Pennies From Heaven
The new streaming economy is here, with or without royalties
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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."
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.