Music rights are the main fuel of the music streaming economy. Music streaming services need licences to use the rights in order to launch and sustain their operations. As we have already seen in the case of Spotify, the major rights holders – labels and music publishers – demand princely sums for licensing their music catalogues. This part of the series will examine how the system of licensing music rights works.
The Music Streaming Economy – Part 12: Master- and Publishing Rights in Music Streaming
Basically, there are two types of rights that an on-demand music streaming service like Spotify has to license: (1) the rights to the music recording, also known as the master rights, which are held by the record companies and (2) the copyrights to the musical work, which are either controlled by the authors themselves or, as is usually the case, are commercially exploited by the music publishers, also known as the publishing rights. Let us first look at the licensing of the master rights to the sound recordings. Since the streaming services offer either a freemium model with a paid and a free component, as in the case of Spotify, or as a pure subscription service with a monthly flat rate, as in the case of Apple Music or Amazon Music, the licences cannot be calculated on the basis of a wholesale or retail price, as is the case with sound recordings and music downloads, but rather on the basis of revenue shares. As many streaming start-ups were not originally in a financial position to meet the licensing demands of the labels, a licensing deal consisted and still consists of at least five components:[1]
Revenue share: The labels receive 55-60 percent of all revenues of a streaming service that are attributable to their master catalogue.
Minima guarantees: A music streaming service must pay a contractually agreed fixed amount to the label, regardless of how much revenue a music streaming service generates.
Upfront cash advance: To be licensed by the labels, a streaming service must pay an advance, usually in the millions of US dollars, which is later recouped by future royalty payments.
Equity in the company: As long as the music streaming services were in the start-up phase, they were generally unable to afford the advance payments. In return, the labels received shares in the company, which could be monetised by the labels in the event of a sale or IPO of the streaming service, as we have shown in the case of Spotify.
Administration or technology fees: These are payments to the labels to cover the administrative/technical costs of providing the music content to the streaming services.
In the case of freemium models, the licence deals distinguish between the paid and the ad-supported free models. The royalties for the paid version are higher than for the ad-supported ones. In both cases, however, it is necessary for the streaming services to report regularly (usually on a monthly basis) the usage figures of the labels’ music catalogues. The following information must be provided to the record companies on a contractual basis:[2]
Total number of subscribers.
Total revenues after sales tax has been deducted.
Total number of streams.
Total number of streams from the label’s catalogue.
Proportion of total streams that came from the label’s catalogue
The streaming services use this information to calculate how the total revenue is distributed to each record company according to their repertoire share, also known as the pro rata model. For example, if streams from Universal Music Group’s master catalogue account for 40 per cent of the total number of streams, the major will receive the contractually agreed 55-60 per cent of 40 per cent of the streaming service’s total revenue after VAT. If this amount is less than the minimum guarantee, the label will receive the latter fixed amount.
Lacking the market power of the majors, independent labels (indies) are unable to enforce the majors’ favourable deals or demand comprehensive reporting from streaming services. To give the indies a stronger negotiating position vis-à-vis the digital music service providers (DSPs), influential indie labels founded the digital rights management agency MERLIN in 2007,[3] which now represents tens of thousands of music labels in 70 countries, covering around 15 per cent of the world’s recorded music repertoire,[4] and is therefore able to negotiate similarly advantageous deals with the streaming services as the majors.
The licensing of publishing rights is much more complicated than that of master rights, because licensing practices differ from country to country. While in the US, collective and compulsory licensing of publishing rights to streaming services is common practice, various forms of licensing coexist in Europe. In particular, the industry publishers of the music majors have founded joint ventures with large collecting societies that licence the Anglo-American repertoire directly to the music streaming services in Europe. There is a joint venture called SOLAR Music Rights Management between Sony Music Publishing the British PRS and the German GEMA, which represents Sony’s Anglo-American publishing catalogue across the EU.[5] There are similar joint ventures between Universal Publishing and the French SACEM (DEAL) and between Warner/Chappell and the British PRS (Pan European Digital Licensing – P.E.D.L.).[6] BMG Rights Management also founded a joint venture with GEMA in 2012 – Anglo-American Rights European Service Agency (ARESA)[7] – to licence Anglo-American publishing rights in the European Economic Area (EEA) in a one-stop shop. The music publisher Kobalt is now operating its own “collecting society” following the termination of its co-operation with the Swedish collecting society STIM after the purchase of the American Mechanical Rights Agency (AMRA).[8] Like the indie labels, the indie music publishers have also set up an agency to licence their mechanical rights to the Anglo-American repertoire with the British PRS – Independent Music Publishers’ E-Licensing (IMPEL).[9] Finally, the British PRS for Music, the German GEMA and the Swedish STIM have joined forces to form the International Copyright Enterprise (ICE)[10] to conclude multinational licence agreements with the DSPs in Europe for their repertoire.[11] All these collaborations between music publishers and collecting societies involve the licensing of Anglo-American repertoire to DSPs. The national European repertoire of the major publishers is still licensed to the streaming services operating in each country via the national collecting societies. This is also the case for those small music publishers that have not joined the IMPEL initiative. In the case of streaming services, this concerns the licencing of reproduction rights, but above all the making available rights (online rights).[12]
A music streaming service that wants to offer a comprehensive service in a European country must sign licensing agreements with the major collecting agencies SOLAR, DEAL, P.E.D.L., ARESA, AMRA and IMPEL, as well as with the relevant national collecting societies. The direct agreements between the collecting societies and the streaming services are similar to the master rights agreements of the labels. The streaming companies must accept a minimum guarantee as well as upfront advances, but these are lower than those paid to the labels. In addition, the streaming services agree to pay 10-15 per cent of their revenues to the publishers, depending on their repertoire share. The rights administered by the collecting societies on behalf of the publishers and authors are licenced according to the collecting society’s distribution scheme.[13]
The music streaming economy therefore rests on two pillars: (1) the licensing of the master rights to the sound recordings and (2) the licensing of the publishing rights, as shown in fig. 1.
