK, a reseller is meant to advertise the seat number when reselling a ticket. Which means, for shows with numbered seating, promoters can monitor the resale sites, note the seat numbers of tickets being resold, and cancel said tickets. Though that can result in both logistical and PR challenges on the night, when the purchaser of the touted ticket is refused entry to the venue.

Nevertheless, some promoters are now routinely cancelling touted tickets, hoping that the word will get out to fans that they should only ever buy tickets from primary ticketing sellers. In some ways, that activity could be seen as one big educational initiative, given one issue in the touting domain is that not all consumers understand the difference between primary and secondary ticketing, and therefore might not realise they are buying a ticket at a hiked up price from an unapproved seller.

Confusing language used by some resale sites that implies they are more official than they really are also causes problems in this domain, something anti-touting campaigners pointed out in 2017. That was a message which Google in particular heard loud and clear. It is now introducing its own rules about how ticket resellers which advertise on its search engine communicate their unofficial seller status, which could prove to be a big boost in terms of educating consumers.

There are, of course, a plethora of secondary ticketing websites employed by the touts, with four big players in the UK market: Live Nation-owned Seatwave and Get Me In, eBay’s StubHub, and Viagogo.

It’s fair to say it was Viagogo who was the hottest contender for the music industry’s enemy number one in 2017. In recent years, it has made the least efforts to reach out to the music industry, and it has arguably used the most confusing language in a bid to mask the unofficial status of the sellers on its platform.

And when a select committee in the UK Parliament put the spotlight on ticket touting, it was the company that declined to participate in the conversation, and very unusual move for a business with active operations in the UK.

The backlash against Viagogo also gained momentum in 2017, both in the press and online. And the Victims Of Viagogo Facebook group has been helping those seeking a refund from the secondary ticketing firm navigate the company’s complex systems for achieving such a thing.

Though, in a way, all the Viagogo bashing created a commotion for the other secondary ticketing sites to hide behind. Because, while Viagogo is certainly the least ethical of the ticket resale sites operating in the UK, anti-touting campaigners still have plenty of issues with the other sites too.

They’ll be hoping that, even if the press are increasingly focused on the evils of Viagogo, the aforementioned National Trading Standards and Competition And Markets Authority will be equally demanding of the Seatwaves and StubHubs of this world. And that secondary ticketing at large, rather than just Viagogo, continues to be seen as enemy number of one of the music community.



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