Friday, 04 Sep 2015

As all musicians and songwriters know, the music industry has changed radically over recent years, and continues to change at a fast pace. At the forefront of the change is the transition from an industry based on sales of physical product (CDs, DVDs etc) to one based on digital distribution.

For songwriters in Australia/NZ the current licensing landscape across the near-forty digital music services on offer is broadly as follows:

• Download services, such as Apple iTunes:

- Prevailing royalty rate: 9% of sales price to consumer -

Total royalties collected in Australia/NZ by APRA AMCOS: c $23m pa, currently declining at a rate of about 12% pa

- Pro forma royalty per single track sale: (on average retail price of $1.98) 16.25c (the 9% excludes GST), split as follows: 12.6c to mechanical right and 3.6c to performing right

• Streaming services, such as Spotify, Apple Music, Pandora and Rdio:

- Prevailing royalty rate: up to 15% of gross subscription and advertising revenue (depending on the functionality of services provided)

- Subscription services are also subject to a fixed “minima” per subscriber per month to protect against price reductions by service providers

- Total royalties collected in Australia/NZ by APRA AMCOS: c$20m pa, currently growing at a rate of about 60% pa, split equally between the mechanical right (distributed via AMCOS) and performing right (distributed via APRA)

- Historic indicative royalty per track for subscription services 20c per 100 streams and for ad-funded services 2.5c per 100 streams.

Performing right shares of digital royalties (ie, 22% of download royalties and 50% of streaming royalties) are paid via APRA to writers and (if published) their publishers, according to their agreed shares registered with APRA. The mechanical right shares of digital royalties (ie, 78% of downloads royalties and 50% of streaming royalties) are paid via AMCOS to publishers for on-payment to their writers (or, in respect of unpublished works, direct to writer members of AMCOS).

Much has been made of the derisory returns to songwriters and recording artists from streaming services, and there is no doubt that those claims are both true and profoundly troubling. Against a global backdrop of rebalancing the respective values of musical works and sound recordings respectively, a few points are worth bearing in mind amidst the noise that surrounds the debate:

firstly, royalty rates for songwriters are – across the board – much higher in the digital world than in the old analogue world. For example, the (mechanical) royalty rate on the sale of a CD was (and is) 8.7% of wholesale price (with an indicative per track rate of about 12c). This equates to about 6% of retail price which, in turn, is – proportionate to revenue – about two-thirds the download rate and below half the current streaming rate;

secondly, the issue of low returns for individual artists and songwriters is a global one. See David Byrne’s recent article in The New York Times (recently reprinted in The Australian) – writers and artists the world over are essentially sharing the same dispiriting financial experience from digital. But that said, there is also an argument that comparing per stream rates with, say, broadcast rates is a misleading exercise in the sense that a stream is a communication to one person whereas a broadcast may be to hundreds of thousands of people;

thirdly, the fundamental problem stems from two inescapable characteristics of the current digital market: (a) the vastly greater volume of music – about a million discrete works each quarter in Australia/NZ – consumed via digital services compared with the volume of music consumed in the physical product world (by our estimate, no more than about 150,000 tracks in any quarterly sales period); (b) the total revenue pool produced by digital services (including both streaming and downloads) is far below where it needs to be to represent meaningful income for artists and writers. Given that pricing is entirely a matter within the hands of the services themselves, the real issue is the need to dramatically grow the customer base of digital services – particularly paid users of streaming services.

There are, by our estimate, around one million paying subscribers to music streaming services in Australia/NZ. This figure needs to grow to at least four times its current level (without cannibalising download service customers and current physical sales levels) to restore recording industry revenue to where it was a decade ago. Such a position won’t restore individual writers and artists to where they were in terms of individual incomes (because of the much greater number and diversity of works being consumed) but will at least produce a revenue pool that is likely to restore confidence and investment capacity to the industry.

Two key developments that lead to optimism in this respect are: firstly, the trend for telcos, technology players and device manufacturers to partner with digital services in bundling music streaming as part of broader service offerings to mobile and broadband customers; this offers the real prospect of volume take-up of such services; and secondly, the recent legislative change enacted in Australia, giving rights holders the ability to apply to block infringing sites. This welcome development offers the real prospect of encouraging consumers away from torrent and other illegal sites and on to licensed service platforms.

Tags: aprap
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