98.Whilst creators and the artist businesses that support them are the most fundamental and important part of the music industry, they are often supported by various corporate and business partners that provide specialist support, resources, investment and market access to help develop that creator’s career. Where a creator is signed to a deal, this includes record labels, who invest in and help creators exploit recording rights, and publishers, who invest in and help exploit song rights.
99.The record and publishing industries are comprised of a diverse array of businesses that offer a range of services. The largest of these businesses are the so-called ‘major’ music companies, known as the ‘Big Three’. These are: Universal Music Group and its publishing company Universal Music Publishing Group (UMPG); Sony Music and Sony Music Publishing (formerly Sony/ATV Music Publishing); and Warner Music Group and its publishing subsidiary Warner Chappell Music. AIM and the IMPF define a major record label and/or music publisher as “a multinational company which (together with the companies in its group) has more than five percent of the world market(s)” in recording or music publishing; otherwise, a company is considered independent. Beyond the majors, there are a range of larger multinationals, such as Beggars Group and BMG, and thousands of medium and small-sized businesses (including self-releasing performers, songwriters and composers and ‘single artist labels’), distinguishing themselves through an array of specialist services based on genre or geographic specificity, fair dealing and so on.
100.This Chapter will first describe how the music industry has consolidated during and following the period of digital piracy over the last few decades and the current state of the market. Next, we will discuss the implications for competition and conflicts of interest in the acquisition of rights, licensing of music and revenue shares. Finally, we will evaluate concerns regarding transparency for creators and how this has been addressed in other jurisdictions.
101.The majors’ market share has become increasingly concentrated in the last twenty years. The devastation of the music industry by digital piracy forced a sustained period of consolidation in the market; notably, each of the three current major music companies have merged with or acquired the other ‘Big Six’ companies (PolyGram, Bertelsmann Music Group (BMG) and EMI Group Ltd) that existed in the 1990s. In 1998, PolyGram was acquired by Seagram, Universal’s parent company, for $10.6 billion and folded into Universal’s music and entertainment operations (though Universal has recently revived the PolyGram brand for new film and TV projects). In 2004, BMG, then owned by European media company Bertelsmann, merged its recording operations in a joint venture with Sony, giving Universal and newly-created Sony BMG a combined 51.1% market share. Sony eventually bought out Bertelsmann’s stake in the joint venture in a $1.2 billion deal in 2008 (with the latter relaunching BMG in the same year with a small stable of European artists retained by the company). From 2012, EMI was broken up and its operations were variously acquired by Universal, Sony and Warner, with Universal acquiring its recorded music operations for $1.9 billion (of which most of the regional and classical catalogues and labels were then sold to Warner for $765 million) and Sony acquiring its publishing operations for $2.2 billion.
102.Even as the record industry has returned to growth with the advent of streaming, the major music companies have continued to acquire competitors. In the last five years, the majors have acquired British indie companies such as Ministry of Sound Recordings in 2016 (by Sony Music), ZTT, Stiff Records and publisher Perfect Songs in 2017 (by Universal) and musical theatre record label First Night Records (by Warner) in 2019. Only weeks after we put an email from singer and icon Sandie Shaw to the UK heads of the major music companies that asserted that “British record companies being bought up, ‘our crown jewels […] are gone’ and ‘there is currently no such thing as the UK record industry’”, Sony Music announced its intention to purchase two London-based companies (recorded music services company AWAL and performance rights collection agency Kobalt Neighbouring Rights) from Kobalt Music Group for a deal worth $430 million. In response, Paul Pacifico, Chief Executive of AIM, told us that “I absolutely understand where Sandie is coming from” and that “it is a concern to artists and entrepreneurs in music alike to make sure that small, hard-fighting sector of the market is given the support it needs to continue to punch above its weight”. Mr Pacifico also warned that the continued acquisition of independents by majors “is not problematic in itself, so long as the market conditions enable new ones to spring up and continue to grow”. The IMPF similarly cautioned that “mergers and acquisitions mean fewer companies, which weakens the bargaining position of independent music publishers”. Since 2014, the Worldwide Independents’ Network, a global network for independent music companies, has pledged in its Fair Digital Deals Declaration that:
we oppose further consolidation in the recorded music, publishing and radio sectors since this is bad for independent music companies, their artists and fans, as it reduces market access and consumer choice
we support initiatives which confront market abuse, and which aim to adapt competition laws to promote independent market access and foster collective responses by independents to potentially anti-competitive conduct by large operators.
103.This continual consolidation has begun to catch the notice of UK regulators. The CMA has recently launched an investigation into Sony’s completed acquisition of AWAL and Kobalt Neighbouring Rights following an initial enforcement order served on 17 May 2021. In response, Mr Pacifico said that:
Over the last several years we have seen an incremental shift towards a music market in which a few dominant players have disproportionate influence. Each increment counts, and it is crucial to the future health of the market to ensure that all players can take part on a meritocratic basis.
Helen Lewis, Executive Chair of the Independent Music Companies Association (IMPALA), a European trade association for small and medium-sized music companies, similarly told Complete Music Update that:
We welcome the investigation into this acquisition as it leads to further concentration in the music market and is part of an ongoing wider move by Sony to acquire significant independent players in key markets. We expect the investigation to cover both the physical and also digital markets, and the impact on competitors, digital services, artists and fans, who will all lose out.
104.Whilst the record label and music publisher for a recording and its underling song and composition may be different companies, it is important to note that the majority of companies have both recording and publishing operations. The three major music groups operate both the recording and publishing industries either under their own brands or through subsidiary companies or brands; through these businesses, the majors dominate both the recording and publishing markets globally and in the UK. Although the two operations are typically kept separate from one another, they ultimately report in to the same corporate leadership (indeed, Sony Corp recently restructured its music operations to greater align Sony Music Entertainment and Sony/ATV under the then-new, unified Sony Music Group). Moreover, this trend extends beyond the majors. A recent survey of AIM members found that 89 percent of independent record labels reported to having business interests beyond just recordings, with 81 percent declaring interests in publishing (as well as 46 percent being involved in artist management and 35 percent being creators themselves).
