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Article - The Dispute - Songwriters Battle Record Companies Over Downloaded Music Royalties - October 2, 2006

"Songwriters and publishers have received 8% of an online music sale before the dispute began, and that is the percentage temporarily agreed on. The tariff was set in 2002 when online music was in its infancy, and only intended as a temporary discount from the originally agreed 12% - a concession to help compensate for losses from illegal downloading, and to encourage the growth of the internet market"

picture The Wall Street Journal has reported on Friday, September 29, that British record companies and songwriters reached agreement over how much artists should be paid when their songs are sold online or through cellphone downloads, ending a dispute that cast uncertainty over the distribution of profits from digital-download services.

HitQuarters traces down the evolution of this dispute, demonstrating it as a test case marking potential developments in the future of the music industry.

This is just one example of how dramatic changes in the structure of the industry are being shaped here and now, with implications for years to come. As this agreement is to be re-negotiated in three years' time, make sure you know where you stand, and safeguard your rights and profits!

Introduction

In June 2005 record company trade association, The British Phonographic Industry (BPI), acting on behalf of record companies, digital service providers and mobile network operators, launched a legal action against UK composers and songwriters.

The action proposed to halve the amount of royalties due to writers from the sale of a digital download, thereby reducing their earnings off a 79 Penny download from 6p to approximately 2.5p. A complaint with the UK Copyright Tribunal was duly filed.

Six months later, on December 2, the MCPS/PRS Alliance (or Music Alliance), the non-profit UK-based royalty collection agency that represents 44,000 songwriters and composers, responded to BPI’s legal action by submitting a counter-claim to the Copyright Tribunal calling for an increase in royalties to between 7p and 9p per download.

This would amount to a 12% royalty rate, although the Alliance offered to discount it to the current 8% for the first two years. The counter-action provoked BPI and the $600 billion consortium to announce that they would take the Music Alliance to the tribunal to resolve the dispute.


The music marketplace is changing beyond all recognition as the digital age dawns. In the first half of 2006 10 million downloads were recorded, almost double the amount sold in the whole of last year.

Apple and their groundbreaking products, the iPod and iTunes, were pivotal in the orchestration of the move to digital but as mere hardware manufacturers it is now left to the music industry - the record companies, the artists, the writers etc - to try to adapt to the strange new landscape, and forge a new future.

Although bells are currently ringing out all across the media landscape, heralding the rise of the download and tolling for the death of the CD, online music sales have still yet to reign supreme over the consumer marketplace.

CD sales have shown a marked upturn so far this year and digital copyright fees over the next two years still only account around £2m of the £500m in total. Nevertheless those in the industry know that now is the decisive period when those who will benefit from digital’s inevitable ascendancy will be established.

The dispute between the Music Alliance and BPI is therefore a key issue in deciding who stands to lose or gain when downloads eventually dominate music sales – and both parties are well aware that future sums are likely to be enormous.

The decisive result will not only dictate the revenue balance within the UK but it will also likely have a bearing on the way other countries deal with their royalty tariffs. The eventual impact could potentially be felt across the globe.

So what are the two opposing standpoints, and what is their individual justification for trying to impose such wildly disparate royalty tariffs?

The Paraphrased BPI Argument

“I don’t understand, why should the Music Alliance and its members earn more than they do already? This is just greed. The way in which music is delivered to the consumer may have changed but their investment hasn’t. They have not had to invest heavily in creating new legal online services and fighting internet piracy.

It is us who have been forced into this digital arena, and been made to adapt our practises to the new environment. And it is us, with the technology companies and the online providers, who have created the vibrant new music marketplace. What’s changed for the songwriters? They’ve just carried on writing their songs.

The Alliance’s narrow-minded view of the new digital industry threatens to seriously harm the development of the online and mobile music market that they seek to benefit from. For one by imposing a publishing tariff for online sales at twice the rate of their offline equivalents, it puts online services at an unfair commercial disadvantage.

Also to try to raise the tariff in the middle of a tribunal process is just provocative and disruptive. Secondly it is narrow-minded to even think that they can apply one single rate.

They don’t take into account the nature of the service, such as in instances when music is delivered as part of a broader mix of products and services, some of which could be unrelated to music entirely. An analogy of this would be in charging a royalty on a department store’s total revenues, instead of just its music sales.

In addition to all this there’s the non-returnable quarterly fee demanded by the Alliance that will unjustly disadvantage independent record companies and small online music services. These greedy publishers might just as well hand over victory to the illegal P2P (peer-to-peer)networks right now.”

