Economics of music streaming

Streaming has undoubtedly helped save the music industry following two decades of digital piracy but it is clear that what has been saved does not work for everyone. The issues ostensibly created by streaming simply reflect more fundamental, structural problems within the recorded music industry. Streaming needs a complete reset.

We urge Universal and Warner to look again at the issue of unrecouped balances with a view to enabling more of their legacy artists to receive payments when their music is streamed.

The pitiful returns from music streaming impact the entire creative ecosystem. Successful, critically acclaimed professional performers are seeing meagre returns from the dominant mode of music consumption. Non-featured performers are frozen out altogether, impacting what should be a viable career in its own right, as well as a critical pipeline for new talent. Those that provide specialist support for creators, either based on commission or working as salaried staff as part of an artist’s business or technical expertise, are also affected, meaning that fewer jobs will be sustained by an otherwise growing sector.

The major music companies and independent record labels have consistently asserted that music streaming is straightforwardly ‘making available’, and therefore performers should be remunerated as though it was a sale. However, this classification does not consider the complexities of streaming that sets it apart from other modes of consumption. For example, it also has the characteristics of a rental and a broadcast, which are consumed by exploiting copyright controls that provide performers with a statutory right to equitable remuneration. Furthermore, this classification creates inconsistencies in comparison to the song rights. Finally, precluding the making available right from equitable remuneration does not capture the realities of costs associated with the distribution of digital music. We recommend that the Government addresses these inconsistencies and incongruities by exploring ways to provide performers with a right to equitable remuneration when music is consumed by digital means.

The right to equitable remuneration is a simple yet effective solution to the problems caused by poor remuneration from music streaming. It is a right that is already established within UK law and has been applied to streaming elsewhere in the world. A clear solution would therefore be to apply the right to equitable remuneration to the making available right in a similar way to the rental right. As such, an additive ‘digital music remuneration’ payment would be made to performers through their collecting societies when their music is streamed or downloaded. This digital music remuneration would address the issues of long-term sustainability for professional performers and the cannibalisation of other forms of music consumption where equitable remuneration applies, whilst also retaining the benefits of direct licensing.

We recommend that the Government legislate so that performers enjoy the right to equitable remuneration for streaming income. Amending the Copyright, Design and Patents Act 1988 so that the making available right does not preclude the right to equitable remuneration, using the precedent set by the co-existence of the rental right and right to equitable remuneration in UK law, would be an effective solution. This would be relatively simple to enact and would appropriately reflect the diminished (and increasingly externalised) marginal costs of production and distribution associated with digital consumption. Furthermore, were the Government to do this by echoing existing UK law, this remuneration right would apply to the rightsholders (i.e. the record labels) rather than the streaming services.

Despite being an important part in the music creation and music streaming process, song rightsholders are not effectively remunerated for their work. The Government should work with creators and the independent publishing sector to explore ways in which new and upcoming songwriters and composers can be supported to have sustainable careers and independent music publishers remain commercially viable. As part of this, and in the context of increasing digital music consumption through streaming, we urge them to consider how to ensure that the song is valued in parity with the recording. If necessary, the Government should bring forward legislative proposals alongside the introduction of equitable remuneration for performers proposed in paragraphs 76–7 to ensure that all creators benefit from these reforms.

Metadata issues compound the poor terms on which creators are remunerated. Whilst there is a significant challenge, it is not insurmountable. First, the Government must oblige record labels to provide metadata for the underlying song when they license a recording to streaming services. Second, it should push industry by any means necessary to establish a minimum viable data standard within the next two years to ensure that services provide data in a way that is usable and comparable across all services. Third, it should work with industry to end the practice of distributing black boxes pro rata and, instead, place obligations on collecting societies that mean that this revenue is reinvested in the industry, such as to support creative talent and or develop solutions to revenue distribution issues. The Government should concurrently commission an exploratory audit of black boxes to achieve greater clarity as to what is genuinely impossible to allocate and what is mis- or un-allocated due to a lack of will. Finally, the Government should explore the practicalities of creating or commissioning a comprehensive musical works database and task the IPO with co- ordinating industry work on a registration portal so that rightsholders can provide accurate copyright data to necessary stakeholders easily.

