Major labels gave evidence to the UK's music streaming economics inquiry... so what did we learn?

It’s actually pretty rare to get genuine smoking-gun ‘gotchas’ from political inquiries in the moment.

When they work well, it’s more about patient, forensic questioning that elicits genuinely enlightening answers – and sometimes quotes that later come back to haunt the speaker.

Did we get that from this morning’s sessions at the UK parliamentary inquiry into music streaming’s economics? Yes and no.

There were some very well-briefed questions for the three major labels’ UK bosses that got to the heart of some of the key issues in the debate about musicians and streaming income… and there were some moments that made me want to bang my head against the desk.

Sometimes unfairly, perhaps. When one MP asked labels why there’s no collective licensing for recordings literally right after taking evidence from recordings collective licensor PPL, they probably just forgot to include ‘for streaming’ in their question.

And when PRS for Music’s boss seemed to be avoiding answering a question about whether a lack of competition is stifling innovation – a topic raised in the collecting society’s own written submission to the hearing – it may have simply been a misunderstanding of the question.

And when the boss of the world’s biggest major label’s UK arm seems to come out in favour of user-centric licensing while slamming the recommendation algorithms of streaming services, but the questioners don’t follow up on either… Well actually, that IS worth an enthusiastic head/desk bang.

Having watched the whole morning: one session with PPL and PRS, and another with the majors, here are some of the key points made.

But wait! First a quick note on balance. Music Ally sits in between all of the entities involved in our industry, and where there are disagreements – i.e. all the time! – we work very hard to give proper space to the different viewpoints.

The writeup below takes the same approach in reflecting the major labels’ views as our report on the inquiry’s first session did for the views of the Broken Record campaign.

Surprise! Labels want to negotiate directly with DSPs

From the very first session of this inquiry, the committee members have been steered towards the idea that The One Thing They Can Do To Improve Things is to extend the ‘equitable remuneration’ model used for broadcast music royalties in the UK – splitting them 50/50 between artists and labels – to the more passive forms of music streaming consumption: like playlists and ‘radio’.

That would be collective licensing, likely overseen by PPL, whose boss Peter Leathem essentially said today that it would be happy to take such a role if asked, but is staying well out of the arguments about whether it should happen. “If there were those rights, obviously PPL could play a role there…”

This won’t be a shock: the three major label executives strongly defended their model of licensing streaming directly.

“We believe that that direct relationship gives the maximum for negotiation, and is underpinned ultimately by the ability to say no to any licence,” said Tony Harlow, chief executive of Warner Music UK.

“We have the ability to walk away from the table if we need to, so that’s why we prefer to negotiate our rights with the respective streaming services,” said Sony Music UK’s chief executive and chairman Jason Iley.

“Whereas with PPL… there isn’t essentially the ability for them to walk away from the conversation. We have [in the past] walked away from the conversation. Our interests are to protect our artists and to get the best deal for our artists, so that’s why we believe we should be in control of those conversations.”

‘Sale’ or ‘rental’ is a hot potato for the labels

Key to the equitable remuneration debate is whether a stream counts as a ‘sale’ (like a CD or vinyl sale) or as a ‘rental’ (more like a broadcast, and thus tipping the revenue share more in artists’ favour). The committee zeroed in on this question, and the parrying was instructive.

“It’s a very interesting debate actually… my view is that the modern world is living in subscription, which gives artists more of an opportunity… a bigger opportunity than ever before to have their music heard, and we as record companies pay those artists on the basis of their royalty rates from their subscription,” said Iley.

It was a carefully pre-prepared line, which he repeated when pressed. “I have to just answer the same. We’re in a subscription model. It becomes almost a legal conversation in the sense of what the definition is. And we’re in a subscription model where people have the ability to subscribe, and more artists have a bigger opportunity than ever before to have their music heard, and we pay them a royalty based on that.”

