Riding the Third Rails: Making the Case at WIPO for Performer Streaming Remuneration

July 1, 2021

Ray Hair  -  AFM International President

This month, my guest columnist is Texas attorney Chris Castle, who works on a variety of matters in the nexus of music, technology, and policy. His most recent public policy study for the World Intellectual Property Organization (WIPO) addresses the systemic economic unfairness proffered by Spotify, Apple Music, and other interactive streaming platforms toward musicians.

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Riding the Third Rails: Making the Case at WIPO for Performer Streaming Remuneration, by Chris Castle

Law out of balance is no law at all. This is most apparent with streaming compensation to musicians and vocalists, the people who make the records. Everyone is getting rich except them, and there’s a good reason for that phenomenon: the contractual royalty system is designed that way. It doesn’t matter if the result was intentional, the effects are so profound.

Rather than fixing the vast number of licenses, the better solution is to bring balance to the law. Leverage the existing international Collective Management Organizations (CMOs), like SoundExchange and AFM & SAG-AFTRA Fund, to collect a new remuneration payment from streaming platforms. CMOs already have payment relationships with featured and nonfeatured performers.

The new payment is fair because it recognizes the uncompensated benefits these performers confer on streaming platforms through their labor. And it appears to be the only way to break free from the clutches of the “market centric” or “big pool” contractual royalty systems that the parties will resist changing.

Thanks to the support of the American Federation of Musicians and the International Federation of Musicians (FIM), the World Intellectual Property Organization (WIPO) commissioned a policy study on this subject for consideration by WIPO’s Standing Committee on Copyright and Related Rights that I co-authored with the noted economist Professor Claudio Feijoo. (The study is available here:
bit.ly/3q7QCMn.) WIPO has never before commissioned a study on the economic effects of streaming on performers, and I think we should all be appreciative of WIPO’s response.

After reviewing the status quo and a number of possible solutions, we determined that the best solution is what we call “streaming remuneration.”

It is up to the member states of WIPO to consider this call for balance and fairness. I am hopeful. It is in the interest of the member states to protect their local cultures and performers from the homogenized dominance of Spotify and Apple Music. It is in the interest of the platforms to get ahead of the scathing criticism of their economics.

We saw this both at Parliamentary inquiries in the UK and with the recent letter to the UK Prime Minister from the Rolling Stones and others quoting our WIPO study and calling for government action on streaming royalties. It is, of course, also in the interest of the record companies to find ways to counterbalance the harmful effects of the “market centric” model on the performers upon whom they depend.

Like a subway that runs only on third rails, streaming remuneration accomplishes many of these goals. Streaming remuneration is an additive payment solely for performers. Like other CMO payments, it is outside of record royalties for featured artists or session payments for nonfeatured performers. It does not expand the compulsory licenses. It may not be offset against or reduce contractual payments from streaming platforms to record companies.

Streaming remuneration helps to solve the unsustainable nature of the “big pool” royalty formula at the heart of each streaming license that results in the notoriously low per-stream payments.

The big pool formula, in its most basic form, is based on these calculations for each monthly accounting period (Tn):

Monthly Service Revenue during T1 ÷ Total Streams in T1= per-stream rate in T1

Per stream rate in T1 x Your Streams in T1 = Your Royalty at T1

And algebraically, can also be expressed as this value for T1:

Monthly Service Revenue x [Your Streams ÷ Total Streams] = Your Royalty

Over time, consider that, if the rate of increase in Monthly Service Revenue from one month (T1) to the next (T2) is less than the rate of increase in the Total Streams, the value of Your Royalty (sometimes called “stream share”) will always trend downwards over time (Tn).

Given that “Total Streams” is a function of the total number of recordings available on the service, which increases at a rate of 60,000 a day, according to recent reports, the number of streams payable to any one artist (“Your Streams”) will never increase as much as the “Total Streams” for all artists. The streaming platforms (especially Spotify) have traded off price increases for global growth, thus sealing the tomb.

Who benefits? While owners of large numbers of copyrights can aggregate the “Your Streams” total, the real beneficiaries of the entire system are the streaming platforms that have driven their way to billions in market capitalization, monetized in the public markets. And that is why Spotify CEO Daniel Ek is buying the Arsenal football club and you are not.

But realize that both fans and other featured artists also are harmed by this model. Fans are harmed because they believe that their subscriptions are paid to the artists they listen to. As you can see from the formula, only the tiniest sliver of revenue goes to the local or niche artist played by the fan. The lion’s share of that revenue goes to the aggregators of recordings, and at that, is claimed mostly by Anglo-American repertoire.

If you are a local artist, a classical performer, a legacy or jazz artist, your fans are paying for music they don’t listen to, by artists they might never choose to play. And the artists who are paid the majority of revenues don’t even know it’s happening and probably don’t want another performer’s revenue.

The “user centric” model attempts to true up the monies earned with the artists played and sidestep the “big pool” altogether. While “user centric” has a lot of interest and promise, we did not feel that it accomplishes the goal of putting money directly in the pockets of performers, as nonfeatured performers have been left out of the user centric discussions. That may change, but we did not embrace the model.

It must also be said that streaming remuneration is further justified because personalized “enterprise playlists” created by platforms through algorithms increasingly replace radio without paying the same performer royalties as radio.

After considering the status quo and the third rails, we concluded that streaming remuneration, like payments already made by the platforms in Spain and Hungary, would be the best solution to the streaming crisis. Performers would at least indirectly be compensated for their value transfer in market capitalization to the streaming platforms, which has been left out of the equation.

A systemic problem cries out for a systemic solution and streaming remuneration helps to bring the law back into balance. We appreciate the opportunity WIPO gave us to make that case and the support of the AFM and FIM in making that case to WIPO.

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