The Loser's Standing Small

Poor Prince. Even in death he is not getting the support he deserves. His 1990s battle against Warner mystified many of his fans. It continues to frustrate some journalists. Here, for example, is Barney Rooney, writing in the Guardian,  ‘It’s difficult not to feel that Prince eventually became his worst enemy. Instead of settling for a role as a treasured cult act, he fought the industry, bit the hands that fed him, and painted “Slave” on his face’. And here is the Independent’s Ben Chu, ‘there has been a lot of purple prose in recent days talking about how Prince valiantly stood up for all musicians with his various battles with record labels. But it’s nonsense. When big acts attack the funding model of record companies what they are doing, whether they know it or not, is pulling up the ladder behind them’.

            There are at least two factors that are coming into play here. One is the record industry’s romantic ideology. It has always been acceptable – even encouraged – for artists to fight against their record companies, but to do so they have to fall on the right side of the art/commerce divide. They receive more sympathy if they are fighting for their musical expression than if they are fighting for their contractual rights. And they receive more sympathy if they are not seen to have done well. The complaints of rich people usually fall on deaf ears.

            And this is where the second factor comes into play. The music business has a famous statistic: only one in ten succeeds. Prince was certainly on the preferable side of this divide. He was among the minority who prospered, while the majority around him failed.

            Unfortunately for Prince, the record industry’s success ratio has been presented in ‘winner takes it all’ terms. This idea goes back at least as far as 1776, albeit that the formula was doubled in those days. In The Wealth of Nations Adam Smith wrote about ‘the exorbitant rewards of players, opera-singers, opera-dancers etc.’ and noted that ‘in a profession where twenty fail for one that succeeds, that one ought to gain all that should have been gained by the unsuccessful twenty’.

This is not how things work in the record industry. The losers are the unprofitable artists who are dropped by their record companies. These artists take nothing, but at least they are not left in debt: their labels waive any money that is in arrears. The winners are those who have achieved profitability. Their gains outweigh the losses of the failures.

However, rather than taking the spoils from the unsuccessful artists, it is the unsuccessful artists who rob the winners of their spoils. Or at least this is the case when it comes to copyright. British law suggests that the owner of sound recording copyright is the party who ‘made and paid’ for the arrangements for the recording to take place. The record companies usually claim this honour, arguing that they draw up the plans for the recordings and they provide the funds.

But they don’t pay for those recordings, artists do. The budgets for recordings are issued in the form of advances. Artists then pay back these advances from their recording royalties. A recouped artist could claim that they have paid for their recording in full.

And yet the record companies still cling on to their copyrights. They defend this practice by referring to their success ratio. The copyrights of the 10% of the artists who succeed are compensation for the debts of the 90% of failures. When it comes to the ownership sound recording copyright it is not the successful artist who takes all; more commonly it is the record company.

It is this practice that Prince was fighting against. He had a right to be hostile. 

I’ve Been Making Available All My Life

In recent blog entries I have been taking a look at the recording and publishing industries, as well as at mechanical and performing rights. Mechanical rights, which are also known as reproduction rights, incorporate the right to copy a work and the right to issue copies of a work to the public. Performing rights encompass the right to perform to work in public and the right to communicate the work to the public, which includes broadcasting.

In ‘Adding Up the Publishing and Recording Industries 2014’ I stressed the monetary importance of performing right for both songwriters and recording artists. Under PRS for Music rules, songwriters are automatically entitled to 50% of income whenever their song is licensed for performance, whether this be in a live setting or via a broadcast. Similarly, under the ‘equitable remuneration’ rules operated by PPL, recording artists are entitled to 50% of income whenever their recordings are played in public premises or are broadcast on radio or TV. In both cases these royalties are safeguarded: they cannot be recouped from advances.

In ‘Broadcast Y’Self Fitter’ I stressed the difference between classifying digital income as a performance or a mechanical right. If it is regarded as the former, being considered more akin to broadcasting, then artists as well as songwriters can be entitled to as much as 50% of the royalties. If it is regarded as the latter, being instead associated with physical recordings, the recording artist’s royalty rate can drop to something like 15%.

            I’m not alone in having this interest. Since uploading my last blog entry, the Music Managers Forum has published Dissecting the Digital Dollar: How Streaming Services are Licensed and the Challenges Artists Now Face. It is an important document, providing a detailed and lucid account of copyright and royalties in the digital age. It also provides further detail for the case that I have been making.

