I Read Ten Articles About Music Streaming And All I Got Was Confused: Demystifying Streaming Royalties

by: John Seay, Atlanta Entertainment Lawyer: The Seay Firm LLC (@TheSeayFirmLLC)

Even if you only casually follow the trials and tribulations of the modern music industry, you’ve probably seen some iteration of the following article: “My Song Got One Million Plays on Pandora and All I Got Was X Dollars.” Without question, streaming services pay granular royalties.[1] But the dollar figures attached to the aforementioned articles are often misleading, and the articles in which they are mentioned generate misperceptions over why the rates are what they are and how those rates are paid, directly or indirectly, to artists. To help myself keep track of all of the moving parts in this debate, I created the following guide, which might be helpful to you too.

Pandora – Non-Interactive

In order to include a song on its service, Pandora must license both of the copyrights that are generated when a song is recorded: the copyright in the melody and lyrics of the song, i.e., the musical work, and the copyright in the recorded version of the song, i.e., the sound recording. For the musical work, Pandora simply obtains a bulk or “blanket” license from each of the three performing rights organizations, i.e., ASCAP, BMI, and SESAC. Because nearly every songwriter in America is affiliated with one of those three PROs, a blanket license from each of them effectively enables Pandora to play any musical work that it desires.[2]

For a license to the sound recording, Pandora can similarly obtain a bulk license, but in the form of a Congressionally created statutory or “compulsory” license. The rate for that license is set by an entity called the Copyright Royalty Board (“CRB”), and is currently approximately 1/10th of a penny per stream, which is collected and distributed to sound recording copyright owners, performers, and session musicians by an entity called SoundExchange.[3] Other than its lobbying efforts, Pandora has virtually no control over the rate that is set by the CRB.[4]

Spotify – Interactive

However, the compulsory license for sound recordings is only available to services that meet the statutory definition of non-interactive, meaning that a user has very little control over the music that the service plays. Services like Spotify, on the other hand, are interactive, meaning that a user can listen to songs on demand.[5] So while, like Pandora, Spotify can obtain blanket licenses from the PROs, unlike Pandora, it must license sound recordings directly from rightsholders.

What Spotify pays sound recoding copyright holders depends not only on the negotiated rate, but also whether the stream is ad-supported, i.e., on the service’s free platform, or premium, i.e., on the service’s paid subscription platform, and the geographic location of the service and the listener. Given those factors, the per-stream rate can be as low as 2/10ths of a penny and as high as one penny.[6] Spotify has not made it easy to determine how exactly it determines its rates.

The Real Spotify Controversy

 As an interactive streaming service, Spotify was forced to negotiate directly with sound recording copyright owners rather than avail itself of the compulsory license available to its non-interactive brethren. Naturally, their first order of business was to strike deals with the major labels and distributors – i.e., the entities with the largest catalogs of sound recordings. The problem was that those majors had all of the leverage in the negotiations, and they used it.

Although the deals that were signed are subject to confidentiality provisions and so are not available to the public, we do know, or at least strongly and with good reason suspect, that the majors obtained equity shares in Spotify as well as large signing bonuses in exchange for making their catalogs of sound recordings available. Of course, it is highly unlikely that those bonuses were shared with artists, and when Spotify goes public, as it plans to do, both Spotify and the majors stand to make millions of dollars, almost none of which, if any at all, will trickle down to artists.

But moreover, the evidence suggests that the majors successfully negotiated higher per-stream royalty rates for their artists – by some estimates, artists signed to majors make as much as 35% more per stream than other artists.[7] That means that independent artists are subsidizing the major label and distributor streams. Hopefully, those first generation deals will expire at some point, and Spotify can renegotiate them at better rates. Barring that, many people, including increasingly the independent labels, have lobbied for a compulsory license for interactive streaming services, which might wrest some control from the major labels and distributors and result in more income for independents.[8]

Are the Articles Accurate?

