Ways to Decrease the Value Gap in the Music Industry
Executive Summary
Understanding the value gap between corporations and music artists or creators is critical for the music industry to create a safer and more inclusive space for emerging artists. As a universal language that allows for human expression in its most accurate form, music is vital to our society. The number of avenues and distribution channels for artists to spread their music to the masses is more extensive than ever. With the rise of streaming services in the last decade, artists enjoy substantial marketing opportunities. However, signing with major record labels and allowing your music to travel through a value chain that takes royalties from your music. Understanding the value gap in the music world requires us to look at the frameworks designed over years of evolution. Recommendations such as having streaming platforms obtain proper licenses are crucial for every part of the value chain to be adequately managed. The music industry is one of the most complicated and intricate industries. The current state of music publishing and lack of freedom in music-making has hindered many artists from owning the rights to their music and has created a severe disconnect between major music labels and artists.
Introduction
Problems regarding the value gap in the music industry are not limited to just major music labels. Several individual agents or smaller brands place artists in deals where freedom of creativity in music and distribution is hindered. The record industry has benefited from artists for decades and will continue to do so even with the complete digitalization of music streaming. We are in the golden age of music sharing and creator content, with more people having access to content. However, only three major record labels control almost two-thirds of all the music consumed in America. Nowadays, there has been an influx of artists that manage their musical compositions. Retaining these mastered rights is difficult to do so. However, this shift in the music industry becomes more prevalent as music corporations continue to benefit from the artist’s hard work. The music industry has changed dramatically over the last couple of decades. 1 Not only has it shifted significantly with the type of music being created, but also it has transitioned into a more customer-centric power. Artists have since learned that there are new ways to consume music.2
1 7 Of the Biggest Problems with the Music Industry.
2 Addressing the value gap in the age of digital music streaming.
The Majority of Artists Make no Money.
When it comes down to the data, it was said that in the year 2017, musical artists only gained 12% of the 43 billion dollars generated in the industry.3
For example, for artists to make a decent living off their work on Spotify, they need at least 120,00 -150,000 streams per month. What do these numbers mean? With about $0.04 per 10 streams and about $4 for 1000 streams, an artist can make only about $400–500 dollars for that range of streams. Because of the significant labels taking a cut of the profits through the stream; there are practically crumbs remaining for the actual musician towards the end. Also, that assumes that the rights to every part of the track belong to them only. Closer to the 1960s, the radio was a key indicator of immense success, and having the chance to have your song played on the radio meant that your music was bound to be highly successful. Additionally, the number of people that tuned in to listen to the song was counted in the metrics. Also, during that time, workers, publishing companies, and advertisers all held their roles in the industry. Program directors and producers were the ones who had the ultimate control and essentially decided whether or not a song did well in the music space. Today, this story does not remain the same. Music is not centralized to just radio, and it seems that we can stream music from practically anywhere now. Everything is multiplying and at a fast rate.3 Rapid growth isn’t always ideal and especially was not suitable for the music industry. The algorithm of music streaming platforms has become increasingly intricate in recent times. The amount of effort it takes for smaller musicians to get on playlists is complex. This leads us to the actual breakdown of a song and how a piece accumulates its success.
3 7 Of the Biggest Problems with the Music Industry?
The Cash Flow of A Song/Royalties
For a song to be a hit, it takes a lot of work and dedication from that specific musician. Almost always, the artists making the most money would be significant contributors such as Drake or Taylor Swift. However, the amount of money that the artists make depends on the musical label size and distributor. There is sound recording copyright owned by different recording artists and masters owned by labels. Then come the different types of rights involved, such as streaming rights, performance rights, and synchronization rights. When a song charts on any playlist, two copyrights generate royalties for the artists. This dual copyright payout happens specifically in this digital age of streaming. Synchronization licenses can be challenging to navigate through. With all the brokers and intermediaries in the industry, the artists’ money towards the end is practically nothing unless you are a superstar. Two essential components to royalties: the composition and sound recording copyrights. Sound recording copyrights are owned by labels and other artists with their samples used, and the composition rights belong to the current artists and publishers.4
The Spotify company filing shows that the average per-stream payout is around $0.006 and $0.0084.5. The data indicates that U.S musicians only take home one-tenth of the national industry revenues. This is true because the royalties and total cash flow of a song seemingly decrease over time. As stated before, the average musician will make practically nothing compared to a higher-level artist like Drake. Statistics show that even with a billion streams on platforms such as Spotify, about $7 million goes to the revenue, and only $1 million makes it back to the artists.6 Where does all this money come from, and where does it go? Thankfully, the industry has acknowledged this disparity in streaming royalties. Earlier in 2021, the Copyright Royalty Board made it clear that streaming services had to increase their royalty reimbursements by almost 50% for the next four years. This is a significant step forward; however, a lot of streamlining problems need to be addressed. All these numbers probably seem like they may not be accurate, but when we look at the black box of royalties, it will make a lot more sense.
