Making streaming fairer for artists

The music industry's prickly relationship with the digital landscape is only set to get more complicated. But are the concerns over the fairness of the fraction-of-a-cent streaming royalties valid?

Thom Yorke’s recent decision to pull certain albums from digital music streaming services such as Spotify in protest over artist royalties again highlights music’s prickly relationship with the digital landscape. Pink Floyd also recently took aim at Pandora’s royalty rates. But are artists concerns over the fairness of these fraction-of-a-cent streaming royalties valid?

Increasingly, it is looking like streaming services could work at the aggregate industry level, converting pirates to paid customer in the process, but could struggle to deliver a sustainable future at the individual artist level unless action is taken by the industry.

Two overlooked distinctions

But to understand whether the concerns of the artists are valid, two generally overlooked distinctions must first be made – from a service perspective and from a royalty perspective.

From a service perspective it is necessary to differentiate between webcasters like Pandora (think of them as a new breed of highly personalised online services, like a kind of radio you control to play to your tastes) and on-demand subscription providers like Spotify (think of them roughly as potentially the “new” CDs or digital downloads – but ones you have access to but don’t actually own). Both have different underlying business models and music use that lead to different royalty calculations and rates.

For webcasting, the underlying business model hasn't changed that much, even though the delivery mechanism may have changed (from over-the-air broadcast to the internet) and user consumption may have changed (from a traditional radio to a smartphone, tablet or any other internet-enabled device). Like traditional radio, Pandora’s business model is based on selling advertisements. But the music use is not the same, with users having an element of control via personalised playlists and limited track skipping.

For on-demand subscription services the traditional business model shifts significantly, becoming more utility-like and based on a flat per month subscription fee ($12 per month in Spotify’s case in Australia). This is a very different model to the traditional per-unit pricing business model of iTunes downloads and CDs that artists and the industry are very familiar with.

These different streaming services generate different types and levels of royalties for artists – just as CDs, iTunes downloads and traditional radio do. The royalties separately cover the songwriter (the person penning the actual words and music), the underlying sound recording (generally the record label funding the production of the song) and the performer (the members of the band singing and playing the song on the recording).

For example, a hit song such as I Will Always Love You was performed by Whitney Houston for Sony but written by Dolly Parton. A more recent example is the hit Rihanna song Diamonds, which was co-written by Australia’s Sia Furler.

In addition to varying by service type, these royalty rates (and, in some cases, if they are applicable) can also vary by country. The debate is further blurred by the fact that service providers like Spotify and Pandora do not technically pay any royalties directly to artists at all. Royalties are collected by the players that represent each royalty and payment is then made to artists based on their existing contracts or agreements.

In Australia, songwriting royalties are collected and distributed by APRA|AMCOS and sound recording royalties by record labels and digital aggregators / distributors.

No simple answers to a complex question

Clearly, asking whether streaming services are shortchanging artists is not a simple question to answer. In many cases, such complexity often makes it unclear what both sides are actually discussing when comparing “artist royalty” rates. Any discussion should firstly be framed in this context to be on common ground.

Artists have a strong position to argue they are being unfairly squeezed by webcaster Pandora’s attempt to reduce songwriting royalties as they look to deliver profits to shareholders. We have discussed this previously, so let’s put Pink Floyd’s gripes aside and focus on Thom Yorke’s concerns regarding on-demand subscription services like Spotify from a songwriting royalty perspective.

In Australia’s case, songwriting royalty rates paid by subscription streaming providers licensed by APRA|AMCOS such as Spotify, Rdio, Deezer and MOG are around nine per cent of gross retail revenue – the same paid by digital music download providers like iTunes.

This means that at the aggregate level, the total amount of songwriting royalties generated by subscription streaming would be equivalent to that seen from traditional download offerings if the former completely replaced the latter in overall sales terms in Australia. If streaming grows the overall music market in Australia so will songwriting royalties – as has been proven in Sweden where streaming now delivers greater sales than CDs and downloads combined.

In Australia’s case, if physical product sales continue to decline and digital downloads soon peak, our modelling indicates that streaming takeup of between 10 per cent and 20 per cent of mobile subscribers could deliver overall music market growth in the coming years. As per Sweden, this will need to be on the back of strong tie-ups and bundling plays with mobile, broadband, television, device / equipment manufacturers and automotive players.

Piracy implications

Streaming services are also important in the fight against piracy. At an industry level, although heavy (legitimate) music users of old that choose to completely switch to streaming may spend less per annum than they previously did, some converted pirates and low spenders of old could jump from zero or low spends to almost $150 per annum. Overall, it is generally believed that this will be positive for industry sales growth.

Spotify claims it’s “still in the early stages of a long-term project” and that artist royalties will grow when subscriber levels grow. Although this is true at the aggregate level, for artists scale alone will not alleviate Thom Yorke’s concerns. By nature, streaming models deliver very differently once they filter through to the artist level and the industry as a whole needs to work this out or music will suffer.

With such huge volumes of music uses compared to traditional formats many more songs need to share in the royalty pie. This is highlighted by PRS for Music, the UK songwriting collection society, who indicated that last year they processed 124 billion music uses compared to just 15 million in 2007. Clearly per unit royalty rates are going to be much lower in this environment.

The upshot is that at the artist level it could take years to generate the same dollars it might have previously taken just months to generate with a new release. Even if the overall pie is bigger, “middle class” artists that previously survived on small shares of the pie could end up starving on crumbs.

Those previously relying on the near-immediate returns of download and CD sales to fund future projects, promotion or tours will need to find different funding avenues to maintain ongoing careers. Although a band like Radiohead – with its huge back catalogue being streamed and monetised with each new release – will not struggle, Thom Yorke is right to highlight the plight of new artists in such an environment.

Equitable streaming requires reinvestment

Given the money may still be there at the top level a solution is needed that also reaches the artist level. With the majority of artists’ royalties generated by the sound recording, traditional record label advances could become increasingly important in a streaming future if up-front investments take much longer to recoup. Crowd-funded platforms like Kickstarter are helpful but will not fill the gap for the majority of artists. Contrary to popular opinion, touring and concerts will not either.

Thom Yorke has also pointed the finger at shareholders. Spotify is currently valued at around US$4 billion, with key shareholders such as founder Daniel Ek and Napster’s co-founder Sean Parker set to generate huge windfalls if the company progresses to its expected IPO. Ek’s share alone could deliver him the same amount the company has paid in total artist royalties to date. Reinvesting some of that in artists would probably be welcomed by artists.

With record labels owning around 16 per cent of the equity value in Spotify, sharing some of this with the artists that helped create that value would also be welcomed. Additionally, considering weighting new releases towards higher royalty levels could be another option, particularly to drive investment in new artists and their work.

Overall, artists such as Thom Yorke are indeed warranted in their concerns. But the issue goes much deeper than a simple fraction-of-a-cent per unit rate battle. Unless the music industry comes together to make streaming services work at all levels the whole industry is set to suffer.

Andrew Harris is Principal Analyst at APRA|AMCOS, The Australasian Performing Right Association (APRA) and Australasian Mechanical Copyright Owners Society (AMCOS).