WHOSE MUSIC IS IT ANYWAY? (Part 5/5)

How can legislators keep pace with technology?

March 18, 2016

|

Dominic McGonigal - C8 Associates

Consumers, musicians and the music industry are not the only ones affected by the ‘giant billboard in the sky and virtual jukebox’. Legislators have been racing to keep up and reform seems to be perpetual.

In the early days, it was all so simple. Queen Anne published her Statute in 1710, replacing the print monopoly system with a copyright for authors in their books. That was the start of copyright legislation, followed by France in 1791 (at the height of the revolution) and most of the rest of Europe in the early 19thC. By 1886, there was a realisation that an international system was needed and the Berne Convention was agreed, giving creators guaranteed rights, with reciprocal recognition in all signatory territories. Then during the 20thC, new legislation came along about every 50 years. Copyright laws were updated in the early part of the century to take account of recordings. They were updated again in the middle of the century to encompass broadcasting and film. And some were updated again as policymakers were looking at convergence and its impact. 
 

Anticipating the effect of the internet, the World Intellectual Property Organisation ratified two treaties in 1996, the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty. 94 countries have signed up to those treaties. Since then, the calls for reform have been all the louder.

Responding to the effects the internet has had on markets, all major territories have been actively reviewing their legislation. The EU has passed no fewer than ten Directives covering copyright in music in the past 25 years. They are Rental (1992 and 2006), Satellite and Cable (1993), Copyright Term (1993, 2006 and 2011), Information Society (2001), Enforcement (2004), Orphan Works (2012) and Collective Rights Management (2014). The USA has also been active updating legislation, starting with the Digital Millennium Copyright Act (the DMCA 1998) with its now much debated ‘safe harbour’ provisions.

Last month, a German court ruled that YouTube could use ‘safe harbour’ provisions so that it has no responsibility for any content uploaded by a user. The rightholder can only take action against each individual YouTube user.

And so the reform continues. The US Copyright Office has instigated a major reform programme and the European Commission has several copyright initiatives within the Digital Single Market. And whereas in the early days, the internet had limited impact on non-music sectors, now the effects go well beyond the creative industries to almost every sector in the market.

As a market, the internet has a powerful networking effect which has resulted in the concentration of power in a few players. What has happened to music, is beginning to happen to film, TV and publishing and the impact is spreading to other sectors too. So the concentration in market power is becoming a more significant problem for legislators to tackle. But legislators have faced those challenges before and made market rules that create a more or less level playing field.

The blog mini series Whose Music Is It, Anyway? is based on a guest lecture given byDominic McGonigal at Trinity College, Dublin in February 2016.

WHOSE MUSIC IS IT ANYWAY? (Part 4/5)

Musicians and the internet: The Good, the bad and the  ugly.

March 17, 2016

|

Dominic McGonigal - C8 Associates

This ‘giant billboard in the sky and virtual jukebox’, read here, has been a bonanza for consumers and hugely disruptive for the music industry. But what about musicians

The biggest impact has been connection with fans. Musicians can now have a direct dialogue with fans in a way that would be inconceivable before the Internet. Back then, an artist could communicate at a live gig, through recordings and through the press. They could also have an army of people answering fanmail, but even that doesn’t touch the experience of a Tweet from a hero, visible to everyone else.

Musicians can now connect with consumers in a way they have never been able to before through social media. It is perhaps not surprising that many of the biggest Twitter and Facebook accounts, with millions of followers, are artists. Fans can feel a direct connection with the artist.

The other big benefit has been the massive reduction in cost and ease of recording. This is not strictly the result of the invention of the World Wide Web, even though the Internet has facilitated recording one musician in New York and dubbing them almost instantly in a studio in Stockholm. It is the advance in digital technology which has allowed musicians to record, mix and edit on their own.
Famously, Daniel Bedingfield created his hit single Gotta Get Thru This in 2001 in his bedroom using PC and Making Waves Audio Software.

This has led to a proliferation of recordings. PPL, the UK licensing body for recordings, has about 1,000 new recordings registered on the database every day. That’s how much is being produced and registered within the industry.
On YouTube, there is even more.

And in theory, distribution is now a doddle. Once you have finished your track, you put it online on Soundcloud and, instantly, you can reach 100 million users.

You can reach 100m users. You probably won’t.

My latest track on Soundcloud has clocked up 22 plays in four months! The reality is that distribution is more than just availability. You still need marketing dollars. Arguably, marketing has become more difficult, because of all the ‘noise’ on social media.

