Arithmetic on the Internet: The Ethical Pool Solution to Streaming Royalty Allocation

Guest post By Chris Castle

“Sick of my money funding crap.”
A Fan’s Tweet

Subscription services are one of the few secular trends in the current economy that is not yet reactive to trade wars or interest rates.  Subscription services are found in many areas of the economy, but music drives some of the big ones like Spotify, Amazon and especially the razor-and-razorblades plays like Apple.  But per-stream royalties do not come close to making up for the CD and download royalties they cannibalize.   Not only do subscription retail rates need to increase, but it’s also time for a major change in the way artist’s streaming royalties are calculated from what is essentially a market share approach to one that is more fair. 

Artists’ dismal streaming royalties on music subscription services are largely based on a simple calculation:  A per-stream payment derived from a share of the service’s revenue prorated by number of streams.  Artists get a portion of a service’s monthly revenue (at least the revenue the service discloses) based on a ratio of your plays to all the plays.  Your plays will always be a lot smaller than the total plays.  (This is essentially what Sharky Laguana referred to as the “Big Pool.”)

Sounds simple, but mixed with the near-payola of Spotify’s playlist culture and Pandora’s “steering” deals, it’s really not.  Negotiating leverage allows big stakeholders to tweak the basic calculation with floors, advances (aka breakage), nonrecoupable payments that help cover accounting costs, and other twists and turns to avoid a pure revenue share.

It also must be said that stock analysts and venture investors always—always—blame “high” royalties for loss-making in music services.  This misapprehension ignores high overhead such as Spotify’s 10 floors of 4 World Trade Center or high bonus payments such as Daniel Ek’s $1,000,000 bonus paid for failing to accomplish half of his incentive goals stated in the Spotify SEC documents (p. 133 “Executive Compensation Program Requirements”).

Of course all these machinations happen behind the scenes.  Fans are not aware that their subscription pays for music they don’t listen to and artists they never heard of or don’t care for.   Plus, it’s virtually impossible for any label or publisher to tell an artist or songwriter what their per-stream rate is or is going to be.

Fans Don’t Like It:  A New Wave of Cord Cutters?

So neither fans nor artists are happy with the current revenue share model. Given that the success of the subscription business model is keeping subscribers subscribing, the last thing the fledgling services need are cord cutters.

Many artists will tell you that the playlist culture and revenue share model are destructive.  Dedicated fans often don’t like it  either (after they understand it) because it gives the lie to supporting your favorite artist by streaming their music.  Artists don’t like it because unless you have a massive pop or hip hop hit, all you can aspire to is a royalty rate that starts in the third decimal place from the right if not the fourth.  This is compounded for songwriters.   (See Universal Music Publishing’s Jody Gerson on streaming royalties for songwriters.)

Simply put, if a fan pays their subscription and listens to 20 artists in a month, that fan likely believes that their subscription is shared by those 20 artists and not by 200,000 artists, 99.99% of whom that fan never listened to and probably never will, similar to Sharky’s “Subscriber Pool.”

This is why some artists like Sharky Laguana (and their managers) have begun arguing for replacing the status quo with “user-centric” royalties that more directly correlate fan listening to artist payments. I have a version of this idea I call the “Ethical Pool.”  

How Did We Get Here?

How in the world did we get to the status quo?  The revenue share concept started in the earliest days of commercial music platforms.  These services didn’t want to pay the customary “penny rate” (as is typical for compilation records, for example), because a fixed penny rate might result in the service owing more than they made–particularly if they wanted to give the music away for free to compete with massive advertising supported pirate sites.

Paying more than you make doesn’t fit very well with a pitch for a Web 2.0, advertising driven model:  All you can eat of all the world’s music for free or very little, or “Own Nothing, Have Everything,” for example.  It also works poorly if you think that artists should be grateful to make any money at all rather than be pirated.

