“Artists are raped”
In a recent interview with Joe Rogan, Kanye West used this language to describe how record labels treat artists.
A little shocking, I know. But I think that was his point.
Kanye’s Twitter storm about this contract with Universal Music Group (UMG) provides context for his hot take. Like all record label contracts, UMG uses the word exploitation to describe their relationship with Kanye. In the podcast with Joe Rogan, Kanye was referencing these complaints about the exploitation of his’ music’s intellectual property rights. If you saw his tweets, you probably read a lot about his mission to get him and other artists, like Taylor Swift, rights to their masters.
Kanye’s goals are much bigger than this, but the exploitation of the artist’s intellectual property rights is the foundational flaw to the industry. The rise of streaming platforms changed the artist’s business model and made this exploitation exponentially more unsustainable. Kanye’s current mission is a big deal, and UMG desperately wants this buzz to quietly fade away into the noise of our crazy news cycle.
Artists have a long history of copyright battles with the record label companies. This battle spans back to the early 20th century when Congress passed the Copyrights Act. The most recent version of this act was passed in 1976. They’re arguably outdated and don’t address artists’ needs in the world of streaming.
To piece together Kanye’s complaints about the intellectual property rights for his masters and their implication for the industry at large, we need to begin with a lesson in the fundamentals of music copyrights. Without it, Kanye’s screenshots of his contract with UMG is a convoluted mess.
The Fundamentals of Music Copyright Law
At heart, Kanye’s copyright battle with UMG is a struggle over ownership and authority. As with any intellectual property, all use of Kanye’s music requires permission through the use of a license. Copyright holders such as artists and record labels make their money by licensing the use of their music for a fee. These fees are called royalties.
Division of Copyrights
Copyright law divides the intellectual property of music into two categories, composition and master:
The composition is the written form of the song. It can exist on paper or as a recording. The critical distinction is that it establishes the lyrics and melody of the song. Because of the Copyrights Act’s precedence in 1909, most songwriters split ownership of this copyright 50/50 with the publisher. They split this because the publishing company typically helped with the song’s production and was traditionally responsible for acquiring the copyright. In Kanye’s case, his contract provided him full ownership of the composition copyright.
Master Recording Copyrights:
The master recording is the specific recorded instance of an artist’s composition. This copyright belongs to whoever is responsible for recording the song. As in Kanye’s case, the record label is typically the owner of the master recording copyright.
Division of Royalties
The division of these two copyrights has major implications on the type and amount of owed royalties. There are three categories of royalties, Mechanical, Performance, and Master:
When someone uses an artist’s composition to create a new song or distribute the existing one, they owe the artist a mechanical royalty. Before the digital age, the industry tracked this royalty through the literal printing of the composition. The Copyright Royalty Board now states that companies owe a 12% mechanical royalty each time a composition is streamed, used in a film or advertisement, or sold.
When someone publicly performs a composition, they owe performance royalties. Traditionally, artists collected these from radio stations, music venues, and bars. Performances don’t have to be in public to be public, though. Now they are collected from streaming platforms. Like a bar, streaming platforms play the music they own for their patrons. It is public, even if someone is listening through their headphones. Since streaming is a new medium, they split 10% of revenue between mechanical and performance royalties.
Companies owe these each time they use a recording in an advertisement, film, television program, streaming service, or another medium. These royalties didn’t receive much attention in the past because they represented a small fraction of the industry. The record labels who owned these copyrights would charge expensive royalties anytime a filmmaker or advertiser would use them. The disruption of digital streaming services increases the ubiquity and value of these royalties and is why artists like Kanye West and Taylor Swift are catching on.
How The Market Values Master Recordings In the World of Streaming
There are two reasons master recordings are so important. The first is that they represent 50-57% of the streaming royalty payouts. Secondly, they are passive income. These two points are great news for music groups like UMG.
Before the streaming model, these music companies would collect a profit, if any, once they paid the artist, distribution, and production costs. Streaming services radically disrupted that process. They bypassed all of those physical distribution hurdles to get music seamlessly into consumers pockets. Now, labels quietly sit on the side line and collect major profits from the exploitation of artists master recordings.
This change in the music industry is so favorable to music conglomerates that they are going public for the first time. Warner Music recently launched its IPO, and UMG has made plans for a public offering in 2023. These growth plans dramatically change if these companies do not own the rights to master recordings.
Under the current payout structure, artists and publishers only receive 10-13% of streaming payouts in the form of mechanical and performance royalties. Contracts signed 10-7 years ago did not consider the streaming services disruption to the music Industry. These contracts didn’t just leave a lot of money on the table for prominent artists like Kanye West; they created an unsustainable business model for smaller artists. Kanye’s frustration over these standards isn’t pure self-interest. He and others like Taylor Swift feel a responsibility to create a fair system for all artists.
To understand how the current streaming payout structure is unsustainable for smaller artists, you have to see how the new subscription model compares to the older sales model. Our next article examines this in How Big Labels Squeeze Local Artists Out of The Growing Streaming Pie.
This flawed model has more significant implications for the future of streaming. We explore this and the Goldman Sachs economic forecast for steaming services in Artists Are Equity | What Kanye’s Fight Needs to Save The Future of Music.
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