No. 31

February 01, 2016

A new report released by the Berklee College of Music's Institute for Creative Entrepreneurship details what it repeatedly calls a "lack of transparency" in the music business. The 28 page report titled "Transparency and Money Flows," also gives recommendations that highlight the complexity of the current system. The output of a year-long study estimates "that anywhere from 20-50 percent of music payments don't make it to their rightful owners." Proposed fixes include better behind-the-scenes technologies, a "Creator's Bill of Rights," a "Fair Music" seal and education campaigns. Those approximated percentages for music payouts lost are "based on multiple conversations with many different folks involved in payments," acknowledges Allen Bargfrede, an associate professor at Berklee who spearheaded the report. "I personally believe the number is closer to 20%, especially in Europe and North America, but probably can be as high as 50% when you start to look at streaming payments in other languages that have different character sets."

The reasons so much revenue might fail to trickle down are as varied as the services and royalty types that generate music income in the first place. Musicians (or anyone to whom they sell their rights) can earn fractions of pennies or thousands of dollars from streaming services, from licenses for films, TV or commercials and from whatever lawyers deem "public performances" of their works, all without anyone ever buying a CD or mp3. A growing layer of middlemen that collect the money and theoretically pass it on to the rights holders presents another opportunity for some of that revenue to lose its way. One focus of the report is the so-called "black box," a phrase that refers to where money ends up when, for instance, royalty revenue from a stream can't be linked back to a songwriter. Then there is "breakage," the difference between the advance a streaming service pays to a label and the royalties. If each streaming service were to pay each of the three major labels the $42.5 million advance for which Sony Music was eligible under a leaked Spotify contract published by The Verge this past spring, the potential pool of breakage revenues to labels would total hundreds of million dollars, the report says. Since the leak, the major labels have all said they share advance payments with artists. Another source of funds for the black box stems from differences in international copyright law, which results in license fees being collected abroad for what's known as the "performance" of U.S. sound recordings. According to the report, this revenue usually ends up with foreign sources, which pass the money along to local artists.

"The biggest message out of the report is just the lack of technology adoption for the back end of the music industry," Berklee's Bargfrede says. "Streaming is now becoming the dominant method of music consumption. We need to figure out how to work with the streaming services in a way that makes sense to creators." More specifically, the report calls for an industry-standard format for up-to-date information about the various types of music revenues, so artists could in effect monitor their royalties online the way consumers track their bank accounts. The authors also propose creating "a decentralized, feasible" database of global copyright ownership details. The "Creator's Bill of Rights" would lay out a set of foundational principles for artists, from the right to be fairly compensated to the right to know which parties are taking a cut out of their payments streams. The "Fair Music" certification would allow digital services and labels to show they meet certain standards, similar to fair-trade coffee or organic vegetables. Beyond that, the Berklee researchers suggest lobbying Congress to enact a sweeping overhaul of the music copyright system proposed earlier this year by the U.S. Copyright Office. Finally, the report urges education programs to inform musicians about these issues affecting their revenue streams.

Some industry observers agree that transparency is a problem for the music industry, though not all fully support the report's proposed solutions. Transparency is "the next big fight," says Casey Rae, CEO of the artists' advocacy nonprofit Future of Music Coalition. Mark Mulligan, co-founder of digital-music market research firm MiDiA Research, says that while transparency is "certainly important," increasing it isn't going to fundamentally change the state of the industry. The biggest shift in the industry remains the transition from an "ownership model" to a "rental model," and the differing payout methods that entails. Jeff Price, founder of Tunecore and CEO of Audiam, a company that helps track down royalties from digital services, says between 15 percent and 30 percent of tracks on streaming services globally go unmatched with a songwriter. Price says "For every single client we represent we have discovered they are just not getting paid for most recordings of their songs". Price lays much of the blame at the feet at what's known as a "compulsory license." That's the system allowing any musician to copy another's song without asking permission, so long as she pays a federally mandated fee. It's a system that dates to a 1908 Supreme Court decision that also gave rise to the idea of "mechanical" royalties, which apply to all mechanical reproductions of songs; the machines in question, back then, were player pianos.

The Recording Industry Association of America (RIAA) declined to comment on the recommendations without seeing the full report. The American Association of Independent Music (A2IM), which represents independent labels, welcomes the discussion. As for streaming services, Spotify says its focused on transparency, too. "We're big believers in transparency and think it's key to building a new music economy that pays artists and songwriters fairly," says Jonathan Prince, global head of public policy and communications at Spotify. Artists, fans, labels, streaming services and others with a stake in the music industry's future will have more chances to weigh in on the report's proposals. Berklee's Rethink Music initiative has scheduled a public event on the subject in Boston on October 2. "We welcome anyone to please participate," Bargfrede says. The floor for the music industry's transparency debate is open.

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