The Global Outpost

This article was also published on Hypebot

The Recent Past

Much of the initial enthusiasm that accompanied the opening up of the Chinese music industry with the advent of the internet, usually supplemented by a hopeful but misguided reference to 1.3 billion people parting with their money, has since whittled down to a more pragmatic approach. Over the past few years, China’s music industry has seemed to vacillate between cautious optimism and a modicum of despair.

The intervening years, during which mega companies like Baidu exploited the works of musicians for their own profit, seem to have left many jaded and a sense of defeatism has numbed many musicians into receiving any sort of remuneration, if at all. Every single music service currently operating in China has its roots in a pirated model.

A few years ago, there was a blaze of publicity perpetuated by Baidu that it had finally turned legit, and endorsed by the major labels, which were no doubt facilitated by sizeable payoffs to turn a blind eye whilst Baidu willfully continued to pirate the music of non-major artists. Since then, Tencent’s QQ Music has been one of the first big music services in China to attempt to become a more large-scale legitimate service, by starting to license the majority of the music it carries. Subsequently, one by one, the other music services started to pay licensing fees for some of the music they carry, often paying high advances to top artists and labels, but low fees to mainstream artists and labels, and pirating the rest.

Now

The main players currently are Tencent’s QQ Music, China Music Corporation’s Kuwo and Kugou, Baidu Music, Alibaba’s Xiami and TTPod (Tian Tian Dong Ting), Duomi, Douban FM, and NetEase (Wangyi) along with mobile telcos China Mobile, China Unicom, and China Telecom. None of the global music services such as iTunes, Spotify, YouTube, Rdio, Deezer, etc. are available in China.

Smaller labels are at a distinct disadvantage, as China’s music services are often reluctant to pay them anything even though some of their music might be blatantly carried by these music services illegally. Foreign labels and distributors are also discriminated against, with music services claiming that few listeners bother about international music so as to avoid paying license fees or at least to keep them at a minimum. This might ring true for music by some artists, but for others like Adele, this is simply a lie told well.

The streaming and download figures displayed on numerous services, which are all unverified, include fake numbers and are influenced by close cooperation with selected labels. In some cases, it’s the music service pushing select artists who they believe could help drive more traffic.

Whilst a lot of the attention outside China has been about the rise of streaming and the accompanying bitching about payouts, China has forged its own path, with many adopting streaming in conjunction with the near-death of physical products accompanied by the winding down of downloads. With the relatively low adoption of mobile 3G in China, for practical purposes many cache 30-50 songs on their mobile phones from streaming services for listening on the go. Once 3G/4G becomes mainstream, mobile streaming will be even more dominant.

Market Size

Physical product has been on a downward spiral and according to the IFPI, CD retail shipments totaled only 2.5m units in 2014, down from 3.6m in 2013 and generated only $13.1m in revenue for the labels.
Based on trade activity, the IFPI reported that digital income rose to $91.4m in 2014, from $82.2m in 2013. Estimates for past annual earnings of the telcos from music put the figure at around US$30m but this has dropped in recent years, and will continue to do so.

Music and Copyright’s recent China Music Industry report had the following caveat on trade and retail differences:

“Assessing China’s recorded music industry by record company earnings tells only half the story, given that there is a big difference between trade earnings and retail sales. When physical soundcarriers were dominant, trade revenue and retail sales differed by around 30% because of the retail markup, but, for some digital formats, the difference between the trade and retail prices can be significantly larger.
Music subscription services in China pay advances to rights holders and offer minimum guarantees that may not be recouped. This means trade revenue figures often inflate the actual value and popularity of the services. In contrast, mobile personalization through ring tones and ring-back tones (RBTs) generate little in trade earnings for rights holders but are a significant, if decreasing, income source for telecoms operators, since rights holders receive only a tiny share of the retail price of the two mobile formats. Measured in terms of actual consumer spend on recorded music, mobile personalization is likely to still account for the biggest share of total recorded music spend. “

The Digital Distribution/ Content Acquisition Model

This article covers only digital distribution, as physical has become very much a niche product in China.

