Streaming and Copyright: a Recording Industry Perspective

May 2015

By Lauri Rechardt, Director of Licensing and Legal Policy, IFPI, London, United Kingdom

The music industry is at the forefront of the rapidly evolving digital market place. Music and engagement with music is fuelling growth of the digital economy, enabling different digital online services to boost turnover, generate traffic and gain scale. Music right holders have worked hard to license their work to the hundreds of digital services that serve customers globally. Today consumers have easy access – legally – to more music than ever before. Statistics from IFPI, the association representing the recording industry worldwide, show that in 2014, 46 percent of record companies’ worldwide revenues came from online digital services (accessible over the Internet or mobile networks).

Today consumers have easy access – legally – to more music than ever before. Music and engagement with music is fuelling growth of the digital economy, enabling different digital online services to boost turnover, generate traffic and gain scale. (Photo: iStockphoto © Branislav Bokun)

Developments within the online digital music marketplace are further evidence of the pace of change within the industry. Digital music markets have diversified and developed. The popularity of download services, while still high, is flat-lining and even declining while streaming services such as Spotify and Deezer are growing. Streaming services have become an increasingly important sales channel and source of revenue for record labels and artists.

The exclusive rights recognized in the 1996 WIPO Internet Treaties (the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT)) have enabled these positive developments. But the digital marketplace is not in balance. While the broad availability of music is driving innovation and the growth of new digital services, music right holders are not benefitting fairly or proportionally from the increased use of their music. Restoring balance to the market should be a high priority for the creative industries.

Digital music – an increasingly diversified market

Over the past 15 years the music industry has changed radically. In most markets physical product sales have declined sharply, while revenues from digital services have grown rapidly. However, although revenues paid by digital services to record companies have increased, they have only recently started to offset falling CD sales. Overall the trade value of recording industry revenues in 2014 remained steady (revenues were down by 0.4 percent) at USD15 billion (www.ifpi.org/global-statistics.php). Of that total income, USD 6.9 billion (46 percent) came from digital services.

Probably the most striking feature of the digital marketplace in recent years has been the continuous innovation and diversification of services and business models. A la carte downloads provided by services such as Apple’s iTunes, the model that led the way for digital online music sales, have started to decline in many markets while subscription streaming services, led by Swedish Spotify and French Deezer, are surging ahead.

Global industry revenues from such subscription streaming services grew by 39 percent in 2014, which already represents 23 percent of all digital revenue. Combined, the subscription services paid USD1.6 billion in revenues to record companies and artists. Streaming income is expected to enjoy further strong growth in the coming years.

International copyright system underpins the digital marketplace

All the largest online services operate in multiple territories, making it necessary for record companies to review their artist agreements to ensure they control all necessary rights in all territories. In turn, the services have had to secure licenses covering all territories in which they operate.

The emergence of so many new services and new operating models demonstrates both the efforts made by right holders and digital services and the resilience of the international copyright system.

Internationally harmonized rights – brought about, in particular, by the 1996 WIPO Internet Treaties – have facilitated the global expansion of digital music services. The legal and commercial certainty they afford at the international level has helped make it possible for digital services to launch and reach consumers in new markets.

Data suggests that subscription streaming as a business model has the potential to support a sustainable music industry. (Photo: iStockphoto © scyther5)

Thanks to these treaties, the process of clearing and licensing rights in each of a large number of territories has been made easier. Also, because these rights are now broadly recognized, right holders have greater confidence in licensing their rights to digital services in new territories.

The approach adopted by the drafters of the Internet Treaties to ensure broad, technology neutral communication to the public right (WCT, Article 8) and the right to make available (WPPT, Articles 10 and 14 ) has proven to be the right one. These exclusive rights apply equally to all types of transmissions – downloads, on-demand streaming and other types of interactive transmission – and ensure that right holders can negotiate fair terms with digital services across territories.

There is thus little doubt that interactive streaming services fall under the right holders’ exclusive rights to communicate to the public or to make available. This too has made the licensing process simpler, clarifying who has the authority to license and which rights need to be cleared.

In contrast, there has been some uncertainty around the applicability of exclusive rights to certain new online business models and practices, in particular as regards the aggregation and reuse of copyrighted material in the online environment. See, for example, the decision of the Court of Justice of the European Union in Svensson v Retriever Sverige, and the critique of the decision by the ALAI executive committee PDF, critique of the decision by the ALAI executive committee.

Unless record companies are able to continue covering their costs and investing in new talent, all participants in the music value chain will lose out.

In keeping with the principles applied in copyright more generally, exclusive rights should be interpreted broadly and right holders should be able to license all commercially relevant uses of protected content, including in the online environment. There is no objective justification for locally inventing and applying new criteria to limit the scope of rights in the online environment. Doing so would be contrary to the principle of technology neutrality. At the very least, such criteria should pass the three-step-test: the ensuing carve-out should be confined to special cases, should not conflict with the normal exploitation of the works, and should not unreasonably prejudice the legitimate interests of the right holder.

