Guest blog by Katie McCort
As you’ve probably heard, the music industry is experiencing a major change, shifting from digital downloads to online streaming. Tech moguls such as Amazon, Google, T-Mobile, and Apple are all pouncing on the opportunity to start their own streaming services in hopes of cashing in on the next big thing in the music industry. This will prove to be a great move for them and they will probably reap millions of dollars in profits, as always. You (the artist), on the other hand, will not be so lucky—at least in the short run.
Personal interviews with professionals from across the industry have provided the information necessary to help compile a fundamental, step-by-step guide to the world of online streaming that all artists should take the time to understand if they want to, you know, get paid in the future. Unfortunately, online streaming is even more unnecessarily complex than the assembly guide to your exercise bike. Additionally, much of it is completely out of your control.
The purpose of this blog is to tell you what you should know and what you can do to stay in control of your career, get paid, and ensure that you don’t get completely screwed over down the road.
Know Who’s Paying You
The table above shows popular examples of online streaming services. Notice they are separated into two categories: interactive and non-interactive. We’ll cover why the separation of the two is important in Step 2. For now, it’s important to know how the two are characteristically different.
If your music is licensed to “non-interactive” webcasters (another name for online streaming services), this means that the consumer (the listener) has little to no control over the direct selection of your song in the streaming process. In other words, non-interactive webcasters work like the terrestrial radio stations that you would find in your car. A playlist is usually assembled based on consumer interest in a certain genre, artist, or time period. However, while the listener has the ability to customize the playlist with their preferences, they have no control over what song is played at a certain time. This is why if you’re listening to a station on Pandora, you are only able to skip a limited number of songs. Being able to by-pass multiple songs gives you the power over the programming of the playlist. When you have this type of control over a playlist, the service is no longer considered a non-interactive webcaster. These webcasters are now considered “interactive.”
Interactive (or on-demand) webcasters are simply online streaming services that allow the listener to pick and choose what songs they wish to compile into their own playlists. This allows the listener to dictate which song they want to listen to and when they want to listen to it.
Know How You’re Getting Paid
Each piece of music has two copyrights: the sound recording right and the public performance right. Webcasters are required to compensate each copyright holder, respectively. The public performance right is collected by a public performance organization (PRO), such as ASCAP or BMI. They collect money for the publisher(s) and the songwriter(s) of the work. The sound recording right is collected by the owner of the sound recording. In most cases, a major or independent label owns the sound recording. What the artist receives from that sound recording right is between the label and the artist and is negotiated in the artist’s contract.
Non-interactive and interactive webcasters pay each of these royalties differently.
Non-interactive webcasters are required to pay a “statutory (meaning required by law) rate” every time a song is streamed under a very complex and utterly inefficient piece of legislation known as the “Webcaster Settlement Act.” To spare you the pain, all you need to know is that the statutory rate is currently fractions of pennies per stream. Theoretically, even though each stream is a miniscule amount, the song is expected to be streamed more than it is downloaded. When a song is downloaded for about one dollar on iTunes, the artist does not receive royalties every time the song is played on the consumer’s iPod. Since the artist is now receiving royalties each time their song is played, the rate is reduced. Theoretically (yes, I am stressing the word theoretically), the frequent amount of plays is supposed to (NOTICE: “supposed to”) make up for the low royalty rate.
Interactive webcasters do not have to pay a statutory rate. Interactive webcasters pay a “blanket (or voluntary) license” per stream. A blanket license is a flat fee that is negotiated between the PRO and the label, respectively, and the interactive webcaster. Typically, the deal is negotiated based on a percentage of total revenue from interactive webcasters. Theoretically (yes, there’s that word again), the rates are negotiated so that both the copyright holder and the webcaster can make a profit, earn a living, and bask in the glory of the American Dream. Using the same logic that is used to justify low statutory rates, blanket licenses, on average, are figured to be fractions of pennies per stream. However, the actual fees vary from webcaster to webcaster and it is difficult to tell for certain what each webcaster pays since the blanket licenses are negotiated behind closed doors.
Know How You’re REALLY Getting Paid
In Step 2, I purposely made “theoretically” the word of the day because the system doesn’t actually work like that. In a perfect world, the artist and songwriter would get paid for their work, the label would make enough not to lower the advances on their artists’ contracts, and the webcasters would make enough profit to ensure that they lived to see another year.
In the world we live in, you’re basically screwed*
*There is hope though! See Step 4
Right now, the statutory and voluntary rates are not fair market value. Artist after artist after artist has come out in protest of the pitiful royalty rates that they are receiving from non-interactive and interactive webcasters. What’s worse is that it’s not like webcasters don’t have the money. In response to Pandora’s testimony against artists’ rights during a congressional hearing on music licensing reform this past month, David Israelite, CEO of the NMPA, tweeted “No Pandora. Start by explaining how your founder cashed out more in stock than you paid every American songwriter!”
Of course, webcasters don’t stop there. Non-interactive webcasters like Pandora are not only refusing to pay artists despite decent equity, they are attempting to make low statutory rates even lower. Last year, Pandora sponsored the Internet Radio Fairness Act on Capitol Hill, which attempted to claim that current statutory rates were above market value. Luckily, the legislation was scrapped soon after it was proposed.