            One of the best ways to highlight injustices and inconsistencies in respect of royalties is to compare the activities of the collection societies, publishers and record labels. Publishers’ collection societies view the broadcasting of songs as involving both a mechanical and a performance right. In Britain, both the Performing Right Society (PRS) and the Mechanical-Copyright Protection Society (MCPS) have collected income for radio broadcasts. The performing and mechanical rights are present for online licensing as well, whether this is for online radio, downloads or streams. Consequently, the umbrella society, PRS for Music, operates joint licences to capture both of these forms of copyright.

There are differences in the way that income is divided, however. Perhaps understandably, as the format has an affinity with the sales of records in record shops, downloads are regarded as being more mechanical: 75% of royalties collected under the relevant joint licensing scheme go to MCPS and 25% to PRS. Online radio witnesses the reverse: 75% of income goes to PRS and 25% to MCPS. Again, this is understandable, as radio leans more towards the communication right that is enshrined in PRS activity, than it does towards the right to copy, which is patrolled by MCPS. Streaming sits in between: here the money from joint licensing is divided 50/50 between MCPS and PRS. These splits have implications for songwriters. They might receive similar overall shares in each area: for example, both the mechanical and performance income could be divided 75/25 between artists and publishers. As stated above, however, it is only the performance income that is safeguarded against advances: 50% goes directly to the songwriter and cannot be recouped.

If the recording world were to have parity with music publishing, streaming would be regarded as having an equal split between mechanical and performing rights. It would then follow that record companies would collect the 50% of the streaming royalty that relates to the mechanical right themselves. From this income, they would pay their recording artists a similar royalty to their income for physical sales: this would result in a new recording artist receiving an approximate 15% share. The recording artist should do better when it comes to the performing right. 50% of streaming income would be collected by the relevant performing right society, which in the UK is Phonographic Performance Ltd (PPL). This income would itself then be split 50/50, with half going to the record company and half to the recording artist.

But this doesn’t happen. Record companies collect the whole of the streaming income. According to PPL’s own literature, the labels regard both downloading and streaming as involving the mechanical right only. Their 2011 Annual Report states:

PPL’s online revenues remain limited as the majority of online sound recording licensing is carried out directly by rights owners. This reflects the prevailing view of record companies that downloading and on-demand streaming is analogous to the distribution of sound recordings, a traditional record company function.

Running somewhat counter to this argument, the record companies’ also claim that recording artists are not entitled to ‘equitable remuneration’ when it comes to downloading and streaming because this is an area in which performing rights operate differently.

            Here they refer to the ‘making available’ right, which was formulated during World Intellectual Property Organisation treaties of 1996 and enshrined in EU law in 2001. Dissecting the Digital Dollar outlines the origins of this right:

the communication control, where defined in copyright law, traditionally related to conventional broadcasting which, while easily extended to webcasting, might not apply to other kinds of digital transmission. To ensure digital communication of this kind would still be restricted by copyright, and perhaps to distinguish it from the existing controls that covered broadcasting, some rights owners lobbied to have a separate control added to copyright law called ‘making available’.

The activity controlled by this law is ‘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’. As such, it clearly encompasses downloading, but does not encompass online radio (as a result online income in this area is collected by PPL). The record companies believe that the ‘making available’ right encompasses streaming as well. However, as the MMF report states, ‘not all artists agree’ with this point of view. As illustrated by the way that the publishing sector deals with streaming income, this activity can be regarded as akin to both broadcasting and to record sales.

            Why does any of this matter? ‘Making available’ is the only area of sound recording performance rights that is exempt from ‘equitable remuneration’. Consequently, artists are not guaranteed 50% of this income. Instead, it can be collected by record companies directly and some artists will therefore be on a standard royalty rate as low as 15%. What is more, any royalties collected can be recouped from advances.

            Dissecting the Digital Dollar includes a survey conducted with artist managers. Their responses to two questions are particularly telling. 78% of respondents believed that equitable remuneration should exist for all digital services, including both downloads and streams. However, when asked if they know how collection societies proportion streaming income according to the mechanical right and the performing right, only 3% replied in the affirmative.  

Broadcast Y'Self Fitter

While it might not be the most exciting game in town, it is instructive to compare the remits of the UK's music collection societies. A Venn diagram would place PRS in the middle. It overlaps with PPL in that it is concerned with the performing right: the income that is derived from the licensing of music to public premises and broadcasters. However, whereas PRS collects this money for songwriters and publishers, PPL collects this money for performers and record companies.

