The Digital Music Industry: the need for fairer rules of engagement

INTRODUCTION

The music industry is rapidly evolving into a purely digital industry, with streaming and downloading advancing as the primary means of gaining access to music. According to IFPI’s Digital Music Report 2015, revenues from digital music services in 2014, for the first time, was at par with those from physical sales, representing 46% of global music sales. This evolution has resulted in, amongst others:  a shift of revenue generation from record companies to the publishing, distribution and telecommunication companies; a drastic reduction in CD sales and a significant tilt towards royalties as a primary source of revenue; and an overall increase in consumer accessibility to music.

The speed at which the Digital Music Industry (DMI) keeps evolving makes the future of the music industry largely unpredictable and any summary of its structure largely inconclusive and temporary. Albeit, it is definite that increased access to music through affordable downloads and streaming services will not stop.

This article aims at making a summary of the Digital Music Industry- elucidating the key players (the Digital Value Chain- DVC) and business models in the contemporary DMI- and identifying the various aspects of the present rules of engagement between members of the DVC that need to be changed to enable all players, especially the primary rights holders, get a fair deal.

THE DIGITAL MUSIC INDUSTRY

The DMI consists essentially of the Digital Value Chain and the various Digital Business Models.

Digital Value Chain

The key players in the DVC can be classified into 3 categories:

1. The Primary Right Holders (PRH) – These are the non-negotiable members of the DVC, essentially comprising of the Authors/Composers, Artistes, Publishers and Record Labels.  Their available rights include: public performance, mechanical, synchronization, distribution and print rights. The percentage of revenue accorded to each party within this category depends on the   agreed terms of engagement.

2. The Intermediaries- These refer to the Collective Management Organizations (CMO)/Copyright Collecting Societies (such as COSSON and CAPPASO) and the Aggregators/Distributors (e.g. Bandcamp, Freeme digital, CdBaby and Tune-Core).

The Aggregators have become very essential in the DVC especially as most major Music Service Providers (MSP) are unwilling to deal directly with PRH. Hence, they act as middlemen between the PRH and the MSP, primarily packaging music (including the rights in the musical composition and sound recordings) supplied by the PRH and distributing same to the MSP as well as collecting sales figures and revenue from the MSP and reverting same to PRH. Additionally, they help in reducing the negotiating asymmetry that would exist between the powerful MSP and the small PRH should direct negotiations take place. These Aggregators, most times, also offer premium packages which could include services such as: direct sales, publishing, marketing and other promotional services for PRH who opt from them.

The CMO on the other hand are organizations established by the copyright laws or upon personal agreements, having authority to collect royalties and license copyrighted works on behalf their members (the PRH) both nationally and/or internationally. Although these organizations play complementary roles with the Aggregators in terms of collection and distribution of royalties on behalf and to the PHR, however the CMO majorly focus on areas of music exploitation that are difficult to manage such as Radio and TV broadcasting as well as use in hotels and/or other public places.

3. Music Service Providers (MSP) – These are the digital download and streaming services.

· digital download services.

These platforms provide permanent music downloads for consumers on payment of certain prescribed fees. Digital music files sold through these platforms are usually on a per-track basis. MSP within this sector include: Telecommunication Companies -which are presently popular in Nigeria for Caller Ring Back Tunes (CRBT) downloads- and online music stores- such as ITunes, Amazon Mp3 and Google Music.

· Music-streaming services

These services allow consumers listen to songs through the internet without having to purchase the downloadable files, usually upon payment of a minimal monthly subscription charge. Examples of these MSP are: Apple Music (launched June 30 2015), Spinlet, Tidal, Music Key, The Kleek, Spotify and Google Play Music.

Some of these MSP however offer Free, Freemium or Free Trial services to consumers, whilst adopting other non-free alternatives such as advertising and/or other premium services.

It is worthy of note that online downloads and music streaming services are not essentially independent of each other. On the contrary most of these MSP are hybrids performing both services and employing consequential business models.

The Digital Business Models

From the foregoing, three primary business models can be discerned: i) Online Retails Model ii) Service Subscriptions Model and iii) Advert Supported Model.

Online Retails model – Under this model, the PRH (upon an agreed fee/ commission) employ services of the Aggregators to distribute their music to the MSP and upon successful sales, revert the proceeds to them. Proceeds from these sales are shared amongst all members of the value chain i.e. from the MSP to the PRH, according to the terms of engagement.

Service Subscriptions model- This model is usually employed by music streaming services.  It entails the MSP entering into licensing agreements (with respect to both musical composition and sound recordings of the track/song) with major labels, authorized Aggregators or CMO and sub-licensing access to subscribers (consumers). Proceeds from subscription charges are similarly shared amongst all members of the value chain according to the terms of engagement.

Although this model is presently not very popular in Nigeria -mainly because of expensive data services- and have been internationally criticized for low returns to artists (largely because most consumers use the free packages), it is however the fastest growing sector in the global DMI, presently representing 23% of the DMI and generating 1.6 Billion US dollars in trade revenues.   The IFPI 2015 report recorded that in 2014, local artists in Sweden witnessed a 111% increase in revenue generated through this channel which was higher than what the record producers witnessed (which was a 47% increase). Additionally, with the emergence of new major players like Apple music and Tidal which came on board  this year (2015) there is indeed a potential for growth in this category.

Advert supported model – This model is mostly adopted by MSP offering free or freemium services to consumers. These platforms essentially use contents provided by artists or fans to build an audience, which it sells to advertisers. Although this business model may seem unappealing as artists make little or no direct revenue from the use of their songs on these platforms (especially in respect of purely advert supported platforms), however these MSP provide suitable platforms for artist to: interact with fans, announce tour and performance dates as well sell tour/performance tickets etc.  Over all they increase the web visibility of the artists.

ASYMMETRY IN THE RULES OF ENGAGEMENT

On the surface, the digital business models laid out above seem fair and straight forward. However,  in reality, the PRH specifically the artists are the least  benefiting (monetarily), being at the bottom of the chain and having to rely largely on revenues from tours, shows and endorsements rather than royalties from use and sale of their songs. The current situation largely results from the unfair rules of engagement exiting between members of the DVC in relation to the revenue sharing. For instance in Nigeria, the Telecommunication network operators  who are one of the major players in the DVC charge up to 70/80% of the end user price with respect of songs vended through their platforms, leaving 30/20% to be shared amongst other members of the chain. These sorts of agreements are largely unfair and ought to be addressed.

CONCLUSION

Asides piracy, inequality in the terms of engagement between members of the DVC is the major challenge preventing artists form adequately reaping returns for their works. In light of this, an eminent need for measures addressing this asymmetry has arisen.

The Arthur is of the opinion that a collaboration of all major stakeholders in the DMI with the Nigerian Copyright Commission towards laying down a structured guideline governing these agreements/licenses, (addressing key issues like:  What and when percentages are to be paid, to whom they should be paid, whether there should be a cap on percentages etc) would go a long in addressing this problem.