Revenue share deals for big stakeholders have some bells and whistles that leverage can get you, like per-subscriber minimums, conversion goals, top up fees, limits on free trials, cutbacks on “off the top” revenue reductions, and the percentage of revenue in the pool (50%—60%-ish).  Even so,  the basic royalty calculation in a revenue share model is essentially this equation calculated on a monthly basis:

(Net Revenue * [Your Streams/All Streams])

Or ([Net Revenue/All Streams] * Your Streams)

In other words all the money is shared by all the artists.

Sounds fair, right?

Wrong.  First, all artists may be equal, but on streaming services, some are more equal than others.  Regardless of the downside protection like per-subscriber or per-stream minima, the revenue share model has an inherent bias for the most popular getting the most money out of the “Big Pool.”  (This is true without taking into account the unmatched.)

And of course it must be said that the more of those artists are signed to any one label, the bigger that label’s take is of the Big Pool.  So the bigger the label, the more they like streaming.

Conversely, the smaller the label the lower the take.  This is destructive for small labels or independent artists.  That’s why you see some artists complaining bitterly about a royalty rate that doesn’t have a positive integer until you get three or four decimal places to the right.  Why drive fans away from higher margin CDs, vinyl or permanent downloads to a revenue share disaster on streaming?

Yet it increasingly seems that we are all stuck with the nonsensical streaming revenue share model.

Do Fans Think It’s Wrong?

There’s nothing particularly nefarious about this—them’s the rules and rev share deals have been in place for many years, mostly because the idea got started when the main business of the recorded music business was selling high margin goods like CDs or even downloads.  Low margin streaming didn’t matter much until the last couple years.

It was only a question of time until that high margin business died due to the industry’s willingness to accept fluctuating micropennies as compensation for the low-to-no margin streaming business.  (I say “no margin business” because the costs of accounting for streaming royalties may well exceed the margin—or even the payable royalty—on a per-stream basis when all transaction costs are considered as Professor Coase might observe.)

So understand—the revenue share model is essentially a market share distribution.  Which is fine, except that in many cases, and I would argue a growing number of cases, when the fans find about about it, the fans don’t like it.  They pay their monthly subscription fee and they think their money goes to the artists they actually listen to during the month.  Which is not untrue, but it is not paid in the ratio that the fan might believe.  Fans could easily get confused about this and the Spotifys of this world are not rushing to correct that confusion.

Here’s the other fact about that rev share equation: over time, the quotient is almost certain to produce an ever-declining per-stream royalty.  Why? 

Simple.

If the month-over-month rate of change in revenue (the numerator) is less than the month-over-month rate of change in the total number of streams or sound recordings streamed on the service (the denominator), the per-stream rate will decline over those months.  This is because there will be more recordings in later months sharing a pot of money that hasn’t increased as rapidly as the number of streams.

As the number of recordings released will always increase over time for a service that licenses the total output of all major and indie labels (and independent artists), it is likely that the total number of recordings streamed will increase at a rate that exceeds the rate of change of the net revenue to be allocated.  If there are more recordings, it is also likely that there will be more streams.  (For example, see “Despite Record Revenues, Spotify’s Payouts to Artists and Labels Continue to Decline” in Digital Music News.)

So streaming royalties in the Big Pool model will likely (and some might say necessarily will) decline over time.  That’s demonstrated by declining royalties documented in The Trichordist’s “Streaming Price Bible” among other evidence.

Thus the fan’s dissatisfaction with the use of their money is already rising and is likely to continue to rise further over time.

User-Centric Royalties and the Ethical Pool

How to fix this?  One idea would be to give fans what they want.  A first step would be to let fans tell the platform that they want their subscription fee to go to the artists that the fan listens to and no one else.  This is sometimes called “user-centric” royalties, but I call this the “Ethical Pool”.

When the fan signs up for a service, let the fan check a box that says “Ethical Pool.”  That would inform the service that the fan wants their subscription fee to go solely to the artists they listen to.  This is a key point—allowing the fan to make the choice addresses how to comply with contracts that require “Big Pool” accountings or count Ethical Pool plays for allocation of the Big Pool. 

Artists also would be able to opt into this method by checking a corresponding box indicating that they only want their recordings made available to fans electing the Ethical Pool.  The artist gets to make that decision.   Of course, the artist would then have to give up any claim to a share of the “Big Pool.”

