"Perhaps the brands with the biggest challenge are iHeartRadio and iTunes Radio. They have reasonably high awareness levels, but do not seem to be getting traction with consumers. The conclusion is that these brands may need to try something different to generate excitement with consumers."Music streaming services largely emerged as a result of major record companies eagerness to open up a second revenue stream to help cope with declining sales of physical recordings. Initially, they were eager to license their recordings to streaming services, but faced an initial roadblock - the existing royalty systems employed two distinct approaches. Royalties for sales were based on fixed compensation for each unit sold, while royalties for licensing music to radio stations was based on a percentage of station revenues (and not directly linked to which music was played). Conceptually, the radio model seemed closest to how streaming services operated, as well as how audiences used them. Thus, most of the early deals utilized royalty payments as a percentage of revenues.
As sales in the traditional music markets continued to fade, the record industry wanted more from streamers. They started arguing that the current system (which they had eagerly negotiated) was "unfair" - largely because streaming revenues were slow to develop. The attack came on three fronts.
First, that not enough money trickled down to artists and songwriters. The biggest problem with that argument is the fact that the share that trickles down to the artists and composers is determined by the rights organizations (like ASCAP and BMI) and the actual rights holders (predominantly the record labels), who take their cut off the top. So the industry argues for a larger royalty rate, of which only a small fraction would actually go to the artists and composers.Second, streaming services differ from radio stations in that they can and do track individual consumer plays. There's no mechanism to measure how many listeners hear a song on radio. The current licensing deal with Spotify calls for royalties to be paid according to a formula that includes both a revenue percentage and the number of streams. Spotify also pays an additional set of royalties to songwriters and composers for what is termed "streaming mechanical royalties". As a consequence, Spotify pays a much higher total percentage of its revenues than Pandora. (Pandora is currently classified as an online radio service, and radio stations are currently not required to pay mechanical royalties).
"Based on the free model, the payouts we're getting on streaming is so small... The problem that we're running into is Spotify is just not converting users to the paid version quick enough."That perspective contributed to the fact that the music labels pressured Apple to raise its proposed starting subscription price for the new Beats streaming service (much like the book publishers did for iBook pricing - which the courts later ruled was an antitrust violation). But the underlying issue is that the record companies want more money, and are using artist payments to engender sympathy. If artist payments are the real problem, the music industry could solve that easily by granting them a bigger share of the payments they get, or changing accounting practices so that the artist share comes from gross payments, and not what's left after music industry costs (and profits) are covered.
One can look at this situation from the "level playing field" metaphor. Spotify wants a level playing field by getting the same deal Pandora has, Pandora wants a level playing field with broadcast radio (straight percentage of revenues, and lower percentage), and the music industry wants to raise the height of the field several feet because they cut the grass (i.e. royalties to artists and composers) too short, and aren't making enough profits from their traditional business models.
The current copyright and royalty system is a mess, largely because it was designed to deal with selling physical copies of intellectual property. The current model has never really worked well with digital reproduction, or with the growing need to replace shrinking sales revenues with licensing arrangements for emerging digital streaming channels. Add the fact that digital markets are global and have the potential to scale much higher than physical copy sales (tens of millions for hit albums in digital, while in the physical medium heyday, hits sold hundreds of thousands). Plus, they're now having to deal with younger audiences who care more about access to music than owning copies of music. In addition, artists need to recognize that the scale differences should be reflected in the setting of royalty fees - and that because digital access to their recordings remain available long after labels drop them, that they'll benefit from their work much longer under digital deals.
The debate and fights over music royalties is likely to continue for a long time, in part because the music industry is trying to hold on to an increasingly problematic business model, and is hoping to find a way to maintain their control over revenues derived from their historic role as the choke point between artists and their audiences. However, the growth of the digital economy is showing that it doesn't require multiple layers of distributors (and their growing costs) to provide access to products for potential purchasers. There are already content creators (including musicians) who have discovered that going independent can provide them much higher levels of return, as well as more control over use of their work. For the big labels, this is a fight for survival; but for society, it's a fight for who gets to control access to content (and who gets to benefit from that). As for the question of whether streaming will leave artists unhappy - the answer is yes, if the big labels remain in control, and no, if we can shift focus from preserving a declining music industry to how to develop a rights and licensing regime that promotes and protects creation of, and access to, intellectual property.
It's time we shifted our concern from protecting the old ways to think about how to develop copyright and licensing systems that benefits the creators and users of intellectual property rather than those who merely reproduce and distribute it.
(For more background, see this post about a digital music licensing panel at the 2014 CES).
Sources: Infographic: Which Streaming Services Are Winning the Battle for Millenial Eardrums, Adweek
Is the Music Streaming Industry Destined to Leave Artists Unhappy?, Adweek
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