Wednesday April 25, 2012 at 3:04

How Streaming services pay Artists

Below is an article we wrote for MTV, which can be found here.

The State of Streaming

Streaming services have been making a lot of noise recently. Spotify, who made a big splash when it launched in the USA last year, has been backing up its recent statement about wanting to become a music operating system by announcing the availability of an embeddable music player called Play Button. Pandora has seen its market value decrease considerably since its IPO despite being extremely popular in the U.S.

Artists have been complaining left right and center about how low streaming payments are. Some big name artists and record labels have pulled their content from streaming services, and Grooveshark is being sued by all four major record labels.

As a small DIY band from Europe who made a name for ourselves in the music accounting world last year by divulging how much money we were getting from the different digital music stores and streaming services, we sometimes get asked what we think about music streaming.

It’s undeniable that streaming is the future. I would even go so far as to say that streaming is already the present. Millions of music fans listen to music via streaming services every day. Why bother downloading songs when you can stream them?

The debates about streaming tend to be more about whether or not they pay enough to the artists for the use of their music. Some believe they are cannibalizing record sales, others think that they’re serving as a catalyzer for music discovery and thereby increasing artists’ income.

As CDs become extinct (or collectibles like vinyl) and the need to download files becomes obsolete, streaming services will likely become the main source of revenue for recorded music. Therefore it is important for musicians to understand how much streaming services pay for music and how those payments are made.

However, streaming services and their associated payouts can be a little confusing.

How Streaming Works

The concept of streaming is fairly simple. The music resides in the cloud (in data-centers) and you stream the music, meaning you download and play the sound file at the same time. In order to make it work more efficiently, some streaming companies use peer-to-peer technology or provide a synchronization feature, which allows you to actually download the songs to your phone or computer, as you would with a song from iTunes. That way you can still listen to your favorite songs when you’re not connected to the Internet. The difference is that if you decide to terminate your subscription, the music will disappear.

The main difference in financial terms when compared to digital downloads or physical formats like CD and vinyl is that the user no longer owns the music, they lease it, or they pay for it every time they listen to it, depending on how you look at it.

So how exactly does a band like ours get paid from a streaming service?

This is where it gets extremely complicated.

How A Band Gets Paid

Put simply, every time a user listens to a song using a legal streaming service, it triggers off a set of royalties, some of which are based on statutory rates as defined by copyright law, with others having been negotiated between the streaming companies and labels and/or performance royalty collection organizations.

There are basically two parts of a song that are covered by copyright law. The composition (lyrics and music score) and the recording (what the lyrics and music score sound like once they’ve been sung and played by musicians and recorded as a sound file).

It is next to impossible to find out exactly how some of these royalties are calculated because of the confidential nature of some of the agreements signed between the different parties, but in some cases the streaming services will pay a fixed amount per stream plus a prorated percentage of their revenues (subscription and/or ad revenues in most cases) based on the artist’s market share. In other cases, they just pay a prorated amount of revenues. This would explain why the per stream amounts from streaming services like Spotify fluctuate as their ad sales and subscription revenues can go up or down. [Editor’s note: Spotify declined to divulge details on this.]

ASCAPBMIHarry FoxSACEMPRS for Music all announced deals with Spotify without disclosing any details.

Another fundamental difference between streaming and traditional record sales is that the artists whose songs are listened to the most receive the most royalties and not the artists who sell the most records. That may not sound like a big difference, but it is. It used to be about selling as many records as you could, but it’s now about finding as many listeners as you can and making sure they listen to your music over and over again. That seems like good motivation to make quality music to me.

These royalties are paid to different people depending on which part of the song they own or the role they played in recording it.

If you own the copyright to the song in full – meaning you wrote the music, the lyrics, performed all the music, recorded it all yourself and released the album on your own – then 100% of the streaming royalties are owed to you, and only you. Whether you actually get all that money is a different story, though.

Most of these copyright laws were designed a long time ago and don’t really suit modern day methods of listening to music. For example, what’s called a mechanical royalty was originally designed to ensure composers would get paid when their music was sold on perforated paper for self-playing pianos. This system trickled through the decades and stayed with us through gramophones, 7” vinyl, cassette tapes, CDs, digital downloads and interactive streaming services… but not non-interactive streaming services.

