Payouts of royalties from non-interactive digital services like Pandora and SiriusXM slowed sharply in 2015. But that doesn’t mean royalties paid by those services fell just as far.
Distributions to record labels and artists from SoundExchange, the organization that receives royalties from over 2,500 services, rose just 4 percent, to $802.6 million, in 2015. The organization distributed $773.4 million in 2014, making its 2015 numbers a small increase relative to previous years. Percentage-wise, 2015’s growth was the lowest since SoundExchange first distributed royalties in 2004. (Last year’s $30 million increase is also its smallest dollar increase since distributions grew from $33 million in 2006 to $36 million in 2007 and far below distributions of $169 million, $128 million and $183 million from 2012 to 2014.)
At first glance, SoundExchange’s numbers might be cause for some alarm. After all, the record business sorely needs to see growth from newer revenue streams like online radio and satellite radio. It has, reasonably, assumed growth from these services would continue well into the future. But there is evidence that suggests non-interactive performances grew at a rate higher than 4 percent.
One contributor to last year’s low growth is what’s called a “pool release,” a distribution of royalties that had not been claimed by either the record label or artist. If there were a pool release in 2014 but not in 2015, that extra distribution in 2014 would skew our year-over-year comparison. And that’s exactly what happened — SoundExchange had a pool release (of an unknown amount) in the third quarter of 2014.
Another factor was a change in the payment schedule in 2014. For payees due to receive at least $250, and as long as they were getting paid electronically, payments were switched to monthly, from quarterly. SoundExchange tells Billboard that this change, combined with faster processing of receipts, resulted in an extra payment in the third quarter of 2014 that did not exist in 2015.
Finally, there’s the effect of on-demand services. From Apple Music to Spotify, on-demand services may be cannibalizing the listening growth of some non-interactive services. This theory isn’t backed up by two key data points, however. Pandora, which is SoundExchange’s largest source of royalties, paid out 41.2 percent more — nearly all to SoundExchange — in the first nine months of 2015 than in the prior-year period. (Year-end financial results will be released February 11.) SiriusXM Radio is also a large source of royalties. Its revenue grew 9 percent in 2015, suggesting royalties paid to SoundExchange also had single-digit growth. The exact amount of SiriusXM’s performance royalties is unknown. Its royalty rate last year was 10 percent of a gross revenue number that’s reduced to account for non-music programming.
In addition to any organic growth, labels and artists might see a bump in royalties this year because of the change in royalty rates for webcasters. The statutory rates for ad-supported subscription services rose to 0.17 cents in December, from 0.15. The subscription rate fell, to 0.22 cents from 0.25 cents. Since ad-supported listening far exceeds listening from subscribers, the growth in ad-supported royalties should more than compensate for any loss in subscription royalties.
What happens to the royalty rate in 2017 depends on the inflation rate — the Copyright Royalty Board has pegged the annual increase to the increase in the Consumer Price Index for 2017 through 2020.