CMU Trends Digital Labels & Publishers The Great Escape 2016

Trends: Tracking digital dollars – the transparency problem

By | Published on Monday 13 June 2016

CMU @ TGE Buzzwords

“Transparency” has become quite the buzzword at music business conferences in recent years, with everyone agreeing that there should be more of it. But who needs to be more transparent about what and to whom exactly?

Based on his presentation at CMU Insights @ The Great Escape last month, CMU Business Editor Chris Cooke reviews how digital royalties work their way through the system, and where the mysteries, confusions and blockages occur.

DIGITAL LICENSING
The ‘Dissecting The Digital Dollar’ report we produced for the UK Music Managers Forum last year explains in some detail how streaming services are licensed by the music industry. But in order to appreciate the complexities around how digital royalties flow from service provider to artist and songwriter, and where the transparency issues arise, it is worth having a very quick recap.

First, some copyright facts.

1. There are, of course, two sets of music rights. There is the copyright in sound recordings, created and/or controlled by recording artists and record companies. And there is the copyright in songs (lyrics and composition) created and/or controlled by songwriters and music publishers. Streaming services need to stream recordings of songs, so need to license both sets of rights.

2. Artists and songwriters can keep hold of the copyright in their work, but new talent will routinely transfer (or as good as) the rights in their output to a label or publisher in return for cash, so that they cease to be the copyright owner, although they will still usually be due a share of any income the copyright generates under contract. Even where artists and songwriters retain their rights, they will usually appoint a label or publisher (or similar) to represent them day-to-day. So streaming services need to deal with labels and publishers rather than artists and songwriters to license music rights.

3. Copyright law provides copyright owners with a bunch of ‘controls’ over their content – including the exclusive right to reproduce and distribute the work, and to perform it in or communicate it to the public. When third parties want to exploit any of these controls they must seek permission – or a ‘licence’ – from the copyright owner. The copyright owner sells this permission, which is how copyright makes money.

4. The music industry has traditionally provided licences in a different way and on different terms depending on which of the copyright controls is being exploited. In particular, a distinction is often made between those who want to exploit reproduction or mechanical rights (ie to reproduce and distribute the work) versus those who want to exploit the performing or neighbouring rights (ie to perform or communicate the song or recording).

5. Whereas when labels put out CDs they exploit just the reproduction rights of the copyright, and when radio stations broadcast music they exploit just the performing rights, with streaming (especially on-demand streaming) it is generally agreed that both the reproduction rights and the performing rights are being exploited at the same time.

6. Sometimes the music industry licenses directly – so the licensee must seek a bespoke licence from the copyright owner or owners for each recording or song they wish to exploit. Other times the music industry licenses collectively – so the licensee can obtain a single licence from a collecting society representing pretty much all labels or all publishers, which usually allows them to make use of the entire repertoire represented by any one society on a per-play royalty or revenue share basis.

7. Sometimes copyright law forces collective licensing through a compulsory licence (a scenario where the copyright owner is obliged, under law, to license, usually at a rate set by a statutory body or court). Other times the music industry chooses to license collectively, usually for efficiency reasons where you have a large group of licensees using lots of music.

8. In scenarios where a collecting society is empowered to license, it will usually have the exclusive right to do so, meaning rights owners can’t do direct deals on the side (the US being the exception here). On the song rights side, the performing rights (and in Continental Europe the mechanical rights too) will actually be assigned to the collecting society, so if it’s those controls being exploited, only the society can license.

How record labels license streaming services
In the US, the record industry is obliged to license personalised radio services like Pandora via the collecting society SoundExchange at statutory rates (if the digital service chooses to go that route, which most have until recently). As a result, in some other territories too the local record industries have also chosen to license such services through their collecting societies.

But with on-demand streaming like Spotify, the labels nearly always license directly. So if you are setting up such a service, you need to get a direct licence from the three majors (Universal, Sony and Warner) and then additional direct licences from the indies. You can cover about half the indie label sector through a template deal with the rights agency Merlin, and you’ll normally secure the rest through distributors and aggregators like Believe Digital, INgrooves, The Orchard, Ditto and Tunecore.

How music publishers license streaming services
On the publishing side, the collecting societies are involved with both personalised radio and on-demand streaming. In some countries, the publishing sector has traditionally had separate collecting societies for reproduction and performing rights, and streaming services need licences for both, remember. The reproduction and performing rights societies in any one country may collaborate on digital, or the service may need to get separate licences.

Traditionally collecting societies only provided licences in their home territories. Each society then has a relationship with its counterparts around the world, so if – for example – a UK radio station plays a French song, the UK society PRS collects the royalties and passes it on to the French society SACEM, which pays the songwriter and publisher. In digital, this is still sometimes how it works, but other times societies may license their own repertoire in multiple territories, and/or they might license via ‘hubs’ made up of societies from multiple countries.

