Royalties 4:C - 1(51) Entertainment and Media: Markets and Economics Revenues and Royalties The Music Market

Royalties 4:C - 2(51) Royalties  Royalty rate per “use” is the monopoly price.  Marginal cost = 0, so revenue maximization.  Applications  Patented technologies, drugs, mathematical techniques  Authors  Actors – reruns and syndications  Music  Others?  Outright sale price = DPV of stream of royalties

Royalties 4:C - 3(51) Royalties  Book Royalties: Simple  Music Royalties: Amazingly Complicated

Royalties 4:C - 4(51) Book Royalties “In consideration of the author’s performance… the publisher will pay to the author the following royalties based on the publisher’s net cash receipts: On copies of the work sold in the United States … 15%. However, if in any year, sales exceed 4500 copies, then … 18%” (Econometric Analysis/Prentice Hall)

Royalties 4:C - 5(51) Kindle edition, $147.63

Royalties 4:C - 6(51) Total 2013 touring revenues for the top 25 earners: $2,155M. The entire market, about $2.5B - $3.0B Total Royalties: more.

Royalties 4:C - 7(51) Total 2013 touring revenues for the top 25 earners: $2,155M. The entire market, about $2.5B - $3.0B Total Royalties: more.

Royalties 4:C - 8(51) Making Sense of Music Royalties  You do not trigger or incur a royalty claim by listening to music (or by doing the Macarena around a campfire).  You justify a royalty to the owner of the music when you use music to make money Music is a factor of production. Royalties are the rental paid to use that factor. Music is a commodity that some (iTunes, Verizon) resell to consumers. Royalties are the wholesale price of that commodity. Music is a commodity (experience) that is delivered to consumers, e.g., by Pandora.  There are many different uses of music and many different kinds of royalties and revenue sources

Royalties 4:C - 9(51) Making Sense of Music Royalties The Segments of the Music Market Productions: Concerts, Local Clubs Money: tickets, ancillary stuff ReProductions: CDs, iTunes downloads, ringtones Money: mechanical royalties Performances: Terrestrial Music Radio, Internet radio, webcasting Money: performance royalties Input to further production: Movie scores, Dentist office, local bar, commercials, Duane Reade, hotel elevators Money: performance royalties, Synchronization royalties Input to further development: Sheet music Money: sheet music sales

Royalties 4:C - 10(51) A Chain of Value (Added)? Music  A chain of value added Composer creates the musical work Publisher develops the work and brings it to the public Performer interprets the work and provides the musical experience Aggregators package (mix?) music for further use Distributors deliver music to consumers Rights organizations manage the flow of compensation to the claimants to the value of the works. (ASCAP, BMI, SESAC, Harry Fox, Sound Exchange, many other agencies)  There is a sequence of claims to the value created by the musical work

Royalties 4:C - 11(51) Music Royalties – Where they Go Writers/Composers Sales of music in fixed form (CDs) Public performances Publishers Performers? (no) Recording Artists NONE from public performance (radio, TV, bars, etc.) Digital arena if not interactive and the listener is a subscriber. (From the DPRSRA)

Royalties 4:C - 12(51) The Property Rights  Claims to the stream(s) of rent  The property rights are (nearly all) Mechanical Rights (reproduction) Performance Rights (bars, concerts, internet, etc.) Synchronization Rights (TV Ads, etc.) Print Rights (sales of print music) (sometimes bundled with performance rights)  Additional rights attach to music videos  Digital (online) distribution has created many variations.

Royalties 4:C - 13(51) Synchronization Royalties If a movie company wants to use the song in sync with the picture or for promotion purposes, then it must also pay Synchronization Royalties to the copyright owner for the legal right to use it. These royalties are paid to use the copyright song or music in advertisements, movies and DVD's. A television news company must pay the copyright owner to use it in a track. It can also be applied to live performances like theatres and plays. Web broadcasters must also pay the royalty for using it in wav, mp3 or in any other files, as also for webcasts. The songwriter, publisher or both should also be paid for using the song or the music in a 800 phone message. These royalties are paid to the songwriter or the composer of the original work or the publisher. In some instances, the royalties are paid to the publisher, who will then split it 50/50 with the original songwriter. Synchronization royalties are typically collected by and managed by The Harry Fox Agency

Royalties 4:C - 14(51) Mechanical Rights Juliet is “innocent” YouTube is not. (Or, are they a safe harbor?)