105.Research also suggests that streaming is driving a historic growth in the number of creators releasing music without a deal with a record label. Evidence from MIDiA Research has found that there were over 4.7 million self-releasing artists by Q3 of 2020, of which over 340,000 were from the UK. Furthermore, self-releasing artists are finding increasing success, with revenues growing faster than any other sector in the global recorded music business, up 32 percent in 2019 to reach 4.1 percent of all revenues globally, and were projected to have taken in £825 million in 2020 alone. Creators who want to release music to streaming services such as Spotify without a label must release a music through a distributor. Many distributors are independent, such as TuneCore, DistroKid and CD Baby. However, the growth in the number of self-releasing artists and the share of the revenues that has begun to accrue to them has prompted intervention by the major music groups. Subsequently, the majors have now each launched or otherwise acquired one or more distributors to capitalise on this market. Sony Music initially acquired a majority stake in The Orchard, a music distribution and artist and label services company reaching both physical and digital retailers, in 2012, and the remaining equity in 2015 for a reported $200 million. Warner launched ADA, a full-service physical and digital distribution company, in 2012 and Level, a digital distributor, in 2018. Universal currently operates three: Spinnup, a digital distributor launched in 2013; Virgin Music Label & Artist Services, a distributor of independent labels (launched as a rebranding of its pre-existing Caroline Distribution service this February to capitalise on the Virgin Records brand); and Ingrooves, a distribution and artist services company, acquired in 2019.
Annual Spotify streaming growth by type of label, 2019
Self-releasing artists represented 4.1% of the global recorded music market in 2019 and will generate £825 million in 2019
106.As well as maintaining interests in recording, publishing and distribution services, several majors maintain commercial interests in the streaming services themselves. In summer 2008, Spotify offered shares worth a combined 18 percent equity stake to the then-four major music groups (Sony, Universal, Warner and EMI) and Merlin, the collective digital rights and licensing agency for independent record labels, in exchange for an €8,804.40 investment. Through this investment, Sony received 6 percent of Spotify shares, Universal received 5 percent (and later acquired an additional 2 percent when it purchased EMI’s record operations), Warner received 4 percent and Merlin received 1 percent.
107.After Spotify was floated on the New York Stock Exchange in April 2018 with a market capitalisation in excess of $28.5 billion, Sony sold 50 percent of its shares for $750 million and Warner sold 75 percent of its shares for approximately $400 million. Both Sony and Warner did credit artists with a portion of the profits “on the same basis as we share revenue from actual usage and digital breakage”. Sony confirmed to us that over $250 million was shared with artists whilst written evidence asserts that Warner paid out 25 percent to artists subject to recoupment of advances. As of 2021, Merlin and Warner have divested completely from Spotify, though the latter retains a “small stake” in Deezer, “a significant platform in other countries”. Since then, Spotify’s market cap has almost doubled, reaching a peak of $54.55 billion in July 2020; Universal, who is yet to sell any part of its equity (but whose stake has reportedly fallen to 3.5 percent due to stock dilution), now has a stake worth over $1.6 billion. It should also be noted, however, that whilst record companies were invited to invest in streaming services, publishers were not similarly invited to do so. This subsequently impacted the remuneration of song rightsholders, as whilst performers received at least some benefit from Warner and Sony’s sales of shares, songwriters and composers did not.
108.However, the shareholdings of the major music groups are made complex by the various instances of cross-ownership between themselves (and their parent companies). Whilst Vivendi is the majority stakeholder in Universal Music Group, 20 percent of the company is owned by Tencent Holdings, a tech-focused multinational Chinese holding company (indeed, this stake was increased from ten percent through an option in the original acquisition after our inquiry began). Alongside its Universal stake, Tencent Holdings also holds two percent equity in Warner Music. However, both Warner and Sony Music own a four percent stake in Tencent Holdings’ subsidiary Tencent Media Entertainment, which develops the music streaming services QQ Music, Kugou and Kuwo that currently dominate the Chinese market. Recently, Tencent Music Entertainment and Spotify agreed to exchange comparable equity stakes in one another, with Tencent Holdings making secondary purchases to make up for the difference in valuations between the two companies, in order to give both companies better leverage in negotiations with the major music groups. As a result, Tencent Music Entertainment now owns a 9.2 percent stake in Spotify, whilst Spotify similarly owns a 9.1 percent stake in Tencent Music Entertainment.
Cross ownership and equity stakes between Spotify and the major music companies
109.There has been some speculation as to the market share of the major music companies. IFPI states that the majors’ global market share in 2020 was 68 percent in recording (with Universal claiming 32 percent, Sony claiming 20 percent and Warner claiming 16 percent) and 58 percent in publishing (with Sony claiming 25 percent, Universal claiming 21 percent and Warner claiming 12 percent). MIDiA Research and the IMPF broadly concur with these figures for recording and publishing, giving the majors a 67.5 percent and 55 percent market share respectively. That said, MIDiA Research does argue that, for recorded music at least, these figures are overstated, as they include revenue from independent labels that have piggybacked on the majors’ own digital distribution deals, but nonetheless “is the measure that they use for licensing negotiations”. However, there is evidence that the majors’ share of the UK recording industry is more concentrated than the global market, despite being US-based companies. AIM states that the independent community accounts for 25 percent of the UK recording market, which would thereby put the majors’ share at 75 percent. Indeed, this is corroborated by a judgement from the Court of Appeal pertaining to a lawsuit by the UK subsidiaries of two of the majors, Warner Music UK and Sony Music Entertainment UK, against TuneIn, which stated that “The Claimants [Warner and Sony] and the groups of companies they represent, own, or hold exclusive licences to, copyrights in sound recordings of music […] account for more than half of the market for digital sales of recorded music in the United Kingdom, and about 43 percent globally”.
