CM In Depth

Streaming Money is Flowing... But Where To?

The article originally appeared in the September/October 2016 issue of Canadian Musician magazine

By Michael Raine

Record labels, music publishers, songwriters, and musicians; these folks are earning money from on-demand streaming services. Combined, they’re earning a lot of money from the likes of Spotify, Apple Music, Google Play Music, and Tidal. Do music’s rights holders feel they’re due more money? Of course. But the current numbers aren’t to be scoffed at and the real question is: where is the money going and is it fair? Depends who you ask, if you can ask them.

What is “a lot” of money? Let’s say $2.9 billion, the amount the music industry made globally from streaming in 2015, according to the IFPI, which represents the recording industry. That $2.9 billion was a 45.2 per cent increase in streaming revenue over 2014 and marked a turning point, making 2015 the first year that digital revenue surpassed physical. Even better, 2015 saw a 3.2 per cent year-over-year increase in global recorded music revenue after many years of decline, thanks almost entirely to streaming. That trend carried over to 2016, with all three major labels – Sony Music Entertainment, Warner Music Group, and Universal Music Group – reporting their first quarters ever of streaming being their biggest money maker. Sony earned around US$300 million globally between April and June 2016 from streaming. Warner earned an estimated US$181 million in the first three months of this year from streaming. During those same three months, Universal, the largest of the three majors, made US$351 million from streaming.

The IFPI’s 2016 Global Music Report painted an even rosier picture for the Canadian recorded music industry. The Canadian industry’s growth in 2015 was 8.3 per cent, more than double the global average. In 2015, paid subscription streaming revenues grew 151 per cent over the previous year to US$29.4 million, with ad-supported streaming adding another US$19.49 million. This year-over-year growth in Canadian streaming revenue surpassed the global average by a significant margin (though that is making up for lost time as Canada was a relative late comer to the on-demand streaming market). So why do musicians, songwriters, and music publishers seem so unhappy? It’s about how the money is divided.

(Important to note is the vast majority of indie labels in Canada have a distribution agreement with one of the three majors, which dictates the indies’ streaming revenue. There is also a lot of fretting over how much streaming services pay “artists.” Technically speaking, in most cases, streaming services don’t pay artists anything. The services pay “right holders,” which are publishers, songwriters, and labels. The artists – or “performers” – get paid by their label subject to the terms of their record contract, which we’ll get into later).

Let’s start with the publisher/songwriter side, where there is significantly more transparency. Keep in mind we’re talking only about on-demand streaming services (i.e. Spotify, Apple Music, Google Play Music, etc.).

Caroline-Rioux
[Pictured: CMRRA’s Caroline Rioux]

“From a licensee’s perspective, when an online service comes to the table, in Canada in any event, there are really four rights that need to be licensed. I would describe it as a quadrant. Half of the pie is for songwriters and music publishers who administer the rights to the musical composition, and the other half is for record companies and performing artists who administer the rights to the sound recording. Sometimes the rights to the composition and to the sound recording for a single track are all controlled by the same person but in most cases they are not, and the composition and sound recording need to be separately licensed. Then within each of those halves, you have the reproduction right and the performing right,” explains CMRRA President Caroline Rioux. “In our environment, SOCAN looks after the performing rights on the songwriter/music publisher side and CSI (SODRAC and CMRRA together) look after the reproduction side for songwriters and music publishers.”

While the image of a quadrant may make it seem like royalties and revenue are divided evenly, that is not the case. The most recent tariff certified by the Copyright Board of Canada dictates that on-demand streaming services must pay 12.78 per cent of gross revenue to publishers and songwriters, with 5.18 per cent to CSI and 7.6 per cent to SOCAN. But that tariff does not cover every aspect of a service’s functionality, particularly those launched after the tariff was certified – such as Spotify, Apple Music, and Google Play Music. To allow those services to legally operate in Canada until a new tariff is certified, which is expected to happen in the fall, CSI and SOCAN negotiated licensing agreements with each service individually based on the same tariff rate but with different splits to account for the change in usage. For example, according to SOCAN’s VP of Licensing, Jennifer Brown, when the service offers on-demand streaming with the ability to cache songs, what she terms “hybrid services,” then the total remains 12.78 per cent but the split is 5.43 to SOCAN and 7.35 to CSI. The negotiated percentage rates, any applicable minimum rates, and the ratio split between SOCAN and CSI vary from service to service based on the different functionality and offerings to users.

