Michael Raine, a Humber journalist post-grad, has been the assistant editor of Canadian Musician since 2012. He recently did some legwork to try and figure out where the proceeds of the streaming services ended up. You can read his article here.
Below, is a conversation between Nick Krewen, on behalf of FYI, and Mr. Raine about his article, Streaming Money Is Flowing... But Where To?
FYI: It seems that with streaming, record contracts are more convoluted these days...
Michael Raine: When I was speaking to entertainment lawyers Paul Sanderson and Safwan Javed, it wasn't that they were more convoluted, but the terminology is broad enough that they're using the old terminology to apply to what essentially is a completely new medium. The idea that record contracts, on the major label side, are still broken down into two revenue streams - the licensing and the sales - that have two very different splits as far as what's going to the artist and what's going to the label. On average, it seems that the licensing revenue is split 50/50 between the label and the artist, which is obviously fair. It's on the sales side that things are split heavily in favour of the label. The odd part is just this idea of streaming, which on the surface, seems closer to a licensing that it does to a traditional sales paradigm. But that's being included as sales, and therefore, that's the reason why so much of that revenue is going to the labels and not really making its way to the artist.
Download sales are decreasing - and that's largely because of streaming. So, not unjustifiably, record companies are saying, because streaming is taking away our sales revenue, we're going to consider streaming sales, not licensing. In the article, Paul Sanderson mentions the Eminem case of his publishing company (F.B.T. Productions, LLC) suing Aftermath Records over download royalties. Eminem and his company won that case (Ed. note - courts ruled that Aftermath owed F.B.T. a royalty rate of 50% on downloads and ringtones under the "Masters Licensed" provision) and Paul says the record companies took that as a warning. From that point forward, they made sure to make very clear in their contracts that they were going to include digital revenue sales.
FYI: This isn't the first time we've seen this happen concerning new technology. It happened with CDs. Is there anything similar with regards to streaming?
MR: Not to the extent where the labels were trying to avoid payment. People were savvy enough on both sides of the agreement to see that that wasn't going to fly. Really, what they tried to do was ensure that they got the most possible. The label is getting money from all sides of it. One thing that came out after I finished the article was that the streaming services are paying daily guarantees to major labels, and I did mention the fact that the labels own part of Spotify. The major labels are the only ones I'd say who are making out in a big way on all sides of this. Not even the streaming services, because they're paying so much. It seems like the only real big winner is the major label. You can see it in their financial statements over the last few quarters, that streaming has become the biggest source of revenue for them. But it glosses over who is getting this money - and in most cases, it's the three major labels.
FYI: When we did the currency conversion of the figures you provided in your article, we came up with an estimated $63.9 million (Canadian) that the majors here made on streaming. Did any YouTube income account for those figures?
MR: Not in the numbers I'm talking about. That's another thing. And the CMRRA recently reported completing a licensing deal with YouTube for the first time, so I'm not sure how that's going to be changing things. I'm primarily talking about on-demand streaming, and it seems like the big ones at the moment are Spotify and Apple Music, Google Play and to a lesser extent, Tidal.
FYI: In questioning labels and services, did you find that they weren't forthcoming due to intent, or just the complicated nature of the information involved?
MR: A bit of both. To be honest, I wasn't surprised that they were unwilling - and maybe unable - to answer some of the questions that I had. I reached out to the three Canadian majors - the folks at Sony, Warner and Universal directly, as well as Music Canada. I was surprised by the complete blanket "no comment," as I thought, at least for the sake of image, they would give some boilerplate responses. All the contract deals between each label and each streaming service is subject to a confidentiality agreement. It's hard to hold it against them if they're keep confidence in a contract, but to me it doesn't mean they can't at least speak in broad terms and provide their own defense. There's been no shortage of criticism directed their way...some of it valid, some of it misguided. I was surprised they left Amy (Terrill) and Music Canada to do it for them.
FYI: Spotify billed $2.2B. They end up paying out $1.54B to the labels, publishers and other stakeholders, leaving $660M in their coffers. Why do you think they're crying poor? That seems to be a lot of money. Even now, they're trying to renegotiate label deals and strike lower payout deals.
