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Let’s Be Pigs Not Hogs: How to Thrive in the Age of Digital Music

IStock_000016101300SmallBy music industry veteran Fred Goldring of Music Aficionado.

In 2003 and 2005 after a wave of R.I.A.A. lawsuits, I wrote editorials in Billboard advocating an “eight-step recovery program” for a healthier music industry.  Among other things, I proposed the “support [of] initiatives that will allow unlimited access to every piece of music in the MP3 format whenever and wherever someone wants it, with no conditions or restrictions in an easy-to-use interface [as] people will pay for this”.

As one of the first people in our industry to embrace the changes that became the digital music revolution, and in light of the public debate over streaming brought on by Taylor Swift’s decision to remove her catalog from Spotify, I thought it would be interesting to look back on my recommendations eleven years later to see how we’ve done – and offer some new suggestions about where we might go from here.

Let’s start with the obvious: streaming is our future. It will only grow and become more ubiquitous. The advent of on-demand streaming is making it clear to everyone that you don’t have to own something that you can get anywhere at anytime on demand on any device (how many of you have visited your CD collection lately?) How we deal with the financial ramifications of that adoption will determine the future health of our industry.  In particular, we need to create a system in which all of the major stakeholders in the music business—artists, record labels, publishers, performing rights organizations, digital music services and consumers—are happy and thrive.

Images-1And therein lies the problem. Our industry is entangled in a Gordian knot. On the one hand, artists and songwriters complain they don’t make enough money from streaming. So they are demanding a bigger piece of the streaming pie before they will support it. On the other hand, streaming services protest that they already pay out too much of their revenues back to the labels and publishers (currently over 70%) and that if they had to pay out even more, they won’t be able to sustain their businesses long term (note: Spotify recently reported a 12% operating loss for 2013). 

Next we have the record labels grumbling that artists have been overpaid by relying on the 50/50 split of “ancillary income” royalty provision in recording contracts for streaming income. The labels’ argue that since streaming is no longer “ancillary”, they should pay artists their regular contractual royalty rate for normal retail channel sales (translation: record companies would keep more of streaming income which they assert they need to sustain their business and continue to invest in developing and marketing artists as well as new required digital infrastructure). 

To make matters even more knotty, Apple will soon to be entering the streaming business (along with YouTube which recently launched their Music Key service). This will inevitably result in more downward pressure on pricing for streaming subscriptions. Unlike the Spotify’s and Rdio’s of the world, companies like Apple (and Amazon and Google), don’t rely on streaming to pay their bills. For the tech giants, streaming is simply a consumer acquisition and marketing tool.

Finally, there’s our outdated copyright laws.  They have not kept pace with the rapid change brought on by technology. The Digital Millennium Copyright Act (DMCA) has been in effect since 1998; and it’s pretty clear that, among other things, the Safe Harbor and Anti-Circumvention provisions of that Act need significant updating now that we have 16 years of actual experience to inform the discussion.

So as ww approach 2015, here are a few concrete proposals for how we can make this business we all love work for everybody. 

  1. As my Dad always told me, “pigs get fat, hogs get slaughtered.” The 70% royalty paid out by streaming services to IP holders seems too high from the point of view of the payers and too low from the point of the recipients.  In every negotiation I’ve ever been a part of, that’s a good sign it’s a fair deal.  The streaming services should stop trying to lower that rate and the artists and labels should stop trying to raise it. Everyone seemed OK with that split on iTunes sales. Let’s just all shake hands and get on with making music.
  2. The crux of the problem is not how much the streaming services pay to IP holders, but how that pool of money is divvied up and allocated.  Currently, it is allocated like a parimutuel betting pool where all subscriptions are pooled and then allocated based on the number of streams listened to for each artist.  This seems fair until you realize that it effectively means subscribers who don’t listen to a lot of music per month are subsidizing subscribers who do.  For example, if a streaming service had two users, one who listened to 999 streams by Artist X and another user who listened to a single stream by Artist Y, 99.9% of that service’s royalty pool would go to Artist X even though both users paid the same $9.99.