The licensing and royalty chains of song rights causes considerable confusion and complexity to the system, and songwriters and composers pay the price. There is no single solution to create more efficient and timely royalty chains but the Government can work with industry to facilitate this. The Government should require all publishers and collecting societies to publish royalty chain information to provide transparency to creators about how much money is flowing through the system and where problems are arising. This should be done periodically, and in a way that is practical and useful to other stakeholders, including other collecting societies and publishers. It should also require publishers and collecting societies to put in place efficient, practical alert systems to inform creators and representatives about data Economics of music streaming 105 conflicts. Finally, the Government should leverage the size of the UK market to explore how global licensing deals could be made possible by policymakers around the world, including in trade deals, which would support creators both domestically and abroad.

There is no doubt that the major music groups currently dominate the music industry, both in terms of overall market share in recording and (to a lesser extent) in publishing, but also through vertical integration, their acquisition of competing services and the system of cross-ownership. We recommend that the Government refer a case to the Competition and Markets Authority (CMA), to undertake a full market study into the economic impact of the majors’ dominance (see paragraphs 129, 134 and 183 for further recommendations). The Government must also provide the CMA with the resources and staffing to undertake this case to ensure that it can dedicate the necessary resources to this work whilst not impacting the pre-existing work it is currently undertaking.

The Government must make sure that UK law is not enabling the outcome of market dominance. This means that independent labels must be supported to challenge the majors’ dominance and creators must be empowered to offset the disparity in negotiating power when signing with music companies. The Government should expand support for the Music Export Growth Scheme to allow British music companies to compete with the multinational majors and provide the resources needed for them to survive and thrive in export markets. This scheme must be appropriately targeted at independent British companies. To prevent the further acquisition of successful rights by the majors and ensure greater competition, the Government and BPI should also place clauses in grant funding awards that a company or artists’ rights cannot be acquired by the major music companies for a certain period of time. Moreover, the Government should bring forward proposals for a focused fiscal incentive for the independent music sector, similar to that which exists in TV, animation, film, theatre and gaming.

We recommend that the Government concurrently expand creator rights by introducing a right to recapture works and a right to contract adjustment where an artist’s royalties are disproportionately low compared to the success of their music into the Copyright, Designs and Patents Act 1988. These rights already exist elsewhere, such as in the United States, Germany and the Netherlands, and would give creators greater leverage when negotiation contracts with music companies. We suggest that the right to recapture should occur after a period of twenty years, which is longer than the periods where many labels write off bad debt but short enough to occur within an artist’s career. This would create a more dynamic market for rights and allow successful artists to go to the market to negotiate better terms for their rights. The right to contract readjustment should similarly be implemented as soon as practically possible to ensure that rights for UK creators do not fall behind rights for European creators.

Despite the general consensus that direct licensing between the record industry and streaming services is positive, there are ongoing concerns about the majors’ 106 Economics of music streaming position in negotiation, which allows them to benefit at the expense of independent labels and self-releasing artists, particularly regarding playlisting. This is further evidence that a referral to the CMA is needed (as recommended in paragraph 111).

As long as the major record labels also dominate the market for song rights through their publishing operations, it is hard to see whether the song will be valued fairly as a result. It is well-evidenced that redressing the disparities in relative value between the song and recording has occurred infrequently in the last few decades. Whilst the major music groups dominate music publishing, there is little incentive for their music publishing interests to redress the devaluation of the song relative to the recording. In its reference to the CMA (as recommended in paragraph 111), the Government should urge the CMA to consider how the majors’ position in both recording and publishing has influenced the relative value of song and recording rights. In its reference to the CMA (as recommended in paragraph 111), the Government should urge the CMA to consider how the majors’ position in both recording and publishing has influenced the relative value of song and recording rights.

Artists and their representatives face a systemic lack of transparency from both music companies and the streaming services that license their works. This exacerbates the inequities of creator remuneration by creating information asymmetries and preventing them from undertaking their right to audit. Creators and their representatives have a right to know about the terms on which their works are exploited and verify the outcome of these agreements. It is also deeply concerning that this norm is challenging academic research efforts, including and in particular taxpayer-funded projects, despite efforts to positively engage music companies and streaming services in this endeavour.