Digital distribution in China by definition is a misnomer in many cases. Global mainstream music services receive their audio files from labels, distributors, and assigned content aggregators after contracts have been signed. But in China, most music services acquire music audio files and metadata – from non-label sources via in-house content farms that till the internet and download the music they require, sometimes via darknets – without any licensing contracts being signed, ie. illegally. Using a combination of crawler software to siphon large quantities of audio files off the internet, and downloading files via sheer manual labor from various sources on the internet, music services then use these to populate their library, which are then brazenly made available to consumers.

The role of distributors, labels, and publishers in China includes pursuing these music services and hashing out a suitable deal. Even after a deal has been struck and with the distributor/ label ready to deliver content directly to these services, many of these services continue to maintain their content farms as their main source of audio files and metadata. Most Chinese music services are unable to process XML or DDEX formats for ingestion, making it harder for international distributors to tap into these music services directly. QQ recently experimented with a self-uploading platform targeted at independent artists, but it is unclear whether there is a revenue-sharing component for artists.

With limited means of monetizing music directly, combined with inefficient content management and bad metadata, this has meant that music services in China are interested in carrying only a finite number of tracks in order to reduce their overheads whilst maximizing the exploitation of user traffic. For example, QQ has an estimated 4m tracks, followed closely by Kuwo at nearly 4m, and then come all the rest, with 1-3m tracks each. This compares unfavorably with the 35m tracks on iTunes and more than 25m on Spotify globally. It is worth noting that there are at a maximum between 250,000 and 300,000 commercially viable Chinese songs, so any expansion in terms of content would have to involve international music.

So the question is, are Chinese users ready for infinitely more content if the necessary infrastructure for metadata, artist information, and promotions that will make all this additional music relevant to users, is not there? Or will this just be an ‘arms race’ for the various music services for marketing purposes or to point missiles at each other in terms of exclusive content? There are only a couple of true music distribution companies in China, yet distribution contracts are being signed and announced by various other music services with no existing distribution teams – a bizarre situation indeed.

This can only mean that content is being signed as bargaining chips between rival music services and as a front for acquiring exclusive content for these services under the guise of ‘distribution’. On the plus side, this might also result in music services and distributors aggressively policing their content against piracy, a situation that few could have imagined a few years ago. But the flip side is that artists whose aim is to make their music accessible to as many Chinese fans as possible are going to be frustrated.

The Business/ Consumer Payment Model

Currently, all music services in China offer music to consumers for free. For some, the music service is merely an appendage by which to draw in user traffic, which they then divert and monetize by other means, especially for the bigger portals like Baidu. It is rarely about the music at all, which is a sad state of affairs for the purist.

So the race is on amongst the various music services to quickly draw in more consumers and with the least amount of resistance, and hence their adoption of the free model for now. For the pure-play music services, advertising is one of their main sources of revenue, but with shrinking CPMs, they are often tempted to find less savory methods to monetize the traffic. There are also partnerships with the mobile telcos, hardware manufacturers, and other companies, but these bring in relatively small revenues.

With free music, there is little incentive for companies to either improve their services or increase their catalogue size, as these would add on to costs but bring in only marginal returns of increased revenue. In the long term, with the current infrastructure model and low CPMs, free music does not appear to be a sustainable model for pure-play music services if there is no clear upgrade path to higher-value paid music, especially once they start paying content owners actual revenue based on the true valuation of content. Music fans will also be left unsatiated, as there is little incentive for the services to improve their service and expand their music offering.

Currently, there is a semblance of premium services labelled as VIP tiers offered by some of the music services, but these are only token offerings with minimal benefits and are not sufficiently differentiated from the free services and hence suffer low take-up rates. Costing RMB 5-10 (US$1-2) monthly, the common thread in their premium offering seems to be high-quality audio at 320kbps with no advertising and the opportunity to buy priority concert tickets. For an audience inured by an onslaught of ads in most of their online activities and not bothering about audio quality via their devices, these benefits are unattractive and have not moved the needle at all.

Mobile

Ringtones and Ringback Tones are not really about music per se, and bring more value to the mobile telcos than to the labels in terms of revenue. It is also said that consumer purchases of Ringback Tones are not a mere organic affair, as the telcos have been known to sometimes force these products onto their customers, especially during festive seasons. For the top artists selected for the exercise, it still delivers good revenue, but on the whole, a downward trend has been noted in the consumption of Ringback Tones.

