ARS Presentation: Leverage


Posted on November 14th, 2012 by Jean Cook in What We're Learning. 5 Comments

On Tuesday, November 13, 2012, Artist Revenue Streams co-director Jean Cook addressed Future of Music Coalition’s 11th DC Policy Summit. Beginning with a review of the 42 Revenue Streams for musicians, Jean outlined the scope of the ARS study, and then went on to discuss the structures that determine the rates that artists get paid for three specific digital revenue streams: iTunes, Pandora and Spotify. This illustration of these specific three revenue streams set the stage for a discussion about the various middlemen upon whom artists rely to represent their interests at the bargaining table, where middlemen interests align and conflict with artists, and what options exists for artists who want to be more involved in how rates for the more complex streams are calculated.

1. Who Decides How Much Artists Get Paid?

We decided to do this presentation because we wanted to talk about how artists actually get paid. A lot of people know that when you buy tickets to see a show or listen to an artist’s music online or on the radio, the artist eventually benefits from your support somehow, somewhere. But how exactly is a mystery to most folks – the details are pretty vague. As it turns out, it may be mysterious because how the money flows in the music industry can be quite complex.

So rather than money flowing directly from fans to the artists…

…the reality is more like this.

Thanks to Erin McKeown for letting me use her picture, by the way. To be clear, this map is not completely accurate nor does it exactly represent her specific experience (though she did say it was fairly close), but what this picture does is give you a sense of how money generated from music trickles back to the artist.

Of the 42 revenue streams we’ve identified, some of them are negotiated by the artist directly one way or another – like a music teacher can usually set her own rates for lessons. Sometimes the rate is negotiated by someone on behalf of the artist – like a booking agent who negotiates a guarantee or a percentage deal with a concert promoter. Sometimes the rate is set through collective agreements representing a group of creators like a union or ASCAP or BMI or SESAC. Sometimes the rate is set by a process outlined by the law, and sometimes it’s set through a private negotiation.

There are three basic categories of stakeholders that negotiate how much artists take home at the end of the day. These are the middlemen who negotiate the rates the artists get paid.

Group 1: Direct Agents. These are artist managers, booking agents, attorneys – people who work directly on behalf of an individual artist. They represent the individual artist in negotiations, and are usually paid a percentage of the artist’s overall income or a percentage of a deal they sourced and/or negotiated on the artist’s behalf.

Group 2: Record Labels and Publishers. These are investors that provide up-front capital to the artist in exchange for control over the artist’s copyrights. They distribute and promote the catalogue and pursue licensing opportunities.

Group 3: Collective Management. These are groups that have formed to collectively manage artist rights – the PROs and the unions. Entities like ASCAP, BMI and SESAC negotiate performance rates for compositions and collect and distribute the income to their composer and publisher members. SoundExchange collects and distributes digital performance royalties to recording artists and sound recording copyright owners (SRCOs). The American Federation of Musicians negotiates rates for certain types of performers and recording artists, and SAG-AFTRA represents recording vocalists.

For most if not all of the copyright related income streams, the rates artists get paid are negotiated by and with Record Labels and Publishers or by Collective Management groups.

So how are the rates determined with these middlemen and what is their ultimate responsibility to the artists?

It’s impossible generalize the answer to that question, and as we are limited in time, I’ll take a look at how the details work for three specific examples: Spotify, iTunes and Pandora. Here you can see the flow chart of the money that goes from the fan to the music service, then to the middlemen and back to the artist. I’ll be talking specifically about the complex negotiations highlighted in this slide in green – between the online services and the middlemen who represent artists.

2. The Devil Is In The Details  

Now two caveats before I show you the slides I made that explain the rates. For the purposes of this presentation I tried to focus on specific and essential aspects of the rate setting – like who is at the table, and the basic nature of the deal structure for three types of online uses (interactive streams, downloads, and non-interactive streams).

