The major record companies breathed a sigh of relief last month at the outcome of the UK competition regulator’s ‘market study’ into the economics of music streaming.
Britain’s Competition and Markets Authority (CMA) launched its study into the music streaming market back in January. The org said that it aimed to “examine the music streaming market, from creator to consumer, paying particular attention to the roles played by record labels and music streaming services”.
The CMA added that its study would help it to “consider whether innovation is being stifled and if any firms hold excessive power”, adding that, if it “finds problems, it will consider what action may be necessary”.
However, on July 26, the CMA confirmed that it was proposing not to pursue a full-scale investigation into the music streaming industry in the UK.
Individuals or companies were invited by the CMA to comment on the matter – including on whether the CMA should make a market investigation reference.
What they submitted revealed much about the differing opinions – and confidential concerns and wishes – of some of music’s biggest companies.
Here, we summarize what a number of leading global music companies argued to the CMA, via a batch of filings that were only recently made public…
Beggars Group, one of the world’s biggest independent music rights companies and label groups, notes, in its nine-page response, that the shift to music streaming has opened the door for new business models to thrive.
Name checking the likes of AWAL, Distrokid, CDbaby and TuneCore, Beggars argues that “the growth of the music streaming market has made these companies more viable, successful and appealing to certain artists”.
Some of the reasons cited by Believe for the viability of such companies are that they “offer short term deals to artists and writers, offer very competitive royalty rates or in some cases an annual fee rather than a percentage of revenue” and “often provide upfront investment monies on a repayable basis, as opposed to recoupable from royalties only as with a traditional label deal”.
“we suspect that the streaming services provide additional benefits to the majors in terms of access, playlists, placements and data which they do not provide to anyone else.”
Asked specifically about issues “that limit competition between music companies, either in the supply of services to music creators or in the supply of music to music streaming services”, the indie label giant raises concerns about what it argues is “the dominant position of the major labels and how it affects the streaming platforms”.
Beggars claims further that, “we suspect that the streaming services provide additional benefits to the majors in terms of access, playlists, placements and data which they do not provide to anyone else”.
In response to how thinks competition could be strengthened between music companies operating in the streaming economy, Beggars says this: “We think that the CMA should require the majors to divest themselves of labels and catalogs.”
Beggars adds: “We also think there should be a ban on the majors acquiring further catalogs and making additional acquisitions.
“We think that payola style rules prohibiting editorial placement or playlisting for pay, or contractual terms would promote better competition based on what the consumer wants to listen to rather than what the service needs to deliver to a partner, or on how expensive the content is to the service.”
In Believe’s concise, one-page response, the publicly traded Paris-headquartered music company argues that, in its view, the CMA is assessing two different markets: “The Consumer Market, and The Artist Market”.
Believe explains that, it doesn’t “see an issue with the consumer market, but we do see an issue with the Artist Market, regarding potential unfair competition”.
The company then breaks down what it perceives to be unfair competition in the streaming market into three different elements, one of which has been redacted.
The two elements that haven’t been redacted in the document published by the UK government, are “Transparency around algorithm” and “Artist Data protection”.
“the lack of transparency around how certain DSP algorithms are pushing certain content, we feel, is leading to unfair competition.”
On the latter point, around ‘artist Data protection’, Beleive claims: “We are seeing the abuse of Artist Data from certain Music Streaming Services, with these DSP’s selling this data to third parties without the authorization or consent from the Artist. Our view is that certain Music Streaming Services are exploiting this personal artist data, generating monetization, and are not protecting the artist data.
“Certain Music Streaming Services, with these DSPs selling this data to third parties without the authorization or consent from the Artist. Our view is that certain Music Streaming Services are exploiting this personal artist data, generating monetization, and are not protecting the Artist data.”
Commenting on the transparency around algorithms used by music streaming services, Believe argues that “the lack of transparency around how certain DSP algorithms are pushing certain content, we feel, is leading to unfair competition. Our view is that these DSPs should be made accountable to providing information and clarity regarding their algorithms.”
Believe also claims that “certain DSPs [are] prioritizing content based on commercial terms that the content provider has agreed to”.
In its response to the CMA’s questions posed to Google around the economics of streaming, the tech giant, and owner of YouTube Music, offers the following summary:
“Streaming generates substantial consumer benefits, including a greater choice of music – and opportunities to discover new music – at a lower cost than ever before.
