Pandora: Free Music "Unsustainable"

[TheBigA]

I just read a great article written by Brian McAndrews, CEO of Pandora. He says that the free streaming model, the one Pandora uses, is unsustainable. I agree.

http://www.businessinsider.com/pandora-ceo-on-why-music-thats-free-all-the-time-is-a-problem-2015-12

The music industry is looking at companies like Pandora, or the radio industry, as the way of replacing the money it used to get from music consumers. Record labels, songwriters, artists, and musicians have been testifying in Congress and other places that the royalty rates set by the government are too low. One hit songwriter told a story that his take on a song that received millions of plays was around $7,000. As he said, it's hard to feed a family on that. He's right. But it's wrong for the music industry to expect that such royalties can be the sole source of revenue, to replace the money that should come from actual music fans. At some point, the fans have to pay for the music they love. It has to come from their pockets, not those of streaming companies. Unfortunately the fans have had a generation of free music. From Napster to Pandora to Spotify. Sure these companies are trying to wean the public off the free teat of music. They offer subscription plans. But the music industry has to find a way to get money from its fans. Otherwise royalty rates will continue to rise to points that are simply unaffordable for those companies. In fact, that's where we are right now.

 

[landtuna]

One hit songwriter told a story that his take on a song that received millions of plays was around $7,000.

Like artists in other venues, if he doesn't like the pay then why not change careers?

That said, why can't songwriters/artists sell their wares on the open market? Why are they limited to a fixed price? It would seem to me that if all the labels are paying the same rate we have that classic collusion scenario which would violate the free market concept.

 

[davideduardo]

That said, why can't songwriters/artists sell their wares on the open market? Why are they limited to a fixed price? It would seem to me that if all the labels are paying the same rate we have that classic collusion scenario which would violate the free market concept.

Songwriters collect royalties via ASCAP, BMI and SESAC which are organizations set up to divide author and composer fees charged to radio, TV, public venues, etc. This system was established to avoid the impossible to administer system of securing and paying for each performance individually.

For example, the custom background music stream played in certain retail chains must pay a license fee. They obtain a blanket license from each of the three organizations and play what they want. Otherwise, they would have to secure a license for each song prior to playing it, and negotiate a fee and then calculate the plays each month and send a separate check to each composer. That would take a staff all of itself, and result in hundreds of tiny payments that would likely be for less than the postage needed to mail the check.

In radio, we do the same thing. We get blanket licenses based on a formula that takes into account our revenue and market. The performing rights organizations do electronic monitors of hundreds of radio stations of all formats, and calculate the airplay of different songs as a proportion of total airplay of all songs, and they pay the composers and authors based on those proportions from the monies received from radio.

If we had to pay every composer separately, we'd have to have at each station a staff of several people negotiating rates with each, calculating the fee owed and cutting checks. It's simply impractical and would impede the exposure of new music and limit the play of many songs.

BigA has a much deeper knowledge of music licensing than I do, so perhaps he can enlighten you further.

 

[TheBigA]

That said, why can't songwriters/artists sell their wares on the open market?

That's what they're asking for. Willing buyer/willing seller. The catch is they have to get Congress to change the law, and we all know how that's going.

The irony here is that while songwriters, who have the forced royalty rate, are asking for free market, the recording industry is asking the same group of people (Congress & regulatory agencies) for a forced royalty on OTA radio. Right now, the recording industry has a royalty rate that is set by 3 judges who make up the Copyright Royalty Board. They're meeting now to set digital royalty rates that will apply to streaming sites like Pandora and Spotify. The recording industry wants those federally mandated rates to increase. Pandora says it's already paying more than 50% of its revenue to cover those royalties. Obviously that is unsustainable. The entire system is screwed up. The big problem is that the public views free music as a right, not as a product they buy.

 

[Kelly A]

By their admission, looks like Pandora finally realized they can't out-radio, radio.

 

[landtuna]

I understand the complexity and overhead of paying artists and composers by performance (radio and records, not personal performances) but my question was more related to selling of the actual product rather than the license to exhibit. For instance, an artist paints a picture and sells it to an individual or gallery whereupon it is displayed (most likely with an admission fee). The artist does not get continuing revenue - he/she is paid one time.

Why wouldn't a similar process work with composers/performers?

 

[TheBigA]

Why wouldn't a similar process work with composers/performers?

They don't view it that way. They define every time a song is played as a "performance," and therefore meriting payment. And the courts agree.

The equivalent in the movie/TV world is residuals. It's the gift that keeps on giving. Mailbox money.

Using your example, the painter would be due a portion of gallery revenues for every set of eyes who view his work.

 

[Groove1670]

To quote the article:

"Years ago, if anyone could have walked into a record store, legally taken every record home for free, and listened to the exact songs they wanted for as long as they chose, the music industry model would have completely broken down. But that is exactly the situation the music industry faces today."

