djfrosty

Over the past decade, as U.S. recorded music revenue grew from $7 billion in 2014 to $17 billion in 2023, the combined market share of music sales and streaming controlled by the three major labels went from 64.9% in 2014 to 64.3% in 2023, Billboard estimates. That modest decline, which counts only music that the majors control rather than just distribute, came even as the companies bought market share with acquisitions of independent labels like 300 Entertainment, 12Tone and Alamo, plus buyouts of joint ventures. And it came about partly because about 5% of the global recorded music market — about $1.5 billion annually, according to a Billboard estimate — is now controlled by digital distribution services that mostly serve DIY and independent artists such as CD Baby, DistroKid and TuneCore, which I founded and ran until 2012. And this part of the market is projected to continue to grow.

This comes as consumers have access to more independent music than ever on the same online services, and even the same playlists, as major label releases. But one of the responses from the major music companies seems to be, if you can’t beat them, push to change the rules to take a portion of their royalties.

Last year, the three major labels made separate deals with Spotify, as well as with Deezer, on new licensing terms for recordings, to which all other rightsholders on those platforms have to agree. The new agreements changed the policy on when a stream of a recording can generate a royalty, and in some cases the amount earned. In addition, this year, under the rules laid out by the Music Modernization Act (MMA), some portion of the “accrued but unpaid” mechanical “black box” royalties currently held by the Mechanical Licensing Collective (MLC) become eligible to be paid out to member publishers, some of which have executives on the MLC board, based on their market share on the platform and at the time the royalties were earned. Although both policies apply to the entire market, they will redistribute revenue disproportionately to large labels and publishers, especially the majors, at the expense of smaller companies and DIY and independent creators.

Deezer now applies a royalty multiplier to tracks by artists that have at least 1,000 streams per month from 500 unique listeners, a policy that generally benefits major label artists, who tend to be more popular. Under Spotify’s new deal terms, royalties that previously would have been paid out on recordings with fewer than 1,000 streams over the course of the prior 12 months are now essentially reallocated to recordings that streamed more than 1,000 times over that same time period. And since the majors control fewer recordings that stream less than 1,000 times compared to the vast number controlled by DIY creators and independent labels, those royalties will overall go disproportionately to them.

In 2023, there were 106 million recordings that received between one and 1,000 streams (others generated no streams at all), which together accounted for a total of 13.68 billion streams globally, according to Luminate. Since each Spotify stream is worth a global average of between $0.0038 and $0.0042, that suggests that, although it’s hard to measure the impact of individual services, about $33 million a year could flow from smaller artists to more popular ones that are disproportionately signed to major labels.

To understand what these new policies mean in practice, consider the indie band Head of Femur. Over the last two decades, the band released several albums that include a total of 58 tracks. Under Spotify’s new model, the service will only pay out royalties for the band’s recordings that streamed more than 1,000 times in the prior 12 months, no matter how much the recordings streamed in total. In other words, a band with 58 tracks that stream 999 times each, for a total of 57,942 streams, will make nothing — while a band with a single song that streams 1,000 times will get paid. The royalties that would have gone to those 57,942 streams will go to bigger acts — many of them on bigger labels.

The model for streaming mechanical royalties changed in a way that will benefit the same players. Before the October 2018 passage of the Music Modernization Act and the January 2021 creation of the Mechanical Licensing Collective, Spotify and other streaming services didn’t get the mechanical licenses they needed, and as a result faced multiple copyright infringement lawsuits, with potentially ruinous statutory damages. In addition, services weren’t paying out all, or in some cases any, royalties for some of the songs they had licensed — to the point that the MLC reported that it received $397.7 million in adjusted unpaid “historical” mechanical royalties that had been earned but not paid out. The Music Modernization Act was supposed to address these issues by making it easier to license mechanical rights and accurately pay publishers and songwriters.

In order to do this, the Music Modernization Act made three significant changes to the relevant parts of U.S. copyright law. First, it created a “blanket” compulsory license for digital services for every song ever written, to protect the services from liability for copyright infringement. Second, it shielded the services from liability for infringement before the law took effect. Third, it mandated the creation of a database to be administered by a designated “mechanical licensing collective,” with the goal of accounting to and paying publishers and songwriters billions of dollars in mechanical royalties generated by trillions of streams — promptly, accurately and transparently. The collective was also charged with paying out the $397.7 million in “historical” mechanical royalties earned but not paid out before 2021.

By enacting the MMA, Congress made mechanical licensing easier and protected digital services from liability for infringement. Although the law calls for penalties if digital services do not pay the MLC, it includes no specific regulations about the MLC paying rightsholders or offering rightsholders any remedies if it fails to do so. (The U.S. Copyright Office oversees the MLC and every five years reviews whether it should continue administering the compulsory license.) In fact, the Music Modernization Act states that its regulation of the mechanical licensing collective “shall supersede and preempt any State law (including common law) concerning escheatment or abandoned property, or any analogous provision, that might otherwise apply.”

That means that any unpaid mechanical royalties are subject solely to the Music Modernization Act, which says that after a certain amount of time they become eligible to be distributed according to “relative market share” of copyright owners “as reflected in reports of usage.” Essentially, the money is divided by market share on a given platform during a given time, which means that it will disproportionately go to larger publishers. So far, the MLC has yet to distribute any money based on market share. But as of June 2024, the MLC is sitting on $634 million in “black box” royalties that it has taken in but not distributed, according to the organization; it also received $397.7 million in undistributed historical royalties, of which it is sitting on $285.9 million. Eventually, all of that money — $919.9 million — will be eligible to be distributed by market share on a given platform and time period.

Over the next decade, predictions suggest that consumers will continue to turn their attention to a wider selection of DIY and independent artists. Under these policies, however, some of the revenue generated by their work will be disproportionately paid to the major labels and publishers instead of to the artists and songwriters who earned them.

Jeff Price is the founder and CEO of Word Collections. He previously co-founded and was GM of spinART Records and founded and was CEO of TuneCore and Audiam.