DEOPERSAUD, NANDA Streaming Policy Memo

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TO: Union of Musicians and Allied Workers (UMAW) Steering Committee Member, Joey DeFrancesco FROM: Nanda Deopersaud, NYU Professor Kleiman’s Public Policy Senior Seminar SUBJECT: Hard Work, Little Pay: Policy Recommendations to Increase the Quantity of Royalties for Independent Artists DATE: May 12, 2022 I. Introduction The purpose of this memo is to advise the UMAW on their advocacy initiative to increase the quantity of royalties for independent artists. Based on research, it would be beneficial to redirect efforts from Spotify to other income sources for independent artists. Spotify has an extensive history of refusing to raise royalties for independent artists and would therefore be an unwilling and unreliable source of income for them. Instead of advocating for Spotify to change their policies, the UMAW should advocate for other platforms to do so and promote the ones that already have. The UMAW should also provide additional resources on copyrighting one’s own music - copyright allows an artist to receive royalties for their music. II. Problem Statement & Context Spotify is currently the biggest streaming service for music across the globe, which is reflected through the numbers of subscribers across all of their payment tiers and their ownership of 31% of the global market share, exceeding Apple Music and Amazon Music - Apple Music owns 15% and Amazon Music owns 13% 1 . Spotify generates revenue via paid subscribers and advertisers 2 . Since independent artists earn meager payouts per stream from big streaming services, they struggle to make livable incomes from their music. Pre-pandemic, artists earned money beyond streaming by selling merchandise, touring, and public performances. However, due to the pandemic, artists must now heavily rely on streaming services to earn income. An industry study shows that artists on average make less than $25,000 thousand a year from streams alone 3 . At Spotify, payouts per stream average approximately as low as $0.004 4 . This means that artists receive minimal compensation from the platform. For this reason, artists need to generate royalties outside of Spotify to earn sustainable income. This policy proposal aims to redirect attention from Spotify and explore alternative options to generate royalties for artists. III. Recommendation 1: Links and Workshops on Copyrighting Music and Reforms to Relevant Legislation 1 https://www.theverge.com/2022/1/20/22892939/music-streaming-services-market-share-q2-2021- spotify-apple-amazon-tencent-youtube 2 https://www.feedough.com/how-does-spotify-make-money/ 3 https://www.digitalmusicnews.com/2018/06/27/music-industry-research-association-income-study/ 4 https://freeyourmusic.com/blog/how-much-does-spotify-pay-per-stream

The UMAW should provide additional resources on how to get one’s music copyrighted since independent artists are overwhelmed with the legal aspects of monetizing their work. Copyright is essential because it generates multiple types of royalties. Spotify-related royalties, called mechanical royalties, only serve as one income stream. They also should advocate for reforms to Section 512 of the Digital Millennium Copyright Act (DMCA), which creates a loophole for platforms like Spotify to exploit artists by falsely accusing them of copyright infringement in what is known as the “notice and takedown” scheme. This results in their work being taken down, causing them to lose money. To successfully advocate for reforms to Section 512, the UMAW should advocate for a stronger definition of standard technical measures (STMs) within the section. STMs give streaming services their immunity to users’ copyright infringement and “identify and protect creators’ work” 5 . The lack of definition specifically contributes to the loophole in Section 512. Since the section did not clearly outline how STMs would specifically identify music, it could not prevent streaming platforms from using their own technology to examine and flag copyrighted work. Platforms, including Spotify, have complete control in removing user content, even the content that does not violate copyright infringement. By falsely accusing innocent artists of infringement, Spotify stands to gain by abusing the “notice and takedown” scheme – when the platform successfully removes an artist’s work, they charge them the standard fine of $750 to $150,000 per infringement 6 . Furthermore, with the removal of the content, Spotify does not have to pay the artist royalties for their now-removed music. IV. Recommendation 2: Continue Promoting Fairer Streaming Services The UMAW should continue promoting alternate services such as Apple Music, SoundCloud, and Catalytic Sound. Apple Music pays a higher payout per stream – between $0.007 and $0.01 per stream 7 – than Spotify does, which allows artists to generate more royalties from the former. SoundCloud recently adopted the user-centric model (“fan-powered royalties”) 8 . This model favors independent artists as it ensures that royalties from monthly payments only go to the artists a paid subscriber listens to. SoundCloud reports that after a year of using the user-centric model, it has seen artists earn 60% more royalties. Catalytic Sound also pays significantly larger royalties to artists by using a unique payment distribution model. According to the example they gave, Catalytic Sound allots an artist 50% of the revenue generated from their album purchases and subscription fees 9 . V. Recommendation 3: Collecting Performance Royalties via Performance Rights 5 https://www.rollingstone.com/music/music-features/dmca-youtube-twitch-spotify-apple-1239258/ 6 https://www.expertinstitute.com/resources/insights/spotify-faces-150-million-copyright-infringement- lawsuit/#:~:text=He%20alleges%20that%20Spotify%20knowingly,violation%20of%20federal%20copyright %20law . 7 https://www.orpheusaudioacademy.com/apple-music-pay-per-stream/ 8 https://help.soundcloud.com/hc/en-us/articles/1260801306810-Fan-powered-Royalties-FAQs 9 https://catalyticsound.com

