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The Great Escape 2018
CMU Great Escape Special: Dissecting The Digital Dollar
By CMU Editorial | Published on Wednesday 16 May 2018
The CMU Great Escape Special was a magazine distributed at The Great Escape 2018 featuring articles linked to the three conferences CMU Insights presented there and other CMU reporting and research. Here is an article about our ‘Digital Dollar’ research work.
For the last three years CMU Insights has been working with the Music Managers Forum to demystify the streaming business via the Dissecting The Digital Dollar project.
Phase one of the research explained how streaming services like Spotify and Apple Music are licensed by the record companies, music distributors, music publishers and collecting societies, and how digital royalties are calculated and paid each month. Understanding all that also required mini-guides to how music rights, record and publishing deals, and collective licensing work.
Phase one also identified a number of issues with the current model. Some were issues for the whole music community, others for artists and songwriters in particular. Phase two debated all of those issues, with artists, songwriters, labels, publishers, lawyers, accountants and, of course, managers all joining the debate.
In phase three we put the spotlight on one big issue in particular – the lack of transparency in the streaming sector. Everyone agreed there was a transparency problem, but who needed to be more transparent about what, exactly? To answer that question, we created the MMF Transparency Index, the twenty pieces of data and information artists and managers need to fully understand the streaming side of their own businesses.
Phase three also saw us put the spotlight on the diversity of label and distribution deals now available to artists, identifying ten different deal types, from DIY distribution to a conventional major label record deal. The aim was to ensure that managers were fully aware of the different kinds of options available when their artists release new music, and that they understand the pros and cons of different approaches.
All of this work was compiled into a book called ‘Dissecting The Digital Dollar’, which the MMF published earlier this year. The book, available from Amazon, provides a comprehensive overview of the streaming business, music licensing, digital royalties, key issues, the ten deal types and the Transparency Index.
Phase four of the Digital Dollar project is now underway. This phase will do two things. Firstly we are getting managers to assess each of the labels and distributors they work with to see which are providing the twenty pieces of data and information identified in the Transparency Index. The aim is to celebrate best practice and communicate where there is room for improvement.
The next phase will also put the spotlight on the song rights side of the streaming business. When it comes to how songwriters are paid when their music is streamed there are added complications caused by compulsory licensing, the split between mechanical and performing rights, the involvement of the collecting societies, and music data issues.
Phase four of ‘Digital Dollar’ will map how the songwriters’ royalties flow, including how money passes between different societies around the world; the territorial nature of music publishing having proven to be a particular challenge in the streaming domain, and another way songs differ from recordings. The aim is to identify all the key issues that occur along the way, including data, deductions and delays.
GET MORE INFO
To find out more about the ‘Digital Dollar’ project or to order the book check cmuinsights.com/digitaldollar
You can download the various ‘Digital Dollar’ guides and access extra tools at themmf.net/digitaldollar
If you think you have something to contribute to phase four of the research do get in touch at insights@unlimitedmedia.co.uk
Dissecting the digital dollar in ten steps
Understanding the way streaming services are licensed requires some understanding of copyright law, of record and publishing deals, and of collective licensing. Here are the ten key things you need to know.
1. There are two sets of music rights
Whenever you write a song you create a song copyright. If you then make a recording of that song, you create a separate recording copyright. So, the music rights industry controls and represents two sets of copyright, the song rights and the recording rights.
Although many artists both write and record music – and although many music companies have one division dealing in songs and another in recordings – the two sides of the music rights business operate pretty autonomously from each other.
So, artists appoint record companies to represent their recording rights, and music publishers to represent their song rights.
As a streaming service streams recordings of songs, it is exploiting both sets of music rights. Which means it needs licences covering both. Which means it will need to negotiate licensing deals with both the record industry and the music publishing sector.
2. Copyright provides a number of ‘controls’
Copyright law provides copyright owners with certain controls over the content they own – which means they can control what happens to their content.
The exact list of controls varies from country to country, though commonly includes: the reproduction control, the distribution control, the rental control, the adaptation control, the performance control and the communication control.
In the music industry it is common to group the reproduction and distribution controls together and call them the reproduction rights or – in music publishing – the mechanical rights. It is also common to group the performance and communication controls together and call them the performing rights or – increasingly in the record industry – the neighbouring rights.
Copyright makes money whenever a third party wants to exploit a copyright owner’s controls. If you want to reproduce, distribute, rent, adapt, perform or communicate someone else’s song or recording, you must get their permission. The copyright owner charges you for that permission, and that’s how they make money. Permission giving for money is called licensing.