The telcos have a limited library and will only take in music they deem worthy of their limited virtual shelf space. For each track they ingest, they will also have to prepare it into about 20 different mobile audio formats, leading to physical resource constraints that dictate their reluctance to open their door to content from every other label. In addition, there is a high burden of proof of ownership on labels and publishers with the need to supply supporting authorization letters from all rights holders and companies involved, all the way up to the artist level, and this creates a further barrier.

Publishing Rights

There is a specialized line of distribution for the often ignored but critical area of publishing that has developed in China. There are probably only two distribution companies in China that are capable of understanding and managing this area of distribution of publishing rights. It is also important to note that some of the major publishers and other sizeable independent publishers have not assigned their digital rights to the collection society, Music Copyright Society of China (MCSC) and instead have engaged independent distributors to this task. Whilst the MCSC is already covering a lot of ground, the content of many other publishers needs to be policed, which they assign to individual distributors in China to negotiate and deal directly with the music services to license accordingly. Most of these deals are on a negotiated advance payment basis (see also Royalty Reporting section).

Music Video Services

With a more stabilized digital video landscape having developed over the past couple of years, the main players that carry music videos are Yinyue Tai, Tencent Video, Youku/ Tudou, Baidu’s iQiyi, Sohu Video, Ku6, and LeTV. Even though these services have licensed large numbers of long-form video content like TV series and movies, they are still lagging in terms of licensing music videos and paying fair revenues.

Although most of them — with the exception of Yinyue Tai, Tencent Video, and Youku/ Tudou — carry only a small percentage of music videos relative to their total content, distributors, labels and publishers will still have to negotiate with all of them for due advance payments, as they are usually using these music videos without prior licenses. Youku/ Tudou carry many music videos but is reluctant to pay the labels for them, and will simply take them down when asked to share revenue. Yinyue Tai, one of China’s biggest music video sites, is currently facing problems with paying rights holders their due license fees; this is a situation to be monitored.

Even though internationally YouTube has been accused of paying low rates to rights holders, it has a more robust monetization and content ID copyright monitoring system than these Chinese video services. Until more effort is devoted to developing the monitoring system and installing a proper payment system, distributors and labels will just have to negotiate with each music service individually, though the revenue returns are not likely to be significant for now.

Royalty Reporting

Royalty reporting, or the lack of it, is one of the biggest areas holding back the long-term development of a healthier music industry ecosystem in China. Currently, China’s music services do not provide royalty reports or have systems that properly track music consumption by users. Licensing transactions are based on negotiations, which lead to upfront advances, and in most cases, these are simply buyout payments. Moreover, the music services do not provide any further revenue above and beyond these buyouts, as there is no proper reporting mechanism in place for labels and publishers to review if these amounts have been recouped.

More critically, the lack of royalty reports makes it difficult for labels and publishers to subsequently distribute the advances received and pay their artists and writers. However, for most international artists in the short term, any divvying up of advances as royalties should be welcome for now, as in all likelihood, they might be receiving more than what they were entitled to for their likely minimal number of streams or downloads in China.

On the mobile telco front, China Mobile and China Telecom are more regular with their line-by-line royalty reports, which are usually delivered 3-6 months after the transactions, but China Unicom has been messier, with its reports being as late as a year.

What Next?

The music distribution market is currently in a state of flux but is moving into an exciting phase. Relatively large amounts of money are being paid for some of the more sought-after artists and label repertoire in the short term but the music of other artists is being used without proper licensing or remuneration.

However, without better accounting and royalty reporting by the music services, there are going to be injustices that imply the new model is not much better than the old model in the long term if the infrastructure is not developed to ensure that artists and writers are paid more equitably. An ‘arms race’ to sign up more content either in the guise of ‘distribution’ or as exclusives will only benefit artists in the long term if proper promotions and artist information are developed alongside it.

Mathew D is the President of R2G

The following is Part 2 of a 2-part series examining the less obvious aspects of the state of music piracy. Part 1 can be read here.

Part 2 – The Artist as the Victim

Meet the New Boss… 

It is too simplistic a notion to throw all consumers under the bus as the main agents of piracy whilst corporations invoke the name of the artist to generate revenue, but then subsequently engineer creative accounting systems and interpretations of the law to deprive these same artists of their rightful revenues. As David Lowery of the bands Cracker and Camper van Beethoven astutely observed in his critique on the state of affairs, “Meet the new boss, worse than the old boss?”,

The tech side of the music business really needs to look at how their actions and policies negatively impact artists,  just as they have pointed out the negative effect record company actions have had on artists. Too often the debate has been  pirates vs the RIAA.  This is ridiculous because the artists, the 99% of the music business are left out of the debate.