Time to review performers’ and producers’ right to broadcast and communicate to the public

Looking to the future, there is a need to revisit the performers’ and producers’ right to remuneration for non-interactive, linear transmissions (WPPT, Article 15). As streaming services become an increasingly important sales channel for music, countries need to start taking heed of the Agreed Statement to Article 15 as follows:

“It is understood that Article 15 does not represent a complete resolution of the level of rights of broadcasting and communication to the public that should be enjoyed by performers and phonogram producers in the digital age. Delegations were unable to achieve consensus on differing proposals for aspects of exclusivity to be provided in certain circumstances or for rights to be provided without the possibility of reservations, and have therefore left the issue to future resolution.”

There is no longer any justification for countries to limit the rights of performers and producers to broadcast and communicate to the public to a remuneration right, as per the minimum obligation in the WPPT and the 1961 Rome Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (Article 12). Today, sound recordings are used by a variety of businesses, from commercial broadcasters that use music to attract listeners and advertising revenue, to retail shops that use it to enhance customer experience and drive sales. Exclusive rights ensure a fair bargaining process and a level playing field between right holders and users of sound recordings.

Streaming is a unique sales channel

There has been some debate about how right holders are remunerated for the new streaming services. In this discussion it is important to understand that streaming services, whether on-demand services (Spotify) or personalized (MixRadio), are sales channels for recorded music. Today, streaming services fulfil the same function as CD sales in that both deliver recorded music to consumers.

Further, although revenues from streaming services are growing, they are yet to fully offset declining physical and download sales. Despite their promising revenue potential, with the exception of markets such as Sweden and Norway, new streaming services are yet to deliver overall market growth. The transition from physical to digital services is still ongoing.

One of the big differences between streaming services and more traditional sales (CDs or downloads) is the way right holders are remunerated. For CD sales and downloads, right holders receive an agreed fee upon the sale of a product regardless of whether the consumer listens to the music. In contrast, with the consumption-based model applied by streaming services right holders receive recurring income as content is consumed. They get smaller initial payments, but income accrues over a longer period of time.

All right holders benefit from subscription streaming

IFPI analyzed local sales data collected between 2009 and 2013 from three major music companies across 18 territories (outside the US and Japan) relating to payments made to locally signed artists. This analysis reveals that while companies’ corresponding sales revenue declined by 17 percent, payments to artists dropped by just 6 percent. In other words, during a period when the industry was moving towards digital distribution and streaming models, artists’ share of sales revenue increased by 13 percent. Overall payments to local artists across these territories during the period amounted to USD1.5 billion. The data also show that in Sweden, where subscription streaming has gained a significant foothold, artists received higher royalties from higher sales thanks to market growth driven by paid streaming.

These findings indicate that subscription streaming as a business model has the potential to support a sustainable music industry where revenue and the benefits of growth are shared in a fair and balanced manner. Any discussion about the fair sharing of benefits must recognize that record companies continue to be the main investors in talent. They continue to foot the bill for the development of artists and the production, promotion and marketing of recordings (www.ifpi.org/resources-and-reports.php#/investing-in-music.php). These costs have not disappeared with the emergence of new sales channels. Unless record companies are able to continue covering their costs and investing in new talent, all participants in the music value chain will lose out.

Balance needs to be restored in the online marketplace

Different digital services use music and engagement with music to attract traffic and generate turnover. Music has been the rocket fuel for digital services, driving new services and innovation. But music right holders have not been able to benefit fairly from the increased engagement and use of their music. Instead of balanced, mutually beneficial growth, in parts of the digital marketplace only one party in the value chain is benefitting while others are worse off.

The fact that many digital services can use music without authorization or without needing to offer adequate payment for it is arguably driving this unwelcome development. The gap in the size and popularity between some large ad-supported content platforms and the payments they make to right holders is indicative of these ills. Consider the following IFPI statistics: in 2013 all free ad-supported services combined paid a total of USD 450 million to record companies; in 2013 YouTube, the largest and most popular ad-supported music platform, had over one billion unique monthly users. In contrast in 2014, Spotify, the largest subscription streaming service, according to its own statement, had 60 million subscribers and paid one billion US dollars to music rights holders. Apparently, some of the main ad-supported services are hiding behind “safe harbor” provisions which were originally granted to safeguard the interests of passive and neutral online intermediaries.

It appears that the legal framework, as applied in major markets, has created a situation in which some digital services engage in online distribution of music without seeking permission from right holders. Correcting this flaw, and restoring the balance between right holders and digital services and between different types of digital services, should be a high priority. Only then can we ensure a diverse and sustainable digital marketplace for creative content.

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