110.The size of the major music groups due to their diverse and pervasive range of operations and holdings across the music industry has resulted in strong financial performances. Aggregate information from the accounts of the major music companies show that, in the last six years, the major music companies are performing exceptionally well in terms of profit, and are continuing to grow. Between 2015 and 2019, disclosed major label turnover increased by 21 percent, but operating profit grew by an unprecedented 64 percent and their operating profit margin on turnover increased from 8.7 percent to 11.8 percent. This means that, not only are the majors earning more money than in the last twenty years, they are also making more profit from these incomes. This has been corroborated by the majors themselves, as it has been reported that Sony Music CEO Rob Stringer recently told shareholders that streaming has underpinned historic profit margins for the company. As such, the majors are now significantly valuable companies outright, despite the recorded sector having not yet reached pre-piracy (inflation-adjusted) levels of turnover and revenue. Warner Music, at the time of writing, currently has a market capitalisation of almost $18 billion. Music Business Worldwide estimates that Sony’s music operations (albeit including its ‘Visual Media and Platform’ interactive entertainment division, which incorporates but does not exclusively deal in music) are valued at $38.4 billion. Based on the recent ten percent option exercised by Tencent Holdings, Universal Music Group is valued at €30 billion (or over $33.6 billion) ahead of its own IPO. This has translated to significant remuneration packages for the executives of these companies. Confidentially-submitted written evidence, analysing Warner Music’s recent filing for its initial public offering, found that in 2019 the top 5 Warner executives received remuneration packages equal to the earnings of 2019’s top 27 tracks as well as a share package worth $590 million.
Growth of UK major label turnover and operating profit
111.There is no doubt that the major music groups currently dominate the music industry, both in terms of overall market share in recording and (to a lesser extent) in publishing, but also through vertical integration, their acquisition of competing services and the system of cross-ownership. We recommend that the Government refer a case to the Competition and Markets Authority (CMA), to undertake a full market study into the economic impact of the majors’ dominance (see paragraphs 129, 134 and 183 for further recommendations). The Government must also provide the CMA with the resources and staffing to undertake this case to ensure that it can dedicate the necessary resources to this work whilst not impacting the pre-existing work it is currently undertaking.
112.Due to the role of record labels, publishers and distributors (and by consequence the major music groups) in bringing music to market, these trends have implications throughout the supply chain. On the one hand, these companies essentially act as buyers for recording and song rights through their investment in creative talent. On the other hand, these same companies essentially act as sellers of licences for access to recordings to streaming services. In this way, it can be argued that the majors create both an oligopsony in the acquisition of music assets at the beginning of the supply chain and an oligopoly where assets are licensed to retailers in order for music to be brought to market.
113.An oligopsony occurs when a market is dominated by a small number of large buyers. This theoretically concentrates demand (and therefore market power) in the hands of the buyers, which can effectively keep prices down at the expense of the sellers. When applied to the music industry, this means that the terms under which the major music groups in particular acquire the rights to music favour the majors at the expense of the creators. As has been discussed, the major music groups are disproportionately benefitting from music streaming relative to creators. This has resulted in record high levels of income and profit growth and historic levels of profitability for the major labels whilst performers’ incomes average less than the median wage.
114.This, naturally, begs the question as to why such contractual terms exist. Record labels have emphasised that performers are presented with more choice than before regarding the terms under which they might wish to release their music. Both Universal and Sony, in oral evidence, argued that this has created a highly competitive environment between the major labels, independent labels and distribution services. Jason Iley, Chair and CEO of Sony Music UK and Ireland, argued that:
Today, three of the most culturally important acts—Jorja Smith, AJ Tracey and Skepta—have chosen to sign to a distribution company. They want a bigger share of the revenue and that is their choice. With respect to them and their management, that is their decision. I clearly would prefer them to sign to Sony Music, but that is the opportunity of choice.
These sentiments were echoed by the Minister for Digital and Culture, who cited Stormzy as another example of a successful, self-releasing artist who found initial success outside the major music companies.
115.However, in many ways, this choice is not straightforward. First, the size of the major record labels means that they can apply their financial might in terms of the size of performer advances, and subsequently leverage the risk of not recouping these considerable advances in exchange for poor royalty terms, externalised costs of production borne by creators, and greater and broader costs being subject to recoupment. Whilst we cannot supply exact figures as the evidence was supplied confidentially, the majority of artist and repertoire costs for the major music companies is spent on artist advances rather than recording and video production costs. Whilst advances are up-front incomes paid directly to creators (subject to deductions by their representatives), and thus are fairly considered recoupable, they also function as a means of asset acquisition, which means they are not solely paid for the benefit of the creator. Moreover, given that the majority of the majors’ advance and royalty deals are life of copyright deals, they will therefore accrue revenue for a significant period of time. As evidence from academics at SCRIPT explains:
The issue remains that artist contracts traditionally favour labels and publishers due to their initial risk in investing in artists, however, the unbalanced nature of such contracts has a direct implication on the revenue received by artists. Contracts agreed before, and even during, the advent of the streaming era do not sufficiently reflect the consequences of streaming on revenue sources for artists. There is also the broader issue of uneven bargaining power in contractual relationships, applicable not just to artists in the music industry, but creative practitioners in general: artists have “a weaker bargaining position, due to their inexperience, lack of information or desire to be published or produced at any cost.”
116.Second, record labels act as industry gatekeepers in many ways. Each of the artists cited by Mr. Iley and Minister Dinenage all make music in the UK hip hop, grime, R&B and/or garage genres, and therefore may have faced structural barriers to record deals before achieving success as a self-releasing artist. Moreover, industry norms often result in artists who view themselves as ‘major label acts’ wanting to sign to major labels who gate-keep access to the press, brand deals, sponsorships and so on. As Tom Frederikse noted, “the reaction to praise for one’s art plays a big role” in artists accepting low royalty rates in record deals, even against legal advice. Furthermore, as copyright enforcement is costly, creators are incentivised to effectively ‘outsource’ it to music companies rather than self-release and take on these responsibilities themselves.