            MCPS overlaps with PRS because it has the same constituency: songwriters and publishers. The money that MCPS collects on their behalf comes from the mechanical licensing of music: the copyright income that arises when songs are reproduced in recorded form, whether this be the sale of physical formats, the broadcast of recorded music on radio and television, the online reproduction of recorded music, the synchronisation of recorded music with moving images or various lesser categories, such as the mechanical reproduction of music in greetings cards. There is no mechanical collection society for performers and record companies. The distribution of money from these sources is something that record companies handle themselves.

            It is appropriate that MCPS and PPL sit at the margins of a Venn diagram, as they collect less money than PRS.  I have written elsewhere about one of the crucial monetary differences between PRS and MCPS. Songwriters and publishers assign the performing right to PRS. The collection society therefore owns this right and collects income from all performance uses. MCPS, in contrast, merely administers the mechanical right. Its members can opt to self-licence the use of their music for films, adverts and some TV broadcasts. Many chose to do so, as the fees that they can extract will be larger than can be derived from MCPS’s blanket licences.

Another crucial difference between PRS and MCPS is the way that money is distributed to songwriters. The standard arrangement at PRS is that 50% of royalties go directly to the songwriter, while 50% of royalties go to the publisher. The songwriter might also receive a share of the publisher’s 50% of royalties: a common deals are for total income to be split 75/25 or 80/20 in the songwriter’s favour. There is nevertheless a difference between the 50% that is paid directly to the songwriter and the 25%-30% of their income that PRS distributes to the publisher. The 25%-30% can be used to pay off the publisher’s advances; the 50% cannot. When it comes to mechanical royalties, a songwriter will enjoy a similar 75/25 or 80/20 split. MCPS distributes its income directly to the publisher, however. Consequently, the entire share that is due to the songwriter can be used to pay off their advances. A songwriter will not receive any mechanical income until these advances have been recouped.

            PPL has similarities with both societies. In response to the European Union’s Rental Directive, it elected in 1996 to distribute 50% of its income directly to performers and 50% to record companies. Here the society parallels PRS in that the artist’s share is safeguarded: it cannot be used to recoup record company advances. This is enshrined in law. In 1996 an amendment was made to the Copyright, Designs and Patents Act concerning the ‘right to equitable remuneration for exploitation of sound recording’. The amendment states that where a recording is ‘played in public’ or is 'communicated to the public' then this performance right ‘may not be assigned by the performer except to a collecting society for the purpose of enabling it to enforce the right on his behalf’. Crucially, this means that artists are not permitted to sign over the performance right in their recordings to their record companies. There is, however, one exception to the 'communication' provisions. Keen readers of updates to the 1988 Act are referred back to the earlier clause 182CA(1), which covers '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 is the 'making available right', which was added to copyright law following the WIPO Treaties of 1996. The electronic transmission being referred to here relates specifically to the online delivery of music. In this sole area of 'communication', performers are not entitled to 'equitable remuneration'. 

            Reflecting this state of affairs, the majority of online income falls outside of PPL's remit. The society’s Annual Review for 2011 states that:

PPL’s online revenues remain limited as the majority of online sound recording licensing is carried out directly by rights owners. This reflects the prevailing view of record companies that downloading and on-demand streaming is analogous to the distribution of sound recordings, a traditional record company function.

Their 2012 Annual Review states:

The scope of PPL’s online licensing rights remains largely limited to online radio, and income from this sector showed further growth in 2O12, albeit from a modest base. The majority of online usage of sound recordings is directly licensed by rightholders and PPL maintains a regular dialogue with its members as to the appropriate extent of PPL’s online licensing.

And in 2013:

The number of small online radio broadcasters licensed by PPL continued to grow, facilitated by the introduction of ‘self-service’ online licensing functionality on the PPL website. Revenue growth from such licensees however, was offset by a decline in revenue from the larger online radio services licensed by PPL, where the market has moved to more interactive online services licensed directly by rightsholders.

The latest Review, for 2014, tells us:

Overall growth in Broadcast & Online licensing income of 1% was delivered in 2014. This was achieved despite increased competition from new online services, which are largely licensed directly by PPL’s members.

What do record companies have to gain by regarding downloading and streaming as analogous to the distribution of sound recordings, on the one hand, or being classified as part of the 'making available right', on the other? First, it means that this income goes directly to the record companies rather than to PPL. Consequently, the money that is due to artists is not safeguarded against their advances: it will instead be used to recoup them. Secondly, it means that the record companies do not have to abide by PPL’s 50/50 rules for splitting income equitably with performers. Many recording artists are, in fact, receiving a far lower percentage of online royalties than this. You’ve probably heard about the fuss they’re making.