Apple suggested a streamlined royalty payment plan. And music industry analysts explained why Spotify is beating Apple. Also, Google’s recent report about the success of its Content ID system at combatting piracy was called into question by the music industry.
Apple’s Simple Plan for Royalties not so Simple
A document leaked last week revealed a “simple” plan proposed by Apple to the Copyright Royalty Board about how the company felt royalty rates should be adjusted. According to Jeff John Roberts of Fortune and echoed by other music industry experts, the “clever plan” to streamline the process for artists is a “a self-serving one that would hurt rivals and consumers and, in the long term, the music industry itself.”
Apple’s basic idea is that the Board set streaming rates based on how many times a company plays a song. Currently, Spotify and others pay royalties as a percentage of their revenue.
Apple’s plan outline came to light on July 15. It was sent to the Copyright Royalty Board, which is responsible for figuring out how much platforms like Spotify and YouTube must pay to stream songs. The rates hold for several years after being set by the Board. Currently, Apple and other companies are expressing their opinion about they believe rates should be set between 2018 and 2022.
Billboard and many others came out in favor of Apple’s plan due to its simplicity and the “alleged harmony” it might cause throughout the industry. Apple’s proposal suggested a price of 9.1 cents for 100 streams, the same as the rate for one download.
Unfortunately, as many point out, streams and downloads are governed by different rights, and a 100-to-1 ratio is not based on anything real. Also, the Royalty Board’s job is to set royalty rates and not invent a system of measurement for the entire industry.
The false sense of “harmony” created by Apple’s plan is not its most unfavorable feature. The issue at the heart of the proposal is that changing from a percent-of-revenue system to a fixed-rate system would eliminate Spotify and many others that offer ad-based music services, including YouTube. According to Roberts, many of these services are already unprofitable because royalty payments take up much of their revenue – as much as 85 percent. Changing the system abruptly by raising royalty rates further would send companies into bankruptcy and take away important revenue streams from artists.
Spotify currently pays 10.5-percent of its revenues for songwriter rights as well as a larger percentage for the right to use recordings.
Roberts and analysts pointed out that Apple has nothing to lose by asking to change royalty payment structures, because the company does not depend exclusively on revenue from its music service to stay in business; its income comes largely from devices.
A federal judge in 2014 said that music is an aid in “[promoting] sales of Apple products,” so the rate it voluntarily pays to music companies should not necessarily be the same as the rate Pandora and Spotify pay. Apple did not respond to questions as to whether or not Apple Music makes a profit.
While no one is saying the current royalty system is fine, it is definitely inconsistent, and many in the music industry believe that these inconsistency issues revolve around it being “rigged” against digital music companies that make payments when AM/FM stations do not.
Spotify’s Popularity Due to Stronger Business Model
A recent investor note suggested that Apple Music might be losing the battle against its competitors.
According to investing site The Motley Fool, the company is consistently “losing ground” to Spotify because it loses customers three times as fast as Spotify. Cowen & Co. reported that Apple Music has a churn rate of 6.4 percent, whereas Spotify’s is 2.2 percent.
Because streaming is still a relatively young technology, what makes up a typical churn rate is unknown. However, Apple Music’s churn rate is very high compared to other streaming services and also other tech companies. Verizon and AT&T both had churn rates of just one percent in 2015.
And market expert Andrew Tonner said, “I can’t recall seeing any major subscription business with such a high churn rate. It’s a clear red flag, especially as Apple attempts to challenge Spotify with an updated version of Apple Music.”
Still, this high churn rate could be caused in part by Apple’s free-trial model, which forces users to unsubscribe before the end of their three-month preview window.
This aside, Spotify and Apple Music still have fundamental differences. Apple can afford to run Apple Music even if it loses money, whereas Spotify must turn a profit.
An analysis of the Cowen & Co. report in Investor’s Business Daily explained, “The big new players in the music industry – Alphabet [Amazon.com] and Apple – aren’t using much as a profit driver. Rather, they use their respective platforms – YouTube, Prime Music and Apple Music – as high-frequency consumer touch points that reinforce the brand, build an ecosystem and generate traffic to higher-contributing offerings.”
Still, looking at Apple and Spotify in a purely financial way ignores Apple’s reason for starting Apple Music. While the company does not need to make a profit with its on-demand streaming business and Spotify does, the fact that consumers like Spotify better than Apple Music means Spotify likely has a better chance of staying on top in streaming, even though music has been integral to Apple’s ecosystem with iTunes and even though Apple still considers music as a main part of the iOS ecosystem, which makes up a majority of its profits.
The Investor’s Business Daily analysis sees the competition between Apple Music and Spotify as having a financial basis and discounts Apple’s commitment to making its iOS music driven. In order to stay competitive, Apple will need to improve Apple Music or risk losing an element at the core of its ecosystem and experience long-term effects from the loss.
Google Piracy Report Failing to Impress the Music Industry
Google stated it created more than $2 billion in revenue for content owners thanks to YouTube’s piracy-fighting Content ID system. This figure was released as part of the company’s “How Google Fights Piracy” report. But according to the BPI, the report was “greenwash,” reported BBC News.
BPI released a statement calling Google “one of the key enablers of piracy on the planet,” despite having enough expertise to tackle the problem.
While “greenwashing” is usually used to describe organizations who claim to be more eco-friendly than they actually are, the BPI declared this was the best term to describe Google’s actions.
The Content ID tool was created in 2014 in order to find copyright-infringing material and let the rights holders choose whether or not to block it or make money from ads connected to the clips. Google has claimed it has spent $60 million on the technology so far.
Google’s report explained, “The music industry, for example, choses to monetize over 95 percent of sound recording claims … Our continued investments in Content ID have resulted in ongoing improvements to its function – from its inception as an audio-only detection system, it has grown to detect video and can now even detect melodies, helping further stymie bad actors’ efforts to fool the system.”
Google stated that over 50 million reference files now exist within Content ID’s database and that the system is responsible for most of the payments Google has made to the music industry.
The BPI is not the only music industry organization to have a problem with Google’s figures. The IFPI agreed that Content ID is “ineffective”: “Record companies and publishers estimate that Content ID fails to identify 20-40-percent of their recordings.”
The IFPI also insinuated that a change to Google Search’s algorithm designed to reduce piracy has not worked: “Google’s search engine continues to direct Internet users to unlicensed music on a large scale.”
The results of the report also pointed to what the music industry has been saying for years: That while YouTube’s business is entirely built on music, Google isn’t paying fairly for that.
YouTube has been countering that argument by saying that its users are not “natural music consumers,” so any money it generates is just a bonus for artists. And that when fans upload music “unofficially,” Google is giving artists and labels opportunities to turn these clips into revenue streams.
Artists such as U2, Paul McCartney and Taylor Swift have called for changes to U.S copyright law so that they can more easily sue YouTube and other sites hosting their material.