David Balfour sees a number of digital royalty disputes coming to a head in 2015

24 April 2015 - Editorial

2015 is shaping up to be the year of the royalty dispute. There seems to be a growing disquiet with the digital royalty framework on a number of fronts. This isn't exactly new, but we suspect these arguments are now beginning to come to a head.

There is not one key issue here but several topics which have been bubbling under and look set to get more urgent in tone. For one, many artists are unhappy with the levels of payouts they're receiving from their labels, with regard to the use of their works on digital services. Artists have long complained about the payouts they receive from labels, sometimes with justification, sometimes not. When it comes to the digital space, there are several different kinds of artist-led arguments here. 

Many artists – typically those signed to the largest labels – are unhappy that their old contracts, which were designed to handle a physical music world, are applied in the same way to digital services. There have already been a number of legal challenges from established artists towards labels on this topic – whereby artists seek higher royalties both now and for past digital uses. No such case has yet led to a wiping of the board however. Whilst it does see unfair that old contracts should govern new media, it also seems that artists need to challenge and renegotiate such contracts on a case-by-case basis. 

Another issue of contention for many artists and managers is a more modern trend whereby labels remove value from the digital royalty chain in a way which is not directly linked to music use. To put it another way, a practice whereby labels often now sign deals which extract payments from digital services in the shape of equity or minimum revenue guarantees. The eventual royalty rates which then get applied to artist payments are as a result lower than they ought to be, to make up for the value that was extracted by the labels up-front. Artists feel that financial value based on their work is being paid direct to the labels, without them standing a chance of receiving a share.

Allied to this concern is a lack of trust in the growing trend for labels to take equity shares in new digital music services. Artists often feel that this is yet another case of labels extracting value from the chain, with no intention of paying it out to their licensors.

There has yet to be an example that we're aware of where a big label has cashed out its equity holding in a major technology platform. It's too early to say therefore, whether labels do actually intend to cut artists out of any windfalls that would come from the sale of such an equity stake. Perhaps they have every intention of remunerating artists. We wouldn't be surprised if 2015 is the year where this question also gets addressed head-on. With labels enjoying equity stakes in key services such as Spotify and SoundCloud, as examples, sooner or later this principal is going to get tested when the ownership of one of the companies changes. Labels must surely be putting strategies in place for how to deal with such a scenario. How they do decide to handle such a situation will have some pretty wide-reaching implications.

Along with the issues outlined above, there's now what seems like an almost universal consensus amongst writers and publishers that their rights are being undervalued in the digital space. We've noted before how many publishers feel that they should be getting a far more significant piece of the digital revenue pie. This is true in the US especially, where many feel publishing value is set especially low in comparison to sound recording value. This debate is certainly not limited to America however. This week the German Music Publishers' association called on streaming services to pay 'fair share' to their members. At least, that's how many media outlets reported the story. What DMV chairman Dr. Rolf Budde actually called for, however, was for “streaming services and the record companies” to “give authors and music publishers a fair share of the revenues once and for all”.

We've noted before how most streaming services are already operating on paper-thin margins which mean that taking on additional royalty obligations would be commercial suicide. This doesn't mean that rightsholders won't try to extract more from services though. In the US a dispute between Pandora and rightsholders over royalty rates is heading for a federal court. Needless to say, both sides think they deserve more and it's going to take a court to decide who is right.

Whilst there are many interesting questions around digital royalty rates in 2015, the one that really interests us is the one around the balance of value between sound recording and publishing rights. It seems extremely likely that record companies and publishers are going to have to battle it out – perhaps very publicly - as to who should receive what share from digital services. With many of the biggest record companies and publishers sharing at least some common ownership, this could prove to be a very interesting battle indeed. Whilst record companies have traditionally led the charge in terms of digital service negotiations, we expect to see publishers and rights organisations making an increasing amount of noise and lobbying actions in these areas. This could prove to be one of the most impactful battles of the digital age to date.