Section 1.3

• Jurisdiction: New York

B. Other Developments in the Industry

Not all changes resulting from technology are negative. For one thing, the development of the digital marketplace has made it easier for recording artists and small, independent record labels to make their product available to consumers. Many observers believe that the large, fully staffed record label is no longer essential. Access to digital retailers is readily available, either directly or through companies serving as "portals" to iTunes, Spotify, and other large digital retailers. With the overall decline in the physical record business, access to traditional "physical" distribution operations has become somewhat easier as well.⁸ The growth of the "big box" retail stores (discussed in more detail below) has allowed certain "superstar" artists to bypass record labels altogether by making a deal directly with a major retailer for the sale of an album. Thus, in 2007, the Eagles delivered their "Long Road Out of Eden" album exclusively to Wal-mart, and in 2008 the "legacy" band Journey delivered a three-CD package exclusively, also to Wal-mart, in both cases without the involvement of a record label. Other artists with significant fan bases have recently elected to make new albums available directly to consumers through their own websites or through direct relationships with digital services without the involvement of a record label.

The most significant business development since the prior edition of this chapter has been the coming of age of the on-demand streaming business. An on-demand streaming service allows the consumer who is connected to the service through the Internet to play selected recordings in real time, on demand. Unlike a download service such as iTunes, the streaming service's customer can't store the recording for future playback at a more convenient time, and can't make reproductions of the recordings.⁹ Streaming services currently adopt one of two models. A few services are free to consumers, and rely on advertising revenue to generate profit. Most services generate revenue by charging customers a monthly subscription fee. Spotify is an example of the former (although it also has a "premium" subscription-based service), and Apple Music, Google Play Music, and Tidal are examples of the latter.

In the last several years, on-demand streaming services have experienced strong growth. In March 2017, Spotify announced that it had 50 million paid subscribers. That represents a 20% increase since 2016.¹⁰ In June 2017, Apple announced that it had 27 million subscribers, up 35% from six months prior.¹¹ Universal Music Group, the largest of the "major" record companies, saw a 60% growth in streaming revenues in 2016 over the prior year.¹² Indeed, in 2016, for the first time, streaming revenue represented more than 50% of the U.S. recorded music revenue.¹³

The sheer number of individual streams is striking. In 2016, 27 different tracks achieved over 200 million streams each; six tracks achieved over 500 million streams.¹⁴

Despite this growth in subscription revenue and in streaming activity, the record companies and artists remain concerned that streaming services generate a relatively anemic amount of revenue for the company and the artist. The royalty payable to the record label for each stream is a fraction of a penny; a million streams only generates several thousand dollars in royalties for the label. (The royalties payable to the labels are based on a revenue pool, pro-rated based on the amount of revenue received by the service and the number of streams in the accounting period and, therefore, the amount of the per-stream royalty will vary from month to month.)

It is rapidly becoming apparent that streaming is the future of the recorded music business. This represents a sea change in consumer habits. Historically, revenue in the business has been generated by the sale to consumers of records, which are then "owned" by the consumer. Consumers can place a purchased CD on their shelves, keep a digital file of the record on their computers, play back the record whenever and wherever they want, and make individual copies of the record for their convenience. Streaming services replace this "ownership" model with a model based on "access." The consumer doesn't "own" anything. Instead, as long as the consumer subscribes to the service and has an Internet connection, he or she will have on-demand access to the music. As a practical matter, the difference between "ownership" and "access" may be inconsequential, but the psychological and emotional differences may be significant.

The growth of the digital streaming market has been accompanied by a severe decline in the sales of physical records and digital downloads. In 2016, physical sales and digital downloads represented only 21.8% and 24.1%, respectively, of U.S. recorded music revenues.¹⁵ Indeed, some major artists have released digital-only albums; some have released albums exclusively in digital format for a "window," with a physical release held back for a period of time. In addition, many less well-known artists, particularly in contemporary music genres such as electronic dance music, are releasing albums in digital formats only.

Several other developments in the recorded music business are important to note.

First is the increasing concentration of the business. In the third edition of this book, the authors of this chapter noted that, as of the beginning of 2003, there were five major record companies in the United States:¹⁶ Sony Music, Warner Music Group, EMI Music, BMG and Universal Music Group. As of this writing, there are now only three majors: Sony (which merged with and absorbed BMG), Warner Music Group, and Universal Music Group (which acquired EMI Music in 2012). One consequence of this greater concentration is that the competition to sign new artists has declined. Although there remain numerous smaller, independent record labels, for the artist who wants the comfort of a major label, there are fewer choices and fewer opportunities.

Second is the shrinking of the physical record market and the growth of online retailers such as Amazon, which has led to the decline of traditional "brick and mortar" record stores. In recent years, the number of local record specialty stores has declined and the well-known national chains such as Sam Goody's and Tower Records have largely disappeared. The bulk of the brick and mortar record sales in the United States takes place in the record departments of the larger, multi-product "big box" stores such as Wal-Mart, Best Buy, and Target. In fact, in 2007 Wal-Mart was the largest retailer of recorded music in the U.S.¹⁷ However, the re-emergence of vinyl records as a specialty market with a growing fan base has led to a modest resurgence of physical record stores, particularly for smaller, local independent stores.

Third is the increasing frequency of windowed or exclusive releases on on-demand streaming services. Many record labels have entered into arrangements with digital services where the label grants to the service the exclusive right to stream a single or an entire album for a limited period of time (or for an indefinite period) before that record is more broadly released to other services and in other formats. Taylor Swift, Drake, and Frank Ocean (Apple Music), Beyoncé, Jay-Z, and Kanye West (Tidal), and Garth Brooks (Amazon) are all examples of this new approach. In fact, such windowed releases have been described as "the new normal—at least for superstars."¹⁸

The fourth development of note is the relatively recent creation of a digital performance right in sound recordings. Sound recordings were not subject to federal copyright protection until 1972, and the amendment to the U.S. Copyright Act that extended copyright protection to sound recordings expressly disallowed any exclusive public performance right in sound recordings.¹⁹ However, in 1995, Congress passed the Digital Performance in Sound Recordings Act (DPRA), which gave owners of sound recording copyrights the exclusive right to publicly perform their sound recording by means of digital audio transmission.²⁰ As a result, record labels and artists now receive royalties from digital radio and streaming services.²¹ The royalty rates applicable to Sirius XM radio and similar "non-interactive" digital radio-like services are set by the Copyright Royalty Board pursuant to compulsory licensing provisions of the DPRA (although services and the owners of sound recordings may negotiate voluntary licenses).

These royalties are generally paid by the services to SoundExchange, a non-profit performance rights organization authorized by the Copyright Royalty Board to collect royalties from satellite radio, internet radio and cable TV music channels and to distribute royalties to sound recording owners and to artists.²² The largest payors of royalties to SoundExchange are Sirius XM and Pandora. Because SoundExchange pays the...