thereport ISSUE 362 | 18 MARCH 2015

Split

The digital royalty share conundrum

Contents05 Beyond music: Meerkat06 Pinboard: Stats, deals, startups and more 08 Country profile: Australia

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The move into digital is seeing growing calls for artists and writers to have a greater share of the spoils. The huge manufacturing costs and excessive wastage of the CD era, with its over-production and returns, are now gone. So shouldn’t that make it easier to give more equitable splits? Not quite. A whole new set of costs – notably accelerated marketing/promotion expenses and data processing – have stepped in to replace them. It’s not quite “Meet the new boss, same as the old boss”, yet a waiting game is gripping the industry that must be resolved but, crucially, can’t be rushed.

Last month, BASCA launched its The Day The Music Died campaign in which it argued for writers receiving a 50% split on gross

royalty income from digital services. The Music Producers’ Guild immediately added its weight to the campaign. This all follows on from the MMF’s long-term call for more “equitable” splits.

There is a concurrent move for recording artists to take a bigger cut of digital revenues. Famously, Beggars Group announced in March 2012 that it was paying 50% of streaming income through to its recording acts but said this was not a permanent policy. Indeed, in March 2014 it stated that it was revising this split and reducing what the acts would receive – although it is not making that split public.

Off the record, executives at major labels told music:)ally that they were spooked when Beggars made this initial pronouncement but then breathed heavy sighs of relief when it publicly stepped away from the 50/50 split.

This, however, will remain a contentious issue as streaming grows and approaches the scale that the likes of Spotify are promising will see everything make sense. We spoke to assorted stakeholders in the digital music value chain to gauge their opinions on what will happen here, what

COVER FEATURECOVER FEATURE

Split infinitives

The digital royalty share conundrum

the arguments for and against higher artist and writer royalties are and where the breaking point will come.

IF MANUFACTURING IS GONE, ROYALTIES SHOULD GO UP. RIGHT?The first line of argument is that the movement away from physical formats has eradicated a large number of costs from the labels’ bottom lines. Gone are manufacturing costs for CDs, paying for vans to deliver them to record shops and the expenses of dealing with breakages

and returns where discs are over-manufactured when misjudging potential demand.

“Generally the major costs associated with recording and marketing music haven’t

decreased that substantially,” said one Nordic label head where streaming now provides the lion’s share of recorded music income. Studio costs have not fallen, especially for acts aimed at a mainstream audience. A certain level of recording quality has to be maintained and labels are arguing this is not getting any cheaper.

“A&R investment is going up,” adds another Nordic executive. “Deals with artists now look different, and more expensive compared to 10 or 15 years ago.”

This is backed up by an artist lawyer who discussed the three ages of the

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ISSUE 36218.03.15 COVER FEATURE

recording artist contract and how that has changed in the 21st century. In their view you could clearly demarcate contracts into three stages: 1) Pre-2000 contracts which would not take account of digital at all; 2) 2000 to around 2012, where you would start to see downloads with similar rates to CDs but, crucially, with no deductions; and 3) 2012 onwards where streaming is explicitly woven into the wording alongside CD and download income.

How those streaming rates break down now will depend on the specifics of each artist contract and recoupment terms, but the same lawyer suggested that, while some artists get a minimum of 20% without deductions, others are now achieving much higher rates, sometimes up to 30-40%.

They also suggested that some major

artists are now even able to get a portion of non-attributable income from digital in their contracts.

IS MARKETING THE NEW MANUFACTURING?

Manufacturing may have gone in digital, but there has been a sharp uptick in the cost of marketing. “We are still spending a lot in marketing,” said one Nordic label executive who added that just under half of their team of 35 worked in marketing and promotion.

Another added, “Marketing for old media was mucxh easier. Now it all becomes more granular across platforms as well as across the whole [artist] roster. It is now clearly more of an on-going process rather than just focusing on some key releases and the Christmas period.”

Marketing for old media was much easier.

Now it all becomes more granular across platforms as well as across the whole [artist] roster. It is now clearly more of an on-going process rather than just focusing on some key releases and the Christmas period”

Image via www.flickr.com/photos/fourthfloor/

A source at a label said that things went far beyond just increasing marketing costs. “It’s not so much marketing that’s changed, it’s more about sales and managing accounts,” they argued. “We now have over 150 digital accounts around the world we are managing. That’s as opposed to one distributor in each territory.”

While A&R and marketing costs may have increased, the Nordics suggested that local releases can lose money but profit margins have increased because of catalogue (as there is no upfront A&R costs here and so in digital they move closer to pure profit).

This, then, raises the notion of the introduction of a sliding scale where new artists get certain royalties to help offset the initial investment and development costs whereas catalogue releases are paid higher royalties as they are pre-existing sound recordings from the pre-digital or pre-streaming era. If the profitability dynamics are different in digital for catalogue and new releases, if should follow that the royalty rates adapt to this.

