In the UK, royalties from online services jumped by 32% last year, according to a report from PRS for Music, the Performing Right Society in the United Kingdom for composers, songwriters and music publishers. In fact, royalties from online services (including both streaming and downloading) now produces more revenue than radio, according to the new report.
The growth figure reported by the UK body is very similar to the percentage increase recently reported by SoundExchange, the licensing and collection organization for performance royalties in the US. The 2012 reported figure for royalties collected in the US in 2012 was $502.2 million, a 35% increase over the 2011 number.
What’s different of course is that in the US, performance royalties are not paid by broadcast radio services, so a comparison of online versus royalties from radio sources cannot be made.
On May 23 in Brussels we’ll be discussing the business of Internet radio and online audio at RAIN Summit Europe. View the speaker list and agenda here.
Royalty payments from SoundExchange set a record in 2012, and exceeded the previous year by 58%. Payments to artists for performance made by Internet radio, satellite radio and cable radio services hit $462 million. Payments for performances made by subscription services are not included in these figures.
“SoundExchange’s increasing annual royalty payments are a positive indication of where the industry is heading. As digital radio continues to grow, so should the amount that performing artists and rights owners receive for the use of their content,” said SoundExchange President Michael Huppe. “Our distribution represents another record-breaking year for SoundExchange, but more importantly, it means more money in the pockets of the creators of music. We’re optimistic about the industry’s future, and look forward to maximizing digital performance royalties for the people we serve and finding new ways to propel the music industry forward.”
To be accurate it’s important to understand that not all of this money ends up in the hands of “creators of music.” According to Billboard, first, SoundExchange takes 5.3% off the top for administrative fees. After that, the “net” figure gets divided up as follows: record labels, or owners of the sound recording, get 50%. Performance artists get 45% and session musicians and backup singers get 5%.
Earlier this year it was estimated that Pandora was responsible for 37% of that record breaking number collected by SoundExchange. While SoundExchange doesn’t specifically report the figure they pay for performance royalties, they do report a “content acquisition fee”, which topped $182 million through their Q3 of 2012.
In casting around online I found this website. Whymusicmatters.com was created by NARM and RIAA as a resource to help consumers find authorized online music services. The site also features videos by various artists singing about the value of music.
“For the first time, in 2011 digital music revenues surpassed those generated from physical sales and that marker was reached because of a breathtaking array of services and platforms embraced by music companies.”said RIAA Chairman & CEO Cary Sherman. ” We understand that with so many options for accessing music online, users are eager for more information about which services are legitimate and what kinds of functionality they offer. That’s why we’re excited to be partnering with NARM and digitalmusic.org to launch whymusicmatters.com, which will hopefully make it easier for fans to access and discover sites that offer their favorite music.”
I’m glad to have found a resource where I can determine if a service is authorized, since it’s one of my personal policies to avoid promoting services that are not. But I’m disappointed in the site – apparently it’s really a site to help consumers find RIAA/NARM’s preferred online music services. It’s really hard to find Internet radio stations because they are listed as “statutory services” under streaming. All the premium subscription services are listed and linked to individually, with logos and descriptions, on that page, and then at the very bottom there’s a box that says “Statutory Services” which opens a new page where the listener has to click through hundreds of alphabetized radio stations (no logos, no descriptions, no links) to find one.
Unfortunately, this site is a glaring in-your-face example of a bad business partnership. Internet radio services, Pandora in particular, are paying a lot of money in royalties to SoundExchange, the royalty collection arm of the RIAA, and in return they get a listing buried deep in the site with no logo or link. Is there any other business you can think of where the vendors treat their retailers so badly? Because that’s what this is, it’s streaming services buying the rights to content and offering it to consumers. And clearly the RIAA and NARM are bad business partners for Internet radio…
Last week the Electronic Frontier Foundation, which tasks itself with protecting the public interest with regard to digital rights, got my attention by coming out in support of the Internet Radio Fairness Act. That’s the bill that has been introduced in congress to equalize the performance royalties that various streaming platforms pay around one standard. Currently, different standards are applied to streaming services based on who owns them and the type of services they provide.
From their post on the topic, here’s an excellent explanation of the issue at hand:
Music services aren’t all treated the same, though – Congress gave older, more established companies a leg up. For satellite and cable radio, the judges set prices to give the labels and artists a “fair return” and the music service a “fair income.” In practice, the judges tell these services to pay about 10% of their revenues to the artists and labels. For Internet radio, though, the judges are supposed to set rates based on what a “willing buyer and a willing seller” would do in an open market.1 This sounds pretty good, except that there is no open market, so there’s no consistent benchmark. As a result, judges have set Internet radio royalty rates at cripplingly high levels. Internet stations went to Congress twice, in 2008 and 2009, to get temporary relief from rates that would have put them out of business. Today they pay about 50% of their revenues to SoundExchange.
