BMG CEO 'Cynical' About Streaming's Growth, Citing Artist Contracts

Hartwig Masuch
Courtesy of BMG

Hartwig Masuch

The RIAA's 2016 year-end report released last month showed a U.S. music industry experiencing its largest single-year growth since 1998, as revenue from streaming services overtook sales for the first time as the dominant source of income for the business. And while that's undeniably good news for a sector that had been in decline since the turn of the century, some industry officials -- including outgoing RIAA chief Cary Sherman -- warned of a "fragile" recovery due to low per-stream payouts and outdated music licensing and copyright laws.

BMG CEO Hartwig Masuch is another who believes that the industry's turnaround could be short lived, though for a different reason: as the industry shifts towards a full embrace of the streaming sector, negotiations with artists could get thornier as some demand higher cuts of streaming royalties in a new, more nimble business model.

"I am very cynical about the view that the good days have returned," Masuch said in an interview with the Financial Times. "Every renegotiation [with an artist] will cut down massively on the margin."

While every artist's record deal varies, Billboard estimates that major-label recording artists generally receive anywhere from a 16 percent to 22 percent royalty rate for sound recordings. (See how that worked out for Calvin Harris, Taylor Swift and Rihanna's "This Is What You Came For" right here.) Spotify, the world's largest streaming service, pays labels approximately a 55 percent (or slightly higher) royalty rate per stream, though its recent long-term deal with Universal Music Group would lower that rate to 52 percent if certain subscriber goals are met.

Masuch argues that, as the sales-based contract model dies out and income from streaming shifts to a long tail rather than more immediate revenue, new artist deals could be restructured in a way that allows artists to demand a higher royalty cut, perhaps as much as 50 percent or higher. In a physical-sales industry -- which the music business was before the turn of the century -- additional costs of distribution, storage and breakage were factored into an artist's contract, costs that are much lower in a digital world.

"Digital is portrayed as very complex... but if you take that cost out, how do you justify such a low rate?" Masuch continued. "Why in the hell would an artist decide to take less than 75 per cent?"

Already there are services such as Kobalt and several indie labels that offer much higher per-stream rates, while artists like Chance the Rapper and Frank Ocean have been able to sustain careers outside the label system entirely, or by using a major-label distribution system. Masuch claims BMG pays its artists a 75 percent royalty rate per stream.

Sherman, in his report released alongside the RIAA's numbers, called the issues raised by streaming "a rigged system" and put much of the blame squarely on the shoulders of YouTube, which has a per-stream royalty rate for its free tier that is 4.6 times below the blended average royalty rate from all streaming services, Billboard estimates.

On March 28, BMG disclosed its revenue had grown 12.2 percent in 2016 over the prior year. (While 2016's global industry revenues reported to the IFPI have yet to be released, that growth is slightly higher than the U.S.'s 11.4 percent.) Bertlesmann -- BMG's parent company -- boss Thomas Rabe attributed that boost to streaming growth, global expansion and catalog acquisition.

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