DATA IS NOT ALL ZEROS

The move into streaming may have done

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away with physical manufacturing and distribution but it has also introduced new costs. “Digital delivery and data maintenance are not free,” an independent executive told us. “There is the additional cost of ingestion and making sense of millions of lines of data in streaming.”

A distributor elaborated on this point. “We used to worry about warehousing, forklift trucks and people to pick stuff from the shelves,” they said. “What we have now is engineers designing systems that ingest store and delivery assets. Our costs are different to what we do on the physical side.” They added, “Any development isn’t a one-off cost. There’s always going to be on-going maintenance and hosting which carries on.”

The record industry has always been subject to attacks over its royalty payments – with stories abounding from the early days of the blues and rock ‘n’ roll where stars were fobbed off with cars instead of proper royalties right up to allegations of “creative accounting” in the boom years of the CD.

Royalties do appear to be becoming more favourable towards the artists, although the artists themselves and their managers would like them to become more favourable still.

THE WAITING GAME

Digital has been both blessing and curse for labels and, by default, artists. As it gives with one hand (no manufacturing costs, no returns, instant reporting) it takes with the

other (new costs in artist development and marketing, the expense of processing millions, if not billions, of lines of royalty data).

“What they’re [labels] suffering with is that they have all the physical stuff going on but at the same time they can’t transition to a completely digital world,” a distributor said. “They are not selling as much so are not making as much money. Unit prices are much lower and now they need to employ people to do the digitisation of all these products and send it to us. That’s the difficulty. People have not managed to move out to a fully digital world.”

This, ultimately, is the conundrum that everyone here – labels, writers, artists, managers – is having to negotiate. The transition to digital is happening at different speeds in different markets and there is a need to ensure the survival of physical income as long as possible. Thus the industry is caught between the pull of the past and the yank of the future simultaneously.

If it swings too far and too quickly one way, the labels argue that they will, as the primary investors in new talent, be driven out of business. If it doesn’t swing far and quickly enough, the labels will, managers grimly intone, have an artist revolution on their hands. Yet in this waiting game (or brinkmanship, depending on your view), it is essential that this debate about rates keeps happening. Without it, nothing will change. And a defiance of change is the fast track to collapse for everyone. :)

COVER FEATURE That’s the difficulty. People have not managed to move out to a fully digital world”If the profitability

dynamics are different in digital for catalogue and new releases, if should follow that the royalty rates adapt to this.

A blessing and a curse: Digital has saved costs in some areas but artists development, marketing and the expense of processing royalty data all adds up

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Great moments in music/tech history: Spotify tweeting a link to a Meerkat stream of a SoulCycle party from its branded house at

SXSW. All it was lacking was a doge emoji and the promise of an Uber cab home to win some kind of Silicon Valley full house.

Spotify was certainly on trend with its choice of technology: Meerkat is the hot startup at this year’s SXSW, amid a new surge of hype around livestreaming smartphone apps that the tech community hopes will catch on in a way that past examples like Qik and Kyte didn’t.

Meerkat launched as an iPhone app a fortnight ago, having been built in less than two months as a side-project within Israeli tech firm Life On Air. It was yet another way to broadcast live video from your smartphone, using Twitter as its distribution and promotion platform.

After being featured on increasingly influential Silicon Valley site Product Hunt, the app started to catch on with other startups, investors and tech bloggers, most of who appear to now be at SXSW streaming conference sessions and party footage.

Cue a bandwagon that brands – Spotify included – are already leaping aboard. This is, despite the fact that most Meerkat streams are lucky to reach a few dozen viewers, hindered by the fact that they can only be watched live.

BEYOND MUSIC

Compare the meerkatsMeerkat’s hot – but it’s still awaiting its Bieber moment

If Taylor Swift or One Direction start Meerkatting (yes, it’s a verb already) then things will get interesting very quickly.

The Hudson River moment? That would be an equivalent to the moment in 2009 when US Airways Flight 1549 landed on New York’s Hudson River, with a tweeted photo being the first many people saw of it, establishing Twitter’s potential for news. When will Meerkat (or Periscope) get something similar?

In the meantime, there’s froth. And early thoughts about these apps’ copyright implications if people start Meerkatting full songs from gigs or – likely an earlier flashpoint – sports highlights from matches. :)

“So, why the hype around a category – mobile broadcasting – that’s been

around for a while now without really catching fire?”

Twitter has certainly been watching, and possibly gnashing its teeth in frustration at the Meerkat hype, given that it quietly acquired a very similar startup called Periscope in January, which hasn’t yet launched beyond a private beta.

It won’t be the first mover in this new wave of livestreaming apps, then, but Periscope will at least have access to Twitter’s social graph to help people build

followings. Meerkat won’t: it’s just been blocked from that graph.