So what’s the difference between interactive and non-interactive?

Interactive means that the user chooses the exact song he or she listens to, meaning services like Spotify, Rdio, Mog, Grooveshark and Deezer. Non-interactive means that you can’t choose the exact songs you listen to – services like Pandora, Jango, and other Internet and digital radio stations like Sirius XM.

From the outside, it’s hard to understand why, Pandora and similar sites do not provide their service to users outside of the U.S., but there are reasons for this.
The Digital Millennium Copyright Act (DMCA) was passed in the U.S. in 1998 and allows Internet companies to develop web services around creative content (videos, music, etc…) as long as they respect a few ground rules. They’re also supposed to pay a statutory rate per song played via their service to a non-profit organization called SoundExchange.

SoundExchange then distributes the money to the interested parties. In Europe, SACEM (France), GEMA (Germany) and PRS for Music (UK) and the record labels typically negotiate these deals individually, which is why it’s so much harder for companies to create services like these in Europe.

Another example of how strange music copyright can get is the public performance royalty, which was designed to ensure a composer would get paid when an orchestra played his or her music in front of an audience. Whenever your music is played in a public place (restaurant, bar, business, etc…) the songwriter and the owner of the recorded song (master) are supposed to get paid for it. Streaming services also have to pay the public performance royalties, which seems a little odd when most people listen to the songs with headphones.

To summarize, in the U.S., interactive streaming services have to pay mechanical royalties and public performance royalties whereas non-interactive only have to pay (digital) performance royalties (as well as publishing royalties).

Some of that money is paid to organizations like ASCAP, BMI and Harry Fox Agency who collect money on behalf of songwriters and the owners of the masters, the rest is paid directly to the labels or music aggregators like Tunecore, CD Baby, etc, who pass the money on the artists.

As for services like Pandora, they pay SoundExchange performance royalties for the musicians and master owners, and songwriter royalties to ASCAP/BMI, etc.

This means that you need to be members of all of these organizations in order to get paid, but that does not provide you with any guarantees that you will actually get paid. You often have to chase after the money like any business owner. But is it really worth spending several hours chasing after a few dollars?

It’s probably not a huge amount of money, but it’s money that’s being paid by companies like Spotify and Pandora for the use of our music, which does not end up in our pockets. So where does it go exactly? That’s another tricky question.

In most cases, it gets divided up between the members of the organizations that collect the royalties, meaning other artists, record labels and publishers. Yes, some of the money artists and record labels get does not belong to them. But they take it. Why wouldn’t they?
Most people don’t realize that they directly or indirectly pay for music all the time.
When you watch an ad on TV that includes a piece of music, an ad agency paid for the right to use that music in the ad and to show it to a certain amount of people for a certain amount of time.

When you buy a concert ticket, you’re not just paying for the right to see the band, a small portion of your ticket money goes to Public Performance Organizations who collect that money on the songwriter’s behalf. What if the songwriter is the one actually playing the songs, you’re thinking? Why not give them the money straight away, so they can pay for gas, or some pizza? Well, that would be too easy.

In some countries, taxes have been added to hard drives and blank CDs and all of that money goes to the collection societies, who are supposed to share it with their members. When you download albums from commercial filesharing sites, advertisers have paid to occupy that real estate so you see their ad when you download the files.

When you use the free version of streaming services, you indirectly pay for music by listening to or watching their ads.

It’s important to realize that the smaller artists very rarely get their full share of the pie, which in itself isn’t the end of the world. We all pay VAT or similar taxes, but what’s annoying is that this money is not being put to good use; it’s going into the hands of people who did nothing to earn it and who in most cases, do not need it.

So here’s some food for thought. Spotify uses peer-to-peer technology to improve the user experience of their music service. What’s stopping artists from using open-source technologies to build an independent peer-to-peer streaming service that cuts out Spotify, the major record labels, the royalty collection agencies and all the other middlemen in the music industry? A non-profit organization that shares the profits from ads and subscriptions directly with the artists?

(Fact checking and editing by Brenna Ehrlich)
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