117.Finally, there is little opportunity for self-releasing artists to fully disintermediate from either record labels or distributors (or, in the case of label-owned distributors, both). Spotify’s own attempts to develop a new tool that allowed artists to upload music directly to the platform was discontinued in July 2019; several witnesses have implied that attempts at disintermediation by the tech companies was (or otherwise would be) stopped as part of negotiations with industry. At any rate, the lack of disintermediation has two key benefits for the major music companies. First, it ensures that artists that self-release must go through intermediaries such as digital distributors and aggregators that are often major-owned in order to distribute music through streaming services, which itself generates revenues from up-front fees or commission. As such, even the many creators who wish to release music without a label may indirectly find themselves working with the majors through label-owned distribution businesses. Second, these businesses may become an avenue to scout and ‘upstream’ new talent in future, whereby self-releasing artists may be identified and signed to more comprehensive record deals. However, it should be noted that, from supplementary evidence we received, upstreaming from distributors and independent or subsidiary labels only comprises a small percentage of the majors’ overall repertoire. Sony, for example, asserted that it had only upstreamed “one or two artists” from a Sony-owned distributor in the past ten years, though Billboard has reported that 80 artists have been signed to Universal’s front-line labels from Spinnup. Whilst trends may change and these proportions may shift long-term both as rights revert to public ownership (i.e. out of label’s repertoires) and major-owned distribution businesses mature, in the short term this impact should not be overstated.
118.This may be why the majors are able to retain their market position despite independent record labels often offering better contract terms, such as profit-share deals, debt forgiveness and rights reversion for artists. Yvette Griffith, co-CEO and Executive Director of Jazz Re:freshed, a not-for-profit label, described the terms of her label’s deals:
We made a decision fairly recently, because of our position in the ecosystem and because we are a not-for-profit and are not a commercial organisation and we receive some support from the likes of the Arts Council to recognise the work we do in the landscape for emerging talent. Parcelled up into our trying to encourage artists to fly into the wider recording world, we made a decision to become a licensing label. We do not own the copyright, and we license the copyright for a period of time. At the end of that period, we can negotiate with the artists and they may choose to let us license for another period or they may fly and take it elsewhere. It is a risk and it is a gamble, but it is the choice we have made. We are probably fairly unusual in that context, but it gives you an example of the diversity of deals that exist within that indie landscape.
119.Regardless, this oligopsony has emerged because of the majors’ success in asset acquisition. Many academics and creator groups argue that the majors’ position fundamentally comes from owning most of the most valuable rights. Professor David Hesmondhalgh argues that although record labels may well take on risk in developing artists, even one success for a label can cancel out many failures, mitigating the overall financial risk, and that larger labels are moreover able to spread this risk, as well as the actualised costs of maintaining their repertoire, staff and executive pay, across a larger catalogue of acts, creating longstanding conditions of oligopoly. As such, many submissions have argued for the Government to provide pro-competition policy interventions in order for independent companies to emerge and compete and for artists to have greater rights when negotiating terms with companies themselves.
120.In terms of supporting the independent sector, the Association of Independent Music argue that new entrants to the market often lack scale, expertise and capital to compete with the major music companies. Whilst scale and expertise are accrued with time and success (and trade associations play a role in also providing the latter), both the BPI and AIM, representing record labels, have called for the Government to introduce capital incentives. As Paul Pacifico explained:
Independent music businesses suffer twice in the capital market. They suffer because it is a high-risk business. It is also a very complicated and misunderstood business, so when you talk to investors they very rarely understand or are prepared to take risk on a business that they do not really get. Access to capital is not an evenly spread problem across the industry. Big corporations with big global parents have access to balance sheets that smaller companies simply do not, and I think a tax incentive is a way of making sure that those smaller businesses, the innovators, the entrepreneurs, those British small businesses, can make a go of it and grow their businesses without having to sell out to a major every single time.
The BPI’s written submission firstly calls for the Government to extend and expand the Music Export Growth Scheme, which is jointly funded by the taxpayer and industry to help break performers internationally and has delivered £4 million in grants since 2014, buttressed by more dedicated resources to assist small and medium-sized labels particularly in exporting and promoting their performers in local markets alongside the Scheme itself. Furthermore, both the BPI and AIM also call for a focused fiscal incentive to “pump-prime the capital market for music investment”. As the BPI notes, whilst the Government currently provides fiscal incentives for other creative industries such as film, animation, high-end and children’s TV, gaming, theatre and orchestras, commercial music remains a notable exception. When asked to comment on the reason for this, Minister Dinenage seemed open-minded to this changing, saying that: “I suppose because commercial music has always been such a great British success story, but clearly the plight of so many musicians now that live music is not an option has definitely brought a lot of things into question”.
121.In terms of improved rights for artists, written evidence has suggested several proposals. First, many have called for a right to recapture to be similarly implemented in the UK. This right already exists in the United States, whereby creators have the right to recapture after 35 years, giving them increased leverage to renegotiate royalty rates or take their rights to other companies if the terms of their record deals are unfavourable. This would prevent the most valuable rights from accreting at labels with the most capital and create a market for recaptured rights, whereby companies would compete upwards on royalty rates and terms of recoupment. Academics at SCRIPT and the Musicians’ Union also recommend that the Government should concurrently introduce contract adjustment mechanisms for creators. They argue that a right to contract readjustment would better correlate remuneration to proven market success and bring the industry as a whole to parity with existing, more ethical business practices like those of BMG. Similar provisions are proposed by the EU Directive on Copyright in the Digital Single Market and are already established in Germany, the Netherlands and the UK’s Patents Act 1977, which applies to an employee’s right to compensation when an invention has benefitted their employer. This would provide successful professional creators with a statutory right to additional remuneration when their initial remuneration agreed under the contract is disproportionately low compared to subsequent revenues derived from the exploitation of their creations, which would particularly benefit performers on outdated legacy contracts.
122.The Government must make sure that UK law is not enabling the outcome of market dominance. This means that independent labels must be supported to challenge the majors’ dominance and creators must be empowered to offset the disparity in negotiating power when signing with music companies. The Government should expand support for the Music Export Growth Scheme to allow British music companies to compete with the multinational majors and provide the resources needed for them to survive and thrive in export markets. This scheme must be appropriately targeted at independent British companies. To prevent the further acquisition of successful rights by the majors and ensure greater competition, the Government and BPI should also place clauses in grant funding awards that a company or artists’ rights cannot be acquired by the major music companies for a certain period of time. Moreover, the Government should bring forward proposals for a focused fiscal incentive for the independent music sector, similar to that which exists in TV, animation, film, theatre and gaming.
