Chapter 1 Theoretical, Policy and Empirical Measurement Challenges
We were tasked with providing a longitudinal analysis of earnings development as well as relating our findings around equitable remuneration. The starting point of our work was centred around these questions:
- How are earnings distributed along the curve from top earners to the ‘long tail’ of musical creators who make only very small amounts of money from music?
- How much money do music creators (rightsholders) currently receive from streaming?
- How much revenue is collected by streaming services through subscriptions, advertising, and any other sources?
- How is this revenue divided between streaming services, music publishing rights holders and sound recording rights holders?
In the subsequent analysis, we point out that any meaningful answer to these questions requires a more precise definition of earners, the long tail, and the timeframe of the analysis. In any given royalty payment analysis, most works or their recordings do not make earnings—this is particularly true in the case of music streaming. This alone makes the use of the median earning a useless indicator. As we show in subsequent subchapters 1.3.1 Sampling the unknown rightsholder population and 1.3.2 Sampling the unknown universe of works and recordings,
it is notoriously difficult to map the distribution of earnings among rightsholders, even when employing advanced surveying techniques or attemting to empirically observe royalty statements.
The question of how much will lead to significantly different answers in different years in different geographical markets: we must carefully chose the relevant geographical market in question and the relevant timeframe for the analysis. The publicly available data on the British or the global music industry contains only highly aggregated revenue data, which hide the different movements in volume of use, price of use, currency rates, number of works/recordings uses, and number of users—often even the number of jurisdictions which collected revenues for the British rightsholders. Because there is no comprehensive database of rightsholders, protected works, and protected recordings, along with total revenue data, it is arithmetically impossible to characterize the earning prospects and changes of the typical (median) or average (mean) rightsholder.
Weather we try to analyse rightsholders’ earnings in a purely empirical, positive way (How much do they earn? How are earnings distributed) or in a normative way (Are earnings fair? Are they equitable?), we run into the same theoretical and empirical questions. We start with the more normative questions that require a knowledge of music economics, royalty accounting, and copyright law; we then turn our attention to empirical problems with the help of statistics and data science.
1.1 Theoretical Challenges
It is impossible to understand music streaming earnings outside the context of the music market or the music business ecosystem. Music streaming royalty rates and distribution methods largely follow long-established practices and regulations concerning valuing intellectual property, accounting for royalties, and regulating the administration of copyrights and neighbouring rights. Music streaming competes with other uses, such as public performances in television and radio broadcasting, or digital downloads. Music streaming cannot be analysed in isolation from the volume and price trends of public performance, mechanical licensing, and home copying.
1.1.1 Equitable remuneration
In the UK policy debate, a potential redefinition of equitable remuneration rights received noteworthy attention, and it is a good starting point to understand music earnings. Equitable remuneration is originally connected to a compulsory license that must be paid when recorded music is played on a publicly accessible location to the performing artists and music producers.
Compulsory licensing is subject to regulation, because it disallows individual negotiations between business-to-business rightsholders and users about the royalty rates or other contractual terms. (Compulsory licensing never applies to private end-users.) Instead of market forces, it is up to regulation to guarantee terms that are called equitable (and in some jurisdictions, fair) and similar to conditions that two business partners at arm’s length–without buyer and seller power, or cross-ownership–would have agreed upon.
The equitable remuneration right is a legal concept, and not a guidance on how much music creators are earning, nor how much they should earn. The equitable remuneration right calls for fair valuation techniques (see in the next subchapter) and competition law guarantees ensuring that rightsholders are eventually paid fairly.
The legal concept of equitable remuneration has an economic aspect. In international law, it was first enshrined as Convention C100 of the International Labour Organisation (ILO), stipulating that men and women should receive equal pay for equal work (ILO 1951). Within the context of international copyright law, it was introduced as a modification of the Berne Convention by the Rome Convention for the remuneration of the broadcasting of recorded fixation of music works (recordings) since 1971. This right is further elaborated by the WIPO Performances and Phonograms Treaty (WPPT).These copyright conventions are administered by the WIPO (WIPO 1996a, 1996b). The equitable remuneration rights ensure that users of music and rightholders should settle along terms as if they would have negotiated in an open market transaction in the absence of barriers to negotiations and asymmetric power.
