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Shifting from physical to digital music; for songwriters, how does it pay?

April 4, 2012
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Image by: Renjith Krishnan

by:  Howard Druckman, Communications Specialist, SOCAN

(PLEASE NOTE:  this article has been revised since it was first published on March 20th.)

Sales of recorded music have rebounded throughout North America, in large part due to the rapidly growing digital market.

According to Nielsen Soundscan, a total of about 68 million downloads were sold in Canada in 2010, a 20% increase from 2009. A total of about 6 million albums were downloaded in 2010, up 25% from 2009. Digital album sales accounted for 19% of total album sales for 2010, compared to 14% in 2009, and 9% in 2008. According to Billboard.biz reports on Nielsen figures for the U.S., as of September 25, 2011, American consumers had purchased an additional 12 million digital albums and 90.5 million digital tracks more than they had purchased at the same point in 2010.

How are songwriters’ royalties being affected by the shift from  physical to digital sales? How do their royalties change when digital versions of their songs are downloaded or streamed, as opposed to when physical copies of their songs are sold?

To answer that question, we have to consider two kinds of royalties paid for music use: performance royalties, which are paid for the communication by telecommunication of copyrighted songs; and mechanical royalties, which are paid for the reproduction of copyrighted songs. In the digital ecosystem, the collection of both kinds of royalties applies for music use, either via downloading or streaming, and whether that activity occurs online, via mobile devices, satellite, etc.

SOCAN, the organization that collects performance royalties on behalf of millions of songwriters in Canada and throughout the world, licenses websites where people can stream and download music, including online music services, radio, TV, audio, and games. The SOCAN tariffs covering the use of music on websites have been approved by the Copyright Board of Canada; however, due to an appeal before the Supreme Court of Canada, SOCAN is not yet distributing the royalties that it has collected for this use. SOCAN appeared before the Supreme Court in December 2011, and the Court’s decision is expected to be delivered later this year.

Music websites that provide music on demand or downloads are covered by SOCAN’s Tariff 22A, which accounts for about 90% of the licensing fees that SOCAN collects from all of its internet tariffs. Tariff 22A is essentially based on a percentage of the amount that the subscribers or consumers pay for that service. For permanent downloads, music sites  pay a quarterly fee of 3.1% of the amount paid by the consumer for the download, with a minimum fee of 1.5 cents per (digital music) file in a bundle (e.g., an album) that contains 13 files or more; 2.1 cents per file in all other cases. For limited downloads, these sites pay a monthly fee of 5.7% of the amounts paid by the subscriber, with a minimum fee of 54.8 cents per month, per subscriber, if portable limited downloads are allowed, and 35.9 cents per month, per subscriber, if not. For on-demand streams, these sites pay a monthly fee of 6.8% of the amounts paid by the subscriber, with a minimum fee of 43.3 cents per month, per subscriber.

Let’s take an example. Say Jill writes a song, records it, releases it, and in one month sells 1,000 physical copies of it herself, experiences 1,000 permanent downloads of it online via a music website. Let’s say that each copy sold or downloaded costs one dollar. According to current rates, the sale of the physical copies will earn her nothing in performance royalties, although she will earn mechanical royalties of $85. The permanent downloads will earn her $31 in performance royalties (minus SOCAN’s 14% administrative costs) and $79 in mechanical royalties. The fees and royalties for on-demand streaming music files are harder to predict.

Currently, licence fees collected from music use on the internet is a very small portion of the total collections that SOCAN undertakes in a year, somewhere around two or three percent. This is somewhat alarming, because we know that music consumption on the web or via mobile phones is far more popular than this figure would indicate. In great part, the small figure is due to piracy, which is free downloading and streaming of music without regard for the owners of the copyrights to that music. In the comparatively young field of new media – specifically, online and mobile music – both the technology and the business models that employ it are changing extremely quickly. As new media evolve, SOCAN is adapting to license them as quickly and efficiently as possible.

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