What They'll Never Tell You About the Music Business

by Peter M Thall

  Streaming—the present and the future: The future is huge; everyone knows that this is the be all and end all of music distribution. How it is achieved, through what media, how to identify the few services that will rise to the top (getting in first or early may have sealed the fates of many of the latecomers)—the jury is still out. But Spotify, Amazon, now Apple, possibly Tidal and Rdeo—these form what, in modern parlance, is often referred to as “the new music ecosystem.” Some researchers have reported that well over 200 billion songs were streamed in 2015—legally! Once the major players have locked in a base level of subscribers, it will be a done deal. Those of us who even know what a cherished record collection is will be a fading few—antiques among the audience sought by the record companies. Not that most people care, except some of the older generation probably, but it is virtually impossible to “own” a stream delivered by these streaming services. So even owning a record collection is becoming less and less possible while being even much less likely.

  Some holdouts among artists and small record labels think that they will be able to “direct stream” their recordings and keep all of the money generated from the public. Good luck with that. This has not worked very well among digital sheet music providers or download providers. We cannot underestimate the sophistication that has gone into the development of technology that achieves the smooth services represented by Spotify and a very few others. To “do it yourself” is harder than it looks.

  YouTube and SoundCloud: What Exactly Are They and Whom Do They Serve?

  One aspect of the digital world that is often ignored when searching for reasons why income to creators is less than reasonable people think it should be deals with the position that YouTube and SoundCloud take. These companies are a kind of blend between active exploiters of music and passive providers of broadband connection. Both companies claim to act like Internet service providers (ISPs) such as AOL, Yahoo, or Internet Explorer. They hide behind this self-designation when unauthorized content gets uploaded to their sites. They take no responsibility for obtaining permission from artists and songwriters. According to YouTube and SoundCloud, they need not go to the kind of expense incurred by Spotify, Apple and others because they are merely ISPs—passive intermediaries.

  Of course, they are not.

  The indisputable result is that YouTube and SoundCloud pay artists unfairly—in part because of their business model whereby, many believe, constitutes a “gaming” of the copyright law. They take advantage of copyright exemptions that were never intended to apply to them. The Digital Millenium Copyright Act (DMCA) was passed to protect ISPs, not the kind of wholesale distributors of music characterized by YouTube and SoundCloud. It provides this protection via the concept of the safe harbor. If someone posts illegal content using their service, the rights owner can demand of the ISP that the content be “taken down” and then, in most cases, the ISP will usually comply after giving the offending company which posted the content an opportunity to object.

  At considerable expense, Spotify actively makes licensed music available on their site. YouTube and SoundCloud claim to be passive participants; they don’t put content onto their sites; users themselves upload content and YouTube and SoundCloud serve, in their minds, as ISPs, Internet service providers no different than Yahoo, AOL, or Microsoft (via Internet Explorer), etc.

  Free is a difficult model to compete with, and the Spotifys of the world are learning that the insatiable practice of peer-to-peer sharing and other forms of piracy (whose impact remains even though the mere existence of inexpensive streaming options has resulted in some softening of its impact on rights owners) still continues—but like the wolf in different clothing. An otherwise legitimate company can cause tremendous damage to the income of rights owners by invoking the safe harbor exemption when it should not.

  What they do is interpose a step prior to taking down an offending video clip which is the subject of the takedown notice. They offer to copyright owners the option of either removing the disputed music (often well after the fact) or allowing advertising to be placed on the video clips, the income from which they will share with the copyright owners. The leverage that they have by considering themselves ISPs—by invoking the safe harbor provisions of the DMCA—allows them to “settle” claims by actually generating new money from the content for themselves, although they share it with the copyright owners. The choices that the rights holders have are limited to (1) letting the clip stay up because they cannot possibly monitor every uploaded work that happens hundreds of thousands of times a day with respect to a major copyright owner; or (2) seeking to identify what is theirs and make a deal so that they end up authorizing the advertising and forego their claims. As a result of exercising this leverage over the rights holders, both YouTube and SoundCloud now have pretty much all of the blanket licenses that they need from the major record and music publishing companies.

  So, are they ISPs or infringers? Apparently neither—just clever negotiators who use the DMCA to give them the leverage they need to pay rights holders less than a free market would have forced them to. The losers? The record companies and the publishers—and, of course, the creators as well because the pot that they share in is far smaller than it could have been.

  PS: PRS for Music, the British mechanical and performing rights society, sued SoundCloud in 2015 after five years of failed negotiations with that company to get them to withdraw their argument that they do not need a PRS for Music license for its streaming service in the UK and Europe.

  Digital Service Income Shares

  Let’s talk about what the actual revenues shared between rights holders and digital service providers such as Spotify and Pandora are. Of course, very few people actually know what these interests are—and they are not talking.