Figure 1: The rights and licencing structure in the music streaming economy
Source: After Music Managers Forum (MMF 2015: 45).
As we have already seen, music streaming services pay 70-75 per cent of their revenues to the rights holders (55-60 per cent to the labels and 10-15 per cent to the music publishers). This not only puts a strain on the cost structure of the music streaming services and calls into question the economic sustainability of the business model, as I have already analysed in detail using the example of Spotify, but also raises the question of distribution between the rights holders.
The distribution formula of 55-60 per cent for the labels and 10-15 per cent for the music publishers is based on the logic of the CD era. The recording, production and distribution of a CD by a record company involves much more effort than the production and distribution of sheet music and the conclusion of synch deals by music publishers. In addition, a music recording can ‘only’ be commercially exploited by a label for 70 years (in the EU) and up to 95 years (in the US) before it enters the public domain, whereas publishing rights can be monopolised for up to 70 years after the death of the author. Publishers also receive royalties when one of their works is performed live and then re-recorded in another form. The possibility of repeated use of works over a longer period at lower production costs justifies the lower revenue share from the labels’ point of view. Nevertheless, the exploitation processes of labels and publishers have converged in the music streaming economy, which would certainly justify a higher revenue share for publishers. Ultimately, it is a question of bargaining power – also within the music majors – whether the music publishers, and thus the authors, can improve their economic position at the expense of the labels and the performers.[14]
Another aspect is the division between the reproduction right and the performance right. In the case of master rights, the distinction between the two rights is academic because they coincide in the music recording and are licensed together. However, the situation is different for publishing rights. Although the reproduction and performance rights of a musical work are licensed to streaming services as a package in the EU, the royalties are distributed separately. For example, the British PRS for Music pays 50 per cent of the income from the performance right directly to the authors and the other 50 per cent to the publishers, whereas 100 per cent of the income from the reproduction right is paid to the publishers, who then distribute the royalties to the authors in accordance with the contract, which usually accounts for less than 50 per cent of the income. From this perspective, authors benefit more from the performance right than from the reproduction right. The problem is that copyright law in most countries does not define whether streaming music should be considered a reproduction or a performance. However, there is a tendency to view streaming music as a performance, which has led to a split of 75 per cent for authors and 25 per cent for publishers. For downloads, on the other hand, which are more likely to be seen as reproductions, the split is exactly the opposite. It is therefore again a matter of bargaining power which distribution rules are applied.[15]
Endnotes
[1] See Music Managers Forum (MMF), 2015, Dissecting the Digital Dollar, part 1. How streaming services are licensed and the challenges artists now face. Ashford: Hartley Brothers, pp 42-43.
[2] Ibid., p 43.
[3] MERLIN was founded in Januar 2007 by Alison Wenham of the Worldwide Independent Network (WIN) and indie label owners Michel Lambot ([PIAS]), Tom Silverman (Tommy Boy) and Martin Mills (Beggars Group) at the MIDEM in Cannes. MERLIN’s first CEO was Charles Caldas. See: The Guardian, “Indie music labels join together to grab a slice of online revenues”, January 22, 2007, accessed: 2024-09-01.
[4] MERLIN, https://merlinnetwork.org/de/, accessed: 2024-09-01.
[5] SOLAR, https://www.celas.eu/, accessed: 2024-09-01.
[6] Warner Music Group press release, “Warner/Chappell Music Launches Its Pan-European Digital Licensing (P.E.D.L.) Initiative”, June 2, 2006, accessed: 2024-09-01.
[7] ARESA, https://www.aresa-music.com/, accessed: 2024-09-01.
[8] New York Times, “Going to the Ends of the Earth to Get the Most Out of Music”, June 8, 2015, accessed: 2024-09-01.
[9] IMPEL, https://www.impel-music.com/ accessed: 2024-09-01.
[10] ICE, https://www.iceservices.com/, accessed: 2024-09-01.
[11] About the music licensing agencies of the major music publishers see Music Managers Forum (MMF), 2015, Dissecting the Digital Dollar, part 1. How streaming services are licensed and the challenges artists now face. Ashford: Hartley Brothers, pp 44-46.
[12] Ibid., p 44.
[13] Ibid.
[14] Ibid., pp 52-54.
[15] Ibid., p 55.
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