Monday, October 19, 2015

Visualizing Decimated Revenue in the Record Business

Since 1999, the old "record business" (i.e., of manufacturing and distributing physical consumer products) has dropped over 70%.  See charts below based on RIAA data:

Record companies collectively lost control of music distribution, albums unbundled into tracks, and downloads have had their day (note: downloads are declining in market share at this point). 

A small number of digital music services have seized control of music distribution; YouTube, Spotify, Amazon and Pandora compete with Apple to offer consumers better, faster and/or cheaper experiences, making streaming one of few recorded music market segments with strong growth.

Losing control of distribution to digital companies has weighed heavily on music license fees, resulting in controversially low royalty rates, which are often based on subscriber or ad revenues. See Boschan Corp.’s estimates below of roughly how many digital downloads or streams are required to achieve $1 Million in US recorded music revenue on many of the popular services:

Note that actual rates do vary based on the services deals with record companies and/or SoundExchange as well as the type of exploitation (e.g., subscriptions vs. ad-supported).

Also, it is important to note that while recorded music revenues have dropped, so have costs (e.g., for physical product), and that record companies have a multitude of other income streams that they classify as "investment" or other types of income or offsets to costs.  As a result of these and other factors, the profitability picture is not quite as grim as it appears when we focus solely on revenues of the recorded music sector.

Thursday, October 8, 2015

Controlled Composition Clauses: Myths Dispelled

Entertainment lawyer Wallace Collins wrote an article for Music Think Tank entitled "Beware of the Controlled Compositions Clause."

While I wholeheartedly agree with the premise of Mr. Collins' post (i.e., watch out for controlled composition clauses) and I appreciate that he couldn't cover all of the details extensively in a single post, the piece does not appear to have been fact checked and when I tried to comment on the Music Think Tank site, I received error messages and the site would not allow my comments to be posted.

In any case, as a royalty auditor who audits compliance with statutory mechanical royalty rates as well as controlled composition provisions, I feel compelled to point out the following regarding Mr. Collins' and Music Think Tank's post. Thus, I am posting my comments here on The Auditrix blog:

Example of language similar to that found in typical controlled composition clauses

First of all, in practice, statutory royalty rates are effectively *maximum* rates, not minimum rates, as Mr. Wallace and Music Think Tank state. (The term "minimum statutory rate" as used in controlled composition provisions references the fact that there is a minimum rate that applies to uses that are five minutes or less; higher rates apply for uses that exceed five minutes.) As much as I wish that my music publishing and composer clients were entitled to minimum rates that would be equivalent to a minimum wage, they are not.  The statutory rates are simply the reportable rates for compulsory licenses and since negotiated licenses virtually never exceed statutory rates, statutory rates are effectively a cap and not minimum rates at all.

Secondly, while I understand that it used to be a common practice of record companies to cross-collateralize mechanical and artist royalties, which is an issue that Mr. Wallace and Music Think Tank warn readers to beware of, I believe many labels were sued over this practice decades ago and I haven't seen it in my 14 years of royalty audits. In fact, modern artist agreements specifically prohibit this. (However, many contracts do allow for recoupment from artist royalties of "excess mechanicals" which are mechanical payments to publishers that exceed the cap set forth in applicable controlled composition provisions. Despite this, such provisions do not prevent the publisher from collecting royalties and, in practice, we do not see many excess mechanical charges against artist royalties in any case.)

Finally, the Digital Performance Right in Sound Recordings Act of 1995 prohibits record companies from applying controlled composition provisions for digital phonorecord exploitations (i.e., permanent downloads) in most but not all cases, which is a glaring omission from the piece, since it drastically reduces the the impact of most controlled composition clauses.  Due to this law (and the fact that streaming services are responsible for paying US publishing royalties for streaming exploitations) the exploitations that are potentially subject to controlled composition provisions are mainly US sales of physical CDs and vinyl, which are less than half of overall US sales. (Not to mention that US sales are equal to or less than foreign sales for most of my clients, and the controlled composition provisions are largely inapplicable outside the US.)

Also, to Mr. Collins' point that there is a question as to whether one writing partner can bind another is the fact that the Department of Justice is considering requiring publishers (or their agents) to engage in what is called 100% licensing, in which any rightsholder can issue a license for 100% of a song. Sony/ATV's Martin Bandier recently wrote a letter to songwriters about this issue (which relates to much more than controlled compositions) and The Association of Independent Music Publishers (AIMP) (of which I am the national treasurer) recently presented a program on the topic, a video of which members can view at (viewing this discussion is well worth the cost of membership, if you aren't already a member).

Of course, there are many more crucial details to understand about controlled composition provisions, especially as they relate to audiovisual content and premium uses, which is why many attorneys consult with us during the contract negotiation process. No one can be expected to know everything about the arcane world of royalties, so such negotiations are usually a team effort.