Recording Industry Association of America Reports Revenues are Up in 2017

The Recording Industry Association of America (RIAA) reports that revenues are up for a second year in a row.  The RIAA states that:

In 2017 revenues from recorded music in the United States increased 16.5% at estimated retail value to $8.7 billion, continuing the growth from the previous year. At wholesale, revenues grew 12.6% to $5.9 billion. Similar to 2016, these increases came primarily from growth in paid music subscriptions to services like Spotify, Amazon, Tidal, Apple Music, Pandora and others, which grew by more than 50%. This is the first time since 1999 that U.S. music revenues grew materially for two years in a row. At $8.7 billion, the industry has taken a decade to return to the same overall revenue level as 2008, and is still 40% below peak levels as the growth from streaming has been offset by continued declines in revenues from both physical and digital unit based sales. 

Notably, “[s]treaming music platforms accounted for almost 2/3rd of total U.S. music industry revenues in 2017, and contributed nearly all of the growth.”  Interestingly, digital download revenues slipped 25%.  Also, “[s]hipments of physical products decreased just 4% to $1.5 billion in 2017, a lower rate of decline than in recent years.”  This is good news for the industry; although we are talking about returning to 2008 revenue levels. An earlier WIPO report noted that positive revenue growth in prior years was attributable to two causes: streaming (new business models) and an expansion into new markets (mostly developing countries).  

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. 

Recording Industry of America Association Reports U.S. Double Digit Revenue Growth for 2016

In a March 30, 2017 article, Billboard magazine breaks down recently released numbers from the Recording Industry Association of America (RIAA) concerning the U.S. music industry.  The article notes:

It looks like happy days are here again: U.S. recorded music sales were up 11.4 percent in 2016. The industry brought in $7.65 billion in revenue, according to the RIAA, up from $6.87 million in 2015. Although the music business showed signs of a recovery at the half-year mark, the 2016 year-end results show more significant growth, led by streaming revenue.

This is the first time since 1998 that the U.S. industry has experienced a double digit increase in overall revenue. Back then, the industry enjoyed revenue of $13.7 billion.

The article further breakdown revenues based on streaming and vinyl sales among other categories.  Notably, streaming revenue is on the upswing and is accounting for a lot of the growth.  Interestingly, the article notes that the revenue is about half from the “good old days” of 1998.  The RIAA report is available, here. 

YouTube Tears Up the Play Book: High Noon or Rising Sun?

As I gear up for the fall semester of my MBA course, the pedagogical word for the moment is "tearing up the playbook". That wonderful piece of imagery, taken from the world of team sports, is particularly apt when considering the challenge of monetizing contents on the internet. In the sports world, "tearing up the playbook" evokes the sight of a coach who is forced to ignore everything that he has learned in the face of a fundamentally altered set of circumstances on the playing field.

Something like that is going on with respect to online content, where the traditional models for monetizing copyright content are proving increasingly unworkable, giving way to uncertainty, if not down right fear and trembling, about how to extract revenues. The challenge in the classroom is to explore with students how IP rights impact, and are being impacted, by the search for workable business models. The effort is very much in a work-in-progress, as we collectively tear up the play book in the teacher-student exchange.

For the print media, the current buzz word is micropayments, which seems to mean charging for discrete items of content, usually as a premium offering that complements contents that are offered for free on the internet. Micropayments can be viewed as an alternative to an ad-based or subscription model for monetizing print contents. Be it the Financial Times, The Wall Street Journal, or Scientific American, the aim is condition readers to expect to pay for at least part of the fare offered on the website. The challenge is to recondition users to pay for contents that they have been receiving (or believe that they have been receiving) for free. Will anyone pay for these contents; if not, who will be creating these contents? This dynamic is progressing apace, and we will follow it carefully.

But, for the moment, let us focus on the struggle that is taking place with respect to visual content. Here, the copyright dynamic is different, characterized by a bifurcated world of visual content creation in which the amateur (for lack of a better term) exists alongside the professional. There is no better example than YouTube, especially since its acquisition by Google in 2006. Against this backdrop, the 3 September report entitled "YouTube Moving Toward Paid Content" under the byline of Kenneth Corbin, is of particular interest. The article reports that Google is negotiating with Hollywood studios

"for a three-month trial that would see YouTube begin offering streaming movie rentals ahead of the title"s sales date, with the studios receiving 60 percent of the revenues ...."

The article goes on to mention that the arrangement, if it takes place, will follow similar arrangements reached by the studios with Amazon and iTunes.

The changing role of copyright in this proposed arrangement is fascinating. As we remember, when Google acquired YouTube, it reportedly budgeted a six-figure sum to address potential copyright infringement claims by professional copyright owners. The emphasis then seems to have been on maintaining the user-generated experience resting on the contributions of millions of amateur contributors, while fending off claims of copyright infringement that might have a materially deleterious affect on this experience. The relationship with professional contents owners was distinctively adversial.

