Streaming music is getting a lot of attention lately. Some of this is because country/pop superstar Taylor Swift removed her catalog from Spotify, and major media outlets like to ask folks like us what it means. But Spotify isn’t the only streaming game in town: there’s also Internet radio, which is an entirely different animal when it comes to how royalty rates are calculated and how musicians are paid.
Today, we will be focusing on sound recordings and how performers and labels are paid when music is used on a few different kinds of services. (Composers and publishers also receive royalties from these uses, according to a different set of rules.)
Under US law, webcasters and satellite services are considered non-interactive, which basically means they’re radio. On the webcast side, a service can be a lot like traditional radio with a DJ and a setlist, or it can be “algorithmic radio” like Slacker, iHeartRadio or Pandora, where “stations” are generated based on user preferences. The important distinction is that listeners can’t pick the exact songs or albums they want to hear or create playlists, etc. These limitations are what make webcasters eligible for a statutory license, which means that if they agree to pay according to a government-set rate, they can play pretty much anything they want without having to directly negotiate with rightsholders.
Right now, a trio of federal judges called the Copyright Royalty Board is considering evidence presented by rightsholders and services in proceedings to determine what the rates should be from 2016 through 2020. (More on that here.)
Contrast the above with a streaming service like Spotify, which to obtain catalog, requires direct negotiation with rightsholders (or their agents). These negotiations are private, and the terms are not disclosed. This frustrates transparency and also leads to situations where the labels are actually part owners of a service in the form of equity shares. It also means that artist compensation looks a lot different. Signed artists on a service like Spotify, Beats, Rhapsody or Rdio are paid by their label based on what’s in their contract. (Unsigned artists are paid based on the terms of service from an aggregator like CD Baby or Tunecore.)
On non-interactive or radio-like services, artists are paid via the nonprofit SoundExchange, which collects and distributes royalties to performers and labels for plays on Internet, satellite and cable radio. Under federal law, performers get 45 percent, the labels get 50 percent and five percent goes to background singers and musicians. The artists’ share is paid directly and isn’t held against their “recoupables,” or debt to the label. It’s a great system. (See this fact sheet for more info.)
And, even though we’re still talking fractions of pennies per play, digital radio is growing. On November 7, 2014, Billboard reported that “SoundExchange distributed a record $267 million in the third quarter, up 74 percent over the prior-year period and 39.7 percent higher than the $161 million distributed in the second quarter. The number of payees—both record labels and performing artists—increased 21 percent.” So, despite arguments over rate-setting, all parties have an incentive to keep digital radio alive.
One thing that we’ve been thinking about a lot lately is what we should expect out of Internet radio. While we’d certainly love for artists to be paid more for plays on any service, we don’t know that it’s fair to expect that Internet radio make up the difference for revenues lost from an eroding sales market.
First off, radio—even in its historic form—was never meant to be a substitute for sales. That doesn’t mean it shouldn’t compensate performers (as is the case with AM/FM radio, which enjoys an exemption in the law that allows them to not pay musicians and labels). It just means that for most of music history, record sales were where rightsholders made the most money.
These days, you’ve got interactive (on-demand) services like Spotify, which is a more direct substitute for sales. Think of what you can do with Spotify: you can choose the song or album you want to hear. You can make playlists. You can download the music to your mobile device for offline listening. You can share songs, albums and playlists with friends who use the service. That’s not the case with Internet radio, which can be customizable to taste, but also comes with major limitations. A service like Spotify clearly offers tremendous value to listeners. To artists? Well, that’s part of what the debate is about.
Internet radio is also different in that performers are compensated directly under fair splits. As musicians, we want to be paid more. But it’s also important to know how we get paid and what the differences are between services—even as we seek higher rates or push for greater transparency, utility and accountability to artists.
The fact that AM/FM radio is unfairly exempt from paying musicians creates a fundamental imbalance in the entire marketplace for music. We love that Internet radio pays, but it also differs from AM/FM in other ways. In terms of listener reach, one million performances on a big webcaster like Pandora is still only equal to 21 plays on KIIS in Los Angeles or 16 spins on WHTZ in New York City. Internet radio is typically one listener per stream, whereas FM radio is called “broadcast” for a reason. Again, this isn’t to say that Pandora couldn’t or shouldn’t pay more in royalties, but rather to suggest that the audience reach (and value to advertisers) looks different. The real takeaway here is that AM/FM stations should absolutely pay performers and labels for using their music in such a massive way.
Another important thing to note is that there are also tons of smaller webcasters that believe in paying artists and want to do it in a way that doesn’t necessarily mean getting big enough to be traded on Wall Street or bought by a larger company. We’re encouraged by services like Mad Genius Radio, which has a unique approach to listener feedback and customization, and is subscription-based. These and other smaller platforms depend on statutory licenses to pay artists and labels, and an increasing number of them want to find ways to grow the pie while compensating creators.
As we’re fond of saying here at FMC, there is no single music industry, but rather a variety of different business models and approaches—just like there are many genres and disciplines within music. So it’s helpful to avoid painting with one brush when we’re talking about digital music services and artists.