Analysis

Labels under fire as UK streaming inquiry report calls for ‘complete reset’ of market


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Music Ally has reported extensively on the hearings at the British parliament’s inquiry into the economics of music streaming. Now the Digital, Culture, Media and Sport (DCMS) committee behind that inquiry has published its report.

It’s fair to say major labels will be wincing the most as they read its recommendations. There’s a paragraph about 25 pages in that neatly summarises the report’s guiding principle:

“Streaming has undoubtedly helped save the music industry following two decades of digital piracy but it is clear that what has been saved does not work for everyone. The issues ostensibly created by streaming simply reflect more fundamental, structural problems within the recorded music industry. Streaming needs a complete reset.”

Rather than give the streaming services a kicking over the royalties they generate for musicians, the committee has trained its fire on rightsholders and how that money flows through their systems – with particular attention to the three major labels.

Its recommendations include:

  • Introducing broadcast-style equitable remuneration (ER) for streaming income
  • An investigation by the UK’s competition watchdog the CMA into major labels’ market power and business practices
  • Legislation giving artists a “right to recapture” their works after 20 years
  • Calling for songs (and thus songwriters and publishers) to get a bigger share of streaming royalties

However, not every recommendation is a blow for the labels. The report comes down squarely on their side in the ongoing ‘value gap’ debate, calling for the CMA to also “examine YouTube’s dominance of the music streaming market” and “normalise” the music licensing structure it operates under.

The report was published at 12.01am this morning UK-time, but Music Ally (along with other media outlets and interested parties) was sent an advance copy under embargo. We spent the afternoon reading it, picking out the key recommendations, and thinking about what it means for the music industry – and what happens next.

Read on for the details. The report should be available here by the time you read this, too.

Equitable remuneration

As a quick reminder, in this context equitable remuneration (ER) refers to the system used for broadcast music recording royalties (radio and TV) in the UK, where they are split 50/50 between labels and artists in a system overseen by collecting society PPL.

Applying ER to streaming was the key demand of the Broken Record campaign, led by musician Tom Gray, which sparked the inquiry in the first place. Labels argued against it, but the report comes down firmly in favour of the pro-ER arguments.

It calls for the British government to be “exploring ways to provide performers with a right to equitable remuneration when music is consumed by digital means”, while setting out a few of the options suggested during its hearings.

One of those would involve separating out “actively selected and passively consumed” streams: in other words those specifically chosen by the listener, and those served up to them by playlists or recommendation algorithms. Nothing would change in how the royalties were handled for the former, but ER would be applied to the latter.

The committee also pushed back against some of the labels’ arguments against applying ER to streaming, including their view that it would erode their negotiating position when licensing music to streaming services – a view outlined by BPI boss Geoff Taylor in a Music Ally interview earlier this year.

The committee’s report points to other examples of ER and these ‘exclusive rights’ co-existing in the UK: for example with CD and DVD library rentals, and funds for non-featured performers. It also notes that ER is applied to streaming in countries including Spain.

“The right to equitable remuneration is a simple yet effective solution to the problems caused by poor remuneration from music streaming. It is a right that is already established within UK law and has been applied to streaming elsewhere in the world,” concludes the report.

“A clear solution would therefore be to apply the right to equitable remuneration to the making available right in a similar way to the rental right. As such, an additive ‘digital music remuneration’ payment would be made to performers through their collecting societies when their music is streamed or downloaded.”

Watch out for the watchdog!

While some of the report’s recommendations are for the government to introduce, there are also a number that would fall into the domain of the UK’s competition watchdog, the Competition and Markets Authority (CMA). This, more so than even ER, is what will be setting alarm bells ringing within the major labels.

“There is no doubt that the major music groups currently dominate the music industry, both in terms of overall market share in recording and (to a lesser extent) in publishing, but also through vertical integration, their acquisition of competing services and the system of cross-ownership,” is the report’s verdict.

“We recommend that the Government refer a case to the Competition and Markets Authority (CMA), to undertake a full market study into the economic impact of the majors’ dominance.”

Later in the report, it calls for this study to include an examination of the majors’ licensing agreements with streaming services, suggesting that “there are ongoing concerns about the majors’ position in negotiation, which allows them to benefit at the expense of independent labels and self-releasing artists, particularly regarding playlisting”.