“For streaming services that operate as part of a subscription paid by a consumer, the revenue is a percentage of revenue alongside certain minimum rates so that when there are free trials or heavily discounted rates given for whatever promotion the service says is needed, then there are certain minimum rates that kick in, in order to not erode the value of the works,” says Rioux of the CMRRA and CSI.

The royalties SOCAN and CSI receive is then divided between their respective members. The members’ royalties are divided according to the number of streams their compositions have received on the individual on-demand services. Those royalty payments also depend on whether songs were streamed as part of a free ad-support tier or as part of a paid subscription. Streams on the paid tier currently pay out a higher royalty rate than streams on the ad-supported tier because, in part, the revenue pool from paid subscriptions is divided by a much smaller number of streams.

“There is always going to be a pool of rights holders who are just very difficult to reach out to,” says Rioux. “Under the tariffs and our agreements, the services have to send us all of their usage data. So we see, in a very consolidated way, all of the streaming activity that is happening from all of these services. We run this through our system and turn around and invoice those online services on a quarterly basis for everything we represent. We have extensive data matching capabilities, but we’re talking about millions and millions of works. Every quarter there are going to be works that we can’t invoice on because these works are either in the public domain, or are not in our repertoire, or their ownership is simply unknown.”

It’s common, especially in pop, R&B, and hip-hop, for there to be multiple writers and publishers with combined ownership of a single song. Rioux adds it’s possible, for example, to invoice and distribute royalties for 75 per cent of a song but not be able to identify the other 25 per cent ownership on that song. It could be because the ownership hasn’t been fully worked out between the various publishers and songwriters, or it could belong to a kid who got lucky, wrote a song that’s getting attention, and they haven’t yet joined the collectives needed to get paid.

“We get new usage files every month so our work is ongoing and it’s a completely iterative process. When we cannot invoice the royalties on the first pass – once we’ve done all of the loads and matching and we’ve sent our invoice – the data for the unmatched works, or unknown shares, remain in our system for future processing. When new songs get registered and when new rights holders affiliate with us, then we retroactively invoice all of the royalties that we weren’t able to invoice before. CSI can only invoice the royalties we know we represent and can distribute to the rightful owner.”

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[Pictured: SOCAN’s Jennifer Brown]

SOCAN’s administrative process works very similarly. “We work with [services’] data people, and we have data specialists here, and we make sure that we’re getting all performances that occur in Canada. With that performance information comes as much data as they can provide – the song, the artist, if they have the creator information, any identifiers that they have – and we pull all that information in and get that paid out,” says Brown. The individual members’ shares of the royalties depend on the revenue received divided by the number of streams in that quarter and their percentage of those streams.

So, if 12.78 per cent of the on-demand services’ gross revenue is going to publishers and songwriters via SOCAN and CSI, that leaves 87.22 per cent to be accounted for. Who is getting what share of that? This is where things are harder to ascertain.

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Unlike the negotiations and agreements between SOCAN, CSI, and the on-demand streaming services, which are largely done in front of a copyright board, the negotiations between the major labels and services are done privately and little-to-no information from the contracts is disclosed. For this article, Canadian Musician reached out to the three major labels in Canada. Warner Music Canada offered a “no comment” while Sony Music Entertainment Canada and Universal Music Canada deferred comment to Music Canada, which advocates on behalf of the major labels but is not privy to their agreements with the streaming services. As well, Spotify Canada offered a “no comment” while Apple Canada and Tidal did not reply to multiple interview requests. A public affairs representative for Google Canada initially agreed to arrange an interview but asked for further information on the article and interview topic. After Canadian Musician answered their question, follow-up emails and phone calls went unanswered. As a result, we’re left making educated estimates.

