The DCMS calls for a complete reset of the music streaming industry

Following a wide-spread inquiry, the Digital, Cultural, Media and Sports Committee (DCMS) published a report which has called for a complete reset of the music streaming market. The proposed reform of legislation and regulation is aimed at addressing the:

1. 'pitiful returns' that creators receive from streaming;
2. disparity in power between creators and companies;
3. major music companies unfairly dominating the music streaming industry;
4. lack of regulation around streaming, such as playlist algorithms; and
5. lack of transparency in the industry.

 Background:

On 15 October 2020, the DCMS launched an inquiry into the impact of the business models operated by platforms such as Spotify and Apple Music on the wider music industry. One of the initial reasons behind the inquiry was the realisation that music streaming in the UK brought in more than £1 billion in revenue (with 114 billion streams in the last year alone) yet the DCMS has found that artists can be paid as little as 13% of the income generated. Whilst this issue existed before the Covid-19 pandemic, it has been exacerbated as creators have been restricted from touring and performing live, and have instead become solely reliant on revenue from recorded music. For more on the launch of the inquiry, please see our previous blog here.

As part of its inquiry, the DCMS received over 300 pieces of written evidence, organised an engagement event with emerging artists and held several oral evidence sessions from various parties involved ranging from creators (performers, songwriters and composers), music companies, collecting societies and governmental ministers, to streaming service representatives (including Spotify, Apple, YouTube, and Amazon).

Key findings:

1. Creator remuneration

Creator remuneration was the fundamental issue which was raised by the inquiry. Whilst consumers typically enjoy music that is cheaper, more personalised and more readily available than ever before, the report finds that streaming's short-term pricing structure puts music at risk in the long term, because creators are being discouraged from creating new music as they struggle to earn enough remuneration from streaming.

Summary of issues/recommendations of note:

• Remuneration for performers – unlike the music broadcasting model, where each play of a track on a radio station, TV programme or film is considered a "communication to the public" and typically results in a 50:50 distribution of revenue between record labels and performers, the major music companies have consistently asserted that music streaming is simply a version of music companies "making available" music, which is a status that does not provide a fixed rate of revenue for performers and instead means that performers' payments are dependent on negotiations between the major record labels and the streaming platforms (which generally result in a 55:30:15 revenue split for the labels, streaming platforms and performers respectively). Performers argue that the classification of "making available" fails to take into account the characteristics of streaming that set it apart. For example, although there is marginal cost for digital consumption in comparison to the manufacture, storage and distribution of physical records, this cost saving has not been passed onto the performers. The DCMS suggests that the Government should legislate to address these inconsistences and provide performers with the right to equitable remuneration when music is consumed by digital means.
• Remuneration for songwriters/composers – despite the important role which song writing and composing plays in music creation, the DCMS found that songwriters and composers receive very low rates of remuneration for successful songs. For example, one songwriter/composer who co-wrote an NME and Rolling Stone award-winning song (streamed more than 137 million times on Spotify), only received a royalty of £3k. The DCMS urges the Government to consider how to ensure that any given song (i.e. the underlying music and lyrics) is valued in parity with recordings of that song, so as to support songwriters and composers, and if needed, to bring forward legislative proposals alongside equitable remuneration for performers, to ensure that all creators are able to benefit from the reforms.
• Metadata – the metadata in music tracks contains a range of data about the creators of the track. Mismatched, incomplete or missing metadata can result in delayed or even misallocated creator royalties.The DCMS recommends that the Government should 1) oblige record labels to provide metadata for the underlying song when licensing a recording to streaming services, 2) push the industry to establish a minimum viable data standard which is usable and comparable across all services, 3) put an end to unallocated royalties being put into 'black boxes' and spread pro rata – instead reinvesting this revenue in the industry, and 4) create a comprehensive musical works database where rights-holders can then provide accurate copyright data to stakeholders as needed.
• Royalty Chains – there is current confusion and complexity over how song rights are licensed and how royalties are subsequently published. As a result, the DCMS suggests that the Government should require all publishers and collecting societies to publish royalty chain information to provide transparency. In addition, the DCMS recommends that the Government should leverage the size of the UK's market to explore the possibilities of global licensing deals.

2. Recorded music market

There are currently just three major companies (Universal Music Group, Sony Music and Warner Music Group) which together have a share of the UK recording market that is equivalent to 75%.  They also dominate music publishing, which is the part of the industry that deals with the rights to the lyrics and composition of a track.