These international treaties do not set an international standard on how to calculate equitable remuneration, and do not apply to all uses of music works and their recordings, but rather try to avoid certain market outcomes. For example, compensation must be proportional to use: rightsholders whose works were not used, or used only very few times, should not receive similar remuneration like those whose works were used frequently. Equitable remuneration is itself an important, but justified source of unequal royalty distribution, because the use of music favors novelty and popular performers or composers. The fact that the equitable remuneration right itself is the cause of inequality among rightsholders may seem to contradict the everyday use of the word ‘equitable.’
The idea of equitable remuneration, and the right for equitable remuneration is not an absolute and well-defined right. It has gradually evolved over the last 60 years, and it has been defined and re-defined many times, like other aspects of copyright law. Because many UK rightsholders have a significant international market presence, they are not remunerated according to a single equitable remuneration right. They receive income from many jurisdictions, which all define differently the equitable remuneration right. There are very significant differences on the distribution of rights between producers, performers, and among performers, featured artists, and session musicians. A British recorded fixation may be subject to differently set rights in in the UK, Ireland, Germany and the United States. In an international context, a study of Europe Economics and IVIR has shown that there are notable differences in how equitable remuneration is understood – and it is often used as synonymous to fair remuneration (Europe Economics & IVIR 2015).
In our understanding, the treaties that define equitable remuneration are silent on how to calculate the remuneration, because this is enshrined in intellectual property law and financial law. The fact that some jurisdictions use the word equitable and fair interchangeably underlines the fact that equitable remuneration should be based on the principles of 1.1.2fair value, as defined by economics and international accounting standards.
The current UK debate is perhaps too much focused on the UK definition of equitable remuneration rights. The changes promoted by the Broken Record campaign were successfully made in several European jurisdictions, but they did not significantly change the earnings of most creators. By focusing on the re-definition of the equitable remuneration right, the debate is only focused on the re-distribution of a very small portion of the music ecoystems’s income. This blurs the fact that the general level of earnings—which is not governed by the equitable remuneration right, but by fair value, arm’s length standard, and competition law—is declining and seems to be inadequate compared to historical levels.
1.1.2 Fair value
When rightsholders are not in the position to negotiate rates freely, various legal, accounting, and economic norms, and institutional guarantees must be in place so that they receive fair and equitable remuneration. Because copyrights and neighbouring rights (in European parlance, or recording copyrights in U.S. terminology) are valuable intellectual property rights, they entail fair compensation for the use of rightsholders’ works or recorded fixations.
When intellectual property is sold (against a lump-sum payment), or licensed (for periodical payment), or used as a pledge against a loan, the transaction must comply with the Fair Value standard. This standard is, similarly to copyright law, set by international law, which generally can only in detail be modified by UK law. The Fair Value standard of the International Financial Reporting Board has been incorporated into UK law via EU law, and remained UK law after Brexit.
In 2008, the global recording industry body, IFPI, published Valuing the use of recorded music, created by Price Waterhouse Cooper (PwC 2008). This excellent methodological guide applies the WIPO and IFRS standards (IFRS 2011; Flignor and Orozco 2006; Puca and Zyla 2019) on valuing copyrights in more practical terms for the music industry. It is important to recognize that IFRS, like copyright law, is international law, and it can be enforced in the UK courts. The valuation principles are enshrined in the fair valuation principles of the WIPO, and the fair value principles of the International Financial Standards Board. While the equitable remuneration right may only apply, from a legal perspective to a subset of rights, the economic techniques of valuing copyrights, or any type of intellectual rights are similar. Therefore, even when no law or jurisprudence stipulates that remuneration must be equitable, the same economic valuation techniques should be used that we use for setting the remuneration level for equitable remuneration.
The recognized fair valuation principles stipulate that the “most applicable method” must be used in valuations. In the music industry, the use of the “cost approach” is completely impractical, which leaves open the choice between the “income approach” and the “market approach.”
The income approach compares the expected future royalty cash flows of a work or its recorded fixation using an appropriate “discount rate.” When a user buys in a music store an mp3 file on 1 July 2015, it triggers a single royalty payment after the deductions of the cost of sale on the marketplace. In a streaming platform, the same user’s royalty payments appear every month when she listens to the song, and in radio, usually every year. The discount rate provides a proper comparison between remuneration received in July 2015 and April 2021.