Currently, Spotify says it pays nearly 70 per cent of revenue to rights holders, and recent estimates from Midia Research indicate it could be as high as 82 per cent, while Apple Music says it pays 71.5 per cent of total subscription revenue to rights holders. (We’ll take them at their word, but both numbers have been questioned publically by industry insiders in the U.S. who say the rate is lower.) Google Play Music has not said what percentage of its revenue it pays back to rights holders. But if SOCAN/CSI receive 12.78 per cent, the services keep about 30 per cent, then that leaves about 57 per cent for the labels. That number can go up or down depending on what figures, reports, and estimates you’re looking at. The music industry website Music Business Worldwide reported on an internal study commissioned by the SNEP, which is Music Canada’s French counterpart representing the major labels in France. That SNEP-commissioned report, which created a breakdown of subscription revenue from Deezer and Spotify, estimated writers/publishers got 10 per cent, 17 per cent went to taxes, the service kept 21 per cent, the artists (mostly paid by their label) got seven per cent, and the major labels retained 46 per cent. Post tax, the numbers in the SNEP report are starker, with the major labels keeping 73 per cent of the post-tax payout and publishers/songwriters getting 16 per cent and artists getting just 10.9 per cent of the payout.

“I do think that music publishers and songwriters are still not getting the full share they deserve, and I think that is true in Canada, as well. When you look at the ratios between what the record company side is getting versus what the songwriters and music publishers are getting, that balance, I think, is not right,” says Rioux. “When the first online music services launched in Canada, their first move was to go to the major record companies to get licences for their repertoire and once they had arrived at some sort of agreement with the record companies, then they came to the music publisher and songwriter side and said, ‘Well, there’s really nothing left over so you’re just going to have to be satisfied with the crumbs that are left on the table.’ So, from a timing perspective, there was definitely some disadvantage to the process and I think that we’ve been afflicted by that reality ever since.”

On SOCAN’s side, Brown seems to be on the same page as Rioux, noting she doesn’t feel there is a justifiable reason for the large gap between the publisher/songwriters’ share and labels’. “Again, there isn’t much transparency on it. We do know that the labels do have a large percentage and that’s been one of the big arguments that a lot of the big publishers have been making, especially in the U.S., about the discrepancy between the recording and the value of their recording and the value of the work and that they should be more on par,” Brown says. “I think it may just be historical or may just be the fact that, again, the labels are negotiating directly and they’ve got the recordings and then publishers and the creators were under a different process of going and having very open tariff hearings so both sides see all the data and can exchange the information and we’re getting the rates that are published by the copyright board.”

Speaking for the labels, Music Canada Executive VP Amy Terrill responds that “I think it really does come down to the level of investment. At the same time, we don’t try to get in public arguments with the publishers. It’s not healthy for the industry. We believe that we need to work together to grow the pie for everybody.”

Growing the pie for everybody is admirable, but let’s remain focused on who is getting what slice of the current pie. Artists, you may have heard, are not happy with the size of their slice. Spotify especially, being the largest on-demand service, has received a hailstorm of criticism by the likes of Thom Yorke and Taylor Swift for what they feel are meager royalties for artists that devalue their music. But is that fair?

Like we mentioned, an artist’s share of streaming royalties is determined by their record contract, not by the streaming service. As well, while Spotify took in US$2.2 billion in revenue last year, it still lost US$193 million. It actually increased its year-over-year losses by 6.7 per cent. The comparable financials for Apple Music and Google Play Music are not available but it’s unlikely they’re turning a profit for their parent companies. How is it possible to earn $2.2 billion and lose $193 million? Because Spotify has astronomical operating costs, the largest of which are its payments to music rights holders. As well, Spotify isn’t a philanthropic organization; it’s a corporation. It’s unrealistic to expect it to pay more than it needs to simply because it “values” music. It’ll pay what the tariffs and negotiated contracts dictate and nothing more. (Another side note, Spotify is currently renegotiating its long-term distribution agreements with all three major labels.)

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“We haven’t done an analysis the way SNEP has, but the IFPI is a pretty good source for some of this information,” says Terrill at Music Canada. The IFPI also commissioned an internal report breaking down on-demand streaming revenue and gave Music Canada permission to share that information with Canadian Musician. The Europe-based IFPI’s report, Terrill says, looked at what portion of a €9.99 monthly subscription fee for an on-demand service goes where. They found that publishers/songwriters get €0.98 of the €9.99, the artist gets €1.35, and the labels get €3.14, with the remaining €4.52 going to the service and taxes. Keep in mind part of the IFPI’s job is to advocate for music labels.

“So on the surface of that, it does look like labels get a lot more in terms of the revenue share, but then if you break down the costs and apply the typical costs for a label for the marketing and promotion and the recording, artist advance, sales and distribution, etc., what the label would retain as net income is 53 cents. So that breaks down to about five per cent of what the consumer has paid in a monthly streaming subscription. Five per cent is what the label is able to retain,” says Terrill. “So it is just recognition of the amount of investment they’re putting in and I think that is the difference.”