Harlow, meanwhile, took the ‘sale or rental?’ question and equally carefully turned it into a ‘sale or broadcast?’ question, asserting strongly that the existing ‘making available’ right in the UK shows that streams are more like sales.

“Streams are generated by deliberate choices. You can play what you want when you want it, and you can skip when you don’t,” he said. Harlow anticipated the next question by extending this to playlists.

“It will feed me artists based on the choices I’ve made before. I can decide how long i want to listen to. That’s not like broadcast,” he said. “I can skip, and cache… in all those ways it is like a sale, and it’s covered by that making available right.”

Universal Music UK chief executive and chairman David Joseph later compared streaming to record stores to hammer home the ‘sale’ argument.

“Streaming is 24-7 in every country in the world, that you can listen to the greatest record store ever,” he said. “It’s clearly a sale, it’s not radio. It’s on demand: you can go whenever you want.”

“It’s really important that it’s not radio,” continued Joseph, suggesting that considering it as such “underestimates the creative curiosity of the fan” – adding that “86% of all listening on the services” is ‘self-selection’, and that even when listening to playlists people can “chose what genre, what theme, they can skip forward, go back, they can listen again: it’s very, very different from broadcast.”

The major labels don’t see themselves as market dominant

When the parliamentary committee announced this session, it described the MPs plans to “focus on the benefit to market-dominant labels from the production and licensing of streamed music”. Unsurprisingly, the three label bosses pushed back at the ‘market-dominant’ part of that during their session.

“This is an incredibly competitive environment, there are so many more choices and so many more labels for people,” said Joseph.

“There are very limited barriers to entry in music nowadays,” added Harlow later, noting that major labels account for “a very small amount” of the 40k-50k new tracks uploaded to streaming services every day – a metric of volume rather than share of streams or revenue, though.

“There is more competition in the music industry now than in 30 years of doing this job. The independent sector is a brilliant sector and signing some of the best acts. There’s more opportunity for artists to either sign to a major label, sign to an independent label or distribute their own records,” said Iley. “There are more avenues today than ever, than I’ve ever seen in my time doing this job.”

“He later returned to the point. “If an artist does not want to sign to Sony, they have a choice, and if they wish to earn more of that revenue, they can sign to a distribution company,” he said, citing Jorja Smith, AJ Tracey and Skepta as three examples in the UK.

[Jorja Smith and Skepta have worked through The Orchard, which is a Sony Music subsidiary.]

“They have chosen to sign to a distribution company. They want a bigger share of the revenue, and that’s their choice,” he said. “I clearly would have preferred them to sign to Sony Music, but that’s the opportunity of choice.”

They want to clear up that sensitive ‘breakages’ issue

In the heyday of physical music, ‘breakages’ were deducted from artist royalties when actual records broke while being distributed to retailers.

One of the questions raised in the wider debate about artists and streaming is why ‘breakages’ still appear in artist contracts in the streaming age, and whether this is an example of labels screwing musicians.

The pushback from the three major labels today was emphatic. “Breakages is categorically not true. I’ve heard this session where it was alleged we charged breakages on physical distribution and digital distribution. From Sony Music’s perspective that is not true. That does not happen,” said Iley.

“In terms of digital royalties, they are 100% clean,” said Joseph, boldly. “I did hear that in the inquiry and it’s not an industry that I recognise or a company practice that I recognise,” he said.

However, Harlow and Joseph offered an explanation of ‘digital breakage’, which Joseph defined.

“The DSPs sometimes guarantee labels a minimum amount fo revenue from plays of their catalogue over a certain period. If the actual revenues paid to the label fall short of the minimum guarantees, then the DSP pays the label the balance, which is called digital breakage,” he said.

“Universal accounts a share of all of this breakage to artists according to he number of plays of their tracks across the minimum guarantee period, in the same way as other revenue received from the platforms.”