And here’s where it gets confusing. Because copyright law treats compositions and sound recordings differently, and because copyright law treats the uses like interactive and non-interactive streaming differently, just who is sitting around the table for these negotiations varies from service to service.

With that out of the way, let’s start with Spotify.

On one side of the negotiating table we have Spotify, which is an interactive streaming service. That means that as a user you can choose what songs you want to listen to and listen to them as many times and whenever you like. On the right side we have the sound recording copyright owner on top – that’s the record labels and aggregators. Below we have the composition rights.

So if I’m Spotify, I’m going to go through a private negotiating process with every record label and aggregator that controls the sound recordings I want to make available in my interactive streaming service. The deals with each label or aggregator may be different from each other, which means that some labels may get more money than other labels do for the same uses. By the way, none of these rates have been published that I’m aware of.

Then, I’m (as Spotify) going to go to the PROs and get a blanket license for the performance of compositions that are streamed on my site. Plus, because it’s an interactive service I’m also going to pay publishers for a mechanical license. The rate, which was negotiated by the NMPA, RIAA and DiMA and approved by the Copyright Royalty Board in 2012, is based on a percentage of revenue.

Now on to the next one: iTunes.

Here we have iTunes on one side of the table, and the labels and aggregators on the other side. Again these deals are private, so there is no way to know if the iTunes payments vary from deal to deal, but when Apple opened up the iTunes store to indie labels and unsigned artists in June 2003, Apple offered a take-it-or-leave-it contract, which was reportedly the same deal they offered the major labels. While the rates aren’t officially published, it’s commonly understood that the wholesale rates are about 70 cents per track download, give or take a few pennies.

You’ll note on this slide that composers are not directly part of the negotiation. That’s because payments to compositions is based on a statutory mechanical rate – currently 9.1 cents per download. And, instead of dealing with the publishers like Spotify does, iTunes does not pay publishers directly. iTunes acts like a retail store – they pay the labels or aggregators the wholesale price, and it’s the labels’ responsibility to pass along the mechanical payments to songwriters/publishers.

Now the last one we’ll look at right now is Pandora.

Now rather than doing a private deal with all of the labels, Pandora participates in a public rate setting process with the Copyright Royalty Board every four or five years to determine the rate. Pandora submits evidence and testimony about why their business is expensive and difficult and why the rates should be lower because they’re building an amazing business that benefits artists, and SoundExchange submits evidence and testimony about why artists have it so hard and Pandora wouldn’t be in business without the artists so the rate should be higher. Then the judges review the evidence from these stakeholders and others, and make a ruling on the rate Pandora will pay.

While this is happening, Pandora and SoundExchange have the option to reach their own settlement agreement of what the rates should be, which then will be reviewed and approved by the CRB so the rates can apply to everyone. This rate is published by the CRB and also on SoundExchange’s website.

On the composer side, Pandora gets a blanket license for a non-interactive stream from ASCAP, BMI and SESAC. It’s a standard formula based on ad revenue, user revenue and number of uses. The rates are published.

The important differences between Collective Management Agents and Labels/Publishers

So at the beginning of this section I asked the question: how are the rates determined with these middlemen and what is their responsibility to the artists with respect to the artists’ bottom line? As it turns out, not all middlemen are the same. While they play similar roles in the negotiation of the rates that artists are paid, there are some important differences between labels and publishers and collective management agents.

Let’s start with what they have in common.

• They simplify the licensing process by negotiating on behalf of a group of artists, a bunch of labels, or an entire catalog of work. So music services don’t have to try and negotiate directly with millions of artists, and artists don’t have to chase down every service when they use their music.
• Middlemen also take responsibility for finding and paying the artists once they receive the money from digital services. Another burden relieved.