“Streaming also generates significant revenue for record labels and publishers, addressing piracy and contributing to record labels’ and publishers’ high profit margins, which they can share with artists and songwriters/composers.
“Dedicated music streaming services face intense competition: users can choose from multiple rival platorms, barriers to entry are low, and the majors have substantial negotiating power.”
“Losing a licence for, say, Universal’s music catalog would be fatal. Major labels therefore have substantial negotiating power.”
Google also argues that the major labels have “the upper-hand in negotiations’, because, “having a full set of licenses from the major record labels is non-negotiable for streaming services”.
Adds Google: “Losing a license for, say, Universal’s music catalog would be fatal. Major labels, therefore, have substantial negotiating power. While it is important for record labels to distribute their music on streaming services, bargaining power lies in the major labels’ favour.
“First, whereas all three majors hold essential rights to ‘must have’ music catalogs, streaming services vary significantly in their size and importance.
“Second, as outlined above, users could quickly and easily switch to alternative streaming services if their current service lost access to one or more of the major labels’ catalogs. Third, the fact that record labels – rather than streaming services – are making signicant profits is consistent with their having the upper-hand in negotiations”
Merlin, the global rights agency for the independent label sector, argues in its response to the CMA that, “competition in the supply of music to music streaming services can best be strengthened by ensuring the continued competitiveness and further growth of the independent sector”.
Merlin also believes “that a key opportunity in this area” – the competiton in the supply of music to music streaming services – “is the continued growth across a variety of different types of streaming service models” including what it refers to as the “incremental services” – services such as short-form audio-visual platforms featuring user-generated content, (e.g. TokTok).
Answering the CMA’s request for what Merlin believes are factors inhibiting competition between music companies in the streaming economy, the indie label organization summarises its views as follows:
“In order to be successful, subscription streaming services in particular need to offer all or most repertoire available in the market – both back catalog and current repertoire.
“Given this need to offer a full range of catalog, the large volume of hit repertoire of the majors is must-have for music streaming services.”
Adds Merlin: “This will have a knock-on effect as regards how music streaming services negotiate with independent record companies, since music streaming services will need to prioritise deals that secure access to that must-have repertoire and consequently may need to offer lesser deals to independent record companies.”
PRS for Music
British Collection Society PRS, which represents the rights of over 160,000 songwriters, composers, and music publishers in the UK and around the world, cites data management as one of the biggest impacts of the growth of the music streaming market.
In 2009, PRS says that it processed 3.8 billion lines of music uses. By 2020 this had grown to 22.4 trillion.
PRS also notes that the online streaming market has “provided an easier route to market for songwriters and composers”.
PRS adds that “this is especially true on services where works can be uploaded by users” and adds that the DIY market, “has been one of the key drivers of the significant growth of PRS membership over the past decade”.
“The main streaming services have a primary position in the market, meaning the commercial ramifications for rightsholders of not licensing are very extreme.”
PRS for Music
Commenting on competition concerns relating to “negotiations between CMOs and music streaming services”, PRS notes “that the music streaming market is predominately populated by a relatively small number of large international companies”.
Adds PRS: “The main streaming services have a primary position in the market, meaning the commercial ramifications for rightsholders of not licensing are very extreme.
“This has led some in the industry to question whether it is still possible to refuse a licensing request from the largest services. We therefore welcome the CMA’s statement that, whilst limitations to copyright are a matter for Government, they are fundamental to how the sector operates and could have a role in any competition issues identified”.
SONY MUSIC ENTERTAINMENT
Sony acknowledges in its filing that “the shift from buying albums to streaming individual tracks has fundamentally changed the underlying economics of the industry”.
This shift, argues Sony, has affected “remuneration models for artists, creators and songwriters, as well as cost and revenue structures of labels and other players across the value chain”.
Commenting on its relationship with music streaming services, Sony calls the DSPs “important and essential trading partners”.
“Sony Music’s non-controlling minority financial investments in certain streaming providers does not have any impact on the relationship and negotiations with DSPs.”
Adds Sony: “With most music consumed via streaming, music streaming platforms now occupy a central role in the industry, and function as the primary gateway to consumers. While the major and established streaming platforms typically have more leverage than newer or smaller platforms, our experience is that it is generally quite difficult to seek meaningfully better terms even from smaller or newer players.”
