Eric Beall is VP of A&R at Shapiro Bernstein, and Instructor of "Music
Publishing 101" at Berkleemusic.com.
Hope
everyone had a very happy Thanksgiving! And on that note, if you were
struggling last week to find something for which to be thankful (and
those things were definitely in short supply this year, particularly in
the dark and lonely corridors of the music business), I received one
from my friend and fellow Berklee blogger, Mike King, who writes Music
Business and Trend-Mongering…
http://mikeking.berkleemusicblogs.com/
Mike brought to my attention a very informative and interesting blog at
thefutureofmusic.com, which explained, as clearly as could possibly be
expected within such murky waters, the recent settlement on a
mechanical royalty rate for songs played on online music services.
Check it out:
http://futureofmusic.org/blog/2008/10/01/agreement-royale
Given that we’ve been following in this blogspace the ever-raging war
between the Israel and Palestine of show business, that is the digital
media community (which includes large companies like Yahoo and AOL,
relatively established ventures like Pandora and Rhapsody, and new
companies like Spotify) and the music industry (including labels,
publishers, performing rights organizations, artists, and writers), it
seems worth taking a minute to try to put some perspective on what has
been achieved with the latest peace treaty. As always when entering a
war zone, it’s probably best to dredge up a little history, just to
understand what’s been achieved, and why everyone was so mad in the
first place.
The conflict is rooted, as is all evil, in money, and who gets how much
of it. When the digital world first emerged as a place to both purchase
and/or stream music, the music community was forced to redefine the
idea of a “mechanical royalty”, which is the royalty that is paid to
songwriters and publishers each time a “mechanical reproduction” of
their song is purchased. In the old world, this translates to 9.1
cents for each song on each CD that is bought by a consumer. This
“per-penny”, “per-song” system is at the core of the music publishing
business, and it’s something that publishers were desperate to preserve
even within the new digital environment.
In part the attachment to this system is rooted in accounting
realities: each songwriter needs to be paid each time his or her
specific song is used, not just given a random portion of a lump sum
paid out to songwriters in general. But more importantly, publishers
wanted to establish with finality that each digital use, whether a
digital download (as on iTunes, which has been paying the 9 cent
mechanical royalty from the beginning) or a stream (in which the music
is not actually owned by the consumer, but is constantly accessible to
the consumer) constituted a “mechanical reproduction” of the song, and
therefore was subject to a mechanical royalty.
Not too surprisingly, the digital media community saw things quite
differently. While generally willing to acknowledge that an actual
digital download constituted a “purchase” of the song and therefore
required a mechanical royalty (unless of course one were to do like the
vast majority of music listeners and simply download it illegally),
services that offered “streaming”, as opposed to downloads, felt that
they should be treated more like a radio station, and that their music
uses should be subject only to “performance royalties” (the money
collected by ASCAP, BMI, and SESAC for public uses of music on the
radio and television). The music industry was quite happy to
acknowledge that “streaming” should be licensed by ASCAP, BMI and
SESAC, and indeed, most of the prominent streaming services are
licensed by those performing rights organizations. However, the music
weasels also wanted the mechanical royalty, in addition to the
performance monies. Them were fightin’ words.
That’s where the war began, and we’ve been following it on this blog
ever since. Having reached this impasse in the early days of the
digital music revolution, the two parties agreed to fight it out…
later. The publishers, not wanting to miss the boat entirely on a new
way of marketing music, but also not wanting to lock in an unfair
compensation system for a pivotal new technology, agreed to make their
catalogs available for a one or two cent royalty, under the proviso
that some kind of more reasonable “per-song, per-play” mechanical rate
would be negotiated in the not-too-distant future.
It’s worth keeping in mind that much of the publisher’s wariness came
from their prior experience with licensing music to DVD’s. In that
instance, publishers agreed to very unfavorable terms for the use of
music in “DVD” ’s, after receiving promises from the film studios that
once the new technology took hold, there would be plenty of money to go
around. Of course, the new technology did take hold, there was plenty
of money, and none of it found its way into the pockets of the
publishers, who were stuck with that first, precedent-setting
agreement. This resulted in much gnashing of teeth, and vows of “never
again”.
On the flip side, the digital media, filled with myriads of start-up
ventures, felt that if they could buy some time to get their new
companies off the ground and into a profitable position, the music
industry would view them as valuable partners, and be willing to agree
to a more equitable royalty situation. Or maybe they just figured they
could get the music really cheap for now, and then later use their
increased bargaining power and hopefully some favorable court decisions
to really put the screws to the copyright holders. Hard to say exactly.
