It’s hard to think of a more brain-deadening topic than the U.S. Copyright Royalty Board’s proceedings over the rates for music streaming. But deep in the dense legalese lies a heated battle over the billions of dollars in royalties generated by streaming services — one that pits the music industry against some of the biggest companies in the world. At stake is nothing less than the future of the music business and the livelihood of the American songwriter.
On the music side are publishing companies — dominated by the three majors, Sony, Universal and Warner — while on the streaming side are Amazon Music, YouTube (owned by Google/ Alphabet), Pandora (owned by SiriusXM/ Liberty Media) and the global market leader, Spotify. Apple Music, the world’s second-largest service, stayed out of the last round of this fight, letting the other companies “take the bullets,” as one top executive puts it, but sources confirm to Variety that it’s on board for the next.
It’s hard to think of a more brain-deadening topic than the U.S. Copyright Royalty Board’s proceedings over the rates for music streaming. But deep in the dense legalese lies a heated battle over the billions of dollars in royalties generated by streaming services — one that pits the music industry against some of the biggest companies in the world. At stake is nothing less than the future of the music business and the livelihood of the American songwriter.
On the music side are publishing companies — dominated by the three majors, Sony, Universal and Warner — while on the streaming side are Amazon Music, YouTube (owned by Google/ Alphabet), Pandora (owned by SiriusXM/ Liberty Media) and the global market leader, Spotify. Apple Music, the world’s second-largest service, stayed out of the last round of this fight, letting the other companies “take the bullets,” as one top executive puts it, but sources confirm to Variety that it’s on board for the next.
The two camps have spent tens of millions of dollars in legal and lobbying fees in an unusually bitter public battle that has sprawled over the past several years. And they’re about to do so again as the sides gear up to fight over setting rates for the next four-year term, a negotiation that is expected to begin in September.
Caught in the middle are songwriters, who are counterintuitively at the bottom of the totem pole in the streaming economy.
The two sides in this “deeply dysfunctional symbiotic relationship,” in the words of one executive, have devolved into squabbling partisan camps that are nevertheless completely dependent upon each other. “Every deal point with the tech sector is contentious,” one top music executive says. “But this one’s gotten so bitter. I mean, can’t we get along?”
Acknowledging that dysfunctional symbiotic relationship, key players in this fight were more than willing to say horrible things about the other side on background, but few of the 30-odd executives Variety spoke with for this story agreed to comment on the record.
Says veteran music attorney Chris Castle, “This is not the way people who have an economically interdependent long-term relationship treat each other.”
The devil is in the details. Using a model jerry-rigged from the CD and vinyl eras, streaming royalties are divided two ways: Approximately 75%-80% are split between the performing artist and, usually, a record label, while 20%-25% go to publishing — i.e., the composition, which is divided between the songwriter(s) and publisher(s).
This uneven division of the revenue was originally calculated to account for the expenses that labels incurred in the manufacture and distribution of vinyl, CDs and cassette tapes. That lopsided split may or may not still make sense in the streaming age, depending on whom you ask.
During the vinyl and CD eras, many songwriters were able to earn a decent living because the per-song royalty on an $18 album was relatively high. But in the streaming economy, where a song must accrue many millions of streams even to approach the royalty it would earn on a CD sale, the bar for sustenance, let alone success, has become dauntingly high.
Despite its foundation in music, Spotify has always behaved more like a tech giant, spending lavishly and at times questionably, considering the company posted a net loss of $39 million in 2021 and $580 million in 2020. The music companies argue that even though Spotify definitely is not on the same level as an Apple or Amazon, its showy spending on offices, salaries, advertising, events and other endeavors — particularly a recent $300 million investment in the Barcelona Football Club that hardly seems business-critical — make their pleas of poverty, at least when it comes to royalties, deeply unconvincing.
“Profitability is a choice,” a top music executive insists. “You can reduce infrastructure, marketing and advertising costs, and maybe not throw such big parties.”
