1. Entertainment and Media: Markets and Economics
Revenues and Royalties The Music Market

2. 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

3. Royalties Book Royalties: Simple
Music Royalties: Amazingly Complicated

4. 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)

5. Kindle edition, $147.63

6. Changing S&D in Music Demand: Supply Owned music vs. Streams
Mechanical, owned music vs. streaming

8. Spotify, for example, counts more than 30 million tracks, each available anywhere and anytime. Because of this, music lovers can now listen to a much greater variety of music – not just the few albums they’ve bought or what’s on locally programmed radio (which is heavily influenced by the major labels, too). This competition has inevitable economic consequences: prices go down and average units sold per album, track and artist drop. This is particularly true for online streaming. Though every music listener has favorite artists, consumption of music tends to be more passive and voluminous than any other media category. The average Spotify user, for example, listens to more than 1,300 tracks per month. When consumption is that great, the value of any one stream becomes slight. The economics bear this out: if we focus exclusively on Spotify paid subscribers ($9.99/month), the implied value of any one stream was $ in Q1 of 2015.

9. This transition is meaningful in a few ways
This transition is meaningful in a few ways. Most obviously, the topline economics vary tremendously across the different services and technology types, with digital distribution currently underperforming by 50-75%. In addition, value is both captured and distributed very differently by channel. Spotify relies almost exclusively on subscription fees and pays rights holders a royalty on revenue, for example, while broadcast radio stations depend almost exclusively on advertising, are free to the consumer and pay a blanket fee for music rights.

15. Total 2013 touring revenues for the top 25 earners: $2,155M
Total 2013 touring revenues for the top 25 earners: $2,155M. The entire market, about $2.5B - $3.0B
Total Royalties: more.
Act Gross Revenues ($M) Iron Maiden 45 Bruno Mars 46 Luke Bryan 46 Lady Gaga 47 Jason Aldean 48 Andre' Rieu 50 Dave Matthews 53 Maroon 5 54 Fleetwood Mac 62 Jay Z and Justin Timberlake 70 Paul McCartney 70 Justin Bieber 77 Madonna 77 One Direction 77 Rogers Waters 78 Kenny Chesney 81 Depeche Mode 91 Beyonce' 100 Taylor Swift 104 Rolling Stones 115 Rihanna 126 Bruce Springsteen 138 P!nk 147 Michael Jackson 148 Bon Jovi

16. Total 2013 touring revenues for the top 25 earners: $2,155M
Total 2013 touring revenues for the top 25 earners: $2,155M. The entire market, about $2.5B - $3.0B
Total Royalties: more.

17. Winners Taking Less Than All

18. Decline of Winner Take All
Yet, what’s typically overlooked by this narrative is that the vast majority of this growth – 83% to be exact – has gone to non-Top 100 touring artists. In 2000, the Top 100 tours (which included ‘NSYNC, Metallica and Snoop Dogg & Dr. Dre) collected nearly 90% of annual concert revenues. Today, that share has fallen to only 44%. Furthermore, the Top 100 tours have faced stagnant revenues for close to a decade, with both ticket prices and sales largely flat:
The most popular artists have seen their primary income stream, recorded music sales, collapse by more than 70% in inflation-adjusted terms since 2000 (~$14B), while their concert revenues have increased by “only” $600M (or 32%).
Meanwhile, independents – the vast majority of whom never generated significant revenue from physical sales – are making considerably more from concerts than at any point in recent history (+$3.2B, or +1,150%) and capturing an increased share of what recorded sales remain

20. Making Sense of Music Royalties
Making Sense of Music Royalties
You do not trigger or incur a royalty claim by listening to music (or by singing Happy Birthday 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

21. 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

22. A Chain of Value (Added)? Music
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

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

24. 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.

25. 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

26. Mechanical Rights Juliet is “innocent”
YouTube is not. (Or, are they a safe harbor?)

27. 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 (

28. CD Costs + Mechanical Royalties

29. Experience is reproducible.
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.

30. New Media: Ringtones
Typical ringtone agreement with phone carrier: Maximum of 4 cents/copy and 10% of retail

31. 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

32. 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.)

33. Royalties for Performers
From:

34. 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?????

35. CRB Outcome in March 2007 Applies to internet radio Minimum $500
A single collection agent: SoundExchange (monopoly?)
Per play rates became impossibly unwieldy

36. Transaction Costs for Webcasters. Pay Per Play
Transaction Costs for Webcasters. Pay Per Play. Noninteractive music distribution This is music as a factor of production.
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
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.

37. New CRB Rates: 2010 
Paid to SoundExchange. Now, how does SoundExchange resistribute these to the multiple record labels and other claimants?

38. Satellite Radio (Sirius-XM) Royalty Rates: Optimal Tax
Satellite Radio (Sirius-XM) Royalty Rates: Optimal Tax. There is no meter

39. 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

40. Capital Cities, 1993
Quoting prior cases:
From the opinion

41. 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)

42. 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)

43. 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.

45. How can companies use these data?
Big Data in Music
How can companies use these data?

46. 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

47. The Users

48. Performance Royalties Market
Internet Radio
Television and Terrestrial Radio
Bars and Lounges
Elevators
Department Stores
How big? $ Several billion

49. The Gatekeepers

51. 14 Million!

52. Spotify is customizable internet radio.
Blanket licenses

53. You “share” the playlist.
Spotify plays the music.

54. New Economy Performances
Internet Radio: Spotify, Pandora, Slacker
Internet Subscriptions: Rhapsody, RealNetworks
YouTube – videos, music videos, musically scored videos

55. 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?

59. 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.

60. 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.

61. 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.