The UMAW should educate its members on obtaining performance royalties. Performance royalties are separate from streaming royalties (also called “mechanical royalties”). Instead of being generated via streaming royalties, performance royalties are generated via public performances, which are defined by the Broadcast Music Incorporation (BMI) as "any music played outside a normal circle of friends and family that occurs in any public place" 10 . This constitutes music broadcasted via radio, TV broadcasts, digital service providers, nightclubs, hotels, restaurants, etc. Musicians are legally able to exclusively give public performances of their own work. However, they may also permit others to publicly perform their work under copyright law, which enables them to earn compensation from another person’s or group’s performance of it. This is known as the "Performing Right" - this will help musicians earn royalties via public performances. BMI and other performance rights organizations (PROs) help thousands of musicians license their performing rights. Because there are "hundreds of thousands" of places of broadcast, an artist can earn a fairly large quantity of performance royalties 11 . Therefore, UMAW should focus on partnering, or at least collaborating, with PROs. PROs collect public performance royalties on behalf of artists enrolled with them 12 . The most prominent PROs in the US are BMI, American Society of Composers, Authors and Publishers (ASCAP), and Society of European Stage Authors and Composers (SESAC). UMAW should invite representatives of each PRO to host workshops, as each organization has a unique contract to offer a musician. VI. Recommendation 4: Adopting the User-Centric Model The UMAW and other critics of Spotify have proposed the user-centric model as one solution to help independent artists generate more income. Currently, Spotify uses the pro-rata model as its current payment model. This model distributes the majority of a user’s monthly fees to the rights holders of the most-listened to tracks, regardless of whether the user listened to them or not. Since these rights holders gain the majority of the generated revenue, independent artists struggle to earn a viable income in this model. On the other hand, the user-centric model solely focuses on the paid subscriber’s streams themselves – as mentioned, it ensures that royalties from monthly payments only go to the artists a paid subscriber listens to. This model allows independent artists to earn more royalties and makes royalty distribution more equitable for them. 10 https://www.bmi.com/faq/entry/what_is_a_public_performance_of_music_and_what_is_the_performing_ri ght1#:~:text=A%20%E2%80%9Cpublic%20performance%E2%80%9D%20of%20music,providers%2C %20and%20any%20other%20means . 11 https://www.bmi.com/licensing/entry/business_using_music_bmi_and_performing_rights 12 https://www.songtrust.com/music-publishing-glossary/glossary-performing-rights- organization#:~:text=PROs%20are%20responsible%20for%20collecting,or%20on%20other %20broadcasting%20systems .

