Friday, 5 October 2018

Adding Up the Streaming Industry


Most British recording artists receive their streaming income directly from their record companies, rather than via a collection society or from the company that is streaming the music. This is because streaming has been classified under the ‘making available’ right. In the UK, this right is the only element of the broader ‘communication to the public’ rights that is exempt from equitable remuneration rules.
If streaming income were to be covered by these rules it would operate differently. The other communication to the public rights are ‘unwaivable’, meaning that they cannot be assigned to a record company; they are non-recoupable, meaning that they cannot be used to claw back the personal or recording advances that record companies have paid to artists; and their ‘equitable remuneration’ is divided equally between the record company and the recording artists. This means that recording artists receive 50% of the rights revenue. In contrast, the making available right is ‘waivable’. It can therefore be assigned to a record company and the royalty rate can be negotiated. As a result, recording artists are currently receiving anything from 15%-50% of the streaming income for their sound recordings. Their record companies are keeping the remainder. The artists’ share is also fully recoupable. Therefore, some artists will never see their streaming royalties, as they are forever paying off their record company debts.
            The ‘making available’ right is confusing and contentious. It is meant to encompass ‘electronic transmission in such a way that members of the public may access the recording from a place and at a time individually chosen by them’. This definition would appear to cover the majority of streaming activity, with the exception of live streaming in real time (and some copyright experts believe that it addresses this too). It was nevertheless configured before streaming became the dominant means of consuming recordings. It was also conceived without due consideration of the economic consequences for performers. There are many people who believe that if the making available right were treated in the same manner as other communication to the public rights, it would result in higher royalty income for the majority of artists.
Consequently, organisations such as Fair Internet for Performers (FIFP) are campaigning for a revision of making available rights. They believe that all artists should ‘enjoy an unwaivable right to receive equitable remuneration, notwithstanding any possible transfer to the producer of their exclusive right for the making available on demand of their performances, independent of any terms agreed for such transfer and in addition to any possible contractual payments that are made by producers in this respect’. This is not a left-field proposal. Croatia, Lithuania and Spain have already decided to apply equitable remuneration measures to the making available right. Copyright scholars such as Fiona McGugan also believe that equitable remuneration will benefit most performers, as do 78% of artist managers (or at least this was their position when surveyed in 2015).
There has been little economic analysis of the proposals, however. FIFP state that they represent the ‘95% of performers who simply transfer all their rights to the producer for a single payment’. In respect of sound recording, this means the session musicians. As we shall see, these performers would be better off under their proposals. But what about featured artists, those have exclusive, royalty-based contracts with record companies? Here things are not so clear-cut. When streaming began its rise to dominance, many artists were being given the same royalty rates for this use of music as they were for record sales and downloads. More recently, things have begun to change. Music Business Worldwide has reported that several ‘superstar’ performers have negotiated 50% royalty rates for streaming income, and that the ‘traditional’ deal, whereby a 20% royalty is applied to both physical sales and streaming is ‘fast becoming obsolete’.
In the following, I will look at how the FIFP proposals could affect featured artists on a 20% royalty rate and those on a 50% royalty rate. In addition, I will look at their potential impact on artists who are releasing music through aggregators, and for those who have Spotify direct deals. The case for session musicians will also be outlined.
