Q. When does $0.000126 = $3.2 Billion? A. When Apple Buys Beats Music.

Someone sent us this interesting document.   This is real.

Never mind that Beats only has 110k subscribers.   Is Apple Buying Beats simply because of the  ridiculously low royalty that songwriters are paid?

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People may be getting the impression that we are down on the Beats service. We actually like Beats from an performers perspective for several reasons. here are two.

1)  As a pay platform-not advertising supported-there is higher revenue per stream.  We are paid on a percentage of revenue.  We make more money as a consequence.

2) The major record labels appear to own less of Beats (then they do of Spotify) and perhaps another explanation for the higher royalty rate at Beats is less was traded away for stock. Perhaps we will get more information about this if there is a Hart-Scott-Rodino Act hearing on the sale given Apple’s dominant position in hardware and music services.

What we don’t like is that as Songwriters we are paid so little.

26 thoughts on “Q. When does $0.000126 = $3.2 Billion? A. When Apple Buys Beats Music.

  1. The Chairman of the World’s Largest Record Company co-owns and co-founded Beats…

    Should we expect that he Is FIGHTING for artists’ compensation?


    1. He’s certainly not fighting for Songwriter compensation. that’s what we’re talking about. Remember record companies have to pay songwriters. And they would like to pay them as little as possible. That’s why both broadcasters and record labels love the government mandates that force us to license songs at rates set by judges not free markets. You realize we are the only country in the world that does it this way. Even Sweden’s government doesn’t regulate song prices this way.

  2. Let’s consider a few things first…

    1. This is all speculation. No confirmation that Apple is buying Beats.
    2. Beats isn’t simply a music service, it is primarily a highly profitable accessories business.
    3. Rights for these services are generally and largely not transferrable. Apple acquiring Beats as a service would only serve to a) eliminate another competitor b) mean that they already have rights in place for Apple’s streaming solution or/and c) could likely mean that they allow Beats to operate on it’s own while iTunes continues to sell music until a point when Beats as a service becomes valuable to have in the iTunes umbrella…considering iTunes is a much more valuable brand.
    4. Apple has typically been one of the higher paying partners when it comes to music.
    5. This seems like paranoia and FUD. Apple doesn’t need to concern itself with high royalty rates. They make more money in a few weeks than Spotify earns in a year. Apple could operate Beats with a higher rate of royalties as a loss leader for years, just as they did iTunes.

    David…I think this is not worth posting as it is disingenuous to the idea that Apple thinks so little of artists and feels they need to carve out a few extra pennies when this isn’t their core business. This is the type of thing that becomes rumored and then turns into a conspiracy when there is no reason at all to believe for a second that Apple would acquire Beats solely on the value of their music offerings (which is nothing at this point) and not for a larger business which is accessories or to simply eliminate another competitor.

    Apple’s iTunes business did $4B last quarter (granted that includes apps and books)…streaming for the entire year in 2013 represented $1B from all of the players combined. Apple’s cash positions mean it could outpace the spending of the entire streaming industry at a loss for 140 years…so really…is this likely?

    I’d personally take this down or give it more context.

    1. Points taken. But at CMW this week all the buzz was on the collapse of digital download sales. I think neilson even showed a chart! I strongly disagree I think buying a headphone maker is not the point at all. You suggest we take it down? Guess it’s time to dig deeper.

      1. I think you do an excellent job here and call attention to oft ignored aspects of what’s happening. That said this particular post doesn’t have enough balance, it just reads very conspiracy theory.

        I’ve covered Apple as a tech writer for a very long time and I can say that they don’t make bad acquisition deals and they certainly don’t make deals lightly. They certainly won’t do that for a deal of this size.I saw someone else pointed out Beats might be the perfect trojan horse for their wearable division.

        Apple has a purpose for everything and at this amount it certainly wouldn’t be for simply a streaming service that has less traction than 4-5 other services out there just to shave off a few pennies on streaming royalties. They are sitting on a $150+ billion war chest and iTunes is still the jewel in their crown as far as an Apple brand. Consider they lost money on iTunes for years as a way of pushing hardware sales.

        And as you likely know, acquisitions generally don’t allow for transferrable rights for streaming. I think it is likely Apple already has rights secured for their own streaming…and I could make a few inquiries to find that out, but I think I’ll just wait until we actually hear what this deal is, if it exists at all.