On top of that, there is one more complication. The big five publishers (Sony/ATV, Universal, Warner/Chappell, BMG and Kobalt) license Anglo-American repertoire directly, so services must do deals directly with these five companies in addition to their collecting society deals. However, by convention, the publishers often only control the reproduction rights of their Anglo-American songs, while the collecting societies control the performing rights. Which means the big five must collaborate with the Anglo-American collecting societies in order to offer these direct deals.

THE STREAMING DEALS
Once the deals are done, how are digital royalties paid day-to-day? Well, most streaming deals are revenue share arrangements with minimum guarantees laid on top. So, the services agree to pay a cut of their revenue to the music rights owners each month, but also to pay a minimum fee per play (and/or per user) until the point the monthly revenue share is higher than those minimum rates.

Every deal between every streaming service and every rights owner (label, publisher and collecting society) is both different and secret. Deals will also differ from territory to territory, and depending on whether the end user is on a paid-for, free or mobile-bundle package. But generally record labels are on a 55-60% revenue share, while the publishers and their collecting societies are on a 10-15% share.

Each month, the streaming service calculates how much income it made in each territory. It also calculates how many streams were delivered in that market. For each rights owner, it then asks: of all the streams, what percentage came from the rights owner’s repertoire?

If it was 10%, it allocates 10% of its overall revenue to that rights owner, and then pays it a cut of that revenue, according to their revenue share arrangement. Except it will also multiply the total number of streams of that rights owner’s works by the per-play minimum rate, and if that figure is higher, it will pay that sum instead.

So far so complicated, though the digital services and rights owners (labels, publishers and collecting societies) have now built systems to deal with these complexities. Though from an artist and songwriter’s perspective, the transparency issues still arise [a] as the sums due are being calculated and [b] as that money passes through the label, publisher and/or society.

How revenues are calculated…
The equation for each time period (approx one month)
• How much net revenue did the DSP make?
• How many tracks did the DSP stream?
• What percentage of overall consumption came from your repertoire?
• What revenues can therefore be attributed to your repertoire?
• What revenue share did you agree?
• Is that figure greater than the minimum per-play rate?
• IF YES – revenue share is paid.
• IF NO – minimum per-play rate is paid.

TRACKING THE DIGITAL DOLLAR

Recordings
As a general rule, a digital service assumes that whichever label or distributor provided it with a recording in any one territory has the rights to represent that copyright, and therefore to receive the royalties.

The streaming service will therefore report to the label how many times any one track was streamed in any one month, and therefore what royalties are due under their specific revenue share/minimum guarantee arrangement. The service will then pay that money to the label or distributor.

The label will then need to account to and pay royalties to any artists who are beneficiaries of the copyright. This is where many of the tensions begin, not least because those artists aren’t usually allowed to know the precise revenue share and minima arrangements their labels have with the streaming services.

Artists do increasingly have access to consumption data – ie how often their tracks have been streamed. This may come via the label or distributor, or some streaming services now provide this information directly to artist and management. But streaming services won’t tell the artist exactly what they paid the label for this consumption.

Management can try to work out what royalties that consumption generated by using the average per-play rates that circulate for different services (from either official or unofficial sources), but these are very much averages, and do not take into account the specifics of any one label’s streaming deals.

The label will usually be obliged to pay the artist a percentage cut of all and any income generated by their recordings. But, under the artist’s record contract, the label is often allowed to deduct some of its costs before calculating what the artist is due. Different royalty rates may also apply according to various variables. But it is not always clear what deductions and rates are being applied to streaming income, especially when an artist’s record deal pre-dates digital.

For many artists, the secrecy around each label’s streaming deals and confusion around deductions are the key transparency issues. How can the artist – or their managers and accountants – know that they have been paid what they are contractually due when they are not allowed to know what the label received from the streaming service, and are not told how deductions are being applied?

To understand why this has become such a big issue, you have to remember there is 60 years of mistrust between artists and labels, with many artists long under the impression that they are routinely being screwed out of royalties by their labels, either through incompetence on the record company’s side, or through a deliberate policy at the label to keep as much of the money generated by each recording as possible.

While artists may have audit rights in their record contracts, those rights are usually expensive to enforce, especially when the payment of royalties is so complicated and shrouded in secrecy.

Of course, it should be noted that these criticisms apply much more to some labels than others. And some indies will share information about their streaming deals, and/or be very clear about their policies on deductions, though usually this is done on a case-by-case basis, so artists need their managers to be proactive and inquisitive in this regard.

To that end, when it comes to streaming income, artists and their managers should be asking…
• How often was your music consumed?
• What share of overall consumption did you account for?
• What is your label’s revenue share rate for this service?
• What is your label’s minima for this service?
• What did the label receive?
• What deductions does the label make to this income (according to contract)?
• What percentage royalty does the label pay on streaming?
• WHERE IS THERE INFORMATION MISSING?

Publishing
On the publishing side there are other complications. First, how does the digital service know who to pay? Because publishers don’t provide any content – remember – and labels won’t (and, would argue, can’t) tell the service who owns the publishing rights in the songs contained within their recordings. And there is no central database that will tell the service who owns the rights in any one song in any one territory.