Interactive radio does not treat artists any better. As I mentioned before, blanket licenses are negotiated based on the percentage of total revenue that a webcaster makes. However, “total revenue” counts towards total revenue from subscription fees only. This means that revenue that comes from advertisement sales (the majority of a webcaster’s revenue) does not enter into this negotiation. As a result, interactive services like Spotify can get away with paying artists fractions of pennies per stream and then claim that they pay artists “nearly 70%” of their “total” revenue while simultaneously pocketing 100% of advertising revenue.
Now, let’s say that Spotify did pay 70% of their total revenue to copyright holders. Unless you wrote the song, you probably would not see much money anyway. This is because not only is there a limited amount of revenue to negotiate with, but the game is rigged to satisfy the major labels and leave the indies wondering why they decided to get into this business in the first place. The latest example of injustice towards the indies is the current debacle between independent labels and YouTube.
YouTube recently announced that they would be developing their own formal streaming service. There was news that indie labels were refusing to sign deals with YouTube, creating buzz that popular artists’ work would be stripped from YouTube’s servers. When Digital Music News posted the YouTube contract for independent labels on their website, it was easy to see why indies pulled out. The contract required, among other things, that all content owned by the independents would be the property of Google for five years. It gave limited rights to artists and required independent label’s rates to decrease if major labels chose to lower their rates first.
Needless to say, the majors do not receive this kind of treatment. They are, indeed, kings among surfs. When in negotiation with other interactive streaming sites such as Spotify, major labels are rumored to have secured immense secret deals with interactive webcasters that have left the indies with next to nothing. That being said, if you’re an artist who is already signed or who is looking to be signed on a major label, you may not want to mourn your poor friends who are locked into doomsday contracts with indies. Truth is, they’re probably going to get paid more than you.
Because majors keep 100% of blanket license royalties from interactive webcasters…which basically means that you get nothing from interactive streaming services, even if your label is making an absolute mint off of the royalties that are rolling in on behalf of your streams.
Know How to Actually Get Paid
Now that all of the ugly truths are out in the open, I can confidently tell you that--although in short supply at the moment--there is hope out there for artists and songwriters who wish to head into this industry. Here are a few things to think about when figuring out how to cash in on online streaming:
One thing you can do right now is join SoundExchange. SoundExchange is a non-profit entity that collects royalties from non-interactive webcasters and gives them to you. While this does not improve tragic royalty rates, it will at least give you access to the limited amount of funds that you can access. Of course, this is assuming that the rates stay statutory for non-interactive streaming services and do not become voluntary licenses…but this is a completely different matter. For right now, go here, get paid.
The next thing you can do is know your terms. As a new artist, you don’t have negotiating power, and that is something you have to deal with. On top of having limited negotiating power, ignorance of industry terminology sprinkled across your contract will only allow the record label or streaming service to swoop in and take advantage of you.
When it comes to online streaming, there are two very important terms in your contract that you should be aware of. Let’s start with what I have already mentioned concerning voluntary licenses from interactive radio.
It was revealed in yet another document leaked to Digital Music News that not even Lady Gaga is getting paid for blanket licenses. Going forward this will become a major problem as the market share of music streaming revenues begins to overtake digital downloads (and it will. Slowly, but it will). Luckily, as music streaming revenues escalate and become more significant to your livelihood, labels will be forced to give up their monopoly on your streaming royalties or else who in their right mind will actually sign to that label? In the meantime, if you can help it, avoid signing contracts that strip you of your share of payments made to the label via blanket licenses. If you can’t avoid this (and chances are you won’t be able to), make sure you are not locked into a bad contract for an absurd amount of time.
The next term to be aware of is a very important concept called “windowing.” Given the current state of streaming royalties, windowing is vital to your success as an artist. Windowing is when the artist does not allow online streaming services to stream their content on their site for a specific “window” of time after new content is released by that artist. This ensures that fans who normally would have bought the album or downloaded a few singles from iTunes will not hop on Spotify, plug all of that artist’s new songs into a new playlist, and drain many of the royalties that the artist could have gained from their work. Recent contracts (such as YouTube’s horrific independent label agreement) between labels and webcasters are attempting to destroy windowing entirely. This could mean devastating losses to the artist. Do yourself a favor and avoid signing contracts that demand you to fork over your sound recordings on the same day that you would give the recordings over to other service providers that will actually pay you.
Hopefully, these steps have given you an overview of what to expect from online streaming. While I have only explored the tip of the iceberg in this blog, the important thing to remember is that, as an artist, you should always be aware of new developments in the business. It may seem daunting, but simply being informed about what is going on in the industry can mean the difference between getting robbed blind and being able to sustain yourself as an artist. If writing and performing music is truly your passion, do your research, pay attention to changes in the industry, and know if you’re really being properly compensated for your work. Chances are, you probably aren’t.
Oh, and go out and find yourself a lawyer. If you haven’t figured it out by now, you’re going to need one.
Katie McCort is a student at American University and has recently switched to majoring in Finance with a minor in Math. She currently writes for Substream Magazine on legal and political issues within the music industry. Follow Katie at @KmMcCort