      2. No. I’m bringing balance to the discussion. Until I posted this no one was examining the acquisition in this light. That is the only point. I never say this is the reason, I suggest that people should investigate this.

        I have reverse engineered my royalties from iTunes radio and they are higher than pandora. You are right Apple usually pays higher. but
        Apple has no obligation to do anybody or anything except to add value for it’s shareholders. Consider the following:

        1) since UMG owns a significant portion of Beats shares it’s entirely possible that the deal cut by UMG for streaming is below market value as they accepted some of the payment up front in warrants, options or actual stock.

        2) Beats license may not be transferrable but it can be completely integrated into the iTunes and IOS software. (you are strangely silent on this point).

        3) Apple now has a “club” when it comes time to negotiate rates with labels and songwriters. They can walk away and still have beats integrated into their platforms.

        Personally, I’d rather have Apple owning a service. I argue against my own financial self interests here as I own apple stock. I don’t think there is anyone else out there that can say the same.

  3. I’m sorry, but I think you may be reading it wrong. It seems to me that the actual payable label royalty pool is in column T – a total of $24,685.50. You’ll notice that PRO payments are actually deducted from the All-in royalty pool (P) in column Q. In fact, if label royalties weren’t subject to a per-sub floor of half-a-dollar (R), songwriter royalties for individual subs would have actually been higher than the labels’

    What bothers me is why there’s no PRO payment figure for ad-supported plays and what’s the deal with family plans, which would appear to pay nothing, were it not for the per-sub floor in the case of the labels. I suppose that the grand total of PRO payments for all plays (regardless of plan) might be subtracted at a single point, but it does seem rather whacky.

    I’m also wondering whether PRO royalties are calculated on total plays (which is likely, I suppose, given that the licences are likely statutory) or on the reduced playcount that is used for recording royalty calculations. While we’re at it, what’s with the “promotional royalty rate” plays (which – as far as I can tell – means plays for which Beats does not pay royalties)?

    1. While that’s possible. This was sent to a publisher. Despite the confusing terminology I think this is the publisher share. they are disclosing the payable amount per “work” which is this case the song. Regardless it’s a clusterfuck. Cause the two tiers don’t match. how does a very large public accounting firm sign off on this? Isn’t this how arthur anderson LLP went bankrupt. signing off on Enron’s fake accounting? There are more problems with this statement I haven’t shown yet. be glad to share privately with you. more eyes on this the better.

      1. I’ve looked over it again and – frankly – I’m not sure what to think. Nevertheless, the fact that this is a publishers’ statement makes it somewhat easier to decipher.

        After serveral attempts and corrections, this is my best guess:
        1. The publishers’ all-in royalty pool is the greater of:
        a. 10.5% of the service’s total revenue (col. F, calculated in cols. M and N)
        b. the minimum royalty rate.

        2. The minimum royalty rate is the smaller of:
        a. 21% of royalties payable for sound recordings (col. G, calculated in cols. I and J)
        b. $0.80 dollars per subscriber (see cols. K and L)

        3. The royalties payable to publishers are net of royalties paid via PROs (see cols. H and Q)

        4. The payable royalties pool is futher subject to a floor of no less than $0.50 per subscriber (cols. R and S).

        Thus, the aggregate royalty pool paid out to songwriters would be $47,651.13 (actually a bit higher than the all-in royalty pool, because of the per-subscriber payable royalty floor) of which $22,965.63 would be paid out to PROs and $24,685.50 would be paid to publishers directly.

        The aggregate royalty for sound recordings is $248,195.51, giving roughly a 5:1 royalty split between artists and songwriters.

        Whew, that was a bit of a mental workout. Does this sound sensible?

      2. it’s a reasonable interpretation. I won’t dispute it yet. let me run it myself. i also have exact same documents for other services that are laid out similarly. I’d like to spend some time with those. It’s all certified by same accounting firm.

        Still this is lower than what iTunes radio pays per percentage of revenue. correct? my point would still stand. That is, financial journalists should examine whether there is a lower royalty play in here for Apple. That’s all i’m saying.

