Why Deregulation Destroys Spotify, Pandora & the Music Industry Comeback

Picture of a collapsing building. Destroy the music industry!

Publishers think they’re getting a raw deal in America.  And they’re probably right.  But you can’t deregulate without destroying some of the biggest music streaming services in the world.

Depending on the day, my in-box features an urgent message about one music industry special interest or another.

Broadcast radio needs to pay for recordings!

Broadcast radio shouldn’t be forced to pay!

Satellite radio needs to pay for pre-1972 oldies!

Publishers need to be freed from onerous government-mandated rates!

… and so forth.

Each of these pleas is a winner-take-all, fight to the finish.  It’s about expanding one sliver of the music industry pie, even if that shrinks the entire pie.  Which is exactly what’s been happening for the past 15 years.

It’s never about growing the entire pie.  I’ve never seen a détente between recording and publishing interests, a summit in which the various industry interests figure out how to give-and-take.  And double the value of the business in the process.

Actually, I have.  I can think of two examples, both wretched failures at industry cooperation.  SDMI (back in the early 2000s) and GRP (Global Repertoire Database).  Sometimes I think this industry would rather burn the restaurant down than let someone else grab a buffet plate.

These pleas are also never about the broader consequences of changing government laws around copyright.

For example, what do you think would happen if radio stations were forced to pay recording royalties on broadcasts, at rates they felt were too expensive?

Well, more of what’s already happening would happen.  They’d strike separate deals, and probably feature a narrower playlist of music (if that’s even possible).  So if you’re not part of a low-rate deal with a major broadcasting conglomerate, your music is OUT.

So, guess we’d need to regulate something against that consequence?

Or, stations would start cultivating direct relationships with smaller (but equally talented) artists that have controlled copyrights.  It’s simple economics.  And there’s a near-infinite supply of great new music in this market.

Publishers are equally myopic.

They’re clamoring non-stop to remove the shackles of mandatory, statutory rates on licenses like performances and mechanicals.

Let the publishers directly negotiate with the platforms!  Let the open market decide!

Okay, publishers.  You’ve been granted your wish.  You’ve also been granted a music industry that’s about 25% smaller.

Why?

For starters, your ‘worse half’ recording labels have already grabbed as much as humanly possible from platforms like Spotify.  In fact, their aggressive compensation demands are the main reason why Spotify isn’t a publicly-traded, billion-dollar corporation right now.

There’s nothing left for publishers to grab!  You can’t demand 50% when there’s only 5% left to share!

And if you don’t believe that, I have a contract for you to read.  Those deals are locked in, and labels ain’t giving back anything!

But wait: Trump’s in charge now.

And who do you think he’s going to appoint to lead the US Copyright Office?  The answer is someone who wants to

(a) deregulate;

(b) doesn’t give a crap about protecting the interests of ‘snot-nosed Hollywood (and music industry) elites,’ and;

(c) someone who probably doesn’t care too much about the nuances.

Which means the chances of a deregulation of decades-old publishing rules and consent decrees has never been greater.

Which also means that every publisher, big and small, is going to start behaving like major (and indie) labels once all the regulations are lifted.  Suddenly, the publishers will have to ability to withhold their IP (songs and lyrics) and effectively shut down platforms like Spotify until they get their outrageous (and objectively unrealistic) terms.

But even if they don’t pull massive amounts of catalog, they will effectively impose unworkable licensing costs on services like Spotify.  And that means that Spotify will have an even harder time convincing Wall Street and investors that these businesses can scale.

And that goes for Pandora and SoundCloud as well, both extremely over-leveraged long-terms plays that rely on licensing (and investors to cover the losses).  Because right now, these companies can’t properly scale, thanks to variable and extremely high recording licensing demands.  Layer in variable and extremely high publishing demands, and the goose is cooked.

Sure, it’s not fair to publishers.  History screwed you guys, sorry.  The labels always had the free market on their side.  And the music industry doesn’t need an expensive, complicated Washington babysitter anymore.

But doing what’s right means destroying the music industry’s ‘comeback’ of the past few years.   And destroying a pie that’s just starting to grow again.

