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Music streaming services and licensing fees – How do artists fare?

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The last 12 months have seen a huge influx of digital music-streaming services ("MSSs") such as Spotify into the Australian online music market. These services offer subscribers unlimited access to stream from an online library of millions of songs in exchange for a subscription fee (or in some circumstances, offer free access with advertisements). This model is a departure from the concept of "owning" music, and is set to redefine the way music is consumed. With such services already prospering in overseas markets and predicted to take over a significant share of the blossoming Australian digital music market over the next few years, [1]concerns have been raised as to whether or not these services pay musicians fairly. This article will examine how MSSs licence music, how their revenue is distributed, and analyse whether they benefit or exploit musicians.

How do MSSs obtain permission to upload artists’ music for streaming?

There are usually three separate copyrights to consider in a song recording.

The first two copyrights are the copyright in the song itself (the "musical work") usually owned by the songwriter, and copyright in the lyrics (the "literary work") usually owned by the lyricist. For an MSS to be able to legally stream the song, it needs a licence from both these copyright owners. These can generally be obtained through APRA-AMCOS (if the copyright owners are members) in exchange for a fee based on a percentage of the MSS's revenue.[2] APRA-AMCOS distributes these earnings to its members in proportions corresponding to the number of downloads of each song.[3]

The third copyright is the copyright in the sound recording itself, which (for recordings made after 2005) is generally owned by all the performers on the recording, plus whoever owns the master at the time (often a record company). It is, however, common for a record contract to specify that instead the record company is the sole owner of this copyright, giving it full power to license the music to other parties.

Any copyright owner has the exclusive right to communicate their copyright material to the public. If someone such as an MSS wants to communicate a recording to the public by making it available for streaming online, they will need to obtain a licence from the copyright owner for a price to be negotiated between them.

How are licences and royalties negotiated?

MSSs have struck deals with the major record companies whereby they pay millions of dollars for access to (ie., a licence for) a record company's complete catalogue of music.[4] In the US, the upfront fees paid to record companies by Spotify reportedly exceeded $100 million.[5]

These agreements also require the MSS to pay a small amount of money every time a song is streamed.[6]This money is shared between the record companies and the relevant artists in proportions specified by the recording contracts they have signed – the MSSs do not decide how record companies and artists divide this money.This model is very favourable to record companies, as the large upfront access fees they earn do not have to be shared with artists.[7]

Independent artists can also make their music available on MSSs by using artist aggregators, which are companies that have negotiated their own licencing arrangements with the MSSs. It is understood that the aggregators (and independent record labels) are offered less favourable licencing rates than major record companies, who have superior bargaining power. However independent labels that are members of Merlin – an organization that represents the rights of thousands of independent labels – tend to get similar treatment to the major record companies because Merlin negotiates as one unified body on behalf of its members.[8] It is also noteworthy that the major labels, along with Merlin, own a minority stake in Spotify.[9]

How much do artists earn from having their music streamed?

Let's take Spotify as an example. The amount of royalties that Spotify pays per stream is unknown, but we do know that it is proportional to its revenue and will therefore increase as its user base grows. The company has pointed out that since Spotify's inception this rate has more than doubled in overseas markets. Recent reports have put the figure at about one third of a cent,[10]and it is estimated that anywhere between 100 and 300 streams are needed to generate the same income for an artist as one iTunes Store download.

Such figures are concerning. At these rates it is most unlikely that even the most popular songs would be able to generate as much income for an artist from Spotify as they would from iTunes. With trends showing that as services such as Spotify grow and are are likely to take significant market share away from retailers like iTunes which offer greater returns to artists, musicians should carefully consider their business plans.

There are on the other hand, several benefits to consider. Firstly, MSSs are a convenient and cheap alternative to engaging in online piracy, and are attracting scores of new legitimate music consumers who otherwise may have continued procuring music by illegitimate means. The music offered by MSSs is legal, meaning they have obtained licences from the relevant owners of copyright in the sound recordings that they upload for streaming. A service that gives people incentives to consume music legitimately instead of engaging in copyright infringement boosts the value of the record industry – an industry which until recently, had for a decade been in a constant state of decline.[11]

What MSSs lack in artist returns per stream, they make up for in the sheer size of their subscriber bases, which are growing exponentially. With each Spotify subscriber spending $11.99 or $6.99 every month, or earning Spotify advertising revenue,[12] there is substantial money being injected into the online music industry to the potential benefit of artists. Spotify board member Sean Parker recently went so far as to boast that within two years Spotify will be generating more revenue for the music industry than iTunes.

Given constantly improving technology, internet accessibility, and the convenience and affordability of MSS subscriptions, the market share of MSSs is set to keep growing exponentially. What this means for artists in the long term is yet to be seen. Spotify claims thatartist returns will grow proportionately to the size of its subscriber base, and Spotify Artist In Residence D.A. Wallach recently pointed out that since the company's inception, its per-stream royalty rate had doubled with 70% of its money now paid out as royalties.[13]On the other hand, the example of Sweden where Spotify has a significant market share (it accounts for 42% of record label revenue) is one where Spotify still delivers poor artist returns.[14] Certainly some artists are yet to be convinced as to MSSs, with The Black Keys withholding their latest record El Camino from Spotify saying that, "for a band that makes a living selling music, it's not at a point where [online streaming] is feasible for us."[15]

The true position seems to be that although payments to record companies are increasing with the popularity of MSSs,16 these benefits are not being passed on to artists.17Such an issue is, however, a matter of negotiation between record companies and artists, rather than artists and MSSs. Artists need to place importance on negotiating fair MSS royalty terms when signing a recording or digital distribution deal. As MSSs become more popular, there is real potential for them to become a key source of income for artists.

For independent unsigned artists, the situation is different, as some aggregators pass on 100% of royalties paid out by the MSS charging only an initial signup fee. Other aggregators take a percentage for themselves. But as explained above, the royalties that aggregators have negotiated with MSSs are less favourable than those of the major labels and Merlin, meaning there is less money to begin with.

Conclusion

Artist concerns aside, MSSs are offering new financial hope for a record industry that has suffered a decade of falling profits. The fact that the major record companies have bought into Spotify suggests a belief in the long-term success of MSSs, and therefore future profit. There are good reasons why artists should want these services to succeed too: they provide accurate statistics on how many times each song is streamed, which is the fairest basis on which to distribute royalties; they can potentially continue delivering royalties for the entire life of the copyright (compared to a music purchasing model, which earns the artist a once-off larger lump sum only); and they have low barriers of access for independent artists.

For artists to benefit fairly from the financial opportunities that MSSs bring, however, two things must take place. Firstly, all record labels and aggregators need to negotiate fairer per-stream royalties from MSSs, especially as the popularity, and thus revenue, of these services grows. Organisations such as Merlin play an important role in this. Secondly, artists need to negotiate a greater share of the profits at the time of signing with any label or distributor.  If these two things were to occur, MSSs could become a major reliable source of financial opportunity for artists in the digital age.

David Szental is a graduate of Bachelor of Arts / Bachelor of Laws (Hons) at Monash University. He is a current student at the College of Law and is passionate about entertainment law and the music industry.

Related Arts Law articles:

·         Musician's copyright royalties in the face of a changing industry: https://www.artslaw.com.au/articles/entry/musicians-copyright-royalties-in-the-face-of-a-changing-industry/



[3]Ibid.

[5]Ibid.

[6]Ibid.

[7]Ibid.

[10]Ibid 4

[12]The differences between the subscriptions are the presence of advertisements, the ability to stream from multiple devices and the option to cache playlists for listening offline.

[14]Ibid 4

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