How Money is Generated and Distributed in The Music Industry

Alot has changed in the way money is generated in the music industry since the days of huge first week CD sales and chart wars between rival pop groups. The digitalisation of music has seen the need for new business plans to cope with the way revenue is generated and contract specifics to how it is distributed between the key stakeholders of Digital Service Providers, Labels, Publishers, CMO, Artists and Songwriters. This blog aims to give you an insight on the specific areas of this subject.

 

The Breakdown for Streaming

Streaming works on a pro rata revenue share deal. How the money is generated comes from two avenues, paid for subscriptions and ad funded “freemium’ services. Each of these two models requires separate deals between the Digital Service Provider or DSP’s (Spotifys and Apple Musics of this world) and the labels and publishers whose content fills up these platforms.

To break it down without the specifics of either of these deals the way it works goes like this.

There is a big pot of money that is generated each month (or near enough). Then it is worked out how many subscribers the services has, the revenue after tax, the total number of streams, the total number of streams from each label or artist. Then a proportion of total streams that came from an artist or label is calculated which attributes a percentage of the total revenue after tax and therefore the slice each artist or label gets.

The DSP will take its cut of around 30%, on a side note, I will be using words like around and estimate for pretty much all the figures throughout for the reason all deals done regarding streaming are subject to nondisclosure agreements which create a huge lack of transparency and trust throughout the industry. Therefore leaving the label with 55/66% and publishers 10/15%. There are question marks over whether this split between recording rights and song rights is fair when the labels costs (and risks) are significantly lower in the digital age with no manufacturing costs. Should there be a rebalancing of the scales?

The problem is that licensing deals are done for the sound recording first by the label who gobble up a large portion of the digital pie leaving the morsley leftovers for the poor old publishers. If iTunes was the evolution of the record shop then surely streaming is the evolution of the radio and traditional broadcast split should be undertaken. A recent survey conducted by the MMF found that no one was demanding a 50/50 split but a 75/25 in the labels favour may fairer.

The 30% that the DSP keeps is similar to the cut the record store would have taken back in the day but it has become increasingly apparent that companies like Spotify are taking a hit on their percentage for reasons listed below.

Other Aspects

 

Along with the basic revenue share income that labels received from the DSP’s there are several contingencies tied into the deals done which affect how money flows through to certain key stakeholders.

A series of minimum guarantees that the DSP has to reach. Whatever revenue they generate a minimum payment is received for each time a track is streamed. It would be hoped that currently as streaming has grown so large now especially services like Spotify that these minimum guarantees would have been surpassed.

Due to streaming services being licenced directly each streaming minimum guarantee or rate each artist’s receives is subject to the deal an artist’s label has done with the DSP. This only creates further confusion and disillusionment with royalty statements. A step towards collective licensing with the aim of a set rate per stream would clear some of the lack of transparency around the subject and allow for easier auditing of royalty statements.

Advances are paid by the DSP to the label up front so for the licensing period labels know they will make at least a set amount of money which they are certainly going to be happy with as have negotiated these themselves. What has become an issue is what happens to the excess money that does not get recuperate, also known as breakage. It would seem that artists whose work helped gain the labels favourable advances have not been given a sniff of this breakage or may not even be aware of this. Which leads me to believe that the rights holders in the labels have kept hold of it all for themselves. Whether or not there is any legal obligations for them to give their artists a share I believe that there certainly is an ethical one,

Labels also demanded equity in initial deal with the DSP’s as it is quite apparent that the biggest revenue generator may be the sale of a certain DSP. With Spotify estimated at being worth over $8 billion in 2016 (Shaw, M. and Barinka, M 2016), when it floats on the stock market huge sums of money will be going the labels way. In recent times Warner Music and Sony Music have committed to sharing the profits with their artists for the first big payday which will most likely be Spotify’s IPO. Universal have not to date followed suit.

The average record contract pays around a 15% royalty to an artist on revenue earner from their work for a “Sale” of their work. More generous offerings are made when their music is “Licenced”. What do record companies do with contracts of older artists that don’t mention anything digital? As clearly labels license their music to the streaming service some interpretations would see the larger percentage being paid. This rarely happens and the sales model is adopted, albeit kicking and streaming from some artists who sued their labels like The Bass Brothers did (and won) with Universal Music.

 

Publishing

Due to publishers not controlling song copyrights outright they are assigned by the songwriter to their CMO, PRS in the U.K. Publishers get paid a share of the revenue created by the exploitation of these elements of the copyright. Unlike with the recording side, the CMO’s cannot be cut out of the deals made with the DSP’s and as many songwriters and artists will agree with, this is favourable due the extended level trust for their CMO opposed to their label or publisher.