The free pure play business model will need be to be modified. Even with pure-plays selling ads, I don't think it is going to make up the deficit. I predict when it is all said and done, you will be able to listen up to 15 minutes a day, or a very limited amount a month (to sample music - New music included). Less time than you are allowed to now. No more listening for hours at your party or get together (that is where they are getting high TSL with college students). If you want interrupted music, you will pay $19.95 (notice the higher price) for unlimited listening. Eventually, the consumer will pay for music sooner or later, or the losses will for the pure-plays will continue to mount, or you will see a major merger.

 

[TheBigA]

Even with pure-plays selling ads, I don't think it is going to make up the deficit.

That's correct. They're facing the exact same situation OTA radio has. The public has a limit on the number of ads it will endure. And ad rates are not going up. But royalties are. And the more listeners you have, the higher the royalty rate. You are penalized for success. So either you run the same number of commercials as OTA radio, or you limit the amount of listening a person can do. And in the meantime, hope to transition users to subscription plans. That's it. Otherwise, even the biggest streamer will be out of business.

 

[landtuna]

They don't view it that way. They define every time a song is played as a "performance," and therefore meriting payment. And the courts agree.

The equivalent in the movie/TV world is residuals. It's the gift that keeps on giving. Mailbox money.

Using your example, the painter would be due a portion of gallery revenues for every set of eyes who view his work.

I understand the issue but I don't understand why the recording and motion picture industries are unique in the "performance" regard. No other business I can think of operates in this manner. If I build an elevator I get one check when it is put in operation. Every person riding it thereafter does not owe me a residual when they take a ride.

So my question, and I hope I have made it a bit clearer is, is there some reason that recording artists could not sell their wares like every other business? Do movie people earn residuals or is this just limited to the recording industry?

I seem to remember several B-star groups (Three Stooges, Our Gang and others) complaining that they got paid once for their movies and nothing afterwards (when studios made huge money taking the movie to TV for instance). Then it occurred to me why should they. I wrote thousands of programs during my career in IT and don't get residuals for any of them. What makes these individuals special?

 

[TheBigA]

So my question, and I hope I have made it a bit clearer is, is there some reason that recording artists could not sell their wares like every other business?

I thought I answered that earlier. Federal law stipulates how they get paid, and how much. They're trying to get the law changed, but it's very slow going.

 

[davideduardo]

So my question, and I hope I have made it a bit clearer is, is there some reason that recording artists could not sell their wares like every other business? Do movie people earn residuals or is this just limited to the recording industry?

In the bad old days of the studio system in Hollywood, many artists were on salary with no residuals.

Today, important actors, writers, producers and directors get points or pieces of the future profits from TV and film. They are stakeholders.

It all depends on the legal help an in-demand talent gets, plus the negotiating skills of their agent.

You likely worked under a contract or conditions of employment that stated that whatever you did for the company was the property of the company. That's not the norm in the field of entertainment.

 

[TheBigA]

In the macro world, every time a song is played, whether it's by a marching band in the Macy's parade, the music system in a restaurant, in the elevator, a spin of a record in a jukebox or by a club DJ, or sung by the artist himself in a concert, the songwriter gets paid a performance fee. It's not much, a fraction of a cent, but it's something.

 

[landtuna]

I thought I answered that earlier. Federal law stipulates how they get paid, and how much. They're trying to get the law changed, but it's very slow going.

I see the problem. Let's try one more time.

In the absence of federal legislation to the contrary is there any reason direct payments wouldn't work? Is federal law the only item preventing direct payments?

 

[TheBigA]

Is federal law the only item preventing direct payments?

As I said earlier in this thread, the songwriters are trying to get the government to allow direct negotiations. So obviously the songwriters feel it would work better for them.

The record labels on the other hand prefer the federal mandate, with rates set by the court.

One problem that would have to be figured out is representation. There are millions of songwriters, so direct negotiations with each of them is impractical. If they keep the same PROs in place to do the negotiating, that might simplify. But we're also seeing a number of upstart rights agencies signing writers and handling representation, like Irving Azoff's GRM, so it's already becoming more complicated.

 

[umfan]

Does the artist not have to agree to ASCAP, BMI, etc.? I understand that if they do not, it won't be played on the radio, but I think what landtuna is asking is, does any law preclude the artist from foregoing traditional radio/streaming distribution and limiting distribution to direct sales(?).

The answer to that is no. BigA is correct that if you partake in the ASCAP/BMI distribution scheme what you are paid is fixed, but nothing stops an artist from not participating and requiring those who want their music to get it from certain outlets. Good luck reaching critical mass without radio or streaming, but if a Taylor Swift or Katy Perry chose to not have their latest records played on the radio (hasn't happened yet that I'm aware of), or, streamed, as has happened, then they will not be available there.

Nothing forces an artist into ASCAP, but I know of none that have made it without it.

 

[TheBigA]

Nothing forces an artist into ASCAP, but I know of none that have made it without it.

