Music Publishing & Songwriting

Hope everyone had a very happy Thanksgiving! And on that note, if you were struggling last week to find something for which to be thankful (and those things were definitely in short supply this year, particularly in the dark and lonely corridors of the music business), I received one from my friend and fellow Berklee blogger, Mike King, who writes Music Business and Trend-Mongering…

http://mikeking.berkleemusicblogs.com/

Mike brought to my attention a very informative and interesting blog at thefutureofmusic.com, which explained, as clearly as could possibly be expected within such murky waters, the recent settlement on a mechanical royalty rate for songs played on online music services. Check it out:

http://futureofmusic.org/blog/2008/10/01/agreement-royale

Given that we’ve been following in this blogspace the ever-raging war between the Israel and Palestine of show business, that is the digital media community (which includes large companies like Yahoo and AOL, relatively established ventures like Pandora and Rhapsody, and new companies like Spotify) and the music industry (including labels, publishers, performing rights organizations, artists, and writers), it seems worth taking a minute to try to put some perspective on what has been achieved with the latest peace treaty. As always when entering a war zone, it’s probably best to dredge up a little history, just to understand what’s been achieved, and why everyone was so mad in the first place.

The conflict is rooted. as is all evil, in money, and who gets how much of it. When the digital world first emerged as a place to both purchase and/or stream music, the music community was forced to redefine the idea of a “mechanical royalty”, which is the royalty that is paid to songwriters and publishers each time a “mechanical reproduction” of their song is purchased. In the old world, this translates to .091 cents for each song on each CD that is bought by a consumer. This “per-penny”, “per-song” system is at the core of the music publishing business, and it’s something that publishers were desperate to preserve even within the new digital environment.

In part the attachment to this system is rooted in accounting realities: each songwriter needs to be paid each time his or her specific song is used, not just given a random portion of a lump sum paid out to songwriters in general. But more importantly, publishers wanted to establish with finality that each digital use, whether a digital download (as on iTunes, which has been paying the 9 cent mechanical royalty from the beginning) or a stream (in which the music is not actually owned by the consumer, but is constantly accessible to the consumer) constituted a “mechanical reproduction” of the song, and therefore was subject to a mechanical royalty.

Not too surprisingly, the digital media community saw things quite differently. While generally willing to acknowledge that an actual digital download constituted a “purchase” of the song and therefore required a mechanical royalty (unless of course one were to do like the vast majority of music listeners and simply download it illegally), services that offered “streaming”, as opposed to downloads, felt that they should be treated more like a radio station, and that their music uses should be subject only to “performance royalties” (the money collected by ASCAP, BMI, and SESAC for public uses of music on the radio and television). The music industry was quite happy to acknowledge that “streaming” should be licensed by ASCAP, BMI and SESAC, and indeed, most of the prominent streaming services are licensed by those performing rights organizations. However, the music weasels also wanted the mechanical royalty, in addition to the performance monies. Them were fightin’ words.

That’s where the war began, and we’ve been following it on this blog ever since. Having reached this impasse in the early days of the digital music revolution, the two parties agreed to fight it out… later. The publishers, not wanting to miss the boat entirely on a new way of marketing music, but also not wanting to lock in an unfair compensation system for a pivotal new technology, agreed to make their catalogs available for a one or two cent royalty, under the proviso that some kind of more reasonable “per-song, per-play” mechanical rate would be negotiated in the not-too-distant future.

It’s worth keeping in mind that much of the publisher’s wariness came from their prior experience with licensing music to DVD’s. In that instance, publishers agreed to very unfavorable terms for the use of music in “DVD” ’s, after receiving promises from the film studios that once the new technology took hold, there would be plenty of money to go around. Of course, the new technology did take hold, there was plenty of money, and none of it found its way into the pockets of the publishers, who were stuck with that first, precedent-setting agreement. This resulted in much gnashing of teeth, and vows of “never again”.

On the flip side, the digital media, filled with myriads of start-up ventures, felt that if they could buy some time to get their new companies off the ground and into a profitable position, the music industry would view them as valuable partners, and be willing to agree to a more equitable royalty situation. Or maybe they just figured they could get the music really cheap for now, and then later use their increased bargaining power and hopefully some favorable court decisions to really put the screws to the copyright holders. Hard to say exactly.

