DAVID PAKMAN’S BLOG
October 28, 2014
There is a commonality in the Hachette/Amazon and Spotify/Pandora/Recording Artist debates and it looks something like this:
- By not paying enough royalties to the licensor (book publisher, record label), authors and artists are being starved.
- We are told this is critically bad for authors and artists who can no longer earn a living.
- Thus, creators won’t create, and art and culture ultimately suffer.
None of us want there to be fewer books or songs in the world. But frequently lost in this debate is a discussion of the presence, or perhaps obsolescence of the middleman and the amount of revenue they keep. Spotify, Pandora, Amazon and the other licensees of ebooks and music are ultimately just retailers. Their job is to acquire and retain customers, and sell them as much music and books as they can. They license their content from book publishers and record labels. The terms of the license are set unilaterally by the publishers or the label as they have exclusive authority over the titles they represent. The publishers and the labels form agreements with their authors and artists. These agreements dictate how much of the money received from retailers gets paid out to the creators. Spotify, Pandora, and Amazon have no control over the terms of the relationships between the creator and the middleman publisher or label.
For every dollar spent on books or music, we know how much retailers keep. In the case of Spotify, more than 70% of every dollar they collect gets paid to record label and music publisher middlemen. In the case of Amazon, we see from their gross margins that they pay out about 70% – 80% of every dollar they collect to the book publishers. Pandora pays out about 55% – 60% of the revenue it receives. Apple, the world’s largest retailer of music, pays out 70%. Most retailers of media, through both analog and digital eras, squeak by on about 30% gross margins and pay about 70% to the middleman. (Apple, in their AppStore, keeps 30% of app revenue and pays 70% to developers.) The argument is often made that “these retailers build their businesses on the backs of the creators and should keep a relatively small share.”
Fair enough. Except how much of the money collected by the book publishers and record labels makes it back to the actual authors and artists—the creators without whom there would be no art? And in a changing digital landscape, are the analog legacies of these payments appropriate for the digital world?
In music, the deals between record labels and artists have two types of royalty structures: a) a percent of revenue paid to the artists for recorded music that is sold (a CD, a digital download) and b) a different percentage for music that is licensed (for use in a film, or perhaps a digital streaming service). Different artists have different deals, and massive superstars can demand better terms, but on average, revenue sharing for music sales are in the 15% – 18% range. That is, the artist receives only 15-18% of the wholesale payments the record label receives from sales. In real dollars, for a $1 download, Apple keeps $0.30, pays $0.70 to the label and the label pays $0.10 – $0.13 to the artist. That is a shockingly low amount and helps explain why artists often feel bitter about digital music sales. If retailers only keep 30%, why do the record labels keep more than 80% of the money they receive?
Traditionally, they claimed they served an invaluable role in the creation of music. They advanced money to the artists to live, they paid for studio time, they guided the recording process and helped select material, they manufactured the records and CDs, they shipped them in their trucks to their distribution facilities and then to the retailers. They also paid for music videos and marketing activities. If the labels needed 80% share to cover all of these costs, that might make some sense. Except in record deals, the artist is actually billed for most of these costs and has to repay them (“recoup”) by allowing the record label to withhold royalties until their advance and many of these costs are recouped. Interestingly, the overwhelming majority of these activities are not needed in the digital age (trucks, manufacturing) or cost a whole lot less to perform (electronic distribution).
In the digital world, many artists have successfully argued that digital services are being licensed by labels and thus the licensed royalty amount should apply. Again, this is negotiable, but generally is about a 50%/50% split. That is, half of the royalties collected by the labels get paid out to the artists, subject to deductions and recouping of costs. In the previous iTunes download example, the artist would receive about $0.35 for every $0.99 download sold.
In book publishing, for eBooks, many book publishers pay out about 25% of royalties they receive directly to the author and pay out about 5% – 15% of the retail price (or about 25% – 30% of the amount the publisher receives) for physical book sales.
In their most recent financial statements, Warner Music Group indicates that they are paying out to artists about 52% of the revenue they collect, far less than Apple, Amazon and Spotify pay to record labels and book publishers. In the case of book publisher John Wiley & Sons, they pay out to authors only about 29% of the revenue they collect, keeping 71% for themselves.
If retailers “build their business on the backs of the creators,” so too do the record labels and book publishers. Are they entitled to the majority of profits of every sale? Are they even any good at the marketing skills required to excel in the digital age? With audience proving grounds like Kickstarter and IndieGogo, how much creative direction and marketing does an artist need in this new world? It’s time not just to revisit the very purpose of these legacy middlemen, but also to re-examine the amount of money they take for their services.