Many insist that streamers, particularly Spotify, could be profitable if they tried. Yet they are locked in such a tenacious battle for market share that growth trumps all other considerations. This ground war between the streaming services has led to dozens of different plans — including ad-supported, a.k.a. free models — all of which mean less money for musicians and songwriters.
“It makes no sense,” says Milana Lewis, CEO of the distribution and payments platform Stem. “The price of everything else on earth is going up, and they all keep finding new ways to make subscriptions cheaper” via family and student plans, bundling and other initiatives. Another exec insists, “They’re giving away their profits with these discounts.”
Why is growth so important? Obviously because it’s what Wall Street and investors expect, but also “because tech companies all want to upsell other things,” one music executive says.
Indeed, Ek has made no secret of Spotify’s goal to become “much more than just a music company,” as he said during its “Investor Day” in May. He spoke from a defensive posture: The formerly sleek and suave Swedish streamer has undergone a series of public-relations fumbles since it went public in 2018, most prominently over racist language used by its top podcaster, Joe Rogan. At the time of this article’s publication, its stock price was slightly more than a third of its January 2021 peak. Yet Ek insisted several times to investors that Spotify’s model, “in its totality, is doing way better than you think,” and made his future goals very clear.
“The best companies — think names you are all very familiar with — are vastly different today than when they started,” he said. “They made their initial mark in one specific category: books [Amazon], search [Google], desktop computers [Apple], and they then redefined the way we think about those categories by expanding their potential through innovation … And this is the exact same journey we’re on,” he said, sprinkling several vague references to the company’s still-nascent “marketplace” into his speech.
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Perhaps the fieriest critic of the streaming services is David Israelite, president and CEO of the NMPA, whose aggressive tactics and verbiage were on full display at the trade organization’s annual meeting in June. At times, the event took on the tone of a rally, with Israelite’s condemnations of the “streaming services’ war on songwriters!” missing only a Fox News-style whoosh.
He portrayed the CRB battle in unambiguous terms, characterizing it as songwriters and publishers “fighting for fair rates for the songs that make these digital services possible.” He also asserted that “some of the largest companies in the history of the world [are] arguing for the lowest rates in the history of digital music,” although any David vs. Goliath implication is undercut by the fact that the major publishers are also owned by multi-billion-dollar corporations. The NMPA has described the streamers’ appeal of the CRB’s 2018 decision as “suing songwriters.”
Not surprisingly, those arguments make executives at the streaming services apoplectic. “There’s so much more money going out than coming in that there’s no way for us to reasonably make a profit,” one top streaming executive says. Another notes: “The publishing industry had its best year ever” with $4.7 billion in 2021 revenue. “It’s more successful and profitable than ever before.”
A solution, according to this executive, is the heroic assumption mentioned above: That labels voluntarily shift 3% to 5% of total streaming royalties to publishers, which would increase the songwriters’ share without placing the onus completely on the streamers.
“We are not suing songwriters,” the executive insists. “We need a better rate structure to facilitate growth. It’s about splitting what we already have more equitably.”
However, Spotify CFO Paul Vogel said the CRB’s ruling “is having a pretty minimal impact on our numbers and our forecast” during the streaming giant’s earnings call on Wednesday, although that may be because it had expected and planned for the increase in royalty payments.
So where does this “dysfunctional symbiotic relationship” end up? Neither of the two pie-in-the-sky solutions — eliminating CRB oversight of publishing nor raising streaming subscription prices — is likely to happen anytime soon: The former because of the complexity of taking it out of the government’s hands, and the latter because the streaming services are so fiercely focused on market share that none will be the first to blink, even though research has shown subscribers are willing to pay more.
The outcome “will depend on how reasonable all parties can be,” one top music executive says. “We all have an aligned interest in bringing as much music as possible to as many people as possible. So how do we grow the music market in the face of competition from other forms of entertainment that cost less — social media, gaming, online TV.
“How do we put more focus on the value of music?,” the executive concludes. “That’s what we need to be talking about.”