15 Responses

  1. Daniel

    I think your article unfairly characterizes Spotify, Soundcloud, et al as plucky go getters who are “saving” the industry. These complaints from publishers are not new, and your rhetorical, “sorry guys” argument is unworkable in that you’re claiming the music industry is rebounding, but leaving out an entire rights income stream from the false idea of the rebound. Are publishers not an element of the industry? Also, the idea that it’s unreasonable to assume some kind of parity between recordings and compositions for streaming content, and would place an undue burden on streaming services is flawed as well. The rights exist. They are protected by law, the only gray area is how streaming platforms have been able to operate without paying for the rights they are, in fact, already benefitting from. If they can’t afford to pay for those rights, then, their business model is a failure and shouldn’t be valued as functional in the market. The business risk associated with a streaming platform exploiting compositions and basing payouts on market share of profit, actually places the burden of business risk on the publishers themselves, not the streamer. What’s worse, is that a publisher cannot effectively opt out of assuming the risk associated with a streamers business model, and is currently forced to assume the risk. In that sense, it’s as though publishers are required to buy stock in a company they don’t want that they see as non-functional. All this is to say, I don’t see any real rebound happening in the industry. There is a settling of the dust and the work of remonetizing is fraught and mostly, in vain.

    • Jim

      How much publishing do publishers actually do these days?

      Oh publishers have to get paid. Yeah 100-150 years ago, Publishers were the ones who actually printed sheet music. So, it makes sense that they should get paid for that. And then there’s now, what exactly do Publishers do?

      It seems like we should really cut down on the various players. If everything is Spotify, Spotify, Spotify, and if anybody can put something on Spotify, what exactly does a label do? Do you search on Spotify by label? Do you search on Spotify by songwriter?

      Why don’t we just say, sorry, publishers, sorry songwriters, sorry labels – you don’t do anything at all, if its all Spotify. I could upload a track I make. It’s me and Spotify. Spotify, in 2017, could fill a very large database with songs recorded entirely without a publisher, a label, a songwriter (distinct from the artist). Back in the day none of that was possible. sheet music was printed by publishers, there was no artist, or label, just songwriter and publisher. The rules were originally set when those 2, songwriter and publisher, were the only parties. Now, they’re unecessary to the process. Acts can write their own stuff. They’re the top of the food chain, they’re the ones with the Facebook pages with millions of fans. I’m not suggesting that labels and publishers and songwriters don’t do anything. I’m saying they aren’t necessary at all to get things done.

      Things are bad in music now. And it’s not because of the artists, it’s because the labels, the publishers, the songwriters are all getting too large a piece of the pie, for doing something unnecessary. It’s extra, it’s not core.

      So make changes and completely cut out the songwriter. Sorry, nothing for you. No automatic anything. You don’t get paid by the radio any more. Sorry, you’re done. If you have valuable skills, you can be paid like a producer. Flat rate. Or points. Your old songs, you can withhold them. And there’s a way to get paid if the song is covered. But basically, no little percent from Spotify. Labels own a lot of that music, but maybe we just say FU, and give everything back to the artists. That would be a dislocation, but I’d say it generally would be better if the artists owned everything they did. I’d like to make the artists richer and everyone else is left out. Now, what do these people who have a lot of connections and ability to get stuff done, do? Well, if the money is going to the artists, the money will come from the artists. Being an artist manager would be financially rewarding. And artists can pay people to get the stuff done they want done. The things that publishers do, that artists can’t do themselves, they’ll pay the publishers to do.

      A music website or app, which plays video and audio, but for a small fee, like a nickel or a dime or a quarter. And the artist gets 80% of that. The customer sets up an account, spends a chunk of money like $10 or $50, and that person consumes a variety of content, which is paid for with the points that that the people bought with their money. Artists will like that, money. Do artists really care that everyone can listen to everything they have for free? Do they like that? You could get a million streams can get $5K, and that seems great if you never really had an intention of pressing 1,000 CDs. You could make something on your computer, upload it, and make money. That’s kinda cool. But there are acts a little bigger than that who have fans who used to give them money in the form of CDs, maybe, who now will not be giving them that money. So, a system that gets 80% of the money to the artist is something that would appeal to the artist, and I think it would appeal to the fan, too. Over time, this great website/app will contain a lot more content that simply the records. The artist, when they see this money, will put everything they have on this great website/app. They’ll figure out the best way to maximize revenue. The huge new potential source of revenue is live streaming for pay. The technology is simple, we’re talking facebook live here, and apparently there are solutions you can buy for not much money that come with an app, and a server and code to run a streaming website. Combine that with a pay per minute, or something like 15 minutes for 50 cents or something.

