Speaking at a MusicTank event in London last month, Beggars Group head of digital, Simon Wheeler, revealed that the U.K.-based indie label group is planning to lower the 50/50 streaming royalty rate that it and many other independent labels currently pay artists. The move by the large indie is attributed to the explosive growth in global streaming usage and the drop in download and physical revenues as well as economies of scale.
Until recently, music sales dominated the record industry's total revenue take. Typically, artist contracts apply a royalty in the 12%-20% range for all sales. But music consumption through all-access models, which is rapidly growing its piece of the overall revenue pie, finds the labels licensing music to the digital music service providers.
When digital download sales came along in the early 2000's, they presented the industry with a whole new spin on what constitutes licensing among artist managers, lawyers and label business executives. Ultimately, the labels ignored that debate and treated iTunes as a record sale instead of a license, something that has since been challenged successfully in court by FBT Productions on the issue of how royalties from Eminem master recordings should be paid. Now others artists and labels are pressing that issue in court, too.
Artists advocate that streaming, even more than downloads, is a clear-cut case of licensing -- but when you examine label royalty payment practices, the picture is pretty muddy.
Major labels are not uniform in their approach to digital royalty payments, sometimes making that decision on a case-by-case basis. Some pay on an artist royalty basis, (i.e, 16% to 20% of revenue). Others pay on a 50/50 licensing basis. For some it depends on the individual contracts. In the indie business there are differences, too; some pay on a 50/50 revenue split while others are paid on a royalty basis.
If streaming is going to become the dominant source of revenue as other streams sag, some labels, both independent and major, are arguing that they can’t survive with the existing 50/50 payout. One industry expert said even the most profitable labels generally don't make more than 15-20% gross profit as it stands now, and if the majority of label revenue were split 50/50, they would not be able to survive.
Speaking exclusively to Billboard, Beggars Group chairman Martin Mills outlined the reasons behind his label’s policy change.
Billboard: What are the principle reasons behind reducing streaming royalties at this juncture?
Martin Mills: Economical. A record company such as us, needing to provide the services we do, cannot survive even paying artists 50% of net core income, let alone 50% of gross as we have been doing. As streaming becomes core income, it has to bear its share of all our costs: A&R, overhead, marketing, promotion, back office services, etc.
Are you able to confirm what the new streaming royalty rate will be?
Not yet. It will be less than 50%, but significantly more than the regular royalty rate.
Does this apply to all Beggars artists and catalog or only new artists that have signed to Beggars’ labels within, say, the last 12/18 months?
Beggars contracts actually only provide for the payment of a regular royalty on exploitation such as streaming. We have been applying the 50% discretionary rate policy to all contracts, of whatever vintage. Although we have not yet determined our new policy for existing contracts, the current intention is to continue to apply the new rate to all existing agreements.
Presumably, all existing Beggars’ artists would have been aware that they would receive a smaller percentage of streaming royalties when the market reached a certain scale?
Our contracts provide for the payment of a regular royalty for such usage, and we have previously informed our artists by means of communications included with their royalty statements that we were paying 50%, but that if the market grew beyond a certain point that would need to reviewed.
Is the rate of streaming royalty that Beggars’ pays to artists likely to lower again as market further grows in the future?
It's possible - depending on where we set the new level. If the market becomes 100% streaming and we set it at a high mark, it would need to be reduced again.
Streaming now accounts for around 40% of Beggars' global digital revenues. Do you expect that figure to cross the 50% mark within the next 12 months?
We make strategy for the future rather than predicting its shape. We certainly expect streaming to grow beyond this point, but not necessarily at the expense of other forms of consumption. We've seen it pretty much double in the last 18 months, though, of course, the picture differs from market to market.
As digital revenues grow is there a similar economy of scale in regards to data processing costs for companies like Beggars?
Not as far as we can see at the moment. The demands of data management, analysis and processing are pretty extreme, however!
Low royalty payments from streaming services has long been a contentious issues for a small, but vocal number of artists. How do you feel that this can be better addressed and what has the reaction from Beggars' artists been in regards to you lowering royalty payments?
Although our policy has meant, and will continue to mean, that we have been paying out a lot more in royalties than we contractually have to, we feel comfortable in doing that in that it has made the artists' income from such services more attractive. Many of our artists have been consequently deriving a very significant proportion of their income from streaming.
Early adopters for new tech and distribution platforms typically tend to be independent-leaning, dedicated music fans. As the streaming market crosses further into mainstream adoption does that present a challenge for companies such as Beggars to maintain a significant share of the market?
We believe that if your artists make great music, the great reach that streaming services offer will benefit them. Certainly we out-punch our weight on such services and see no sign of that slowing down.
As the world’s largest streaming service, YouTube has attracted widespread criticism for its low rate of royalty payments and failure to properly secure rights-holders material. What are your hopes for the forthcoming YouTube music streaming service?
We are concerned that there should be a level playing field for all streaming services, such that one is not advantaged competitively by the terms it is able to secure. And we would want the biggest digital music service in the world by usage to pay a fair share of its revenues to rights owners and to not discriminate against independent labels and artists.
What can labels and artists and artists do better to help further grow the digital market?
It's important that labels and artists support services that treat all rights owners even-handedly, and that digital services appreciate that independent music listeners are key early adopters.
Additional reporting by Ed Christman.