It’s hard to think of a more brain-deadening topic than the U.S. Copyright Royalty Board’s proceedings over the rates for music streaming. But deep in the dense legalese lies a heated battle over the billions of dollars in royalties generated by streaming services — one that pits the music industry against some of the biggest companies in the world. At stake is nothing less than the future of the music business and the livelihood of the American songwriter.
On the music side are publishing companies — dominated by the three majors, Sony, Universal and Warner — while on the streaming side are Amazon Music, YouTube (owned by Google/ Alphabet), Pandora (owned by SiriusXM/ Liberty Media) and the global market leader, Spotify; Apple Music, the world’s second-largest service, is staying out of this fight, letting the other companies “take the bullets,” as one top executive puts it.
The two camps have spent tens of millions of dollars in legal and lobbying fees in an unusually bitter public battle that has sprawled over the past several years. And they’re about to do so again as the sides gear up to fight over setting rates for the next four-year term, a negotiation that is expected to begin in September.
Caught in the middle are songwriters, who are counterintuitively at the bottom of the totem pole in the streaming economy.
The two sides in this “deeply dysfunctional symbiotic relationship,” in the words of one executive, have devolved into squabbling partisan camps that are nevertheless completely dependent upon each other. “Every deal point with the tech sector is contentious,” one top music executive says. “But this one’s gotten so bitter. I mean, can’t we get along?”
Acknowledging that dysfunctional symbiotic relationship, key players in this fight were more than willing to say horrible things about the other side on background, but few of the 30-odd executives Variety spoke with for this story agreed to comment on the record.
Says veteran music attorney Chris Castle, “This is not the way people who have an economically interdependent long-term relationship treat each other.”
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The devil is in the details. Using a model jerry-rigged from the CD and vinyl eras, streaming royalties are divided two ways: Approximately 75%-80% are split between the performing artist and, usually, a record label, while 20%-25% go to publishing — i.e., the composition, which is divided between the songwriter(s) and publisher(s).
This uneven division of the revenue was originally calculated to account for the expenses that labels incurred in the manufacture and distribution of vinyl, CDs and cassette tapes. That lopsided split may or may not still make sense in the streaming age, depending on whom you ask.
During the vinyl and CD eras, many songwriters were able to earn a decent living because the per-song royalty on an $18 album was relatively high. But in the streaming economy, where a song must accrue many millions of streams even to approach the royalty it would earn on a CD sale, the bar for sustenance, let alone success, has become dauntingly high.
Why do labels receive such a large percentage of streaming royalties if there’s no physical product involved? One top music executive defends the practice, telling Variety, “The costs that labels used to incur for manufacturing and distributing millions of CDs and records have shifted toward maintaining and distributing databases for streaming services, along with such long-standing expenses as recording, artist development, marketing [and] advertising” that are rarely borne by publishers.
However, executives at streaming services argue that it is very much in the majors’ interest to maintain that system, because labels can make deductions on those expenses, and note that the system is riddled with conflicts because the world’s three major music groups own the three largest labels and the three largest publishers. Also, publishers take a significantly lower percentage of streaming royalties — around 25%, according to the National Music Publishers’ Assn. — than labels do for most artists.
Complicating the situation further is the fact that labels’ streaming royalties are determined by free-market negotiations between the music companies and streamers, while publishing is determined by the government via the Copyright Royalty Board panel. It’s an unbalanced system that has no real parallel anywhere else in the world — one music exec calls it “absurd, archaic and unnecessary” — but it is unlikely to change in the foreseeable future.
“Consequently, we’ve had this lopsided arrangement between [publishing] and sound recordings for a long time because sound recordings can set their own prices,” says Castle, who dates the split to a 1909 law governing player-piano rolls.
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Ironically, this fight pits the music industry against its savior: streaming, particularly Spotify. Founded in 2006 by current CEO Daniel Ek and Martin Lorentzon, Spotify was not the first streaming service, but its ease of use, nearly bottomless catalog and sexy marketing made it the first to be widely adopted and imitated — the shiniest music gadget since the iPod. In the process, it achieved the near-miraculous feat of convincing a generation that had grown up getting music for free to pay for it.
Indeed, at the time of Spotify’s U.S. launch in 2011, the American recorded music industry had seen its value cut in half over the previous decade, from $14.6 billion in 1999 to $7 billion in 2010, gored by illegal downloading and plummeting CD sales. Although streaming royalties were a pittance compared with the bounty from physical CDs — the pricing model changed from around $18 for one album to $10 per month for many millions of songs — it was a vast improvement over nothing, and the freefall stopped almost immediately.
By 2021, recorded music revenues reached $15 billion, according to the Recording Industry Assn. of America, bringing the music biz back to its arrogant old self. Goldman Sachs’ annual “Music in the Air” report issued last month forecasts the boom to continue even in the face of a leveling-off of streaming growth and tough times for the overall global economy.
But despite the industry’s revival, the U.S. subscription price, which was set at $9.99 per month at the dawn of the streaming age more than two decades ago to mirror the cost of a Blockbuster video-rental subscription, implausibly has not budged — and in a sadly ironic twist, the entity who benefits least from this new business model is the one who actually creates the product: the songwriter.
The CRB has acknowledged that songwriters deserve a greater share by ruling in 2018 that publishers would receive 15.1% of streaming revenue instead of the previous 11.4% for the period spanning 2018-22. That decision was upheld earlier this month, despite a hard-fought, multimillion-dollar appeal from the streaming services. The NMPA has said it will argue for an even greater increase, to 20%, for the next four-year period, negotiations for which are expected to begin in September.