It's a two-way street. From the artist perspective, you need someone to represent you to get paid. Right now, you have four choices: ASCAP, BMI, SESAC, and GRM.

But on the other hand, an outlet legally can't play unlicensed music. If a radio station or streaming outlet plays unlicensed music, they're in effect stealing.

With all the media outlets in the country, with all the writers and artists, it's extremely inefficient to expect each individual artist to negotiate directly. You need a certain amount of muscle to get it done. There are several threads on this board of radio stations trying to avoid paying SESAC or licensing SESAC music. Global Rights Management is the newest licensing company, run by Eagles manager Irving Azoff. Once again, radio stations and others are trying to avoid additional negotiations and payments, and GRM has lawyers suing radio stations that play unlicensed music. So it's not easy or simple. You're asking a simple question about a complex situation.

 

[boombox4]

I understand the issue but I don't understand why the recording and motion picture industries are unique in the "performance" regard. No other business I can think of operates in this manner. If I build an elevator I get one check when it is put in operation. Every person riding it thereafter does not owe me a residual when they take a ride.

So my question, and I hope I have made it a bit clearer is, is there some reason that recording artists could not sell their wares like every other business? Do movie people earn residuals or is this just limited to the recording industry?

Musicians already have a venue for selling their music and setting their own price: it's called the CD. You take it to your shows, or you sell them over your website. You set your own price. As long as there have been CDs (cassettes and records before that), musicians had a venue to sell their own music -- directly interacting with the consumer -- and set their own price on it, from free to however high they want to go and still hope to make money off of it.

I saw a blog written by a 90's musician last year -- a guy who was in a one hit wonder band from that era. He complained about the paltry amount of money he made off of streaming. I forget how much money he said he made off a hundred thousand or so 'plays', but it was in the low thousands of dollars (if memory serves).

A reader left a comment asking him why he didn't also complain about radio -- after all, if just one station had 5000 listeners who heard the same song five times a day, that was the rough equivalent of 25000 "plays", and the money he probably made from such 'plays' was just as low. The blogger wouldn't have any of that. He was bent on explaining how musicians were getting screwed by the streaming companies. Not having access to all the numbers, I don't know how valid his complaint was. But it was obvious the streaming model was not matching his expectations.

I think musicians may have some valid complaints about the present system. But no one holds a gun to their head telling them to get into the business and hope to make money. Because few of them actually make money on it anymore. Most local musos I know 'market' most of their songs for free on Mp3 download, taking the loss as a form of promotion for playing shows or hoping the listeners will order the CD, because they know there isn't much money to be made in music.

In book publishing it's much the same. There is so much out there, hundreds of thousands of people market their books on Amazon and the like and many of them maybe make $10 a book which hardly covers the cost of copyright.

The benefit to the musician, the beginning author, etc. from the modern model is even if they don't make much money at what they do, at least they can be heard or read. In the pre-internet days, it was more of a closed model.

 

[TheBigA]

A reader left a comment asking him why he didn't also complain about radio -- after all, if just one station had 5000 listeners who heard the same song five times a day, that was the rough equivalent of 25000 "plays", and the money he probably made from such 'plays' was just as low. The blogger wouldn't have any of that. He was bent on explaining how musicians were getting screwed by the streaming companies. Not having access to all the numbers, I don't know how valid his complaint was. But it was obvious the streaming model was not matching his expectations.

Typically when musicians complain about streaming, they use one specific site as their example. But they ignore the fact that their songs are streaming on multiple sites, so they get money from many places, not just one. I like your example about the single small radio station, because they don't see the break-out for individual stations, but a single monthly check for all broadcast radio play. But the SoundExchange check includes an itemized report that is broken down by site. That gives them ammunition for these blogs and hearings. The broadcast radio rate is set by federal law, and then the actual dollar amount is negotiated between the licensing agencies and the Radio Music Licensing Committee. The digital rate is set by the Copyright Royalty Board, and then negotiated by SoundExchange and major streaming companies.

Clearly, right now, musicians are united in their objection to the digital rate, and the way the law is constructed, it's likely they will get an increase. Perhaps not enough to make them happy, but enough to really hurt streaming companies. They don't complain about the broadcast rate, but songwriters get 100% of the royalty, which is certainly better than what they get from digital. The percentages in digital are about 20% songwriters, 80% labels, artists, and musicians. That second group gets no royalty from broadcast.

 

[wavo]

Consider the group that does not want/need radio airplay (if there is such an animal) and wants to direct market it's music to consumers. Could they legally stream their own material, on their own website, and then sell their own music to interested consumers?
I thought there were a handful of artists that were trying this approach. No record labels involved...no radio...just Twitter/Facebook et.al. and a website where you can sample, and then purchase their music. If you pay $0.99 for a song the band receives $0.99. The band pays the cost of producing the product and bringing it to market. Social media is the main marketing tool, bypassing radio and streaming.
Is there a Federal law preventing this type of arrangement?