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The UMAW should stop advocating for Spotify to switch to a user-centric model and advocate for other platforms, such as Apple Music, to do so instead. Spotify’s likelihood of switching from its pro-rata model to a user-centric one is scarce to none. This is due to their dependence on major labels. Other platforms such as SoundCloud have already switched to this model due to their lack of dependence on such labels. However, the likelihood of Apple Music switching to it is more promising. Since they have already agreed to the US Copyright Royalty Board’s (CRB) original proposed rate to raise streaming royalties by 44% over a five-year period, they may be open to this alternate model. Apple Music’s acceptance of the CRB’s original proposal gives them a competitive edge against Spotify; by switching to the user-centric model, Apple Music would further strengthen their edge. VII. Unfeasible Solutions The UMAW should desist advocating for Spotify to pay a penny per stream. This is financially unfeasible for the platform as it would have to pay more than what it generates to achieve the penny-per-stream. Even if this was feasible, Spotify would be unwilling to do this. In 2019, the service ended partnership with Warner-Chappell as they disagreed on raising royalties in India. The same year, Spotify opposed the CRB’s proposal to raise streaming royalties within the next five years and resulted in the CRB raising royalties at a lower rate. VIII. Oppositions and Obstacles There are challenges to the user-centric model in general. Firstly, this would require users to continuously stream an artist’s music. While close friends, family members, and superfans might be willing to do so, the average listener will not be. However, SoundCloud noted that after it switched to a user-centric model, “there was a 97% increase in fans contributing more than $5 to a single artist” 13 . This indicates the fans’ immediate effect on independent royalty distribution after switching to this model. Secondly, the model requires a streaming service to conduct extensive calculations by examining each individual listener’s streaming behavior in order to accurately pay artists their royalties. This would require the service to purchase additional resources to realize the model. Additionally, more research must be done on the model’s impact. This being said, since SoundCloud has switched to the user-centric model, its impact on independent artists’ royalties can be tracked through them. Recently, SoundCloud reported a significant increase in royalties for independent artists after the switch to this new model. Last but not least, due to its emphasis on solely paying to streamed artists, major artists and labels earn less via the user-centric model. Because popular streaming services, such as Spotify and Apple Music, depend on major labels for the bulk of their revenue, switching to the user-centric model would harm their contracts with the labels and cause them to lose money. 13 https://www.musicweek.com/digital/read/soundcloud-marks-one-year-of-user-centric-royalties-with- fan-powered-friday/085716

Spotify’s influence in the music industry is hard to overcome as they own 31% of the global market share. Since it owns more of the share than its competitors, Spotify’s ability to negotiate policies is unparalleled with other streaming platforms. The platform has even influenced other platforms to make the same decisions - its opposition to the CRB’s original proposal inspired Pandora to do the same. Pandora’s subsequent opposition to the proposal also influenced the CRB’s decision to alter it. Since Spotify faces competition from the other streaming platforms, Spotify would oppose the UMAW promoting their competitors as better alternatives. Spotify would feel threatened by the UMAW as the union has an international presence and has established a solid media presence since its establishment in 2020. Despite Spotify’s influence in the music industry, the UMAW, alongside other organizations, generated enough press on the issue that Spotify released a public statement regarding its practices. The union has also gained the attention of Congress member Rashida Tlaib. This results in negative press coverage for Spotify. Gaining support from a Congress Member poses a legislative threat - this could lead to the Congress pushing legislation that would hurt Spotify. It would allow artists to withhold licensing their music to streaming services should they pay them below market rate 14 . This means that Spotify will not legally be able to acquire artists’ music and distribute it online. Despite the threat Spotify would face from the UMAW promoting its competitors, convincing the average listener to stop using Spotify would be challenging. While Spotify has a free tier, Apple Music only offers paid subscriptions and deals. Furthermore, since the two platforms have similar prices, it would not make financial sense for a paid Spotify listener to switch to Apple Music. Recently, Apple Music received criticism for blocking out other applications, including Spotify, on the iPhone dock. Besides negative user experience, this issue raises concerns on antitrust legislation 15 . Despite Apple Music’s record of catering to independent artists, like Spotify, they also rely on big labels. While they may be more sympathetic to the user-centric model, their negotiations with these labels impedes their ability to switch to it. Another limitation is that Catalytic Sound has a limited amount of music to offer. SoundCloud tends to effectively promote rap music on its platform while other genres receive less attention. IX. Conclusion Independent artists struggle to make a livable income from their music. Streaming services such as Spotify pay small royalties to these artists. It is unfeasible for the streaming service to raise their payout rates. Spotify has also not made efforts to switch to a user-centric model. However, other music distribution platforms have either raised their payout rates or have 14 https://musicrow.com/2021/10/u-s-representative-ted-deutch-introduces-new-legislation-to-help- independent-artists/ 15 https://techcrunch.com/2022/05/05/iphone-users-complain-apple-music-is-installing-itself-to-the-dock- booting-out-their-other-apps/

switched to the new model. Since Spotify is unwilling to cater to the UMAW’s demands, it is imperative that the union shifts focus from Spotify to other platforms, such as Apple Music and SoundCloud, that are willing to meet said demands. Most importantly, the UMAW should advocate for artists to explore alternate sources of revenue. The organization should also promote platforms with more favorable models for artists.

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DEOPERSAUD, NANDA Streaming Policy Memo

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