Be careful what you wish for

The music industry’s broken business could change in 2015

The music business has been screwed up for a hopelessly long time, but change is afoot: Congress, courts and the Justice Department are all poised in coming months to shake up how companies and consumers pay for music. The big question, though, is whether this flurry of activity will produce a rational royalty system — or just make the existing rathole even deeper.

Here’s what to watch for in a year that could change the rules of the game for performers, [company]Pandora[/company] and everyone else with a stake in music.

Flurry of laws, hearings

The last month has seen the return of two proposed bills in Congress. One is the Local Radio Freedom Act, which would ensure that traditional AM/FM stations don’t have to start paying performance royalties on top of the songwriter fees they currently pay. The other is called the Songwriter Equity Act, which would tweak the way so-called “rate courts” calculate how much people who write songs should get paid.

Both bills have appeared before in one guise or another, but never passed. This time, the outcome will be determined in part by whether Congress takes up the issues at stake on its own, or as part of a larger royalty reform effort.

Meanwhile, industry attention is turning to the Justice Department, which is holding a hearing on March 10 over so-called consent decrees. These are antitrust orders that apply to ASCAP and BMI, two giant outfits that license songs on behalf of music publishers, and require them to license song rights at a fixed price to all comers. The antitrust orders have been a boon to everyone from cover bands to bars to radio stations because they provide an easy, efficient way to clear copyrights. But music publishers say they are getting short-changed and want the orders, which date from the 1940’s, to be changed or abolished outright.

Finally, some high stakes court cases increase the chances this will be a year of reckoning for the music industry.

Digital on trial

The most contentious of these cases involve an aggressive series of class action lawsuits, brought by record labels and former members of the band The Turtles. In courts from California to New York to Florida, the labels are claiming that Pandora, Sirius-XM and other digital music services have failed to pay for performances that date from prior to 1972.

The legal theory appears far-fetched, but it’s gained traction before some judges. If the cases go any further, they will have huge financial and legal implications not just for Pandora, but for any other service that plays old music on the internet. (The labels also pushed the issue last year through a proposed law, The Respect Act; look for that bill to return if the labels strike out in court).

And, if all that’s not enough to keep track of, there’s also a court clash between Pandora and BMI. This one is about royalty rates, but also about whether publishers who use BMI to license their songs can pull the digital portion of their catalogues or if they must instead be, in the words of one judge, “all in or all out.”

A ruling in favor of BMI could cripple digital radio services, but that appears unlikely given that ASCAP lost a similar case last year.

What the fight’s really all about

All of these disputes are bitter and complicated, but the source of them can be summed up in a sentence: the music royalty pie has shrunk significantly, and what’s left of it is being distributed unequally. As an RIAA report in 2013 revealed, digital sales may be growing, but not fast enough to offset the long-term loss of CD sales. Professor Peter Tschmuck, as part of an analysis of the U.S. music industry, put the RIAA’s data into a chart last year:

Peter Tschmuck chart of RIAA data

These larger forces are why many of the measures now floating around — the songwriter law, the consent decrees, the court cases — won’t do much to change the game. Such piecemeal fixes also do little to acknowledge the current royalty system is broken because it’s built on assumptions of the analog era.

The proper way to approach the problem is instead to require the music industry to recalibrate the entire copyright collection process from the ground up and, especially, to fix two major imbalances in how money is collected and paid. The first imbalance involves a seemingly irrational distinction in how the law treats AM/FM stations and digital radio.

Pandora, for instance, is a favorite punching bag of the industry, but the company also spends the bulk of its revenue paying performers — even as traditional radio stations pay nothing at all. The reason for this, Washington insiders suggest, is that members of Congress are eager to make nice with local stations on which they rely heavily during election campaigns. This is why they are happy to let them pay nothing to performers, while at the same time throwing the likes of Pandora and Sirius-XM under the bus when it comes to royalty rates. But for musicians and for consumers, there’s really no reason why digital and AM/FM should be treated so differently.

The other big imbalance when it comes to royalties is between songwriters and performers. Many people will be surprised to know that when performers do get paid, which is the case when a song is played on digital radio, the rates can be up to ten times higher than what the songwriters (and their publishers) get.

The reason for the imbalance in this case, though, is the consent decrees that set the rates at which publishers get paid. The Justice Department could address this by lifting the decrees, and allowing publishers through ASCAP and BMI to charge what they like. But this could lead songwriter rates to go through the roof, and fatally wound digital radio services once and for all (recall Pandora is already on the ropes). It would also create new licensing headaches for restaurants, bars and other places that play music.

