In last September’s blog entry, ‘Stream a Lie’, I pointed out how the recording industry is disingenuous when it comes to its revenue figures:
Streaming income is not calculated in the same manner as physical sales income, yet the record industry presents it as such. In its market reporting, the industry lumps together the wholesale revenue from CD and vinyl sales with the money it receives from streaming and downloading companies to present an overall picture of industry wellbeing. This is misleading, as the revenue from physical sales income includes costs that are absent from streams. The former is provided as a gross revenue figure and the latter details net revenue.
The result, in the UK, is that the trade figures provided by the British Phonographic Industry (BPI) look like this:
While I still stand by my analysis, there are some amendments to be made. In the first instance, while the money from physical sales is represented as a gross revenue figure, it was wrong of me to represent the money from streaming and downloading as net revenue. Some, but not all, of the expenses are taken out.
The percentage splits that make up the wholesale price of a physical release can be broken down as follows:
Record company 45.5%
Songwriting copyright 8.5%
The first key difference between the reporting of physical sales and the reporting of downloads and streaming is that the costs of songwriting copyright are only included in the former category. This not because the record companies are masking this expenditure in respect of downloads and streams, but instead because it is not them who bear it. They pay the songwriting royalties for physical sales; it is the digital service providers who pay them for downloads and streams. A more equal tabulation would nevertheless have these payments removed from all formats. It would then look like this:
This does make a difference. Whereas the record industry depicts their overall trade in 2018 as bringing in only 75% of the revenue that it had in 2000, once songwriting copyright is factored out it is instead worth 80% of the business at the turn of the century.
The next thing to eliminate are the costs of manufacture and distribution. As with songwriting royalties these form part of the record companies’ expenditure when it comes to physical sales but they are not spending in these areas for downloads and streams. On the one hand, there are no (significant) costs of manufacture. Each digital download of stream costs little to create. On the other hand, it is the service providers, rather than the record companies, who bear the costs of distribution. If we additionally remove these costs from the physical sales figures, we end up with the following chart:
Viewed from this perspective, the record companies were more prosperous in 2018 than they were in 2000.
One reason why it is important to remove these costs is because it gives us a clearer idea of record company profits. Following on from this, we can gain a clearer perspective of what share of royalties it is fair for recording artists to receive. Record companies could perhaps justify their claim for 80% of the revenue for physical sales on the grounds that they had significant costs to bear. That 80% looks more questionable once the expenditure on songwriting royalties, manufacture and distribution are removed. Together they represent 34.5% of the wholesale price of a physical product. The record companies have nevertheless paid their artists the same royalty rates for downloads as for CDs. They have accounted for this parsimony by pointing to their figures. Their representation of revenue has painted a picture of an industry in decline, while at the same masking the reduction in their costs.
Streaming has been treated differently. Whichever way the figures are represented, the position of the recording industry has improved. BPI’s own figures demonstrate an increase in revenue of 29% since trade bottomed out in 2015. My adjusted figures demonstrate an increase of 30%. Against this background, recording artists have been in a stronger position to demand higher royalties. They can also highlight the diminished role of record companies in the digital age. Some of them are being successful too. At the top end, there are artists who are now receiving 50% royalty rates for streaming.
This also has an effect on the figures. If our next move is to remove the costs of royalties from each of the formats, bearing in mind that the record companies are now paying out higher percentages for streaming, the overall trend is reversed once more. We arrive once more at a downturn in the overall figures from 2008 to 2018. The trade in 2018 worth 83% as much as it was in 2000:
It should be pointed out that, even when we reach this stage, the figures do not detail net revenue. There are still the costs of artist advances, recording advances, video production, tour support, and marketing and promotion to take into account. IFPI have given their own representation of these figures, breaking down the US$500,000-US$2,000,000 that represents their ‘typical investment in a new signing’ into expenditure that looks like this:
There is some sleight of hand here. Much of the expenditure on advances, recording costs, video production and tour support is borne by the recording artists out of their share. The record companies advance this money to the artists, but it is ‘recouped’ from their royalties. Amongst the expenditure outlined by IFPI, it is only the costs of marketing and promotion – tellingly portrayed as the major expense – that the record companies pay for outright. They do, however, also have staff, legal and facilities costs to account for.
And there is one further twist. The BPI do not adjust their figures for inflation. If we update my final ‘net’ figure according to the Bank of England’s inflation figures, we end up with this chart:
The result is an industry that is worth only 50% as much in 2018 as it was at the millennium.
What can we gather from all of this? On the one hand, the BPI has inflated a story of decline. On the other hand, it has under-reported it. When it comes to the over-representation of decline, the most important tactic to bear in mind is not the overall totals, but instead the manner in which BPI’s representation of revenue masks the differences between physical sales and downloads/streams. Not only has this enabled them to downplay disputes about artists’ royalties, it has also aided them in their negotiations with the service providers. They have obscured the fact that the turn to downloads and streaming has reduced their costs.
The under-reporting is harder to account for. The recording industry has tactically employed its decline as a means to strengthen copyright laws in their favour and as a means to defend punitive recording contracts. Why then, has it not factored in inflation to illustrate an even more precipitous decline? Maybe, this too is about their negotiating position. They want to tell the world they are suffering. They don’t want to place themselves as beggars, however, by demonstrating that theirs is an industry that has been on its knees.