How the MMA Could Shift Music's Wealth From Labels to Publishers -- and Impact Companies That Own Both
If the newly passed Music Modernization Act (MMA) delivers more streaming revenue to music publishers and songwriters, who will see their slice of the pie shrink?
That's a question weighing on the minds of some record-company executives as the industry wraps up its celebration over the passage of the historic act and prepares to carry out the new law's mandates.
Even though the size of the whole pie is growing and the MMA is likely to produce more overall revenue for publishers and songwriters in a variety of ways -- creating a more efficient royalty payment system, for example -- the publishing sector could also amass some new revenue at the expense of record labels, due to how the law will change the way royalty rates for publishers are determined.
Apple Music has already negotiated to pay a smaller share of its revenue to labels in order to offset undetermined increases to publishers, targeting a rate of 55 percent to labels, sources tell Billboard, down from the 58 percent it promised in its initial licensing deals. Publishers, which have been getting 12 percent of Apple Music's revenue, could therefore see their slice of Apple's streaming revenue grow to 15 percent.
That's a big victory for the songwriting world, which has for years lamented its relatively puny share of digital music revenue, an increasing concern as CD sales continue to tank and radio playlists narrow. Sony/ATV Music Publishing chairman/CEO Martin Bandier argues that music publishing should get 50 percent of all revenue because the song is just as important as the record.
But the three biggest publishers by revenue -- Sony/ATV, Universal Music Publishing Group and Warner/Chappell Music -- are owned by the three biggest record companies, and cannibalization of their label revenue by their publishing arms could actually hurt such companies owning both assets. That's because the profit margin on additional label revenue resulting from rate changes is much higher than that on extra publishing revenue, in part because of the higher royalty rates publishers pay their songwriters.
"The incremental impact on the major music company model is better if the incremental money flows into recorded music [rather] than publishing," says a financial executive at a major company. Assuming the same outlay on marketing and talent, says the executive, a company will earn anywhere from 55 to 75 percent of its revenue from recorded music, versus 10 to 45 percent on publishing.
The reason publishers could start to eat at the labels' revenue share is because a provision of the MMA allows the federal judges who determine the publishing rates for programmed music in rate court to look for the first time at how much digital services are paying record labels when determining their formula. Previously, judges weren't taking labels' rates into consideration because of a section of law, now eliminated by the MMA, that said fees to owners of sound recordings "shall not be taken into account to set or adjust royalties payable to copyright owners of musical works."
Going forward, rate courts will try to replicate a market rate for music rights based on a "willing buyer/willing seller" standard, a shift that could shift the balance from labels toward publishers. Also in the publishers' favor: While the major record companies have direct deals with Spotify and Apple, the publishing portions of those deals often use the statutory rate formula determined by the U.S. Copyright Royalty Board as a starting point. Previously, the going rate to publishers was 10.5 percent of revenue, or 21 percent of what Spotify pays the labels. Now, the formula escalates the rate each year until publishers get 15.1 percent of revenue, or 26.2 percent of the label payout, in 2022, pending regulatory approval. If money-losing streaming services like Spotify are forced to pay higher rates for publishing licenses, they may try to shrink the share of revenue they pay to labels even more. Spotify already drove down the share it pays labels in its 2016 licensing deals: It distributed 53.85 percent of revenue to labels and 12.8 percent to publishers in 2017, compared with the 57.9 percent of revenue it shared with labels and 12.5 percent it paid to publishers before 2016, Billboard calculates.
Optimists, though, note that growth is widely forecast to continue for at least the next year or two, and they see no point in questioning whose slice is shrinking as long as the overall pie gets larger.
And even as the Music Modernization Act potentially provides more revenue for publishers, it also has a component that could help record labels realize more money too. For one thing, the Classic Acts component insures that labels are paid for pre-1972 recordings on a going forward bases.
The MMA also eliminates roadblocks that were inhibiting rate courts from setting better rates for labels and publishers. For one, the MMA gets rids of the 801(B) standard, which gave Copyright Royalty Board judges a bunch of requirement to consider when setting rates for "pre-existing services," i.e. Sirius and Music Choice, which were in existence before the last change to copyright happened -- the Digital Millennium Copyright Act of 1998. Since that is no longer applicable, both labels and publishers hope that these changes will produce better rates and more revenue. But the impact for those changes on the label side won't be felt for 10 years because in compromising to get the Music Modernization Act passed, the RIAA and the major record labels agreed to accept the 15.5% of revenue rate assigned from 2018-2022 to Sirius; and extended it for the next five-year period as well.
Whatever rate increases might come for record labels due to that change are not expected to impact publishing rates because the publishers also benefit from that change and the programmed music digital services like Sirius pay much lower rates to labels than on-demand services like Spotify and Apple Music. So for programmed services, there currently appears to be room for a publishing rate increase that won't result in cannabilzation of the other side of the music industry.
But as long as the major on-demand streaming services like Spotify are unprofitable, it will put pressure on the way the pie is divided, says a financial executive.
The MMA's financial impact will be broader than its reproportioning of the pie: It will ensure that publishers and songwriters get the checks they're already owed, and faster. The law calls for a new blanket mechanical license, a collective to administer it and a comprehensive database that matches compositions and songs.
"To me, the creation of a music licensing collective with a single database should result in a faster and more efficient delivery of royalties to music publishers," says a major label executive. "That is the core of the advantages being delivered to music publishers."
The MMA also mandates that unmatched royalties be divvied up after three years to publishers according to their market share, which could produce close to $100 million in new annual revenue, Billboard calculates. (The Congressional Budget Office saying the MMA will produce $175 million, or nearly $22 million a year, in new tax revenue over the 8 year period from 2021 through 2028. Using the corporate tax rate of 21% for publishers and the high individual tax bracket of 35% for songwriters, extrapolating that out means the collective would produce somewhere between $63 million and $105 million in newfound revenue, either through better matching of compositions or through market share payouts of royalties, as required by the law.)
"These benefits are real," says another music executive, adding that talk of how the pie is divided "denigrates the benefits of the bill."
But at the majors, a shift of revenue from label to publishing could have real impact as well. While publishers have much lower marketing costs than labels, music publishing pays higher royalties, with at least 50 percent of revenue going to the songwriter. Recorded music, by contrast, generally pays acts royalties of 16 to 22 percent of revenue, with only some stars landing 33 percent to 50 percent of revenue from streaming. Labels also have more contractual provisions that allow them to claw back some expenses and pay out less.
At Warner Music Group, for example, operating income before depreciation and amortization amounted to 25.9 percent of publishing revenue versus 14.9 percent of label revenue in fiscal year 2017. But A&R costs for WMG's music publishing arm hover at 62.1 percent of revenue -- twice as high as its A&R costs for recorded music, which account for 31.9 percent of revenue. So while publishing can make a greater return than recorded music for each dollar it takes in during the course of normal business, that doesn't apply with an incremental revenue increase driven solely by rate changes.
As another financial executive at a major label puts it: "If you assume that the aggregate marketing costs will stay the same, then the variable flow-through on recorded music is greater than [that on] publishing."