Guest Post: Why Getting Paid In The Music Industry Is So Complicated, And How It Can Be Better

David Balto is a lawyer and consumer advocate based in Washington, D.C., who previously served as the policy director of the Federal Trade Commission.

In Recording Academy CEO Neil Portnow’s recent op-ed called The Penny Paradox, he asked, “Isn’t a song worth more than a penny?” The problem, as outlined by Portnow, is that artists aren’t being paid enough for their work. However, this is a gross oversimplification of a more complicated issue of payment in the music industry. An issue that, unfortunately, consumers (and artists) are caught in the middle of as powerful and less powerful interests fight over how to divide payments amongst themselves.

When Portnow is talking about a song being worth a penny he is, of course, not talking about someone being able to own a song for an actual penny. He is talking about the cost per listen of a single license. An interactive music streamer like Spotify needs two licenses to serve a single song to a customer, and three licenses under certain circumstances. When a consumer buys a song, they make one payment and own it forever. Streaming a song is not ownership, and royalties must be paid for each listen. 

This leads to a complex picture of how artists earn money. They can get one payment from a fan that buys their album or a recurring payment as a fan continues to play their songs on a streaming service. Artists can also get paid both ways from a single fan -- a correlation between internet radio “spins” and sales was found in 2014.

It gets even more complicated. Artists own different copyrights and get paid differently based on whether they wrote the song and/or recorded the song. They deal with different middlemen and the licensing is handled through different organizations: SoundExchange for sound recording rights, a publishing rights organization like ASCAP or BMI for the performance right and individual publishers for each song’s mechanical rights.

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ASCAP and BMI are currently regulated through agreements made with the Department of Justice that are regulated by federal courts which stress fairness and transparency. These agreements were necessary because collective bargaining -- like that done through ASCAP and BMI -- is illegal under antitrust laws, but all parties considered it necessary to have a collective bargaining system to cut down contracting costs in a complex industry. In other words, it’s a narrow exception to the general rules of a competitive market.

And now it’s getting even more complicated. Publishers, some of which have market power, are lobbying the DOJ to make changes in the consent decrees to allow them to withhold music from radio, venues and streaming services. These changes would let publishers jump out of ASCAP and BMI when it suits them. So much for fairness and non-discrimination. And so much for fair prices for consumers.

Publishers will also be able to agree amongst themselves not to license a performance right unless all owners of a copyright assent. This will give even small owners of a copyright complete control, not just over performance rights but over the sound recording as well. If a five percent owner of the performance rights to Justin Bieber’s “Love Yourself” refuses to license, for instance, that not only affects other owners of the performance rights, but also Justin Bieber’s royalty payments for the sound recording. A music user has to license all rights to play a song, and if any fractional owner had veto rights they would be able to control the destiny of the entire song and every sound recording, not just what they own.

This didn’t matter when radio and venues could contract with ASCAP and BMI, each of which has to license to all comers at a fair rate. But in a world where publishers can be in and out of ASCAP and BMI, it suddenly matters a great deal. This has the potential to not only hurt consumers, but also artists who can’t get their song played because an owner of a small piece of it refuses to license. Ultimately, both consumers and artists will lose.

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I do not agree with Portnow on the simple solution that payments for songs need to increase. This is the solution before the DOJ right now, and it will likely lead to tremendous harm to consumers and potentially artists (we don’t know how much of that increase, if any, will filter through to them and how much will be pocketed by the powerful publishers). However, I do agree that we can do better and that solutions must come from Congress. 

Congress, for example, could set up a one stop shop for the complete bundle of rights needed to play a song, and all the rights owners could divide those payments among themselves. This would make it easy to agree on a payment that is good for artists while still allowing streaming services to be profitable (important after the Copyright Royalty Board’s rate increase led to the closure of many smaller independent and local services). Congress also has many more options to make sure the most vulnerable parties, consumers and artists, are protected.