Harlow agreed, describing digital breakage as a situation of labels “having done a smarter deal than the platform realised”, and adding that WMG also allocates it to artists based on their performance on the streaming service.

“When we talk about digital breakage, that works in favour of the artists. When we talk about physical breakage, that’s a deduction,” he said.

Is UMG set to back user-centric licensing?

Phrased as a question, because one executive’s view is not necessarily company policy. But after a question prompted by artist Nadine Shah’s testimony earlier in the inquiry about struggling to pay the bills with her streaming revenue, Joseph seemed to back the user-centric model as something that could help.

“There are some artists who’ve been particularly badly hit by the pause in the live industry. They have a small fanbase but a particularly passionate fanbase who they play to very often… their economy has been incredibly badly hit, because the major source of income that they had, playing live, has not been available to them,” he said.

“It’s not possible or logical that that would be instantly replaced by the money they would make from their recordings. That was never how their earnings were shaped.”

But here it comes: “With the platforms, perhaps look at how at the moment, all of the streams are coming to us and other artists based on popularity, and there are other ways we could look at that,” said Joseph.

“There are models that if you just listened to Nadine Shah that month, there would be models the services can do just to pay that artist rather than be diluted.”

That’s user-centric licensing, yet Deezer has been trying to get a trial off the ground for more than a year without success – because it cannot persuade all the labels to sign up. UMG swinging its weight behind the model would be significant.

“Streaming is at the start. It’s not perfect yet… I’ve got tons of ideas for how to improve streaming for the artists,” said Joseph. Sony Music’s Iley, however, preferred not to take a side in the user-centric debate.

“That’s a very difficult conversation because I look after artists across many different genres, and I have many artists who favour the current model,” he said. “I’d be favouring one subset of artists over another. That’s the difficult part of the position in this debate.” Although arguably not a reason not to support a trial of the model to understand it more.

David Joseph isn’t a fan of music streaming algorithms

Joseph also made waves – although he could have made more if only the committee had followed up on it – with his views on the recommendation algorithms of streaming services. Or more accurately, the importance these algorithms play in what does well on the services.

He even described his views as “very anti algorithms” at one point. “I’m happy to share thoughts on how I think our UK artists could benefit from different types of models for them in terms of curation and albums rather than just lists,” he said, later adding “I would love to have a service that isn’t based on the algorithm: I think it favours certain types of music”.

“Perhaps we could get to a pure service, a 6Music [style] service where things are just being curated for people rather than by data and algorithms.”

There’s a really important discussion to be teased out here, especially if the UK’s biggest label boss wants to drive it. Hopefully it will be part of a future session involving the streaming services, with proper nuance.

(In other words, not just ‘Algorithms are bad aren’t they? JUST ANSWER THE QUESTION MR EK’ but a proper dive into the winners and losers from lean-back streaming.)

What’s in a label deal?

Another facet of the labels’ arguments to the inquiry is pushing back against the idea of ‘the major label deal’ as a single thing.

“There are all different types of deals. A lot of deals at the moment in a competitive market are just distribution. A lot of them can be 80/20, some can be 50/50,” said Joseph, talking about the split between label and artist.

“If you’re talking about an advance deal, 90% of deals, average between 20 to 25 per cent artist royalty,” he continued. Around 40-50% of Universal UK’s A&R spend goes to new / first-album artists, and of those on advance deals, the majority fall into that 20-25% royalty rates bucket.

The conversation about deals offered some useful unity of figures from the three majors in terms of how much artists are likely to be making from streaming.

“If you look at an artist having 10 million streams, that’s roughly £50,000 revenue, and then taking the royalty of 20% for the sake of easiest maths, that would be £10,000,” said Iley.

“We would say a million streams is worth four to five thousand pounds in revenue, and that would deliver on that same 20% metric a thousand pounds to the artist,” agreed Harlow. Joseph, too, later said that “for us about a million streams is about £5,000” [for the artist].

