I recently moderated a panel for the
California Copyright Conference entitled “Streaming for Dollars,” that
addressed the music industry’s current evolution from an “ownership” model to
an “access” model. Instead of purchasing
CDs or permanently downloading songs via iTunes, Amazon, etc., a vastly
increasing share of music listeners are choosing to stream music over the
Internet via services such as Pandora, Spotify, and Sirius XM. While these streaming services still pay
royalties to artists, songwriters, music publishers, and record companies, the
rates can be miniscule compared to the revenue artists receive from permanent CD
and download purchases. Understandably,
this seismic shift in consumer consumption of music is a hot topic in the music
industry.
Key factors differentiate royalties
generated by the digital streaming of music from revenues attributable to permanent
purchases and the traditional "terrestrial" broadcasting of music. This is driven by the business and legal relationship
between the streaming companies, performance rights organizations (or "PROs,"
which are BMI, ASCAP, and SESAC in the United States) and the record labels in
the streaming age. In the "old
world," permanent sales of music represented the bulk of the music
business— music was sold either as physical product (CDs) or as permanent
downloads. Record labels would get a
wholesale price per CD from a distributor or digital seller (like Apple iTunes)
and pay a royalty to the artist (a percentage based on a wholesale or retail
price, depending upon the label and type of sale).
But when a song is streamed on‑demand
via Spotify or by a non‑interactive company like Pandora, there are no
traditional royalty-based sales. Royalties
get paid solely from the performances of songs and master recordings. Thus, Spotify will usually pay royalties for
the performances of the songs to the PROs via "blanket" licenses of
the entire catalogs. The PROs negotiate
a "blanket" catalog license fee and then divide it between the
songwriters and publishers based on the number of streams. So, hypothetically, if ASCAP received a
"blanket" license fee of $1,000,000 for a particular quarter from Spotify,
in which there were 5 billion streams of the ASCAP catalog, the per stream rate
would be $.0002. Spotify also pays a fee
to stream the sound recordings (via direct licenses with labels), but unlike
non‑interactive services such as Pandora, these deals are neither set by
statute nor publicly disclosed. Also,
major companies like UMG, Sony Music, and the Warner Group have taken stakes in
Spotify and other streaming services, raising the issue of whether the labels
are trading equity for lower royalty rates, which are shared with artists.
Non-interactive companies like
Pandora and Sirius XM also pay royalties for the performance of songs and the
master recordings embodying them.
However, the rates paid by Pandora and Sirius XM to broadcast songs are
based on consent decrees dating back to the 1940's. When such rates came up for renewal, Pandora,
ASCAP, and BMI couldn't agree on new terms.
Pandora then sued ASCAP and BMI for a judicial rate court determination. To the dismay of the PROs, the District Court
decision upheld the current ASCAP-Pandora rate (1.85% of income) until December
31, 2015. In response to mounting
criticism about royalty rates based on antiquated consent decrees, the Department
of Justice ("DOJ") announced it will review these consent decrees. Hopefully, the DOJ will address the argument
that the changing conditions in the music industry should enable PROs to
negotiate performance rates to reflect free market conditions. As Representative Doug Collins succinctly stated: "Should Congress promote more music
creation through less regulation?"
Pandora and Sirius XM also pay
royalties from digital streaming of master recordings to labels and artists
under the Digital Millennium Copyright Act and the Digital Performance Right in
Sound Recordings Act, whose rates are set by statute. Such royalties are collected and distributed
by Sound Exchange. However, to the
chagrin of labels and artists, Pandora and Sirius XM don't pay on pre‑1972
sound recordings, which are not protected by federal copyright. As a result, both the major labels and
"heritage" acts like Flo & Eddie (Mark Volman and Howard Kaylan,
p/k/a "The Turtles") have sued Pandora and Sirius XM under various
state copyright and related intellectual property rights laws. In a decision with far reaching effects, U.S.
District Court Judge Phillipe Gutierrez held that under California law, Flo &
Eddie owned exclusive rights to the public performance of their pre‑1972 recordings
of such classics as "Happy Together" and "She'd Rather Be With
Me." The economic consequences of
this ruling cannot be overstated – companies like Pandora and Sirius XM could
end up paying hundreds of millions of dollars in additional royalties. Not surprisingly, Sirius XM has
appealed. In the meantime, Flo &
Eddie have brought similar suits in other states, while a group of labels is
pursuing its own action against Pandora in New York.
The legal battles over what rates
should be paid for the digital performance of songs and pre‑1972 master
recordings are hardly surprising, and the Flo & Eddie California case may
open a floodgate of litigation. This was
predictable, given overall U.S. music revenue during 2013 was flat at $4.47
billion, down from a $14.6-billion peak in 1995. While consumer appetite for
streaming music has grown exponentially and seems insatiable, digital revenues
have not even remotely kept pace.
Certainly Spotify, Pandora, and
similar services enable more people to experience a wider variety of music, arguably
providing more access to and exposure for artists than ever before. But present music streaming models haven't materially
offset lost permanent sales revenues. In
this climate, music creators have and will continue to suffer. Consumer habits have changed, and the
economics of the music industry in a streaming world must change as well.