The market approach tries to identify a payment rate, regardless of whether it is made in lump sums, monthly or annually to established, among sufficiently similar uses. Many ideas were tried at an international level to identify the sufficiently similar uses of music streaming; for example, relating ad-supported and automatically selected songs to radio streams, and relating cases where the user controls the selection of songs, and may even download them.
The application of fair valuation principles is particularly challenging in the case of private copying, where the transactions are not recorded (as they are not market transactions) and in streaming, which is a relatively new technology that is seen in licensing as a mixture of earlier mechanical copy-based and public performance-based licensing, and has so many transactions that most rightsholders (and even their national organizations) lack the data processing capacity to administer the rights or challenge incorrect payments. In our practice, we usually use the market approach, and we carefully compare after timeframe and other adjustments mechanical licensing revenues and public performance revenues with proceeds from music streaming platforms and media platforms, such as YouTube.
Comparing royalties is challenging because some royalties are paid upfront and for perpetuity (like in the case of the digital download model of mp3 music); music streams are remunerated monthly, based on actual use; and public performance streams, such as broadcasting, are usually remunerated annually, in equitable proportion to the use of the works and recordings. Both monthly and annual royalties are subject to accruals of small sums.
1.1.3 Relevant market for analysis
In competition policy, a relevant market is a market in which a particular product or service is sold—an intersection of a relevant product market and a relevant geographic market. This concept is particularly useful in our case, because music has no clear-cut product, service, or geographical market.
A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use—experience and research in other countries shows that music streaming can be substituted with other, differently licensed music, for example, listening to music via the media platform YouTube, or from mp3 files. Even the sale of physical music products, such as microcasettes and CDs, can be substituted with music services such as streaming subscriptions.
A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous. Because recorded music creates royalties from copyrights and neighbouring rights defined by national copyright law, and, with some exceptions (for example, the BIEM agreements), are set nationally, the relevant market for analysis is the national market. British music is licensed in almost 200 jurisdictions, which makes the analysis of music creators’ earnings particularly difficult. Yet, there are very few national (or domestic) data available on music sales volumes and sales prices, particularly in streaming. And the empirical observation, either via surveys, self-reporting, or via the observation of various royalty statements is very difficult, because the population of rightsholders, works and recordings is unknown, and representative sampling is difficult. (See subchapter 1.3 Empirical Challenges.)
While observing their global income is relatively easy, it tells us nothing about the economics of those earnings, i.e. the change of demand, supply, volumes, and prices.
1.2 Policy Issues
The MCE project is taking place in a time when serious policy changes and discussions are taking place in the United Kingdom and Europe. As the UK is building a new regulatory system, its legislation must decide on which aspects of the copyright regulation to keep from retained EU law and which aspects to change.
Because of the important global position of the UK music industry, the international policy debates and expected or undergoing changes are relevant for understanding the earnings prospects of music creators. We believe that the most important factors at play are the consolidation of the data management of a very fragmented music ecosystem, the creation of trustworthy AI in algorithmic music sales and the closure of the value gap towards media platforms. These problems are directly related to the low level of earnings from music streaming, and some unjustified differences among rightsholders.
1.2.1 Problems with copyright management
As we will show in the 3 Differences in Music Creators’ Earngins: Simulation Results chapter, the fluctuation in streaming price and currency conversion to the function currency from the market of sale can cause much and justified earnings differences among British rightsholders. But there are differences which are not justified and related to some form of malfunction in the rights management system.
For producers and performers, the problems are partly different from the problems of composers, because streaming platforms license the copyrights and neighbouring rights (the publishing side and recording side) differently. But generally, both publishing and the recording side suffers from the problem of high documentation and data processing costs, high error rates, and large sums of unpaid revenues. The lack of data interoperability, frequent changes of standards, and the general fragmentation of the music ecosystem–which disallows the application of specialized documentation or data management workforce–causes delays or non-payment for rightsholders. In some markets, we observed that this could affect up to fifty percent of all rightsholders.