It doesn’t have to be this way.  Streaming royalties could be accounted for on a “user-centric” basis: i.e., 70% of each subscriber’s revenue would be allocated amongst the artists that subscriber listened to in a given month.  This small accounting change would make a substantial difference in the profitability of streaming for indie, up-and-coming and struggling artists:  i.e., exactly those artists that we need to nurture if we are going to have a thriving music scene ten years from now. 

  1. Record labels need to earn their keep.  The 70% payout to IP holders largely goes to labels who then pay each of their artists based on the intricacies and convoluted terms of their contracts with each artist.  I should know.  I negotiated many of those contracts for artists.  It doesn’t really matter whether labels call it “ancillary income” or “development” or “digital gobbledygook.” What matters is that unless labels provide real and substantive value to musicians, musicians will take their business elsewhere.  Every day there are more and more alternatives to the traditional big 3 labels for musicians to consider.  And many of these alternatives are much more exciting and rewarding to deal with for musicians than a label’s lawyers. Labels need to return to their culture of being musicians’ champions and supporters.  Or they shouldn’t be surprised if they get disintermediated, and nobody is crying at their funeral.  
  2. Digital copyright law is a mess.  We need to craft and implement a comprehensive overhaul of the sound recording copyright law to include payment of performance royalties for sound recordings on par with musical compositions. And copyright protection for pre-1972 sound recordings should also become a federally mandated right, not just a state right.  We also need to revamp the DMCA to bring it in line with the realties of a 2015 digital world, and make the restrictions, obligations and payments under the Act sensible for all sides.
  3. It may be tough for the streaming services to acknowledge, but Taylor Swift was right: windowing works.   The music business needs to adopt a windowed/tiered system for new releases similar to that implemented by the movie and television industries. CD’s and downloads should have the initial window, followed by the paid streaming subscription services and then ad-supported free streaming services. Each window should have a different pricing model so that the fans who are willing to pay a bit more can get access to new music they love first. 
  4. IP holders and streaming services need to agree on a higher per-stream minimum that applies across the board, both to subscription and ad-supported services.  This per-stream minimum must be high enough to generate a fair income to IP holders while, at the same time, not being so high it kills off the ad-supported services (after all, this is provably the best channel for upselling consumers to paying for music).
  5. The album is dead.  Long live the song. Artists would be better served releasing a new recording monthly, weekly or in a batch rather than waiting until they have a complete album. (Remember: albums only became a format originally due to the physical limitations of vinyl). Consumers don’t have the attention span they once did to listen to an entire album. Web and mobile connectivity now allow for novel ways for musicians to connect directly with their fans and engage them in their creative process.
  6. Neil Young is right:  the quality of MP3 song files sucks.  If we want music to thrive, it needs to sound good.  The entire industry—streaming services, artists and labels—should support rapid adoption of lossless FLAC as the new audio standard for paid interactive streaming. Most young people have never known anything but compressed MP3 audio. Introducing them to music in all its sonic glory might make them more passionate about music (note the resurgence of vinyl among young music fans). Higher quality audio would also attract older music fans who can finally get the sound quality they grew up with in streaming format - leading to more paid subscriptions and sales of high fidelity hardware.
  7. Finally and most importantly, let’s make great music.  We are all in a business built on a passion for great music.  Music isn’t great simply because it is automatically installed on 500 million phones without the users wanting it.  Music is great when it is brilliant and original and makes everyone with ears want to rush out and listen to it.   If we stop making great music, it won’t matter how we divvy up the revenues because nobody will be listening. 

What will the music industry look like eleven years from now? I’m optimistic - as long as ­all stakeholders accept that compromise will be necessary and inevitable to sustain long-term growth and innovation. More people are listening to a greater and a wider variety of music than ever before. The barriers to entry are dropping, and improved curation approaches and filters are being introduced regularly.  We can get to a place where all participants can feel good about zealously supporting the rapid growth of streaming. But this can only be achieved if all parties recognize that “pigs get fat, but hogs get slaughtered.”

FRED GOLDRING is the Chairman and Co-Founder of Music Aficionado. He is also a media/tech entrepreneur, entertainment lawyer with Counsel LLP, an Emmy-winning Executive Producer and a Member of The President’s Committee on the Arts and the Humanities appointed by President Barack Obama. 

Twitter: @fredgoldring

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