In case you got lost, they explain that satellite and cable services pay 10% of their revenues in performance royalty fees, while streaming services pay 50%. Simply because the technology is different. These are services that do not provide on-demand access to songs. You can’t download anything.
An article yesterday in the NY Times quotes Clear Channel’s Bob Pittman and Pandora’s Tim Westergren in support of the bill. The two companies compete fiercely as brands, but have paired up to support the bill as leaders in the Internet Radio Fairness Coalition.
MusicFIRST meanwhile, is the coalition of record labels, artists’ representatives, and unions that would like to bring the bill down. They would like fairness, but they’d like everyone to pay based on that “willing buyer/willing seller” arrangement that nets them 50% of revenues. Which would likely drive streaming out of business. And what would happen then you might ask. Would all the younger demos that have gotten so attached to streaming stop listening, or would they go underground and start listening to services that pay nothing? I’m just saying..
The following is a guest post by Angus MacDonald, General Counsel, Live365:
A few days ago, SoundExchange publicly released its Annual Report (Draft) for 2011. According to the report, SoundExchange’s 2011 collections from ALL statutory services amounted to $371.9 million. See SX’s Annual Report, p.7 (“In 2011, SoundExchange collected statutory royalties from all statutory classes of services in the amount of $371,922,621.”). That’s an increase of 40% ($106M) in collections compared with the previous year – i.e., $265.9M in 2010 vs. $371.9M in 2011.
Impressive increase. However, as discussed below, Pandora accounts for most (over 70%) of that growth. In its most recent 10-K filing (released about 3 weeks ago) for the fiscal year that ended Jan. 31, 2012, Pandora paid 49.7% of its revenues to SoundExchange. See Pandora’s 10-K , p.20 (“For our fiscal year ended January 31, 2012 we incurred SoundExchange related content acquisition costs representing 49.7% of our total revenue for that period.”).
Using the 49.7% figure (along with Pandora’s recently-reported revenue of $274.3M for its last fiscal year) means that Pandora paid $136,346,980 to SoundExchange in the 12 months that ended Jan. 31, 2012. That $136.3M figure represents 36.66% of SoundExchange’s total revenues ($371.9M) collected in CY2011. [NOTE: For the purposes of this exercise, I'm comparing Pandora's FISCAL year (Feb. 1, 2011 to Jan. 31, 2012) to SoundExchange's 2011 CALENDAR year, even though it's not entirely apples-to-apples.]
That 36.66% figure certainly would be much higher – well over 50%, I’d safely bet – if you look only at SX’s Internet-radio revenues, which are NOT separately broken out in SX’s Annual Report. [As many of you know, SoundExchange collects statutory royalties from many different types of services – including noninteractive Internet radio (Pandora, etc.), satellite (Sirius XM), cable subscription services (Music Choice), and business establishment services (DMX).]
Pandora’s royalty payments to SoundExchange more than doubled year-over-year – $61.99M in FY2011 vs. $136.35 in FY2012. That $74.35M increase in royalties paid by Pandora accounts for MOST – i.e., over 70% – of SoundExchange’s increased revenues ($106M increase) for 2011.
Another interesting factoid: Pandora paid about as much in royalties for its FY 2012 (i.e., $136.3M) as it made in TOTAL REVENUES for its previous fiscal year, FY 2011 ($137.7M).
My own editorial: With Pandora’s ever-growing listening hours and royalty payments, SoundExchange and the labels need a healthy Pandora as much as Pandora needs a reasonable Pureplay-like rate for the next royalty term (2016-2020). This is especially true if Sirius XM continues to sign up more direct license deals, thereby bypassing SoundExchange (though Sirius XM’s recent antitrust complaint suggests that may be a tough row to hoe).
There are several other semi-interesting tidbits from SoundExchange’s Annual Report, including its mini-hiring binge in 2011 (55 employees in 2010 vs. 72 employees in 2011) – which was probably necessary to handle all of the additional royalties from Pandora!
2011 revenues for the record industry from streaming music royalties jumped to more than half a billion dollars, according to a year end report by RIAA. Revenues from subscripton services (like Spotify, Pandora One, Rdio, MOG, Slacker) jumped 13.5% to $241 million, and Digital Performance Royalties, paid by all other streaming services (including Pandora) rose 17.2% to $292 million.
In its fiscal year ended January 2012, Pandora paid out more than $285 million in “content acquisition”, the bulk of which is performance royalties to SoundExchange. The time periods don’t match up perfectly because the RIAA report is calendar year, but you get the picture — Pandora’s paying a huge amount to SoundExchange.
Which should make for an interesting next round of negotiations for streaming royalty rates. Tim Westergren has always been very vocal on this topic, stating over and over again that he’s not against a royalty, but that the current costs are too high. With the next round of CRB hearings looming, he’s talking about it again. But this time, he’s coming to the table with over a 100 million registered users. And he’s SoundExchange’s biggest customer.