Existing subscribers could be informed in track metadata that an artist they wanted to listen to had elected the Ethical Pool.  A fan who is already a subscriber could have to switch to the Ethical Pool method in order to listen to the track.  That election could be postponed for a few free listens which is much less of an issue for artists who are making less than a half cent per stream.

The basic revenue share calculation still gets made in the background, but the only streams that are included in the calculation are those that the fan actually listened to.  If the fan doesn’t check the box, then their subscription payment goes into the market share distribution as is the current practice, but their musical selection is limited to “Other than Ethical Pool” artists.

That’s really all there is to it.  The Ethical Pool lives side by side with the current Big Pool market share model.  If an Ethical Pool artist is signed, the label’s royalty payments would be made in the normal course.  The main difference is that when a subscriber checks the box for the Ethical Pool, that subscriber’s monthly fee would not go into the market share calculation and would only be paid to the artists who had also checked the box on their end.

One other thing—the subscription service could also offer a “pay what you feel” element that would allow a fan to pay more than the service subscription price as, for example, an in-app purchase, or—clasping pearls—allow artists to put a Patreon-type link to their tracks that would allow fans to communicate directly with the artist since the artist drove the fan to the service in the first place.  I’ve suggested this idea to senior executives at Apple and Spotify but got no interest in trying.

The Ethical Pool is real truth in advertising to fans and at least a hope of artists reaping the benefit of the fans they drive to a service.  There are potentially some significant legal hurdles in separating the royalty payouts, but there are ways around them.

I think the Ethical Pool is an idea worth trying.

 

How Spotify (and others) Could Have Avoided Songwriter Lawsuits, Ask The Labels.

This is simply a story about intent. Daniel Ek is the co-founder of Spotify, he was also the CEO of u-torrent, the worlds most successful bit-torrent client. As far we know u-torrent has never secured music licenses or paid any royalties to any artists, ever.

Spotify could have completely avoided it’s legal issues around paying songwriters.  The company could have sought to obtain the most recent information about the publishing and songwriters for every track at the service.  The record labels providing the master recordings to Spotify are required to have this information. All Spotify (and others) had to do, was ask for it.

Here’s how it works.

For decades publishers and songwriters have been paid their share of record sales (known as “mechanicals”) by the record labels in the United States. This is a system whereby the labels collect the money from retailers and pay the publishers/songwriters their share. It has worked pretty well for decades and has not required a industry wide, central master database (public or private) to administer these licenses or make the appropriate payments.

This system has worked because each label is responsible for paying the publishers and songwriters attached to the master recordings the label is monetizing. The labels are responsible for making sure all of the publishers and writers are paid. If you are a writer or publisher and you haven’t been paid, you know where the money is – it is at the record label.

Streaming services pay the “mechanicals” at source which are determined by different formulas and rules based upon the use. For example non-interactive streaming and web radio (simulcasts and Pandora) are calculated and paid via the appropriate performing rights society like ASCAP or BMI. These publishing royalties are treated more like radio royalties.

The “mechanicals” for album sales from interactive streaming services are calculated in a different way. It is the responsibility of the streaming services to pay these royalties. CDBaby explains the system here and here. Don’t mind that these explanations are an attempt to sell musicians more CDBaby services, just focus on the information provided for a better understanding of this issue.

Every physical album and transactional download (itunes and the like) pays the “mechanical” publishing to the record label directly, who then pays the publishers and writers.  This publishing information exists as labels providing the master recordings to Spotify have this information. All Spotify (and others) have to do, is ask for it.

Record labels have collectively and effectively “crowd sourced” licensing and payments to publishers and songwriters for decades. Why can’t Spotify simply require this information from labels, when the labels deliver their masters? It’s just that simple. Period.

The simple, easy, and transparent solution to Spotify’s licensing crisis is to require record labels to provide the mechanical license information on every song delivered to Spotify. The labels already have this information.