123.We recommend that the Government concurrently expand creator rights by introducing a right to recapture works and a right to contract adjustment where an artist’s royalties are disproportionately low compared to the success of their music into the Copyright, Designs and Patents Act 1988. These rights already exist elsewhere, such as in the United States, Germany and the Netherlands, and would give creators greater leverage when negotiation contracts with music companies. We suggest that the right to recapture should occur after a period of twenty years, which is longer than the periods where many labels write off bad debt but short enough to occur within an artist’s career. This would create a more dynamic market for rights and allow successful artists to go to the market to negotiate better terms for their rights. The right to contract readjustment should similarly be implemented as soon as practically possible to ensure that rights for UK creators do not fall behind rights for European creators.
124.In contrast to an oligopsony, an oligopoly occurs when a market is dominated by a small number of large sellers. This theoretically concentrates demand (and therefore power) in the hands of the sellers, which can effectively keep prices high at the expense of the buyers in absence of alternative sources of supply. When applied to music streaming, this means that the major music groups have been able to extract favourable terms from the streaming services, which has had implications both for competition in the market for streaming services and between record labels themselves.
125.One way this has manifested is the prevalence of non-exclusivity in licensing negotiations, in contrast to streaming services for film and television; instead, the music available on most mainstream services is relatively homogenous (see paragraphs 143–6 in Chapter 5). This has created the situation whereby, even as the majors are posting record profits, the streaming services themselves are yet to prove sustainably profitable. Traditional costs that fall to the record labels with physical distribution, such as manufacturing, storing and transporting the product or for breakage or returns, do not apply for streaming. Instead, the internet has simultaneously allowed for frictionless transfer of assets from the label to the service. Concurrently, the costs incurred by digital distribution have been transferred to and are borne by the streaming service. For example, there are costs for content hosting through cloud storage providers (such as Google or Amazon) and for research and development to improve the service. Spotify, for instance, spent 10 percent of its revenue on research and development in 2020. Horace Trubridge, General Secretary of the Musicians’ Union, noted that streaming has also extended the commercial lifespan of music by eliminating these costs for labels, as previously, “when their labels decided that they were no longer able to make money for them, they stopped pressing up records and stopped marketing their music”, but now “suddenly there is a market for that music again”. Despite the elimination, externalisation and replacement of physical costs as music distribution has become digitised, the revenue share for music retailers (i.e., record shops, download stores or streaming services) has remained consistently at 30 percent across both physical and digital retail domains, whilst the savings created by digital distribution have disproportionately benefitted record labels.
126.That is not to argue that the costs of producing music have been completely eliminated. Confidential, commercially sensitive evidence we received from two of the major record labels demonstrated that labels do provide significant, non-recoupable investment in marketing. However, representatives of both the streaming services and creators have pointed out that streaming services have also undertaken costs of marketing individual performers alongside marketing their services. Paul Firth, Director of International Music at Amazon and with a background in music retail, said that “I think as a streaming service you play a much more active role in helping an artist break than we ever did as a retailer”. Given that, generally speaking, music licensing is non-exclusive, this investment in marketing is not solely for the benefit of the service but may also indirectly market that performer for play on other services.
127.This has likely underpinned record label success of negotiating licensing agreements for recordings to streaming services directly. Both the major and independent record labels definitively favoured direct licensing. Tony Harlow, CEO of Warner Music UK, explained why record labels felt direct licensing was more effective:
I think that the answer to that is that we believe that that direct relationship […] gives the maximum power of negotiation. It is underpinned by the ability, ultimately, to say no to any licence, and that is the maximum strength to get the best position. Wherever that position is weakened, for example by the safe harbour, which was very much the theme of the conversation before, we get less good and less effective deals. That is why we favour the direct negotiation.
Paul Pacifico, CEO of AIM, representing the independent community, noted that direct licensing had not disadvantaged smaller labels due to the ability for independents to license collectively but separately from the major labels:
In most markets across the economy, you would expect smaller operators to suffer when negotiating with large organisations. If you are a small food supplier dealing with a big supermarket, you do not expect to get great rates. In the independent music community, we have addressed some of those challenges, for example, with the formation of a licensing partnership in Merlin, an international organisation that licenses on our behalf and enables us to take advantage of the best available rates in the market.
128.Despite Mr Pacifico’s assertion, several contributors have expressed concerns about the indirect impact of direct licensing on independent labels and self-releasing musicians. Because these licensing negotiations are conducted in secret, smaller labels and self-releasing artists are therefore similarly subject to these terms with no leverage to extract similar terms for themselves. As one artist noted, because these parties do not negotiate directly with platforms but instead release via a distributor or piggy-back on the majors’ deals, “we just get to sign up, wait for the first payments to come through, and then decide whether it was worth it or not”. The Incorporated Society of Musicians speculates that:
whilst the terms of [the majors’] deals remain confidential it is believed that preferential streaming rates were secured over smaller stakeholders and independent artists due to their overwhelming market share.
Academic evidence supports these speculations. Written evidence received from Dr Franco Mariuzzo and Dr Peter Ormosi at the Centre for Competition Policy observed through quantitative analysis that there exists a “difference in the distributional characteristics of major and independent record label streaming data” and that “major songs feature on popular Spotify playlists at a disproportionately higher rate than independent songs”. They posit that this may be due to the majors’ leverage over Spotify and their direct and indirect ownership over the platforms’ playlists contribute to this and “resembles more a vertically integrated part of major record labels”. In a recent paper, Daniel Antal, Professor Amelia Fletcher and Dr Ormosi, who contributed a separate written submission, similarly argue that streaming services “tend to favor more mainstream, established and international music, in particular that which appears on major labels, and to disadvantage the more niche, the more independent, the more locally-focused”. They also consider this to be due to the majors’ strong negotiating power preferential playlist access and unlabelled proprietary playlists and algorithmic bias.
129.Despite the general consensus that direct licensing between the record industry and streaming services is positive, there are ongoing concerns about the majors’ position in negotiation, which allows them to benefit at the expense of independent labels and self-releasing artists, particularly regarding playlisting. This is further evidence that a referral to the CMA is needed (as recommended in paragraph 111).