  Usually, receipts by a record company as a result of the exploitation of their recordings are split somehow with their artists—not usually 50/50—often quite arbitrary amounts—more like 3 to 1 in favor of the record companies (remember the various ways in which DPD royalties can be calculated discussed earlier in this chapter).

  When the record labels and music publishers licensed the streaming services, in many cases, they insisted on being given equity in the services themselves. This, together with huge advances and, sometimes, catalogue “service” fees, made one question in whose interest were the rights owners working. Clearly not their artists and songwriters. (No wonder Bette Midler, and many others made very public complaints about how little they receive from the extensive number of streams that they have received.) The great David Byrne, always a force for artists’ rights, says that the not-tied-to-standard provisions such as term and royalty rates result in a “black box” consisting of monies collected by the rights holders, but not shared with their artists and songwriters. This is not the black box that I identify in the audit and publishing chapters (chapters 12 and 13) which refers to foreign collection societies’ secret funds reserved for their own local members. No, this black box refers to the depository of money earned, but not remitted to artists and songwrwiters, even though generated solely from their art and their appeal to the users of these services. Writers and publishers are as close to partners as is possible under the sophisticated relationship that they have with each other. Labels and artists? Not so close. But the result is the same. Amusing as it was disturbing, the secret memo from Sony’s top digital consultant that went viral (and described at length earlier in this chapter) asserted that labels are justified to perform this way; that they need advances to allow them to take risks by signing and developing new acts; that their overhead demands considerable revenues to keep the machine going for their acts; that big-selling artists have always subsidized new or failed artists. Taken to its logical conclusion, his argument is that the core of an artistic enterprise must be manipulated in however many ways can be dreamed up to ensure that the corporation and its stockholders are unaffected by the rises and falls of the marketplace. The result? Artists and songw
riters are actually subsidizing their record companies and music publishing companies. Who knew?

  Of course, how the revenues derived from streaming is split depends on there being money to split in the first place. These are still early days of ad-supported and subscription-based delivery systems. Streaming services are figuring out how to collect revenues and how to share them—all the while being chased by rights owners to make sure that the parties reach some kind of reasonable and balanced accommodation. This is an evolving area, of course, and most pundits predict that sooner or later the availability of free music—at least the kind offered by iTunes—will be controlled and properly monetized, and things will even out to everyone’s advantage.

  Pulling Digital Rights as a Means of Circumventing the PROs Consent Decree Limitations. Another aspect of the digital evolution deals with the pressures being put on the American performing rights societies. As there was no royalty rate established in the streaming “space,” both the American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music, Inc. (BMI) had to go to their respective rate courts (overseen by federal judges appointed to oversee the consent decrees—issued by the US Justice Department—under which the PROs were allowed to function, being, after all, monopolies) to seek one. Their music publishing company members and affiliates were apoplectic at the decisions made by the rate court judges. Spurred on by Sony/ATV, in 2013, the large music publishers attempted to withdraw only their digital performance license rights from the PROs and to license them directly. In this way, they could negotiate individually with the digital streaming services and obtain more money in a market characterized by a willing buyer and, for the first time, a willing seller—not one ruled by the hand of a single judge. While they eventually failed in their quest, and have since pulled back from their stance, these and other music publishing companies are now focusing their efforts on the pursuit of modifying the consent decrees rather than merely striking at windmills.

  Does Sound Matter?

  One would think that, with all of the technology emanating out of the imaginations and skills of computer scientists worldwide, the quality of the sound in the digital age might have improved from the 78 rpm, but apparently consumers don’t demand it and suppliers accordingly don’t really bother to deliver it.

  Neil Young is betting that the powers that be are wrong and “if you make it, they will buy it.” So in a combination of altruistic and commercial initiative, he has developed Pono. Who better to lead the fight to replicate the highest level of studio production than this icon of the recording world who has actually experienced firsthand the incredible advancements of recording capabilities from the 1960s to the present?

  Neil Young’s goal is to bring high-quality-sounding music to the marketplace—“not just some 21st century fake shallow Xerox facsimile, with all of the essence taken away and replaced by a thin exterior with no passionate core.” He states that he has no intention of reaching the masses of consumers who he believes are not that interested in perfection, but he feels that he can give a choice to those who are. If Young is correct, the loss of quality between a first-class master and an MP3 is almost 95%. He claims that the size of the respective files confirm this.

  Gilbert Hetherwick, former head of Columbia’s Masterworks and EMI’s US Classical Label awards HDTracks the current high-water level of quality sound. He calls it the ULTIMATE in sound quality…and “provides your files [with sound capabilities] FAR exceeding the quality of your now ‘primitive’ CDs!”