How this publishing aspect is split is that revenue generated by the exploitation of performing rights to a song is paid in full to the CMO who then pays the songwriter 50% and the other 50% goes to the publisher after the non profit commission is taken. Depending on the publishing contract the songwriter has with the publisher a cut of the publisher’s half may be passed over to the songwriter. It is important to note that the 50% paid to the songwriter is not subject to deductions of any kind in accordance to any advance received from the publisher. So you would assume songwriters would prefer the performing rights to be exploited opposed to the reproduction right which I will explain below.

The CMO will collect money generated through the exploitation of reproduction rights when they are licenced collectively (when the CMO licences the DSP). The CMO then passes the money over to the publisher who pays a royalty to the songwriter in accordance to the publishing contract, once their advance is recouped.

In an attempt to move away from collective licensing joint ventures between the CMO’s and publishers have been made. They go by the acronym SPV which stands for Special Purpose Vehicles. With the relevant permission from the CMO the SPV can negotiate a direct deal with each DSP that covers all elements of the song. The deal is led by the publisher but has to be approved by the CMO, therefore the best interest of the songwriter is preserved.

These SPV’s do make it easier to license songs as only one deal needs to be made and essentially generate revenue for all but it is not that simple when it comes to publishing like it is with recording rights. Co-ownership of the copyrights due to collaborative efforts between songwriters, which we all knew to be common, leads to problems, problems that mean people aren’t getting paid what they are owed. And no one likes that do they? With the lack of centralised data surrounding ownership of songwriting copyrights songs may have been or currently still being streamed where full copyright isn’t licensed. Songwriters who have a percentage of ownership often receive no remuneration for their work and this is not right, especially when the money is going somewhere. This is a specific problem to songwriters but a certain amount of responsibility must be laid onto the DSP and I for one do not buy into any of the claims that Spotify not knowing who to pay.

How they work out what is owed, is that DSP’s will send a streaming report to both the publisher and the CMO with the amount of time a song is streamed. It is then the job of the publisher and the CMO to separately go through these and work out what they are owed from the songs and what part of the copyright that belongs to them and send an invoice to the DSP. Then what frequently seems to happen is that these invoices never add up to 100%, but always more which causes problems all round as the DSP is not going to pay out more than they owe so there is a delay in payments being made. With songwriters already claiming about drastically low royalties coming from streaming, any delay or non payments due to incorrect publishing data further worsens their situation.

It seems to me that there is a simple solution to their problem with a little bit of cooperation was to happen. Force labels to provide the DSP with publishing information when they licence the recording. Sort of like a pseudo rights ready model like in the good old days of CD sales.

 

Performer ER Argument

 

There is some controversy over which rights streaming actually exploits on the sound recording side. Currently, as it stands the reproduction rights are being exploited but there is a valid argument that the performing rights are instead. This would mean performer equitable remuneration should be paid. Meaning that artists who performed on a recording are due payment, this includes session musicians.

The record labels argument against this is the performing right aspect of a stream is more alike the “making available control” and not a pure communication to the public. The making available control is defined as an electronic communication that the user can access from a place and time chosen by them.

Copyright law does not define what equitable remuneration means but traditionally a 50/50 split between the performers and the copyright owners would be made on money generated through the use of sound recordings that exploit performing rights. If a stream was to constitute exploiting the performing rights then record labels would see a huge portion of their income diminish. Many roundtables put on by the MMF have noted this and realised that following the old model of 50/50 would not be workable but an agreement needs to be made between labels and artists. It is not simply a case of the division of revenue but crucial for a demographic of people who have relied on income paid to them in Performer ER, like session musicians who litter the recordings of less talented but better looking artists. How would you like it if suddenly you stopped receiving money which was one of your main sources of income? That happened to the labels and look how they dealt with it.

 References

Auddly.com. (2017). So Spotify doesn’t know who to pay? Here’s the simple solution. [online] Available at: https://auddly.com/spotify-pay-songwriters-simple-solution/ [Accessed 11 Apr. 2017].

CMU Insights, (2015). Dissecting The Digital Dollar. [online] Music Managers Forum. Available at: https://themmf.net/wp-content/uploads/2015/09/MMF_DDD-Part-Two_Full-Report_Web.pdf.pdf [Accessed 11 Apr. 2017].

CMU Insights, (2016). Dissecting The Digital Dollar Part 2. Music Managers Forum.

Fuller, Z. (2017). Why Drake’s More Life Is The New Normal In Streaming. [Blog] Music Industry Blog. Available at: https://musicindustryblog.wordpress.com/2017/03/23/why-drakes-more-life-is-the-new-normal-in-streaming/ [Accessed 29 Mar. 2017].

Shaw, M. and Barinka, M. (2017). Will a Spotify IPO Live Up to Its $8 Billion Valuation?. [online] Bloomberg.com. Available at: https://www.bloomberg.com/news/articles/2016-07-20/will-a-spotify-ipo-live-up-to-its-8-billion-valuation [Accessed 10 Apr. 2017].

Wallach, D. (2012). Spotify’s D.A. Wallach Explains How Spotify Pays Artists.

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