Unfortunately, artists who have spoken out intelligently against the  injustices of the current system are often brush-stroked broadly by the digerati/ tech lobbyists as  “dinosaurs……luddites or doddering old hippie musicians.”

It is also ironic that in this digital age where processes and resultant royalty earnings can be mapped down to the minutiae, transparency is the enemy and obfuscation seems to be the norm in the music industry. And the biggest loser seems to be artists.

Artists Beware…

How do they screw thee? Let me count the ways
They screw thee to the depth and breadth and height
Their hands can reach, grab your money out of sight

 

1) Equity, Advances/ Breakages, Piracy Settlements

The newest shenanigan in the hall of shame is the side deal which some labels have been making with music services for equity and non-recoupable advances that will not be paid to the artists they supposedly represent, with both music services and labels conveniently hiding behind non-disclosure agreements that serve more to keep the information away from the artists than to preserve business confidentiality.

Robb McDaniels, CEO of music distributor INgrooves, recently shared his insights on major labels’ machinations on market share:

”I have long wondered why major labels and publishers care so much about ‘market share’, seemingly above even generating profits (at least at the distribution/JV level). I now realize that it is because there is so much non-recorded music revenue generated from the market share metric. Things like equity stakes in startups, non-recoupable advances and fees from retail and promotional partners, black box funds from performance royalties not collected by indies and “in store” promotional space.”

Rich Bengloff, head of the Association of Independent Musicians accused some of the majors of extracting equity deals and/or huge advances from streaming sites like YouTube and then jointly engineering low ‘standard’ per stream rates so that they only need to pay through a fraction of it to artists.

Bengloff added:

“Then, on top of that, they have something called a ‘listener hour guarantee,’ which they know is going to up their compensation by about 40% — since it’s per listener hour, not per track, the artist gets screwed because it’s not attributable to a track, so the artist doesn’t get a royalty. That’s not fair, that’s not the way we do business. The third thing they do is get a minimum annual guarantee or an advance if they know the service isn’t going to reach that level of business and be able to recoup — it’s what’s called [digital] breakage and they also don’t share that with the artists.”

Although negotiations are done in the name of artists via a collectivization of songs, artists are paid only a portion of the breakage and the corporation keeps an inordinate share, and this is what I will term ‘leakage’. Following a similar pattern, anti-piracy action by corporations, again undertaken in the name of artists that results in successful compensation claims or settlements have often not been disbursed to artists.

It’s a fine line to tread as the sales of last.fm and early MySpace off the backs of musicians pushed the labels to swing the other way and demand greater accountability (and equity) from other start-ups. But the processing of streaming revenue royalty reports is in itself resource intensive service that not all entities in the food chain are able to provide satisfactorily leading to another source of leakage.

The silver lining in light of the increased role of streaming has been the emergence of some enlightened labels that have looked out for their artists and provided them fair royalty rates to their artists as the market evolves.

 

2) Advertisers/ Ad Agencies/ Website/ Media brokers/ Google conspiracy

Follow The Money

Most pirate sites survive…scratch that, thrive on advertising revenue especially by tapping into Google’s advertising programs. A study by the Digital Citizens Alliance estimates that pirate sites earned more than $227 million in revenue annually.

Advertisers are not limited to dubious fly-by-night companies, but also to many major brand advertisers like Amazon, Adobe, AT&T, BMW, Ford, HP, LG, McDonald’s and Target.

Samsung was notorious for advertising on many unlicensed music services, fueling the pirate industry in China, while Nokia’s Asian marketing team maintained for a number of years that it would continue to advertise on pirate sites and worked on a different remit from its very own Nokia music service. Little wonder then that its music service was doomed when its own staff acted against the interest of artists and labels.

