Streaming services like Spotify and Pandora pay many millions of dollars each year for the rights to the music they play. But how much of this ends up back with artists and songwriters?

The answer: not an awful lot.

There are a number of arguments about the fairness of streaming services - for the services themselves, and for major labels, streaming is often hailed as the “saviour” of the music industry. But artists, both independent and signed, often claim that payments made to them by the streaming services are unfairly small. The services routinely respond by noting that they pay tens of millions of dollars each year to record labels in royalties and licensing fees.

The arguments on both sides tend to suffer from misconceptions about the nature of music “ownership” and about the kinds of licenses underpinning the streaming service business model. By establishing the guise of a commodity market based on physical formats during its heyday (post-WWII to 1999), the recorded music industry created the widespread idea that music could be “bought” by “consumers” as if it were any other commodity.

Of course that was never the case. Consumers only ever acquired a non-transferable license to listen to music under very specific and strict conditions. No title in the music was transferred and no license other than the right to private enjoyment was given.

Music rights are divided into two broad categories: those associated with the musical composition itself (publishing rights) and those associated with any recording of that composition (recording rights). There are separate rights and obligations activated in the licensing of a recording, just as there are in the public performance of both the composition and any individual “recording” of that composition. Similarly, any recording generates a publishing right and, under the Australian Copyright Act, a recording right is automatically created for anyone who participates in its making.

Aside from these specific individual rights, there are more abstract rights systems into which individual rights enter in order to realise value. They include nation-specific “blanket” legislation that regulates the rights and obligations of broadcasters, audiences, labels, publishers, and, by extension, artists. They also include abstract rights around catalogue control, sale, lease, and licensing.

The catalogue level of rights is central to the argument about streaming services and the way they pay (or don’t pay) artists. In the case of a catalogue sale (for example, when Universal recently bought EMI), artists have no clear claim on proceeds – control of their copyrights simply passes to another entity.

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Streaming services are a post-internet solution to the downturn of physical music sales and the rise of “free” sharing platforms. They require the prestige and reputation of the majors’ back catalogues to operate. Without access to those rights, streaming services are simply not viable on any large scale.

Spotify and other streaming services loudly proclaim that they pay the major labels “tens of millions” of dollars each year for blanket access to their catalogues. Those transactions have no direct bearing on the use of specific tracks by the customers of Spotify. There is no clear claim for individual artists in respect of such payments because the license is for access to an entire catalogue, rather than the specific usage of any particular part. It therefore becomes what label accountants call “Black Box” revenue.

As songwriter and musician Helienne Lindvall explains:

“Black Box” is the name given to the income labels collect that can’t be directly related to the recordings of any specific artist. As the record industry changes, Black Box revenue is becoming more and more important, and artists and their managers are starting to wonder where this money has gone and why.

Music industry researcher Peter Tschmuck notes that the majors’ streaming model “is not just based on royalties … but also on guarantees and upfront payments by the streaming platforms”. The size of payments is a secret but they are likely in the “double-digit millions” and “need not be shared with the artists”.

In other words, the majority of the revenues currently being generated by streaming services are paid to the majors by entities in which the labels own large shareholdings. Those payments are made for catalogue-wide licenses against which individual artists have no clear claim.

This system is almost certainly going to be short-lived, at least under current arrangements.

The major labels face multiple hurdles relating to artist payments for digital commerce. A number of successful legal challenges launched by Weird Al Yankovich, Eminem, and others have created a precedent recognising all digital sales as licensing deals, thereby greatly increasing the artist’s share of revenue (in the case of Eminem, from 12% to 50%).

It seems unlikely that the current relationship between the majors and the streaming services would withstand similar legal challenges from artists, at which point the long-term viability of streaming services will be less than certain.

If so, the current structures of streaming revenues may well be, as Thom Yorke put it this week, “the last desperate fart of a dying corpse”.

This is the second of our five-part series looking at the contemporary music industry. Click the links below to read the others:

Music sales are waning but don’t blame the pirates

Spotify: merging music with social media

“Doing things” with music: the newest arm of the industry

Rage against the machine: music TV still important for the Australian industry