Here’s an overview of the three types of transparency we previously outlined:
1. structural transparency: how different services function and how they compensate artists
2. rates and revenue transparency: how money is split, who gets paid what and why
3. repertoire transparency: readily available ownership information to facilitate more efficient licensing and accuracy in payment
Today, we’ll take a closer look at revenue transparency. This goes beyond simply knowing how much you’re getting paid as a musician or songwriter. Revenue transparency should also include information about the terms of compensation and how revenue is collected and distributed.
Before we get started, it’s crucial to understand that there are two distinct copyrights in music: the musical work (think lyrics and notes on paper) and the sound recording (think of performances captured to tape or hard drive). Musical works belong to publishers and composers, while labels typically own sound recordings (though sometimes it’s the artist).
In certain circumstances, the law treats these two copyrights completely differently. This can make the revenue picture even more complicated. For a great breakdown, check out our Music and How the Money Flows charts—they’re particularly helpful for visual learners.
Below, we present a few common types of digital service and assign a transparency grade of one to ten—where one equals not at all transparent and 10 equals highly transparent. Although this is a fairly lengthy post, this is by no means a complete list. Oh, and it probably wouldn’t hurt to keep the aforementioned charts handy to consult as you go.
Keep in mind that the laws and business practices that govern compensation are often in flux. New or hybrid technologies can emerge that require a novel approach to payment, and some individual deals end up affecting the entire marketplace. Additionally, the US government is currently examining current copyright law with an eye towards an eventual update. With those caveats in place, here are some examples to consider.
Transparency score: 7
Currently, AM/FM radio is only obligated to pay songwriters and publishers when they play music over the air; performers and labels don’t get a dime. In the US, rates are set according to government rules managed by a New York court. Songwriters are paid a 50 percent share by their Performing Rights Organization (PRO); their publisher gets the other half (some songwriters control their own publishing). The writers’ half goes directly to the composer(s) and is not recoupable by the publisher. Details about current agreements and terms can be found on the websites of the performing rights organizations ASCAP and BMI. Although specifics about deal terms could be clearer, the method of payment and the splits are easy-to-understand and for the most part transparent.
For recording artists
Transparency score: N/A
In one way, the terms for recording artists on AM/FM radio are incredibly transparent: they aren’t paid at all. But this glaring loophole in the law does make it more difficult to determine fair rates for Internet radio and other services.
Transparency score: 5
Information about how much songwriters get paid on various on-demand services (think Spotify, Beats Music and Rdio) is publicly available. However, the process for determining rates is fairly complex. First there is the “mechanical royalty,” which is generated when a song is reproduced, retransmitted or rebroadcast. This is a compulsory royalty, which means that services are obliged to pay rates approved by a trio of government judges. Rates can depend on whether a service is subscription-based, ad-supported or a hybrid. In general, mechanical royalties for on-demand streaming are the greater of a percentage of overall revenue or a fixed amount per-subscriber. (It’s actually a bit more complicated than that, but the Harry Fox Agency has some helpful charts.) The publisher pays the writers’ their share based on their contract. On-demand streaming also generates a performance royalty, but only for songwriters and publishers (not recording artists). This royalty is carved out from the overall “all-in royalty pool” and is typically based on a service’s percentage of gross revenue. Money is collected and distributed to songwriters and publishers by their PRO (ASCAP, BMI or SESAC). The upshot is that although information about rates is available, the royalty calculations are fairly complex. This is why we’re giving it a 5 on the transparency scale.
For recording artists
Transparency score: 2
Streaming on-demand services have come under a lot of fire from musicians due to the lack of transparency in how rates are calculated. It’s not really the fault of the services, however—in fact, at least one major streaming platform has made efforts to better describe how payment works. For a streaming on-demand service like Spotify to launch in a major market such as the US requires direct negotiation with the three major labels. These labels aren’t known for their transparency, especially when it comes to artist royalties. In typical negotiations with a digital music platform, the major labels are able to demand large cash advances, equity shares in the service and other revenue that has zero to do with music plays. Since these deals are under non-disclosure agreements, it’s difficult-to-impossible to understand how they impact the fractional penny rate that everyone receives. For signed artists, payment is dependent on their individual contract and subject to recoupment. For these reasons, we can only give on-demand streaming services and recording artists a transparency score of 2.
NON-INTERACTIVE STREAMING (INTERNET RADIO)
Transparency score: 6
Songwriter revenues from Internet radio have become a contentious issue. While most songwriters want rates to go up, there is currently debate about how best this can be achieved. Our earlier post on transparency and songwriters describes the push by major publishers for direct deals outside of ASCAP and BMI. Today, we’ll focus only on how performance royalties are paid out under the current system. The two biggest PROs, ASCAP and BMI, operate under consent decrees, which provide for blanket licenses that webcasters can obtain simply by asking (PROs aren’t allowed to play favorites). Royalties are paid by the services to the PROs, who then pay composers and publishers according to a 50-50 split (much like AM/FM radio, though the rates are calculated differently). This system is fairly transparent in terms of how royalties are paid out, although it isn’t always easy to understand the rate determination process. Parties negotiate rates for a set term, and if they are unable to arrive at an agreement, a judge from the US District Court Southern District of New York reviews the evidence and makes a determination. Recent court rulings have failed to satisfy songwriters and publishers, but under the current system there is at least confidence that the writers’ share is paid equitably and transparently. This could all change, however, depending on whether/how the US Department of Justice responds to calls to amend existing rules.
