US Copyright Royalty Board Significantly Raises Rates on Streaming: Is it Enough?

The Copyright Royalty Board in the United States has issued an initial determination and accompanying regulations that raise the amount of royalty available to songwriters for streaming, which will impact services such as Pandora, Spotify, Apple and YouTube.  Variety has an excellent article on the impact of the decision, which seems substantial—almost boosting royalties by 50%.  Paula Parisi of Variety explains:

The ruling effects only the mechanical license, a term that literally references the rolls mechanically cranked through player pianos – arguably the first mass distribution media for recorded music. Albums, CDs and downloads also fall under the mechanical license (the thought being that like piano rolls, these are “physical copies,” although the idea that a digital stream is concrete by virtue of being stored at various points (on a server, in a buffer) is somewhat specious; analog broadcast signals also collect at various points, and digital radio and TV in practical terms is distributed in the manner of a stream.

But broadcasts – digital or analog – are considered a public performance, and garner what is currently a higher  “performance license” rate. Songwriter Rodney Jerkins illustrated the discrepancy in September at the Recording Academy’s District Advocacy Day in Los Angeles by sharing an accounting statement for “As Long As You Love Me,” a top 10 hit for Justin Bieber in 2012. By 2013, Jerkins’ stake in the song generated $146,000 in performance royalties, while streaming revenue from the same period garnered $278 for 38 million Pandora plays and $218 for 34 million YouTube streams. “If I owned 100 of the song I would have made $1,100 from YouTube,” Jerkins said, proclaiming, “Those numbers are criminal.”

The article explains how arguments for the lower rate were justified because of the need to allow the industry to grow.  Of course, once the industry grows there are public choice issues associated with an industry’s attempt to maintain benefits or lack of regulation to allow the industry to flourish.  Even at a 50% increase, the songwriter will still only receive around $560 for 38 million Pandora plays under Jerkins' example.  It looks like we’re still trying to give the streaming business more time to mature. 

Preparation for (more) Patent Assertion Entites in Europe: Intellectual Property 2 Innovate

As reported by Florian Mueller on the FOSS Patents Blog on April 5, a relatively new organization has been formed to raise awareness of and presumably lobby against patent assertion entities in Europe.  The organization is called Intellectual Property 2 Innovate and its members include: Adidas, Google, Intel, Bull AtWios Technologies, Proximus, Spotify, Wiko, Daimler, the European Semiconductor Industry Association, and Syndicat De Industrie Des Technologies De L'Information.  Notably, the Intellectual Property 2 Innovate website has references to a list of suits brought by patent assertion entities in Europe, media reports concerning patent assertion activity in Europe and third party studies concerning patent assertion entities in Europe.  The website includes link to a helpful seven page position paper, which states in part:

Patents support innovation by allowing companies to protect their technology from copying, to share and develop new technology, and to obtain the freedom to operate necessary to bring new products to market.  But a patent system that can be manipulated through abusive litigation tactics, including the assertion of low quality patents, will undermine rather than support innovation, disserving consumers and the economy by draining scarce resources from the development of new products.

The dramatic rise in patent litigation involving PAEs is a dangerous trend that merits the attention of EU policy makers. In the United States, lawsuits brought by PAEs have nearly quadrupled over the past decade.1 PAEs now account for a majority of all patent litigation.2  Small and medium-sized entities (SMEs) are frequently the targets of these assertions, facing lawsuits that can disrupt their business and even threaten their survival.3,4

In Europe, PAE lawsuits have begun to follow the same trajectory, growing in number and often targeting SMEs.  PAE activity has long existed in Europe, accounting for roughly 10% of the lawsuits filed in Germany between 2000 and 2008 and in the United Kingdom between 2000 and 2013.5 More recent evidence, however, suggests that PAE activity is accelerating rapidly. An empirical study of the registers for recording patent ownership in Europe demonstrated that PAE purchases of European patents increased ten-fold from 2005 to 2015.6 Most of the transferred patents involved communications or computer technology and were purchased by PAEs based in the United States. Those purchases now form the basis of a growing number of PAE lawsuits in Europe against productive companies. European countries together received 80% of all PAE cases filed outside the US over the past five years.7 Germany receives by far the greatest number, with the large majority of those cases proceeding during 2015 and 2016.8 A recent study provides examples of lawsuits brought by PAEs in Europe.9 According to this study, while PAEs account for 19% of known patent lawsuits filed in Europe accounted for in the study, it is nonetheless a significant fraction which will undoubtedly come to increase in the next years. This rate corresponds roughly to the same level of PAE activity in the US in the early 2000s to mid-2005. Despite the alarming data and active discussions amongst the legal community, US public authorities nevertheless did not seriously tackle this problem which has led patent lawsuits to skyrocket in the US since then.