While all sides say they agree that songwriters deserve more money, exactly where that money is supposed to come from is at the core of the dispute.
The streaming services argue that they already shell out billions in royalties to the music industry (Spotify says it paid out $7 billion in 2021 alone) and that these increases will make their business models unsustainable. They say that the additional funds for publishing should come out of the labels’ share, with the labels voluntarily shifting a percentage of their royalties to publishers — an unrealistic and laughably “heroic assumption,” in the words of one CRB judge.
The music companies argue that streaming rates initially were set low in an effort to help the then-fledgling services get off the ground, and the revenue was so small at first that the difference between rates of 10% and 15% was negligible. But now that revenues are in the billions and the some of world’s biggest companies are in the game, “it’s time to pay,” they say.
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Despite its foundation in music, Spotify has always behaved more like a tech giant, spending lavishly and at times questionably, considering the company posted a net loss of $39 million in 2021 and $580 million in 2020. The music companies argue that even though Spotify definitely is not on the same level as an Apple or Amazon, its showy spending on offices, salaries, advertising, events and other endeavors — particularly a recent $300 million investment in the Barcelona Football Club that hardly seems business-critical — make their pleas of poverty, at least when it comes to royalties, deeply unconvincing.
“Profitability is a choice,” a top music executive insists. “You can reduce infrastructure, marketing and advertising costs, and maybe not throw such big parties.”
Many insist that streamers, particularly Spotify, could be profitable if they tried. Yet they are locked in such a tenacious battle for market share that growth trumps all other considerations. This ground war between the streaming services has led to dozens of different plans — including ad-supported, a.k.a. free models — all of which mean less money for musicians and songwriters.
“It makes no sense,” says Milana Lewis, CEO of the distribution and payments platform Stem. “The price of everything else on earth is going up, and they all keep finding new ways to make subscriptions cheaper” via family and student plans, bundling and other initiatives. Another exec insists, “They’re giving away their profits with these discounts.”
Why is growth so important? Obviously because it’s what Wall Street and investors expect, but also “because tech companies all want to upsell other things,” one music executive says.
Indeed, Ek has made no secret of Spotify’s goal to become “much more than just a music company,” as he said during its “Investor Day” in May. He spoke from a defensive posture: The formerly sleek and suave Swedish streamer has undergone a series of public-relations fumbles since it went public in 2018, most prominently over racist language used by its top podcaster, Joe Rogan. At the time of this article’s publication, its stock price was slightly more than a third of its January 2021 peak. Yet Ek insisted several times to investors that Spotify’s model, “in its totality, is doing way better than you think,” and made his future goals very clear.
“The best companies — think names you are all very familiar with — are vastly different today than when they started,” he said. “They made their initial mark in one specific category: books [Amazon], search [Google], desktop computers [Apple], and they then redefined the way we think about those categories by expanding their potential through innovation … And this is the exact same journey we’re on,” he said, sprinkling several vague references to the company’s still-nascent “marketplace” into his speech.
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Perhaps the fieriest critic of the streaming services is David Israelite, president and CEO of the NMPA, whose aggressive tactics and verbiage were on full display at the trade organization’s annual meeting in June. At times, the event took on the tone of a rally, with Israelite’s condemnations of the “streaming services’ war on songwriters!” missing only a Fox News-style whoosh.
He portrayed the CRB battle in unambiguous terms, characterizing it as songwriters and publishers “fighting for fair rates for the songs that make these digital services possible.” He also asserted that “some of the largest companies in the history of the world [are] arguing for the lowest rates in the history of digital music,” although any David vs. Goliath implication is undercut by the fact that the major publishers are also owned by multi-billion-dollar corporations. The NMPA has described the streamers’ appeal of the CRB’s 2018 decision as “suing songwriters.”
Not surprisingly, those arguments make executives at the streaming services apoplectic. “There’s so much more money going out than coming in that there’s no way for us to reasonably make a profit,” one top streaming executive says. Another notes: “The publishing industry had its best year ever” with $4.7 billion in 2021 revenue. “It’s more successful and profitable than ever before.”
A solution, according to this executive, is the heroic assumption mentioned above: That labels voluntarily shift 3% to 5% of total streaming royalties to publishers, which would increase the songwriters’ share without placing the onus completely on the streamers.
“We are not suing songwriters,” the executive insists. “We need a better rate structure to facilitate growth. It’s about splitting what we already have more equitably.”
However, Spotify CFO Paul Vogel said the CRB’s ruling “is having a pretty minimal impact on our numbers and our forecast” during the streaming giant’s earnings call on Wednesday, although that may be because it had expected and planned for the increase in royalty payments.
So where does this “dysfunctional symbiotic relationship” end up? Neither of the two pie-in-the-sky solutions — eliminating CRB oversight of publishing nor raising streaming subscription prices — is likely to happen anytime soon: The former because of the complexity of taking it out of the government’s hands, and the latter because the streaming services are so fiercely focused on market share that none will be the first to blink, even though research has shown subscribers are willing to pay more.
The outcome “will depend on how reasonable all parties can be,” one top music executive says. “We all have an aligned interest in bringing as much music as possible to as many people as possible. So how do we grow the music market in the face of competition from other forms of entertainment that cost less — social media, gaming, online TV.
“How do we put more focus on the value of music?,” the executive concludes. “That’s what we need to be talking about.”
From Variety US