Thursday, 31 October 2019

Dividing up the Pies

Take a look at this:

Now take a look at this:

These vastly contrasting pie charts tell a history of the music industries. On the one hand, we have the division of income for physical products, such as cylinders, shellac records, vinyl, cassettes and CDs. It is skewed towards the creators and owners of sound recordings and away from the writers and publishers of the songs that those recordings contain: 91.5% of the revenue goes to the recording and 8.5% to the song. This weighting has been roughly the same for as long as there have been copyrights in recordings. In the UK, the ‘mechanical’ right, which provided royalties for the deployment of compositions, and the ‘master’ right, which gave a copyright to recordings themselves, were both established in 1911.
            There are reasons for this division. In the first instance, the record companies would only accept the imposition of the mechanical right on certain conditions. One of these was that it must be subject to compulsory licensing. It was stipulated that once one record company had recorded a song all other companies were then entitled to record it as long they paid a pre-determined fee (it is compulsory licensing that gave birth to the cover version). Another condition was that these fees be fairly small. Despite complaints from music publishers, the mechanical royalty was originally set at 2 ½ % of the retail price of a record, with a stipulation that this rise to 5% by 1913. It is currently set at either 6.5% of the retail price or 8.5% of the ‘dealer’ price (the cost of the recording to retailers).
            The record companies also argued that they were taking the most significant risks and that they bore the major costs. They were paying for the manufacture and distribution of recordings, as well as for their promotion and marketing. These costs also account for the division of physical sales revenue between record companies and recording artists. Record companies argue that they can only afford to pay recording artists 15%-20% royalties because they have so many overheads. In contrast, the compositional royalties are split in the writers’ favour. One of the reasons why they are receiving a 75% share is because publishers do not have significant costs. They are not manufacturing or distributing the recordings, and since the mid-20th century their promotional role has declined.
            Why does the division for radio play look so different? The answer lies in the trade off between compensation and promotion. The songwriters and music publishers gain substantial revenue from radio because they deserved compensation. Radio usurped other forms of income. The publishing trade used to be centred on the sales of sheet music. Radio brought this to an end. Domestic music making (which required sales of sheet music to the public) was replaced with transmissions of the work of professional performers (which did not). The songwriting industry sought and gained compensation. In the UK, their broadcast revenue from the Performing Right Society (PRS) soon became primary.
            In contrast, the recording industry has gained promotional benefits from radio play. The broadcast of a recording boosts its sales. And it was these sales on which the industry was traditionally centred. The record companies still felt that they deserved some payment from the broadcasters for the use of their work, however. In Britain they managed to secure a performing right of their own in 1934, and they immediately set up the collection society PPL to administer it (the US, in contrast, has never had a performing right for recordings in respect of analogue radio. Consequently, if the second pie chart were to represent American FM or AM radio, there would be no share whatsoever for the record companies, featured artists, session musicians or for the collection societies that look after their interests).
            Recording artists are in a slightly different position to their record companies. While their record sales gain promotional benefits from radio play, the broadcast of their music can also put them in competition with themselves. Why pay to see a performer in the flesh when you can hear their music on the radio instead? It is the technological unemployment that radio occasioned for musicians that accounts for their substantial share of broadcast income. Where they might be on a 15%-20% royalty for physical sales, they are assured 50% of the sound recording income for radio play.
            It would be wrong to suggest that the establishment of these splits has been easy. Songwriters have fought for an increased share of publishing income, while featured artists, session musicians and musicians’ unions have all lobbied for performers’ shares vis-à-vis the record companies. I should also note that the 50/50 division of radio revenue between songwriting and sound recording is an estimate. The licensing income gained from broadcasters is not readily available. What has not been contested by any of the interested parties, however, is that the revenue from physical sales and radio play should have these vastly different splits.
            This difference is now rearing its head in respect of the revenue for streaming. What is a stream? The position of this format is vague within copyright law. There are those who argue that it is more akin to a physical sale (and hence should fall under the reproduction right) and there are those who argue that it is more like radio play (and therefore should be established as a performing/communication to the public right). The solution of the music publishers, in the UK at least, has been to divide the revenue 50/50. Half of it is treated as sale. Half of it as a broadcast.
            But how is the overall income from streaming being divided? Take a look at this:

When it comes to streaming, the division between songwriting and sound recording looks roughly the same as for physical sales. Songwriting has increased its share fractionally from 8.5% to 13%, that is all. Where there is a difference between streaming and traditional retail is in the the division between record company and recording artist. Some featured artists have increased their royalties from the 15%-20% they might get for physical sales to as much as 50% for streaming. There is a good reason for this: the record companies are doing and paying less. They do not have to manufacture or distribute streams; these overheads have gone.
            If record companies are doing less, why then shouldn’t the share for the songwriting copyright also increase? Writers and publishers are making this case. Session musicians are missing out too. They receive royalties for radio play, but they do not receive them for streaming. As a result, an argument has been mounted that the overall revenue for streaming (rather than just the revenue for the songwriting copyright) should be split 50/50 along reproduction right/communication to the public lines. If this were implemented, it was result in the split of payments looking more like this:

The record companies are resisting. When it comes to determining the splits between themselves, the featured artists and the session musicians they have legislation on their side. Streaming falls under the ‘making available’ right. This is a sub-set of the communication to the public right, but it has particular characteristics. Most importantly, it is not subject to the ‘equitable remuneration’ rule that is applied to broadcast revenue, meaning that rather than automatically dividing the revenue 50/50, it is instead subject to negotiation between the record companies and the featured artists (and the session musicians are squeezed out). The net result is that, in this one instance, the communication to the public right operates in the same manner as the reproduction right.
            The record companies have different arguments regarding the overall split between sound recording and songwriting. Although their costs of manufacture and distribution have been removed, other areas of expenditure remain. In particular, they are now emphasizing their spend on marketing and promotion. Publishers do not spend a great deal on advertising their wares. In contrast, the record companies’ international trade body, IFPI, stresses that marketing is now the major expenditure that record companies encounter. They posit a deliberately intimating figure of US$500,000-US$2,000,000 to launch a new act. Marketing and promotion accounts for around a third of this figure. IFPI’s estimate is that it amounts to US$200,000-US$700,000.
            There is something else that we can look at too. Compensation has always played large part in determining royalties. When a new music technology comes along, the licensing rates and the division of revenue tend to be established on the basis of the deprivation that is being caused. Therefore, we could ask, who is streaming affecting the most: is it replacing radio play or is it affecting record sales? Thus far, the figures would appear to play out in the record companies’ favour. Since streaming first rose to prominence in 2011, the revenue for physical sales and downloads in the UK has more than halved. In contrast, the UK’s collection societies for songs and sound recordings have increased their revenue for radio:

This increase in radio revenue is not vast, however. And how should the streaming splits be calibrated if it goes into decline? We have a pie fight on our hands.