After spending a long, say seven months, finishing law school and sitting for the amazingly time-consuming bar exam, I was ecstatic to catch up on the latest news concerning digital media trends in music. One of the first articles that I came upon engaged a debate concerning whether small restaurants and businesses should to pay artists and record labels public performance royalties.
What caught my attention was that argument did not concern the typical “does music really draw in customers, or does it merely serve as background music?” argument. Rather, the article used the prevalence of illegal downloading to back its argument that small businesses should escape royalty payments by utilizing illegally downloaded music (as illegally downloaded music is not traced by performing rights organizations, and therefore avoid statutory licensing fees).
Although I can come up with a million reasons why I both agree and disagree with the logic – not to mention the fact that many small businesses are probably already doing this – I am reminded of a legal article that I wrote back in April, excerpted below. Although I never thought about record revenues being undercut via illegal downloading by businesses, coming up with a sustainable resource that allows people to cheaply download music will cut down on illegal downloading while allowing artists to continue to receive applicable royalties – whether or not the downloader is a business or an individual.
According to the 2008 PriceWaterHouseCoopers Entertainment and Media Report, recorded music made up 20% of the digital entertainment market.[i] According to the PriceWaterHouseCoopers Global Entertainment and Media Outlook for 2008-2012, the United State entertainment media market is expected to increase at a 4.8% compound annual growth rate, generating an estimated $759 billion in 2012.[ii] Similarly, the global compound annual growth rate is expected to reach 6.6%, producing $2.2 trillion in 2012 with digital and mobile content distribution making up 24% of the market growth.[iii] The report states that traditional record sales will still make up the higher percentage of music sales revenue, but digital distribution is expected to exceed physical music sales in 2011.[iv]
“By 2012, digital and mobile revenues will account for just 11% of total entertainment and media spending, or $234 billion of the $2.2 trillion global market. In comparison, by 2012, digital and mobile revenues will account for 10% of total entertainment and media spending in the U.S., or $75 billion of the $759 billion U.S. market.”[v] With the dramatic, expected increase in entertainment and digital media usage, observing other segments of the entertainment industry’s performance and missteps will allow the music industry to take better calculated business risks.
Digital Music Streaming Services
Pandora, whose mission is “to only play the music you’ll love,” has become profitable despite years of struggling.[vi] Although Pandora started in 2000, the company reported its first profitable quarter at the end of 2009.[vii] In 2009, Pandora reached profits of $50 million in annual revenue, deriving profits from subscriptions, advertisement revenues and “payments from iTunes and Amazon.com when people buy music.”[viii] According to a William Blair digital media analyst, Ralph Schackart, Pandora is expected to bring in an estimated $100 million in 2010.[ix] Pandora’s performance highlights the music industry’s ability to become profitable by allowing listeners to stream music online.
Pandora’s service is unique to other streaming companies. Pandora operates based on the Music Genome Project, which creates unique musical experiences for listeners.[xiii] The Music Genome Project analyzes each song “using up to 400 distinct musical characteristics by a trained music analyst. These attributes capture not only the musical identity of a song, but also the many significant qualities that are relevant to understanding the musical preferences of listeners.”[xiv] All users are required to do is “drop the name of one of your favorite songs or artists into Pandora and let the Genome Project go. It will quickly scan its entire world of analyzed music, almost a century of popular recordings – new and old, well known and completely obscure – to find songs with interesting musical similarities to your choice.”[xv]
Despite Pandora’s popularity, there are few legal and business issues that affect listeners. Pandora, like most American streaming services, provides a limited, non-exclusive license to the service to listeners in the United States.[xvi] Additionally, because of statutory license fees, Pandora is unable to provide free service that is completely based on advertisement revenues.[xvii] This only causes a minor setback for users. Users are able to use Pandora for free for 40 hours per month.[xviii] Once a listener has reached the 40 hour limit, the listener must pay $0.99 to utilize the service for the remainder of that month.[xix] For heavy listeners, the Pandora service will give them access to a great deal of songs for less than $12 per year.[xx] Additionally, Pandora only enables listeners to skip a certain amount of songs per month, and disallows users to select specific songs or artists.[xxi] Although users can designate channels based on artists and songs, Pandora prohibits this ability in order to fit within the definition of a non-interactive service under the DMCA.[xxii] This allows Pandora to keep costs relatively low by only being required to pay statutory license fees instead of individual license fees.
Following in Pandora’s path of developing a successful streaming service is Spotify. Spotify, which is not yet available in the United States, is a streaming services that allows users to access upward of eight million songs on a user’s computer or mobile phone.[xxiii] Like Pandora, Spotify generates capital from advertisement revenues for its free service, by subscription services and through revenues gained when users buy music through their service.[xxiv] While Spotify does not provide the unique music customization as Pandora, Spotify does allow users to access music legally, only requiring users to download the Spotify platform.[xxv]
[…]According to the Vice President of Digital for Universal Music Group International, Rob Wells, the Spotify business model is financially sustainable, and is capable of adequately paying record labels to license music.[xxvi] Universal Music Group International currently licenses music to Spotify, per user, in two of its territories – the United Kingdom and Spain.[xxvii] As users can choose to listen to specific songs, Spotify, if used in the United States, would be required to pay individualized licensing fees as it would be classified as an interactive service under section 104(j)(7) of the Copyright Act.
“In [Spotify’s] other four territories: Sweden, Norway, Finland and France, Spotify pays the record labels from the money generated by subscriptions and advertising and not on a per user basis.”[xxviii] According to Wells, Spotify pays record labels in all of its territories via a combination of advertisement revenues and subscription revenues, allowing the company to maintain finical stability.[xxix] Additionally, Wells noted that Spotify can obtain stability in any of its markets by converting 10 to 12% of its free service users to its subscription service.[xxx]
[i] DIGITAL MUSIC REPORT 2009, IFPI, January 2009.
[ii] PriceWaterHouseCoopers Entertainment and Media Report Now Available on Report Buyer, pr-inside.com, October 2, 2008, http://www.pr-inside.com/pricewaterhousecoopers-entertainment-and-r840466.htm.
[vii] Clair Cain Mitchell, How Pandora Slipped Past the Junkyard, New York Times, March 7, 2010, http://www.nytimes.com/2010/03/08/technology/08pandora.html.
[xv] About Us, supra, note 157.
[xvii] Blog: Important update on royalties, Pandora, http://blog.pandora.com/pandora/archives/2009/07/important_updat_1.html.
[xxv] About Spotify, Spotify, http://www.spotify.com/int/help/faq/#about-spotify.
[xxvi] Emma Barnett, Spotify now makes record labels money, The Telegraph, January 21, 2010, http://www.telegraph.co.uk/technology/news/7043818/Spotify-now-makes-record-labels-money.html.