Now where they differ:

• PROs and unions arguably ultimately answer to their artist and songwriter members. Most have mechanisms in place that allow the artists to have input on how these organizations are run and how they do business. Protecting the artist share of the income streams they negotiate and collect is dictated by law in the case of SX, and with ASCAP, BMI and SESAC it’s written into their charters.
• This is in contrast to labels and publishers. Artists rarely have substantive oversight over how the label/publisher negotiates on their behalf – especially when it comes to the majors. And, on the back end, labels can often be unreliable payment agents as many of them will cross-collateralize the income they negotiate and collect on behalf of artists against the debt the artist usually owes them, use the wrong formula to calculate what they owe the artist, or otherwise have general issues with improper accounting. These kinds of concerns extend to major publishers as well.
• In other cases, major labels have used their ability to control massive catalogues to extract additional income in the form of equity stakes, or ‘access to catalogue’ fees, or ‘showing up at the negotiating table‘ fees from new services. Time will tell whether this additional income will ever be seen by the artists or if it will make its home in the major labels’ general coffers.

3. Takeaways for Artists

So where does this leave us? We started by wanting to talk about how artists get paid. We dove deep into the mechanics about how the royalty rates are determined for three popular services, and now as we head into the home stretch of this presentation I’m going to roll back to 150,000 feet and focus  on the artist and give some context for how musicians and composers fit into this picture.

Not all income is created equal.

So where do these particular income streams iTunes Spotify and Pandora fit into the artist’s big picture anyway? While it may be a relatively small portion of an artist’s income, our research tells us that every little bit counts.

If you were to make a pie chart that included all of the revenue a musician earns, it’s probably not going to look like this.

Most of the time it will be more like this.

For this musician, live performance, salary, and CD sales on the road are more significant income streams than teaching, acting, session work, or producing income. So it naturally follows that this artist will spend more time and energy maintaining their live performance, salary and CD sales on the road streams. That is not to say the teaching, acting, session work or producing streams are not important. Most of the musicians we have spoken with rely on every stream no matter how small. It’s only through these combined income streams that they can make ends meet.

But not all income is created equal. While this artist made 30% of their income from live performance, you might say that their income from live performance is, say 5 times their public performance royalty income. But this pie chart shows gross income numbers. When you take live performance expenses into account, you might find that their net income from live performances is much closer to their ASCAP money. So the smaller income streams have more value when they don’t have expenses attached to them. You can see illustrations of this important net vs gross phenomenon in some of our project’s financial case studies.

Additionally, certain income like touring doesn’t scale the same way copyright-related income will. As tours get bigger and longer, the expenses get bigger as you hire more staff and accumulate more expenses. And, when you stop touring, you stop earning money. On the other hand copyright related streams – whether income from synchs, public performance or sound recording royalties (sometimes referred to as “mailbox money”) – can have a shelf life much longer than the artist’s career.

Finally, on the “not all income is created equal” point, it’s important to remember that most of the income streams of musicians are somewhat interdependent. It’s because they are touring that people are promoting their music and encouraging things like licensing and radio airplay which results in more PRO money. Touring also helps merchandise sales. Radio airplay helps touring and record sales. Making more records can sometimes give you a reason to tour. The revenue streams rely on each other. Successful artists are able to leverage them against each other.

What does it mean to have leverage?

Now this brings us to the concept of leverage and its role in artist income. But what does that term really mean? Leverage is a pretty broad concept and can apply in many different situations. An artist who owns their own masters and publishing has more leverage than the artist who is beholden to a label and/or publisher. Labels are banks that have leverage with some artists simply because they can advance cash. Music services gain leverage with artists and labels when they start to get traction and have a critical mass of users. Artists gain leverage when they collectively manage their rights. In other cases, publishers with valuable catalogs gain leverage when they chose not to give up control to collective agencies and negotiate their own deals instead.

If we really want to talk about leverage, we need to acknowledge that major labels and major publishers have a lot of it (and artists don’t). Through their legacy catalog and existing roster, major labels control access to vast amounts of valuable recorded work and compositions.  And, even in this age of ubiquity and talk about the “death of major labels”, their power has not diminished in this area.