The Paraphrased Music Alliance Argument


“Why shouldn’t the songwriters benefit from the wealth generated from this new liberated music market when they are the talent that underpin the whole industry? Without songwriters there are no songs and without songs there is no music industry.

And so that’s why it’s important that the creative community of artists and composers is looked after and able to make a living from its craft.

Yes, there are artists like U2 and Coldplay who maybe don’t need to worry too much about the small percentages, but then they themselves are the small percentage as out of 44,000 writers we represent 60% who earn less than £10,000 a year. And so ultimately to treat the creative element of the industry fairly is to effectively sustain the future of music.

Our modest proposal that from January 1, 2006 composers and songwriters receive 7-9p per download (12%) was founded on the belief that this would bring their earnings in line with what they would have earned in the past with physical sales. A writer earns 8p for every CD track, whereas at present they receive only 5p for each download.

The increase would be easily compensated by the enhanced earnings enjoyed by the record companies as a result of not needing to manufacture discs, rent retail space, hire delivery trucks etc.

Ours is a modest proposal because we are only asking for the equivalent of what we were earning in the analogue world when really, with the soaring profit margins enjoyed by the record companies as a result of savings from digital production and distribution, it would be fair and reasonable to demand more.

Therefore the fact that BPI and the record companies are now insisting on a 2.5p per track cut is just astonishing, it does not make any economic sense whatsoever.”

Songwriters and publishers have received 8% of an online music sale before the dispute began, and that is the percentage temporarily agreed on. The tariff was set in 2002 when online music was in its infancy, and only intended as a temporary discount from the originally agreed 12% - a concession to help compensate for losses from illegal downloading, and to encourage the growth of the internet market.

The copyright royalties of CDs are lower at 6.5% but then record companies are believed to net somewhere between 38 to 46% of a physical CD sale, and take 64-68% from an online sale – an equivalent of 50p cut from a 79p download with a percentage of that being then distributed to the artists.

When any digital download or CD is sold a ‘mechanical’ royalty is paid out to both the artist and to the songwriter. The rate is governed by law. In the UK it is 8.5% of the published price (in the US the equivalent rate is ¢9.10 per unit sold as of January 1, 2006).

This 8.5% is then split between the publisher and songwriter in accordance with the terms of their agreement. The record company is responsible for handing out these royalty payments, one directly to the artist and the other through a publisher, and usually a royalty “collection agency”.

The collection agencies are accountable for the fixing and collection of royalties on behalf of music publishers and composers. In the USA there are three – ASCAP, BMI and SESAC - but in the UK, as with most countries in the world, there is only one.

The MCPS/PRS alliance is a cooperative made up of the “Mechanical Copyright Protection Society” (MCPS) and the “Performing Rights Society” (PRS). The Alliance collects and pays royalties to composers, songwriters and publishers when their music is performed or recorded, whether this be with live concerts, TV and radio, CDs, DVDs, downloads or streams.

The trade body the British Phonographic Industry (BPI) takes care of the recording industry in the UK. Its membership comprises more than 320 companies including all four major record companies. BPI is essentially the British equivalent of the Recording Industry Association of America (RIAA).

In addition to being the certifier of silver, gold and platinum awards and the founder of the annual Brit Awards, it promotes the interests of its members through lobbying government, negotiating with other music industry bodies, and taking action against copyright infringers.

BPI has actively promoted the move onto the internet by encouraging new online business models and by championing the introduction of an Official Download Chart and the recent introduction of downloads into the Official UK Singles Chart.

We have in one corner the Music Alliance and in the other, BPI, but what about the community in the middle, i.e. the music consumers and the online marketplace itself? Is there a resolution that will benefit them and the growth and welfare of their new community?

Many see the dispute as being the direct result of the record companies’ slow reaction to the swift shift to digital. They did not organise or actively participate in the move to online downloads and were then caught off guard by its unexpected early success.

And so, harassed by fears over illegal P2P file-sharing and falling CD sales, they jumped unprepared into the digital arena, hastily accepting the pricing dictated to them by Apple.

What is happening now is that the labels are now coming to the conclusion that the original online pricing policies and royalty tariffs are unfair and to their disadvantage. The launch of the legal action last June appears to coincide with the dawn of this realisation.

The record industry is still moving into the digital age with some trepidation. It is still reluctant to relinquish the hold on its long standing commitment to the “perceived value” of music, an idea that harks back to a time when it was still in a position to be able to manipulate high CD prices. Today it is either trying to stand firm on pricing or attempting to find ways to raise the cost of downloads.

Now they are either trying to stand firm on pricing or attempting to find ways to raise the cost of downloads. This “perceived value” of music however may be the stumbling block to online success. The unprecedented success of the ‘cheap’ ¢99 download (1 billion and rising) suggests that there is an eager marketplace for cheap and accessible music.