Services could try to build their own databases, though that’s a challenge. Many songs are co-written and therefore co-owned by different publishers. And the split of ownership is for the collaborating songwriters to agree. Ownership may vary from country to country. And sometimes the publisher may control the rights, other times the collecting society may be in control.

In the US, on the reproduction rights side, attempts have been made by the digital services to work out what songs are contained in what recordings, and who controls those songs; albeit with mixed success, and resulting in an assortment of lawsuits over unpaid royalties.

However, in the main the payment of publishing royalties by streaming services works like this. The streaming service provides each of the big five publishers and all the collecting societies with a complete list of every track that was streamed in the previous month. The publishers and societies work out which of those tracks contained songs they control, and what percentage of those songs they represent. That then gives them their monthly consumption share, and they work out what they are due via their revenue share and/or minimum guarantee arrangement with the service provider.

That’s a lot of number crunching, and most publishers and societies struggled in the early days to process all the data the streaming services were handing over each month. Though systems have been built, and the aforementioned collecting society hubs often do the number crunching as well as multi-territory licensing, so less crunching is being done overall.

Nevertheless, the crunching takes time. And there is the issue of what happens when two publishers or societies both claim to control the same song. Or where a publisher or society incorrectly identifies the song contained with a track and claims it by mistake.

In theory the services should spot when songs are double-claimed and put payments on hold. Though sometimes they probably pay out twice on the same work. Either way, neither situation is ideal, and arguably there is something to be said for the US method of paying publishing royalties, even though that hasn’t worked out so well for many parties to date.

Once the publisher and/or society has worked out what they are due and has been paid, there is then another extra stage to go through. How is that income split then between the reproduction and the performing rights? Because remember, different entities may control the different elements of the copyright.

This is important to the songwriter, because how they get paid may differ depending on which entity is involved (in terms of revenue share and/or whether payment is subject to deductions or recoupment of an advance). In fact, that can even be true where one collecting society controls both the reproduction and the performing rights. Copyright law says nothing about this, so societies decide for themselves how to divvy the money between the different elements of the copyright.

At this point the songwriter will start to ask the same questions as the recording artists. If the money passes through a collecting society, what is the society’s deal with the streaming service? Surprisingly few societies – despite usually being not-for-profit membership organisations – share this information. Then, what admin fees does the society charge? And what if the money passed through other societies – ie it was collected by the digital service’s local society and then passed to the writer’s collective management organisation via a reciprocal agreement?

If the money passes through the publisher, then the questions are all about how the songwriter’s publishing deal is being applied, especially if the publishing agreement pre-dates digital. And what terms is the publisher on with the digital service? When the big five license Anglo-American catalogue direct, they generally command higher rates than the societies manage. Is that better rate passed onto the songwriter?

So, to conclude when it comes to streaming income, songwriters and their managers should be asking…
• How does your publisher and/or society work out what streams are of your work?
• Are they getting this right?
• What is your publisher/society’s revenue share rate for this service?
• What is your publisher/society’s minima for this service?
• What was the service invoiced? Did it pay up?
• How is the revenue split between reproduction and performing rights?
• What does that mean for how you get paid?
• What fees does your society charge?
• What is your royalty share under your publishing deal?
• WHERE IS THERE INFORMATION MISSING?

CONCLUSION
Pretty much all the managers of artists and songwriters you speak to express frustration about the lack of transparency around digital royalties, and most labels, publishers and societies – with some notable expectations – admit that this is a big problem. Not least because – with the aforementioned long-standing trust issues between corporate rights owners, societies, artists and songwriters – when things aren’t clear, the management community is prone to assume their clients are being screwed over somewhere along the line.

Rights owners and societies often cite the non-disclosure agreements in their deals with the streaming services as the reason for at least some of the transparency issues. Though some lawyers reckon those NDAs actually allow rights owners to share deal specifics with the representatives of artists and songwriters, albeit on a confidential basis. And a number of sources at the digital services themselves have said that they are fine with that.

Another issue sometimes raised by labels et al over the confidentiality of their streaming deals is competition law. Though not all lawyers are convinced by that excuse either.

And even where the specifics of streaming deals do need to be kept secret, why the lack of clarity on deductions, admin fees, payment processes and reproduction/performing right splits. Some of that information is actually public domain, though often requires some digging or specific questioning by managers before information is shared.

Why the lack of clarity? Is it simply poor communications? Or a need-to-know culture? Confusion within the labels, publishers and societies themselves? Or a deliberate effort to confuse, to hide inefficiencies, incompetence or corruption?

It could any of those things. And, indeed, any combination of those things. But transparency issues are causing massive tensions within the music community at a time when everyone needs to be working in sync, to enable and assure efficiencies, to support and nurture emerging business models, and to fight for the future of copyright.

Which means labels, publishers and collecting societies need to recognise these specific issues and raise their game. And managers need to identify the questions and make sure they get asked.



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