In the current market situation, with the current streaming prices and streaming volumes, the cost of proper (metadata) documentation of works and recordings often exceeds the value of expected future royalty cash flows. Because metadata documentation and data processing exhibit large economies of scale (i.e., the unit costs are much lower for a million songs than for a thousand songs, and the difference is even greater to a hundred songs), payment problems plague independent labels and publishers. In Europe, the publishing share in streaming revenues is unusually low compared to the recording side, therefore the proper documentation of composer royalties is particularly challenging.
Our Digital Music Observatory, and its related Listen Local Initiative was partly set up to allow the pooling of data processing, documentation automation for smaller organizations, like independent labels, or national organizations of smaller countries, who usually manage a much smaller national catalogue than major music businesses. We are participating in an international research consortium (which includes the UK Copyright and. Creative Economy Centre from the United Kingdom) to understand the problems in data and metadata management and propose copyright law changes in Europe and the UK.
We do not have estimates about the scope of the problem in the UK, but in the United States, after the introduction of the new Music Modernization Act, the Mechanical Licensing Collective received in January 2021 $424.38 million in unmatched royalties from Apple Music, Amazon Music, and Spotify among other streaming services. According to various reports, these streaming services paid accrued historical unmatched royalties, often called “black box money,” to the MLC in order to get these royalties to copyright holders, songwriters, and publishers who have applied to become MLC members. Apple Music transferred the most money to the MLC with over $163 million, while Spotify wasn’t far behindl submitting over $152 million. Amazon, meanwhile, transferred $42 million, while Google/YouTube sent $32 million. We experienced similar problems with a smaller absolute and a higher relative value on the smaller European markets.
1.2.2 Value transfer
During the creation of this report a legislative process is underway to implement a new European legislation that aims to close the value transfer to unlicensed media platforms. Media platforms, like YouTube, unlike licensed music streaming services like Spotify, Deezer, Apple Music or licensed audiovisual services like Netflix, did not get a license from rightsholders for the use of their music, audiovisual content, literary or artworks. Their objections to such licenses were based on the safe harbor of copyright law mandated by the U.S. Congress to help the evolution of internet businesses.
The representative associations of composers (GESAC 2015a, 2015b; CISAC 2017), performers (AEPO-ARTIS 2016, 2017), and producers (Moore 2016) in Europe were all strongly calling for a change in these practices, while technology companies on the other side were vehemently lobbying European governments and members of the European Parliament to stop or water down proposals. Eventually the European Union adopted the new Copyright Directive (EUR-Lex 2019). The transposition of this European directive into national copyright law is happening in these months all over Europe (or it has already finished.) It is yet to be seen if the regulatory approach will close the value gap in Europe, but it is likely that revenues from the United Kingdom will fall under a different copyright regulation.
Value transfer is undermining mechanical licensing, public performance, mixed streaming licenses, and even compensation values for home copying. They offer a cheaper platform for viewers than licensed onces, which moves the basis of potentially royalty earning revenues towards the media platform. We have measured this effect in several European countries, and we have found this to be far more significant than the potential redistribution effect from pro-rata streaming distribution (see the next 1.2.3 subchapter) or the redefinition of the equitable remuneration right (subchapter 1.1.1).
Unlicensed uses create competition to the business-to-business users of music, audiovisual content, books and other copyright protected content. For example, television stations and radio stations lost audiences to YouTube, because YouTube could offer programming “for free,” as it paid only about 1-10% of the similar royalties of broadcasters for content. This means that advertising revenue moved from TV and radio stations to YouTube. This revenue should have been shared with rightsholders by the broadcasters.
The availability of unlicensed platforms, such as YouTube, that claims not to be a streaming platform, and pirate websites reduced demand for licensed, legalized use of copyright protected content. The lower sales volumes and the direct loss of advertisement revenues reduced the market price of content.
Because private copying remuneration must be based on market values of music, filmed content, literary works, and other works, it is important that we enumerate the price loss due to illegal activities, so that the damage claim is truly based on arm’s length rather than illegal market transactions.