4 Streaming royalties and the starving artist
5 7 Of the Biggest Problems with the Music Industry?
6 Streaming royalties and the starving artist
The Black Box of Royalties
In the age of data sharing and streaming music online, it may seem that the artists are making tons of money due to their high count of streams. However, the black box of royalties tells a different story. This idea explains an obscene amount of unpaid money that has yet to be received by major artists. There is a lot of faulty metadata that has not been adequately processed to receive proper compensation for their work. Also, several services and agencies have communicated extremely poorly with reporting their numbers. After all the missing data has been calculated, it is said to be a number in the billions.7 The reason this number is so high is because of “breakage”. So what does the term breakage mean regarding music? When a company such as Apple offers to purchase a music catalog, it usually comes with a hefty advance for the labels or music groups. This leads to a licensing deal between the two parties and when this deal ends, there is usually a leftover of accrued royalties that is lost in the label’s books. Essentially, the money that is lost in breakage never makes it to the artists that rightfully deserve it. Frequently, this disconnect in the music industry is due to simple incompetencies by executives and label managers. Not only have these mistakes led to missed royalties for artists, but there have also been instances where companies are creating fraudulent royalties that have no value behind them. These fraudulent activities have resulted in more than 46 million undiscovered revenue for unknown copyright owners and songwriters. 8After all these streaming services recognize that their mechanical licenses are to be accounted for, all of these payments eventually land in a “black box” These giant piles of money are then used for salaries, label expenses, and expensive lunches for the execs of course.
7 Welcome to the ‘royalty black box,’
8 Welcome to the ‘royalty black box,’
9 Music Streaming and The Global Music Value Gap
Music Industry Laws
A few laws and acts have been present in the music industry in the past; however, they seem to have highly outdated laws and distribution agreements. The first example is the Musical Works Modernization Act, which focuses on mechanical licenses for reproduction purposes in the digital world. The next is the Classics Protection and Access Act which places its focus on the legacy of artists. 10 For example, if a current artist uses any samples or music from other artists before 1972, they will be protected under this law. 10 The third and possibly the most critical has to be the Allocation for Music Producers Act which handles royalty payments for producers, engineers, and mixers.10 All three of these acts fell under the umbrella of the Music Modernization Act and were signed in 2018 to protect artists of all magnitudes better. These current laws are just one of the reasons the value gap has become larger over time. While also placing the future of the music business in jeopardy, these laws have an adverse effect on today’s musical progression. The goal is to rework the laws to create a clearer vision of which royalties belong to who.
10 Streaming royalties and the starving artist
Accountability & Responsibilities
The biggest question we all have is, who should take responsibility for all the lost revenue in the industry? Reporting accurate data is critical to understanding the streamlining of value created by these complex copyright rules. A better understanding of the money-flow system will make for a better linear form of payment.11 For many years, recording artists have been in the front row questioning the fiduciary practices of major labels. There have been many reports of music labels using loopholes and tricks to reduce royalties as much as possible. 12 Without properly reporting on various licensing agreements and publishing laws, a lot of blank spaces where labels can take advantage of artists emerge. This is important to note because artists’ profitability depends on the proper accounting of their songs. This offers the correct amount of royalties, but it has a considerable effect on the relationship between the artists and labels. Relationships are important for marketability and growth. We can compare this situation to those of athletes. If an athlete meets their contract requirements, they become eligible for larger marketing opportunities and deals that reflect their current standing in their careers. Similarly, it is extremely crucial that labels should be required to report and allocate as these royalties help build a financial foundation for certain artists. Leveraging yourself and vouching for contract extensions based on statistical data of success is critical for many artists and especially important for brand new ones in the space. Artificial deductions in the music space have become the norm. 13 This unfortunate mindset that label executives have adopted has caused many errors. The five major music conglomerates claim to have paid proper royalties based on the evolution of laws in the music industry. Companies such as Sony and Univeral have controlled more than 90% of the music in the market. The Recording Industry of Association of America, or the RIAA, as most people identify it, has claimed that errors discovered in performing audits have been accidental. These “accidental errors” have also led to settlements with certain artists to compensate for their losses.