Royalties 4:C - 15(51) Mechanical Royalty from Sales of Recorded Music  Label  Publisher  Composer (50/50) Statutory rate: $.091/song 5 minutes or less or $.0175/minute in 2014  Recording Artist: 8% - 25% of retail price Less 25% of retail for packaging Less other expenses (promotion, tour, music video, manager, producer, band) Net, frequently close to $0 (There is no net?).  Note: Controlled Composition when Composer is the Recording Artist. A separate category – e.g. Paul McCartney (

Royalties 4:C - 16(51) CD Costs + Mechanical Royalties

Royalties 4:C - 17(51) MC to Apple is not really zero. Royalty = 70 cents per tune. Resource cost net of royalty is close to zero. Priced as “downloads” Experience is reproducible.

Royalties 4:C - 18(51) New Media: Ringtones Typical ringtone agreement with phone carrier: Maximum of 4 cents/copy and 10% of retail

Royalties 4:C - 19(51) Music Videos Have Additional Value Produced and owned by the record labels: EMI-Universal, Sony (BMG), Warner Once free: Distributed free as advertising to VH1 and MTV Free no more – millions in royalties paid by users. (1) The music (2) The video (3) The composition of the music with the video

Royalties 4:C - 20(51) Royalties for Performers  The Digital Performance Rights in Sound Recordings Act (DPRSRA) created a right in sound recordings to perform the copyrighted work publicly by means of a digital audio transmission, as well as established a compulsory licensing scheme.  (Compulsory license = the owner cannot deny the request. Disagreements on terms must be litigated.)

Royalties 4:C - 21(51) Royalties for Performers From:

Royalties 4:C - 22(51) Copyright Office Proposal for Webcasting and Rebroadcasting Webcasting (Musicmatch.com, RealNetworks.com, Beethoven.com) Retroactive to 1998 Webcasting: 0.14 cents per listener per song Rebroadcasting of AM or FM 0.07 cents per song Noncommercial broadcaster 0.02 cents for radio rebroadcasts 0.05 cents for Internet only programming What do these numbers mean. Where do they come from? Who gets the royalty income?????

Royalties 4:C - 23(51) CRB Outcome in March 2007  Applies to internet radio  Minimum $500  A single collection agent: SoundExchange (monopoly?)  Per play rates became impossibly unwieldy

Royalties 4:C - 24(51) Transaction Costs for Webcasters. Pay Per Play. Noninteractive music distribution This is music as a factor of production. comparison-of-how-much-various-services-pay/ Broadcasters Per Performance Royalties 2011 – $.0017 per performance 2012 – $.0020 per performance 2013 – $.0022 per performance 2014 – $.0023 per performance 2015 – $.0025 per performance Statutory Webcasting Per Performance Royalty Rates 2011 – $.0019 per performance 2012 – $.0021 per performance 2013 – $.0021 per performance 2014 – $.0023 per performance 2015 – $.0023 per performance Pureplay Webcasters Per Performance Royalty Rates 2011 – $ per performance 2012 – $ per performance 2013 – $ per performance 2014 – $ per performance 2015 – $ per performance Royalty is per song play or based on average listening hours.

Royalties 4:C - 25(51) New CRB Rates: 2010  Paid to SoundExchange. Now, how does SoundExchange resistribute these to the multiple record labels and other claimants?

