Streaming, Copyright Law and the Future of Music

SMITH BRAIN TRUST -- The way songwriters and performers get paid in the United States is a mess, shaped to a surprising degree by government regulation. Some of the basic rules, in fact, are so old they were originally crafted to prevent a monopoly in the player-piano industry. This month the U.S. Copyright Office proposed reforms that could affect the bottom line of streaming services like Pandora and put more money in the pockets of artists. But these reforms won’t change the economic fundamentals of a streaming-centric musical marketplace, says Brent Goldfarb, an associate professor of management and entrepreneurship at the Smith School.

The copyright office framed its work as not only reducing inefficiency and unfairness, but helping working artists: “Songwriters and recording artists are concerned that they cannot make a living under the existing structure, which raises serious and systemic concerns for the future,” it wrote.

“They are arguing over the margins—who is going to get the rents from music sales and airplay, how much goes to the streaming services, how much to the artist," Goldfarb says. "But whether the royalty rates are a little higher or a little lower doesn’t change the fundamental dynamic”— that revenue from music sales have declined dramatically from the CD era.

The copyright office proposed that Congress close several loopholes in current law. One requires radio stations to pay songwriters but not performers when songs are aired. Musicians protesting that rule have adopted the hashtag #irespectmusic. The office recommended placing performances and the underlying music on equal footing. Even more oddly, satellite radio and "non-interactive" online radio services don’t pay anyone royalties for music created before 1972 (though courts in California and New York have overturned that arrangement locally).

But tweaks to copyright law, however sensible, will not roll back the clock, says Goldfarb, also the academic director of the Smith School’s Dingman Center for Entrepreneurship: “In the past, radio play would lead to album or CD sales, but now there really isn’t a CD market. Unless you are at the Taylor Swift level, you are not going to sell many CDs. If you’re thinking of streaming as a primary revenue stream, it’s going to be woefully insufficient.”

Now artists use streaming to generate interest in live shows, which are also hard to make money on. You can rue that change, but it’s irreversible. “We aren’t going back to a world where people paid $15 for a CD. The alternative to streaming is stolen MP3s,” Goldfarb says.

Pandora’s stock took a hit after it announced revenues of $268 million for the fourth quarter of 2014, up from $200.4 million in 2013, and it’s surely not looking forward to paying more in royalties. But Goldfarb doesn’t think investors’ bearishness says much about the viability of streaming. “Pandora may have disappointed Wall Street, but they still had $800 million in revenue, and they paid the artists $400 million in royalties. They probably are being squeezed by competition. But that’s not a fundamental problem for the distribution model.”

One challenge for artists who argue that the current streaming regime—and copyright law—spell doom for the music industry: “There is no lack of entry into the music business. There are tons of bands trying to enter.”

The technological changes that killed the CD also mean you can make a recording in your bedroom and publicize it on the web. Cold comfort, of course, to established musicians who find a middle-class existence out of reach. For better or worse, Goldfarb says, “Earning money through recorded music was a little bit of an anomaly of the 20th century.”

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