Breakage in Digital Licensing/Streaming Music Services

October 20, 2013

As the music industry continues to transform from a music purchase model to a music access model a number of new services are in the process of being launched with the accompanying new licenses being presented to labels and distributors.

Certain services, such as Pandora, Sirius/XM, Music Choice, etc., are covered by compulsory statutory licenses. In general these licenses for non-interactive music streaming services, where the listener can’t pick the song, have been good for the independent music label community because all music label copyrights, whether those of the major labels or those of independent labels or artists, are treated equally and paid the same rate amount for each stream (play) of that music.  Those rates set by the Copyright Royalty Board and administered by SoundExchange. The authority of SoundExchange to aggressively pursue the best possible statutory rates and handle all of the administration, including processing and auditing, results in having a central group to protect Indie rights as the statutory rate is working and indie labels are benefiting from having a this central voice.

For music streaming services not covered by compulsory statutory licenses, those that have an audiovisual component or allow greater customer interactivity to select the songs or create playlists, a direct license is required between the music service and the copyright owner.  These services may equally be valuable to the independent music label and artist community but the deal terms are trickier.  Compensation under these agreements (generically) might include a combination of a per stream rate, revenue sharing, equity in the service, minimum guaranteed revenues, and an advance. If the advance or minimum guarantees exceed the amount earned during the licensing period the label will earn “breakage” in excess of the earned amount.

Music labels can enter into these direct licensing arrangements directly, through their music distributor or via Merlin. Under direct licenses, there are cases where independents have received less than equitable deal terms so the key for every label, whether the deal source is direct, distributor or Merlin, is to move slowly and thoughtfully and not be rushed into a deal based upon launch dates.

At the end of the day, each music label must determine for themselves their own promotional and commerce plans and we respect that entrepreneurial spirit. We’re just suggesting to you that before agreeing to any direct licenses please consider all factors and their effects on your music label’s results, now and in the future, and make an educated decision. If you have any general generic business questions please always feel free to contact us at A2IM.

TAGS: breakage compulsory statutory license CRB Digital Licensing Direct License Merlin SoundExchange streaming services