Unfortunately, the war didn’t quite go according to plan for either
party. The music industry quickly found that the new “mechanical”
royalties from digital downloads were draining off their old
“mechanical” royalties from CD album sales, and actual overall income
was plummeting. The digital music services found that consumers were
not that eager to actually fork up money for something that they were
now used to getting for free. On top of all that, the music industry
sensed that they’d once again been out-weaseled, as the DMA (Digital
Media Association) backed away from negotiations, and focused instead
on legal efforts to re-define which uses required a mechanical royalty
in the first place.
And yet, out of this ugly little tale of self-interest, deception,
suspicion and greed, springs a small blessing– which leads me back to
the whole idea of what we can be thankful for this year. After years of
arguing, the two beaten-down, weary factions finally reached an
agreement, and here’s what it amounts to:
Limited download and interactive streaming services will pay a
mechanical royalty rate of 10.5% on the revenue they generate, MINUS
any amounts for performance royalties.
In other words, services like Rhapsody and Napster are indeed subject
to both a mechanical and performance royalty, but the entire
compensation for songwriters and publishers from any limited download
or interactive streaming site is “capped” at 10.5% of the site’s
revenue. For the record, an interactive stream is one that’s selected
by the user (that is, music on demand), and a limited download is one
that’s based on a subscription (and which disappears when that
subscription ends). The mechanical royalty does not apply to “jukebox”
type streaming, which is not selected specifically by the user (like
Pandora).
Like most blessings, this one is decidedly mixed. It does give the DMA
what they needed most, which is some ability to gauge what their
overall music costs will be, and some flexibility in their
price-setting to the consumer. Obviously, if you’re in the business of
selling a product, you like to know what it’s going to cost you to
provide it. By assuring the digital services that the combined PRO
royalty and “mechanical” royalty will not exceed 10.5% of their
revenue, the new agreement should help the digital music services build
a more stable financial model in the future.
The new deal also gives publishers part of what they wanted, which is
the legitimate claim to something more than a performance royalty from
services that offer a consumer direct access to specific music. It
opens a Pandora’s box (yes, that’s a pun) of accounting problems, as
publishers will now have to somehow negotiate, audit (?), and
continually adjust rates for each of the thousands of services that
exist or are in the launching stages, not to mention figure out how to
collect and properly apportion the new money to the appropriate
songwriters.
But in a barren land of nothing, at least this is something, so let’s
raise our cups in thanksgiving, especially to the powers that
negotiated the agreement on behalf of the publishers, labels and
others: the National Music Publishers Association (NMPA), the Nashville
Songwriters Association International (NSAI), the RIAA, and the
Songwriters Guild (SGA).
Now that we’ve laid our weapons down (temporarily at least) it’s time to turn our attention to something a bit more productive:
Let’s make some money.
If it seems strange that Mike King brought to my attention an agreement
that directly affects the publishing community, it’s because most
publishers haven’t exactly been on the edge of their chairs, waiting to
see how this war turned out. A growing number of us increasingly
suspect that we’re fighting over a useless piece of land in the desert.
The fundamental problem with this agreement is that none of these
services are generating much in terms of real revenue. The subscription
model is growing less and less attractive, as consumers have quite
literally not bought into it. The “free” streaming services are
generating plenty of activity, but very little in the way of
advertising revenue, which is where the money is supposed to come from.
In the end, receiving ten percent of the total revenue of these
services may wind up being less than the one or two penny rate that we
were getting as part of the temporary agreement.
Worse than that, many of us suspect that these services may not
actually be intended to make money. Looking at the YouTube model, it’s
clearly quite possible to use “free” music as a “carrot” to attract
loads of visitors or viewers to a site. A buzz-savvy entrepreneur can
then use that high level of traffic to foist the new start-up venture
off to a giant corporate media company like Google (YouTube) or News
Corp (MySpace)– all without ever having generated any real profits. In
that scenario, the founder of the site gets rich, and the publishers
and songwriters who provided the music that brought all that traffic
are left with, yep, ten percent of nothing. Sound familiar?
I suspect that somewhere towards the end of the first Thanksgiving
feast, after the pie had been consumed and the last bit of wine drained
from the bottle, someone on the side of either the pilgrims or the
American Indians probably mentioned that there was still some work to
be done in the harvesting, and that they should all probably get back
to work. Judging from current music sales, publishers and record labels
and songwriters all need to get back to trying to make music that the
public is truly compelled to purchase. Across the table, digital media
services need to start figuring out how to sell that music in a way
that actually generates profits, rather than simply giving it away. If
both parties do their jobs, maybe next year we’ll all have more to be
thankful for…