Commenting on Sony Music’s own investments held in music streaming services, (Sony Music is believed to own around 2.85% of Spotify stock), the label states: “Minority investments in streaming providers does not provide any advantage for Sony Music”.
Adds the company in its filing: “Sony Music’s non-controlling minority financial investments in certain streaming providers does not have any impact on the relationship and negotiations with DSPs. We would be happy to confirm to the CMA that these do not result in any competitive advantages for us.”
Elsewhere in the filing, Sony also argues that “competition between record labels is strong” and that, “this delivers benefits across the value chain, including better terms and increased choice for artists and creators and a more diverse range of music for listeners”.
The major says that it also currently “directly competes” against rivals Warner Music Group and Universal Music Group, and also “faces intense competition from independent labels, A&L [Artist and Label] service providers and the DIY sector, including a range of new entrants that are being underwritten by financial investors”.
Sony also disputes the suggestion made in last year’s report into the economics of music streaming, “that larger record labels’ ‘overwhelming market share’ enables them to extract more favourable terms from music streaming providers”.
Sony argues that “this is not the case,” because, “further down the value chain, the rapid increase in the number of companies entering the sector as A&L service providers and DIY platforms (e.g. ADA, Believe, Virgin, Ingrooves, Distrokid and TuneCore) means that artists can ‘pick and choose’ their level of service and can (and do) bypass record labels altogether”.
SONY MUSIC PUBLISHING:
Sony Music Entertainment (SME) and Sony Music Publishing (SMP) make it clear in their filings that they’re run independently as recorded music and music publishing divisions of Sony, and as such, SME notes in its filing, that there “is no coordination between the two divisions as part of any negotiations with DSPs (which are conducted bilaterally)”.
This is made all the more clear with SMP’s differing views on the music streaming economy shared within its filing.
SMP notes that “innovation in the [music streaming] sector is robust” and agrees with what the CMA sets out in its statement of scope regarding streaming services representing “exceptional value for the consumer”.
SMP adds however that challenges remain “in ensuring that its songwriters and creators are compensated appropriately in circumstances where the business models (and resulting commercial objectives) of these platforms vary considerably”.
“These tech companies operate in a way that creates distortions in the music subscription market which have contributed to a gradual erosion of the value of music over time.”
Sony Music Publishing
The publisher argues that “The tech companies operate complex and diversified businesses” and that it believes they “all share the following features,” which it adds, the CMA would “benefit” from looking into:
- “They have significant financial and lobbying power and significant leverage when compared with any music industry participants including SMP;
- “Music is an important, but not core, aspect of their businesses; and
- “They do not need to focus on the optimisation of revenues from music offerings (in fact they may have incentives to offer music for free or as cheaply as possible to help optimise other value creation opportunities within their businesses in which rightsholders do not participate).”
SMP suggests further that “for the pureplay service(s) and for rightsholders, these tech companies operate in a way that creates distortions in the music subscription market which have contributed to a gradual erosion of the value of music over time.”
Adds SMP: “This effect is exacerbated by the wide availability of User-Generated Content (UGC) / User-Uploaded Content (UUC) services. These UGC / UUC services offer a broader range of content to consumers for free than the paid for subscription services that operate on a fully licensed basis.
“This generally serves to decrease the consumer’s willingness to pay for a subscription service or to adequately value a subscription service. Streaming service providers are also motivated to pay as little as possible for song rights (as evidenced by their very public approach to valuing those rights in the US).”
Despite these challenges, SMP admits that “its overall revenues from streaming services have grown over time as the streaming services have increased their user base and with that SMP’s payments to its songwriters from streaming services have also increased in aggregate”.
It adds however that, “notwithstanding this general trend, at an individual songwriter level, the growth in earnings does not necessarily reflect the industry-wide growth”.
UNIVERSAL MUSIC GROUP:
Universal Music Group writes in its own filing that, “the growth of the music industry in the last few years is cause for optimism” and that “the digital era has ultimately resulted in a healthy competitive market”.
Like Sony Music, Universal points to the significance of the business relationship between labels and music streaming companies, noting that “record labels and the music streaming business of DSPs need each other to be successful”.