RM: That's a fair point. There's a big difference between the service as an entity losing money and the people working for it. The executives and those working at say, Spotify, are making out very well - I can't remember their exact salaries (Ed. note - A Digital Music News article published in May 2016 listed the average Spotify employee salary as $168,747). I suppose if you extract taxes out of what they're keeping, promotion and whatever other overhead they have, the numbers that Spotify has put out there in their own financial statement, they are losing money. Ultimately, the service has to make a profit somehow. One quote I didn't use was to Paul Sanderson, who put up the hypothetical question, what happens if these services go under? The labels have put all of their eggs in the streaming basket. The industry is pretty quickly putting all its eggs in the streaming basket. If these services aren't making money...what happens, at some point? At some point it has to turn a profit to continue to exist. It doesn't seem like a sustainable business model for anybody.
FYI: And Tidal?
RM: Very little is out there about Tidal. I reached out to them multiple times and they didn't respond. But it seems that on-demand streaming is becoming a two-horse race with Spotify and Apple, who are out there well ahead of the others. I wonder openly why Google isn't doing a better job of competing.
FYI: Do you feel there's a change or correction coming?
RM: Not from the labels. They're doing well. It will be very interesting to see what the new distribution deal is that's currently being negotiated between Spotify and the record labels. The labels don't want new releases being made available on the free tier of Spotify - they only want it on the paid version. It's no secret that Spotify wants to do an IPO, and they can't do that until Spotify has an agreement with all three major labels. The labels are using that as leverage. It'll be very interesting to see.
FYI: Does the monthly subscription amount cover royalties if you listen to 1000 or 2000 songs?
MR: It does, and really the number of streams is kind of irrelevant. The royalties that are paid to the labels on one side and to songwriter/publishers on the other isn’t based on a per-stream rate, even though that’s what tends to get a lot of attention. The services pay a certain percentage of gross revenue to stake holders – what people call the big pool formula. So regardless of how many songs actually get streamed, a just under 13 per cent of the gross revenue, of subscription revenues, will go to publishers and songwriters and a much larger share, somewhere around 55 to 60 per cent, will go to the labels. Some estimates actually peg the labels' share at more than that. What share of those payments makes its way to the individual publisher or songwriter or performing artist will depend on the number of streams they received, but that doesn’t affect the service itself. In that sense, it’s much better for everybody to have 10 subscribers each paying $9.99 a month and streaming 1,000 songs each than one person paying $9.99 and streaming 10,000 songs.
Right now, the big challenge for the streaming services and the industry is to reintroduce some value to music and get more people to pay to subscribe. I think the freemium version of Spotify that derives its revenue from ads seems like a failed business model. It's generating a fraction of what paid subscriptions are. The big challenge for everybody involved in the streaming services and the labels and the industry as a whole is to get people to start paying for subscriptions. If you could get that to be the norm, to get people to expect to pay for music again, there's a whole lot of room for growth there. Especially for the average consumer, who spends between $35 to $70 a year on new recorded music is what the average fans spent in the pre-streaming era. If you can get those people paying for subscriptions, now the annual spend goes up to $120. Getting the average consumer to spend more, that's where the real money comes in.
FYI: What was your biggest challenge of writing and researching this article?
RM: Trying to make sense of it all, really. There's a lot of information out there and you can really get bogged down in the numbers. I suppose, in a way, it was trying to stay focused on, what question are we trying to answer? That came down to how the revenue from the streaming services was being divided, but I kept having to remind myself that we were just trying to answer this one simple question. Because there are so many tangents you could go off on. It was a potentially complicated issue.
FYI: What was your biggest takeaway?
RM: That the major labels are really the only major winners in this right now. Right now, things are look as good for major labels as any time before Napster. The increase in revenue for them and the increase in revenue in the industry as a whole currently isn't making its way to artists, and there seems to be a breakdown there. I don't know what it is, but there seems to be some kind of new business model that allows everybody to stay afloat - and that includes the streaming services. artists, publishers, music labels...Right now, everybody's fighting for themselves. But at some point, I think people will need to take a step back and say, alright, how do we make this sustainable for everybody? Not just one side of it.