We were not provided with data to estimate the size of the value transfer in the United Kingdom, but given the global nature of the music ecosystem, we do not believe that the British rightsholders are affected differently than European ones. Partly, because a large part of the British revenues are export revenues to the European Union, and partly because unlicensed media platform are competing precisely in the same manner in the UK with licensed public performers or streaming platforms like in other countries. We believe that the existence of the value transfer is one of the sources of the declining value of music shown in subchapter 2.3, but we have not attempted to estimate the size of this effect. However, our detailed data in Hungary, Croatia, and Slovakia suggest that the value transfer amounts to 10-20% of the total music market value.
1.2.3 Distribution rules
Recently we have seen a considerable discussion around the choice between the pro-rata versus user-centric model of royalty distribution from streaming platforms. Except for SoundCloud, and only from April 2021, music streaming services do not divide up the royalty fund (from subscription and advertising revenues) based on the number of streams per recording. We did not have a mandate to analyze this issue deeper, but we believe that in the long-term, the choice between these two models is a false dichotomy, and the music industry must look beyond its boundaries, for example, to telecom services, to find a better and more just distribution system. We summarize empirical studies made in Denmark, Norway and France in subchapter @ref(#earnings-distorsion).
1.2.4 Trustworthy AI
Recommendation systems of music and media streaming platforms are extremely complex systems, and they operate as a proprietary marketplaces where the rules of fair competition, fair play, and equitable remuneration are basically maintained by the owner of the platform. Forthcoming UK and EU regulations try to make these autonomous or semi-autonomous algorithmic systems accountable.
One important element of work we are doing with the founding partners of our Music Observatory–with the support of the Slovak Arts Council–is to find out why classical musicians are paid less, or why 15% of the Slovak, Estonian, Hungarian and Dutch artists never appear on anybody’s personalized recommendations (Antal 2020b).
When we analyze the effect of AI algorithms on royalty payments, we describe potentially bad outcomes of the use of automated sales or personalization, which undermines or contradicts national or EU-level cultural policy goals, national media regulation, national child protection rules, national or international fundamental rights protection against discrimination without basis. In a recommendation system many bad outcomes may happen that can eventually lead to lower or no payment for a rightsholder.
In these cases, we are not talking about unjustified differences of payment as simulated in 3 Differences in Earnings: Simulation Results, but a systematic breach of non-copyright rules that lead to an unjustified lower streaming volume, and therefore a lower royalty payment on lower volumes. A recommendation system might exhibit the following characteristics:
- It may recommend too few female or small country artists, or start recommending artists with hateful language.
- It may put certain label’s music on less visible places.
- It may make the works of major labels easier to find than those of independent labels.
- It may place less works and recordings on personalized lists than local content guidelines (applied in about 90 territories of the world, see (Stein, Brock, and Inc. 2012)) would require from competing local television or radio stations.
- Your personalized list is filled with misleading track/artists names that are hunting for accidental streams, much like click-hunting text content that plays search engines.
These potential undesireable outcomes are sometimes illegal, and, for example, they may hypothetically make Welsh artists earn significantly less than American or English artists.
In our work in Slovakia, we reverse engineered some of these undesirable outcomes and we are planning similar research in the United Kingdom. We do not have relevant empirical estimates for the United Kingdom, however, and our experience shows that one potential reason why UK rightsholders are facing such a different outlook on streaming revenues may be due to various bad outcomes of the largely autonomous system of playlist personalization and playlist curation. We want to stress that these problems are unlikely to be the results of foul play by streaming providers, but they are inherent to extremely complex systems that need constant and complicated monitoring.
1.3 Empirical Challenges
Many people are familiar with the work of Sixto Rodriguez, a Detroit-born songwriter, whose works were not licensed for more than 30 years after they were recorded between 1967 and 1971, until 1997, when it was famously discovered that he is a best-selling songwriter in South Africa. After the documentary Searching for Sugarman won the Academy Prize, his recordings, 40 years after their release, became golden and platinum records in many countries.
Many artists are active in their twenties, and in the 21st century they can expect to live 60-70 years longer, and their heirs enjoy copyright protection for further decades. Like Rodríguez’s recordings, there may be many protected works and recordings that have not been observed in distribution schemes, media and streaming platforms, yet become successful in the future. In the absence of a global, compulsory registry of copyrights, we do not even know how many works and recordings enjoy copyright protection in 2021.
