Irving Berlin lived at the right time. So did Doc Pomus. And Bernie Taupin. Harlan Howard, Ellie Greenwich, Jeff Barry,
“Yip” Harburg were also lucky to be born when they were. In fact, practically the entire Songwriters
Hall of Fame, pre rock and roll, should consider themselves lucky they were
born when they were.
Why?
None of them had to worry about Pandora, Spotify or any
other music streaming service.
“God Bless America”, “White Christmas” (Berlin); “Save the
Last Dance for Me”,” Lonely Avenue” (Pomus); “Tiny Dancer”, “Candle in the
Wind” (Taupin); “Streets of Baltimore”, “I Fall to Pieces” (Howard); “Leader of
the Pack”, “River Deep, Mountain High” (Greenwich/Barry); “It’s Only a Paper
Moon”, “Somewhere Over the Rainbow” (Harburg) – these are just a few examples
of songs written by NON-performers.
Those titles are amongst the most popular songs written in the past 100
years. Any of those – and hundreds more
– have been successfully recorded by dozens, perhaps hundreds, of artists
during that time. The songwriters
received royalties based on the number of records sold and on the sales of
sheet music and songbooks containing the fruits of their labors.
When the item sold is a physical item (LP’s, CD’s,
cassettes) a pre-set mechanical royalty comes into play. The mechanical royalty is set by Congress and
has been since 1909 when the rate was established at two cents. The current rate is set at 9.1 cents (a bit
more if a song is over 5 minutes).
Downloads are also subject to these rates. Sheet music is generally a % of the cost of
the item.
While there are still myriad ways in which the songwriter
was denied the full royalty rate, some legitimate and some not so much, most of
these were front and center to the songwriter.
That at least allowed the songwriter to make an informed decision or at
least understand where they were taking a hit to the established royalty rate
they were entitled to collect.
Collecting these royalties and distributing these monies are
generally done by companies such as ASCAP (American Society of Composers,
Authors and Publishers) and BMI (Broadcast Music , Inc) in the US and similar
organizations outside the US.
Radio royalties are generally collected as a percentage of
advertising revenue and songwriters receive their share based on formulas
designed to impart some level of fairness.
In addition bonus money is available for songs that are played over X
amount of times in a designated period (typically a quarter) or that have
established themselves as all-time perennials
or standards (think “You’ve Lost that Loving Feeling” for a contemporary
example). Whether or not these formulas
truly properly distributed the collected fees to the songwriters is another
discussion, but simply put the percentage used in calculating the gross amount
was set across the entirety of the radio medium.
Radio stations derive their revenue from advertising
sales. Stations are free to set their
rates based on what the market will bear; free to decide how many minutes of
ads per hour will be run and decide the mix of 60 seconds, 30 seconds, 15
seconds or even shorter lengths ads to make up the content. While the average today is around 9 minutes,
stronger economic times have seen as much as 20 minutes per hour. The key here is that each station has the
responsibility to understand their
market.
That brings us to streaming services such as Pandora and
Spotify. These types of outlets pay on a
per 100 songs basis. Pandora pays 12
cents/100 and Spotify 35cents/100 (Spotify is an on demand service, hence the
higher rate). Another way of looking at this
is that you need to go to THREE spots to the right of the decimal to reach a
number (.0012 for Pandora and .0035 Spotify ).
So, for the solo performer who pens the tune they sing, self-publish
and releases on their own label ONE MILLION plays will yield $1200 in royalties
from Pandora and $3500 from Spotify. Of
course most music is not made by solo performers. Many songs are written in collaboration. Most artists do not set up their own
publishing houses or recording labels.
That means the the royalties are split amongst a number of involved
parties.
Contrast that with the mechanical royalty rate of 9.1
cents. One million unit sales will yield
$91000 in royalties for the songwriting copyright alone.
