Thursday, February 21, 2013

Streaming Royalty Calculations

A writer researching record company accounting practices recently asked me for information about how record labels account to recording artists for streaming exploitation of masters.  I thought my response to him would make a good blog entry, so here it is:

Most artists are entitled to share in a record label's interactive streaming net receipts, so when we audit a label, we try to ascertain its net receipts from streaming companies (just like we aim to account for all the physical records it manufactured).

Since modern recording contracts usually provide that an artist is entitled to share only in net receipts that have been specifically allocated to masters by the licensee, labels structure certain deals with streaming services so that only a portion of the total compensation to the label is specifically allocated to the masters by the licensee, while the rest is not allocated to specific masters ("unallocated receipts").

When we audit, the information that a label may make available is usually limited to samples of the statements it receives from streaming licensees, since these are the receipts that have been allocated to masters by the licensee (which typically the label reports on artist royalty statements).  However, in order to ascertain unallocated receipts, we need more information than the labels are willing to provide, including copies of agreements with streaming services and documentation of all compensation received from the streaming services, which can include both cash compensation (e.g., advances or settlement payments) and non-cash compensation (e.g., an equity interest in a streaming service or valuable marketing expenditures).

Regardless of whether a record agreement entitles artists to share in unallocated receipts, it takes a lot of leverage to gain access to documentation of unallocated receipts, and when we are granted access to such documentation, it is always on the condition that we keep the non-public details confidential, so we can't use it for other audits.

Even in the limited cases when a label reports to artists some of its unallocated receipts,  it doesn't mean that amount reported is proper or fair.  For example, a record company may allocate a settlement payment it receives from a streaming service to unrecouped artist accounts, because the less it allocates to recouped artist accounts, the less it actually pays out.

Therefore, at least historically, the basic concerns with respect to artists getting their fair share of streaming net receipts have been related to the allocation of receipts (i.e., Are the licensee’s allocations to masters proper?  Did the label report its unallocated receipts?  If so, were the label’s allocations proper?  If not, what shares are allocable to the artist?), especially non-cash unallocated receipts like equity interests in YouTube, Spotify and Vevo.

In addition, a few labels take packaging/container and other deductions from streaming receipts, particularly when the contract is old and does not contemplate streaming, and when a label claims it was not compensated for a stream, those streams are usually categorized by the label as “free” distributions on which no artist royalties are paid.

Recently, in calculating the net receipts reportable to artists, labels have become more aggressive in the deductions they take from gross receipts, such as deducting foreign affiliate fees.  I expect to see more of this in the future.