Feature: Decoding digital

Digital Main image

Helienne Lindvall takes stock of the digital landscape to discover how 2013 could be a watershed year for the industry.

Unless you’ve been living in a cave for the past decade you can’t have escaped the sweeping digitisation of music; its pitfalls and triumphs have split the industry in half and razed traditional business models to the ground. And, while it’s fair to say digital progress has been mired in controversy, it would be churlish to deny its potential for creators.

Cast your mind back to when Apple first launched the iTunes music store in 2003 — it was just about the only legal digital music outlet out there. Its competitors were cavalier websites and unlicensed file-sharing services such as Napster and Soulseek. Back then, the digital landscape was such an unknown quantity, hostile and unwieldy, that the music business eyed it with suspicion. Fast forward a decade and, although perceptions of digital have radically changed, iTunes is still, by far, the biggest legal music download service in the world. It currently sells 15,000 downloads per minute — that’s 21.6 million songs a day. To put that into context, in 2013 iTunes sells more songs in 12 hours than it did in its first five months of existence.

This January, a track by UK producer and PRS for Music member Chase Buch became the 25 billionth download sold through the store. That same month PRS for Music’s Chief Executive Robert Ashcroft told midem delegates: ‘Apple is now making more in profit than the recorded music industry ever made in revenue. I would like to think that the music industry contributed a little bit of that value to Apple, so my question is, have we handled that well in this transition? I would say not. So far, Apple has fared much better than the industry has.’ But, he added, all this could change with the rampant growth of streaming.

It’s clear that iTunes isn’t the only digital music shop on the block anymore, even though it still provides the biggest chunk of a songwriter’s digital revenue stream in both the UK and US. There are now hundreds of legal download and music streaming services worldwide, including 7Digital, Spotify, Deezer, Beatport and eMusic. In 2011 about £40m of the total £630m that PRS for Music collected — including broadcast, public performance and international revenue — came from digital, which represented a third of all record sales.

In Sweden, the birth country of the on-demand streaming service Spotify, streaming revenue has even surpassed download revenue, with over 10 percent of the population subscribing to a music streaming service. Spotify founder Daniel Ek has said that his company is projected to pay artists, labels, publishers and other rightsholders $500m in 2013.

Online royalties: the small print

As almost all digital music services have differently structured licensing deals, songwriters’ royalty statements have become longer and more complex.

Robert Ashcroft

This complexity within the digital space has proved a huge challenge for collecting societies. Consider that in 2007 PRS for Music processed 15 million music usages in total. By 2012 that figure had grown to a whopping 124 billion usages. ‘Think about it,’ exclaims Ashcroft. ‘Every Spotify stream, every Deezer stream, every WE7 stream, YouTube stream… the services just notify the stream of the song, PRS for Music has to divide it up. It’s massive! We’ve had to invest an awful lot in back office systems.’

Over the last three years, the society’s back office has been under increasing pressure to adapt. Creating the Global Repertoire Database (GRD), enabling a single, authoritative international song repository, will help, says Ashcroft. The society has been working hard to adapt the GRD, alongside increasing cooperation and partnerships with international societies. These actions will undoubtedly help streamline operations and help make sure that royalties flow to songwriters more efficiently and accurately. These, however, are multimillion-pound investments and take years to implement due to the number of records that are in existence and the complexity of doing the operations. ‘For example, in the online world, here in the UK, 75 percent of a download is deemed to be mechanical and 25 percent is performance. The reverse is true for a pure streaming service and others are 50/50. And other countries have different splits,’ explains Ashcroft. The fact that some publishers have withdrawn their repertoire from societies to negotiate deals on a pan-European basis has added to the complexity.

Digital pennies and pounds

Around eight to 10 percent of the retail price of a CD goes to the publishers and songwriters. For a digital download they can expect up to 10p per track. The share writers get of revenue is, generally, slightly higher in streaming than in downloads, says Ashcroft, who expects streaming to become a decent source of revenue for songwriters and composers in the near future.