Now by now you may be wondering why all the songwriters
listed at the start of this article were lucky they preceded Pandora and other
streaming services? After all streaming
services allow more music to be heard by more people for longer periods of time
than ever before. One is no longer
confined to hearing only what – and when – a radio station decides to play a
specific song. Or any song for that
matter. Isn’t the opportunity for more
people to hear a singer or a band more often a great way for these performers
to make themselves known to a wider listening audience? Doesn’t this promote their “brand”, allowing
them to increase ticket sales, merchandise sales, performance royalties from
their labels? Well, yes it does. EXCEPT the artists listed above – and so, so
many more unnamed and unknown – are NOT performers. Their revenue is the song itself.
That is why Pandora’s request to Congress to reduce the
amount of royalties they pay is so wrong.
Pandora, quite simply, is looking to maximize their profits
on the backs of the very folks who create the music that gives Pandora the
reason for their existence.
Pandora currently has two primary revenue streams – monthly
subscriptions (that are ad free) and limited hourly ads that broadcast to non-subscribing
listeners. Pandora is making the
argument that their current schedule of royalty fees is costing them too much and
preventing them from turning a profit.
There are two answers to that:
1)
Increase your revenue streams (higher
subscription fees and/or sell more ads)
2)
Why is Pandora guaranteed a profit? That is, what makes Pandora different than
any other business? If the business
model does not work – change the business model.
Tim Westergren, Pandora’s founder, has recently posted on
the Pandora website his rationale (justification?) for his company’s seeking a
new royalty payment structure read it here: http://blog.pandora.com/2013/06/26/pandora-and-royalties/). The irony, of course, is that Pandora is now
“player” – not an upstart – in the business world. Its IPO raised over $230 million just two
years ago. The songwriters, who would
suffer the most, are simply small entrepreneurs. The ultimate small businesses. If their songs don’t sell – they don’t eat.
Recall that mechanical royalties are currently set at 9.1
cents, yet from 1909 through 1976 the rate remained at the same 2 cents
level. That’s right – the rate did not
budget for over SIX decades. Is it any
wonder that Pandora’s lobbying for paying reduced royalties would stick in the
craw of any songwriter?
This is not just about Pandora, of course. Spotify would benefit from any adjustment in
royalty rates as well. The founder of
Spotify has gone on record, in a recent Wall Street Journal article (http://online.wsj.com/article/SB10001424127887323566804578553691334279504.html),
as envisioning Spotify being able to customize your playlists based on your location(such as when your
smart phone detects you are at your gym or in your home). He also spoke of other ways Spotify could
deliver music to you – at a cost.
Nowhere in the article are artists even mentioned. It’s as if all this music came fully formed
and it is the delivery system that is
the true reason for music. At least
Pandora’s Wintergren pays lip service to the artists who make the music (if not
the folks who initially create the music).
Spotify does appear to have a different business model than
Pandora, focusing on more 3rd party apps that allow the consumer to
have an enhanced listening experience.
While many of these apps are currently free, it does not take a leap of
imagination to envision a time where some charge is attached. That is another reason why Pandora’s lobbying
for a change in what they pay for the use of songs is so frightening to
songwriters – it would impact all such streaming services. Companies such as Spotify, who are
aggressively developing a business model unlike Pandora, would reap what
amounts to a windfall profit.
Despite Pandora’s protestations of the current drag on their
profits due to the way their royalties are calculated, they are projecting to a
breakeven point for Q2 2013. This simply
underscores the point that they need to change their business model. The current subscriber base, as reported by
Pandora (http://investor.pandora.com/phoenix.zhtml?c=227956&p=irol-newsArticle_print&ID=1823913&highlight=)
is 2.5 million. The cost is
$36/year. Is that modest annual cost the absolute upper limit
that Pandora can charge? Fundamentally
that is the question.
Ultimately it comes down to fairness. Do you support the delivery system or do you
support the creators of the very music that is the reason for Pandora, Spotify
and other such streaming services. Do
you support David…or Goliath?
