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The Economics of Music Streaming – Part One

April 26, 2022

On Friday 3rd December 2021, the Copyright (Rights and Remuneration of Musicians, Etc) Bill underwent its Second Reading in the Commons. As anticipated, the bill failed to proceed to the committee stage. However, Private Members Bills are rarely successful. The introduction of the bill, by Kevin Brennan, was more about publicising the issue to a wider audience, including the government, and it has succeeded in that aim.

Designed to ensure a fairer distribution of streaming income, the bill was drawn up following the DCMS Select Committee’s inquiry into ‘The Economics of Music Streaming’. Their report comprised a damning indictment of the major record labels, and it was no surprise that the only negative comments the bill elicited within the industry arose from the record companies and their trade associations, BPI and AIM.

Their complaints revolved around a demand for more empirical evidence to be presented. A demand made despite both the record companies and BPI categorically refusing to supply any information on their royalty distributions to the Intellectual Property Office funded study: ‘Music Creators Earnings in the Digital Era’. An attitude that had already created anger amongst the artist community, and which is likely to be revisited in the future, because, as Stuart Dredge stated in music:)ally, ‘what happens next is going to be based on that study and other new research’.

The select committee’s findings, and the subsequent bill, centred around three main issues: the making available right; transparency over the deals between record labels and streaming services; and the current safe harbour provisions governing copyright infringement. This is the first of three articles examining these issues and will concentrate on the making available right, which is the control at the very heart of the streaming controversy.

PERFORMERS’ RIGHTS – A REDUNDANT FATUITY?
Although more and more artists are self-releasing, the labels are generally the owners of the sound recording copyright and, as such, enjoy the benefits of exploiting this copyright. To counter this, performers were awarded additional controls, known as moral or performer rights, which were originally formulated within the Rome Convention of 1961. In 1996, because of the P2P file-sharing software and the MP3 algorithm emerging at the time, the making available right was added to these controls in the WIPO Performances and Phonograms Treaty (WPPT).

These rights amount to approvals that are required from the performer to enable the rightsholder to make and exploit a recording. As Chris Cooke states, ‘where they can be waived, corporate rights owners will usually insist that they are, which may make these rights ineffective in real terms.’ 1 This insistence on waiver is non-negotiable. By why of illustration, as to the effectiveness of the monolithic intimidation employed by the record companies in their dealings with their creative partners, the Select Committee noted that emerging artists were reluctant to speak out publicly ‘for fear of losing favour with major record labels.’

Separate from, but co-existent with these controls, is Performer Equitable Remuneration. This performer right is generally linked to the public performance and communication controls of a recording, and ‘exists beyond any contractual arrangement between musician and label. Crucially, this right is usually “non-waivable” or “unassignable”, so a rights owner cannot demand artists waive their remuneration right in a contract’.2 It is the unassignable nature of Performer ER that has dictated the way that labels treat streaming income.

PERFORMER EQUITABLE REMUNERATION VS THE MAKING AVAILABLE CONTROL
The debate over whether the performers right to streaming income falls under equitable remuneration or the making available right has rumbled on for years. The situation has been accelerated due to the pandemic laying waste to touring income, which has stripped their income to the bone, and prompted a call to arms from many artists. Most notably the #BrokenRecord and the #FixStreaming campaigns, both of which were significant factors in the establishment of the Select Committee inquiry.

The making available right, as defined in article 14 of the WPPT, states that: ‘Producers of phonograms shall enjoy the exclusive right of authorizing the making available to the public of their phonograms, by wire or wireless means, in such a way that members of the public may access them from a place and at a time individually chosen by them.’

Using this definition, ‘the labels argue that the performing right element of streaming constitutes “making available” rather than “communication to the public”, and that Performer ER does not apply.3 This embracement is hardly surprising, given the financial benefits that arise by the labels’ derailment of equitable remuneration.

Performer ER is not distributed to the artist by the label, but by their collecting societies, which is PPL in the UK. There are no legislative rates of payment, but industry norms dictate that 50% of the revenue is paid to the label, and the other 50% directly to the performers.
However, 100% of the Income attributable to the making available right, having been previously reassigned to them in the artists’ contract, is paid to the label by PPL. It is then down to the label to pay the artist their percentage of this income, at the royalty rate defined in their recording contract.

Whilst indie labels usually apply more generous rates, the average rate granted by the major labels in the digital era is just 15% of net revenue. For pre-digital contracts, which are based on a physical sales model, that rate can be as low as 8%. This last point is significant, as back-catalogue sales have soared with the advent of streaming, and much of this will be paid out to the artist at pre-digital rates.

SALE, RENTAL OR BROADCASTING?
The inquiry noted, from the evidence provided to it, that ‘music streaming poses a definitional challenge. There is no consensus as to how streaming should be defined and classified under UK law.’

On one side, stands the performer and their representatives, including overseas collecting agencies and the IPO study on creator’s earnings. They all stress that streaming is closer to rental or broadcasting and should attract equitable remuneration.

On the other side are the record companies, BPI and AIM. Alongside them stands PPL, which was created by, and is still owned by, the labels. This collective declares that streaming constitutes a sale. Tony Harlow, Warner Music UK’s chief executive, insisted that ‘streams are covered by the making available right, which is the sort of internet equivalent of a sale.… You can play what you want when you want it and skip when you don’t want … You have a choice.’

However, this assertion overlooks the point that you can only ‘play what you want when you want it’ for as long as you pay the subscription fee. The moment the subscription ends, access to those streams ends, as does the argument that this is a sale.

The inquiry also pointed out that the labels’ definition of streaming as akin to a sale ignores the fact that equitable remuneration currently applies to modes of consumption whereby the costs to the labels are marginal relative to the costs that arise from physical sales. As this marginal cost to the label exists for both permanent downloads and streaming, why are these formats not also equated with equitable remuneration?

Even the streaming services, despite being hand in glove with the labels, acknowledged that the definition of streaming was not clear cut. Horacio Gutierrez, at Spotify, declared it to be ‘different than an ownership model. I am not sure that it is quite the same as renting per se … It is hard to find analogues in the physical world of what streaming is.’ Amazon’s Paul Firth echoed that sentiment, stating that it was ‘something different and trying to qualify it to something from an old world is not really helpful.’

WHAT CHANCE CHANGE?
The first skirmish, courtesy of sustained influence-lobbying, as evidenced by the brazen parroting of the BPI’s complaints by those politicians opposing the bill, has gone the way of the majors. However, even the government, via George Freeman, Minister for Science, Research and Innovation has acknowledged that there is an issue of fairness regarding remuneration, and that they accepted ‘the fundamental case made by the Select Committee.’

He went on to confirm that the government would be examining the results of the IPO-funded research, as well as a Competition and Markets Authority report on the activities of Universal Music, Warner Music and Sony Music, who together account for 80% of the music industry.

Acknowledging that it was not a question of if, but of how, any reform was implemented, he cited a deadline of September 2022 for its ultimate resolution. As the Featured Artists Coalition and the Music Managers Forum declared, ‘the trajectory towards reform, and the eradication of outdated industry practices, now feels unstoppable.’

References:
1. Cooke, Chris. 2020
    Dissecting The Digital Dollar, Third Edition
    Music Managers Forum, p. 40
2. Ibid, p. 42
3. Ibid, p. 71

Feature Image taken by Bob Price

Emma Panayi

Emma leads our London office in Camden, bringing 24 years of diverse experience to our team. Her role bridges SMEs and Live Music, with a strong focus on cultivating client relationships. As Partner, Emma is dedicated to creating a workspace where everyone can pursue their aspirations, making her an integral part of our success.

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