When the third party is getting a licence, they will usually need to state which of the copyright controls they wish to exploit. The nature of the deal – and even who they do the deal with – may differ depending on which controls they are being exploited.
3. The music industry licenses directly and collectively
At a basic level, if someone wants to make use of a song or recording, they must identify the copyright owner or owners, get in touch with them and negotiate a bespoke deal. That is direct licensing. However, in some scenarios the music industry licenses collectively.
With collective licensing, all the rights owners put their respective copyrights into one pot and appoint a central organisation to negotiate on their behalf.
That central organisation may be called a collecting society, or a performing rights organisation (PRO) or a collective management organisation (CMO). The CMO then does the deal and collects royalties from the licensee, passing the monies on to artists, labels, publishers and songwriters based on usage.
In most countries there are separate collecting societies for recording rights and song rights. And in some countries – on the songs side – there are also separate collecting societies representing mechanical and performing rights.
4. Streaming exploits both the mechanical and performing rights
This adds to the complexity of digital licensing. Whereas pressing a CD exploits only the mechanical rights and playing a track on the radio exploits only the performing rights, it is generally agreed a stream exploits both elements of the copyright.
This is a particularly important point in countries where – on the songs side – mechanical and performing rights have traditionally been licensed separately by different entities.
5. Record labels usually license digital services directly
This means that the streaming services need to do direct deals with the record companies, rather than dealing with a collecting society.
This usually means doing a deal with the three majors – Universal, Sony and Warner – and then with an organisation called Merlin, which negotiates a template deal on behalf of about half of the world’s indie labels.
The streaming service would then usually get access to the music of the other indies and DIY artists via aggregators and distributors.
6. Publishers sometimes license digital directly and sometimes license it collectively
Songwriters and publishers predominantly license streaming services via their CMOs, but with a big exception. The big five publishers – Universal, Sony/ATV, Warner/Chappell, BMG and Kobalt – license their Anglo-American catalogues through direct deals, albeit via joint ventures with the CMOs.
So, as a streaming service, you need to do your direct deals first, and then negotiate additional deals with all the collecting societies, including – in some countries – one collecting society for mechanical rights and another for performing rights.
Though the CMOs are now starting to form ‘hubs’ so that you can get deals with multiple societies via one set of licensing negotiations.
7. Streaming deals are ultimately revenue share
Every label, distributor, publisher and collecting society does its own deal with every streaming service, and the terms of all those deals are different and often secret.
However, in the main, labels and distributors will generally negotiate a revenue share from the DSP of between 50% and 60%, while publishers and the song right CMOs will be on a revenue share of between 10% and 15%.
8. But it is revenue share based on consumption share
That means that every month a service like Spotify works out what percentage of overall streams came from any one label or distributor.
Let’s say one label’s catalogue accounted for 10% of all streams. Spotify would then allocate 10% of its overall revenues to that label. It would then share that sum of money with the label based on its revenue share agreement. So, if the label was on a 50% revenue share deal, it would pay half of the money allocated to the label’s catalogue to the label.
The service then repeats this process with every label, distributor, publisher and CMO – hoping that there will be about 30% of its overall revenues left on the table at the end of the process.
9. There are other elements to the deal
Although at their core, the streaming deals are revenue share arrangements, there will be other parts of the deal too. With a new service, the label might ask for equity in the business and upfront fees to set everything up. Labels and distributors will also often ask for an advance – a lump sum of money up front.
But perhaps most important are the minimum guarantees. A label, distributor, publisher or CMO might demand a minimum rate per-stream, or per-user, or per-month.
After the revenue share calculations described above have been done, the service has to work out what the label, distributor, publisher or CMO would have been due based on these additional minimum guarantee agreements. If the sum being paid based on revenue share is less than the minimum guarantee, it must pay the higher amount.
10. The streaming service doesn’t always know who to pay
When it comes to the recording rights – a streaming service assumes that whoever uploaded the content to its platform owns the copyright, and is therefore due payment when those tracks are streamed.
However, the label or distributor doesn’t control the song rights, and doesn’t tell the DSP who does control those rights. Which means the streaming service doesn’t know who to pay the song royalties to. To that end, the streaming service relies on the music publishers and CMOs to work out what they are due.
The streaming firms send the publishers and CMOs a list of every track that has been streamed, and said publishers and CMOs must then tell the digital platform which contain songs they control.