Record Company Distribution of Streaming Revenue
At present, the streaming companies keep approximately 30% of the overall money that their use of music generates before passing on the remainder to the rights owners. This money is split between the copyright in the sound recording (usually owned by the record company) and the copyright in the musical composition (usually assigned by songwriters to their music publishers and CMOs). The balance is 65/35 in favour of the recording copyright. As a result, recording artists royalty rates pan out in the following manner:
·      A featured artist on 20% royalty will receive 13% of the rights revenue (the remainder will be split 52% to the record company and 35% to the songwriters/publishers)
·      A featured artist on a 50% royalty will receive 32.5% of the rights revenue (the remainder will be split 32.5% to the record company and 35% to the songwriters/publishers)
·      A DIY artist with an 85% aggregator/distributor deal will receive 55.25% of the rights revenue (the remainder will be split 9.75% to the aggregator/distributor and 35% to the songwriters/publishers)
·      An artist with a 50% Spotify direct deal will receive 31.25% of the rights revenue (this figure is lower than that gained by a featured artist on a 50% royalty because the Spotify direct deal is worth 62.5% of the rights revenue, in comparison to the 65% achieved by record companies; the remaining rights revenue will be split 31.25% to Spotify (acting in a record company capacity) and 37.5% to the songwriters/publishers)
·      Session musicians receive no royalties for streaming; they are instead paid one-off fees via contract
Equitable Remuneration Distribution of Streaming Revenue
In contrast to the above, FIFP are proposing an equitable remuneration right. In Britain, if this were to operate in the same manner as the other communication to the public rights, it will be split 50/50 between performers and record companies. If implemented for all streaming income, we have the following rate of pay:
·      Recording artists will receive 32.5% of the overall rights revenue (the remainder will be split 32.5% to the record company and 35% to the songwriters/publishers)
Looked at one way, this appears to be beneficial to all recording artists, even those who are already on a 50% royalty rate. This is because these equitable remuneration royalties are not recoupable from advances. Yet there are some disadvantages too. The maximum royalty that artists receive from PPL will be limited to 50% (no other equitable remuneration rate in the UK has gone higher than this). In contrast, because of the ‘waivable’ nature of current rights, it is possible that some artists could eventually negotiate above the 50% ceiling. In addition the PPL rates are subject to deductions and splits. PPL charge a 15% administration fee, which reduces the recording artists share to 27.63% of the streaming spoils (record companies, on the other hand, do not charge for their distribution of royalties). In addition, the artists’ share of PPL income is divided 65/35 between featured artists and session musicians (current record company royalties are not divided in this manner; the session musicians are instead remunerated via contractual fees). Taking these two factors into account, the equitable remuneration rate looks more like this:
·      Featured artists will receive 17.96% of the overall rights revenue
·      Session musicians will receive 9.67% of the overall rights revenue
·      The remainder will be divided 27.63% to the record company, 9.75% to PPL and 35% to the songwriters/publishers (whose income is subject to its own administration charges from their CMOs)
It should be noted, however, that not all recordings utilise session musicians. In these instances the featured artists will receive a 27.63% share.
Record Company/Equitable Remuneration Distribution of Streaming Revenue
There is a further complicating factor. Few people believe that streaming revenue should be subject to an equitable remuneration right only. Any tendency to make it akin with other broadcast/communication rights tends to be balanced by equating it with traditional record company distributions. This is the policy adopted by the UK's CMOs for songwriters and publishers, for example. They split streaming income 50/50 between the communication (performing) rights and issuing to the public (mechanical) rights. The Musicians’ Union have expressed a similar view about streaming; they have proposed that ‘50 percent of the making available right should be an equitable remuneration right, non-assignable and administered by a collecting society, with the other 50 percent being an exclusive right assignable to the record company’. FIFP are in accord. They envision their ‘unwaivable right to receive equitable remuneration’ being split with an ‘exclusive right for the making available on demand of ... performances’, which featured artists may choose to assign to a record company.
            If we divide recording artists’ streaming income along these lines - so that half of the income is regarded as an ‘unwaivable right’ distributed by PPL at a 50% rate, and the other half is an ‘exclusive right’ distributed by record companies at contractual rates - we arrive at the following:
·      A featured artist on a 20% royalty rate will receive a 6.5% share of the rights revenue via their record company and an 8.98% share via PPL, giving them 15.48% overall
·      A featured artist on a 50% royalty rate will receive a 16.26% share of the rights revenue via their record company and an 8.98% share via PPL, giving them 25.24% overall
·      A DIY artist on an 85% deal will receive a 27.62% share of the rights revenue via their deal with their aggregator/distributor and an 8.98% share via PPL, giving them 36.6% overall
·      An artist with a 50% Spotify direct deal will receive a 15.63% share of the rights revenue via their deal with Spotify and an 8.63% share via PPL, giving them 24.25% overall
·      A session musician will receive 4.84% of the rights revenue via PPL
Record Company/Equitable Remuneration Distribution of Streaming Revenue with Broadcasting Rebalance
And things don’t end there. If half of the streaming income is viewed as being akin to broadcasting/communication rights, then we should consider how this rights revenue is usually divided in the UK. These royalties are not split 65/35 in favour of the record companies. Instead, this revenue is commonly split 50/50 between the rights in the recording and the rights in the composition. If the FIFP proposal were adopted, and the ‘communication’ half of recording artists’ streaming revenue was controlled by a CMO rather than their record company, we could see this revenue recalibrated in the same manner. Record companies are generally more powerful than music publishers. This is one of the reasons why they have gained a higher percentage of overall streaming revenue. In contrast, the CMOs for recording rights are junior to the CMOs for songwriting rights. The latter would seek an advance in songwriters’ and publishers’ fortunes.