130.Record labels disproportionately benefit from streaming both because of how royalty pot revenues are distributed between the song and master rights and because the making available right means that record labels pay performers under the terms of their record deals. As noted previously (see paragraphs 78–88 in Chapter 3), this has led to songwriters, publishers and composers feeling short-changed by the split between two sides. It should be noted that song rightsholders have more than doubled their share of revenues in predominant formats over time. Roberto Neri and Rupert Skellett have explained that the song copyright received 8.5 percent of wholesale revenues for physical sales, which was negotiated up to 12 percent for downloads, and has since been negotiated up to 15 percent of retail (not wholesale) revenues for streaming. However, it is clear that there are many factors that mean that this remains a contentious issue.
131.Throughout our inquiry, we have questioned witnesses about why the status quo for the revenue share between the recording and publishing has come about. It has been suggested that, while the major music groups maintain that these respective rates are due to market forces, rates were actually fixed following a negotiation with Apple. This has not been corroborated by published evidence to this inquiry but Spotify’s Head of Global Affairs and Chief Legal Officer, Horacio Gutierrez, stated in no uncertain terms that “the reality is that labels demand that a majority of the revenue go to them, and then we had to clear the rights with publishers around the world”. In terms of the origins of the split, Fiona Bevan argued that:
It comes from an archaic split where the labels had huge physical overheads to produce vinyl and CDs, to store them and to ship them. We have heard about breakage as well during these sessions. Of course very few people buy physical nowadays and streaming has taken over utterly. Streaming has even supplanted downloads. There is not really an excuse for these huge behemoth companies to have 55 percent when they do not have these physical overheads anymore. It is very cheap for them to distribute the music.
Graham Davies, CEO of the Ivors Academy of Music Creators, similarly asserted that:
If we go back to 2005 when digital started, it was a download economy and we used to download singles and albums. We can see why the industry adopted a model more akin to a physical sales model, but it really is not applicable to streaming. There is ambiguity over whether or not it is a sale. Clearly, a download is a sale, where you purchase something and you can listen to that as little or as much as you like for the rest of your life. That is what a download is. A stream is not a download. We would really advocate for clarifying that aspect, because it is a communication to the public, and the more the industry has propagated it, the more it has suppressed the value of the song.
When asked whether it was by accident that archaic models have been transposed by record companies onto streaming, Maria Forte speculated that “I think it was not design initially, but I do think there is a certain design now” and noted that, unlike for recording, songwriters receive the majority of revenues, meaning the corporate side (including the major publishers) get less. Nile Rodgers similarly posited “since streaming became the main mechanism for consuming music, record companies have unilaterally decided that a stream is considered a sale because it maximises their profits”. When asked to speculate from an independent recording company side, Rupert Skellett conceded that “I suppose that might be true; the majors might be looking at where their margins are highest”, though he argued that as “a record company man” the rates were “at the right level”.
132.With music publishers and the IMPF unanimously calling for the value of the song to have parity with the value of the recording (see paragraphs 78–88 in Chapter 3), it is conspicuous that the MPA refused to give a definitive perspective on the debate, particularly given that the publishing arms of the three major music groups are counted amongst their members. The MPA’s written submission specifically warned the Government not to legislate in favour of more equitable business models and creator-publisher contracts, alongside recommendations regarding piracy and safe harbour provisions for tech companies. We also asked Roberto Neri several times in oral evidence whether he was satisfied with the valuation of the song. Whilst Mr Neri’s responses consistently advocated song rightsholders’ share of revenues increasing, he refused to argue specifically for parity between the song and recording, asserting that “we are all negotiating and would love it to be as high as it possibly is, and, as I say, with every negotiation we are managing to nudge it up”. When asked outright whether the MPA’s perspective differed from the IMPF because of the major music companies’ dominance of both recording and publishing, Mr Neri responded that:
I have not encountered or seen anything, but I have heard conspiracy theories in the 20 years that I have been in the business. The major publishing companies are helping to push the rates up in the other forums that I sit in, on different boards.
133.Though rebalancing the relative values of the recording and the song would have implications for record label revenue, it must be contextualised. As most independent labels and the majors also have publishing interests, losses to the recording operations would be somewhat offset by a growth in publishing revenue (whilst also benefitting songwriters and composers). By realigning remuneration incentives for industry (that is, by bringing parity to record labels, publishers, performers, and songwriters and composers) debates could then shift from ‘how the revenue pie is divided’ to ‘maximising the size of the pie’ within the music industry itself. Instead, under the current arrangement, the debates about the overall size of the industry are lost on publishers and creators because only a minority of revenues will subsequently make their way to them.
134.As long as the major record labels also dominate the market for song rights through their publishing operations, it is hard to see whether the song will be valued fairly as a result. It is well-evidenced that redressing the disparities in relative value between the song and recording has occurred infrequently in the last few decades. Whilst the major music groups dominate music publishing, there is little incentive for their music publishing interests to redress the devaluation of the song relative to the recording. In its reference to the CMA (as recommended in paragraph 111), the Government should urge the CMA to consider how the majors’ position in both recording and publishing has influenced the relative value of song and recording rights.
135.We also received evidence criticising the lack of transparency from music companies and streaming services. Creators and their representatives are routinely prevented from seeing the terms of licensing agreements between record labels and streaming services both during and after negotiations despite the licensing of their works by labels to streaming services occurring on their behalf. As Tom Gray argued “It is very untransparent. It is almost impossible to find out anything. All the deals between the DSPs and the labels are shrouded in NDAs”. These sentiments were echoed by Nadine Shah and Ed O’Brien, who argued that the lack of transparency, combined with the unequal remuneration, has eroded trust between creators and their labels. Ed O’Brien noted the potential for this to discourage younger artists:
I think it has always been tough for artists. I think it is even more murky now with the lack of transparency, the opaqueness in the system, the fact that some partners are making huge amounts of money, some of the labels and things like that. It has always been tough but it feels like it is tougher now.
