Royalties in the Digital Age

Around the year 2000, a tremendous shift in how sound recordings and audiovisual (AV) productions were widely accessed and consumed began. With the creation of Napster and similar peer-to-peer file-sharing services, pirated digital copies of songs, films, TV shows, and other types of intellectual property were made available—free of charge—to anyone with access to the internet. This quickly dealt a huge financial blow to the rights holders who received revenue from traditional radio and TV broadcasting, theatrical releases, and the sale of physical media like CDs and DVDs.

In an effort to counteract piracy and capitalize on the popularity of digital media consumption, online stores like iTunes were established. They allowed users to pay to legally and permanently download music (full albums or individual tracks), TV shows (full seasons/series or individual episodes), and movies, which could be “rented” as temporary downloads as well.

While iTunes was wildly successful and dominated the digital music and AV markets for a few years, continued piracy and changes to the business model (e.g., allowing consumers to purchase single tracks or TV episodes rather than full albums or seasons) resulted in revenue declines—particularly for recorded music.

By the early 2010s, however, access to high-speed internet and personal computers with powerful microprocessors made streaming a seamless alternative to downloading. So digital service providers (DSPs) and “over-the-top” (OTT) media services changed the business model again by providing users with access to expansive libraries of sound recordings and AV productions rather than ownership of individual copies. All of a sudden, for the same price as one album on iTunes, a listener could gain access to millions of songs for a month on Spotify. And the cost of a movie ticket unlocked more TV shows and films than one could ever come close to viewing in a month on Netflix.

Since the introduction of these streaming services, revenues derived from the consumption of sound recordings, films, and TV shows have been on a consistent and dramatic upswing. And while this is seemingly great news for the solvency of these media industries, whether individual contributors like music creators have actually benefited from these seismic shifts—and whether the altered ecosystem is sustainable—are matters of debate and will be explored below.

Digital Music: The Flow of Rights & Royalties

While the digital usage of musical works has added a great deal of complexity to how certain royalties are calculated, fortunately, the fundamental flow of rights and royalties has not been dramatically altered. Collective societies still grant licences to users/licensees—in this case, DSPs and OTT media services—in exchange for licence fees, which are then used to pay applicable royalties to music creators and/or music publishers. 

Nevertheless, similar to traditional media, the exact flow and the entities involved differ somewhat depending on certain variables including how the musical work is delivered to the end user.

Downloading

In Canada, when a musical work embedded in a sound recording or an AV production is downloaded, this is deemed to be a reproduction but not a performance. Therefore, a mechanical royalty, deriving from the mechanical licence fee paid by the DSP or OTT media service, may be generated and distributed by the reproduction rights organization (RRO) to the publisher—which may be a production company if the musical work is embedded in an AV production—or self-published music creator. (Performing rights and performance royalties aren’t a factor.) However, it’s important to note that production companies routinely ask for a buyout of all reproduction rights from music publishers and creators when their works are used in AV productions. Where the owners of the musical works agree, mechanical royalties may not be paid for downloads.

Streaming

When a musical work embedded in a sound recording or an AV production is streamed, this is deemed to be both a performance and a reproduction. Therefore, in addition to the generation and distribution of a mechanical royalty, a performance royalty, deriving from the performance licence fee paid by the DSP or OTT media service, is generated and distributed by the performing rights organization (PRO) to the music creator and, if applicable, the publisher, which may be a production company. However, it’s important to note that production companies routinely ask for a buyout of all reproduction rights from music publishers and creators when their works are used in AV productions. Where the owners of the musical works agree, mechanical royalties may not be paid for streaming.

Please note that this flow applies to all types of streaming in Canada, but this is not the case in many other territories. In the US, for example, when a sound recording is streamed via non- or semi-interactive streaming (i.e., where musical works are played in an order determined by the service and over which the consumer can exercise limited or no control) through services like Pandora or iHeartRadio, this is considered to be strictly a performance. Only interactive (or on-demand) streaming through services like Spotify is deemed to be both a performance and a reproduction.

Calculating Digital Royalties

Downloading

Since permanently downloading a musical work embedded in a sound recording or AV production can be regarded as the digital equivalent of pressing a vinyl record or a Blu-ray disc, the calculation of the mechanical royalty generated by such a reproduction is decidedly simple. According to the Copyright Board of Canada’s most recent Online Music Services Tariff, it’s “8.91% of the amount paid by end users for the downloads of audio tracks,” subject to certain minimum amounts. The royalty calculation for limited downloads (which provide access to files for a set period of time) is very similar.

Distribution is equally straightforward. The licensee keeps a record of which files are downloaded in Canada in a given time period and passes that data on to the RROs—the CMRRA and SOCAN RR—who calculate the mechanical royalties and charge the licensee accordingly. Once the licence fees are paid, and the RROs’ overhead is deducted, the royalties are distributed to their respective publisher clients (or self-published music creators).

Streaming

Determining the performance and mechanical royalties derived from streaming is another matter altogether. It’s notoriously complicated and sometimes, depending on the licensee, completely mysterious. 