The position paper further suggests: increasing judicial discretion to minimize abusive patent practices and encourage higher quality patents as well as make better data available concerning patent litigation across Europe.  According to the paper, these measures are necessary in light of the soon-to-be operational European Patent Court. 

Spotify goes China

Spotify, the UK-based streaming music service launched last October, this week surprised its growing fan community with news that it will launch in China.

The launch will be made in partnership with Chinese media company TOM Group, a subsidiary of Hutchison Whampoa with reportedly some 300 million users in China. It might be backed by an investment injection of up to $50m from high-profile investors including the charitable foundation of Hong Kong tycoon Li Ka-shing, valuing Spotify at $250m, as the Financial Times reported earlier this month.

Instead of conquering more Western countries (most notably the US) first, Spotify decided to tackle the far more difficult market of mainland China, where internet users are already very familiar with free online streaming portals offered by main telecom operators, as well as a whole range of illegal music download websites, such as search engine Baidu.

While Spotify is praised by users for its tremendous offer of music, for the Chinese market it will have to ramp up its Chinese artist portfolio. If it gets more Chinese labels to sign up, its free advertising-supported service could become as successful as in Europe. However, Chinese users might be even less willing to sign up for its premium subscription service for which they have to pay a monthly fee to receive the service without advertisements.

So the US market has to wait for the time being – maybe one of the reasons for this is that Spotify is still busy negotiating an iPhone application with Apple? Meanwhile in Sweden, The Local reported that Sony BMG Sweden confirmed that in terms of monthly revenue, proceeds from Spotify now exceed iTunes.

More information on Spotify’s China launch is available here and here.

Spotify mobile app -- will it spread from Android to Apple?

Readers of this blog might not yet have seen this -- but Spotify (see previous IP Finance posts here, here and here) have demo'd a hotly anticipated mobile application at Google IO 2009 on Google's Android mobile operating system. Video on YouTube here.

The market penetration won't be particularly high as long as it remains on one device, but there has been some indication that it is coming to other mobile devices. Spofity apparently posted an advert for a developer for Nokia's s60 platform, so there is a good chance a similar application will be on its way for high-end Nokia phones. It remains to be seen whether they will manage to get an iPhone application through Apple's fortress. I can imagine Apple coming up with any excuse to block it from the app store.

In any event, it certainly represents a threat to iTunes. It will probably also help Spotify sell more Premium subscriptions, but there has not been any information yet about what the pricing will be for the mobile app. It will almost certainly be data-intensive, so if its being used on the move the mobile operators will want a piece of the action.

Also interesting it the 'offline sync' feature which raises copyright and licensing issues. Details are few and far between, but it seems like something of a download/streaming hybrid, being neither download-to-own nor streaming in the conventional sense.

Written by Andrew Logie, to whom IP Finance offers its thanks.

Spotify will not launch an unlimited download option

Regular readers may recall an earlier post from Andrew Logie about ‘free’ music service Spotify, which allows users to listen to a huge and expanding library of music to rival other major music services. Rather than downloading tracks, music is streamed from the Spotify servers (although some caching does go on in users’ computers). 

Right: 'download' can mean different things in different business contexts

Writes Andrew:

The business model might be described as ‘Freemium’ in that the free service is backed up by a premium subscription model. Although the ‘free’ option is supported by adverts, this on its own would not generate enough revenue to support the service. Users can go Premium for £9.99 a month and listening will not be interrupted by adverts. The biggest problem facing the service is how to convert users who listen for free into users who pay a monthly fee. At the moment, the Premium offering just doesn’t offer enough to tempt users away from the free service.

Revolution magazine has now announced that Spotify is planning to launch an unlimited download option – a sort of ‘all you can eat’ for a fixed monthly fee. What they seem to suggest is that users would be able to download a file to their computer, much like they do when they download using iTunes. This came as some something of a surprise. I have been expecting Spotify to try to improve their Premium offering, but I didn’t expect unlimited downloads, and not for so little as £9.99 per month. Indeed, according to an article by Pocket-lint, a spokesperson from Spotify denied that they were planning such a service:

"Spotify's core aim is to provide a user-friendly music streaming service with the added flexibility of offering paid-for downloads in partnership with our external partners. That is not set to change”.

