Out of tune? - Charles Russell Speechlys

Music and copyright
Out of tune?
Picture: Christos Georghiou / Shutterstock
Speechly Bircham’s Nathalie Moreno takes
a look at new online music business models
creating revenue for rightsholders
The UK digital music market has expanded rapidly with a range
of new online music business models offering better choices for
consumers. However, while consumers have responded enthusiastically,
rightsholders are faced with a constant battle to enforce their rights and
to come up with more innovative and flexible methods for licensing to
adapt to the new emerging online music business models and keep up
to date with consumer demand. Rightsholders are facing a myriad of
challenges to compete and survive.
The BPI said, “It is currently estimated that 95% of all music files
exchanged online are unlicensed and unpaid for, meaning that in most
cases no money goes back to the people who actually create the music1”.
Cloud-based locker systems
In the last year, cloud-based locker systems, namely those which do
not permit streaming of music, have become a conventional method in
the market for providing music services. Examples of providers include
Apple iCloud, Google Music and Amazon. Cloud-based locker systems
offer a variety of services, which includes allowing users to upload songs
as well as to benefit from scan-and-match capabilities.
For example, all new Apple devices such as iPads and iPhones,
are compatible with Apple’s cloud storage system the iCloud, which
provides Apple users with easy access to their downloaded music on
their Apple devices wherever they are. Moreover, music downloaded
from the iCloud is automatically synced to all of a user’s Apple devices.
In terms of remuneration, Apple gives music rightsholders a share of its
revenue from file downloads, but no share of hardware sales.
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In the case of Google Music – now known as Google Play – which is a
storage system for all Android applications, enables users to shop for and
share music with other users using Google+. The service allows free storage
for some 20,000 songs from the user’s own library and gives instant access
to this music on any of the user’s Android devices or the web.
These cyberlocker models are a clear response to what more and
more users want – storing files online so as to reduce space taken up
on hardware. However, the issues that cloud-based locker systems
arguably present for rightsholders are numerous.
First, cloud-based locker systems are unable to distinguish
between music which has been purchased and music which has been
downloaded illegally.
Secondly, where Apple gives music rightsholders a share of revenues
from file downloads, Microsoft has agreed to pay Universal Music Group
a per-player fee in addition to a share of revenue from music downloads
under ZUNE, Microsoft’s online music platform. As a result, there is no
consistency of revenue sharing across the online music business models.
The Spotify alternative
In contrast to cloud-based locker systems, Spotify allows users to stream
songs, instantly and for free. The secret of its success has been the ability for
people to share music with one another. Since arriving on the music scene
in Sweden in 2008, Spotify has built up a library of 15m songs and now
has 10m users. The creators of Spotify aimed to create a legal alternative to
music piracy by offering a way for the music industry and rightsholders to
claw back some of the revenue previously lost to illegal downloads.
Unlike rivals such as Rhapsody, MOG and Rdio, Spotify streams
music in three different ways:
• Free access (which is supported by advertising revenue).
• Paid desktop access with no adverts.
• Limitless multi-platform access.
The latter two, subscription-based services enables Spotify to pay the
rightsholders their revenue.
All content is licensed from a number of rightsholders. There are
certain cases where certain rightsholders, such as the Beatles and Led
Zeppelin, have refused to sign on with Spotify and as a result, their
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Music and copyright
music does not appear in Spotify’s library. Spotify, alongside MOG
and Rdio, take the revenue they earn from the subscription models
and appoint a certain percentage (65-70% of profits) to the record
companies they have deals with. Each record label’s share is worked out
according to how many of their artists have been streamed that month.
These revenues are then passed on to the rightsholders at each label
according to the type of royalties each has contracted for.
Last year, Spotify cemented a relationship with Facebook – ensuring
that its library of 15m songs is now potentially accessible to Facebook’s
800m users. Spotify hopes that exposure to this many users will arguably
also increase its fee-paying subscription service and increase the return
on revenues for rightsholders.
Cloud-based locker systems such as iCloud, Zune and Google
Play, and peer-to-peer sites such as Spotify are not alone. Online music
business models are adapting to accommodate growing demand by
consumers for music any time anywhere.
Impact on the music industry/rightsholders
From internet radio services, to streaming and cloud-based music
services, the media sector is creating new and exciting methods for
music fans to enjoy music whenever and where ever they like.
The problem is that the music industry and rightsholders have not
reacted quickly enough to these changes. Still reeling from its fight with
Napster2 – where vast numbers of users were illegally downloading
music, the industry has rapidly seen and felt the impact of these new
music delivery models.
However, one of Spotify’s biggest assertions is that it plays an important
role in the fight against music piracy. Regular users of the service are used
to the announcement, “Piracy is so last year. Every time you use Spotify,
you can feel good knowing you are supporting your favorite artists”.
