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Pennies From Heaven

The new streaming economy is here, with or without royalties

By Doug Freeman, Fri., May 18, 2012

Pennies From Heaven

Standing on the corner of Fourth and Trinity amid the jostling throngs of South by Southwest, Quiet Company doesn't draw much attention against the blasts of noise and marketing that swirl around them. The local quintet is unassuming save for a cardboard placard that announces "Free Hugs From Quiet Company."

Most of the crowd rushes by, tactfully immune to the maze of street teams, fliers, and reverse panhandling flooding Austin for the annual music festival. The young band draws a few ebullient individuals into its arms, inviting them to free shows that week and encouraging them to check out the group's music online.

Eminently notable about the scene this particular Thursday morning is that the band hustling to create fans one hug at a time is newly crowned the most popular in Austin. The night before, Quiet Company took home 10 Austin Music Awards, including Band of the Year and Album of the Year, for third disc We Are All Where We Belong.

"The actual song is becoming worthless," offers Quiet Company frontman and songwriter Taylor Muse. "As an artist, I just can't see caring about how much I make per song, so it's kind of weird to think of music as really even a stream of revenue for the music business anymore.

"At the same time, it doesn't cheapen it or make it less important because we all know at the end of the day that music is the engine that's driving the ship."

That fatalism regarding the lack of revenue from recordings has increasingly taken hold among artists. With the crash of physical album sales a decade ago, digital downloads and MP3s emerged as the new prospect for keeping the recording revenue ship afloat. Yet as the initial wave of download sales began to slow, with payouts still far below previous industry watermarks, streaming services like Spotify, Rhapsody, and Pandora have begun serving as lighthouses by which the music industry might navigate. For artists, the new streaming economy has yet to provide more than a trickle.

Across all the streaming services currently paying royalties, Quiet Company has garnered over 60,000 song plays since October. For those 60,000 streams, the band has earned $342.

"Are you going to get rich off that?" asks Quiet Company manager Paul Osbon. "No. Can you tour off of that? No. So it's not worth counting on. You can't really budget it. It's a nice bonus. It's the difference between having $5 and no dollars, but are we going to pay our rent with that?

"No."

Celestial Streams

By any standard, streaming services must be understood as still in their formative stages. They account for only a small fraction of music consumption, but they're also the fastest growing format and what most of the industry considers the inevitable future.

The 2012 Annual Music Study from market researchers NPD Group, released in March, found that online radio streaming via noninteractive services like Pandora increased to 43% of U.S. Web users. This remains a small portion of the discovery and consumption spectrum, with AM/FM radio remaining the overwhelmingly dominant medium cited by listeners. Tellingly, free models still far outweigh subscription services for Web users, with only 3% converting to paid, on-demand entities.

Though the shift is small, it's important. With the U.S. launch of Spotify last July (see "Nights in White Satin," Aug. 5, 2011) and the service's integration with Facebook, conversation about streaming evolved from speculation on so-called "cloud" services to deciphering their effect on the industry. At SXSW this year, numerous panels were devoted to streaming royalty formulas and their impact on artists (see "Pennies From the Celestial Jukebox," March 16).

"With all these new technologies, people's memories are short from when they had the same experience with CDs and cassettes," cautions Gary Churgin, president and CEO of the Harry Fox Agency, a licensing, royalty collection, and distribution firm. "Revenue's just starting to flow in from these new consumer experiences, and I think what you're going to see over time is that the economic consequences will become more and more positive.

"Can I predict when? No. Is it going to grow? Yes. How long is it going to take? I don't know."

Much of the confusion surrounding streaming royalties stems from the complexity of adapting previous copyright and payment models to new formats. Increasingly Byzantine formulas are being deployed to anticipate new services. Further, royalties and rights differ between noninteractive Web radio services (Pandora) and on-demand interactive services (Spotify).

"In general, people don't find the licensing process to be a very pleasant experience," admits Churgin. "When Spotify launched this past summer, it was 10 million licenses they needed. The process was not designed with those kinds of volumes in mind. So it's not that people don't want to do it, it's that everybody's world has been turned upside down.

"The entire system of licensing, which includes human procedures and processing as well as technology, wasn't made for this. It wasn't made for speed, for volume, and low value."

Don't Put Another Dime in the Jukebox

The traditional "mechanical" royalty for the physical reproduction of a song was established by the government, a rate currently set at $0.091. Every time the song is reproduced on a CD or downloaded, the songwriter receives just under a dime. Streaming royalties work on a different business model defined by three key differences.

First, there's an additional royalty alongside the mechanical royalty: the right to public performance. Streaming services require both the mechanical rights and performance rights to a song. For interactive services (Spotify), performance royalties are commonly collected through performance rights organizations (ASCAP, BMI, SESAC). For noninteractive streaming services (Pandora, webcasts, Internet radio), performance royalties are collected/distributed by nonprofit government agency SoundExchange.

Second: Royalties for streaming play are much less than the traditional download or purchase, the reasoning being that instead of a one-time royalty payment per download, there are now multiple payments for a single song as plays accrue over time.