What appears has to have happened here is that Revolution magazine has misinterpreted, deliberately or otherwise, comments by Spotify’s chief executive Daniel Ek in relation to a hotly anticipated mobile application and its threat to iTunes.

Ek had indicated that they were in talks with mobile phone operators in relation to the rollout of a streaming mobile service, presumably so that the quality of service over the mobile networks is garunteed. If succesful, this would allow users to use the Spotify service on their mobile or network enabled music player. Up to now, Spotify has only been available on a PC or Mac connected to the Internet. With the mobile application, users will be able to stream anything from the Spotify library from anywhere with network coverage. This is undoubtedly a threat to the iTunes model of paying for downloads then loading them on a device. That doesn’t mean however, that they will be launching an unlimited download service. Yes, Spotify may cache files on a device to make it run smoothly, but it’s a long stretch to say that’s a download service!

Business models, free music and pay-for options: the Spotify site

Since the IP Finance weblog is much given to reviews of new IP commercialisation business models, or in some cases to improved and refreshed versions of existing ones, the blog is indebted to a law student, Andrew Logie who writes in to extol the potential of Spotify (www.spotify.com). Says Andrew:

"I think it really shows the future of music delivery and marks an acknowledgment by the music industry that 'free' music is not necessarily something to suppress, in fact quite the opposite.

Aside from a slick interface, the great thing about the service is that its 'free' to listen to high quality (160kbs) full albums. If you choose the free service, you will occasionally be served an advert, and by that I mean about one thirty second add in an hour of listening. I suspect that the frequency of adverts may rise as the service grows in popularity, but for now it's a fantastic trade-off bound to attract the masses.

If you want a completely ad-free service you can either take a day pass for 99p, or pay a monthly subscription of £9.99. I suspect the £9.99 is a little overpriced when you consider that the music can't be format-shifted (ie put on your iPod), a service that Napster offer for £14.99 a month, but it's certainly not beyond most budgets.

The most important thing about the service however is the sheer number of tracks available. Lots of services allow free streaming music, but very few give such free access to such a massive database of full albums. Spotify, who are based in Sweden, have managed to team up with major labels such as EMI, Sony BMG, Universal and fast growing independent 'distributors' such as CDBaby.

The success of Spotify, I believe, will accord with The Long Tail principle advanced by Chris Anderson which says that as the cost of inventory falls, the efficient inventory falls. In other words, as the cost of storage and bandwith falls, it becomes reasonably viable to have huge store collections, bigger than the world has ever seen.

Access is important. It is no longer acceptable simply to store the major albums as might a bricks and mortar store. As Lessig points out in his recent book Remix, 25% of Amazon's sales come from the the 'tail' - titles which are not available in a bricks and mortar store. A library could never be big enough and never afford to store all the world's books, just as HMV can never afford the retail space to sell all the world's music, and so on. But in the digital world people demand all the music in the world, and will come to expect is as standard.

Not only do people want all the music in the world, but they want it for free. So how does the market solve this problem? How do artists get paid?

A 2007 decision by the Copyright Tribunal (here), which concerned the Music Alliance and download services such as iTunes, set out certain minimum royalties that such services must pay. This includes 8 per cent of gross revenues from online music service providers for on-demand services including downloads and subscription streaming services, 6.5 per cent of revenues for interactive webcasting services and 5.75 per cent for non-interactive webcasting.

The framework for free stuff, at least free music, is beginning to take shape. Services such as Spotify can exist because labels are now willing to accept free streaming of their music in return for a share of advertising revenue, pay per click, or other such models.

I tend to see this as a negotiated peace deal between the music industry and the Internet. The invention and rise of file sharing advanced like an army against the traditional model of content delivery. Feeling under threat, the music and film industries declared war, and sought to crush the revolution. After a heavy exchange of blows from either side, a peace deal has been reached, the boundaries re-drawn, both sides accepting compromises. In other words, free music is here to stay, but in return we will listen to the occasional advert or pay a subscription. Free stuff is no longer necessarily a threat to the creative industries, but the revenue model has most definitely changed".

Thanks, Andrew, for this insight.