A competition inquiry might sound like a terrifying prospect for the major labels, but it’s important to understand the steps in the process where it could be kicked into the long grass.

The committee is recommending that the government refer a case to the CMA – but it can’t force it to. It wants the government to ‘urge’ the CMA to examine particular issues – but the government can’t make the regulator do that. And if the CMA does investigate these issues, it may decide that there is no case to answer.

One way to look at this: a CMA referral could be a handy way for the government to pass some of these hot potatoes on to the regulator. Another view might be that the threat of a competition investigation may be enough in itself to drive through some of the other recommendations in the report. Still, the report puts the ball (or potato) in the government’s court to decide whether to refer.

Songs, recordings and royalty splits

Another issue the DCMS committee would like to see the CMA get involved with is the way streaming royalties are divided between songs and recordings – and thus between labels and publishers. This emerged as one of the contentious topics during the hearings.

Questions about whether the rough split of 55% to labels and 15% to publishers is fair (with the remaining 30% going to the streaming services) developed into accusations that the major publishers cannot campaign for a bigger share because their parent companies keep a bigger share of recording royalties than of publishing royalties.

Publishing body the MPA won’t enjoy the report’s conclusion that “it is conspicuous that the MPA refused to give a definitive perspective on the debate, particularly given that the publishing arms of the three major music groups are counted amongst their members”.

The committee takes this theme on in a recommendation that bodies like the Ivors Academy and Musicians’ Union will cheer loudly. “As long as the major record labels also dominate the market for song rights through their publishing operations, it is hard to see whether the song will be valued fairly as a result.”

“Whilst the major music groups dominate music publishing, there is little incentive for their music publishing interests to redress the devaluation of the song relative to the recording.”

However, when it comes to changing this state of affairs, it’s a case of calling for the government to ‘urge’ the CMA to investigate it. “In its reference to the CMA, the Government should urge the CMA to consider how the majors’ position in both recording and publishing has influenced the relative value of song and recording rights,” is the recommendation.

Recapturing works and royalties transparency

Another recommendation that labels won’t like: the committee’s desire for the government to create a “right to recapture works” for musicians, as well as a “right to contract adjustment” if their royalties are “disproportionately low compared to the success of their music”.

The latter zeroes in on the issue of artists signed to labels on a long-term basis, who have yet to ‘recoup’ their advances, and who thus may not be seeing any royalties from streaming.

During the hearing, we heard that several independent labels have policies of wiping these unrecouped balances after a certain number of years, so that the artists can begin to earn royalties again. Shortly after the hearings concluded, Sony Music announced that it will be paying royalties through to artists with unrecouped balances, if not wiping the actual balances themselves.

In the wake of that, the DCMS commitee would like Universal Music and Warner Music to “look again at the issue of unrecouped balances”, although again this is a matter of ‘urging’ rather than forcing them to do it, indicating the limits of government’s power to get involved in these companies’ contractual matters.

The right to recapture works, however, could be something the government legislates on, as has happened elsewhere in the world (notably the US).

“We suggest that the right to recapture should occur after a period of twenty years, which is longer than the periods where many labels write off bad debt but short enough to occur within an artist’s career,” recommends the report. “This would create a more dynamic market for rights and allow successful artists to go to the market to negotiate better terms for their rights.”

20 years is considerably shorter than the 35 year period used in the US for rights recapture. For musicians, this would be a big deal: bringing forward the date at which they could regain their rights to earlier in their working lives. Labels will have big concerns on what this means for their businesses, including their ability to invest in new artists. Expect to hear much on this particular recommendation in the coming days.

There are also some brickbats lobbed at the labels – and the streaming services – over their non-disclosure agreements, and the problems that causes for artists trying to audit them.

“Artists and their representatives face a systemic lack of transparency from both music companies and the streaming services that license their works. This exacerbates the inequities of creator remuneration by creating information asymmetries and preventing them from undertaking their right to audit,” is how the report puts it.

Here, too, the committee thinks that legislation could be the answer: “a right for performers (or their representatives) to have sight of the terms of deals where their works are licensed, on request and subject to non-disclosure” as well as requirements to provide “clear information and guidance to creators about the terms and structures of every deal where creators’ works are licensed, sold or otherwise made available, and the means and methods by which monies that are being distributed to them are calculated, reported and transferred”.