The user-experience created an unparalled platform for capturing eyeballs interested in visual contents online. Revenues were a different story. How different can be seen by this most recent announcement. For Google, the transformation marks a potentially major shift in the way that it views the role of professional contents on the platform. No longer an adversary but a partner, the proposed arrangement underscores YouTube as a distribution platform, the value of which rests on its user base. With a reported nearly 8.95 billion (!) video sites viewed monthly on Google (read mostly YouTube), Google may be close to its High Noon monetizing moment. Are its viewers attracted by a distinct YouTuve viewer experience, or will the availability of commercially streamed contents drive users to other, more pristine sites? Stated otherwise, what will be the dynamics of the YouTube network effect when the platform creates an environment where "free" rubs up against "non-free".



For the studios, there is the realization, which has been true of all content providers since the rise of authors in 17th century England, that copyright is as much about the means of distribution as the act of creation. DVD sales appear to be in a spectacular decline, necessitating an urgent search for new means of distribution. YouTube offers one attractive possiblity, but it is not the only online platform that studios can potentially partner with to distribute their products. That suggests a certain assymetry in the content provider-distributor relationship. If YouTube proves to be a bonanza distribution platform, there will be a win-win situation. If not, content owners can presumably move on until they find a satisfactory online distribution model. In such a situation, what happens to the long-term viability of YouTube in this latter situation must be at the back of the minds of its owners, as they work on their play book for turning YouTube into a leading platform movie streaming.

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.

Online Video: Has Hulu Found the Business Model?

Lest we forget, modern copyright is ultimately about monetization. Nowhere is this first principle more apparent than in the world of user-generated content, especially of the visual sort. YouTube may have zillions of viewers and a seemingly endless number of users willing to share visual content, but YouTube, and its owner Google, still struggle with how to turn YouTube from a social phenomenon into a viable business model. It is not surprising, therefore, that the search for how to monetize visual contents on the Internet goes on.

One notable attempt--Hulu--was reported last month in The Economist ("Hulu Who?", February 7th). The article can serve as an elegant primer for anyone interested in the complex matrix of considerations of how to turn content into profits in the online video world. According to the article, YouTube as a business suffers from three overarching problems: (i) Advertisers and brand holders are wary of being connected with user-generated content; (ii) the content is too variable and may turn off viewers in unpredictable way; and (iii) a sizable amount of the contents was illegal and has attracted law suits from media giants.

Based on these uncertainties new entrants, according to analyst Shadid Kahn, had to confront the following questions in fashioning their alternative to YouTube: (i) How much to rely on user-generated content as opposed to commercial content?; (ii) be an aggregator for numerous media providers, or focus on delivering the content for one provider?; (iii) distribute the contents via the user's computer to a user-held device, such as the IPod, or stream the contents; (iv) if streamed, is is better to do via a dedicated application on the user's computer, or to enable viewing inside the web browsers; and (v) charge viewers or rely on advertising?

User-generated contents: but will they still watch it tomorrow?

Enter Hulu in 2007 --a joint venture of NBC Universal and and News Corporation. Hulu, and particular, its CEO Jason Kilar, formerly of Apple. Already in December 2008, 216 million videos were viewed, advertising is fully subscribed, and the impression (unverified) is that Hulu is generating revenues in a way that point to a viable business model.

So what is the Hulu business model? There are at least four basic elements: (i) Eschew user-generated contents and use only professional content: (ii) aggregate content from many sources, despite the fact that the two partners is each a content provider on its own (Universal and Fox); (iii) streaming through the browser rather than downloading to the user's computer by means of special applications software; and (iv) rely on advertising rather than charging users for downloads.

I said Hulu, not Hula

So will Hulu win out? Prophesy is beyond the ken of this blog, but we would note the following. there are substantial competitors to Hulu, such as Apple and TV.com, a streaming service owned by CBS, and there is no doubt that others will surface. It is possible that there is room for more than entrant, each of which provides a somewhat different mix reaching its own distinctive audience. Hulu may itself modify its model to reach out further (already there is talk of enabling downloads which will be funded by user fees rather than advertising revenues). Moreover, in the short term, at least, the appetite for advertising may soften in the face of deteriorating economic circumstances. From the business point of view, it will be fascinating to see how all of this plays out.

One final comment is in order. The Economist report mused that the decision to stream via the user's browser was perhaps the most crucial decision in accounting for Hulu's early success (particularly in that allegedly left rival Joost, who charged for user downloads, far back in the pack). But being an IP person, I believe that the decision to rely on professional content is no less important. Copyright may be, as we never fail to tell our students, the most democratic and omnipresent of IP rights, but mass itself is neither necessary nor sufficient for commercial success.

Like it or not, even the most repulsive example of reality show contents is the handicraft of content professionals, while capturing one's cat on video, engaged in some momentarily eye-catching antic, is not. Not every professional content will presage commercial success, but it seems more likely to be a prerequisite (necessary, but not sufficient, if you like). I do not think that the online video world will prove to be any different.

Even cats like Reality TV