So, why the hype around a category – mobile broadcasting – that’s been around for a while now without really catching fire?

Some reasons are technical: more smartphones capable of broadcasting (and watching), more reliable 3G and 4G networks to carry the data, and cheaper mobile data plans making it not ruinously expensive to use these apps.

There’s also the growth of Twitter as the distribution platform for these live streams, and also the general belief that video – from YouTube to Vine – is going to be ever-more prominent on social networks.

What Meerkat hasn’t got quite yet is one of two things: its Bieber moment or its Hudson River moment, to answer why this app might be successful outside a short-lived tech industry bubble. Why should normal people care about Meerkat?

The Bieber moment would be a big star – well, several – adopting the app to broadcast to their fans.

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ISSUE 36218.03.15 TOOLS Pinboard » Deals

Bandcamp has paid out $100m in royalties since its launch and the company says it has been profitable since 2012.

Snapchat has secured a $200m investment from Alibaba, the Chinese online marketplace operator, giving it a valuation of $15bn. Snapchat had also raised $486m at the end of 2014.

Naxos has launched what it is claiming to be the world’s first lossless audio classical streaming and download service – ClassicsOnline HD. It debuts with a catalogue of 60,000 albums from over 500 labels.

BANDCAMP

NAXOS PANDORA

PATREON

Pandora is giving its users the option to buy day passes to the service that will strip out ads. It will launch later in the year and pricing is expected to be $0.99 a day.

@hunterwalk I’m now rooting for @AppMeerkat to go mainstream just so VCs stop

dominating my live stream.

@shakIn Board Rooms around the World Tomorrow morning “What’s our Meerkat

strategy?”, followed by “No Idea, Social Media team are all at SXSW”.

@paul_a_smithIt’s like monkey-see, monkey-do watching the tech press fall over

themselves chasing Meerkat. Easier to follow a trend than discover one.

Follow Music Ally on Twitter...twitter.com/musically

Tweets#MeerkatSOUNDCLOUD

Patreon is now paying out $2m a month to its community of 10k+ creators. This is double the monthly payouts it was reporting in November 2014. Over 250k patrons are signed up to the site.

SNAPCHAT

Since launching its On SoundCloud offering in August 2014, a service that wraps interactive ads around audio uploads, SoundCloud has paid out $1m to creators and labels. On SoundCloud is currently US-only.

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ISSUE 36218.03.15 TOOLS

Source: BMVI, March 2015

Computers

Tablets

1,489

GERMANY: MUSIC SALES

Smartphones

3%

RECORDED MUSIC SALES(trade value, € millions)

1,483 1,435 1,452 1,478

86% 83% 80% 77% 75%

14% 17% 20% 23% 25%

2010 2011 2012 2013 2014

Physical

Digital RECORDED MUSIC DIGITAL SALES(trade value, € millions)

US: ONLINE RADIODEVICES USED TO LISTEN TO ONLINE RADIO

Connected hifi

Connected TV 18%

32%

61%

73%

Source: Edison Research / Triton Digital, March 2015

Source: Edison Research / Triton Digital, March 2015

47%49%

39%34%

53%

2010 2011 2012 2013 2014

MONTHLY ONLINE RADIO LISTENING

% of 12+ population who listen to AM/FM radio online and/or online-only streaming devices

0

50

100

150

200

250

300

350

400

2010 2011 2012 2013 2014

DownloadsStreamingOther

Source: BMVI, March 2015

Pinboard » Stats

NEW SERVICE STARMAKER

What is it?StarMaker has been around for a while making karaoke-style apps for US talent shows American Idol and The Voice, but now it’s stepping up its emphasis on its own app and platform.

The app has been downloaded more than 20m times, enabling people to caterwaul along with their favourite tracks then share the results. Last year, however, StarMaker evolved into more of an MCN, with a YouTube network of its new talent.

Developing that further is what the company raised $6.5m of new funding for this month, pitching itself as a way to “discover and develop new artists and the subsequent ability to plug them into opportunities across multiple distribution platforms”.

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formats except subscriptions and, more importantly, a lack of genuine breakthrough domestically signed acts.”

He added, “These challenges are being offset by the industry as it continues to diversify and create new revenue streams. The return to growth will be about breaking acts and growing new revenue streams while, at the same time, ensuring we continue to fully support the existing areas of the business we work in.”

Digital formats are not only failing to make up for the physical decline but, more worryingly, are also seeing a negative performance: totalling AU$187.8m, they fell

2.3% in 2014, pushed down by a 6.1% decline in downloads to AU$152.3m. Downloads still accounted for 81% of digital sales. Subscription revenues grew more than 111% from 2013 – but this remained relatively small at AU$23m.