Some of the variables set by the Copyright Board that dictate which calculations should be applied include:

• Which type of licensee is streaming the content (e.g., DSPs, OTT media services, dedicated internet radio sites, traditional broadcasters offering internet simulcasts, sites that allow users to generate their own content, gaming sites, the CBC, etc.)
• What degree of interactivity is permitted (i.e., non-interactive, semi-interactive, or fully interactive streaming)
• Whether the content is user generated (e.g., YouTube videos)
• How the licensee generates revenue (i.e., via paid subscriptions, pay-per-view fees, or advertising)
• Whether a subscription-based service offers a free trial
• Whether the licensee is Canadian

While, compared to downloading, there are more variables that apply to streaming, it’s in the allocation and distribution of these royalties to individual rights holders that much of the confusion ultimately lies. The most common method is to first establish a royalty pool from the gross revenue (from paid subscriptions and/or advertising) received by the DSP, and then distribute the funds to each rights holder based on the percentage of the total number of streams their musical works comprise.

Here’s a tangible example of this calculation:

• If Spotify’s gross revenue in Canada in a given month is $25 million, the performance royalty pool allotted to SOCAN for that month would be $1,325,000 (5.3%, as outlined by the tariff), and the mechanical royalty pool allotted to, and shared between, the CMRRA and SOCAN RR would be $372,500 (1.49%).
• If, over the course of that same month, musical works are streamed one billion times in Canada, the performance royalty rate would be $0.001325 per stream ($1,325,000 divided by one billion) and the mechanical royalty rate would be $0.0003725 per stream ($372,500 divided by one billion).
• Therefore, if the musical works owned by one particular music creator and their publisher (if applicable) comprise 50,000 of the one billion streams, these rights holders will, collectively, receive performance royalties amounting to $66.25 and mechanical royalties amounting to $18.63, minus the overhead deducted by the collective societies. (In the US, performance and mechanical royalties are combined to form an “all-in” royalty pool.)

This is often referred to as “pro rata” royalty allocation, and while Spotify and many other streaming services have adopted it as their preferred model, it is by no means the only one. Different platforms define streams differently (e.g., some require a sound recording or AV production to be consumed for a minimum amount of time in order to be counted as a stream), and many weigh the value of each stream differently as well.

For streams of musical works embedded in AV productions, the calculations can get even more granular since a single film or episode of a TV show may include a large number of musical cues and songs, sometimes from a variety of music creators and publishers. Moreover, the percentage of the per-stream royalty received by each rights holder is subject to many of the same variables used to calculate the performance royalties generated by traditional AV broadcasts including the length of each cue/song relative to the total duration of music in the production, and how each cue/song is used (i.e., as theme, featured, background, or logo music). Fortunately, all of these details are included on the cue sheets filed with SOCAN for each production.

Of course, all of this assumes that the music creator has not relinquished their right to receive royalties, which many are pressured to do in order to secure work. Read more about buyouts and how they can affect music creators’ earnings.

A Special Case: Non-commercial User-Generated Content

While using music without permission in a video that’s subsequently uploaded and shared online may seem like obvious copyright infringement, this is not necessarily the case, according to Canadian copyright law. 

Part III of the Copyright Act details a number of exceptions to infringement, and the use of material under copyright in “non-commercial user-generated content” (or “UGC”) is one.

Encompassing everything from cat videos to children’s dance recitals, UCG is considered to be an example of “fair dealing” as long as, among other criteria, the new work isn’t being used for commercial purposes and doesn’t have “a substantial adverse effect, financial or otherwise, on the exploitation or potential exploitation of the existing work.”¹ (Under what are often referred to as the “safe harbours” provisions of the act, UGC services themselves are also free of liability since they’re considered simply to be content conduits.)²

Even though platforms like YouTube and TikTok primarily feature UGC, they still pay performance and mechanical licence fees to Canadian collective societies. SOCAN/SOCAN RR and CMRRA have negotiated agreements with many of these platforms directly.

The Value Gap

While there are a lot of factors that determine the amount in streaming royalties music creators receive, what remains troublingly constant is how dramatically low this revenue is compared to the royalties generated by traditional broadcasting as well as other performances and reproductions.

Negative Impacts on Music Creators

On average, for the streaming of sound recordings, approximately 12–15% of a DSP’s revenues are distributed to the owners of the musical works. The rest is either retained by the service or distributed to the owners of the sound recordings (with labels typically claiming a much larger portion of the master-use royalty than performers). Most individual music creators will only receive a small fraction of the revenue since the number of recordings available through these services is vast and ever increasing.

Use this calculator to see the approximate royalties generated for any number of streams on the most popular platforms. (Please note that the amounts listed would be shared among all rights holders—in both the musical work and the sound recording.)

The royalties generated by the streaming of musical works embedded in AV productions can seem even more minuscule to individual creators. This is evidenced by the fact that SOCAN considers 1,000 Netflix streams to be the minimum number required to generate a distributable performance royalty (it’s 500 streams for YouTube and 100 for other platforms). And SOCAN’s distributable-earnings threshold is $0.25.³ According to the Screen Composers Guild of Canada (SCGC), in just two years, their members saw “declines in digital copyright remuneration from streaming of up to 95% when compared to the established broadcast model.”⁴ And yet, a number of these streaming services generate billions of dollars in revenue annually.