Finally, royalty rates are contingent upon overall revenue generated by streaming services. The current mechanical rate for these sites is a statutory rate set by the government: 10.5% of the services' gross revenue, minus the performance royalties. This pool is divided among songwriters based on the number of streams for their songs. In other words, royalties fluctuate not only on the number of times a song is streamed, but also on the gross revenue generated by the service itself every month.

Take Quiet Company's AMA song of the year, "You, Me & the Boatman." Since the group retains all rights to the song and is the performer, it's due money for both the performance royalty via ASCAP and a mechanical royalty, collected in this case through TuneCore, a distribution service that placed the song on streaming sites in lieu of the band having a label. Quiet Company also collects money from SoundExchange for noninteractive digital plays.

How much each play of that song is worth to Quiet Company is different from month to month, depending on the services' revenue and rates defined by what kind of streaming service it is. Not all streams are created equal, but QC manager Paul Osbon's aforementioned bottom line may be: "It's not worth counting on. You can't really budget it."

Black Boxes

If that seems complicated, it's only going to become even more so as new digital services enter the mix. Last month, an agreement was reached among labels, publishers, and the digital services that, when approved by the Copyright Royalty Board, will create mechanical royalty rate formulas for five new digital music models (see "Papa's Got a Brand New Bag").

The deal's comparable to other streaming royalty agreements, and provides a new flow of revenue for artists. Yet the overarching question is how much these different services will end up cannibalizing each other in relation to royalty payments and, perhaps more to the point, detract from the higher payments of downloads or physical sales.

"This is really a brand-new income stream for artists and songwriters that they didn't have before," emphasizes Rhapsody's Senior Director of Licensing, Adam Parness, of streaming royalties. Rhapsody is somewhat unique in that the service offers various formats of consumption, including downloads, on-demand interactive streaming, and noninteractive Web radio.

"We've had examples in Rhapsody where once streaming rights were enabled for a track, people were actually downloading tracks from the album more than they were before," Parness offers. "So streaming encourages permanent downloads and certainly doesn't take away from it. They're really all kind of different models, and there's really demand for all of them."

Whether that trend continues as streaming services grow is a point of contention for the industry, especially as major labels have taken a vested interest in the future of streaming music. Rather than be backed into licensing deals for their catalogs as they were forced to do with iTunes, major labels and music corporations have seized upon the nascent competitiveness of the new models to leverage greater control and revenues.

"There's been, over the last 10 or 15 years, an effort trying to increase profit margins, with online companies in particular, by decreasing royalties," says Chris Castle, an Austin lawyer who represents artists, publishers, labels, and music services. "This is nothing new. Record companies have been doing it for years. But the bottom line is that the rates that have been set for streaming are set for such a large number of people and participants that there's no way that we're all going to take the rate based on what the major labels report."

Deals major labels have struck with the streaming services remain tightly guarded black boxes, rightly raising concerns among independent factions in the music industry. That lack of transparency is exacerbated by the revelation that major labels have negotiated for equity with some services, as much as a combined 18% from Spotify alone, which is reportedly seeking a current valuation of up to $3.5 billion.

"The traditional music industry now has a new income stream that's based on other people's music and copyrights being exploited and sold," argues Jeff Price, founder and CEO of TuneCore. "It is complex, it's complicated, and nobody wants to talk about it, but as major labels and record companies sell less music and make less money off of selling music, they make more money off of other people's music that aren't even tied into them."

"To me, it's a lot like the record clubs," offers Castle, referring to the mail-order companies of last century, like Columbia House and BMG. "Record clubs were owned by the labels, and once you got put out by the record club, you became part of this giveaway program. The royalty rates for artists and songwriters went way down, and if you worked at one of those labels that had a record club, there was no way they were going to let you hold back those records because the profit was just too great."

Muddy Waters

All this leaves independent artists like Quiet Company with few options and little recourse, especially if streaming services began to significantly impact digital sales. Some high-profile artists including Adele and the Black Keys have chosen to restrict rights to stream their music so as not to detract from sales. That model isn't as effective for smaller artists such as Quiet Company.

"It's a battle now for exposure," notes frontman Muse. "You're hurting yourself if someone looks you up on Spotify and you're not there. You almost have to be everywhere, and I guess it's good that we're making some money from it, but someone's making a lot more somewhere, obviously."

At the very least, it changes how bands must think about distribution and the payoff of their recordings, especially when fluctuating returns make it impossible to establish any type of budget projections based on streaming revenue.

For its part, Quiet Company looks to capitalize on streaming in other ways, forming a promotional partnership with Grooveshark, one of the largest on-demand streaming services with over 30 million users. Grooveshark has recently come under fire because it hasn't secured any rights or licenses to the songs, instead operating in a gray area of copyright law that allows services to host user uploaded content without penalty, provided they remove it if asked by the rights holders.

"For me, streaming isn't any kind of future for making money for this band," acknowledges Muse. "But it is enabling everything else that we want to do, looking at licensing [for film and television] and that kind of stuff. It's a huge part of how our band operates and our marketing plan even if we're not banking on our Spotify check."

That curbing of expectations on digital royalty returns for artists may be exactly what the major music industry players and streaming services are banking on, especially as more middle men are inserted to decipher formulas, monitor plays, and pick at the edges of the new streaming economy.

Either way, the promise of the celestial jukebox generating meaningful revenue for artists is quickly crashing to the earth.

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