“I am very positive about the future potential for streaming in Australia and am sure it will become a key part of our business mix,” asserted Ash. “Australia is a country that adopts new technology quickly and this attitude will help transform our industry. We do, however, have to ensure the current consumer offer is a paid environment that delivers a genuine return to rightsholders and artists; if not, the sector will struggle to get traction.”

He continued, “Like all media platforms, if you get the right content mix, consumer offer and market yourself then you can resonate. Right now I don’t think any of these areas are being addressed positively by the current players. We are working hard

MARKET PROFILE Australia

The sixth-largest music market in the world according to IFPI numbers, Australia faces a challenging time: physical sales are falling rapidly and downloads also seem to be on their way out. Streaming has not yet delivered as expected – so much expectation is being heaped on Apple/Beats.

STATS

f Population 22.5md GDP per capita US$43,400h Internet users 18.7mc Broadband households 1.9mj Mobile subscriptions 31mi Smartphone users 11.1mSources: ACMA, CIA World Factbook, IFPI, World Bank

AUSTRALIA

According to local trade body ARIA, recorded music sales in Australia totalled AU$317.8m ($242m) in wholesale value last year. This

was a 9.6% setback from 2013 which, in turn, had seen an 11.7% decline from 2012. This is largely due to the slump in physical

formats, which are clearly on the way out. Sales fell 18.4% to AU$130.1m in 2014, thus accounting for 41% of the market.

In talks with music:)ally, George Ash (president of UMG Australia) explained, “2014 was a challenging year for the industry, with declines in most

2014 was a challenging year for the industry, with declines in most formats except subscriptions and, more importantly, a lack of genuine breakthrough domestically signed acts”George Ash,

UMG Australia

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to help the market address these issues.”Analysing the performance of the digital

market, Dan Rosen (CEO of ARIA) added, “The streaming market is still nascent [in Australia], but in the next couple of years it will lead growth. The nature of our market is closer to that of the UK rather than Scandinavia, which largely skipped downloads straight into streaming. Here downloads have been very strong for eight years.”

He also suggested that 2015 should be a turnaround year for streaming. “Google is pushing [Play Music All Access] very strongly and [we] will expect it to do the same with YouTube Music Key,” he said. “Much is also expected from the new Apple/Beats, which will partner with [incumbent telco] Telstra.” The latter point is of

particular interest: last year it was hinted that Telstra would migrate it bundling partnership with MOG to Beats Music (as the latter acquired MOG). Should this finally take place under Apple ownership it could certainly spark a whole new ballgame for subscriptions in Australia.

It would not be surprising for the country to be one of the first in which Apple/Beats rolls out. In recent years we have seen prominent US-based music services taking a much keener interest in Australia than ever before (it used to be the case that new services would launch much later in the country – and only after rollouts took place in Europe). To date, for instance, Pandora and iTunes Radio are only available in the US and Australia/New Zealand.

Spotify has been available in Australia

since the middle of 2012. While evidently the service has not stormed the market, music:)ally understands that it has been driving much of the growth seen in subscription revenues. In October 2014, the company announced a bundling partnership with Vodafone, the smallest major mobile operator in Australia, with a 16.7% market share (according to Kantar Worldpanel ComTech).

Outside of the recording industry, it is worth highlighting that live music remains

a massive business in Australia. The latest report published by Live Performance Australia indicates than live revenues across all sectors in 2013 grew 22.7% to AU$1.48bn, with contemporary music generating 42.5% of that. However, various sources concur that the live music sector (particularly the festival segment) is now increasingly saturated, having recently seen cancellations of key events such as Big Day Out. :)

MARKET PROFILE Australia continued...

ISSUE 358

Like all media platforms, if you get the right content mix, consumer offer and market yourself then you can resonate. Right now I don’t think any of these areas are being addressed positively by the current players. We are working hard to help the market address these issues”George Ash, UMG Australia

2011 2012 2013 2014

130.1

140.5

213.8 159.4242.2

184.3 192.3 187.7

TOTAL382.7

TOTAL398.1

TOTAL317.8

TOTAL351.6

Physical

Digital

Australia: recorded music sales (wholesale value, AU$ millions) Source: ARIA

2011 2012 2013 2014

Ad-supported

Subscriptions

0

50

100

150

200

Other

Downloads

Australia: recorded music digital sales (wholesale value, AU$ millions) Source: ARIA

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Music Ally is a music business information and strategy company. We focus on the change taking place in the industry and provide information and insight into every aspect of the business, consumer research analysing the changing behaviour and trends in the industry, consultancy services to companies ranging from blue chip retailers and telecoms companies to start-ups; and training around methods to digitally market your artists and maximise the effectiveness of digital campaigns. We also work with a number of high profile music events around the world, from Bogota to Berlin and Brighton, bringing the industry together to have a good commonsense debate and get some consensus on how to move forward.

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