11 Should record labels have a fiduciary duty to report
12 Should record labels have a fiduciary duty to report
13 Should record labels have a fiduciary duty to report
Recommendations
Although this is a complicated and multi-step process of solving an ongoing issue, taking accountability on behalf of the labels is critical for anything to change. On the other hand, streaming services have become complacent and need to better compensate the artists for the work and effort to keep the platform alive. I believe that platforms such as Spotify can use other avenues of revenue such as subscriber and ad revenue to split profits with smaller artists. This will better help artists feel comfortable with pursuing their careers. I also think streaming services should obtain licenses for sound-recording from significant labels to better manage the linear progression of cash flow so that everyone in the chain is adequately compensated.
Design Principle #1: Full Transparency On Contractual Obligations
Better transparency in contractual obligations will be critical moving forward. Label executives that tend to trap or keep artists from using certain music licensing tactics to release music at their own time have to be addressed. As stated before, there have been many attempts to compensate for black-box royalty payments in cars or homes. This easy fix to take care of a problem is just a bandaid on a massive wound. While a lot of deficiencies in structural transparencies exist, many services are created to assist artists in their journey better; however, they are never informed about those. Because of the value of the advance given to certain artists, they tend to ignore their contractual obligations and requirements. Therefore, there are many stipulations that prevent them from earning their rightful amount. The Future of Music Coalition is a not-for-profit company that has been addressing the need for transparency and unattributable income in the industry. Their push to have regular audits on the label’s financial books is commendable and can allow for a clear understanding of all licensing transactions, shared revenue, and artist revenue.
Design Principle #2: Extend the value chain of royalties
Extending the value chain of royalties is vital so that smaller producers can also make a living. Artists should not have to choose between surviving and making music. If only a tenth of the revenue reaches the artists, errors in the value chain need to be addressed. This goes back to the vacuum that is the black box of royalties. Along with the consistent lack of accountability, there has to be a responsibility of understanding every supply of a specific song from samples to previous artists, writers, and engineers. This means that without proper research on the part of the labels, the lack of responsibility amongst executives and the decline of sufficient royalties provided to artists will continue.
Design Principle #3: Force Labels to commit to reporting fiduciary reports
Policymakers must consider the number of artificial reductions in the industry. They must engage them themselves, and more prominent artists must pressure executives to take legislative reform in the organizations more seriously. The most important law to take a second look into would be the Digital Millennium Copyright Act (DMCA) which must be reevaluated to monitor any sort of infringement that might take place. Another alternative would be to call for legislative reform in licensing and publishing laws to suit today’s technological advances better.
References
Barker, George Robert, Global Music Revenues, Music Streaming and The Global Music Value Gap (December 10, 2018). Available at SSRN: https://ssrn.com/abstract=3340040
Clark, Brian. “7 Of the Biggest Problems with the Music Industry?” Musician Wave, 9 Feb. 2022, https://www.musicianwave.com/biggest-problems-with-the-music-industry/.
Clover. (2003). Accounting accountability: should record labels have a fiduciary duty to report proper royalties to recording artists? Loyola of Los Angeles Entertainment Law Review, 23(2), 395–.
Lawrence. (2019). Addressing the value gap in the age of digital music streaming. Vanderbilt Journal of Transnational Law, 52(2), 511–543.
Our writers, & Staff, R. (2021, May 18). Streaming royalties and the starving artist: How musicians make money. Reviews.com. Retrieved March 2, 2022, from https://www.reviews.com/entertainment/streaming/music-streaming-royalties/
Resnikoff, P., Smith, D., King, (2021, October 28). Welcome to the ‘royalty black box,’ the music industry’s $2.5 billion underground economies. Digital Music News. Retrieved March 2, 2022, from https://www.digitalmusicnews.com/2017/08/03/music-industry-royalty-black-box/