Now, let’s return to the “My Song Got One Million Plays on Pandora and All I Got Was X Dollars” conundrum. For any use of a musical work, we know that PROs pay their member songwriters and publishers directly, after taking a percentage cut for their administration services.[9] For any use of a sound recording, we know that SoundExchange pays record labels, performers, and session players directly, also after taking a cut for its administration services.[10]

If an artist is wholly unaffiliated, meaning that he or she maintains full control over both musical works and sound recordings, then the artist keeps the rest of the money after the PRO and SoundExchange take their cuts. If, however, the artist doesn’t fully control, for example, his or her publishing, and/or the artist’s record label owns or licenses the sound recording, then the rest of the money gets filtered through those deals. And some of those deals are bad, particularly if the sound recording is being licensed directly from a record label for streaming on Spotify.[11]

Finally, it is worth noting that payments from interactive streaming services include a streaming mechanical royalty that is paid out differently depending on whether the artist: is signed to a record label that has a direct deal with services; is signed to a record label that is represented by a digital aggregator/distributor; or owns his or her own sound recordings and uses services like CD Baby or TuneCore. The more unaffiliated you are as an artist, the harder it is to collect these payments, although both CD Baby and TuneCore have set up services to help self-published songwriter clients collect them.

Conclusion

When an artist says, “My Song Got One Million Plays on Pandora and All I Got Was X Dollars,” it’s worth digging deeper – does that figure include what the artist would have made from his or her PRO? Is the payment low because the artist signed a bad deal with a publisher or record label? Are there other songwriters on the song that we don’t know about who might also be receiving payments?[12] Armed with the above, you can cut through some of the obfuscation to discover the full royalty picture, and then from there, make an educated determination as to whether the payout is fair given the kind of service and the realities of the market.



[1] As an initial aside, I’ll note that there’s an arguably good reason why these payouts are granular, which is because each play is to an individual and not, in the case of radio, to a community. Performance payments are granular as well, which no one seems to mind. Recognizing the difference between services, however, doesn’t prevent you from arguing, as I do, that payments across the board should be higher.

[2] Recently Universal Music Publishing Group and Sony/ATV-EMI pulled their digital rights from ASCAP and BMI, in search of a higher right by negotiating directly with webcasters like Pandora. Theoretically, an artist could pull his or her songs from Pandora while maintaining PRO affiliation, but I’m told that the process is complex.

[3] SiriusXM, another non-interactive service, pays a rate that is also set by the Copyright Royalty Board, and which is currently 8% of the company’s gross revenue. Pandora pays something closer to 54% percent of its gross revenue based on its per-stream rate. There are legitimate reasons why these rates are set differently. For one, Pandora is almost exclusively a music site (they have some comedy as well) tied to personal devices whereas SiriusXM offers broad programming to drivers.

[4] However, the parties can contract at a rate lower than the rate that is set by the CRB, although the CRB rate influences those negotiations by providing a ceiling.  Also, as an aside, terrestrial radio pays no royalties for its use of sound recordings, under an ancient and now irrelevant theory that radio drives sales, and radio also doesn’t pay performers or session musicians. So, for example, when Patsy Cline’s iconic version of the Willie Nelson song “Crazy” plays on the radio, Willie Nelson and his publishing designee get paid, while Patsy Cline receives nothing.

[5] Other interactive streaming services include Beats Music. iTunes Radio is essentially a non-interactive service that nevertheless decided to negotiate directly with sound recording copyright holders rather than avail itself of the compulsory license, presumably to get better rates and to compete better internationally.

[6] When referring to Spotify’s rate, you often hear the term “blended,” which refers to an average combination of Spotify’s rates. Many independent artists maintain that approximately 140 streams on Spotify equals one digital download.

[7] You may recall that one of Beats Music’s big selling points was egalitarian payouts – the same per stream regardless of major label or distributor affiliation. Of course, we still don’t know whether Beats Music paid huge bonuses to those companies to license those rights, but the same rate per stream concept is much appreciated.

[8] I’m generally in favor of such a license, for the reasons stated herein and some others, although it’s not perfect. For one, it means that artists lose the ability to choose where their songs wind up, and companies must turn to concepts like curation a la Beats Music to differentiate themselves. For the record, I’m also in favor of terrestrial radio paying sound recording copyright owners, performers, and session musicians, which is something that most other countries in the world do.

[9] I’ve seen as high as 13% for administration services, though the numbers can vary.

[10] Specifically, 50% goes to the owner of the sound recording, 45% to the featured performer, and 5% goes into a fund for session musicians. SoundExchange reserves approximately 5.3% off the top for its administration service.

[11] A record label may take 50% of the money that would otherwise go to the artist, for example, although that percentage runs the gamut.

[12] E.g., maybe the artist who posted the figure only gets 50% of the publishing.