There is another downside, from the ‘post first, license later’ model. Musicians have now lost control over the music they produce – once it’s out there, you lose control. Anyone can upload your music and even if you or your record company gets it taken down, it will most likely appear somewhere else within a few hours.

But, the biggest impact has been on their income. As consumption has moved from CDs and radio to streaming, it is easy to see why artists’ royalties have dropped. CDs and radio generated significant revenues, with a share (up to 50% for radio) going to musicians. Streaming generates around the same income as radio, but artists receive a much smaller share. This is because a stream is treated as a sale under older style artist contracts and, so can be subject to deductions such as packaging (25%), overseas sales (50%), TV advertising (50%) and even breakages (10%) – based on the early days of the industry when records were shattered as boxes of vinyl were loaded into the back of a lorry.

So what are musicians doing about it?

When Apple announced their new music service in June 2015, with a three month free trial, Taylor Swift said in an open letter, “Please don’t ask us to provide you with our music for no compensation.” Within 24 hours, Apple responded with a Tweet from Eddy @Cue, “We hear you @taylorswift13 and indie artists. Love, Apple.”

Another example is Adele. Her album 25 was the biggest selling last year – selling 3m units in the UK alone and 7m in the U.S. One of the reasons the album was so successful is because it was not on the streaming services. And sales generate significantly higher royalties than streaming services.

Taylor Swift did a similar thing in 2014, removing her back catalogue from Spotify. Interestingly, Adele’s manager Jonathan Dickins commented at the time,

“I think streaming’s the future, whether people like it or not, but I don’t believe one size necessarily fits all with streaming. Spotify have always been pictured as the bad guys in this, but the biggest music streamer out there is YouTube, without a doubt. If I make a search now for Taylor Swift on YouTube, give me 30 seconds and I can have the whole Taylor Swift album there streamed.”

And we know that YouTube revenues for a stream are a fraction of what comes from Spotify.

Perhaps most interesting, Ellie Goulding released ‘On My Mind’ in September 2015. She did post it on YouTube, but only a trailer. YouTubers were limited to a 30 second clip, with a still photograph and prompts to go to Vevo or iTunes for the whole track. And you can see why she wants to push people to those services. Each play on YouTube would pay Ellie 0.01c in round terms. Other streaming royalties would be nearer 0.1c while a sale would be more like 10c.

Recent research by ADAMI (the French collecting society for artists) shows the breakdown in revenue from streaming services, based on analysis of several hundred contracts

The result is that, out of the typical €9.99 subscription fee, the performers get less than 5%, smaller than all the other players in the value chain, including the government. Artists have recently got together in the International Artist Organisation, formed just over a year ago. They are actively campaigning for a change in legislation to create a fairer and more transparent market as part of the EU Digital Single Market.

The blog mini series Whose Music Is It, Anyway? is based on a guest lecture given byDominic McGonigal at Trinity College, Dublin in February 2016.

Dominic McGonigal is Chairman of C8 Associates, a consultancy dedicated to taking creative businesses to the next level. He also chairs two creative startups, CICI and JazzUK. Read more at www.c8associates.com

WHOSE MUSIC IS IT ANYWAY? (Part 3/5)

What the internet has done to the music industry.

March 16, 2016

Dominic McGonigal - C8 Associates

That ‘giant billboard in the sky and virtual jukebox’, read here, has led to an explosion of consumption, but most of it is free. This has had a profound effect on the music industry.

Before the internet, the vast majority of record company income came from sales of records. This delivered substantial revenues, with good margins. In fact, worldwide revenue for recorded music increased year-on-year, peaking at $33bn in around 2003.

Now, the revenue is around $15bn – less than half what it was twelve years ago. And yet, consumption has gone up. What has happened?

The first reason for this is obviously piracy. Shawn Fanning, a brilliant and creative developer, created peer-to-peer software when he was 18 years old. Apparently, he spent 60 hours writing the code for peer-to-peer file-sharing without a break. He named it ‘Napster’ and released it in June 1999. Within weeks, about 80 million people downloaded Napster on to their PCs to share files.