136.Some evidence we received did seek to provide some balance to the discussion around transparency. Independents such as Jazz Re:freshed argued that one of their unique selling point to creators was greater transparency. Guy Garvey similarly noted that Elbow’s label had provided a level of transparency:
On transparency—and I am referring to notes that I have from my manager, so I am swotting up here, Nadine, I am not claiming to have this knowledge—he says that Polydor accounts every six months show clear and accurate income streams. We have a great relationship with our record label, I feel I should say that. He also says that Spotify and Apple have management apps that show real-time streaming figures and historical data that can be referenced with the label info. He is happy with that element of it.
Similarly, Rupert Skellett argued that often these non-disclosure agreements were imposed from above by other parties:
We obviously cannot show them the deals through Merlin and platforms. We are prevented by NDA clauses from showing our agreements, our licences, that we have direct to artists.
However, it should be noted that, even in these instances, the industry norm is that of opacity, with creators relying on good relationships with labels or company norms for transparency rather than systemic industry-wide practices and obligations.
137.The prevalence of non-disclosure agreements impacts creators in several ways. Non-disclosure agreements create barriers to auditing streaming revenues. This means that creators and their representatives often cannot independently verify whether they are being remunerated correctly. Colin Young detailed the importance of transparency when undertaking audit for all sides of the music streaming ecosystem:
I am constantly met with much resistance and there are always reasons why [the data] is not available, so I am always having to make compromises in the audit. I can never do what I would like to do. It comes with limitations. That is the problem. The audit is there to provide a remedy. It is to remedy mistakes, errors or misunderstandings and it is both ways; there could be a counterclaim, so I am not saying either side is perfect—absolutely not. What I am saying is I need the data to be standardised and consistent, and I need it granular and I need it at source. I need to be able to go back to Spotify and what they gave labels.
Nile Rodgers similarly emphasised the importance of audits for artists in claiming rightful revenues:
The only time that we really get to check to see if things are the way they should be is when we go in and audit. Every single time—and I am not making this up for dramatic or comedic purposes—I have audited a label, I have found money. Sometimes it is staggering, the amount of money. That is because of the way the system was designed right from the beginning.
138.Furthermore, NDAs also prevent the disclosure of proof of sales figures which, in turn, block an artist’s legal right to audit every three years, and the cost of legal recourse for this may fall to the artist. As Helienne Lindvall notes, this means that creators like her “have no legal, affordable avenue to dispute such claims, and simply have to accept whatever royalty payouts these huge corporations pay me for the use of my music”. Second, the lack of transparency disempowers creators by creating information asymmetries when it comes to negotiating terms with music companies and making decisions about which route to market to choose. The costs of this asymmetry is then likely to be borne by creators in terms of reduced royalty rates, advances and other terms through adverse selection. Finally, a lack of transparency has undermined research into inequities of creator remuneration. Most recently, the important IPO-funded study into Creators Earnings in the Streaming Age, mentioned in Chapter 1, has faced challenges due to a lack of data and engagement from the major music companies and streaming services. In a recent damning letter from the Department for Business, Energy and Industrial Strategy confirmed that the streaming services and major music companies have treated the process with apparent contempt. Of the streaming services, only YouTube, Deezer and SoundCloud agreed to be interviewed and none provided relevant data that was not already in the public domain, whilst all major record companies and all but one major publishing company declined the researchers’ requests for further discussions.
139.Artists and their representatives face a systemic lack of transparency from both music companies and the streaming services that license their works. This exacerbates the inequities of creator remuneration by creating information asymmetries and preventing them from undertaking their right to audit. Creators and their representatives have a right to know about the terms on which their works are exploited and verify the outcome of these agreements. It is also deeply concerning that this norm is challenging academic research efforts, including and in particular taxpayer-funded projects, despite efforts to positively engage music companies and streaming services in this endeavour.
140.It is unsurprising, then, that many creators and their industry bodies have, in response, called for greater obligations regarding transparency from streaming services and music companies. However, perhaps as a reflection as to the pervasiveness of industry norms, when asked what policy changes could be brought about to address this issue several witnesses expressed scepticism that such intervention was even possible. Both Tom Frederikse and Maria Forte reckoned in oral evidence that contractual obligations would prevent government from legally intervening. The Department for Digital, Culture, Media and Sport and the Intellectual Property Office seemed to agree with this position, telling us that:
The Government recognises the importance of fair remuneration and transparency in the global streaming environment, while also acknowledging that contractual agreements between rights holders and streaming platforms as well as between record labels and artists are a private matter.
The Government’s submission subsequently takes a passive approach to this issue, simply urging for “ongoing dialogue between music creators, record labels, and streaming services, as they seek to resolve challenges in this area”.
141.It is important as parliamentarians to address any misconception and to reaffirm, therefore, for the avoidance of doubt that Parliament is sovereign within the UK. As such, it is of course within the gift of Parliament to bring about, for example, minimum statutory standards or rights that would apply irrespective of attempts by music companies or streaming services to shut artists out through non-disclosure agreements. Indeed, the European Union has done exactly this: Article 19 of the Directive on Copyright in the Digital Single Market (discussed further in paragraphs 173–8 in Chapter 5) imposes a transparency obligation on entities such as music companies, collecting societies and streaming services to provide creators with transparency reports:
Member States shall ensure that authors and performers receive on a regular basis, at least once a year, and taking into account the specificities of each sector, up to date, relevant and comprehensive information on the exploitation of their works and performances […] in particular as regards modes of exploitation, all revenues generated and remuneration due.
142.The Government has repeatedly told us that it will not implement in UK law provisions akin to those established by the Directive on Copyright in the Digital Single Market. We accept that the Directive is not a silver bullet to the music industry’s problems, but it is a step in the right direction in terms of protections and rights for rightsholders. The Government should ensure that creators in the UK are not worse served that they would have been had the UK remained in the European Union. As a minimum, the Government should introduce a right for performers (or their representatives) to have sight of the terms of deals where their works are licensed, on request and subject to non-disclosure. There should also be notification requirements, requiring relevant parties to provide clear information and guidance to creators about the terms and structures of every deal where creators’ works are licensed, sold or otherwise made available, and the means and methods by which monies that are being distributed to them are calculated, reported and transferred.
