Biz Angry 2016

       

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In case you haven’t noticed, YouTube has come under attack. A perfect storm of “simmering issues,” as one industry executive put it to Billboard, has provided rights owners and their trade groups multiple opportunities to push the message that YouTube pays less than fair royalty rates by using copyright law to its advantage.

There’s no evidence labels are coordinating their messaging. For legal reasons, the labels aren’t allowed to work on a joint strategy. But labels do lobby via their trade groups, so their views are undoubtedly represented in the comments coming from the RIAA and IFPI.

There are three main events, and a serendipitous and smaller fourth, through which labels are attacking YouTube. Any one in particular is cause to push an agenda. Combined, they have resulted in quite a ruckus.

First, there are the current negotiations to renew labels’ licenses with YouTube. It’s no coincidence that Spotify was the target of a similar public relations campaign when its licenses were under negotiation last year. The timing of licensing talks tends to coincide with complaints against companies and their business models. Information is leaked to the press. Public statements are made by trade groups. Op-eds are written. It’s all a textbook way to use public sentiment as a negotiating tool.

Second, there has been a spate of annual revenue figures that have revealed growth -- or lack thereof -- in ad-supported streaming revenue. There is nothing unusual about the timing of these reports; the RIAA tends to issue the previous year’s sales numbers in March of the following year. The IFPI always follows soon after with its own annual numbers on the global recorded music business. These trade groups would have probably showed their frustration with ad-supported streaming revenues if licensing negotiations weren’t underway. The timing of these negotiations, though, have provided the perfect opportunity to help shape the public’s view of YouTube and other services that rely on Section 512.   

 IFPI Global Report: Digital Revenues Surpass Physical for the First Time as Streaming Explodes

Third, the U.S. Copyright Office is currently conducting a study of Section 512 of the Digital Millennium Copyright Act, the section which lays out the “safe harbor” rules that protect digital service providers from their users’ infringing activity. Section 512 tells rights holders and services like YouTube and SoundCloud how they must deal with unlicensed, user-uploaded content. Rights holders have long complained about the courts’ interpretation of Section 512, the resources required to deal with infringing content, and how they believe Section 512 adversely affects the rates they receive from these services. They have long wanted these safe harbor rules, written in 1998 -- a time when services like YouTube weren’t even anticipated, labels often point out -- to be updated. Nearly 91,000 parties and people, representing the spectrum of markets touched by Section 512, submitted comments before the April 1 deadline.

Coincidentally, a fourth event is dovetailing with the war of words. This week the Recording Academy is hosting its annual Grammys on the Hill event in Washington D.C., with an awards show Wednesday evening that will be attended by dozens of members of Congress. On Thursday, a long list of recording artists, songwriters and producers will descend on Capitol Hill for meetings with members of Congress. Section 512 will undoubtedly come up.

The labels’ main message has been consistent: Section 512 costs rights holders and recording artists. The RIAA, IFPI and Warner Music Group have all used the term “value gap” to describe the difference between YouTube’s royalty rates and rates paid by comparable services. The RIAA has used the term in its 2015 sales report and recent interviews with CEO and chairman Cary Sherman. The IFPI used the term nine times in its Global Music Report released Tuesday. 

Labels define this “value gap” as the difference between what YouTube actually pays and what they believe it should pay -- the difference between a Section 512 service’s royalty rates and the rates received by comparable services like Spotify, Apple Music, et al.. Labels argue that safe harbor “distorts” the market by giving services leverage in negotiations.

There’s another common accusation from the labels -- user-uploaded services that take advantage of Section 512 displace streams at services that don’t have user-uploaded content. That is to say, a service like YouTube takes streams away from services that pay what labels consider a fair, undistorted rate.  

The rhetoric is typically delivered in statements, both on the record or anonymously (as in the first sentence of this article), delivered to the public. But there’s a far richer trove of statements and information in major labels’ comments recently submitted to the Copyright Office.

Warner Music Group has made clear it feels Section 512 puts it at a disadvantage. In its comments to the Copyright Office, Warner Music group said the value gap is “by no means an immaterial or theoretical concern” because what it receives per play from user-uploaded services “are far less than comparable services that do not rely on 512." After describing its difficulties in blocking unauthorized use of its recordings at YouTube, Warner Music Group “did not put [it] at any discernable advantage in negotiations with YouTube” and the agreed terms in 2009 “were only slightly better” than terms declined in 2008.

Sony Music made similar statements to the Copyright Office. It described how it “routinely” finds that new digital services which feature user-uploaded content put off licensing negotiations until Sony “devotes substantial resources” issuing takedown requests. Before Sony reached a licensing agreement with SoundCloud, copies of 218,000 Sony recordings “amassed over two billion unremunerated streams representing millions of lost dollars in lost revenue” because SoundCloud displaced streams sales and streams “on licensed, revenue generating platforms.”

YouTube says otherwise. In its comments to the Copyright Office, Google talked about the “value gap” and suggested the labels’ claims of the high cost of policing YouTube are overblown. “[S]ince January 2014, over 98 percent of all YouTube copyright removal claims have come through Content ID,” Google stated, meaning 2 percent of removal claims came though DMCA take down notices instead of YouTube's own infringement identification system. “Although business partners can be expected to disagree from time to time about the price of a license, any claim that the DMCA safe harbors are responsible for a ‘value gap’ for music on YouTube is simply false.”

Aside from negotiated rates and any market distortion, labels and creators have been unhappy with the amount of revenue services like YouTube get from advertisements. Since labels are paid a share of revenue, the revenue generated for each advertisement is a major variable here. In addition, it’s said only 45 percent of streams are actually monetized.

An ad-supported service could use a few rejoinders. The size of the YouTube’s addressable market is far larger than the current recorded music industry. A source close to the company tells Billboard that through YouTube “the music industry can now participate in a $200 billion a year market [a number in line with a forecast of the global TV market by  grow within it for decades. Given the acceleration of revenue flowing through ads, this is a tremendous opportunity."

But these advertising dollars don’t immediately follow rises in streams. Ad spending takes time to shift from a legacy industry like TV to newer digital platforms. This lag time can be seen in Pandora’s financial statements. The Internet radio service’s listening ours spiked 70 percent in 2013 but its RPM, or revenue per 1,000 impressions, grew just 7 percent. The growth in RPM jumped 104 percent in 2014. When listener hours grew 43 percent in 2014, RPM grew 19 percent in 2015.

Separately, a source tells Billboard ad spending lags behind growth in streaming because of a general lack of investment in advertising technology and a lack of competitors to YouTube and Pandora. Although hundreds of ad networks have been build for display and mobile apps, the technology that could help the music industry — although that is starting to change.

The impact of Section 512 is going to linger in the music industry. Labels negotiations with YouTube will eventually -- maybe painfully -- conclude at some point. Future revenue numbers, issued bi-annually and annually, will reveal if rights owners are getting more from ad-supported streaming services. The Copyright Office will issue a report with its recommendations to Congress about Section 512. But Section 512 will continue to be a theme until either a voluntary resolution is reached, Congress updates the law, or the courts change their views on Section 512 and safe harbor rules. Even then, the differing parties will have moved on to another war of words. It never stops.