Because there is no global database of copyright (and neighbouring right) protected music works and recordings, we do not know precisely how many rightsholders and how many works or recordings are protected by the law. From a strict mathematical perspective the average (mean) and typical (median) rightsholder earnings do not exist, because their calculation would involve division by, or ranking of an unknown number of rightsholders.
1.3.1 Sampling the unknown rightsholder population
Most rightsholders create works and recordings that have a limited lifespan: in a few years they lose their audience, and in the absence of their use, they no longer create income. But, as the case of Sixto Rodríguez shows, they may in the future, even decades, or a hundred years later. There are many rightsholders who create something, but never become full-time creators, or eventually they go back to part-time or occassional creators. Creating a representative survey of rightsholders is very challenging, becaues the rightsholder population has many inactive members.
Similarly to rightsholders, most of the works and recordings are not in use, or hardly in use at any given time period. Creating a representative sample of recordings or works for empirical observation is very difficult, because we simply do not know how many works or recordings exist.
Since 2014, we perfected sampling both rightsholder populations and recordings to create better and better representations of the creators and their creations. We created special surveys among music professionals to establish their typical earning levels and composition, and we created special samples of recordings to observe their typical revenues.
The way we sample or weigh musicians’ self-reported earnings in the Digital Music Observatory’s surveys is based on the known, but anonymised payouts of author’s societies, and comparing it to the self-reported earnings from author’s societies. The closer the self-reported median, quartile, or average payouts get to the know, but anonymous true payouts, the better the sample. In Hungary and Slovakia we were able to create highly representative music professional surveys for the active musician population. On active musician population we meant those living artists, who recieve some collectively managed royalties in a given year, i.e., their works are played on radio, television, directly identified public performance, collectively managed streaming services, on concerts, or other uses where author’s societies record use and collect revenues. We believe that this is the best target population for investigating music creator’s earnings. This target population is usually rather different from the payrolls of author’s societies, not to mention neighboring rights soceities, becasue those contain heirs of many deceised artists. This target population does not include new artist who do not have yet a registered work or commercially released sound recording, or whose works are not exploited in these channels. Generally, this is an appropriate target, though in some genres they may not be representative. (For example, old and classical musicians play music that has no author royalties, and some subgenres of hip-hop are not radio friendly and avoid any registration.)
1.3.2 Sampling the unknown universe of works and recordings
The approach we used for the Central European Music Industry Report, which is so far the most comprehensive European music industry report, was a systematic sampling of a very large portfolio managed by Consolidated Independent (in the state51 music group.) With the help of state51 music group’s engineers, we pooled the royalty statements of several million recordings, and chose to examine further those which were used in one of the four services (Spotify, Deezer, Apple, YouTube) in 20 select markets, including the United Kingdom. We did not believe that the Consolidated Independent portfolio was representative of the entire European or each of its national markets. We used a sampling technique reminiscent of some bond and stock market indexes to select recordings that were good candidates to represent the earnigs of a typical recording in a given market and time period. Our ‘index basket’ chose the median use of more than 300,000 recordings for 20 distinct national copyright jurisdictions and months. The index basket was ‘rebalanced’ every month: songs that were used more or less than the median value were replaced with the median used (played) songs of the month. We wil introduce these indice in the next chapter.
Our indexing was deliberately experimental, and connected to the creation of the report, not the Music Creators’ Earning project. We believe that more sophisticated and even largely different sampling techniques could be used for understanding earnings in streaming channels. Our selection method tried to find the ‘typical’ song that was played in a given months, which is very different from the ‘typical’ recording. In any given month, in the CI portfolio, as in any large portfolio, the ‘typical’ recording was not played, and the median (typical) earning was zero. We avoided this problem with selecting every month the ‘typical played’ song, but if we would like to characterize the ‘typical’ rightsholder, we would have to give up on the use of both the arithmetic mean (which is cannot be calculated as we do not know the number of protected works/recording) and the median (because it non-descriptively zero.) We still believe that the CI-CEEMID index is the probably the best descriptive statistic that can characterize British and European individual rightholder earnings.
