Transparency in the Music Industry
Of the issues that have bedeviled the music industry, perhaps the most insidious has been that of transparency, or, more accurately, a lack thereof. In fact there really has not ever been a time when the modern music industry, meaning the industry that developed around the distribution and use of sound recordings, has been truly transparent. Stories abound of artists receiving Cadillacs and other non-monetary payments in lieu of regular royalty checks, and there is often talk of the “mailbox money” that songwriters received without much of an explanation about the exact amount. The music industry could have done better during much of the twentieth century, and there have been plenty of cases documenting the exploitation of talent. Success did come, nevertheless, for there was a good proportion of artists and songwriters whose works commanded commercial value. Even when payments felt short of what was owed, earnings beyond a livable wage were possible.
Today, for better or worse, the music industry is at a different place. The record and publishing industries are not the gold mines they once were, and digital technologies have made it possible for any musician with an internet connection to reach a global audience, dramatically increasing the level of competition for listeners’ time. This digital music industry demands a higher level of transparency because exposure is key and royalties are the result of the accrual of micropayments. If only it were so. In a recent report, Fair Music: Transparency and Payment Flows in the Music Industry, the Rethink Music project at Berklee College of Music has examined the topic and laid out a series of steps to address these issues. (Editor’s Note: The report was published as we went to press, and the MBJ’s Editor was involved; we will cover the report in full in our next edition).
There are three categories of transparency in the music industry: structural transparency, repertoire transparency, and rate and revenue transparency.
The first major category of transparency is structural transparency, which has been defined as “how different services function and how they compensate artists.”1 To better illustrate what structural transparency is we can look at digital aggregator services like CDBaby and TuneCore. While the exact offerings of aggregators differ somewhat between companies, and sometimes between different membership levels within a given aggregator, these services basically function as an intermediary between independent artists, or those whose record labels do not offer distribution services, and digital music distribution platforms, including streaming services like Spotify and Google Play, and digital sales hubs like the iTunes Store, that would not otherwise be accessible to those artists. The services, in exchange for compensation through either a flat fee or a share of revenue, use their existing relationships with the services to get artists’ music on the service, then distribute any revenue earned on a given platform to the artist. Of course the degree of structural transparency varies amongst aggregators. However, this fairly straightforward business model is in theory, and often in practice, structurally transparent.
Another class of services that has been cited as an example of structural transparency are the performing rights organizations that function under government control, either through statute or Department of Justice antitrust consent decree, which currently includes every PRO in the United States other than SESAC and Irving Azoff’s Global Music Rights. These PROs are limited in terms of what services they can provide to members and in how money flows through them, making them inherently structurally transparent. Though the transparency is the result of mandate, the effect is nonetheless significant.
While deficiency in structural transparency does not pose nearly the same level of threat as lacking in the other two areas of transparency, it does still create some confusion, particularly for independent artists and songwriters. Of particular concern is the array of services dedicated to providing independent music creators with tools to assist with a wide range of promotional activities, such as brand partnerships and social media engagement, among others, which often fail to convey comprehensible what exactly the service they offer is. In fact aggregator startups that seek to expand their offerings beyond the basic model outlined above often poorly define what their additional services do, and what value they could provide to artists. Of course the seemingly endless repackaging of services to find the ideal combination is part and parcel of a developing market, particularly a digital one, but individual companies could certainly do a better job of defining the substance of their offerings, rather than relying on flash.
Rate and Revenue Transparency
Rate and revenue transparency is defined as “how the money is split, who gets paid what and why,”2 and in the era of micropayments that can come from up to 700,000 different revenue sources,3 it is an incredibly important that it be maintained at a high level. Given the immense number of revenue sources, there are quite a few issues that can crop up within the realm of revenue transparency, but the most significant are those regarding royalty rate setting, and how money flows back to artists and songwriters.
Royalty rate setting is always accomplished through either direct negotiation between the rights holder (label, publisher, PRO) and the distribution service (Spotify, iTunes, Pandora, etc.), or, in the cases where such a framework exists, through a government rate setting procedure, both of which present transparency issues.
Government rate setting procedures exist to assist licensing of performance rights, and to a lesser extent mechanical rights, and are non-transparent primarily due to the fact that they are highly convoluted. For performance rights alone there exist three separate legal entities charged with setting rates for a given PRO, namely ASCAP and BMI rate courts, and the Copyright Royalty Board for SoundExchange, each of which follows its own unique rate setting procedures, and often must do so for each service looking to license the catalog represented by its assigned PRO. Additionally, once the rates are set, they are generally not put forth in a way that can be understood by most artists, and little is done to make them more comprehensible. While the lack of clarity for the layman is somewhat inherent to the complicated process of assigning a rate, the overcomplicated system by which they are set can certainly be addressed. In Copyright and the Music Marketplace, the culminating report of its comprehensive study on music licensing, the Copyright Office suggested a streamlined process in which all performance licensing be done through the CRB and be based on a single standard that relies heavily upon the perceived fair market value of a work. While the Copyright Office itself does not have the authority to make such a change, its recommendation will certainly carry great weight as Congress moves through the process of overhauling the Copyright Act.
