Music Streaming – Wrong villain.

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The music labels strike back.

• It looks to me like intense lobbying by the music labels has resulted in the Copyright Royalty Board unfairly penalising the music streaming services when all along it is the labels that are mostly responsible for the “poverty” of the artists.
• The Copyright Royalty Board of the U.S. Library of Congress has issued a written decision that will require the streaming services to increase their pay-out to artists to 15.1% from the current 10.5%.
• On the surface, this ruling makes very little sense as, all of the streaming services already pay away far more than 50% of their revenues to the rights holders.
• Furthermore, almost all of them are unprofitable as they either lack the scale to gain operating leverage or they have a free pricing tier supported by advertising.
• If this decision is applied directly to the streaming companies, then I would expect to see a decline of 4.6% points on their gross margins and a deepening of their losses.
• If the artists are not making good money from the streaming of their content and the streaming services are not hugely profitable then the only other place to point the finger at is the labels themselves.
• Consequently, I have long believed that it is the labels that are making the most money from music streaming and it is they that are mostly responsible for the poor pay-out to artists from music streaming.
• Interestingly, the announcement of this ruling was made by the National Music Publishers Association (NMPA) which may have had a hand in influencing the decision by the Copyright Royalty Board.
• In its own words the “NMPA promotes, protects and advances the interests of music publishers and songwriters in matters relating to domestic and global protection of copyrights”.
• To me this means that when some of its members are grumbling about not making enough money, it will seek restitution from outside of its ranks.
• I have long believed that the music labels are at severe risk of becoming obsolete in the long-term.
• This is because as more and more music goes digital, it is possible to recreate the historical function of the music labels (promoting and distrusting music to fans) can be more easily and effectively done with algorithms.
• Consequently, in the long run I see artists going directly to Spotify and Apple Music and getting far more lucrative deals than they have today as the music labels will no longer taking a big share of the pie.
• I think that the music labels are well aware of this threat and are doing everything that they can to prevent this scenario from playing out.
• Lobbying the Copyright Royalty Board to worsen the economics for the streaming companies will help clip streaming’s wings and keep the labels in business for longer.
• If this ruling goes into force, it is clearly bad news in the short-term for the streaming companies but the balance of power s rapidly shifting in their direction.
• There are already signs of this as the deals that Spotify has most recently signed with the labels have shown an improvement in the economics in Spotify’s favour.
• Hence, I still think that the long-term picture is still rosy for music streaming and that the labels will eventually be removed from the sale and distribution of music, but the economics will worsen in the short-term as the labels fight back.
• This may put a small dent in Spotify’s IPO plans but its long -term path to a profitable, music-label free future remains intact.