Summary of concerns/recommendations of note:

• Competition – as the three major companies currently dominate the UK recording market, the DCMS recommends that the Government should expand their support for the Music Export Growth Scheme which provides resources for British music companies to survive and thrive in export markets. The DCMS also propose that any grant funding awards should include a clause in their contracts so that any funded performer cannot then be acquired by a major company for a certain period of time.  Lastly, the Government should introduce a right for performers to vary their existing contracts where a performer's royalties are disproportionately low compared to the success of their music (especially as lots of performers sign their contracts very early on in their careers and the DCMS recognises that there should be a dynamic market which enables successful performers to re-negotiate better terms as their career develops).
• Market domination – in addition to the 75% share of the UK recording market controlled by the major companies, there is also concern over the major companies' position in negotiation of licensing (particularly in regards to playlists). This has prompted the DCMS to recommend that the Competition and Markets Authority (CMA) should undertake a full market study into the effect of the major companies' dominance over the music economy.
• Transparency – performers face a systemic lack of transparency from both music companies and streaming services that license their works. The DCMS has found that often, performers are not privy to the terms of the licensing agreements being negotiated on their behalf. As a result, performers find it difficult to know their rights and NDA clauses mean that performers are prevented from accessing proof of sales figures to ensure they are being remunerated correctly.  Whilst the Government has already stated that it will not implement UK law provisions that are similar to those under the Directive on Copyright in the Digital Single Market in the EU (such as Article 19 of the Directive which imposes a transparency obligation on entities like music companies to provide creators with transparency reports in relation to the modes of exploitation of their work, all revenues generated and remuneration due), the DCMS suggests that new rights need to be introduced for performers in the UK so they are not left worse off than their EU counterparts. Additionally, the Government should introduce notification requirements so that parties are clear on the terms/structures of a deal before signing.

3. Streaming market

Generally, streaming services such as Spotify and SoundCloud remain mostly in parity with one another on price. Although both of these platforms are operating at a cumulative annual loss, their services are sustained by venture capital which allows them to price competitively in order to maintain market growth. Rather than trying to compete on price, streaming services tend to try and distinguish themselves from their competitors based on their technology offerings.

Summary of issues/recommendations of note:

• Technologies – the use of algorithms is important in the role of consumers' discovery and consumption of digital music, and ultimately plays a significant role in determining how creators are remunerated. Where curators of playlists are paid or receive benefits in kind for creating playlists, the DCMS suggests that curators should be subject to a code of practice developed by the Advertising Standards Authority, to ensure that decisions are transparent and ethical.
• Payment systems – the predominant method of payment for streaming is (net distributable revenue / total number of streams) x the pro rata share of total streams. However, this model is seen by creators and performers as unfair given that subscription and advertising revenue pools are calculated separately. Various alternative models have been proposed, such as the user-centric model, whereby a music company would isolate each user's subscription fee and allocate it exclusively to the tracks streamed by that user. The DCMS found the user-centric model to be compelling and has been generally encouraging of new and creative ways to improve fairness and transparency in creator remuneration. However, the DCMS have expressed concerns about existing contractual frameworks between music companies and streaming services and have recommended that the CMA consider whether these contractual frameworks could (if misused) prevent innovation when it comes to exploring new economic models for creator remuneration.
• 'Safe harbour' provisions – the so-called 'safe harbour' (or sometimes 'liability shield') rules (which were transposed into UK law back in 2002 as a result of the EU's E-Commerce Directive, and sit under Regulation 19 of the Electronic Commerce (EC Directive) Regulations 2002/2013) provide tech companies that host user-generated content (UGC) with an exemption from liability for content that infringes copyright, provided that they act quickly on becoming aware of infringing content (usually by taking down the offending content). These provisions effectively give UGC platforms a competitive advantage, because they do not have to negotiate licences for music until after users have uploaded the music onto their platforms (unlike streaming platforms such as Spotify who negotiate licences with music distributors before the relevant music is uploaded onto the platform). Whilst YouTube is an example of an UGC platform using safe harbour provisions and is popular for 'free' music streaming, YouTube is mostly advertisement-funded, which then leads to YouTube paying artists less than average on a per-stream basis compared to other services such as Spotify who mostly rely on funding from subscriptions. In this way, the 'safe harbour' provisions have led to a value gap (from the artist's perspective) between ad-funded streams on UGC platforms and subscription-funded streams on streaming platforms. In addition, due to their popularity, UGC platforms have also forced streaming platforms such as Spotify to keep their prices low in order to remain competitive, which has resulted in even less revenue to be shared amongst creators and artists. As a result, the DCMS have suggested that the CMA should consider introducing a pro-competition framework for music streaming and designating YouTube's streaming services as having a "strategic market status" (the same designation has been given by the CMA to the "tech giants", one of the key consequences of which is that they will be required to abide by a code of behaviour to encourage competition between different products).

Next steps:

From the report's findings, it is clear that the current music streaming industry is unsustainable and is likely to lead to the decline of new music in the long term unless supported by a comprehensive new legal framework. The Government is now due to respond by 15 September 2021.