The Government has repeatedly told us that it will not implement in UK law provisions akin to those established by the Directive on Copyright in the Digital Single Market. We accept that the Directive is not a silver bullet to the music industry’s problems, but it is a step in the right direction in terms of protections and rights for rightsholders. The Government should ensure that creators in the UK are not worse served that they would have been had the UK remained in the European Union. As a minimum, the Government should introduce a right for performers (or their representatives) to have sight of the terms of deals where their works are licensed, on request and subject to non-disclosure. There should also be notification requirements, requiring relevant parties to provide clear information and guidance to creators about the terms and structures of every deal where creators’ works are licensed, sold or otherwise made available, and the means and methods by which monies that are being distributed to them are calculated, reported and transferred.

Music curators play an important role in the discovery and consumption of digital music and are influential in how creators are remunerated. It is, therefore, unsurprising that music creators are putting more resources into catching the eye of these curators. Where curators are paid or receive benefits in kind for playlisting, Economics of music streaming 107 we recommend that they are subject to a code of practice developed by the Advertising Standards Authority, similar to social media influencers, to ensure that the decisions they make are transparent and ethical.

Algorithms are fundamental to the operation of streaming services. However, many questions remain about how they influence music consumption and how much oversight exists. The Government should commission research into the impact of streaming services’ algorithms on music consumption, including where creators are forgoing royalty payments in exchange for algorithmic promotion.

The market for streaming services itself is fiercely competitive. However, there is the potential that companies may leverage other aspects of their business or elsewise use vertical integrations to gain a competitive advantage; indeed, some jurisdictions have considered that this is already happening in some areas. It is important that the UK has a regulatory regime to respond to these challenges. We are encouraged that the CMA has already launched its Digital Markets Unit, which is undertaking important work in this area within the scope of the CMA’s current powers, but to ensure proper compliance the DMU needs to be put on a statutory basis as soon as possible. The Government should launch its consultation on the new pro-competition regime for digital markets by the time it has responded to this Report and commit to a reasonable timeframe (to which it can be held accountable) for when it reasonably expects legislation to be brought forward thereafter.

The Government must ensure that the challenges posed by music streaming to the UK’s prominence regime are duly considered.

Safe harbour provisions that have been transposed into UK law have profoundly impacted the market for digital music consumption. YouTube’s dominance of the music streaming market shows that the market has tipped. Safe harbour gives services that host user-generated content (UGC) a competitive advantage over other services and undermine the music industry’s leverage in licensing negotiations by providing UGC-hosting services with broad limitations of liability. This has suppressed the value of the digital music market both in real and absolute terms even as these services generate multi-billion-dollar advertising revenues.

We note that the CMA has developed a pro-competition framework for tech companies with ‘strategic market status’ that dominate digital markets. The CMA should consider exploring designating YouTube’s streaming services as having strategic market status to encourage competition with its products.

As we have acknowledged, the Government has repeatedly told us that it will not implement the Directive on Copyright in the Digital Single Market. However, to ensure that music creators and companies prosper in the globally important UK music market, the Government must provide protections for rightsholders that are at least as robust as those provided in other jurisdictions. As a priority, the Government should introduce robust and legally enforceable obligations to normalise licensing arrangements for UGC-hosting services, to address the market distortions and the music streaming ‘value gap’. It must ensure that these obligations are proportionate so as to apply to the dominant players like YouTube but does not discourage new entrants to the market. It must also ensure that existing obligations 108 Economics of music streaming are being enforced as appropriate, and detail in its Response how it plans to address the recording industry’s concerns regarding the enforcement of existing ‘know your business customer’ obligations.

The debate between the predominant pro-rata payment model and alternative methodologies such as user-centric has been compelling. It is positive that new services are inventing new and creative ways to address creators’ and consumers’ concerns about the fairness and transparency of creator remuneration from streaming. We are concerned, however, that current contractual agreements between the major music companies and streaming services have the potential to stifle further innovation if they are misused. The CMA should consider in its case (recommended in paragraph 111) whether these agreements have the potential to (or indeed have already) prevented experimentation and innovation by streaming services.

As technology continues to evolve, the Government must ensure that copyright law is fit for purpose and that appropriate mechanisms are in place for rightsholders to enforce their rights. The Intellectual Property Office must not be a passive witness but an active player, particularly in areas of systemic contestation between rightsholders or where rightsholders believe that their rights are being systematically infringed. We recommend that the Government set out a clear position on livestreaming, both regarding remuneration of rightsholders and the live sector and explain what actions it is taking to support rightsholders in tackling copyright infringement. It should also explain what it and the IPO are doing to identify emerging threats to rightsholders enabled or caused by new technologies. (Paragraph 18 Economics of music streaming 109