Battling Goliath: Why The Music Industry May Lose Its Business To Google

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By Katie McCort of Rock Edition

Copyright reformation was a hot topic on Capitol Hill this summer, despite being buried under IRS scandals, immigration crisis, and lawsuits against the President. As the House Judiciary Subcommittee on Courts, Intellectual Property, and the Internet’s summer session comes to a close, the multiple hearings held by the committee on music royalties, online piracy, and fair treatment of artists have awarded a silver lining to a disheveled creative class trying to overcome the trials of technological advancements in music distribution.

The National Music Publishers Association (NMPA), Performance Rights Organizations (PROS), and artists have sought congressional intervention in order to reform copyright since the rise of online streaming. This has included attempts to raise statutory rates paid out by non-interactive webcasters (streaming services that do not allow hand-picked playlists) such as Pandora and iHeartRadio, and propose legislation such as Project 72, a campaign demanding fair compensation for copyright holders of songs made prior to 1972 from internet radio services. All initiatives taken by the music lobby have received support on the Hill from both democrats and republicans. However, while the committee’s undivided efforts to aid the creative community have been commendable, it is unlikely that congress will enact any legislation any time soon as upcoming mid-term elections will most likely put all bipartisan issues on stand-by.

In a highly politicized congress where gridlock is not only rampant but promoted, both party’s number one priority is obtaining congressional majority. With stakes this high, safe issues like copyright become almost irrelevant next to issues that boast hefty ideological divisions along party lines including health care, immigration, economics, and foreign policy. In other words, championing copyright concerns will not give any party any political advantages in the upcoming elections and, as a result, is likely to be ignored in the fall session.

If Congress Bails: The Winners and Losers

Congress temporarily dropping the concerns of the creative community will inevitably produce some obvious and some not-so-obvious winners and losers.

WINNER: Silicon Valley 

The most obvious winner of all is—no surprise—the tech lobby. Delaying legislation that would force major internet streaming services to shell out more revenue to copyright holders will benefit tech-giants’ massive expansion into streaming. These companies include Pandora, whose business model is expanding to include bundling their service with automobile manufactures similar to that of Sirius XM; Google, who is swiftly becoming the top name in streaming with three streaming services including YouTube, Songza, and Google Play; Rhapsody, who has topped 2 million paid subscribers; Apple, who is beginning their launch of Beats music; and other streaming services such as Uprising.fm and Guvera who are likely to become bigger players in the streaming market in the near future.

LOSER: Singers and Songwriters

Obvious losers to this scenario are the artists and songwriters who depend on decent mechanical royalties to earn a living. Many artists including The Black Keys, Pink Floyd, and Beck have balked at the inadequate rates paid to them by non-interactive and interactive webcasters (streaming services that allow hand-picked playlists), alike. Elliot Resnik, entertainment attorney at Shukat Arrow Hafer Weber & Herbsman and artists’ rights advocate, recalls that he “just had an artist who did 950,000 spins on Spotify. In a mechanically driven world, that is a smash.” However, in the world of online streaming where there is no “pay-per-play” system, the tens of thousands of dollars that could have been made off of that song has been diluted to only a few hundred dollars. For most artists, any hope of improving this system requires congressional intervention; an opportunity which may not be available to artists in sessions to come.

WINNER: The Majors

The major labels—Sony BMG Entertainment Group, Warner Music Group, and Universal Music Group—have been under fire in recent news for refusing to pay out monies accumulated from blanket license fees paid to them by interactive webcasters, such as Spotify and Rhapsody, to artists. In Washington, the major labels are unlikely to mourn the silence of the House Judiciary Committee on copyright issues if these issues are ignored in the fall. Government-set royalty rates do not allow majors to collect large profits from interactive streaming services such as Spotify.

Resnik remarks that “major labels are themselves vested in Spotify. They have an interest in preserving whatever revenue they can glean out of master use rights.” Not only are majors offered a higher percentage of royalty streams from webcasters but, as Digital Music News recently reported, major labels are hording all profits accumulated through blanket license fees from online radio stations. This means that the majors suck up 100% of profits from interactive streaming services. Taking away possible congressional action that would limit a major label’s power to soak up a majority of royalties paid out by internet streaming services is a win for the majors.

LOSER: The Indies

Without congressional intervention, low statutory rates will continue to plague independent labels. While majors are able to haggle large sums of money from interactive webcasters, independents can’t rely on blanket licenses to support their business model.

Jake Gold, artist manager and head of The Management Trust, a Canadian based management firm, explains that, “the major labels want [blanket licenses] because they have the most clout.” Unlike independent artists and labels, major labels have more to bring to the negotiating table. While the exact amount of money that major labels make from blanket licenses is not public knowledge, it is no secret that majors secure the majority of revenue given out by interactive webcasters. “This puts the independent at a disadvantage,” attests Gold, as the independents are left to take what little they can get.

Is the Game Rigged?

To recap, if Congress takes a hiatus on safe issues like copyright reform in the fall session, this will most likely benefit those who do not need congressional intervention or updated legislation to make money such as tech and major labels. For those like independent labels, artists, and songwriters who desperately need the government to set higher statutory rates and simplify the copyright system to level out the playing field between heavy hitters and smaller business interests, being left behind for petty gridlock is bad news.

With that in mind it is important to consider that, even if Congress does not move forward with reforming copyright issues in the fall, it is possible that the same parties will win and lose. Assuming that the final goal is keeping the artistic class from going bankrupt while sustaining decent corporate profits, corporate interests who will attempt to sway this final goal away from the creative class are likely to be the ones who come out on top.

“There is way too much influence with tech,” claims Gold. And he’s not wrong. Recent reports by Politico have confirmed that Pandora and Google are ramping up their lobbying efforts in Washington. Google—easily the most interested party in the streaming business—is consistently a top spender on Capitol Hill, cashing out over $9 million in lobbying expenses this year alone. This is compared to an average of $434,000 given out by the three largest lobbies supporting artists and indie labels, SoundExchange, ASCAP, and the NMPA.

Come fall session, it may not matter if another hearing is arranged to give the NMPA and ASCAP a chance to voice their concerns about the struggling artistic class without the ability to line their congressman’s pockets. Chances are the winners and losers in this convoluted battle of business interests have already been determined by well paid lobbyists and PAC contributions. “If you’re the NMPA and you’re up against Google, it’s a very David and Goliath situation,” laments Resnik, “and I’m very sorry to say that it might look like the tech industry is a Goliath for which we don’t have enough small rocks to battle with.”