Assets and Equity

Assets. They have long complicated music industry economics. Record companies have argued that they deserve to own the majority of sound recording copyrights because a minority of artists succeed. They need to keep the copyrights of the 10% of artists who recoup their advances in order to pay off the losses of the 90% who are in debt. While the losses from ‘unsuccessful’ artists are detailed in record company balance sheets, the value of their copyright catalogues does not appear there. Nevertheless, as the Music Managers’ Forum has argued, ‘the copyright catalogues of the record companies are their most valuable asset’. Traditionally, the biggest deals that have been made in the business have arisen when these catalogues have been sold on to other companies. These transactions have happened when the major companies have merged with one another and when larger companies have bought up indie labels. Derek Green, head of China Records, made the economics of the indie sector clear:

Well, the only reason we do it is because on our balance sheets we have the value of our masters and the value of our contracts marked as zero. Therefore technically every year our accountants tell us we’re bankrupt. But what we really know and believe is that the majors will pay millions to buy us.

The crucial factor about these takeovers is that the money went to the owners of the record companies that were being sold. Unless artists happened to have equity in the company, they would gain little, nothing or perhaps even lose out from the sale. There are many stories of artists who found themselves marginalised when transferred to a new corporation.

            The sale of one record company to another did at least have a degree of honesty and transparency about it. The owner of the record company that was being sold would be profiting from an institution that he or she had overseen. The assets up for sale were the recordings that they had invested in, even if some of those recordings had been fully subsidised by artists who had recouped.

Streaming provides continuities and discrepancies with this model. We still have the situation whereby companies are making little profit – even Spotify is running at a loss. The low sums of money being generated by these companies is presenting a problem for record labels, whose income from streaming is, in the first instance, based on a share of advertising and subscription revenues. The record companies’ songs might be being streamed billions of times, but this doesn’t mean that advertisers are willing to invest in these new advertising platforms or that consumers are willing to upgrade to subscription services. Last year in the UK there were 14.8 billion individual audio streams and 14.3 billion video streams. Despite this vast traffic, the money generated by subscription services only constituted 12.4% of the total income for recorded music, while the money from ad-supported services - although it was the avenue for the vast majority of those 29 billion streams - only constituted 3.5% of the same market. In total, the income from streaming contributed £115m to the UK’s recording ‘sales’ last year. Vinyl albums and CDs, meanwhile, contributed £320m. Record companies are nevertheless continuing to have faith in streaming services. If the income generated by these services hasn’t managed to offset the decline in physical and download sales, streaming is having the effect of converting ‘pirate’ users of musical content into legal consumers.

What is more significant for our immediate purposes is that record companies have found diverse ways to generate income from streams. Their share of advertising and subscription revenue is backed up by minimum guarantees. Each record company who enters into a licensing agreement with a streaming company will be guaranteed a minimum sum each time one of their tracks is played. In addition, some record companies receive a guaranteed sum for each subscriber who signs up to the streaming company. These minimums only come into force if the revenue target is not reached. In the instances where this income did come into play last year, it will have been reported as part of the total streaming income of £115m.

There are, however, areas of streaming income that are not reported on the record industry’s balance sheets. Most importantly, record companies demand equity in streaming companies as part of their licensing agreements. Here, as the MMF have identified, there is an echo of the ‘bankrupt’ nature of indie record companies. Just as those old indie companies were aware that their impoverished balance sheets disguised the fact they could be worth millions if sold on to larger record companies, today’s record labels are aware that, when it comes to streaming, the ‘single biggest revenue generator may be the sale of the streaming business, either to an existing major tech or media firm or through flotation on a stock exchange’. What is more, the record labels might even ‘agree to less favourable terms on revenue share and minimum guarantees, where income is shared with the artists, in return for a better deal on equity’.  And who will get the money from the sale of the sale of the streaming companies? The MMF have reported that:

The assumption is that many labels will keep these profits in their entirety, citing clauses in artist contracts that say the record company is only obliged to pay royalties to artists on income directly and identifiably attributable to a specific recording.

Here there is a difference to earlier practice. The record companies will be profiting from the sale of companies that they haven’t even had a hand in creating. The labels might argue that they have provided the essential content that has transformed streaming companies into valuable commodities, but that content is sound recordings, which have been created and in some cases paid for by recording artists. The record companies will not even be selling this content on to the new purchaser of the streaming company: the purchasing corporation will still have to licence the recordings. No wonder then that it is artists, rather than record companies, who are raising questions about the land of streams.