MARCH 17, 2011
Understanding The Cloud: How You Can Benefit From Streaming Music
By George Howard (follow on Twiter)
Overview: Cloud-based streaming is here and growing
The first thing you must be clear on is that, inexorably, we are moving towards an all-streaming delivery of music. Should you be interested, you can read more details about the coming streams in an article I wrote some time ago entitled,“The Stream that Snuck Up on You.” The premise is that in an era of (near) constant connectivity, there is little-to-no reason to actually have the file on your device.
Soon, about the only place where (for better or worse) you won’t be online is on a subway. Combine this constant connectivity with a virtually unlimited selection of music that is available for instant streaming, and you truly must ask, “What is the distinction between ‘ownership’ of a file and streaming?”
The old arguments for ownership — “I want to be able to play it whenever I want.” (Answer: (see above) you now can unless you’re in a subway); “I don’t trust that the streaming service will stay in business.” (Answer: another one will quickly fill any gap in the market; there’s no shortage of these types of services, and, if the VC money now pouring into this space is any indication, there will soon be more) — are no longer valid.
Like it or not, it’s about streaming. Certainly, old habits die hard, and there will be early adopters who quickly and gleefully abandon their ties to “ownership,” and laggards who continue to meticulously alphabetize their CDs near their LPs and speak righteously about sound quality. Still, downloads will go the way of their forbearers — vinyl, cassette, and CDs — and be relegated to a niche product.
Even if you don’t agree with this conceit (which, if you haven’t noticed, I’ve made a little (just a little) more emphatically than necessary in order to make a point), it’s clear that cloud-based streaming is not only here to stay, but will become an increasingly material portion of music delivery.
The Rules Around Cloud-Based Streaming
Given this, what does an artist who controls her own destiny do in order to capitalize upon this cloud-based zeitgeist? The answer, as is so often the case, is to first understand the rules around streaming, and then to have a strategy that integrates with your overall plan for success.
As is the case with all aspects of the music business, the rules around cloud-based streaming are defined and codified in accordance with certain of the six exclusive rights an artist is automatically granted upon the creation and fixation of an original work. For more on your six legal rights, download the freeTuneCore Survival Guide. In the case of streaming, the rights that must be addressed are: the exclusive right to reproduce; the exclusive right to publicly perform; and the exclusive right to digitally transmit. These rights correspond to the two types of streams.
There are two dominant types of streams: interactive and non-interactive. Interactive streams are of the type you find on a service like Rdio or Spotify. On these services, you can pick a specific song to listen to, listen to that song as many times as you like, rewind the song, etc. Essentially, it’s as if you have the song in your library on your iPod. These interactive streams have been deemed reproductions, and as such require a “streaming mechanical” license to be in place between the streaming service and the copyright holder of the song. This license thus grants the streaming service the right to reproduce. Additionally, when these songs are played by the end user, there is a public performance that occurs, and, in order to not infringe on the copyright holder’s exclusive right to publicly perform, the streaming service must pay a blanket license fee to the Public Performance Organizations (ASCAP/BMI) who act on behalf of the copyright holder.
Non-interactive streams are much more akin to what you encounter on traditional radio. That is, you cannot select a specific song, you cannot rewind a song while it’s playing, and there are limits to the number of times you will hear a specific song. The best example of a non-interactive streaming service is Pandora. With respect to the rights associated here, there are, as above, the public performance royalties that must be paid by the streaming services to the PROs who represent the copyright holders. Additionally, there is a digital performance royalty in the sound recording that must be paid by the non-interactive streaming service to the copyright holder of the master in order for the streaming service to not infringe upon the copyright holder’s exclusive right to digitally transmit her work.
As you can see, running an interactive streaming site, such as Spotify, is a far more expensive proposition than running a non-interactive site; such as Pandora. Someone desiring to set up a business that allows for interactive streaming must make deals with the master holders (i.e. the labels), and pay much higher royalties to the songwriters (publishers) than does someone who streams in a non-interactive fashion. The non-interactive streaming services must pay as well, but they’re able to enjoy compulsory license rules that obviate the need to make deals with master holders (i.e. labels), and pay a lower rate to the songwriters (publishers).
This makes sense when you think about it. If you are a content holder, you are going to be far more threatened by a service that is allowing for the repeated, on-demand play of your master(s) by the customer (i.e. interactive streaming) than you will streaming that is more akin to traditional radio, that at least in theory, might compel someone to purchase a song they heard in a non-interactive way so that they are able to hear it whenever they want. Because of this dynamic, the fees associated with interactive streaming are much higher than non-interactive streaming.
As an artist who releases your own records and writes your own music, you, of course, benefit financially from both interactive and non-interactive streams.
For interactive streams, you will be paid both from the negotiation of the master rights (i.e. the interactive streaming service must make a deal with you for the rights to stream the music you release on your label) and from the public performance of these streams via the payments the streaming services make to the Public Performance Organizations (ASCAP/BMI) who negotiate on behalf of their affiliated writers and collect blanket license fees from the streaming services and then distribute this money to their affiliated writers.
For non-interactive streams you, as master holder/featured performer, will collect digital performance royalties from the public performance of the sound recording via SoundExchange, who operates in the same manner described above as do ASCAP/BMI, but on behalf of the master holder/featured performer. Of course, you also will receive your public performance income for the song itself via ASCAP/BMI.
What you can do to capitalize on cloud-based streaming
Currently, few artists are seeing huge payments from either interactive or non-interactive streams. However, as these types of services become increasingly prominent, and as tracking, collection, and distribution associated with streaming improves, one hopes that this income will become more material. Additionally, as an increasing number of artists own their own masters, they will be able to strike deals with the interactive streaming services that at least give them more favorable rates (not to mention direct payments) than they get via payments from their record labels.
Last, it’s of course important to note the promotional benefit of an increased amount of music being streamed from the cloud into the public consciousness at any time. As above, services like Pandora do indeed act in the manner that traditional radio had always aspired, and do seem to introduce customers to new music. The ability to achieve some level of customer attraction on the back of these streaming services (while also being paid royalties) is appealing from the perspective of extracting additional value (via ticket sales, merch, artist subscription models, etc.).
The cloud is upon us; it looms large, and no gale force winds will blow it away and return physical sales or even downloads to our atmosphere. Streaming will become increasingly present in peoples’ lives (wait for the Pandora IPO if you don’t believe me). As artists, it’s imperative to prepare and capitalize upon this disruptive technological innovation. In order to immediately begin the preparation process, be sure to affiliate with both a PRO (like ASCAP or BMI) and with SoundExchange. At that point you’re covered in terms of non-interactive streams. You should then look for opportunities where you can extract value out of these streams. This can be direct financial value via licensing your owned masters to interactive streaming services, or brand building value by strategizing how you can leverage an increasing presence on these streaming sites by incorporating it into a larger business development plan.
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George Howard is the former president of Rykodisc. He currently advises numerous entertainment and non-entertainment firms and individuals. Additionally, he is the Executive Editor of Artists House Music and is a Professor and Executive in Residence in the college of Business Administration at Loyola, New Orleans. He is most easily found on Twitter at: twitter.com/gah650
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