It’s been reported that of the £10 Spotify collects monthly per subscriber, £6 goes to the owner of the recordings, £1 to the owner of the publishing copyright, and Spotify keeps £3. Though Ashcroft is prevented from revealing exact numbers due to the non disclosure agreements that cover most deals, he says that if you deduct VAT off the subscription charge these figures are ‘not a million miles out’.

‘I would like to see the split in rights look much more like radio, because there we have a 50/50 split,’ Ashcroft continues. ‘I don’t really understand why the record labels have gone into it with splits that are predicated on the cost of manufacturing, returns and breakage and all the rest of it. That’s something we have to address in the future.’

DIGITAL_Jane Dyball

Meanwhile Jane Dyball, Senior Vice President of International Legal and Business Affairs for Warner/Chappell – and a PRS Board member – says that getting a percentage of ‘the revenue pie’ is not always the best option. ‘I want to get the best value for our writers — if you just ask for a percentage of what someone else is getting there’s a danger you could sit on your laurels.’

Ashcroft is unable to discuss details of the society’s YouTube deal. He says that at the time the previous deal was negotiated, music wasn’t as big a component of the video streaming site as it is now. Now you can choose genres and create playlists on their music app. ‘It’s beginning to look very similar to a Spotify,’ he concludes. ‘I have no objection if they have a different business model, but it’s very clear to me that they’re now running a fully fledged music service and they have to pay on a fair basis — or else we’re putting other people out of business.’

Driving up the value of music

In her role at Warner/Chappell, Jane Dyball is one of the first people digital entrepreneurs will have to meet with before launching a new music service. ‘It’s what I love the most about my job,’ she says.

There are two criteria that have to be met for her to get on board. ‘I love music, so first of all I want to know if I’d like to use their service,’ she explains. ‘We usually ask for a Beta version to try it out for ourselves. And then I look at if they’ve figured out a way of making money — if they’ve got a proper business model. There is a sweet spot between commerce and art, and it can be a difficult one for a new service to hit.’

Dyball says she and her colleagues guide new services to a point where they have a workable business model. ‘Where services have been established without one it’s difficult to change the world overnight, so we have to do it step by step, moving the needle slowly… If you’re able to increase the rates then it’s good for everyone — if there’s a rising tide it lifts all the boats.’

Fans go digital

The advent of iTunes meant music fans no longer had to buy whole albums to get access to a few tracks, as they can now cherry pick songs. This has had both positive and negative effects for songwriters. There is a possibility of a ‘long tail effect’, as fans are no longer dependent on what records their local record store stock. Instead almost all music in the world is available right there at their fingertips. Yet, so far, online music consumption tends to still largely reflect what’s being played on the radio. This means it’s currently even more important for songwriters ‘to get the single’, whereas previously an album track could still accumulate quite a bit of revenue.

Ashcroft believes, however, that we’ll see an evolution in user interface, which will give people access to discovery they previously didn’t have. The best way to do it is via human curation, which is not as easy as it may appear, as it’s difficult to know which aspect of a song the listener liked — it may have been contextual, that he or she liked the song at a particular moment.

There is a huge appetite for music and information about music,’ chimes Dyball. ‘This in turn can drive revenue and growth.’

There’s no doubt the digital revolution has brought huge changes for songwriters. And, as streaming and download services continue to gather pace, 2013 could be the year that this upward trajectory converts into decent returns for music creators and their publishers. However fruitful the year shapes up to be, one thing is for certain: the music industry is lither, more efficient and open to licensing than it was when iTunes launched a decade ago.

‘There is no doubt the industry has undergone momentous change,’ agrees Ashcroft. ‘And many are now predicting that streaming will return the music business to overall growth in 2013 — in fact, we’ve already seen positive signs in the Scandinavia and the US. So, while we may not be back to the glory days of the CD, it looks like we are finally turning a significant corner in terms of digital revenues.’