These are useful figures to have out in the open: it means the average per stream rate for an artist signed to a major label in the UK is around £0.005 ($0.0068).

But the labels came back to the idea of competition sparking a wide range of deals.

“The idea that three major record companies are putting down on the table three exact similar deals of a ‘take it or leave it’ for an artist feels like something from over 50 years ago,” said Iley.

“The modern deals are all different. I do licensed deals, I do distribution deals, I do life-of-copyright deals. There are different things that are important to different artists… The idea that it’s literally ‘sign here, take it or leave it’ simply isn’t the case.”

Iley also gave some interesting specifics as an illustration of labels’ investment in artists at the higher end of the scale.

“One of my rap artists, we gave her an advance of £300,000, recording costs of over £400,000 and we’ve subsequently spent over a million pounds on marketing that artist to be successful,” he said. “Fortunately that artist is successful!”

He added that Sony Music signs on average around 50 artists a year in the UK, and that it is “very rare that I see an album artist deal advance for less than £200,000” – with singles deals, especially for tracks blowing up on social media – going even higher.

“I might get a call from one of my labels in the morning it’s £50,000 for an advance, and by the end of the day it’s £300,000 for an advance,” he said.

Jason Iley is not a fan of ad-funded music streaming

Later, during a discussion about ‘freemium’ music streaming, Iley offered some surprisingly spicy views, albeit couched in pragmatism about the established nature of the model.

“Services such as Spotify are ad-funded, and my personal view is we would much rather that the ad funded model was not there: but actually that people literally went to subscription right away,” he said, noting that 95% of Sony Music’s streaming revenue comes from subscriptions.

“Spotify argue very very strongly that that ad-funded model is the funnel into subscription,” he continued, but after being pressed by an MP about why labels allow it, he suggested that this was something the committee should ask Spotify.

“I’m not disagreeing with you. I don’t disagree. Quite frankly if he ad funded model went tomorrow i’d be delighted. But Spotify’s business model says it works for them. And again, I think that’s a conversation you should have with them. I sympathise with your point. I’m not disagreeing with you.”

Harlow offered a slightly different view of freemium’s value to the industry. “It’s all about the maximum number of people encountering music, falling in love with music… and enjoying music and then gradually saying music has value,” he said.

“We’re always fighting for the value of music. This is an evolving situation, It’s been well governed by a market that is nimble.” This, an argument against the government adding more regulation of streaming.

Should Spotify keep a smaller share of its revenues, and pay out a bigger share to music rightsholders? Here, too, the label bosses argued that the market is working fine on its own.

“Every single streaming platform and our relationship with them is subject to an individual negotiation… It’s a two-way negotiation. We have rights and music, they have their interests, and we get the negotiation that is not hidden in any way, and governed by the market, to the best place for our artists,” said Harlow.

The labels defended taking stakes in streaming services

The committee seem interested in the fact that the major labels had stakes in Spotify – UMG still owns its equity in the service, Sony Music has sold most of its, and Warner Music divested its entirely – and whether this is has potential for anticompetitive practices.

Harlow defended it. “I think that’s more about our efforts to encourage the pool to grow by licensing as many different parties as we can. On occasion when we’re licensing startups and platforms we will take a small stake to cover the risk we’re taking on behalf of ourselves and our artists,” he said.

“We’re trying to grow as many platforms as possible, as widely as possible. I don’t think there is any implication at all of market power.”

Iley, meanwhile, offered an anecdote about the earliest days of Spotify’s dealmaking.

“None of us in 2006 had any idea that Spotify would be as big as it is today. None of us. I remember sitting in a boardroom and we were discussing the concept of streaming. One person, the head of digital, said in that boardroom that streaming was the future, and all of us executives at that time didn’t believe it would happen. We all totally believed in ownership [of music],” he said.