      How much would Taylor Swift make if she was getting paid by thousands of fans 50 cents for walking around or just doing nothing at all. “I’m eating breakfast” Kahching.

      We don’t have these things now. We could have these things, there’s really no benefit to a band to throw unnecessary video on the internet, at least once you’ve done some. The marginal benefit of messing around video falls below cost when you’re not getting paid. If you’re getting paid for doing messing around video, it’s a non stop money making machine.

      Having to deal with various groups with specific rights makes it hard to get anything done, and, really, Spotify might get sunk by this. On great website, where the artists get paid 80%, great website would be telling the artists that they’re responsible for paying the publisher and songwriter and the label and whoever else wants to get paid. Eventually, that money will be nothing as the laws change. We know that everybody combined is making less than a penny on a spotify play, and that’s fine, because the artists will be getting much more than that, so, the money will be there to pay the people that need to be paid, publishers, songwriters, labels, etc.

    • LRG

      Im starting to think that Digital Music News is shilling for the Tech Corporations in disguise.
      This article is just full of Lies!

  2. Anonymous

    “I know it’s crooked, but it’s the only game in town.”
    ― Neil Gaiman, American Gods

  3. Anonymous

    Once upon a time, an argument could be made that labels should get a bigger piece of the pie than publishers, due to recording costs, distribution costs, promotional costs. The argument is not as valid these days, and I can certainly see where a 50/50 split between labels and publishers would be considered fair.

    But Paul’s right. The label agreements are what they are, and they aren’t changing. Fair or unfair, if publishers demand 50/50, the songs will come down. The label’s share is already over 50%, and the service needs some share of that revenue to cover operating costs. And you can’t raise the subscription price. Consumers will cancel their subscriptions and pirate the fuck out of everything. Streaming services will go out of business. Youtube ripping and torrents will become the new norm. No one makes money. Industry dies. The end.

    So no, publishers should NOT be able to negotiate their own rate, and the royalty rate should NOT be 50/50 with labels.

    With all that said, there ARE meaningful changes that congress can make that WILL benefit songwriters. Here are a few suggestions.

    1. Under the consent decree, a service can enter into a license with ASCAP and BMI by sending them a letter. They don’t have to pay any royalties to ASCAP and BMI until they negotiate a royalty rate. If they fail to negotiate a royalty rate, the matter goes before a royalty rate judge, who determines the rate. The problem is that such a process can take years, and songwriters don’t get paid in the meantime. This process needs to be streamlined so it takes weeks, months at most. Songwriters should be getting their money as soon as possible.

    2. The statutory mechanical rate should have a floor of $0.00091 per stream, but otherwise remain the same. If the royalty calculation results in a per play rate greater than $0.00091, that per play rate takes effect. If not, the rate is $0.00091. This will effectively shut down free ad-supported interactive services. Free ad-supported services should all be non-interactive only. If you want to pick the next song you want to listen to, you should be paying $9.99/month.

    3. Fix the DMCA. Eliminate or severely reduce the need for copyright owners to play whack-a-mole with infringement notices.

    • Jim

      Songwriters should be paid like producers going forward. There’s no good public policy reason to favor the songwriter these days. Acts can record their own music and put it on spotify. The acts should be getting paid. Songwriters, publishers, labels, none of them do anything. If we’re talking about spotify. What do all of these entities do in that arrangement? Why do any of those entities need to be paid at all?