Unfortunately, the war didn’t quite go according to plan for either party. The music industry quickly found that the new “mechanical” royalties from digital downloads were draining off their old “mechanical” royalties from CD album sales, and actual overall income was plummeting. The digital music services found that consumers were not that eager to actually fork up money for something that they were now used to getting for free. On top of all that, the music industry sensed that they’d once again been out-weaseled, as the DMA (Digital Media Association) backed away from negotiations, and focused instead on legal efforts to re-define which uses required a mechanical royalty in the first place.

And yet, out of this ugly little tale of self-interest, deception, suspicion and greed, springs a small blessing– which leads me back to the whole idea of what we can be thankful for this year. After years of arguing, the two beaten-down, weary factions finally reached an agreement, and here’s what it amounts to:

Limited download and interactive streaming services will pay a mechanical royalty rate of 10.5% on the revenue they generate, MINUS any amounts for performance royalties.

In other words, services like Rhapsody and Napster are indeed subject to both a mechanical and performance royalty, but the entire compensation for songwriters and publishers from any limited download or interactive streaming site is “capped” at 10.5% of the site’s revenue. For the record, an interactive stream is one that’s selected by the user (that is, music on demand), and a limited download is one that’s based on a subscription (and which disappears when that subscription ends). The mechanical royalty does not apply to “jukebox” type streaming, which is not selected specifically by the user (like Pandora).

Like most blessings, this one is decidedly mixed. It does give the DMA what they needed most, which is some ability to gauge what their overall music costs will be, and some flexibility in their price-setting to the consumer. Obviously, if you’re in the business of selling a product, you like to know what it’s going to cost you to provide it. By assuring the digital services that the combined PRO royalty and “mechanical” royalty will not exceed 10.5% of their revenue, the new agreement should help the digital music services build a more stable financial model in the future.

The new deal also gives publishers part of what they wanted, which is the legitimate claim to something more than a performance royalty from services that offer a consumer direct access to specific music. It opens a Pandora’s box (yes, that’s a pun) of accounting problems, as publishers will now have to somehow negotiate, audit (?), and continually adjust rates for each of the thousands of services that exist or are in the launching stages, not to mention figure out how to collect and properly apportion the new money to the appropriate songwriters.

But in a barren land of nothing, at least this is something, so let’s raise our cups in thanksgiving, especially to the powers that negotiated the agreement on behalf of the publishers, labels and others: the National Music Publishers Association (NMPA), the Nashville Songwriters Association International (NSAI), the RIAA, and the Songwriters Guild (SGA).

Now that we’ve laid our weapons down (temporarily at least) it’s time to turn our attention to something a bit more productive:

Let’s make some money.

If it seems strange that Mike King brought to my attention an agreement that directly affects the publishing community, it’s because most publishers haven’t exactly been on the edge of their chairs, waiting to see how this war turned out. A growing number of us increasingly suspect that we’re fighting over a useless piece of land in the desert.

The fundamental problem with this agreement is that none of these services are generating much in terms of real revenue. The subscription model is growing less and less attractive, as consumers have quite literally not bought into it. The “free” streaming services are generating plenty of activity, but very little in the way of advertising revenue, which is where the money is supposed to come from. In the end, receiving ten percent of the total revenue of these services may wind up being less than the one or two penny rate that we were getting as part of the temporary agreement.

Worse than that, many of us suspect that these services may not actually be intended to make money. Looking at the YouTube model, it’s clearly quite possible to use “free” music as a “carrot” to attract loads of visitors or viewers to a site. A buzz-savvy entrepreneur can then use that high level of traffic to foist the new start-up venture off to a giant corporate media company like Google (YouTube) or News Corp (MySpace)– all without ever having generated any real profits. In that scenario, the founder of the site gets rich, and the publishers and songwriters who provided the music that brought all that traffic are left with, yep, ten percent of nothing. Sound familiar?

I suspect that somewhere towards the end of the first Thanksgiving feast, after the pie had been consumed and the last bit of wine drained from the bottle, someone on the side of either the pilgrims or the American Indians probably mentioned that there was still some work to be done in the harvesting, and that they should all probably get back to work. Judging from current music sales, publishers and record labels and songwriters all need to get back to trying to make music that the public is truly compelled to purchase. Across the table, digital media services need to start figuring out how to sell that music in a way that actually generates profits, rather than simply giving it away. If both parties do their jobs, maybe next year we’ll all have more to be thankful for…