Amy-Terrill
Music Canada’s Amy Terrill

That labels should receive the largest share of the payouts because they invest the most in music is a fair argument, but artists still need to make a living. The labels’ majority share of payouts includes the royalties they pay on to their artists and the value of those royalties is determined by the artists’ record contracts.

What those record contracts look like with regards to streaming royalties has become a bone of contention between artists and the labels. What’s interesting is that in record contracts, streaming royalties are not separated from physical and digital download sales even though nothing is being “sold,” per se. This is important because the label/artist split of revenue from “sales” versus “licensing” is often very different. It is all dependent on negotiations, of course, but the typical major label record contract dictates that the split of licensing revenue is 50/50 between the artist and label while the split of sales revenue is weighted heavily in favour of the label.

Indie labels often, though not exclusively, negotiate what are called “net receipts deals” with their artists, which typically means there is a 50/50 split of all revenue, sales included. Major labels, on the other hand, negotiate based on PPD (purchased price to dealer), which is the wholesale unit pricing of a recorded work used to negotiate royalties and necessitates the separation of licensing and sales.

Safwan Javed has been privy to many record contracts as an entertainment lawyer for Taylor Klein Oballa LLP, and as a songwriter and drummer for Wide Mouth Mason. He is also the VP of the Songwriters Association of Canada and sits on the board of directors for SOCAN. “Each label, especially the bigger ones, will have their own ranges of what they’re willing to move within [on the sales revenue split] and that is wholly dependent upon what tier of artist you are. If you’re an established artist that’s still making a big impact, you’re obviously going to be on the higher end of that spectrum and if you’re an up and coming artist that basically they’re going to develop, you’re going to be on the lower end of it,” says Javed. “[The major label] will offer a certain percentage. If you’re lucky it’ll be in the 20 per cent range and if you’re new it’ll be in the 15 per cent range, maybe less. But that is based on the PPD, so basically based on sales figures minus returns. Then there are the complications of how that actually gets sussed out and, again, bear in mind all the recoupables coming off the top and those recoupables only get paid back at that royalty rate.”

So, to simplistically recap on the major label side: on-demand streaming services pay the label based on an (unknown) percentage of gross revenue, the label lumps that money in with all other sales revenue from physical and download sales, the label pays the average artist about 15 per cent of those royalties from their work based on PPD, but not until the label has first recouped the money it already spent on that artist (artist advance, recording, tour support, video production, etc.) at a 15 per cent rate. It’s largely a formula adapted from the analog age, but it carried over into the iTunes era where there was still some logic in digital downloads being categorized as “sales” rather than “licensing.” But is it logical that streaming revenues are considered sales? After all, no one is selling, buying, or owning the songs. They’re effectively licensed by the label to the streaming service to be rented by consumers.

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[Pictured: Entertainment lawyer & author Paul Sanderson]

There is a famous 2007 lawsuit where Eminem’s production company sued Aftermath Records and its parent company, Universal Music Group, to have downloads be considered licences rather than sales. “Eminem won that case but ever since then the record labels have amended the deals to make it very clear that those are not licences, they’re sales,” says entertainment lawyer Paul Sanderson, who also wrote the book Musicians and the Law in Canada, now in its fourth edition. As such, when it came time for labels to include streaming revenue in record contracts, they made sure not to make the same mistake. “I think they were able in that case to anticipate that and not get caught in the same situation because there is a big difference between 15 per cent and 50 per cent.”

For his part, Javed agrees that on the surface it is not logical for streaming to be considered sales. “Effectively, aren’t you licensing the music to stream? You’re not selling it, right? No one owns anything. So, in that case, shouldn’t it fall under the third party licensing revenue split, which would be 50/50, which would be amazing,” he says, before adding, “But not to be too negative, I don’t think you’ll ever see that happen unless maybe a court mandates that.’”

To be fair, the labels do take a significant financial risk by paying possibly millions in production and promotion costs on an album that may not (or even likely won’t) sell or stream enough to break even, let alone make money. You can understand why they feel entitled to a return on that risky investment and streaming is increasingly providing the only chance of a return.