      They used to make a lot of money because they did important stuff like make sheet music or vinyl records, but now they’re doing little, and nothing that an act can’t do. We’re talking about an act, and spotify. An act can upload a track to spotify and get a million streams. If they had a publisher or a label, I’m not sure what either of them did that was necessary to get that “upload song to spotify” process done. Why again are they getting paid? If the label or the publisher or the songwriter has an issue with getting paid, they can get paid by the artists.

      Because they do nothing essential – except maybe getting the laws written to benefit them – going forward, there’s no reason to write laws that cut them in at all. Since they don’t really do anything, or they aren’t necessary to get things done, why are they being paid.

      At some point there will be a music website that pays the artists. And the artists will want to be on that website.

  4. David Gerard

    > 3. Fix the DMCA. Eliminate or severely reduce the need for copyright owners to play whack-a-mole with infringement notices.

    The fix the DMCA needs is any sort of effective penalty for sending out bogus notices by the (literal) million. Wikipedia noted this:

    “In our comments, we suggest that increasing the penalties for rightsholders who send bad notices, particularly ones who persistently send bad notices, could reduce the number of bad notices and the amount of time we and other intermediaries waste dealing with them.”

    https://blog.wikimedia.org/2016/04/06/save-safe-harbors-open-web/

    A “notice and staydown” regime immediately kills Wikipedia, and there is a chance we won’t sit still for that.

    • Anonymous

      I’m not suggesting we eliminate safe harbor altogether. I believe DMCA can be drafted in such as way to provide reasonable protections to companies like Wikipedia who rely on fair use, while providing relief to copyright owners who must incur significant, unreasonable expense to enforce their own copyrights on sites like YouTube.

  5. Jody Dunitz

    “History screwed you guys” actually should be read as The Labels screwed you guys. From the earliest days of the record biz (and even the movie moguls who first bought pub cos), pub cos were seen as a faucet of steady, predictable cash. It didn’t matter that profit margins were thin. Cash is king — it decreases dependence on bank loans and funds the growth of records, the primary biz. Record cos (or their corporate owners) gobbled up pub cos for that cash flow and inevitably sold them off years later for the huge, instant cash infusion that a sale brings to fund further record growth (or stem record side bleeding). And the cycle repeated. Serving songwriters was not in any mission statement; they are a very expensive accounting overhead cost. Today’s concentration of publishing assets in just 3 majors that are sister companies with the 3 major labels makes the subservience worse than ever. As for the mess now with the streaming services: The Beat Goes On.

    • Anonymous

      That’s true, it does indeed suck, and I doubt there’s any deregulation that will fix it. That piece of the pie belongs to the labels, whether they deserve it or not. I think the only way to reallocate the pie is for the government to regulate music even more than they are now. No one wants that.

      • Paul Resnikoff

        From the standpoint of public policy, maybe no time is the right time for deregulation. You just need to rip off the band-aid. Let the people of a respective industry work it out among themselves. If they can’t, they suffer accordingly.

        This brutal ripping of the regulatory rug makes sense when it doesn’t involve issues like public safety (for example, governments can regulate traffic laws so people don’t die). Look, if the recording and publishing halves can’t work out a reasonable system, the system collapses. The government can’t fix every little industry problem, nor should they be asked to.

    • Daniel

      My initial statement is about just that. There are not sustainable streaming business models because they are currently not paying publishers fairly. Both labels and publishers want to “share in the success” of spotify, et al, but the reality is that success is a myth. They are not paying appropriately, if they were they’d sink. If another 200 million people suddenly started using their service, they’d sink because of scaling. The obligations to rightsholders grow just as much as the increase of users. So how can they ever be more profitable than they are now, which is not at all?

      • Anonymous

        I don’t entirely disagree with you. Of course, that begs the question… if Spotify isn’t a sustainable business model, what sort of business model would be sustainable for the music industry, in this day and age?

  6. R.D. Aragon

    Most people here don’t understand how it works. More regulations, plus more government control = We’re screwed!

    I’ve said it many times, the U.S. government was created to serve and protect our human rights and property! Not our IP or be a glorified babysitter.

    The free market will weed out the competition, it always has. Will there be corruption? Of course, were greedy, stubborn, imperfect human babies.

    More regulations = Less Profit = Inflation = More crimes!