The usual reaction from media agency executives and marketing directors in many of these companies is to feign innocence and blame third party ad networks – which conveniently gives them plausible deniability. They are happy to gather large traffic numbers (fraudulent or otherwise) to bolster their internal targets, regardless of whether pirate sites have been farmed. However, this also serves to strengthen the ad fraud element in the business with Google being a key cog in the machine by serving ads to many pirate sites and amassing huge revenues in the process. There is a whole ecosystem – of advertisers, media buyers/ brokers, ad networks with so-called programmatic systems, ad serving companies, websites and Google itself – that feeds off the advertising system at the expense of content creators, that is, the artists.

As David Lowery of Cracker and Camper van Beethoven sums it up:

“We can see that there are a lot of people making a lot money from the unauthorized, illegal infringement of artists’ and creators’ work. This is no longer about individual ‘sharing.’ This is about businesses exploiting artists for profit, and not paying the artists a penny.”

 

3) The DMCA Safe Harbor Law Abuse

“Safe harbor provisions were introduced with some foresight, by the legislators in the USA framing the DMCA, to provide a notice and take-down procedure for unlicensed content. But the legislation has been distorted into a protective wall behind which cyberlockers and torrent sites, and companies such as YouTube and Grooveshark operate.

The original intent was to protect reasonable people acting reasonably from falling foul of the law, to enable the digital economy to grow without ‘gotcha’ lawsuits against ISPs who had no idea that their networks were being sued for infringement. They were not intended to provide fortress walls behind which companies could build billion dollar businesses on content that had not been cleared. They were never intended to become a “defacto licence”. As you might imagine, policing the YouTubes of this world for infringing content is a herculean task, one beyond all but the largest of companies.

These provisions are being abused. Many of the companies taking advantage of them are not start-ups that need a break, they dwarf everyone in this room. They’ve been in business long enough to now be able to identify that content. They know what it is……We are at the point at which notice and take-down must become notice and stay down.”

~ Sir Martin Mills, Chairman, Beggars Group

It has been expedient to simply frame the end-consumer with the smoking gun, but the other players in this cozy little ecosystem are all set up to knowingly profit while facilitating the transfer of unlicensed content.

But what about a user who downloads the music of Pretty Lights or Moby via torrents? Both artists used Bit-Torrent as a mass distribution mechanism. Yet if that same user downloads a Madonna album via a torrent, he is somehow expected to differentiate that this is unlicensed. Furthermore, if a pre-release unlicensed Madonna album were available on both file locker Mega and YouTube, users accessing it via the former would most likely be accused of piracy but not those via YouTube.

Kim Dotcom, owner of the now defunct MegaUpload file locker service, upon his arrest infamously claimed in his defense that his business was no different from YouTube, in that users were similarly uploading files, and his organization should therefore be protected by the Safe Harbor provision in the copyright law. Interestingly, Google went so far as to file an amicus brief in support of another file locker service, Hotfile (and also defended MegaUpload) but despite that, Hotfile was found guilty of piracy in a case brought against it by the MPAA. Of course it still remains to be seen if Dotcom’s MegaUpload induced/encouraged piracy or violated some other statutes of the copyright law, which will eventually be determined by the courts, hopefully without further use of SWAT teams!

Note that Viacom sued YouTube for piracy and lost the case despite producing a smoking gun of emails showing that the founders had knowledge that unlicensed content were on their service, with the tacit understanding that this would attract the most users, which was surely a violation of the Safe Harbor Law. Pirate Bay and its founders, on the other hand, were conclusively found to be guilty of piracy by the Swedish courts in 2009, but Google and most ISPs around the world have been reluctant to block the site, yet Google zealously blocks child pornography sites proving that they are not just dumb pipes with no control over content.

 

4) Collection Societies/ Performance Rights Organizations

 

Collection Societies and Performance Rights Organizations were set up in a byzantine era when the world was a seemingly bigger place and these collective rights organizations were able to simplify the licensing process and collect revenues in bulk from various organizations that used their members’ works across international borders.
With a borderless Internet world and the emergence of digital formats, rights licensing should have been a more transparent process but has become mired in complex territorial legacy systems that has hobbled the fair flow of revenues to artists.

There are some well-meaning and effective collection societies that have upped their game and have served their members well, but as they are part of a global network, they are only as strong as their weakest link. Collection societies in some countries are downright corrupt and the current anachronistic structure serves as a black hole where artists revenues go to die, or worse, line others’ pockets.