The simple solution is for Spotify to withdraw any and all songs from the service until the label who has delivered the master recording also delivers the corresponding publisher and writer information for proper licensing and payments. Problem solved!

No need for additional databases or imagined licensing problems. Every master recording on Spotify is delivered by a record label. Every record label is required by law to pay the publishers and songwriters. This is known and readily available information by the people who are delivering the recordings to Spotify!

There is no missing information, and no unknown licenses. Why is this so F’ing hard?

This system would mean that the record labels would have to provide this information. It’s also possible that some of that information is not accurate. Labels would probably fight against any mechanism that would make them have to make any claims about the accuracy of their data, which is fine. If it’s the most update information it’s a great place to start.

Of course, we know that both sides (both labels and streamers) will reject any mechanism that introduces friction into the delivery of masters. However, with the simple intent of requiring publisher and songwriter info for every song master delivered there will no longer be a problem at the scale that currently exists.

To be completely fair to Spotify they did work to make deals with the largest organizations representing publishers and songwriters (NMPA and HFA). However those two organizations leave out a lot of participants. So back to square one. If publishing information is required upon the delivery of masters, the problem is largely solved. Invoking a variation on Occam’s Razor, the best solution is usually the most simple one.

You’d think that in the times before computers this would have been harder than it is now, but like all things Spotify you have to question the motivations of a company whose founder created the most successful bittorrent client of all time, u-torrent.

Oh, and of this writing Spotify is now claiming they have no responsibility to pay any “mechanicals” at all. Can’t make this up.

 

Labels / Spotify Admit Windowing is Streaming Solution (while cutting royalty rates)

It’s amazing how long it takes the industry to catch up to us. We strongly suggested windows and pay-gates at ad supported streaming services (Spotify) to drive conversion rates to subscription revenues back in 2014 and again in 2015, twice!

Well guess what is being reported in Digital Music News this week…

“According to details tipped, the Swedish streamer would restrict the biggest album releases to only paid subscribers for a period of time.”

Wow, windowing works! Who knew?!

But here’s the real kicker, the labels are LOWERING royalty rates in exchange for the ability to window hit records! It’s unbelievable that the industry must always take two steps back for every one step forward. Does it really need to be this hard?

Read the full story at Digital Music News below:

Spotify Finally Finds a Way to Lower Licensing Deals and Go Public

 

YouTube’s Value Gap is the Record Industry’s Biggest Problem To Fix, and Here’s Why…

If the record industry is serious about growing streaming revenues (and the digital economy in general) it must address the problems with the exploitative practices of Google’s YouTube. We’ve been lucky to be supplied with Content ID data from the same source as our previous data – so we added that into the mix to see where it would rank.

These numbers are just staggering.

If you combine Content ID to the YouTube Subscription numbers you arrive at a whopping 63% of total streaming market share that only contributes  11% of revenue. Ya’ll taking notes here?

yt_istheproblem

 

Look at the combined YouTube revenues of Subscriptions and Content ID together at 11% of revenue. That puts the combined earnings at #3 in market share behind Apple Music. However, Apple Music creates more earnings than the two combined YouTube Revenue streams with less than 4% of the consumption. You’ll also notice that YouTube is the only streaming service with three zeros following the decimal point. That means YouTube is paying hundreds of dollars per million streams while the other leading streamers are paying thousands.

Apple Music generates 12% of revenue with less than 4% of streams. YouTube generates 11% of revenue with 63% of streams. Does that sound like a problem to anyone else?

As of this writing we’re not factoring in the direct channel uploads for artists to YouTube or Vevo, however we just can’t imagine that those numbers are much different in terms of plays versus revenues. We hear from a lot of label folks that they are afraid to give up their annual revenue from YouTube sources, but all we can say is that you’d be gaining more much more than you would be giving up.

We’ve heard of at least one executive who met with resistance when faced with the prospect of potentially walking away from millions of dollars a year in YouTube revenues. But, it’s not walking away from millions, it’s giving up 10’s of millions in true revenue.