Many believe that both the labels and the writers need to realise that in this digital age the rewards of price cutting are much greater than in the physical world.

It may be therefore that lower prices, and a consequently stronger more profitable market, won't happen unless the writers, artists and the labels all agree to smaller royalty fees per song. But this might not be the case, it is impossible to predict at this early stage.

What is important to the growth of the online community is that the pricing policies are keenly scrutinised and the online services are able to experiment with pricing levels and product mixing until an ideal can be achieved. Only then will the marketplace be able to truly flourish.

In the end the resolution that will unquestionably benefit the consumer and the online marketplace will be the one that reflects the indispensability of the creative community to the music industry.

If the resolution leaves the writers feeling undervalued in the long term then the whole music world, whether it be the digital service providers, executives at EMI or teenagers with iPods, will ultimately bear the brunt.

The Eleventh Hour Resolution

In order to resolve the dispute amicably, discussions between the two organisations began in earnest at the start of the year. By March 21st the talks were already on the verge of collapse, and a pre-autumn tribunal resolution seemed as unlikely as ever.

But on September 28th, the day court proceedings were due to begin, an agreement between MCPS-PRS and BPI was finally reached. The two parties agreed on a three year contract whereby the download gross revenue rate stays at the current ‘temporary’ rate of 8% (less VAT) for composers, songwriters and publishers and 6.5% for non on-demand services – such as live ‘streaming’.

The Music Alliance also secured valuable clauses on minimum royalty payments. Nothing much has changed then- it is neither a back step nor a step forward. This ‘eleventh hour resolution’ essentially means that after nine months of intense discussion neither party has backed down.

So to save the ordeal of a self-defeating and expensive tribunal, with costs amounting to £12 million, a striking figure considering the total value from online royalties currently stands at only £3-4 million per annum – both sides agreed to leave things virtually as they are, and review the matter at a future date.

So even though this result will likely not spark major shifts in digital royalty payments and a similar dispute will inevitably rear its head in the future, it does at least allow the digital music market to continue to flourish, and its profits swell, and with 34m sales in the UK so far this year – already more than the whole of 2005 – this continues unabated.



Appendix 1 - To join or not to join? Quick Q&A with MCPS/PRS.

I want to join the PRS. What criteria must I fulfil before I start filling in my application?

“You must have had a work that has been broadcast, performed live or played in public and you will need to provide a letter confirming this from a radio station, venue owner or promoter.”

Okay, say I have such a work and such a letter, what then?

“Then all you need is an application form and the £100 membership fee. The application form you can download from our website, the £100 you will have to find yourself.”

After they’ve accepted the £100 and I’m a fully fledged member, will the PRS start taking a percentage of my profits too?

“No, PRS is a non-profit organisation. It only charges an administration fee for its work.”

How about the MCPS, what would I need to consider before trying to enrol with this society?

“There are three main criteria for considering membership with the MCPS:

• Have you written any musical works, which are not assigned to a music publisher, other than Sonoton in Germany or Flipper Music in Italy?

• Have any of your musical works been either released by a record company (other than one you own) or used in a radio, TV, audio-visual or multimedia production?

• Have your musical works been released by a record company or used in a radio, TV, audio-visual or multimedia production within the last six years?

If you answer yes to all three points then you should seriously consider membership with MCPS. If you answer no to any of the questions then MCPS membership is not necessary for you at this time.”

Will I need to pay a membership for this one too?

“Yes, there is a flat fee of £50 (incl. VAT).”

And will the MCPS take a percentage of my earnings?

“Yes, I’m afraid so, a commission of between 8-12% of all royalties.”

Do I have to join an organisation based in my country of residence?

“No, you are free to choose whoever you like but nevertheless, we do advise that an artist picks the society from their own country.”

Appendix 2 - additional links to composers, authors and publishers societies worldwide

International - CISAC, BIEM

Great Britain - ISA

Germany - Gema

Australia - CAL, APRA, AMCOS

Canada - SOCAN, SODRAC, CMRRA

France - SACD, SCAM, SACEM

Ireland - IMRO

Sweden - STIM

Norway - TONO

Denmark - KODA

Finland - TEOSTO

Netherlands - BUMA/STEMRA

Belgium - SABAM

Italy - SIAE

Spain - SGAE

Portugal - SPA

Switzerland - SSA, SUISA

Hungary - ARTISJUS

Brazil - UBC

Japan - JASRAC

If you wish to publish this article, or parts of it, you are welcome to do so after having received an approval from us. Requirements are statement of origin and link to HitQuarters. To get an approval, please contact us.




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