Pandora’s also got a lot of investors, and they’re working that crowd as well, including this statement in their recent SEC filing:
“Since our inception in 2000, we have incurred significant net operating losses and, as of January 31st, 2012, we had an accumulated deficit of $101.4 million. A key element of our strategy is to increase the number of listeners and listener hours to increase our market penetration. However, as our number of listener hours increases, the royalties we pay for content acquisition also increase. We have not in the past generated, and may not in the future generate, sufficient revenue from the sale of advertising and subscriptions to offset such royalty expenses.”
This new revenue report from the RIAA shows very clearly that the recording industry is becoming increasingly dependent on the streaming industry as a very real source of bread and butter.
For the first time, digital music sales are larger than physical sales; accounting for 50.3% of all music purchases in 2011. Digital track sales set a new record with 1.27 billion sales in 2011; an increase of 100 million sales (8.4%) over 2010. Total digital album growth was 20% in 2011 as well, according to Nielsen Soundscan.
Adele had the top selling digital song, but Lady Gaga was the most streamed artist with more than 135 million streams while “Super Bass” by Nicki Minaj was the most streamed songs with nearly 85 million streams (according to Nielsen BDS).
Meanwhile SoundExchange reported that they distributed a record amount of money to artists during the 4th quarter of last year - $89.5 million with more than 18,000 payments, bringing year-end estimated royalty payments to $292 million (up 17 percent from the prior year). The royalties are paid by Internet radio, satellite radio and cable TV music-only channels for their use of sound recordings, and are distributed by SoundExchange to recording artists, record labels, and a non-featured artist fund.
The upward trends in both digital song and album sales and in streaming consumption and compensation are all evidence of a healthy online listening marketplace, something we can all be happy about.
SNL Kagan and Senior Analyst Robin Flynn have produced a 2011 report on the Economics of Internet Music and Radio that’s very comprehensive and insightful. Using existing data points from RAB’s quarterly revenue reports, publicly available financials on Pandora, and research from Triton Digital and Arbitron on audience, SNL Kagan provides an excellent summary of the marketplace and its players, both online only and radio broadcasters.
Digital/online ad revenue will become an increasingly important and larger portion of radio’s revenues. The report pegs annual revenue for 2011 attributable to digital/online, including website, streaming, hd, and other digital sources, at $713 million for 2011. That number will grow to $1.55 billion in 2021 and comprise 7% of radio’s overall revenues.
Internet only stations will grow revenue at a faster rate – coming from $293 million projected annual revenues in 2011, that number will be $365 million in 2012 but reach $1 billion in 2021. Those projections are based only on ad revenues and do not include revenue from subscription or song download sales.
Pandora’s IPO has provided insight to the business model for an Internet radio station, and it’s a challenging one thanks to the enormous share of revenues that are owed in royalties. SoundExchange takes 45% of Pandora’s revenues and leaves them still losing money after ten years. The report quotes several radio broadcast company CEOs discussing the expense of streaming thanks to those issues as well. But most agree it’s a channel that they can’t afford to ignore.
Internet radio’s audience is growing, and connected devices are expanding the audience and time spent listening. Optimizing cpms for targeted mobile ads is a critical piece for Pandora in overcoming the digital royalty expense. Interestingly, SNL Kagan has projected that Pandora will take 4% of 2011 mobile ad revenues in the US, ranking fifth behind Google, Apple, Yahoo and Twitter.
SoundExchange, the performance rights organization that collects royalties on the behalf of sound recording copyright owners, has exercised its right under the Digital Media Copyright Act to request that access to a webcasting platform be disabled. SWCast is a platform that has offered a streaming solution to smaller webcasters that may not have the funds to develop their own streaming platform. “DJ your own web radio station.” says the site, offering “clearance to legally broadcast your music” along with technical support, streaming audio software and other tools.
According to SoundExchange, SWCast has failed to make any payments for royalties incurred after 2005 and has not filed reports necessary for compliance, while collecting monthly fees from webcasters for those payments and reporting services.
Randall Krause, President and CEO of SWCast, in a letter posted on his website, does not deny the claims and says he is “committed to ensuring that we reconcile any and all compliancy concerns of SoundExchange going forward.”
Meanwhile the more than 100 webcasters that were streaming with SWCast are left looking for another streaming partner – not to mention the monies they were paying thinking they were covering their royalties. Jason Stoddard, Live365’s Director of Broadcasting Sales, says there’s always room for them in their network. “While the disabling of SWCast is an unfortunate event for many webcasters, our ongoing dedication to complying with all royalty regulations means they still have a place to go.”
By everything I have read, the stations that were streaming with SWCast had no idea they were not compliant. While it seems that they were eclectic stations with smallish audiences, the betrayal of the stations and their listeners is not small at all. By all that I can see, SWCast represented that they covered all the licensing obligations for its stations. And SoundExchange hasn’t received payments for any period since 2005? All I can say is, what took SoundExchange so long?