The return of the global repertoire database!

Here’s a sentence that will make industry veterans of a certain age run around screaming for an hour or two (which, given the report was published just after midnight, is a bit of a shame for their families and neighbours):

“The Government should explore the practicalities of creating or commissioning a comprehensive musical works database and task the IPO with co-ordinating industry work on a registration portal so that rightsholders can provide accurate copyright data to necessary stakeholders easily.”

Yes, it’s the return of the GRD, or Global Repertoire Database concept, which has been tried before in Europe, falling apart before it could launch (but after millions of pounds had been spent trying) amid a flurry of recriminations.

Call us unpatriotic sceptics, but expecting a government which spent £22bn on a Covid-19 test and trace programme that missed many of its targets to find a solution to the music industry’s metadata mess is… optimistic.

That said, from the creation of the MLC in the US to the work being done by data-focused startups like Blokur, there are reasons for hope that this isn’t an unsolvable problem if the government puts its mind to it – and doesn’t subcontract the work to its mates down the pub who set up their metadata consultancy last Tuesday.

The report contains other recommendations focusing on data, and while they may get lost amid the spicier parts, they could be good steps forward.

The committee wants the government to oblige labels to provide metadata for the underlying songs when licensing recordings to DSPs – thus ensuring that they know exactly who wrote songs and what publishers represent those rights – and it wants the music industry to “establish a minimum viable data standard within the next two years to ensure that services provide data in a way that is usable and comparable across all services”.

(Again, with our sceptical hat on, this is less a technology problem than it is a people and companies problem, and specifically a getting those people and companies to work together constructively problem. But here too there are already efforts and initiatives that can be built on, so it’s not a lost cause by any means.)

Collecting societies, meanwhile, may be nervously eyeing the recommendation to “end the practice of distributing black boxes pro rata”, including an audit of those black boxes “to achieve greater clarity as to what is genuinely impossible to allocate and what is mis- or un-allocated due to a lack of will”.

Safe harbour and the ‘value gap’

One area where the DCMS committee agrees firmly with labels is on YouTube, and the wider issue of user-generated content platforms and music licensing. The report runs through the competing ‘value gap’ arguments, including YouTube’s figures on its value to the music industry, and claims by rightsholders of a mismatch between its share of royalties and its share of consumption.

The report’s conclusion mirrors the lobbying position of the labels. “Safe harbour gives services that host user-generated content (UGC) a competitive advantage over other services and undermine the music industry’s leverage in licensing negotiations by providing UGC-hosting services with broad limitations of liability,” it concludes.

“This has suppressed the value of the digital music market both in real and absolute terms even as these services generate multi-billion-dollar advertising revenues.”

What’s the answer to this? Another competition referral, although in this case, the CMA is already scrutinising various aspects of the big technology companies’ businesses and market impacts.

The report recommends that the CMA “consider exploring designating YouTube’s streaming services as having strategic market status to encourage competition with its products”. You can read more about ‘strategic market status’ here: it’s part of a new regime introduced in the UK in November 2020 that sets specific expectations for “platforms that have considerable market power”.

The report also addresses the European Copyright Directive (ECD), which the UK is not transposing into law, following its exit from the European Union. The committee wants the government to come up with UK legislation that “provide protections for rightsholders that are at least as robust as those provided in other jurisdictions” (i.e. the ECD) as an alternative.

It wants those to include “robust and legally enforceable obligations to normalise licensing arrangements for UGC-hosting services, to address the market distortions and the music streaming ‘value gap’” while not hurting startups trying to get into the market.

YouTube won’t like this, of course, but as we saw with the European Copyright Directive, there will be a long period of intense lobbying ahead as the two sides in the ‘value gap’ debate try to sell politicians on their vision of what this legislation should look like.

And more… user-centric, algorithms, exports and tax breaks

It’s a long report, and there are other recommendations worth thinking about. One topic that is significantly lower-profile than might have been expected before the inquiry is user-centric payout systems. The report merely describes the debate around these and other mooted new models as “compelling” but stops short of urging the industry to adopt them.

