Art for Streamlining the Streaming Regime.
Sam Backer,  January 19

Streamlining the Streaming Regime

Of rat kings and royalties in the streaming age

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After a decade in which it seemed like illegal downloading had made it all but impossible for record companies to eke out a profit, recent years have seen things improve for the music industry. The rise of streaming services like Spotify have helped restore the major labels—now fused into three massive conglomerates—to their nineties-era wealth, with untold riches beckoning on the horizon. Despite this, the situation for musicians has never been grimmer. Streaming has failed to match the income that artists once garnered from album sales. Constant touring has replaced some of this, but for many, especially older performers, it can’t make up the gap.

While musicians struggle to bring attention to these untenable conditions, the industry’s C-suite has focused their efforts elsewhere. As firms like Spotify and Pandora glided to multi-billion-dollar valuations, hailed in the press as “saviors” of the industry, they failed to pay for all of the intellectual property on which their products were based. This gave rise to a slate of expensive and potentially destabilizing litigation that threatened such companies—and the major labels’ projected earnings. Faced with these pressing concerns, record label executives, music publishers, tech moguls, and telecommunication lobbyists came together to create legislation to address what they perceived to be the pitfalls of music’s new digital economy.

Passed unanimously by Congress in 2018 and signed into law by a beaming, Kid Rock-flanked Donald Trump, the Music Modernization Act (MMA) is now in effect, promising to streamline a long-antiquated legal regime for the benefit of music’s bright streaming future. The act was primarily designed to establish a new infrastructure for digital copyright, limiting legal liability for the streaming services, and (supposedly) ensuring easy payment for composers.  The MMA proved “that progress is possible when everyone has something to gain,” gushed David Israelite, head of the National Music Publishers’ Association. It was, according to a letter signed by heavyweights including Paul McCartney, Gloria Estefan, Jason Derulo, and Tom Waits, “the most consequential music legislation in 109 years”—praise that was echoed throughout the music press.

The disjunction between industry profit and creative penury that defines modern music is usually explained by the inevitability of tech-driven transformation. According to this narrative, it was tech—and the betrayal of consumers—that created the file-sharing crash of the early 2000s. Likewise, it’s been the unstoppable force of Silicon Valley that has recreated the business in the years since. This framework implicitly strips the record industry of all agency—things are done to it, but it has no power to change the way events occur. A closer look at the MMA reveals a very different situation. Rather than the result of blind market forces or pure digital innovation, the political economy of modern music is the product of a deliberate set of negotiations, alliances, and legislative deals. And while the MMA does indeed offer a handful of benefits to songwriters and performers, it offers more—a lot more—to the companies that have long dominated music.  

While the MMA does indeed offer a handful of benefits to songwriters and performers, it offers more—a lot more—to the companies that have long dominated music.

Every musical recording has two types of copyright associated with it—publishing rights, which are related to the composition of the song, and master rights, which are based on the recording. Publishing companies deal with publishing rights, while record labels deal with master rights. Each of these makes up a separate revenue stream, and each exists in an entirely distinct legal ecosystem. The most consequential elements of the MMA are focused on publishing rights, specifically how streaming services pay for what are known as mechanical rights. Mechanical royalties are owed whenever a new copy of a composition is created. Originally, this meant a songwriter was paid when a record (or a piece of sheet music) with his or her composition was produced. In the age of Spotify, this payment is triggered every time someone streams a song, creating what is considered a unique copy on their computer or phone. While the best-selling contemporary albums often top out at around a million copies purchased, streaming totals routinely reach the hundreds of millions. As a result, the number of mechanical payments that are owed to songwriters has ballooned wildly.

Connecting this increase to the amount actually paid out by streaming services is far from simple. Mechanical payments are not determined on a set price-per-stream basis, but instead rely on a baroque system (currently the subject of its own set of lawsuits) incorporating both the total number of songs played and the overall level payments owed by Spotify to the record labels. While its functioning may be opaque, the results are clear—streaming concentrates profits among the tracks at the top of the charts while reducing the payout-per-fan for most artists, with mechanical royalties paying out roughly .06 cents a stream, a rate 15,000 percent lower than that for physical sales or downloads.  

Managing these mechanical payments has been a problem for companies like Daniel Ek’s Spotify. After all, how could a data-driven tech firm that prides itself on the accuracy of its AI-derived recommendation engines possibly find the copyright holders and independent songwriters they owed money to? The answer is simple: they often just didn’t. In 2015, David Lowery, a musician and music-business activist who fronted the bands Camper Van Beethoven and Cracker, sued Spotify for $150 million on behalf of a group of artists, alleging that the company had failed to obtain proper licenses for their compositions. “Songwriters,” he told me, “have had a lot of their work monetized without compensation . . . Tech firms have been willing to skate by on loopholes and just pay people off.”

In 2016, Lowery’s suit was folded into a broader class-action suit that included performer Melissa Ferrick and the estate of fusion bassist Jaco Pastorius. The following year, Spotify settled for $43 million dollars. They, along with the Harry Fox Agency, a company that had been hired to deal with the issue, had indeed failed to notify songwriters that their music was being used by the now $65-billion-dollar tech firm. Such infringements can incur substantive penalties in the aggregate—each instance could cost between $750 and $150,000, and there were potentially millions of infractions. “If you’re a willful infringer, there’s a sliding scale,” explained entertainment lawyer and journalist Chris Castle by Skype. “Does the judge think you need to get your hand slapped? Or does the judge think you need to get your hand smashed with a sledgehammer?” According to Castle, the result of the lawsuits brought by songwriters meant Spotify “was looking out at litigation as far as the eye could see.” While settling Lowery’s class action suit helped alleviate the issue, new claims continued to emerge, including, in late 2017, a $1.6 billion-dollar suit from the publishing company Wixen. Such litigation was a major problem. The music industry’s “recovery” was based on the symbiotic relationship that had developed between labels and streaming services, one in which labels received a majority of the revenue while high-growth tech companies relied on market capitalization. The possibility of endless lawsuits threatened the stability of the system.

