Economics of music streaming review: Where are we now?

Over the past decade, music streaming services have grown rapidly, now accounting for more than 80% of music sales in the UK.  Consumers have benefitted from access to large catalogues of music, at lower prices, using a range of innovative services such as higher quality audio, view video content and synced song lyrics.  Music streaming services have not been seen to benefit the music industry equally, and there are concerns, particularly among recording artists and songwriters, that the current system for distributing revenues generated from music streaming is flawed.  On account of these concerns, the Digital, Culture, Media and Sport Committee ("DCMS") conducted a review of the economics of music streaming and published a report in September 2021 along with a follow-up report in January 2023.  The Competition and Markets Authority ("CMA") concurrently undertook a market study into music and streaming services and published its report in November 2022.

DCMS and CMA findings

Each of the reports recognised that music streaming has increased access to music for consumers and led to the availability of better, more innovative services at a lower price.  For music industry players, revenue has increased overall with digitisation extending the music industry's market exposure and its revenue earning potential.  Despite these outcomes, some are of the view that the economics of music streaming services are working to their disadvantage.  The DCMS and CMA analysed these concerns and reported these findings:

1. 3 major labels hold the majority share of the UK streaming market but this has not necessarily led to negative outcomes

Although 3 'majors' hold a combined share of over 70% of the music streaming market, the CMA concluded that this has not necessarily led to negative outcomes for consumers or the industry but could do so in the future as:

• labels' growth incentives may change when growth potential significantly drops as the pool of potential new users decreases (for example, if ad-funded 'free' streaming services start to reduce revenues, labels could shift focus on licensing only to the paid/premium services which generate more revenue);
• competition among streaming services for new users may reduce as the supply of potential new users decreases and music streaming platforms' efforts may shift to undermining the small pool of competition from other platforms rather than driving innovation to stand out; and
• data collection by smart speakers could also affect competition, for example streaming services which offer ad-supported streaming may be incentivised to use customer data to inform advertising or to leverage in licensing.

2. Clauses in agreements between labels and music streaming services protect the market position of the majors

• Most favoured nation clauses on pricing regarding the rates paid by music streaming services and non-discrimination clauses could both act to prevent music streaming services from favouring music based on price, for example by giving more prominence to cheaper music.
• Artists had raised concerns that confidentiality restrictions in agreements between labels and music streaming services meant that the level of information artists receive on the number of streams and royalties earnt on streams is inconsistent across labels. The CMA confirmed that the information available to artists concerning number of streams and royalties varies significantly.  However, it concluded that the confidentiality restrictions themselves did not prevent data sharing and that best practice standards in data sharing could improve outcomes for artists (albeit that confidentiality restrictions might make it harder for artists to verify the information by reference to source data).

• However, the CMA determined that the majors provide a "full catalogue" of music and, in the absence of alternative services with extensive catalogues, competition would remain weak even in the absence of these contractual clauses.

3. Unfair remuneration rights

The DCMS found that performers are not currently entitled to a fair split of streaming revenue, deeming this unfair considering the marginal costs of production and distribution associated with digital consumption. The CMA similarly found that the split in streaming revenues between songwriters and publishers may be sub-optimal, particularly for songwriters due to challenges in negotiating increases but determined that competition policy is not the right tool to reach an optimal split (see below).

Recommendations and the UK Government response

In response to these findings, both the CMA and DCMS suggested the Government take a more strategic approach to resolve the issues identified within music streaming, with the CMA ultimately concluding that these difficulties were not caused or exacerbated by issues related to how firms compete. Both the CMA and the DCMS considered that better access to data would improve outcomes for songwriters and artists:

• The CMA recommended that the Government develop best practices to tackle the lack of consistency and transparency across artists' rights to access streaming information. In this respect, the CMA suggested the Government review policies relating to the copyright framework and how music streaming licensing rates are set.
• The DCMS recommended that the Government establish minimum viable data standards so that artists can access streaming data in a way that is usable and comparable across all services. In response to the DCMS' report, the Government is engaging with the transparency working group and the metadata working group at the Intellectual Property Office, exploring agreed standards and a code of practice for contract transparency and developing minimum data standards for industry data flows.

Looking ahead and abroad

Currently there is no UK law governing the revenue split between music streaming services, labels, songwriters and recording artists. By comparison, several EU countries have legislated for performer rights in music streaming.

• Germany was ahead of the curve with its copyright laws which provided for these rights earlier than most other EU countries.
• Other Member States have now implemented new measures following the adoption of the Directive on Copyright in the Digital Single Market. Among them, Italy, Spain and the Netherlands have amended existing laws to require that the principles of good faith, transparency and proportionality are upheld in remuneration negotiations.
• In France, creators and industry representatives have instead negotiated an agreement for a minimum remuneration guarantee for streaming.

As music industry players lobby the Government for better outcomes and access to data, and the DCMS and the Government looks to other countries for their approaches to the distribution of music streaming revenues, we may see some proposals which shape the economics of music streaming come to the fore.

For further information regarding the economics of music streaming review, please refer to our previous blogs here and here.

This article first appeared on Lexis®PSL on 27 February 2023.