We're buying less music than we did the year before. Just like last year. And the year before that, and so on. But now more than ever we're streaming on YouTube, Pandora, Spotify, Rdio, MOG and a whole host of other digital music services — creating an entirely new pathway between your music loving ears and an artist's bank account, one that is anything but straightforward. As Spotify subscribers continue to grow — up 5 million active users and 1 million paying subscribers since January — global physical format sales continue to drop, down about 19% since 2009.
Today, there are a lot of different ways artists can make money today — 42 ways, according to the Future of Music — but it's not always clear how much artists are pocketing from some of the most popular services. In the digital music era, complicated and outdated copyright law as well as private negotiations between artists, labels and streaming services have made it difficult see how much is going back to the people making music.
That hasn't stopped people from trying. One source says Adele's "Rolling in the Deep" is worth 0.0153 cents per premium stream on Spotify, whereas another estimates 19 cents per 60 streams on any subscription service. "Everybody wants to break it down to per stream," says Graham James, a spokesman for Spotify. "But that's just not the way to look at it."
Last week Pandora made an announcement about how much it pays in performance fees for specific artists — which were largely interpreted as how much those artists make from Pandora playing their music. Billboard was quick to point out that $3 million in performance fees doesn't mean $3 million for Lil Wayne, because of how copyrights are split between labels and artists.
Before the Internet, there were two different ways artists made money off of sound recording copyright royalties. One way was through distribution — selling a physical record or CD, and the other was performance. These were two different categories of usage for which different rates were calculated, but once music went online the distinction between distribution and performance became fuzzier.
For the most part, downloads have been analogous to distribution and streams to performance — but not all digital music services fall under the same copyright laws, and thus a straight "X streams costs Y dollars" is not the most accurate way to compare how much money goes back to the artists (not to mention nearly impossible to estimate because of private deals between labels and artists).
"It's important to line it [the digital music model] up to the old regime because we haven't updated copyright law to account for this new system," Jean Cook, the Future of Music Coalition director of programs, told me. "We're kind of stuck to these old definitions of how you use these copyrighted works — they define the contours of the new model."
A better way to think about how much artists are making today is to look at a few different types of music services and see how much of their total revenue is going back to the copyright holders — the labels, musicians and song writers, who then decide how that money is divided.
Let's break streaming down into two camps, based on how they pay the copyright holders of the sound recording, since music composition is its own, separate copyright: 1) satellite radio and Internet radio ("non-interactive" streaming) and 2) interactive streaming. In the first group are services like Sirius XM, Pandora and Muzak, and in the second are interactive streaming services like Spotify, Rdio and MOG. The biggest difference between the two groups is that the first group pays royalty rates set by the Copyright Royalty Board (CRB) every five years, while the interactive streaming services negotiate privately with each copyright owner to set their rates.
For reference, terrestrial AM and FM radio pay zero in sound recording royalties (but they do for online streams). Under the CRB compulsory rates, satellite radio services like Sirius XM pay only about 8 percent of their gross revenue in royalties, whereas Pandora and other Internet radio services pay webcasting royalties of almost 50 percent of their revenue.
With a projected annual revenue of $3.36 billion in 2012 for Sirius XM, that means about $268.8 million will go back to the copyright holders. Pandora's projected revenue is somewhere between $425 and $432 million for this year, which would mean about $212.9 million back to the copyright holders.
The interactive streaming services are a bit trickier, since they are private companies that don't have to report revenues or their privately negotiated royalties with each label and artist. Last year Spotify made $236 million, and some people think it could be as much as $840 million this year, of which "we pay those rights holders nearly 70 percent" Spotify's James told me. That'd mean about $588 million back to the copyright holders this year, more than Pandora and Sirius XM combined.
Keep in mind that out of of that $588 million, it's not clear how much the actual artists are really seeing, since Spotify makes a private deal with the label, who then makes a private deal with the artist. Under the CRB set royalty rates, artists are much more protected because the music providers pay royalties to SoundExchange, a non-profit performance rights organization, who takes a small cut and then distributes 50 percent to the owner of the sound recording, 45 percent to the performing artist and 5 percent to the session musicians and backup singers, according to Billboard. Additionally, all songs are fair game under the CRB royalties, whereas artists can simply refuse to have their music on any of the interactive streaming services.
A potentially bigger issue for copyright holders is the discrepancy in statutory rates between the satellite and internet radios services — 8 percent vs. 50 percent — that are renegotiated every five years. Pandora is basically getting screwed right now because of the Digital Millennium Copyright Act of 1998 that drew a line between "preexisting satellite digital audio service" and "new subscription services" — an arbitrary decision based more or less on which music services existed before 1998. This put satellite radio under the more lenient 801(b) standard and internet radio under a "willing buyer/willing seller" model. This competitive market scenario that the DMCA envisioned in 1998 for Pandora would never exist. Long story short, nobody knew what the heck Pandora was in 1998, and they've been stuck with higher statutory rates than satellite radio every since.
The impetus for Pandora's announcement last week is because the the CRB is currently setting the compulsory rates for the next five year period beginning this January. Pandora and other webcasting services will testify about why they think it's important to keep the rates low for future of internet radio, while Sound Exchange and the music labels will testify about why it's important to keep the rates high, so artists make money.
"The internet has been held back as a medium with respect to music broadcasting because of these flawed frameworks," John Villasenor, a senior fellow at Brookings and UCLA professor, told me. "Everyone loses; it really does need to be fixed."
The debate continues to be whether the people providing us with free music are paying too much, or if artists are getting paid too little. Streaming services like Rdio don't think it has to be one or the other, and are trying to bring in more revenue for both the streaming service and the artist with its new program that pays artists $10 for every subscriber they bring to Rdio.
"We know artists don't feel like they're being paid enough from streaming services," Rdio CEO Drew Larner told me. "This [program] creates ancillary revenue for the artist while driving more subscribers to our service." Until Rdio and other streaming services are on the scale of satellite and internet radio subscribers, the royalties artists receive from streaming services will probably continue to feel insignificant, he says. Sirius XM alone has 25 million subscribers, whereas all the interactive streaming services are still only 10 to 12 million combined.
On the CRB royalty rates side of things, however, the chances of a solution seem grim with two competing bills being pushed through Congress. The Internet Radio Fairness Act of 2012 would bring the royalty rate of non-interactive streaming services down to match satellite radio — somewhere around that 8% mark — while the Interim Fairness in Radio Starting Today Act would move the royalty rates of satellite up to match Pandora's. The first bill would favor the music providers, while the second bill would increase revenues for the copyright holders.
If neither legislation is passed, Internet radio will continue to suffer. And as promising as the future of interactive streaming services looks, their sketchy private negotiations are a much more uncertain source of revenue for artists. As long as the Internet is around, people are going to want to listen to music ON THE INTERNET— but the only way that's going to keep happening is if current copyright laws are updated to favor both the music providers and the people making music.