Let us not forget, that this devalued revenue will prevent the overall growth of streaming as a format. With streaming revenues (largely from Spotify and Apple Music) now accounting for approximately 40% of overall digital music revenues why should YouTube be able to pay 1/10th of the other major players? Oh, that’s right because of user pirated content uploads…

It’s time for the record business to get serious about cleaning up YouTube.

 

Updated! Streaming Price Bible w/ 2016 Rates : Spotify, Apple Music, YouTube, Tidal, Amazon, Pandora, Etc.

The last time we did this was back in 2014, so we thought it was time for an update. Not a lot of surprises but as we predicted when streaming numbers grow, the per stream rate will drop. This data set is isolated to the calendar year 2016 and represents an indie label with an approximately 150 album catalog generating over 115m streams. That’s a pretty good sample size. All rates are gross before distribution fees.

Spotify was paying .00521 back in 2014, two years later the aggregate net average per play has dropped to .00437 a reduction of 16%.

YouTube now has their licensed, subscription service (formerly YouTube Red?) represented in these numbers as opposed to the Artist Channel and Content ID numbers we used last time. Just looking at the new YouTube subscription service numbers isolated here, they generate over 21% of all licensed audio streams, but less than 4% of revenue! By comparison Apple Music generates 7% of all streams and 13% of revenue.

Speaking of Apple, they sit in the sweet spot generating the second largest amount of streaming revenue with a per stream rate .00735, nearly double what Spotify is paying. But, Spotify has a near monopoly on streaming market share dominating 63% of all streams and 69% of all streaming revenue. The top 10 streamers account for 99% of all streaming revenue.

streamrevenuemkrtshr2016

To put this list in the context of our 2014 numbers we’re adding the chart below with the data sorted by the quantity of streaming plays required to match the revenue of a single song or album download. This is important as we work towards defining and setting a fair per stream rate and also setting an accurate economic equivalent of streams to songs and albums for the purposes of charting.

Billboard currently calculates 1,500 streams to one album for the purposes of charting, which at current streaming rates actually matches an economic equivalent. However, that is most likely a highly excessive numbers of plays to achieve that economic equivalent. But, more on that later…

Keep in mind every streaming service has a key piece of data that would allow artists and labels to set a fair per stream rate. Every on demand streaming service, Apple, Spotify, Tidal, Google Play all know how many times a song is played (per person) on average over time. This is the data that is key to setting fair streaming rates. Who will share this information? Apple, Jimmy Iovine, we’re looking at you.

streamspersong2016

  • HOW WE CALCULATED THE STREAMS PER SONG / ALBUM RATE:
  • As streaming services only pay master royalties (to labels) and not publishing, the publishing has to be deducted from the master share to arrive at the comparable cost per song/album.
  • $.99 Song is $.70 wholesale after 30% fee. Deduct 1 full stat mechanical at $.091 = $.609 per song.
  • Multiply the above by 10x’s and you get the album equivalent of $6.09 per album
[EDITORS NOTE: All of the data above is aggregated. In all cases the total amount of revenue is divided by the total number of the streams per service  (ex: $5,210 / 1,000,000 = .00521 per stream). In cases where there are multiple tiers and pricing structures (like Spotify), these are all summed together and divided to create an averaged, single rate per play.]

[royalties][streaming royalties][music royalties][royalty rates]

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Gently Down The Stream (Songwriters Streaming Royalties Explained) | SONA [VIDEO]

Thank You Songwriters Of North America (SONA)

Windowing Works! 9 of the Top 13 UK Albums NOT on Spotify…

Windowing isn’t just for Adele and Taylor Swift anymore, Music Business Worldwide reports the following:

Four of the Top 5 current UK midweek albums aren’t on Spotify – and are, streaming wise, particularly fragmented.

A quick scan down the rankings, sent to labels today, shows that the same fact applies to five of the Top 6, six of the Top 10 and nine of the Top 13.

We started suggesting that windowing was one of several viable solutions to combat the negatives effects of streaming music ubiquity as early as 2013 when we stated “Why Spotify Is Not Netflix, But Maybe It Should Be“.