This disparity “between revenues that are earned by the platforms and the amount of those revenues that make their way back to the music creators themselves” is typically referred to as the “value gap.” And other factors that contribute to it include the following:

• Non-Canadian DSPs and OTT media services don’t currently operate under the regulatory framework mandated by Canada’s Broadcasting Act and overseen by the Canadian Radio-television and Telecommunications Commission (CRTC) and are thus exempt from the minimum Canadian-content (“CanCon”) and French-language requirements that would aid the discoverability and consumption of works by Canadian music creators.
• Incorrect or incomplete metadata makes tracking the usage of musical works in sound recordings and AV productions difficult if not impossible.
• Private agreements between DSPs and record labels (particularly the major ones) guarantee that the lion’s share of streaming royalties (usually 75–80%) almost always goes to the owners of sound recordings.
• Pro-rata royalty allocation doesn’t take individual listening habits into account and heavily favours the most popular tracks on streaming platforms. Further, playlists (both curated and algorithm-based) reinforce the stratification of the royalties distributed to creators by promoting the most-streamed tracks. In other words, streams beget more streams.

It is not an exaggeration to predict that the value gap might eventually make it impossible for all but the most popular music creators to make a living wage. This means that scores of existing creators would be forced to explore new jobs, and many potential successors would avoid the music-creation profession altogether. The consequences of such an outcome would be disastrous for every entity in the music-revenue ecosystem. 

Potential Solutions

Though the value gap has existed for a number of years, the devastating effect of the COVID-19 pandemic on certain revenue streams for music creators—including live performances, touring, and film and TV productions—threw it into stark relief. As a result, an urgent and encouraging international effort to address the financial disparity is in full swing.

Because the value gap is a multi-faceted problem, however, a single solution won’t suffice. According to a report from MIDiA Research, what’s needed is “an interconnected set of solutions across three areas: [music creator] remuneration and share, streaming pricing, and culture and consumption.” And most of the solutions proposed—both in the report and by advocacy organizations and industry experts around the world—do indeed touch on more than one of these areas simultaneously. They include the following:

• Increasing the share of streaming royalties for owners of musical works while encouraging platforms to collectively raise subscription rates, which have essentially remained flat for years due to competition (since many DSPs, including Spotify, already operate at a loss, it’s important that these steps are taken together)  
• Standardizing the metadata that needs to accompany recordings and make its submission/completion a prerequisite for distribution on streaming platforms
• Making licensing agreements between platforms and all rights holders (particularly record labels) more transparent
• Encouraging streaming services to adopt alternatives to the pro-rata model of royalty allocation so a larger proportion of music creators will receive higher royalty payments (e.g., a version of the user-centric model, by which each user’s subscription fees are distributed based only on the music they consume, has already been adopted by certain DSPs like Deezer)
• Working with all pertinent stakeholders to ensure that the discoverability and promotion of recordings and productions (e.g., via playlists or film/TV show recommendations) is more equitable.

While some of these solutions can be implemented through negotiation between the key players in the streaming economy, many require legislative backing—and headway is being made in this regard all over the world. For example, the European Union’s new copyright directive, which, among other protections, imbues creators with greater bargaining power, has been adopted by a number of member nations including Germany and Sweden.

Here in Canada, the federal government has introduced the Online Streaming Act (Bill C-11), which, by bringing “online broadcasters under similar rules and requirements as [Canada’s] traditional broadcasters,” would “ensure that online streaming services showcase Canadian music and stories and support [Canadian] creators and producers.”⁵

These are just a few of the hopeful, tangible steps being taken to bridge the value gap and restore fair compensation for music creators and other rights holders, as streaming’s popularity continues to rise alongside the revenue it generates.

Read More about the Value Gap

• Music Creators Fight for Middle-Class Livelihoods (article in the Toronto Star)
• Shifting Paradigms (report by the House of Commons Standing Committee on Canadian Heritage)
• Canada’s Communications Future: Time to Act (report by the Broadcasting and Telecommunications Legislative Review Panel)
• Digital Disruption: Modernizing the Income of Canadian Music Creators (report by Nordicity, prepared for the SCGC, S.A.C., and SPACQ)
• Rebalancing the Song Economy (report by MIDiA Research and Björn Ulvaeus)
• Music Streaming and Its Impact on Composers & Songwriters (report by the European Composer & Songwriter Alliance)
• Study on the Artists in the Digital Music Marketplace: Economic and Legal Considerations (report by the World Intellectual Property Organization)

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Footnotes

1 https://laws-lois.justice.gc.ca/eng/acts/C-42/page-6.html#h-103295

2 https://laws-lois.justice.gc.ca/eng/acts/C-42/page-9.html#h-103770

3 https://www.socan.com/wp-content/uploads/2020/10/Simplified-Distribution-Rules-2018-SP_FINAL2.pdf

4 https://screencomposers.ca/advocacy/

5 https://www.canada.ca/en/canadian-heritage/news/2022/02/government-of-canada-introduces-legislation-to-support-the-next-generation-of-canadian-artists-and-creators.html