UMG adds: “From the perspective of record labels, DSPs have become indispensable as trading partners for record labels given their significance, ever growing, as a route to market to consumers.
“As a function of this relationship of mutual interdependence, record labels and DSPs are strongly incentivised to agree terms with each other so as to ensure an optimal experience and affordable service to consumers.
Continues UMG: “Moreover, their respective incentives are entirely aligned with those of artists, because artists almost universally want their content to be available worldwide, and on as many platforms as possible.
“Consequently, record labels typically look to license to all DSPs and – in strong contrast to digital distribution in other markets such as TV content – there is almost a complete absence of exclusive licensing between record labels and platforms. This is a mutual requirement, as, in order to remain competitive and successful, DSPs need to be able to obtain licenses from all record labels in order to provide consumers with a comprehensive offering of the world’s music content.”
“Increasing the cost of music streaming services risks increasing the number of users that access pirated content.”
Universal Music Group
Universal also praises the role of licensed music services in tackling music piracy, which it says “remains a significant ongoing threat” to the music industry.
Elswhere in the filing, Universal suggests that raising subscription prices could lead to more music piracy.
Universal notes that “increasing the cost of music streaming services risks increasing the number of users that access pirated content” and uses Netflix as a case study to explain this.
Says UMG: “Netflix has admitted to lowering prices in countries where piracy is more common, and the recent jump in video piracy has been attributed in part to the higher consumer costs associated with the increasingly fragmented video streaming market.
“It is therefore unsurprising that music platforms are significantly constrained by the existence and continued threat of piracy in their relationships with consumers, and are very reluctant to raise prices. As a result, the already-low retail prices for streaming services have fallen year-on-year in real terms.”
WARNER MUSIC GROUP:
Warner Music Group suggests that, while music streaming has experienced explosive growth, it is still in the early stages of its potential global adoption and penetration.” It adds however, that “DSPs are now essential for the distribution, marketing and promotion of music”.
WMG also breaks down the percentage of revenue it earned from its agreements with DSPs in FY 2021: Spotify represented 18%, Apple represented 13% and YouTube represented 11% of WMG’s total revenue.
The major argues later in its filing that “DSPs have significant negotiating power” and that “a small number of DSPs control much of the legitimate digital music business”.
WMG writes that “the major DSPs either themselves or combined with their affiliates are some of the world’s most powerful, commercially successful entities and they dwarf the recorded music industry in terms of their economic weight”.
The company also points to a handful of these companies’ market caps (at the time the filing was written. It’s dated February 17.) to contextualise their own positioning in the global economic market, including Apple ($2.82 trillion), Google ($1.82 trillion) and Spotify ($31.49 billion)
“By contrast”, writes WMG, it’s own market capitalisation is $19.05 billion.
Adds WMG: “These large, sophisticated technology companies leverage their indispensable distribution, marketing and promotion position, economic heft and enhanced bargaining power in negotiating licensing deals.”
“The major DSPs either themselves or combined with their affiliates are some of the world’s most powerful, commercially successful entities and they dwarf the recorded music industry in terms of their economic weight.”
Commenting on competition between record labels, WMG states that they “compete vigorously with one another (as music publishers also compete vigorously with one another) both to get consumer attention for their artists and to strike the best deals with DSPs”.
On the topic of artist remuneration, which was discussed in depth during the economics of music streaming study carried out by the cross-parliamentary Committee last year, WMG notes that, “the best way to grow artist royalties is to increase the revenue that record labels receive from DSPs and, to do that, WMG works constantly to optimise deals with existing DSPs and other platforms and to drive incremental revenue from new platforms and licensing opportunities”.
WMG adds: “Any meaningful review of competition in music streaming must also examine all the various means by which artists monetise their talent. Artists’ income sources have evolved significantly in recent years. Many artists are doing well from streaming, although others supplement their income from other sources, such as touring, brand partnerships, acting or teaching.
“The fact that some artists supplement their recorded music income is not new or particularly related to music streaming. Even during the era of physical goods, not all artists made a living exclusively from the sales of their recorded music, nor did they all become commercially successful even if they were critically acclaimed.
“Consumer preferences play a large role; genres like rap, hip-hop and dance music benefit greatly from streaming, while other genres, like jazz, rock, folk and classical, are streamed less.”
Music Business Worldwide