  Hashtags as a Source of Income in the Digital World

  These are known to most young people—less so to their parents. Hashtags are keywords used to reach like-minded people out there in the cyberspace. Twitter is the mechanism by which hashtags are disseminated. So someone sends a message not exceeding 140 characters to the ether, which may or may not have impact on those who receive the tweets. Incredibly fast communications of likes, dislikes, recommendations, etc. regarding all things imaginable, including music, are facilitated by the use of hashtags. Hashtags seem to be here to stay. Even though their value is questionable, admittedly they disseminate information about music widely and often. I can’t say that this result isn’t useful in a world of overstimulation where artists and songwriters seek to be easily and broadly identified and followed.

  * * *

  *1. The public domain, of course, is just what it says. Once the period of copyright protection expires, the public ends up owning the work and can do anything it wants with it. It can perform it, mechanically reproduce it, print it, display it, edit, arrange, adapt or translate it, use it as the basis of a dramatic work or film, download it, etc., all without permission and without the obligation to pay anyone for using the work. Its domain—its home—is the public.

  *2. For millennia, partnerships have been characterized by one characteristic above all others: the parties share in the profits; but they also share in the losses. It is not customary for one partner to share in the profits, but to have the right to recoup from the other partner’s share large portions of their investment (that is, recording costs after which the record companies still claim ownership of the master recordings for ninety-five years).

  *3. The notion that promising to pay a royalty to an artist presumes that the record label will follow traditional, and substantial, release protocols such as promotion, marketing and sales, as well as other commitments customarily provided by a record label—particularly a large one. Otherwise, it would have no retort when requested to share profits.

  *4. Music publishers/songwriters still don’t comprehend why they should only get $0.091 (the statutory mechanical royalty), while the record label/artist/producer retain about $0.659 (and Apple retains $0.23 off the top). After all, there are two products being sold: the song and the sound recording, according to them. Why shouldn’t the song owner enjoy half the net proceeds? As noted earlier in this chapter, that would work out to $0.3295 for both the record label and the music publisher to share with their respective artists and songwriters. In the current scheme of things, the publisher/songwriter receive 25% of what is logically theirs. The artist? Less.

  *5. Now that’s one for the books! In Canada the mechanical rights society (CMRRA) has worked out a deal whereby they are paid the disputed mechanicals into a suspense fund and at least the money is in the hands of the music publishers’ agents rather than the record labels which are all too anxious to withhold money due on the sale of records. Similarly, Apple’s deal with record labels provides that they pay to the labels the mechanical royalties, for later distribution by the labels to the music publishers/writers. In Canada, and I believe in the rest of the world, this does not happen; the music publishers and their agents collect the mechanicals directly from the eventual user, in this case iTunes.

  5 • PERSONAL MANAGEMENT

  The Whys, Wherefores, and Watch Outs

  The man that hath not music in himself

  Nor is not moved with concord of sweet sounds

  Is fit for treasons, stratagems, and spoils

  The motions of his spirit are dull as night

  And his affections dark as Erebus.

  Let no such man be trusted.

  —WILLIAM SHAKESPEARE, THE MERCHANT OF VENICE

  Okay, I am being a bit dramatic with the quotation. And actually, I disagree with the Bard—at least insofar as personal managers are concerned. It matters not how musical your personal manager might be. What matters is how dedicated, how energetic, and how imaginative he or she might be. Add ethics and a way with numbers and you’re a long way toward having it all—professionalism, enthusiasm, and results.

  What values should you apply to your choice of manager and to your rationale for entering into a formal agreement in the first place? Artists are principally concerned with, and principally adept at, only their own art; yet the business aspects of conveying and transmitting this art to the public must also be dealt with if they are interested in protecting their creations, ea
rning a living, and communicating their art to others. What is the thought process that artists should conduct before entering into an agreement with a personal manager? Pertinent questions might include these: Why should you even consider obtaining a manager? What would and would not be included among a personal manager’s duties? How should your manager be compensated? What should you expect and what should you reasonably not expect of this person?

  First of all, let’s concern ourselves with the schooling for managers. Sorry, there is none. Well, then, what about the licensing for managers? After all, accountants have to be licensed, as do lawyers, even dogs. What agency licenses managers? Sorry again; there is none.

  Let’s focus on something more concrete, then: the various kinds of managers waiting to assist artists in developing their careers. As you have no doubt guessed, there are as many types of managers as there are one-hit wonders. There are educated managers and uneducated managers; experienced managers and grads who ran the live music programs in college; managers who know songs and managers who know sounds; managers who are attentive to the business of their artists and managers who are as lost in the world of business as their clients profess to be (and often are); managers who are creative geniuses and managers who are public relations disasters; managers who have never left Landsdown Street in Boston, Beale Street in Memphis, or Sixth Street in Austin, and managers who understand, or at least are aware, of the world as a marketplace; managers who are happy to have the record company do its thing and managers who are hands-on and make sure the jobs expected of the record company’s personnel are done efficiently and on time; in-box managers who are reactive types and handle only what comes to their attention and managers who are proactive and initiate activities without having to be tapped on the shoulder. There are probably no managers who have either all of the negative or all of the positive attributes listed above, although most managers exhibit at least some of both.