            It could therefore transpire that, while the ‘issuing copies to the public’ half of streaming income would continue to be divided 65/35 in favour of the record companies, the ‘broadcasting’ half would be split 50/50 with the songwriting copyright. This produces the following results:
·      A featured artist on a 20% royalty rate will receive a 6.5% share of the rights revenue via their record company and a 6.91% share via PPL, giving them 13.41% overall
·      A featured artist on a 50% royalty rate will receive a 16.26% share of the rights revenue via their record company and a 6.91% share via PPL, giving them 23.17% overall
·      A DIY artist on an 85% deal will receive a 27.62% share of the rights revenue via their aggregator/distributor and 6.91% share via PPL, giving them 34.53% overall
·      An artist with a 50% Spotify direct deal will receive a 15.63% share of the rights revenue via Spotify and a 6.91% share via PPL, giving them 22.53% overall
·      A session musician will receive 3.72% of the rights revenue via PPL
The Results
If we compare this final ‘Record Company/Equitable Remuneration Distribution of Streaming Revenue with Broadcasting Rebalance’ with the current situation, whereby all of the recording income for streaming is distributed by record companies, we are left with the following results:
·      A featured artist on 20% royalty will gain an increase of 0.41% in their royalties via the FIFP proposal (13.41% of the rights revenue as opposed to 13%); they will also benefit from having 6.91% of their royalties free from recoupment
·      A featured artist on a 50% royalty will suffer a decrease of 9.33% in their royalties via the FIFP proposal (23.17% of the rights revenue as opposed to 32.5%). They will, however, have 6.91% of their royalties free from recoupment
·      A DIY artist on an 85% aggregator/distributor deal will be 20.72% worse off via the FIFP proposal (33.53% of the rights revenue as opposed to 55.25%)
·      An artist with a 50% Spotify direct deal will be 8.72% worse off via the FIFP proposal (22.53% of the rights revenue as opposed to 31.25%)
·      Session musicians will receive 3.72% more of the royalties via the FIFP proposal (3.72% of the rights revenue as opposed to nothing)
There are of course some caveats to this analysis. Streaming payments are complex. Different streaming companies have different deals with record companies, and these record companies have different deals with their artists. The movement, nevertheless, is towards a system that is based on payments that reflect that actual usage of recordings.
            But what is the best way to split that payment? On an overall income basis, it looks as though the FIFP proposal is only of benefit to session musicians and to featured artists whose royalty rate for streaming is 20% or less. There is nevertheless a virtue to a proposal that secures a guaranteed, non-recoupable element of streaming income for all featured recording artists. And many people would feel that it is right that session musicians should receive a performance-based payment for recordings that they have helped to realise.
            But would the most successful recording artists feel this same way? It is notable that few of them have stood behind FIFP’s proposal for an unwaivable streaming right. It is unlikely, however, that any of them have gone through the complicated sums outlined above to calculate that they will be worse off under this deal. They may have been swayed, instead, by the desire to have control of exclusive, waivable rights. And they may also have been swayed by their record companies, who are detracting attention from demands for ‘fair remuneration in contracts of authors and performers’, and focusing their artists’ thoughts on the ‘value gap’ instead.

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