We were told we were “out of touch”, “luddites” and we “didn’t understand the new digital economy.” But we persisted on this point with additional writing in 2014, “How To Fix Music Streaming In One Word, Windows“.

Again, many resisted what is just common sense. The record industry always had utilized windows (or windowing as some prefer), but it just looked a little different than the way the film business did it. But it was there, and it always had been there.

In a December 2015 post we got more specific, suggesting that record labels experiment with more disruption and innovation following Taylor Swift and Adele successfully windowing off of Spotify during the initial release window of their latest releases. We wrote, “Three Simple Steps To Fix The Record Business in 2016… Windows, Windows, Windows…“.

In that post we included this:

This is not a philosophical discussion. This is financial reality. Respected stock analyst Robert Tullo who is the Director Of Research at Albert Fried & Company says this:

Longer term IP Radio and Spotify are good annuity revenue streams and great promotional tools. However, we believe the system works better for everyone when artists have the right to distribute their Intellectual property how they see fit.

Ultimately we think windows for content will form around titles that look much like the Movie Windows and that will be great for investors and the industry as soon as all these so called experts get out of the way and spot trading fashionable digital dimes for real growth and earnings.

So here we are in the spring of 2016. As simple math and economic reality effects more artists, managers and labels first hand the truth becomes self evident.

YouTube is the next windowing battle to a restoring a healthy economic ecosystem for artists. You can’t window if you can’t keep your work off of YouTube. That’s not YouTube, that’s YouLose…

Guest Post by @schneidermaria: Open Letter to YouTube, “Pushers” of Piracy

A must read. YouTube from an independent artist’s perspective.

Music Technology Policy

[We’re pleased to post this open letter to YouTube written by Maria Schneider, a five-time GRAMMY-winning composer and bandleader, a board member of the Council of Music Creators, and an active supporter of MusicAnswers.org.]

Open Letter to YouTube, “Pushers” of Piracy

by Maria Schneider 

Hank Green’s recent open letter in support of YouTube (that was in response to Irving Azoff’s open and scathing letter against YouTube) deserves a strong response from musicians and other creators.   I appreciate YouTube’s illegal business model might yield a few anecdotal success stories like Mr. Green’s and his videos of opening beer bottles with antlers, but for the vast majority of the artistic community, including me, and every musician I know (and I know thousands), YouTube is a resounding disaster.

MariaSchneider_GregHelgeson Maria Schneider in rehearsal

There’s no use in beating around the bush, so I’m going to cut to the chase…

View original post 3,429 more words

Fight For The Future Of Corporate Astroturf Ripping Off Creators!

Musicians, know who your friends are and are not. Here is another example of big tech money, corporate astroturf, attempting to remove your rights. In the last hours of the submissions to the Copyright Office for comments on the DMCA a webform was introduced.

Note the fear-inducing reference to “robots”–“robots” must refer to the tools that Google itself gives to big companies to automate sending DMCA notices to Google for infringing links.  So by definition, “corporations” use Google’s own “robots” at Google’s request.  80 million infringing links this month alone!  (And remember, the Google “transparency report” does not include DMCA notices sent to YouTube, Blogger or any other Google property, it just covers Google search.)  EEP! ROBOTS!  DON’T BREAK THE INTERNET!

Google DMCA 3-31-16

This letter is exceptionally misleading because Google doesn’t allow independent artists to use these tools.  That means even the handful of artists who can monitor Google search 24/7 have to send manual notices.  So what the astroturf group is really complaining about is that EVERYONE should have to send notices manually which would increase the amount of time that Google has to profit from links to infringing content by data profiling or advertising sold on pirate sites.

This webform did not even verify if those sending the automated letter to the US Copyright Office were actually US Residents or machines…or made an intelligible comment on the questions the Copyright Office asked for public comment.  So, we had some fun with it, see bel0w.

David Newhoff at The Illusion Of More has an excellent piece looking much deeper at how these corporations and their funded organizations are working aggressively to take away the protections granted to individual creators in copyright.

Read it here, at the link below.

Astroturf Organizations Typically Hysterical on DMCA | The Illusion Of More

 

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