Napster was actually closed down in 2001, just two years later. But by that time there was a growing number of Napster clones e.g. Kazaa, Limewire and later BitTorrent. Essentially, the peer-to-peer technology became more and more networked and less and less reliant on a central server. The availability of free music was too much of a temptation for many. Just as significant though is the new model ‘post first, license later’. Platforms such as YouTube allow its users to upload any video with the platform using the ‘safe harbour’ provision to absolve itself of responsibility for the content, legal or illegal. Instead, they have a takedown procedure where any rightholder can request that an infringing file be taken down. Rather than this being the exception, it has become the rule. YouTube receives over 15m requests to take down an infringing file, every week. And when faced with a choice of something or nothing, many rightholders will accept a low royalty, rather than go to the expense of all the takedown notices. This explains the relatively low revenue from the enormous consumption on these platforms. 

Let’s take a look at some numbers:

YouTube is far and away the largest streaming platform online. Its 1bn monthly users generate just $600m for the music industry. By comparison, the streaming services, with just 41m users, generate $1.6bn. The difference is highlighted by looking at the gross revenue per user. A streaming customer typically pays $120 a year for a premium subscription. That same consumer using YouTube is worth about 60c, per year.

But the ‘post first, license later’ model has a more significant impact. It effectively means everything is available free, no matter how many takedown notices are sent. Why would a consumer pay for music when everything is available free, even streaming continuously similar tracks for you. Back in the old days, the baseline was a budget album (around £2). Now, the baseline is £0. In order to compete, the freemium services such as Spotify have to offer the entire catalogue free and find other ways to upsell to a subscription.

That has led to a decline in sales revenue (physical and online combined), while the biggest form of music consumption, streaming, delivers just 24% of revenues. The world’s largest streaming service and largest platform for music consumption, YouTube, produces about 2% of total recorded music income. Live music revenues have increased in recent years, but not enough to plug the gap.

Record companies and publishers can still make a margin in the business, but when topline revenues halve, there is little room for investment in anything but a bankable hit. That explains why catalogue sales overtook sales of current releases in the USA for the first time last year. 

It is easier to plan for a modest return licensing a back catalogue than to risk investment in a new release. 
 

The blog mini series Whose Music Is It, Anyway? is based on a guest lecture given byDominic McGonigal at Trinity College, Dublin in February 2016.

Dominic McGonigal is Chairman of C8 Associates, a consultancy dedicated to taking creative businesses to the next level. He also chairs two creative startups, CICI and JazzUK. Read more at www.c8associates.com

WHOSE MUSIC IS IT ANYWAY? (Part 2/5)

Consumers have never had it so good.

March 15, 2016

Dominic McGonigal - C8 Associates

Back in 1993, when I described the Internet as ‘like a giant billboard in the sky and a virtual jukebox’ read here, I thought it would transform the consumer experience, but even I have been astonished at the change.

Before then, if you liked music, you could go to a gig, turn on the radio or buy a record. It’s hard to remember now, but music was not as ubiquitous back then. Listening to music was a conscious decision and one that generally took some effort, such as choosing a record, taking it out of the sleeve, putting it on the deck, and gently resting the stylus on the opening grooves.

How things have changed.

We can still go to gigs, listen to the radio and play a CD. But, now we have access to music wherever we are, and it’s music we can choose.

The first ten years of the Internet had limited impact on music consumption. Even when Napster launched in 1999, giving access, albeit illegally, to the entire music catalogue, dialup speeds meant that downloading an album took a couple of hours – hardly the instant response we are used to now.

Things started to change at the turn of the millennium, with the iPod (2001), iTunes (2003), YouTube (2005) and Spotify (2008) expanding the choices available. Now there are hundreds of legal online music services and many more that are unlicensed. There are even over-the-top services (mostly unlicensed) that will source music from anywhere according to your preferences.

And, of course, most of this music is free. Even the paid services, such as a Spotify premium service with 24/7 access to millions of tracks, is less than the cost of buying one CD per month (at pre-Internet prices).

So, there is now a massive choice for the consumer in terms of what they can get and how they can get it.

It is hardly surprising then, that music consumption is at an all-time high. Nielsen Soundscan reported 845m sales transactions for music in 2000. Ten years later, that doubled to 1.5bn, albeit with a lower transaction value. But, those figures are dwarfed by streaming. Never mind 1.5bn transactions in a year. YouTube reports 1bn users active every month. About half of those are reckoned to be music videos, often set to play in the background while the consumer is doing something else online.

Music fans have never had it so good. But what about the music industry?

The blog mini series Whose Music Is It, Anyway? is based on a guest lecture given by Dominic McGonigal at Trinity College, Dublin in February 2016.