That’s why any solution that looks to pay songwriters more will also have to consider when it is appropriate to pay record labels, which represent the performers, less.

As for the dispute over pre-1972 recordings, the court cases (and the now-dormant Respect Act) appear to be no more than a cash grab through copyright expansion. Judges and law-makers should blanche at the idea of handing out windfalls, at the expense of consumers, for music that is already 50 years old. Such a gift would be a boondoggle akin to ethanol subsidies or the Bridge to Nowhere.

Change is coming.. but for better or worse?

All of this comes at a time when musicians are having a harder time than ever. The record industry that once nurtured them has shrunk dramatically, CD sales are drying up rapidly, and internet royalties are not making up the difference. But on the bright side, the internet has introduced new efficiencies that make it easier to track song sales and distribute payments (which helps explain ASCAP’s surprising $1 billion year.)

A solution from courts or Congress is in order. The danger, though, is that a partial solution will protect parochial interests such as FM stations or labels that own 1960’s recordings without creating a sustainable system for royalties in the digital age. There’s also a risk that changes to the law will simply scapegoat companies like Pandora and Spotify, which represent the future of music, or even kill them off altogether.

In any event, watch closely. This is the year that a lot of long-time log-jams in the music industry appear set to move.

21 Responses to “The music industry’s broken business could change in 2015”

  1. Karsten

    First of all — When discussing ways of how we can create positive change in the music industry…… Why don’t you start things off by hiring an actual musician, to pose for the stock photo?

    Mouthpiece with no ligature? Hands in reversed position on the horn?

    To bring about change – you have to start by looking at yourself…..

    :P :)

  2. Apple’s wealth is staggering, greater than that of some nations. They should be required to pay the people who got them there – the artists whose content is what their products are based upon. .00003 cents is not a payment. These companies have to start abiding by the law as everyone else does.

  3. I forgot to complement Mr. Roberts on what I think is an extremely well-written article. There are so many great pull quotes from the article I do not even know which to choose.

    “All of this comes at a time when musicians are having a harder time than ever. The record industry that once nurtured them has shrunk dramatically, CD sales are drying up rapidly, and internet royalties are not making up the difference.
    “The source of them can be summed up in a sentence: the music royalty pie has shrunk significantly, and what’s left of it is being distributed unequally. As an RIAA report in 2013 revealed, digital sales may be growing, but not fast enough to offset the long-term loss of CD sales.” One reason CDs are drying up is because, e.g., Hyundai cars are eliminating the CD player. And the digital download: you dont know what you are getting. Imagine, you are paying for something, full price but then the music industry will make you pay again to listen to that track through a streaming service. That is deadly for sales.

    “Such piecemeal fixes also do little to acknowledge the current royalty system is broken because it’s built on assumptions of the analog era. …. But on the bright side, the internet has introduced new efficiencies that make it easier to track song sales and distribute payments”

    Yes.. additionally … it is built on the assumption that you cannot track every listener listening to, say, WABC on Jones Beach. But those days are gone, … now you can track every listener… and advertisers sure as heck want you to track every listener. Blasting the same make-up commercial to everybody, male and female, on Jones Beach was the pits. So if you are tracking every listener, why not track what they own, and what streams they are borrowing? All this information of who owns what, and who is lending what, could be maintained on an exchange. That exchange exists. But yeah there has got to be some cooperation. There always has to be, for change to happen.

    “While at the same time throwing the likes of Pandora and Sirius-XM under the bus when it comes to royalty rates. But for musicians and for consumers, there’s really no reason why digital and AM/FM should be treated so differently.”

    Bingo.

    “A solution from courts or Congress is in order. The danger, though, is that a partial solution will protect parochial interests such as FM stations or labels that own 1960’s recordings without creating a sustainable system for royalties in the digital age.”

    Sigh. Unfortunately, yes. The solution is to take a page out of what the financial industries do to solve the problem of digitized fungible commodities. The financial industries (and the Securities Exchange Commission) would not have tolerated Congress legislating to protect parochial interests. The financial industries are too competitive, and have to be for the health of the nation. The media industries (music, film, games and books ) need to be just as healthy, for the good of art as well as for the good of the health of the nation. The Digital Content Exchange is a method based on wisdom gleaned from the financial industries.