Transparency issues in directly negotiated deals come not from an overly complex rate setting structure, but from true opacity in the process. The deals that best highlight this are those between record labels, particularly the three majors, and on-demand streaming services like Spotify and Deezer.
To begin with, these deals are almost always protected by nondisclosure agreements, making it impossible to discover their exact terms without the contract being leaked. Recently such a leak occurred, with the full contents of the contract between Sony Music and Spotify appearing on The Verge.4 Among other things, the contract confirmed the prevalence of compensation given to the labels that is outside the royalties derived from plays of songs in the labels’ catalog, which include discounted advertising space, some of which can be resold at a profit, and large up front advances. While the advertising space is difficult to address, and is presumably used to promote Sony artists (and then, in all likelihood, only their very top tier), the money earned from the sale of unused advertising space, along with the advances, and potential future profit from the equity stakes each of the majors hold in Spotify is a much more dicey area. Because this money is not directly tied to the playing of an artist’s song, the provisions of most record deals do not stipulate that it must be paid back to the artist. Of course in the wake of this leak all of the majors insisted that they have paid out money from advances to artists, but the subject remains clouded, as does the split of potential future income from equity stakes in Spotify and other services.
Repertoire transparency deals with the accuracy and availability of information regarding who owns the rights to works in the music industry. One would assume that in an age in which classified government documents can be accessed with great ease on the internet that finding out who owns a musical work or sound recording should be easy. In this case, however, one would fall victim to the old adage about assumptions, as in many cases finding this information is difficult or even impossible.
There are a number of reasons for the inaccessibility of this information, one of which is the frequent sale of individual works and entire catalogs and the infrequent recordation of these sales. Further, in recent years there has been a proliferation, particularly in pop music, of songs with many writers, each of whom generally owns a share of the work, making it difficult for potential licensees without great knowledge of music licensing to determine whose permission they need for a certain use. The Future of Music Coalition illustrated this point using a hit song by Flo Rida that had 13 writers who were represented by a total of 17 publishers. Depending on the nationality of the 13 writers, there could have also been as many as 13 different PROs for a single work.5
While the two issues mentioned above have certainly exacerbated problems with repertoire transparency, the main issue is the absence of a single comprehensive and accurate database of music rights ownership information. Such a database would at the very least state what entity or entities own a given work and provide their contact information for licensing purposes. The database could however be much more, potentially serving as a licensing clearinghouse itself and perhaps as a royalty payment terminal, which could help address some of the issues with revenue transparency. There have been a number of attempts to create a global database of music rights, most recently the massive Global Repertoire Database effort, but all have ended in failure. This has left us with a series of independent databases controlled by PROs, labels, publishers, and governments. The information there is not always up to date, it is organized sui generis, and at best covers a small fraction of the global music market. This creates a terribly inefficient music-licensing regime, particularly when it comes to works that are not hits.
Transparency is by no means the only challenge the music industry faces in the 21st century. In the digital age traditional distribution models have taken major hits, new distribution models are a long way from being fully developed, and proliferation of artists has made it all the more challenging to be heard. That being said, creating transparency is the first task the industry should face. Addressing other problems and ultimately building a healthy sustainable industry requires a solid platform, the development of which demands tremendous clarity within the industry. While the music business remains at its current level of opacity, building such a platform will be nearly impossible.
By Griffin Davis
1. “Transparency: Why It Matters to Musicians.” Future of Music Coalition. Future of Music Coalition, 12 Jan. 2015. Web. 7 July 2015. <https://www.futureofmusic.org/blog/2015/01/12/transparency-why-it-matters-musicians>.
2. “Transparency and Artist Revenue: The Deep Dive.” Future of Music Coalition. Future of Music Coalition, 27 Jan. 2015. Web. 6 July 2015. <https://www.futureofmusic.org/blog/2015/01/27/transparency-and-artist-revenue-deep-dive>.
3. Gray, Kevin. “Kobalt Changed the Rules of the Music Industry Using Data — and Saved It.” Wired UK. Conde Nast, 1 May 2015. Web. 6 July 2015. <http://www.wired.co.uk/magazine/archive/2015/05/features/kobalt-how-data-saved-music>.
4. “F*&K It: Here’s the Entire Spotify/Sony Music Contract…” Digital Music News. 22 May 2015. Web. 6 July 2015. <http://www.digitalmusicnews.com/permalink/2015/05/22/fk-it-heres-the-entire-spotifysony-music-contract>.
5. “Transparency: Why It Matters to Songwriters and Fans.” Future of Music Coalition. Future of Music Coalition, 14 Jan. 2015. Web. 6 July 2015. <https://www.futureofmusic.org/blog/2015/01/14/transparency-why-it-matters-songwriters-and-fans>.