Dominic McGonigal is Chairman of C8 Associates, a consultancy dedicated to taking creative businesses to the next level. He also chairs two creative startups, CICI and JazzUK. Read more at www.c8associates.com

WHOSE MUSIC IS IT ANYWAY? (Part 1/5) How the Internet has changed business models

March 14, 2016

|Dominic McGonigal - C8 Associates

Source: Dissecting the Digital Dollar, MMF/CMU, 2015

In 1993, I received a phone call from Darren Henley. Yes, the Darren Henley who is now the Chief Executive of the Arts Council. Back then, he was doing the news for Classic FM. He asked me whether I had heard about the internet – it had only been invented three years earlier by Tim Berners-Lee – and whether I would do an interview. He wanted me to tell the radio listeners about the internet and what it means for musicians.

I described it as a ‘giant billboard in the sky and a virtual jukebox.’

Twenty five years later, the internet is dominated by advertising and interactive streaming.

And the business model for music has been turned upside down.

In the pre-Internet days, right up until the millennium, the music business was about selling records. Bands toured to sell records. They made videos to sell records and they went on the radio to sell records. The record company had one deal with a distributor and almost all their revenue came from four or five retailers. It was a linear value chain, with a margin for the retailer, a margin for the distributor, a royalty for the artist and a royalty for the writer. The record company was at the centre of the business model. 

But that all changed with the Internet, although it wasn’t until about ten years after Tim Berners-Lee invented html that the music industry really began to feel the effects. In 2001, Apple introduced the first iPod. iTunes launched in the U.S. in 2003, followed a year later with the launch in Europe. Within three months of the UK launch, there were over 2m legal downloads, enough to create a download chart, announced by BBC Radio 1 in September 2004. YouTube followed in 2005 and Spotify in 2008. Consumers turned their back on CDs and online consumption rocketed.

Let’s take a closer look at these new business models.

iTunes offers downloads for $0.99. In round terms, 70% of that goes to the record company and about 8% goes to publisher and songwriter. This is very similar to the old sales business model, except that the songwriter royalty comes directly from iTunes, not the record company.

Spotify offers a basic $9.99 monthly subscription or an ad-funded service, which is free. The total revenue from subscriptions and adverts is then combined to determine the royalties for the music – about 65% goes to record companies and 8% to publishers. That’s known as a ‘Freemium’ model, a free element with a limited offering, encouraging consumers to opt for the subscription with the full premium service. Spotify now has a total user base of just under 100m, of whom around 28m are paying subscribers, which is the lion’s share of Spotify’s revenues. Although there is still a link between a play and the payment by a consumer, that link is not direct as the royalty payment will depend on the number of other songs that are played, as well as the total number of subscribers.

YouTube is free to the consumer. The revenue comes from advertising on the platform, as well as from the user data. There is no direct link between a play on YouTube and a payment by an advertiser. In theory, the deal is that 50% of any advertising revenue linked to a video is shared with the right holder. I say in theory because there are quite a lot of caveats to that and record companies and artists have no way of knowing whether the accounting is correct.

More significantly, YouTube allowed anyone to upload any content. Rightholders were then offered a choice of accepting that licence deal or going through the takedown process (currently YouTube receives over 15m takedown requests every week). It is effectively a ‘post first, license later’ model. 

The outcome is a new business model.

Instead of the record company being at the centre we have the licensee, such as Spotify, YouTube or iTunes at the top. They get the licence from the record company, which includes the artist, and the licence from the publisher, which includes the songwriter. The business model is now based on a licence for a whole catalogue, rather than a transactional deal for the sale of an album.

While this licence model undoubtedly impacts the music industry, it is the ‘post first, license later’ model, favoured by some service providers, which has had the most profound effect. It is effectively a reversal of copyright principles.

From the Statute of Queen Anne in 1710 to now, copyright law is based on the simple idea, ‘I write the music, it’s mine.’ In law, that gives me the right to say ‘Yes’ or ‘No’ to anybody. I can decide about making copies, making it available, distributing it, selling it – anything. But on the internet, I no longer have the right to say ‘Yes’ or ‘No’. It’s already out there.

Post first, license later.

The blog mini series Whose Music Is It, Anyway? is based on a guest lecture given by Dominic McGonigal at Trinity College, Dublin in February 2016.

Dominic McGonigal is Chairman of C8 Associates, a consultancy dedicated to taking creative businesses to the next level. He also chairs two creative startups, CICI and JazzUK. Read more at www.c8associates.com