        Finally I post this because it really seems to me like this beats purchase is a very weird move for apple. Is it really about headphones? I think beats has peaked with my 18-22 year old students. Why wouldn’t they start another service themselves? Is beats somehow a club?

      3. Addendum and self-correction:
        Adding the label (G) and publisher (N) shares of revenue and comparing it to total declared service revenue (F) we see that their sum amounts to ~70% of service revenue – which, given industry standards, suggests my reading of this statement in the previous post is correct. This 70% of revenue appears to be split between labels and publishers on roughly a 6:1 basis.

        I’ve also noticed that in figuring total amount payable to publishers (and thus songwriters), I’ve neglected to account for both ad-supported spins and family plans. Because neither of these service plans has generated any declared revenue (why is anybody’s guess), these are subject to minimum payment provisions: 22% of label revenue in the case of ad-supported streams and $0.50 per subscription in the case of family plans.

        The total royalty payable for licensing the music would thus be:
        $22,965.63 (payable to PROs) +
        $192.28 (payble to publishers; ad-supported, minimum payment) +
        $30,810.50 (payable to publishers; family plan, minimum payment) +
        $24,695.50 (payable to publishers; individual, minimum payment) =

        which is roughly 30% of the amount paid in sound recording royalties.

        Bonus calculations:
        Sound recording royalty per spin (individual, net of promotional) – $0.0083
        Sound recording royalty per spin (individual, aggregate) – $0.0021
        Songwriter royalty per spin (individual, net of promotional) – $0.0016
        Songwriter royalty per spin (individual, aggregate) – $0.0004

        These numbers are broadly in line with what we’ve seen elsewhere.

        The royalty rate paid to PROs would appear to be 5.5% of service revenue. Does that seem about right?

  4. Songwriters are compensated at a fixed rate of service revenue. For terrestrial radio it’s 1.7% of revenue; for Pandora it’s 1.85%. Without full details of Beats’ revenue, it’s somewhat unclear whether the service is actually stiffing songwriters more or less than other streaming services.

    Item F, Service Revenue, seems to be missing other revenue sources like those paid from AT&T to Beats through their partnership (i.e. line 2, family plans). Maybe those are paid quarterly or something.

    Considering Item F and Item H, PRO Payments, are only listed on the individual subscriber line, I think we can make a pretty confident conclusion, nonetheless, about how much Beats is paying songwriters. $22,965.63 accounts for EXACTLY 5.5% of the revenue listed. That’s WAY higher than Pandora or terrestrial radio.

    But let’s say Beats makes $10 a month off of each of its 110,992 subscribers. (That’s highly unlikely considering the majority of its subscribers come through the AT&T family plan that charges $15 per month for up to five subscribers, and AT&T must be keeping a portion of that revenue.) That’s $1,109,920 per month. At Pandora’s rate of 1.85%, Beats should have to pay songwriters $20,533.52. That’s less than the $22,965.63 it actually did pay out.

    As you can see, if Apple was after lower royalty rates, it could have found a better option.

    1. Hey Adam:
      You are factually wrong on this. You are comparing Apples to Oranges. You are comparing webcasting service to on demand streaming. On demand streaming is essentially a rental of a song. Consequently they generally are mandated to pay higher royalties than passive non on demand listening. You need to compare to Spotify not to Pandora. That would be a fair argument. no pun intended but you need to compare Apples to Apples. And Spotify pays much higher rate. Fact check this before you blog on this on motley fool.

      1. Thanks David.

        I did write that comment just off the top of my head without looking into exact details except for those presented by this document.

        Do you have any insight into how much Spotify pays songwriters? Is it the same 5.5%? I know it pays out 70% of revenue to rights holders, which would include labels. Beats, comparatively, pays out 65% total by these numbers. So, you’re right, Beats does seem to be getting a bit of deal on total royalty rates.

        The best info I could find on YouTube (which must be somewhere in the middle, right? not exactly a rental, but still on demand.) was that songwriters get paid about $90 per million streams — that’s $0.00009 per stream — according to The Guardian. That’s up from two years ago, when The Guardian reported songwriters can expect about $40 per million streams, though, so I’m guessing it’s tied to how well Google monetizes those views.

        Note that I’m not saying songwriters don’t deserve more, I’m just trying to get the perspective right. Obviously, I’d be in the wrong place if I felt otherwise.

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