It is a disgrace that millions of dollars in artists/ composers revenues remain unpaid as it supposedly cannot be matched to the rightful artist/ composer simply because music metadata systems are a mess. Worse, it has been said that in some collection societies, unmatched black box royalties for so-called orphan works are sometimes divided up and shared amongst the top publishers. The 1% rule applies again and robs more artists of their revenues.

To the outsider, putting together a veritable central database of artist metadata and rights does not seem to be a complex task in this digital age. Yet, the Global Repertoire Database initiative which was supposed to have addressed this was scrapped in June after 6 years and 8 million pounds spent.

The outsider obviously does not have to contend with the various parties’ parochial interests. Complete Music Updates’ Chris Cooke wondered if some members wanted it to fail as, “an efficient repertoire database would render the societies redundant in that domain.”

Clearly, more needs to be done to clean up the undesirable elements in the network.

 

5) US Terrestrial Radio Performance Royalties

Unlike most of the free world, terrestrial and satellite radio stations in the US only pay royalties to composers for the performance rights of the musical works (the lyrics/composition) via ASCAP, BMI and SESAC, but not for performance rights of the sound recording to the artists who recorded the works.

Internet radio stations in the US on the other hand, have been paying both since 1995, highlighting a discrepancy in the application.As the non-payment of sound recording royalties also applies to foreign artists whose music is used by US terrestrial radio stations, Performance Rights Organizations in the rest of the world reciprocate the negativity by not paying US artists their royalties which almost all other artists in the world enjoy.

As such, foreign artists whose music is played on US terrestrial radio stations can deem it to be pirated music as they don’t get paid for it.

The US National Association of Broadcasters (NAB) with their strong lobbying arm has so far resisted calls to pay fairly and instead claim that radio stations are offering these artists the privilege of exposure and this should therefore be deemed a promotional activity. While there might have been a case for that in the past, Internet radio’s conformity to the payment of sound recording performing rights weakens the NAB’s case. Even though a proposed Performance Rights Act has now been submitted to attempt to correct this injustice, it remains to be seen if it survives the powerful lobbying forces.

Other countries that similarly do not pay artists in practice include China and North Korea.

 

6) Unethical Copyright Term Extensions

Copyright law was legislated to protect artists, authors and composers subject to a limitation of time, but long after they are deceased, their estates and corporate owners have lobbied to extend the copyright terms.

Copyrights expire after the life of the author plus 50 or 70 years (depending on the country) or for corporate authorship, 95 or 120 years. Or in the case of Mickey Mouse or Gershwin, seemingly forever, hence the reference to the law as the Mickey Mouse Protection Act.

In 1993, European copyright terms were extended by 20 years and in 1998, the US reciprocated by extending its term with the Sonny Bono Copyright Term Extension Act by another 20 years, supposedly to harmonize it with the European term but mainly at the behest of corporations which simply wanted to keep the revenues coming in. This was in addition to the 1976 Copyright Act that established an earlier copyright term. Long copyright terms lobbied by corporations undermine the raison d’etre of copyright and robs the culture of public domain works. It is rich irony that when the owning corporation or estate of an artist wilfully and successfully lobbies to extend the copyright term of works beyond its moral lifespan it is an act of ethical piracy against living artists who are robbed of the opportunity to re-use these works freely.

As the current extension cycle winds down, incumbent copyright holders will definitely attempt to start lobbying soon for another term extension to prevent their works from falling into the public domain on January 1, 2019.

 

Conclusion
There are many that act in the name of artists but until artists unite and reclaim their right with a greater say in the collectivization of their songs with a systemic, structural approach to cut the Gordian Knot, hitting out randomly at streaming services or radio et al is akin to a baby throwing toys out of a pram. There is definitely money in the recorded music industry, but currently it’s just being siphoned away from artists and misappropriated as advertising, technology, ‘unclaimed’, investment or even shipping revenue!.

For the average user on the Internet there is a basic truism that dictates their behavior:

If it’s on the internet, it can, and will be downloaded or streamed.

That consumers are burdened with complex moral or legal copyright dilemmas which the industry has failed to define and resolve properly in the first place is an atrocity. Artists and the music industry at large cannot cop their responsibility in fixing these broken areas by not speaking out and acting accordingly, otherwise they are simply complicit in the shenanigans of the complex.

 

 

Credits:
All images by Can Stock Photo except
Old Mickey Mouse by Teaessare Illustration & Design