It does, however, express concern that “current contractual agreements between the major music companies and streaming services have the potential to stifle further innovation if they are misused” in this regard. The committee would like the CMA to look into whether those deals “have the potential to (or indeed have already) prevented experimentation and innovation by streaming services”.

There are various rumours about which label(s) have so far prevented Deezer from getting its user-centric pilot off the ground in France, so the prospect of a CMA investigation hanging out the dirty laundry is intriguing – or troubling, if you’re one of those labels.

It may seem that streaming services come off lightly in the report’s recommendations, but some will give them pause for thought. Like where the committee calls for the government to “commission research into the impact of streaming services’ algorithms on music consumption, including where creators are forgoing royalty payments in exchange for algorithmic promotion”.

That’s clearly putting Spotify on notice, with its ‘Discovery Mode’ already having drawn attention from politicians in the US, and criticism from some industry campaign groups including claims that it’s a modern version of payola.

Talking of payola, the report also calls for the UK’s advertising watchdog, the ASA, to create a code of practice for streaming playlist curators that is similar to its code for social media influencers, with requirements for full disclosure if they’ve been paid or received other benefits in return for playlisting any tracks.

Finally, two more bright spots for labels. The BPI’s desire for a boost in funding for its Music Export Growth Scheme (MEGS) has been answered by the committee, which recommends that the government expand support for the scheme that funds independent music companies and artists in their efforts to grow audiences overseas.

The report positions this as an effort to “allow British music companies to compete with the multinational majors”, and recommends “clauses in grant funding awards that a company or artists’ rights cannot be acquired by the major music companies for a certain period of time”.

The committee also backed the music industry’s call for “a focused fiscal incentive for the independent music sector, similar to that which exists in TV, animation, film, theatre and gaming” – a tax break – which will go down well.

So… what now?

With the report published, what happens next? There’ll be plenty of public comment from industry bodies, companies and campaigners over the next day or two, although some (DSPs in particular, we sense) will be keeping quiet and breathing a sigh of relief about being out of the direct firing line. For a bit.

However, the real activity will be behind the scenes: the next phase in the lobbying battles around streaming, artist payouts and the workings of the music industry.

Whether the British government makes a referral to the CMA will be one hotspot for this activity. As for legislation, the government could take the report’s recommendations forward as a parliamentary bill, or it could leave that to the private member’s bill already tabled by Kevin Brennan MP – a member of the DCMS committee – which will receive its second reading in the House of Commons later this year.

The government could order its MPs to vote against that bill, albeit at the risk of being seen as anti-musician. It could back the bill wholeheartedly. And even if it backs (or at least doesn’t block) the bill initially, once it reaches the ‘committee’ stage where MPs go through it line by line and make amendments, what the bill contains could change a great deal.

(For non-UK readers, or indeed anyone who isn’t well-versed in the workings of Westminster, here’s some information on the process for legislation in the UK.)

In other words, there is still a very long way to go before we find out which, if any, of the DCMS committee’s recommendations become regulation or legislation. Any suggestion that the report is a knockout blow for labels or a stunning victory for Broken Record is thus extremely premature.

Labels will hope that their views carry more weight with ministers and politicians beyond the DCMS committee; the Broken Record / Fix Streaming campaigners will be energised by their success so far; YouTube will be preparing its troops for any UK equivalent of the ECD’s Article 17; and so on. It’s all to play for.

In another sense, the debate around streaming economics is already driving change. Sony Music is paying royalties to unrecouped artists, and it seems likely that its main rivals will follow suit in some form. The inquiry hearings and its report have shed light on a range of issues that are already influencing music industry dealmaking – particularly musicians’ contracts.

At Music Ally, we sometimes talk about streaming ‘driving’ the music industry, which is true on a formats level. But the heart of the industry are its musicians, and ensuring streaming works for them as well as it does for the rightsholders, digital services and other companies who provide essential support for those musicians is… well, it’s a challenge that if tackled properly, could make the next decade the most exciting ever for the industry and its creators.

The streaming economy has never been set in stone: it’s constantly evolving, and the music industry evolves with it. And while the industry’s ability to infight like a sack of furious badgers remains unparalleled, the inquiry has provided much of the information it needs to plot a constructive path forward.

Or at least to get out of the bag, stop clawing at one another’s throats, take a deep breath, and look for that path together.

Stuart Dredge

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