The curious case of statutory licensing in the streaming business

There are some numbers that are guaranteed to evoke animated discussion. Mention Section 370 or 35A to the ‘aam junta’ and watch it happen.

Similarly there is this number 31-D that is a red rag to the music industry. That is Section 31-D of the Indian Copyright Act, as amended in 2012. Music labels, broadcasters, internet music platforms and government functionaries have been arguing about it for the past couple of years in a debate that has got steamier by the minute.

What is it? For the layman, it is whether the term ‘broadcast’ that is normally used for radio and television, applies to internet streaming as well. The music industry is clear that it does not, as also agreed recently by the Bombay High Court, since streaming is an ‘on demand’ service where an individual can pick and choose what he listens to, against radio or television broadcast where content is pre-programmed and the consumer cannot choose. Those who want to expand the definition of broadcast, see it differently though. And this battle of wits is playing out in a proposed amendment to the Rules that are part of the Copyright Act.

On the surface, it seems that the government is extremely keen to push this so that statutory licensing rates for music royalties apply to the streaming of music, in line with the royalty rate paid by FM radio broadcasters for sound recordings. Which, according to the Copyright Board ruling of 2010, is 2% of net advertising revenue earned by a radio station.

So why are the music labels in a blue funk over whether this rate should be applicable to music streaming services?

Simply put, it’s the fear of the entire business going kaput! Over the past couple of years, the streaming story is the real success story for the industry. More services, more subscribers, greater penetration of smartphones, more listening time and so many more numbers appear in annual reports that it makes one hopeful of ‘achhe din’ truly being round the corner.

In terms of numbers, there is the FICCI-E&Y Media & Entertainment Report which has the entire music industry pegged at Rs. 1,420 crores and the IMI Report that declares recorded music revenue at Rs. 1,068 crores. The E&Y Report has digital contributing to 83% of label revenue, ie Rs. 1,179 crores while the IMI one has digital at 78% and specifically lists streaming revenue at 70%, which means about Rs. 750 crores. While you can pick which number you want to follow, what is critical to this piece is the huge percentage of revenue that streaming services contribute to the rights owners.

What happens then if royalties are parked under statutory licensing, as the proposal intends?

Essentially, music label earnings would be linked to advertising revenue generated on the platforms. Which is pretty much how You Tube operates but the difference of course is that You Tube is a Google company that attracts a lot of advertising. On the other hand, on audio streaming services, the E&Y Report states,

“Advertising on music streaming has not yet found traction, mainly because compared to other digital platforms, the ability of some platforms to demonstrate return on investment to advertisers is lacking. There is an opportunity to combine radio ad sales with streaming music sales, which could result in growth in this segment.”

I do not know if this is what triggered the idea of expanding the definition of broadcast, but the moot point is that advertising on audio streaming services “remained negligible”. So, if payment to sound recording owners were to become 2% of negligible net advertising revenue, money to the music industry could plummet to some lakhs instead of that Rs. 750 crores. Which means the industry turnover would become an abysmal Rs. 300 crores. Kaput!

Logically, the business interests of platforms and the music industry are at variance. The latter wants to keep the price of music high so that creators and copyright owners maximize revenues. The former need to push this value down or give the music free to attract more and more consumers. To attract advertising revenue. And when there is enough advertising, the listener is so fed up, he moves to a paid subscription to avoid the ads and get a few other ‘premium offerings’. And music royalties are paid from this advertising and subscription revenue.

What if there many are platforms with identical offerings so none actually hits the sort of ad revenue or subscriber numbers that it projected? There is always the option of selling the business, which has gained huge valuation, while the music industry can only watch and twiddle its thumbs!

I do not know anything about business but I can see a flawed premise, as did many people wiser than me across the world, when streaming services were still only an idea. Yet the industry supported them, but naturally chose to be partners only on condition of security of revenue through advances, which in Hindi are called Minimum Guarantees or MGs!

The labels provided these start-up services with catalogues to go out and grab those consumers and achieve their projected numbers. If, about a dozen years later, the services haven’t been able to generate either the number of paid subscribers or the advertising revenue they had hoped to, they can scarcely place the blame at the doorstep of the music industry. So, to think that reducing royalties to music owners will see a dramatic upswing in the fortunes of the streaming services, again looks like a flawed premise to this non businessman!

And to have the government fight this battle with the music industry seems grossly unfair. We have to remember that streaming services are owned by entities like Google, Reliance, AirTel, Times Of India and others who have a lot to contribute visibly to the economy, even if none of them are behind this present move. So, if I were in the government, I too would think that the way to get huge investment into the streaming business from these entities would be by removing the thorn of MGs. Then there is so much more money to spend on attracting consumers and advertisers, isn’t it?

That’s being overly simplistic. Streaming royalties have created a ‘value chasm and not a value gap’ as Times Music COO Mandar Thakur puts it. Interested in numbers? There were five billion music streams per month last year, according to the E&Y report. Which would mean a rate of Re. 0.12 per stream to make up that Rs. 750 crores! Against an average rate of roughly 2 paise per stream today!

And the fact is that only the major labels get these famous MGs. Perhaps fair because their music makes up the bulk of the consumption currently, but things are changing rapidly, and regionalisation is the buzzword. At the moment however, the majority of regional labels do not get MGs, as is the case with smaller national ones. So, to think that the entire industry has the streaming services by the short and curlies, is incorrect. And speaking of unfair, what about poor independent artistes and labels? All platforms now want to focus on the ‘indie scene’ and have sections and playlists devoted to ‘indie’ and ‘non-film’ music. This sunrise segment gets nothing by way of MGs either. So, who is holding whom to ransom?

If a platform has self-belief and guts, it goes ahead with business, as we saw with the roll out of Spotify in India earlier this year. It could not conclude a licensing agreement with Saregama, arguably the most valuable catalogue in India, yet went ahead with its launch. You have to applaud that. And did the parting of advances murder Spotify’s ability to market the service? I think we have all seen enough of Anil Kapoor to know the answer to that!

The business has created strange bedfellows. Platforms want to bundle music into larger offerings while the music industry knows that value lies in unbundling of rights and creating value propositions around them.

As the Deloitte September 2019 ‘Economic Impact Of The Recorded Music Industry In India’ says, “….business and revenue models in the Indian audio OTT industry are still evolving…” Which means that platforms and labels will negotiate and fight over fair value all day and have a drink in the evening over which they’ll discuss it some more. That’s how solutions emerge. The government would do well to keep out of something it doesn’t understand.

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