Global revenues to record labels went up by 8% in 2011, with the
increase put down to music downloads and subscription services such
as Spotify. The number of paying subscribers to music services leapt
65% in 2011 to 13.4m subscribers3.
Since 2010, the major internet companies have pushed their efforts
into streaming music services and locker room systems, each trying
to reinvent the way music is both purchased and listened to. In fact,
streaming services are now music labels’ second largest source of revenues
after iTunes. Spotify stated that in 2011, it paid out $150m of revenue
to rightsholders compared with $55m in 2010, and it is now the second
single largest source of digital music revenue for labels in Europe4.
SoundExchange, the non-profit performance rights organisation
appointed by the Copyright Royalty Board in the US, collects statutory
royalties from satellite radio, internet radio and other platforms for
streaming sound recordings, and announced a 2011 distribution of
nearly $300m to rightsholders and musicians. So arguably online music
business models are seeing an increase in returns for music rightsholders.
Spotify has licensing deals with the majority of the big record labels as well
as many independent labels. However, although the revenues that are going
to the rightsholders in the form of licence fees are increasing, it is not clear
how much each rightsholder receives, as this is subject to contracts with their
record labels. Spotify and other platforms such as MOG, have stated that the
subsequent distribution of royalties to artists is beyond their knowledge – and
more importantly, their control. Some musicians have clauses in their contracts
with the record label that give the rightsholder certain control over digital
distribution, but there are concerns from smaller artists and rightsholders that
they may not be given this level of control over their rights.
Spotify may claim that it is helping to increase record label revenues,
but rightsholders claim that fixed-cost revenue models are impacting the
revenue streams rightsholders might otherwise receive. There are concerns
from rightsholders that unless Spotify and other music streaming services
increase the number of paying customers, the advertising subsidies will not
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cover what is needed to pay the multitude of rightsholders.
A November 2011 National Purchase Diary Group and National
Association of Recording Merchandisers study5, found that services like
Spotify increase access to online revenues for rightsholders that they might
not otherwise receive, but at the same time, there are less revenues from
higher-returning formats like iTunes downloads, CDs and LPs.
Royalty rates agreement in the US
In the US, rightsholders and their representatives are finally getting to grips
with the revenue sharing models. In April 2012, some of the largest trade
groups in the music industry announced an agreement with a proposed
new format adding five new categories to S.115 of the royalties section of
the Copyright Act. These amendments are intended to bring cyberlockers like
iCloud and streaming sites like Spotify within the remit of the Copyright Act.
The licensing amendment was requested by the Recording
Industry Association of America (RIAA), the National Music Publishers
Association (NMPA) and the Digital Media Association (DMA), alongside
representatives of certain mobile phone companies. The purpose of the
proposed amendments is to create new rates and payment terms to
accommodate the rise of these new music business models.
RIAA chairman Cary Sherman believes this model to be “…a historic
agreement that reflects our mission to make it easier for digital music services
to launch cutting-edge business models and streamline the licensing process6”.
It remains to be seen whether the royalty rates agreement, intended to
cover industry from 2013 to 2017, will be approved by the Copyright Royalty
Board. New and innovative online music business platforms and models are
offering consumers an alternative to piracy, and the global 8% increase in
revenues speaks for itself that these models are directing more revenues to
rightsholders. Echoing the words of Richard Conlon, Broadcast Music Inc’s
senior VP of corporate strategy, communications and new media, at a Marché
International du Disque et de l’Edition Musicale panel discussion on cloud-based
locker systems, “It’s not about rights enforcement… but about making markets
and putting a layer of economy over these activities7”.
Footnotes
1.Quote taken from the BPI website – http://www.bpi.co.uk/category/
protecting-uk-music.aspx.
2.A&M Records, Inc v Napster, Inc, 239 F3d 1004 (2001).
3.International Federation of the Phonographic Industry Digital Music Report 2012.
4.International Federation of the Phonographic Industry, April 2011.
5.https://www.npd.com/wps/portal/npd/us/news/pressreleases/pr_111110.
6.http://riaa.com/newsitem.php?content_selector=newsandviews&news_
month_filter=4&news_year_filter=2012&id=692D1CFB-5B21-0DB9-899E6A6C4E8F561D.
7.http://www.billboard.biz/bbbiz/industry/legal-and-management/the-futureof-cloud-music-debated-by-publishers-1006045962.story.
Author
Nathalie is an international technology partner,
with over 20 years experience in advising clients
operating in the communications, information
technology and e-commerce sectors across EMEA
and globally. A Harvard Law School graduate
with a PhD in international law, she is a dual
qualified TMT partner (France-UK), based in
the UK regularly advising on transactional,
commercial, regulatory and compliance matters
both under English and French laws after
practising in several jurisdictions such as Belgium, France, USA and
the UK.
With special thanks to assistant Louise McAdam and trainee
Mariam Cherian.
June 2012
Intellectual Property magazine 37