Royalties 4:C - 26(51) Satellite Radio (Sirius-XM) Royalty Rates: Optimal Tax. There is no meter

Royalties 4:C - 27(51) Understanding CRB’s Rates The law requires rates to be based on the price that would be set by a marketplace of willing sellers and willing buyers. Much of the discussion centered around deciding issues like who would be the willing sellers. The Board decided that an individual record company was the basic unit of a "willing seller". This is an impossible construction. There can be no such market outcome. See Capital Cities, page 7

Royalties 4:C - 28(51) Capital Cities, 1993 From the opinionQuoting prior cases:

Royalties 4:C - 29(51) On Economic Viability An issue that smaller webcasters raised was the desire to be assured that their fees would not exceed their revenue. The Board rejected this reasoning in their final decision because the ability of smaller stations to generate revenue from their operations has little or no bearing on the market value of the rights held by the copyright holders. (Protecting competitors vs. protecting competition)

Royalties 4:C - 30(51) Mechanical vs Performance Royalties Variations on 70 cents/tune – paid to SoundExchange If you listen to the music while you download it, is that a performance that triggers a royalty obligation to ASCAP? (No.) If you listen to music on the site (sample it before buying it) does that trigger a performance royalty? (Yes)

Royalties 4:C - 31(51) Digital Performance Royalties Digital royalties are fees that digital radio services, such as Pandora, SiriusXM, webcasters and cable TV music channels are required by law to pay for streaming music. These royalties are paid by the services to SoundExchange, and accompanied with playlists of all the recordings played by the service provider.

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Royalties 4:C - 33(51) Performance Royalties  Song is added to PRO data base (“collection”)  PRO tracks the royalty trail (TV, Radio, Concerts, Restaurants, Elevators, etc.)  Revenue (minus fees) is distributed Source of profit: Low (zero) marginal cost, economies of scale.  Usage is estimated using statistical sampling

Royalties 4:C - 34(51) The Users

Royalties 4:C - 35(51) Performance Royalties Market  Internet Radio  Television and Terrestrial Radio  Bars and Lounges  Elevators  Department Stores  How big? $ Several billion

Royalties 4:C - 36(51) The Gatekeepers

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Royalties 4:C - 38(51) 14 Million!

Royalties 4:C - 39(51) Spotify is customizable internet radio. Blanket licenses

Royalties 4:C - 40(51) You “share” the playlist. Spotify plays the music.

Royalties 4:C - 41(51) New Economy Performances  Internet Radio: Spotify, AOL, Yahoo  Internet Subscriptions: Rhapsody, RealNetworks  YouTube – videos, music videos, musically scored videos

Royalties 4:C - 42(51) Royalty Rate Determination: Questions  Why do we need the Copyright Royalty Board?  Why do we have the special court for determining performance royalties (ASCAP, BMI, SESAC)?  Why do we have ASCAP? (and BMI)  What economics motivates these?

Royalties 4:C - 43(51) Free users trigger performance royalties Premium users who customize their own playlists trigger mechanical royalties

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Royalties 4:C - 47(51) U.S. vs. ASCAP, 2008  How to tax the internet users of music  An optimal tax based on public finance principles: Zero marginal charge Flat percentage of total advertising revenue.  ASCAP won.

Royalties 4:C - 48(51) A Threat to ASCAP and BMI Blanket License Business Model 1. DMX licenses all 5,000,000 ASCAP titles and pays $40/location for the right to use all the music 2. DMX separately obtains a license from SONY to use SONY music in its locations. $25/store 3. DMX requests that ASCAP reduce the $40 by the proportion of the total ASCAP music they use that is SONY music. Reduced fee to about $15. Under AFJ2 and compulsory licensing, BMI and ASCAP both said no. DMX sued in rate court. DMX won both cases.

Royalties 4:C - 49(51) DMX Case: Analysis  DMX purchased from SONY a license it already had from ASCAP  SONY did not sell anything to DMX – SONY could not prevent DMX from using SONY music even if it wanted to.  DMXs deal would be a total loss if they lost the rate cases.  Under AFJ2 ASCAP and BMI are not able to sell separate licenses for SONY and others.  DMX won both cases.  Where do they go from here? … stay tuned.

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