“There is a strong investment [by the labels] and that investment has actually stayed very steady over time, even while label revenues have gone down,” says Terrill. “Globally, over a five year period from 2009 to 2014, industry revenues declined by 17 per cent and artist revenues declined only by six per cent. So they didn’t drop as much and you know the reasons for the industry revenue declines are obvious. So the investment in artists remains strong and, in fact, we like to think of it as our R&D. Record labels continue to invest 27 per cent of their revenues in R&D, which is pretty high compared to other industries.”

So the major labels invest 27 per cent of their revenue back into developing and supporting artists while physical and download sales crater. So it’s only fair they should keep the majority of streaming revenue by classifying it as “sales,” even if no one is actually selling the music, right?

“Yes and no,” says Javed. “It’s such a weird concept; so the label pays for the product you’re making up front and because of that, they own the product. But you’re going to pay them back from money off of that product, off your royalties from that product. So in the end, if you’ve made enough money back, ultimately you did pay for it, it was just basically a loan, but you don’t see ownership revert back to the artist do you? So it is kind of a weird notion.”

Javed continues, “Having said that, it’s also a notion that’s been in place for a long time. If we’re assuming the jumping off point is, ‘Well OK, we’re willing to accept that,’ then the next question is, ‘OK, is it fair for [the label] to have the royalty rate be as low as it is for the artist because they took the risk of putting the money in?’ Well, let’s see, you’re now seeing more and more labels taking pieces of other revenue streams. So, because the overall revenue pie generated from record sales has diminished significantly, labels are now often taking a piece of touring income and sometimes publishing income and a lot of the time from merchandise.” These, of course, are often referred to as “360 deals,” though the labels now prefer the more legalistic term “ancillary revenue sharing.”

Safwan-Javed
[Pictured: Entertainment lawyer, musician & songwriter Safwan Javed]

Those ancillary revenues provide the labels a much lower royalty rate, but they are still taking money from an area where artists traditionally got all of it. “What role does a label play in getting you live shows? Arguably they help build your profile so obviously that plays into you getting those shows, so maybe that is justified,” says Javed. “That is sort of the lay of the land and I probably wouldn’t fight that one very hard because, yeah, I get that profit margins are low these days and those are other avenues where revenue is made and it is made partly because of the profile built up by the efforts of the label.”

This leads us to question whether artists could or should negotiate ancillary revenues from the labels, which in the streaming realm means the major labels’ shares in Spotify. Combined, the three majors are believed to own somewhere between 15 and 20 per cent of Spotify as worked out in each of their original licensing contracts. While Spotify is losing close to $200 million a year, recent valuations peg its worth at around $8 billion, which means a hefty pay day for the labels if they sell their shares. Should they do so, are artists entitled to any of that money?

“There is nothing in any artist’s contract I have ever seen about if the label kept an equity share in a distribution arm, the artist gets to participate in the revenue derived from that. No, that doesn’t exist,” says Javed. He’s right, there is no contractual obligation for the labels to share proceeds from the future sale of Spotify shares with artists. That said, the heads of both Warner and Sony have publicly stated they would do so. Universal has not made any public comment one way or the other on whether it plans to share its portion of a future Spotify sale with its artists. But whether the major labels do or don’t share those future earnings with artists is only part of the problematic arrangement.

“Here is another avenue for the label to potentially make money and the way for them to do that is to drive up the valuation of, let’s say, Spotify, or whatever the streaming service is. The way you do that is by getting more and more memberships, or at least that is one of the ways you do it,” notes Javed. “In that case, what is going to attract membership? Keeping your prices low is one good way to attract membership, but that means you’re also getting less revenue from the streams, right? So, in a way, you’re sacrificing what your streaming revenue is to drive up the valuation of the company because when it sells, you’re going to have X number of shares in it and that is going to be worth way more than whatever difference you potentially could’ve made and you don’t have to share that with artists.”

So where does this all leave us? Hopefully with a better sense of where the money is going. Exact numbers in many cases remain a mystery, but we do know publishers and songwriters in Canada are getting just under 13 per cent of gross revenue and the streaming services are keeping around 30 per cent, give or take. The remainder is going to the labels, with the indies typically splitting it 50/50 with their artists (minus the amount taken by their major label distributor), and the majors are keeping around 85 per cent plus recoupables. And then there is the messy business of Spotify’s ownership. So to return to the original question, where is the money going and is it fairly divided? Again, it depends who you ask, if you can ask them.

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Michael Raine is the Assistant Editor of Canadian Musician magazine.