1.3.3 Market geography
Aggregated income indicators are usually made in two versions: national or domestic. The national music creator earning is the earning of rightsholders who live or are registered as legal persons in the United Kingdom. The domestic income of the music industry is the earning made by entities in the United Kingdom, including the earnings of non-resident rightsholders they represent. The earnings of a French artist residing in the United Kingdom, represented by a French label, is likely to be counted in the British national earnings, but not in the domestic earnings of the British music industry. However, a Dutch artist residing in the Netherlands but represented by a British label is likely reported in the domestic revenue of the British music industry (and add value to the British GDP.)
Defining the geographical scope of the analysis is relatively easy in the case of live music, and rather complicated in the case of recorded music. Because copyrights (and neighboring rights) are nationally granted on the basis of international treaties, rightsholders—via distributors or collective management socieites—collect their revenues from each copyright jurisdiction separately. However, this information is often lost in surveys and global reports. In some cases, tying the revenues to a country, or even a region of a country is possible—this maybe possible in the case of radio revenues or royalties connected to live performances.
The loss of information, as we will show in the next chapter, is critical, because volumes, prices and exchange rates move rather differently from the UK market in other countries. German revenues are driven by different volume growth rates, different local price fluctuations in the value of a stream, and by the EUR/GBR rate applied whenever a monthly or accrued royalty is paid. Because practically all stakeholders have non-UK revenues, without knowing how much they are affected by different international factors, they cannot know what steps in Britain can lead to a positive change in their visibility or income goals.
The British music industry is not constraint by language barriers, and most rightsholders receive income from dozens of territories or jurisdictions. This means that British rightsholders collect from many jurisdiction, subject to various definitions of equitable remuneration, public performance, mechanical royalty regulations, and in many currencies. Because of the significant differences in streaming prices across the world, and the presence of currency rate fluctuations, a very large part, if not most of the income differences of rightsholders are caused by the different geography of their audience distribution.
The Digital Music Observatory uses data from righthsholders directly, from collective management and distributors. It is not always possible to break down the figures to national territories—for example, in the case of musician surveys, it would not be possible to ask musicians to break up their royalty statements when they self-report revenues.
This is an important problem, because each artist, label, may have a different share of British, Irisih, American, German, and other income, and therefore their reported income may contain an unknown element of foreign income, and an unknown currency conversion effect. For example, in the 2016-2020 period the British pound generally lost value against the euro, so a label or artists with flat revenues partly arriving from the eurozone could have seen a rising pound revenue.
The CEEMID-CI indices are denominated in British pound, and each revenue is exactly tied to a jurisdiction. This cannot be said of self-reported surveys like that of the UK Music in Numbers, and we believe that there is no mechanism to prevent reports to IFPI to clearly delineate revenues per market. In the case of the CISAC Global Collection Report, we have a different problem: while we know that all reported income was generated in a particular national jurisdiciton, often a large share, even majority of those collections were made on behalf of foreign rightsholders.
1.3.4 Units of observation
Music is a global industry, and even less known artists or songs find occasionally international audience on streaming platforms. This means that practically every British rightsholder has some revenues that are not originally denominated in British pounds. In the post-Brexit period, the British pound lost value against the US dollar and the euro, which means that a British artist could have received the same 100 GBP revenue even if her euro or dollar quantities or prices were falling.
For any meaningful economic analysis, the volume, price, and exchange rate effect must be separated.
Revenues are multiples of use volumes over price expressed in a certain currency. They can be national or domestic market indicators if they contain revenues only domiciled rightsholder or neutralized rightsholders’ revenues. Without the ability set up apart foreign versus national or domestic revenues, and break up the effect of changing volumes, prices and exchange rates, they are not suitable for economic analysis, and they do not indicate the earnings of the average or typical rightsholder. They still maybe useful for business target settings, but only for organizations with a large and diversified portfolio.
There are several problems with the existing national and international music industry reports:
They usually do not separate domestic, national and foreign income.
They do not consider the exchange rate, or use currency translations that may not be adequate for every type of analysis.
They do not separate the effect of price and volume change.
Sometimes they do not even control the number of territories (jurisdictions from where royalties are received.)
