Are We Headed for a Digital Music Apocalypse?

streaming music

An Interview with Paul M. Fakler, Partner at Arent Fox 

Digital music services are in the middle of every argument about the music business. Streaming royalties, digital collection, plays, rate courts, artist payouts, growth – all roads lead back to companies like Pandora, Spotify and iHeartRadio. Whether you like it or not, you are going to have to pick a side in this battle; your career depends on it.

We spoke with Paul Fakler, an intellectual property lawyer specializing in copyright, and a partner at Arent Fox LLP. He recently presented at SXSW 2014 – “The Digital Music Performance Royalty Apocalypse,” and blogs about music business at title17.net. It should be noted, lest you think he’s just another “suit,” Mr. Fakler came up as a guitarist and bassist in the ’80s hardcore scene and did his time in the bar cover band scene in the ’90s; he’s slugged it out at clubs, just like you.

How did your playing days shape you as a music business lawyer today?

I have a profound appreciation for the people who actually create the music. That would be the artists, and not the labels – that think they do. I want a music industry that is fair to the creators.

So, you support the music services because you think they help the artists?

I see how hard it is for artists and musicians to exist today. These services are a potential new revenue stream. There’s an opportunity for a win-win here. Consumers want that choice, in their car, on the go, etc. And importantly for independent artists, it’s a great opportunity for discovery outside of the traditional radio “payola” system that has favored labels for years.

In this digital world, is copyright registration still necessary for independent artists? 

I think it is even more important for mid-level and independent songwriters to register their stuff. If someone tries to rip you off, it gives you tremendous leverage. Copyright law is a rare exception in litigation. If your copyrights are registered prior to infringement and you win, the other side has to pay your attorney fees and statutory damages, irrespective of actual financial damages, in a range of $750-150,000 per song. With no prior registration, you may not be able to bring forth a suit. So, yes, file your copyright registrations; it’s worth it.

As you know, many are fighting the digital music services, citing that they are not paying the artists enough. What’s your opinion?

It’s infuriating to me when I see it said that they are “ripping” off the artists. This, coming from the labels who have been obviously been ripping creators off, systematically, for all of history, by accounting tricks. Record sales are down for a lot of reasons but not because of Pandora, iHeart, etc. The record companies are making money off of Spotify. With upfront advances to offset, they made it work for them, but maybe not the artists. And those “artist exposés,” showing that they got a portion of a penny per spin, are just wrong-headed; people are misevaluating the numbers. Ask that songwriter how much they got paid for a radio play, and then think about this: one spin on regular radio (industry standard) is 7,000 listens. So, in reality they are getting single listens per spin and the rates are not dissimilar, if compared one to one.

Why is there such disagreement over whether these services hurt or help artists? 

Labels want to say it’s a bad thing for their bottom line, but they can’t really prove it in most cases, so they are trying to extract as much money as they can, which is their right as a business. Publishers have always wanted to even the field with labels, so they will always fight for higher rates. The services are hampered by high licensing costs to grow and innovate, so songwriters aren’t seeing the benefit of scale yet.

I think there is proof that non-interactive services like Pandora tend to promote record sales and discovery. I also think there is some substitutional impact on sales with on-demand services like Spotify. If you can play whatever, whenever, chances are for some people, there is no incentive to buy music. And artists are rarely aware of the actual rates these services are paying. So, you have PROs suing Pandora, artists suing labels over streaming, and labels suing Spotify over playlists. It can be confusing to know what side to be on. But this is the most important thing: in the roughly 15 years since digital music services have existed, not one has turned an annual profit. Not ONE!

This is the “apocalypse” you’ve been talking about?

Yes. Again, numerous businesses have tried different business models with vastly different pricing, and no one has succeeded…there’s a reason for that. It’s the licensing burden, which can be upwards of 50-70% of all revenue, most of that going to the labels. When Pandora has 75% of market share and they can’t turn a profit, something is wrong!

What’s the fix? 

Labels and publishers need to work with the digital music services to find some common ground. At the same time, we need to address how copyright royalty rates are set based on this digital landscape we live in…we’re going to see more companies go out of business causing disruption, higher costs, and less revenue for the music industry. This is especially true for the independent artists. The music publishing rates are fine as long as they don’t jack them up. That’s why I agreed with the ASCAP vs. Pandora decision. My hope is that with new judges on the Copyright Royalty Board, and having open discussions like this, we might see a positive change.

ABOUT THE AUTHOR

-Michael St. James is the founder and creative director of St. James Media, specializing in music licensing, publishing, production and artist development.

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