This is a fundamental dynamic that has and will continue to shape all negotiations about music rights for the forseeable future. While new digital music services want to pay the absolute minimum they can get away with and want the licensing process to be as easy as possible, artist, copyright aggregators, and collective management bodies want the rates to be as high as possible and, in the case of the majors, have the leverage to force a conversation about the material differences between a stream, a download, a tethered stream, a ringtone, an audiovisual use, and interactive use, a non-interactive use, the list goes on and on.

The road to that frictionless licensing process of the future that many dream about is rocky, difficult, expensive, and long. It’s also an excruciatingly incremental process.

Artists oversight over rate setting

So if the previous takeaway is about how leverage has an impact on the landscape for negotiation, this third and last takeaway looks at where the artist fits in in all of this.

In the earlier examples in the presentation we described the rate setting process for a few different digital music services. Artists have different levels of oversight depending on who is at the table in the rate setting process. It’s not a ton of influence as individually they tend to have very little leverage in these negotiations, but opportunities to participate and be heard do exist.

For example, when setting the rate paid by Pandora for how much performers get paid – as in many statutory rate-setting processes – there is a public aspect of the process through the proceeding at the Copyright Royalty Board. Any stakeholder can participate in the proceeding and any participant can file testimony about how the rates should be structured and submit evidence to support their position. If artists disagree with how SoundExchange is representing them, they have the ability to participate in the proceeding, and their testimony will be considered by the CRB judges.

In the case of blanket licenses offered by ASCAP, BMI and SESAC described before, as members of the PRO, artists theoretically have the ability to give feedback directly to the PRO on the rates set. In cases where artists were unhappy with the PRO rates, they can move their catalogue to another PRO or – if they own their own publishing and have some leverage – pursue direct licensing with music services for their catalogues.

In the case of private deals, though, artists have limited recourse if they are unhappy with the rate that is agreed upon by music services and the middlemen – the labels and publishers – who control the artists’ copyrights. There is very little transparency about the process and the rates are rarely even published (in contrast with the CRB process or the blanket licenses offered by the PROs). Because the deals are private, there is no way to know for sure how much artists are supposed to be paid; too often, there is little accountability in the reporting when labels distribute the royalties paid to them.

Now this is not to say that private deals are always bad. There are times when private negotiations are the best way for artists to get the most value out of their work. But you have to be at the negotiating table to benefit from the process.

Conclusion

Despite their many differences, there are a few things that music services and rights holders can probably agree on. As this industry moves forward I think there is broad consensus that more efficient ways of licensing is a good thing. For example, it’s not a good idea for music services to have to chase down all of the individual publishers for every song they want to use that isn’t in the NMPA catalog. We’ve heard every stakeholder at one time or another say they want individual artists to get paid. There is probably also consensus that accurate payments and accountability on all sides isn’t the worst thing in the world. And transparency is one of those words you hear again and again at conferences like this one.

These are principles that can perhaps help guide those of us trying to figure out the next step for more efficient licensing processes of the future, as well as some suggestions for middlemen who are interested in improving how they serve artists they represent.

 

Other resources:

FMC’s New Business Models spreadsheet which provides details on about 30 different digital music models and if/how various rightsholders are paid.

FMC’s Digital Distribution infographic which describes how musicians can engage in the digital marketplace, and the costs associated.

 






5 Responses to “ARS Presentation: Leverage”

  1. [...] Coalition’s Kristin Thomson in What We’re Learning How Artists Make Money by Jean Cook Artist is Erin McKeown There are a number of assumptions made about musicians and money. Some are [...]

  2. […] and that individual musicians (unless you are as powerful as Metallica or Pink Floyd) have almost no leverage over that (c) per-play […]

  3. […] and that individual musicians (unless you are as powerful as Metallica or Pink Floyd) have almost no leverage over that (c) per-play […]

  4. […] Cook, J. (2012, November 14). ARS Presentation: Leverage. Retrieved November 29, 2013, from futureofmusic.org: http://money.futureofmusic.org/leverage/ […]