These problems give rise to the problem that growth in aggregates may lead to a diminishing revenue for smaller entities or individual artists. These indicators are not adequate for the use of small publishers, labels or managers of bands, artists, because they do not indicate growth or decline in volumes (and signal for changes in promotion), do not indicate growing or declining prices (and allow the focus of sales on more lucrative segments.) While currency risk can be hedged or otherwise insured, they do not even show which part of the earning change is attributed to exchange rate movements and which is related to the market performance of their catalogue.
Ideally, the data collection should record volumes (number of streams), prices (value of individual stream), and exchange rates (conversion rate applied for the particular stream) for all significant markets of the artist, company or national organization. Currency translations must be consistent and meaningful.
1.3.5 Timeframe of analysis
As we have experienced during the creation of the CI-CEEMID indices, most recordings’ typical (median) earning over a single royalty payment cycle (a calendar month) is zero. But it is certainly not zero during the entire lifespan of the recording, and it is usually not zero for the first or second year. The choice of the timeframe for empirical observation is critical.
Various licensed uses of music have three royatly payment cycles. Mechanical royalties are paid once in a lifetime. Public performance royalties are collected on an annual basis, and small earnings (that would be too costly to pay out during the year) are accumulated over two or more years. Streaming earnings are paid out monthly, but similarly to public performance royalties, small amounts are accumulated over two or more periods. Observing royalty statements alone cannot enable meaningful comparisons, because the same payouts on a given date–for example, 30 April 2020–refer to different earning periods.
Periodical earnings often do not reflect accrued but unpaid royalties, which may affect a very large number of rightsholders, given that the earnings in the long tail are smaller than the accounting and bank transfer cost. These accrued earnings are not always lost, and often carried over to the next period when the payment, after payment costs, is practical. It is very easy to significantly underestimate the payouts in the long tail, because their payment frequency is lower than among successful artists.
The different timeframes of various royalty collections has another impact on the analysis: different royalty cash flows are subject to different currency exchange rates. Two, seemingly equal royalty payments may veil a different quantity or price by an offsetting currency movement.
1.3.6 Survey design and harmonization
Because surveying musicians and rightsholders is very difficult, we use various techniques to improve our results. As mentioned earlier, we can use known payouts (such as various collectively managed income paid to living British rightsholders) to create post-stratification weights for responses. Another possibility that the Digital Music Observatory uses ex ante and ex post survey harmonization. Asking the same questions with the same methodology used in large, representative, national or Pan-European surveys allows us to understand the various demographic biases of musician surveys.
For example, in the Central European Music Industry Report, we used relative income and life satisfaction questions that have been asked for decades by Eurobarometer, and compared results. In some countries, we could create a representaitve sample of musicians; we could observe that everywhere musicians’ earnigs were more precarious than that of the local population. A major advantage provided by survey harmonization is that we can compare musicians’ earnings with various occupational groups, too.
Our suggested approach to the MCE project was the use of survey harmonization and post-stratification, but this was turned down by the Steering Group.
When we are surveying rightsholders, which I have done so far in 12 countries, we must keep in mind time and again that respondents are typically drawn from a very small minority of the rightsholders. Music careers are not always linear or exponentially growing, many rightsholders are inactive for years or decades when they often receive very little or no earnings, and do not participate in any surveys. Heirs almost always decline to participate in any music earnings survey. Statistically valid surveying is possible but challenging – in our surveys we use ex ante and ex post survey harmonization with national and international standardized surveys (which are available in the United Kingdom, too) and we compare surveyed, anonymously reported earnings with anonymised known earnings. For example, in the CEEMID surveys conducted in Hungary and Slovakia, we compared the anonymously reported income from Artisjus and SOZA with the anonymised, full payout of actual Artisjus and SOZA royalties to living rightsholders. Our successfully distributed surveys very accurately resembled the known, true payouts. Because the distribution of the earnings was very similar in 12 analysed countries, and in two we could very carefully compare the reported earning distribution with the true distribution, it is safe to assume that British payouts have a similar form.
In any empirical analysis, it is important to note that usually we can observe a minority of the works or recordings, and a minority of the rightsholders. If we observe actual streams or payouts, most of the works/recordings are not used in any given period, and the second largest group is so scarcely used that the payout is carried over to a next period. In any given period, most of the works/royalty payments are not observed; additionally, the end of the long tail is also not visible.