  4. David S

    So exactly what value do the recording labels provide? With digital media they no longer provide distribution channels, production, or development. Artist now develop at their in-home recording studios and can deliver directly to their fan base. If the labels cannot find a way to add actual value to the market they don’t deserve to get paid. Hopefully, the new direct model that bypass the recording labels will be liberating for those that do provide value.

  5. Hog wash! This is just the labels trying to get more money to line the executives pockets. There are many musicians now a days that are monetizing on everything and not having to share it with any label, thanks to these online outlets. I hope that court one day demand that terrestrial stations also pay as they’re asking Pandora and other outlets, who would be crying then??

  6. Geoff Boyd

    The recorded music industry’s broken business cannot change (for the better) in 2015 because it is broken at a very fundamental technical level – that of the transparency and vulnerability of electronics audio signals; sometimes called the (intractable) analog loophole. The bottom line is that with minimal readily available signal processing, a perfect master copy can be made anywhere in the signal chain in digital form to be pirated and distributed.

    That may not be a permanent commercial threat if it’s AM or FM (or even MP3) quality but as it becomes trivial to capture, store and distribute (pirate) the very highest resolution copies of musical works of art which Sony and Neil Young’s Pono music promise to deliver to the consumer in the course of 2015 – in effect deliver the master copies of these works of art – then it is conceivable that even the comparatively modest revenues from the current digital streaming services will start to evaporate. This is a really bad. The musicians and their lobbyists need to get real because they are on course to see their industry reduced to – in effect – a sponsored charity supported by commercial advertising. When that happens they will yearn for the ‘better days’ of streaming revenue from the likes of Pandora and Spotify.

    The only solution is to use bullet proof end-to-end encryption of the audio electronic signals into loudspeakers and headphones which can effectively mask the recorded music work of art right up to the point of acoustic output. This may not be in the interests of the Consumer Electronics companies who have always taken the view that the purpose of software is to sell hardware. Apple included. Specifically, the software and gaming companies have innovated continuously from the early 90’s to ensure that their revenues continue to rise without the hindrance of massive piracy. I will go further and say that these IT companies have it in their power to help with the necessary innovation for a sustainable recorded music marketplace but claim that their software is different in that it is interactive and they can use that interactive attribute to protect their software products. This is nonsense – in fact it is necessity that is the mother of invention. The problem is that the musicians have an unhealthy panache to delegate the commercial realization of their works of art to third parties – presumably the name of artistic integrity. The popular music press and their journalists who should know better continue to support this act of gross delusion. Things must change.

    In the words of Samuel Taylor Coleridge – Suspend Disbelief…

    • The technology and a patent exists, and high-quality prototypes are being built, for loudspeakers and headphones that can play audio that is not only analog-encrypted but also encrypted specifically for the destination loudspeaker or headphone
    • The only way to pirate the content would be to put a microphone in front of the speaker
    • In combination with audio watermarking that is unique to each user, each song, and each device, this creates a marketplace where piracy is not a consideration – a genuinely sustainable marketplace

    I suspect that only dedicated musicians and true music lovers understand the imperative at hand. Things must indeed change but I suspect in the meantime the record labels and the digital streamers will perhaps unfairly be the whipping boys carrying the blame for completing the total destruction of the commercial viability of the recorded music industry in the digital age during this the early part of the twenty-first century.

    • I agree with you on the threat at hand. But if there is one thing that has been tried time and time again it is encryption. What’s never been tried? Cooperation with a trusted-third party ownership registry.

      Do not worry about encrypting anything: just worry about allowing users access to something they are not entitled to. Just like I am being blocked out of making this comment and must I sign in, You should block people from accessing their media unless they are logged in and the trusted third-party verifies with they own or are borrowing and therefore have access to. http://www.authorstream.com/Presentation/frystew-1158142-new-dce-content-owners-explan/

      • Geoff Boyd

        Full end-to-end encryption including the loudspeaker transducers has never been available or implemented. The enterprise encryption regimes deployed these days is really a joke and it is unsurprising that every day we read about some theft of private data.

        The music you get on Pandora and Spotify should really be free, like radio, but at a reduced quality level. What you should quite rightly pay for is the convenience of these services. But the revenue from just this streaming business is totally unsustainable if it is expected to support the entire recorded music business.

        A multi-level multi-price distribution system, ultimately controlled by the artists will restore the dignity to the artists which has been and continues to be eroded by the digital world where in reality everyone believes that if it is that easy to get then it should be free.