The deal at the core of the MMA was designed to address this crisis. The law created a “Mechanical Licensing Collective” to develop and manage a database linking songwriters’ copyright information with data from the streaming services. In the future, companies like Spotify will no longer track down individual copyright holders to license these compositions. Instead, they will be able to receive blanket licenses from the collective and will report their streams (and send their payouts) to the MLC. In exchange for this—and for footing the bill for the MLC’s efforts—streaming services from Spotify to TikTok receive both “retroactive safe harbor” for copyright infringement suits brought before January 1, 2018, as well as liability protection for any future failures that might occur. To put it another way: by promising to create a system to pay songwriters the peanuts already owed to them, streaming services dodge future lawsuits while increasing their stock price and solidifying a musical economy that supports labels and tech firms at the expense of artists.

If the broad strokes of this bargain raise some questions, the enactment of the bill has made its biases clear. The most obvious problem surrounds the continued role of the Harry Fox Agency, the firm that had been so inept at finding songwriters for Spotify that it kickstarted the legal crises that led to the MMA in the first place. Harry Fox is owned by the private equity firm Blackstone, and when a draft of the MMA proposed the creation of the MLC as a government competitor to the agency, the firm’s lobbyists nearly killed the bill. “Suddenly, pretty much every senator was opposed,” recalled Lowery. “It’s one thing when you’re running around dealing with the record label’s lobbyists. It’s another thing when you run up against private capital.” While it’s unclear exactly what was promised in response to this challenge, one thing is clear: soon after the MLC was put together, it hired the Harry Fox Agency as the primary vendor to build its database, giving the firm an expanded version of the role it fumbled so disastrously in the past.

While the MLC promises that the database constructed by Harry Fox will work seamlessly, the data it is being built on is notoriously spotty for songwriters not represented by the major publishers, and it remains untested at the scope necessitated by the bill. Efforts at augmentation have fallen to the songwriters themselves, who are encouraged to “play their part” by checking the details of their copyrights with the new database. “The HFA can’t even do the job that they’re supposed to do for one or two of these services,” observed Castle. “What makes anyone think they’re going to be able to do the job for the entire industry?” For musicians whose income has been devastated by Covid, the possibility of Harry Fox getting it wrong could be disastrous. “If this database is not correct,” said Lowery, “a lot of songwriters are not going to get their royalties. It’s the most vulnerable part of the musical ecosystem that’s going to get clobbered.”

What are frequently viewed as competitors are actually a rat king of conglomerates, shifting centers of profit with far more in common than not.

Any confusion is likely to end up benefiting the major publishers, who stand to profit from new rules regarding the so-called black box that contains royalties owed to songwriters that the streaming services haven’t yet been able to identify. No one knows how much money is in this purgatorial piggy bank, but estimates run to the hundreds of millions, with far more potentially being added now that the MMA is in effect. As the law is currently interpreted, money owed to these untraceable compositions will sit in the box for three years, awaiting identification, before being distributed to known copyright holders. The bill organizes such payouts according to market-share, which means that the largest publishers (who just so happen to control the MLC) will receive a proportionally greater slice of the unclaimed royalties. This is despite the fact that it is smaller firms and songwriters—like Lowery himself—who are most likely to have their compositions fall into the black box. “They have created, again, a situation which is most likely to produce the biggest black box for the people who are least able to enforce their rights,” argues Castle. “There could be some real unhappy campers now and the only question is: Are they going to be unhappy for a little while? Or are they going to be permanently unhappy?”

Such small-bore details reveal that the MMA—despite containing victories for songwriters who can now be paid for mechanicals, or archivists who know what is and is not in the public domain—is ultimately far more beneficial for the consolidated powers that control the music industry. The group that stands to gain most is the major labels, which have removed a potential threat to the streaming ecosystem while leaving themselves with remarkable leverage over the entirety of digital music. “The historical timeline means that record labels have been operating in a totally free market,” explains Meredith Rose, a policy analyst for Public Knowledge. Without licenses from the record labels, no service—not Spotify, not Amazon, TikTok, nor YouTube—would be able to use the vast bulk of popular music. “They get to basically say who lives or dies,” says Rose. 

This position has given the labels the enormous power and influence they exert as part of a far larger corporate system that links record companies like Warner Music Group to tech companies like Spotify and Tencent. Such connections upend a common understanding of how the industry functions, particularly in regard to the often-criticized role played by streaming services. What are frequently viewed as competitors—Spotify versus Universal Music Group versus TikTok—are actually a rat king of conglomerates, shifting centers of profit with far more in common than not. While they might be prone to litigation, and though they compete to sign artists and refine their products, all of them—from the tech firms to the publishers to the labels themselves—want to maintain the status quo. With the MMA, they’ve reached a détente from which all will profit handsomely. 

None of this is new. Publishing deals, master rights, advances—the basic machinery of the music industry—are explicitly designed to funnel profits away from performers and toward the companies that sell their products. That has been true since the beginning of recording, when the same handful of companies first realized they could pay musicians what amounts to corporate pocket-change in exchange for million-selling compositions. That exploitative logic continues in the Music Modernization Act, which addresses problems for the industry but does little for the true disasters facing artists. This is not failure, but an intentional design. So, when the music industry pats itself on the back for pulling together to create a deal that works for everyone, it’s worthwhile to question who that “everyone” really is.

Sam Backer is the cohost of Money 4 Nothing, a podcast about music and capitalism. He is currently a PhD candidate in history at Johns Hopkins University.

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