For recording artists
Transparency score: 9
In the mid-1990s, Congress enacted legislation that for the first time compelled payment to performing artists and record labels for sound recordings. This royalty was limited only to Internet radio, cable radio and satellite radio, however—AM/FM broadcasters won an unfair exemption that they enjoy to this day. Still, the digital public performance right for sound recordings is a major advancement for recording artists. Why? Because the money owed to them is paid directly, under fair splits and is not held against an artist’s debt to their label. SoundExchange is the nonprofit organization tasked with collecting and distributing money for digital plays. There is no fee to sign up with SoundExchange; if they have your information and your music is being played, they will pay you as often as once per month. The splits are 50 percent to the sound recording owner (usually a label, but sometimes the artist), 45 percent to the featured performer (bands can decide on how to split this money) and five percent to background musicians and singers. Rate-setting is overseen by a trio of federal judges called the Copyright Royalty Board. While there is often heated debate about rates, most would agree that the system is very transparent with regard to musician compensation.
Transparency score: 4
The biggest user-upload service is the popular video platform YouTube. Technically, YouTube doesn’t require a license for user-uploaded videos that contain someone else’s musical composition, as they are shielded by the so-called “safe harbors” outlined in Section 512 of the Digital Millennium Copyright Act. In simple terms, this means that so long as the service has a policy to disable repeat infringers and has no knowledge of a specific instance of infringement and removes the offending material upon notice from a rightsholder, they are not liable for the actions of users. However, YouTube and similar services do often enter deals with rightsholders. Technically, a video service requires a “synch license” for both musical works and sound recordings, as there is a video and audio component. There is no compulsory license for synchs. However, both the publishers and the PROs have struck deals with YouTube to compensate for musical works. These deals are notable in part because they allow for songwriters to be paid for cover songs performed on YouTube without the cover artist obtaining permission or courting individual liability. The opt-in licenses for publishers are administered by the Harry Fox Agency; payments are pro-rated based on the publishers’ share of the songs. Under a recent deal for independents, YouTube pays 15 percent of net ad revenue when a video uses the underlying composition from a sound recording (think lip-sync videos) and 50 percent of net ad revenue for user-generated covers. The PROs have also entered deals to compensate for the public performances of musical works, though there is some controversy about which works are and are not covered under the current licensing period. Understanding the specifics of how songwriters are paid in this environment remains difficult. Hence our score of 4 on the transparency scale.
For recording artists
Transparency score: 2
Sound recordings that are uploaded by users on a service like YouTube are subject to the notice-and-takedown provisions mentioned above. However, many sound recording owners, especially labels, choose to join YouTube’s Partner Program, which gives them additional options through YouTube’s proprietary Content ID system. If a recording is in this system, a rightsholder can choose to automatically block the use, monetize it through advertising and/or collect demographic data. YouTube has also entered into direct deals with major and independent labels, though there was controversy regarding the deals offered to indies for YouTube’s new Music Key—the terms of which have since been modified. More recently, self-released artist Zoë Keating suggested that unaffiliated artists are being presented with provisions similar to the original indie label deal. (At this point, it is unclear whether those terms will be adjusted in the wake of Zoë’s widely circulated post.) For signed artists, what you are paid from user-upload sites—now including SoundCloud—is based on your contract with your label. Whether it’s transparent or fair depends on a lot of factors, including your negotiating leverage. All in all, the current system isn’t particularly transparent for recording artists, therefore we score it a 2.
LOCKER SERVICES (iTunes Scan-and-Match, Amazon Drive, etc.)
Transparency score: 2
Locker services are those that allow users to back up, or upload or access music they have already purchased or had on their hard drives in order to access “in the cloud.” This is an entirely new form of royalty that had to be hammered out by parties in direct negotiation. Therefore, many songwriters and composers may be unaware that they are eligible to receive money from such services. In 2012, a settlement was reached in which the Copyright Royalty Board sets mechanical royalty rates for two types of locker uses. For the paid services like iTunes scan-and-match, publishers receive the greater of: 12 percent of of revenue, 20.65 percent of overall content cost or 17 cents per subscriber. For services that offer free cloud storage after buying a download, publishers get the greater of: 12 percent of revenue or 22 percent of the overall cost of content. Publishers pay songwriters their share based on what is in their contract. Information on how these services function isn’t easy to come by, and we have heard rumors that disbursement is slow. For that and other reasons, we give locker services for songwriters a transparency grade of 2.
For recording artists
Transparency score: 1
Once again, we have a situation where the three major labels were able to demand large cash advances for licensing their music to locker-style platforms. There is no information available about whether any of that money will be shared with artists, but our informed opinion is no. Recording artists are compensated for these uses based on what’s in their contract, subject to recoupables. So unless you’re with an indie that has committed to provide clear information about terms, you may be in the dark about whether, how and how much you should be getting from locker services. Unaffiliated artists can also receive revenue from lockers if their aggregator (like CD Baby, TuneCore or Distrokid) has agreements in place for these services. Artist revenue will vary depending on whether the aggregator takes a percentage of royalties or charges a flat fee for distribution. At this point in time, there isn’t a lot of data about whether locker services amount to meaningful revenue for artists, but based on the overall compensation arrangement, that info might be hard to track down in the first place. Therefore, we give a transparency grade of 1.
As you can see, the music licensing space is highly complex and involves tons of moving pieces. Which is why one of our earlier posts in this series was about the importance of quality data. If the information about who owns what is missing or incomplete, or if standards differ, there is no guarantee that the right people will be paid. As musicians and songwriters, you are in your rights to demand greater transparency across the board. We hope this series has helped prepare you for making the case.