      • Geoff Boyd

        Emmett, I have taken the time to go through your slide deck and think it is well thought out but it needs to be underpinned by the uniqueness that comes with bullet proof encryption. In fact this is precisely what crypto-currencies like BitCoin bring to the marketplace. Your DCE cannot function in the current “only partially connected” digital world without the equivalent crypto-media, to coin a new phrase.

        • >> but it needs to be underpinned by the uniqueness that comes with bullet proof encryption.

          We would not be against that. The DCE is is a “libertarian” method: completely opt-in, voluntary, cooperative , and compatible with whatever additional encryption a website dispensing music, movies, books or games would want to add. Some will choose encryption, but why not also, while you have a logged-in user, Verify that the owner is truly the owner rather than just some Tom, Dick, or Harry who happens to be in “possession” of the file?

          That being said, we are not really interested in the uniqueness of the object. We are interested in the uniqueness of the User who is trying to access the file.

          Crypto-media” is an interesting phrase. I will have to think on that. My 1st reaction is, “it is and it isn’t” crypto-media. “Crypto” implies hidden or “not real”. It is not just media that is declared to be media by consensus. If you put a song or a movie in your digital locker it is a real thing that you can use for something, i.e. play it.

          And finally, I will gladly take an “only partially connected digital world”. At least counterfeit files are not being accepted for full-value in that “world” such as it is. Hopefully the world would become more digitally connected as time goes on. In the meantime, do not let the Perfect become the enemy of the Good. The time for vendors to start sharing purchase/purchaser information with thedce.com … or to start registering your own personal collection on the Exchange .. is now.

    • I’m a DSP engineer and your statement that perfect copies can be made from analog is pure hogwash until you invalidate information theory. Good enough, certainly, but hardly perfect.

      Until you can encrypt it at the level of the ear’s cochlea you and your kind are screwed. The more you try this crap, the more you lose in the long run as people migrate more and more to pirate-only content consumption in retaliation until there is no market left at all.

      • Geoff Boyd

        So, dongateley, how do you suppose the very best recording studios convert their electronic analog signals to digital? Any DSP engineer worth his salt should know that if the signal can be properly bandlimited in the analog domain then a good A/D converter can accomplish this task.

        Encrypting up to the acoustic domain is sufficient for protection because a microphone’s interaction with loudspeakers in the real world is much less than perfect as you put it. Mono AM quality for free and HD Audio+ for those who want it at a price. A multi level, multi price distribution system.

      • Derek Mayberry

        I agree. The more restrictive and protective the issuers of media become, the more resourceful and defiant the pirates will become. In other words, the ordinary consumer will be caught in the crossfire and end up not purchasing anything at all, as they have no interest in the dog-eat-dog world of digital music piracy. I know I would be perfectly satisfied with an analog recording of an analog source. After all, it’s what I grew up with. Not everyone wants 256bps mp3s.

    • Mainly

      Unfortunately none of those ideas support a realistic solution (there’s a reason it hasn’t been done). It would take all of 10 minutes to write an algorithm to circumvent that type of technology rendering it useless and a waste of money.
      The industry is still using licensing models based on the 1940’s “The Work of Art in the Age of Mechanical Reproduction.”
      it should be apparent it will not work going forward because it was not designed to promote restriction, which is how it is expected to function in today’s market. Building new licensing models that don’t allocate revenue to aspects of a mechanical distribution channel that is not part of the process is a start.

      • Geoff Boyd

        You are absolutely clueless about encryption technologies. End-to-end symmetric encryption which include the delivery device and with physically protected keys at the delivery end are generally considered immune from attack.

        • Effria

          So customers will have to buy new speakers/headphones that limit their choices to what they can listen to? Requiring the real music nerds to throw out their 1,000 dollar speakers and expensive headphones? Yeah…. good luck with that.

          All encryption can be broke if people want to break it hard enough.

    • Not a bad idea. The problem was created back in the early 1980s with the CD. The music industry, in their headlong rush to open up a new revenue stream with a higher price point, did not pause to consider what they were fundamentally selling: no longer a a piece of vinyl, but a bunch of zeros and ones. Thus commenced a process in music (shortly followed by video, books, and games) where content was released into the wild. Had they bothered to ask for ownership information when they sold the item, there would be a registry and the problem today could have been addressed .Unless there is a late attempt to mobilize these goods through the DCE, these hundreds of millions of items of digital media will continue to be a drag on the system.

  7. Funny how only part of the actual music industry revenue is looked at (maybe one third) , better serves their interests.
    If you look at actual revenue stats for the actual music industry the picture is quite different but the MAFIAA won’t talk about that .