“We didn’t believe it [streaming] was going to happen. It has, and that is great for the industry, and it is great for artists. and going back to the point on our shareholding [in Spotify]. Yes we still have a shareholding: we divested half of our shareholding a couple of years ago, and we put over $250m of that shareholding directly into the pockets of our artists.”

The ‘value gap’ debate rears its head again

Right now, it’s often the big tech companies who come in for the sternest grillings at these kinds of inquiries. So you would think that the arguments made by labels about YouTube and the ‘value gap’ would be falling on friendly ears.

Harlow called for the safe harbours of YouTube and similar ‘UGC’ platforms to be restricted, noting that while YouTube is “the way a lot of people like to consume music, and it’s the way a lot of our artists like to share music… it would be healthier if YouTube and other platforms like that were not as able to use the safe harbour provisions, where they can say that UGC content… is protected on their services.”

“If the [streaming royalties] pool grew on less ability to hide behind the safe harbour, that’s probably the most effective thing you could do to improve artists’ position.”

Joseph later came back to this point: the idea that “it’s hard against this backdrop of YouTube: 70% of the music of our artists being consumed, and giving us only 5% of our revenues.”

In the earlier collecting societies session, both PPL’s Peter Leathem and PRS for Music’s Andrea Martin also exhorted MPs to crack down on safe harbour.

“When we look at the hosting defence in the EU or the safe harbour in the US, it dates back to 2001. The iPod didn’t even exist then… yes, there has been evolution, but the market is going really quickly, and it has to be modernised,” said Martin, who pointed to the EU’s recent copyright directive.

“The UK government has a huge opportunity now to take what the EU has done and improve it so much better to make sure that the money that is due to our members, that more money goes back into the pockets of the creators.”

What about the collecting societies?

Good question. There were less headlines coming out of Leathem and Martin’s session today, but still some points of interest.

For example, Leathem said that PPL is exploring options with labels to start collecting royalties – under equitable remuneration – from Apple Music Radio, the linear radio part of Apple Music. He added that when an agreement comes, it is expected to be backdated.

Martin was asked about a section of PRS for Music’s written submission to the inquiry that apparently (it’s not been made public yet) suggests that the music market is characterised by a lack of meaningful competition, although her answer focused on the “many platforms that offer free music that are not licensed” instead.

Leathem suggested that there is plenty of competition in the streaming market, but that the overall pool of royalties is still considerably lower than at the market’s peak in 2001.

“You’ve got a smaller pie that everybody is fighting over, and this is why the music industry has come back and said we do need support in terms of the value gap,” he said.

“When you look at the 2019 market, 50% of the streams from YouTube were 7% of the value… even though we’re not now going to implement that copyright directive from Europe, we would like support from government… to make sure better deals can be done that then support the overall music industry.”

“These unlicensed platforms that I talk about have to be stopped, because then there’s a concept with consumers that music is free, and that does not help,” said Martin.

She also criticised YouTube’s Content ID system for identifying copyrighted music and enabling rightsholders to take down, monetise or leave videos up.

“In this case it’s not just better data in, it’s all data in, and better data out. The content recognition, it depends how it’s deployed, how it’s applied,” she said. “We need to be confident that the content recognition tools are being applied on all content uploaded on the services. And we know that our members’ works are not always identified by these recognition tools.”

Bonus Harry Potter content

If you’ve made it this far, you deserve a light-relief ending. Joseph supplied it when offering his final defence of labels.

“We’ve been told so many times by tech companies, by live companies, that there’ll be this platform disintermediation… that ‘artists don’t need you, we’ll go directly to the platforms’,” he said.

“When people for 15 years in an industry that you love, that you want to support artists, say you’re going out of date, you’re behind, you’re not listening, it makes you lean into technology more, it makes you fight more,” he continued.

“There’s often this depiction of Slytherin rather than a company of Gryffindors…”

But before he could finish the point, the committee’s chair seized his opportunity to close proceedings with some banter. “I think the performance today has been a bit more Hufflepuff…”