382 CMU ()
383 IMPF, Independent Music Publishers International Forum ()
384 IMPF, Independent Music Publishers International Forum (); Qq332–3 [Paul Pacifico]
385 BMG ()
386 “”, The Independent (21 May 1998)
387 “”, Music Business Worldwide (12 February 2017)
388 “”, BBC News (19 July 2004)
389 “”, BBC News (5 August 2008)
390 “”, BBC News (1 March 2013)
391 “”, CBC (11 November 2011)
392 “”, Complete Music Update (11 August 2016)
393 “”, The Guardian (19 December 2017)
394 “”, Music Week (15 July 2019)
395 Q331 [Damian Green MP]
396 “”, Music Business Worldwide (1 February 2021)
399 IMPF, Independent Music Publishers International Forum ()
400 Association of Independent Music ()
401 Competition and Markets Authority, , accessed 2 June 2021
402 “”, Music Week (19 May 2021)
403 “”, Complete Music Update (19 May 2021)
404 The Ivors Academy of Music Creators ()
405 “”, Complete Music Update (12 December 2016)
406 “”, Music Business Worldwide (17 July 2019)
407 Association of Independent Music ()
408 MIDiA Research ()
409 MIDiA Research ()
410 “”, Music Business Worldwide (15 July 2019)
411 “”, Music Business Worldwide (11 May 2018)
412 “”, Complete Music Update (8 July 2014)
413 “”, Music Business Worldwide (18 February 2021)
414 “”, Music Business Worldwide (14 May 2018)
415 “”, Music Business Worldwide (14 May 2018)
416 “”, Music Row (5 February 2016)
417 Q251 [Jason Iley]
418 The Ivors Academy of Music Creators ()
419 “”, Music Business Worldwide (14 May 2018)
420 Q251 [Tony Harlow]
421 “”, Music Business Worldwide (3 August 2020); #BrokenRecord Campaign ()
422 “”, The Guardian (18 December 2020)
423 “”, Financial Times (22 March 2021)
424 The Ivors Academy of Music Creators ()
425 “”, Financial Times (8 December 2017)
426 “”, Music Business Worldwide (10 February 2020)
427 The Ivors Academy of Music Creators ()
428 MIDiA Research (); IMPF, Independent Music Publishers International Forum ()
429 MIDiA Research ()
430 Q332 [Paul Pacifico]; Association of Independent Music ()
432 Helienne Lindvall (); Iain Archer (); Anthony Hamer-Hodges ()
433 Will Page ()
434 Helienne Lindvall ()
435 “”, Music Business Worldwide (15 August 2019)
436 “”, The Guardian (18 December 2020); #BrokenRecord Campaign ()
437 Will Page (); Anthony Hamer-Hodges ()
438 Ben Sizer (); The Ivors Academy of Music Creators (); Q181 [Fiona Bevan]
439 Qq241 [David Joseph], 251 [Jason Iley, David Joseph], 252 [Jason Iley]
441 SCRIPT ()
444 Dr Nicola Searle ()
445 “”, Music Ally (1 July 2019)
446 Qq33, 128, 156–8
447 Sony Music UK & Ireland ()
448 “”, Billboard (24 June 2020)
449 Q381 [Yvette Griffith]
450 Q33; Bournemouth University (); Professor David Hesmondhalgh ()
451 Professor David Hesmondhalgh ()
453 BPI ()
454 Association of Independent Music (); BPI ()
455 BPI ()
457 Music Managers Forum and Featured Artists Coalition (); CREATe: UK Copyright and Creative Economy Centre, University of Glasgow (); SCRIPT (); Dr Hayleigh Bosher (); Musicians’ Union ()
458 SCRIPT (); Musicians’ Union ()
459 Musicians’ Union ()
460 SCRIPT ()
461 Competition Policy International, (23 February 2021)
462 Christian Castle (); CREATe: UK Copyright and Creative Economy Centre, University of Glasgow (); Davo McConville (); Qq9, 14 [Tom Gray], 22 [Tom Frederikse], 493 [Horace Trubridge]
463 Q5 [Tom Frederikse]; Musicians’ Union (); Professor David Hesmondhalgh (); The Ivors Academy of Music Creators ()
464 Q624 [Horacio Gutierrez]
465 Q5 [Tom Frederikse], 624–5
466 Q623 [Horacio Gutierrez]
467 Q513 [Horace Trubridge]
468 Qq490 [Graham Davies], 625 [Paul Firth]
469 Q625 [Paul Firth]
470 Qq238–9, 341
471 Q238 [Tony Harlow]
472 Q341 [Paul Pacifico]
473 Ben Sizer ()
474 Incorporated Society of Musicians ()
475 Mariuzzo, Franco and Ormosi, Peter L., (13 November 2020).
476 Dr Peter Ormosi and Dr Franco Mariuzzo ()
477 Dr Peter Ormosi and Dr Franco Mariuzzo ()
478 Competition Policy International, (23 February 2021)
479 Daniel Antal, Amelia Fletcher, and Peter Ormosi ()
480 Qq402 [Rupert Skellett], 427–31 [Roberto Neri]
488 Music Publishers’ Association ()
489 Qq424–30, 434–6, 452
493 Music Managers Forum and Featured Artists Coalition ()
495 Qq75 [Nadine Shah], 84 94
497 Qq335, 391 [Yvette Griffith], 393
498 Q75 [Guy Garvey]
500 Musicians’ Union (); Creators’ Rights Alliance (); The Ivors Academy of Music Creators (); SCRIPT (); Incorporated Society of Musicians ()
503 Hipgnosis Songs Fund Limited ()
504 Helienne Lindvall ()
505 SCRIPT ()
506 The Ivors Academy of Music Creators ()
507 Department for Business, Energy and Industrial Strategy ()
508 Musicians’ Union (); Creators’ Rights Alliance (); The Ivors Academy of Music Creators (); Incorporated Society of Musicians ()
509 Qq43, 160
510 Department for Digital, Culture, Media and Sport and the Intellectual Property Office ()
511 , Article 19