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Royalties in the age of online music streaming services

Created: June 2015

The waters of the music licensing business have turned increasingly murky recently with artists expressing displeasure over the compensation they receive from online music platforms such as Spotify, Tidal and Apple Music.

Pop star, Taylor Swift’s, recent spat with Apple over its use of free music to boost its customer acquisition strategy at the expense of artists is just one high-profile example.

Musicians, wherever they are based, rely on good licensing terms which protect their interests while their songs are distributed around the world. Regulatory mechanisms, which govern music licensing, date back to an era when songs were mainly distributed over the radio. They have remained fairly stagnant in the face of evolving technological times.

Digital difficulties

Modern day music sharing has become digital which has made distribution to consumers much easier and cheaper. Across the internet, users from all over the world avail two types of music services – interactive and non-interactive. Users that are open to hearing new suggestions or cannot decide what they want to hear might defer to non-interactive services, such as Live365 and RadioIO. Interactive services, on the other hand, give customers flexibility to choose their musical palate by allowing them to create their own playlists. Spotify, Tidal, Apple Music and the like are well known providers of such an interactive experience.

While listeners find Spotify, Tidal and Apple Music convenient, it does always not bode well for artists to have their songs featured on these platforms. This is because artists have usually handed over the ownership of their songs to the record labels which sign them early on in their careers. The labels then sell the songs to terrestrial and digital distributors like Spotify and Tidal. These online services are legally required to pay the labels, who are the owners of the songs, and they do. The artist who is at the bottom of this financial food chain sees little of the profit though, particularly as revenues have been squeezed by fiercely competitive digital distribution platforms.

There is thus a perception that platforms and labels continue to amass wealth while artists are unfairly left out of the loop. In what was thought to be a revolution in the music industry, artist Jay-Z recently acquired Tidal and promised payments of royalties just to artists whose music is featured on the website.

Is revolutionary change required?

Tidal is now claiming to be the first “artist owned digital streaming service” and vows to pay more in royalties than rival, Spotify ever did. Jay-Z is unlikely to be the agent of change he wishes to be however. Tidal will still pay royalties to record labels who own the songs and the artists are still threatened by loss in revenue. Spotify, which became the focus of this controversy after Taylor Swift pulled her songs from the platform, is no better or worse than Tidal despite contrasting ownership. Other services such as Apple Music also operate i n a similar way. Irrespective of the amount paid in royalties by platforms to record companies, artists’ interests are unlikely be much improved unless laws governing music distribution are changed.

Conclusion

There are suggestions that music regulation needs a revamp. Services like Spotify, Tidal and Apple Music now have a massive impact on listeners globally, who can listen to any song at will through customised playlists. They increase an artist’s brand value and following amongst users with the trade off that the platform takes a slice of the revenues generated. Huge commercial interests stand behind these business models.

The basic proposition from proponents of change is that the contracts that labels offer their artists should be amended to ensure the actual creators of the music receive a substantial share of the resultant royalties. Online streaming services are critical to the far reaching effects of modern music. If artists are not compensated for their life’s work in a fair manner, everybody in the industry stands to lose out on this potentially huge digital opportunity. However, pushing through this kind of change is likely to require more than a Tweet from Taylor Swift.

Rafi Saville, Royalties Partner
T 020 7874 7967
E rsaville@hwfisher.co.uk