Internet Radio v. On-Demand — Music Streaming Demystified

by Jeff Yasuda

First thing’s first, check out some stats…because stats are sexy. According to Nielsen:

- A staggering 93% of Americans listen to music.
- Each week, they spend over 25 hours listening to their favorite songs.
- Americans now listen to music more than they watch television.
- 36% of listening is spent streaming via online services.

Now, let’s think about that for a second. The television medium is arguably the truest barometer of a cultural zeitgeist. Be it news, sports, soap operas, dramas, cartoons, etc., the programming that we digest through our TVs is a form of cultural currency. It provides a visual “cultural map” which we as individuals use to find where we fit and build our personal identities. It reflects society-present while simultaneously influencing society-future. Choosing what to watch has both political economic implications. Not only do companies and brands use it to reach you in your home/sell you on their products, the cultural imagery of America that we export to those outside the country sells those living abroad on our country’s “exceptionalism”, and turns them into “customers” of our democratic, capitalist ethos. The television medium is largely responsible for the globalized economic context we live in today, and is at its very core, American. Yet here we are. Americans are listening to music more often than they watch TV…

Could it be that the “American Dream” sounds cooler than it looks?

Obviously, I ask facetiously. However, technological advances generally precipitate paradigm shifts in economic behavior, and the music space is no different. Just as analog went digital and changed how artists recorded music, vinyl records gave way to more the more portable cassette tape, and auxiliary and USB chords have replaced CD players in cars and so on, the rise in the popularity of streaming music services that we see today is merely the most recent example of how technology has historically pioneered new distribution channels, and opened up previously untapped markets for record label licensed content. While I was obviously asking my question facetiously, perhaps it would behoove marketers and advertisers to take note of these developing trends, and see music for the bankable form of cultural currency that it is seemingly proving to be…

Having been in the music streaming space for over a decade I often find myself playing the role of “music industry spokesman/resident music know-it-all” at cocktail/dinner parties, having to painstakingly explain the music industry in layman’s terms. People think everything about music is sexy. They expect me to tell them stories of late nights, sex, drugs, and rock n’ roll, so I try to explain to them who the associated stakeholders of record label content are. By now I can usually sense their impatience (for what they must believe is my soon-to-come segue into R-rated anecdotes), so naturally I am extra thorough in my explanation of the content license procurement process. Then, I usually go sit by myself in a corner facing the wall, and battle through the inevitable self-worth issues that arise as I ponder when the exact moment was when that I became who am I now, and strayed from the champagne-bathing, opulent “industry insider” that I was supposed to become.

Don’t worry I was just kidding about all of that. I would describe the amount of rockstars that I’ve partied with as “healthy”. Now that that’s cleared up…

…in this blog-post, I will attempt to provide a high-level overview of how the streaming music model fits into the modern music economy. Partly because I think it’s interesting to know, and also because if ever get this question again in a social setting I can just assign them this blog-post as required reading and gauge whether they really wanted to know, or whether they were just brown-nosing. By the way, I will also touch on any relevant legal issues, discuss the interaction between the tech sector and the music content rights holders, and in doing so hopefully provide at least a bird’s eye view of how the streaming music space works.

OK. Enough foreplay. Let’s get to what we came here to do…

For starters, I think it’s important to underscore that the music industry is a highly complex environment where copyright holders will aggressively go after parties that they believe have infringed upon those rights. There are a myriad of professionals and professional services that specialize in resolving conflicts and provide proper reporting in this his highly complicated world. However, there is much room for improvement and the landscape is constantly changing.

I like to try to keep things simple and divide online streaming into two distinct categories:

1. On-Demand Services
2. Internet Radio

On-Demand Services

As the name implies, On-Demand Services allow listeners to access a particular song immediately. In many ways, these services are essentially a replacement for purchasing the song. Provided that you continue to subscribe to the service, a listener can hear a particular track as many times as they want at any time. Songs are even cached on mobile devices in a DRM formats for offline listening as well. Examples of On-Demand Services include Youtube, Spotify, Rdio, and Rhapsody.

Companies who wish to obtain licenses for On-Demand Services need to approach two primary groups:

1. Labels — both Major and Independent — for the sound recordings
2. Publishers — for the compositions

Sound recordings simply mean the end product when an artist records his or her music in the studio. For artists that have signed a deal with a label, the label owns (or at least partially owns) the sound recording. The 3 major labels (Universal Music Group, Warner Music Group, and Sony Music Entertainment) all require direct deals in order to license music for an On-Demand Service. Independent labels and aggregators such as Merlin also require direct licenses. Typically, these deals involve:

1. The greater of a per stream rate or a percentage of revenue
2. An upfront payment recoupable against future streams or rev share payments
3. Equity

The label will collect these payments on behalf of the artists and compensate them directly.

Compositions are the end product that song writers create — the lyrics, notes, and melodies are combined to form a composition or written song. In addition to licensing from labels, On-Demand Service would also need to compensate the Publishers who represent the songwriters of the music. Examples of the major publishers include Universal Music Publishing, Warner/Chappell Music, and Sony/ATV. There are numerous publishing companies who all require a direct license which typically involve the greater of a per stream rate or a revenue share.

Internet Radio Services

The other major streaming category is Internet Radio which is governed by a compulsory statutory license under the DMCA. Everyone thinks of the DMCA as the “take-down statute”, but it also contains the law creating what is known as Internet Radio. Similar to terrestrial radio (e.g. FM radio that you would hear in your car) and unlike On-Demand Services, Internet Radio’s listening experience is one where the listener cannot reasonably predict what song is coming next.

If this sort of thing doesn’t bore you to tears, Internet Radio is governed by Sections 112 and 114 of U.S. copyright law (these sections are part of the Digital Milennium Copyright Act or DMCA. Sections 112 and 114 contain the rules that govern how users can access and listen to internet radio stations.

Another set of rules is known as the “performance compliment”, which prevents stations that are full of tracks by just one or two artists. These Sections also create a process where the Copyright Royalty Board can set or approve the rates we paid to the copyright agencies.

Similar to On-Demand Services, Internet Radio services also need to pay copyright holders for the sound recordings and the publishing. However, the agencies that collect these payments are government approved organizations that in turn pay the rights holders. The agencies are as follows:

1. SoundExchange — for the sound recordings — which in turn pay the labels or artists. For more check out http://www.soundexchange.com/
2. Performance Rights Organizations (aka the PROs and includes ASCAP, BMI and SESAC) — for publishing licenses — which in turn pay the publishers or songwriters. For more check out http://www.ascap.com/, http://www.bmi.com/, and http://www.sesac.com/

The licenses are generally identical and there is not much room for negotiation. The rates are set by the Copyright Royalty Board (or CRB) which is a group of 3 royalty judges who arbitrate between various stakeholders. You can read more about it here http://www.loc.gov/crb/

I hope that this primer was helpful and helps clear up some of the mysteries around streaming services and how licenses are obtained. Of course, this is not intended as legal advice and should be used purely for informational purposes.

Keep calm, and onwards.

- Jeff