Apple to Pay Rightsholders for Apple Music Free Trials

Over the weekend, pop singer Taylor Swift signed an open letter to Apple (presumably written by “her people”), which discussed the fact that Apple wasn’t planning to pay rightsholders during the three-month free trials that Apple Music was offering. In it, she explained why she was withholding one of her albums from Apple Music, but, curiously, not the rest of her music.

I was planning to write an article about this today, but, when I woke up, I saw that Apple had changed its mind, and had announced, via Eddy Cue’s Twitter account, that the company would, indeed, pay for streams during the free trial period.

Cue tweet2

Cue tweet

Apple, like most other people in this discussion, are a bit confused about their terminology; they don’t pay “artist[s],” they pay rightsholders. They make two payments: one for publishing, and one for performances. Clearinghouses for publishing rights then divvy up their share to songwriters, and record labels let some of their income trickle down to the actual artists. (Except, of course, with the smallest indie bands who actually contract directly with Apple, or any other streaming music service. Most indies go through aggregators, who distribute their music on streaming and download services, and who collect the income and pay it to individual labels.)

The person who wrote Ms. Swift’s open letter got it wrong too. Her text says:

I’m sure you are aware that Apple Music will be offering a free 3 month trial to anyone who signs up for the service. I’m not sure you know that Apple Music will not be paying writers, producers, or artists for those three months.

Apple doesn’t pay artists or producers. Ms Swift says nothing about record labels, who, other than for the publishing payment, are the ones who collect the money. This distinction is very important when discussing streaming music. All the streaming services try and claim that they pay “artists,” but they absolutely do not.

When an artist gets paid, it’s by their record label. Standard contracts give a recording artist somewhere around 10% of the record label’s income, after expenses, including a producer’s royalty, for their recordings. Streams are already paid very little, and the artists get a fraction of that. Somehow, the record labels get a pass in this discussion, as if the paltry amounts that artists get are the fault of the streaming services, not their vampiric contracts.

Apple caved not because of Taylor Swift, but because her open letter was the highest profile statement among the many who complained about this issue.

But let’s take a step back and look at the free trial, and what it means. Every streaming service gives a one-month free trial, and doesn’t pay record labels or songwriters. Apple is extending this to three months in the hopes of getting more people to embrace music streaming than have ever done so. Apple is also paying about 1.5% to 3% more in overall royalties than other streaming services. And some people have made back-of-the-envelope calculations, saying that at that rate, it would take some eight years to make up for the three months. But it’s not that simple. (But it’s good enough that all the major labels signed on to that rate.)

Note that Apple won’t be paying the full per-stream rate during the trial period. Peter Kafka of re/code spoke to Eddy Cue and says the following:

Cue says Apple will pay rights holders for the entire three months of the trial period. It can’t be at the same rate that Apple is paying them after free users become subscribers, since Apple is paying out a percentage of revenues once subscribers start paying. Instead, he says, Apple will pay rights holders on a per-stream basis, which he won’t disclose.

I think Apple’s goal was two-fold:

First, they want to get as many people on the music streaming wagon as possible. Spotify, the biggest of the a la carte streaming services, has 20 million paid subscribers; Apple is aiming for 100 million. In one fell swoop, Apple hopes to increase the amount of money being spent on streaming, and being paid out to rights holders, by a factor of five. (I’m not counting radio-style streaming like Pandora, or the smaller services, who have a few million subscribers.)

Apple is trying to sell the idea of music streaming, which, if successful, will have a knock-on effect across the board. If music streaming becomes mainstream, then musicians and record labels will benefit more than they can imagine. (And users will pay the music industry a stipend for what may be their lifetime.) If they are successful, that 1.5% to 3% will be increased by a vastly larger number of subscribers, and, presumably, streams.

Consider this number: if Apple does get 100 million users, at $10 a month (I’ll leave out the family plan in the interest of a simple calculation), that’s $1 billion a month, of which more than 70% goes to record labels, songwriters, and artists. That’s about $8 billion a year more than what is currently spent on streaming. According to the IFPI, the total value of the recording industry in 2014 was $15 billion. No wonder the major labels have kept quiet about these free trials… (Yes, streaming will lead to fewer downloads; it’s not clear how much one will compensate the other.)

Second, and this is a much bigger issue, it’s unclear if Apple can actually pay the rights during this trial period and not get targeted by competitors for predatory pricing or anti-competitive behavior. A company who has a big cash hoard can’t price something so low that others can’t match it, in order to unfairly compete with them. In some countries, it’s illegal to sell anything at a loss, and Apple will be clearly doing that during these free trials. Imagine a small streaming service, such as Tidal, which now has to compete with a free service for three months; they can claim that they’re losing money because of Apple’s cash hoard. (And they may be right.)

I strongly agree that it’s unfair for Apple to expect record labels, musicians, and songwriters to not be paid for their streams for two months (not three; all the streaming services offer one-month unpaid trials). But the solution, with Apple paying for these streams, may end up being a Trojan horse that can lead to regulatory authorities investigating Apple’s plans. One of the biggest problems around these free trials is that, while Apple negotiated with major labels, they simply imposed their conditions on smaller labels and independents. The company cannot negotiate with everyone, and their contract comes across as aggressive to smaller labels.

In the end, I think that Apple did the right thing. They didn’t cave because of Taylor Swift; the reaction was too quick. My bet is that Apple has been discussing this internally since there has been so much negative press about the issue. And Taylor Swift got a boatload of free publicity.

I’m waiting to see what Spotify has to say, whether they’ll claim that Apple is being anti-competitive. And that Mr. Z from Tidal, who has been claiming that there is a conspiracy against his service… Apple is treading a fine line here, one that may lead to more problems than just angry musicians.

3 thoughts on “Apple to Pay Rightsholders for Apple Music Free Trials

  1. I’m convinced that Apple anticipated the backlash with two possible outcomes:

    1. Apple doesn’t pay full royalties during the trial period. This has been confirmed, but we don’t know the percentage. I’m guessing 50%.

    2. Apple has a clause in their contract that if they do pay full royalties during the free trial period, the payouts after the trial ended would remain the industry standard of 70% to the rights owners.

    Outcome number one is much more likely. 20 years ago I worked in the BMG Music Club distribution center. I was told that the artists received zero compensation for CDs that were part of an introductory offer. Any CD purchased at a sale price would result in a 50% reduction in royalties. That seems plausible, as BMG eventually morphed into YourMusic.com. YourMusic was able to sell every CD for $5.99 with free shipping and no minimums or commitments. Artists likely received half their normal royalties for those purchases.

  2. This was the first thought I had last night on reading that Apple had responded to Swift/indie labels/whoever this way. Please the artists… and commence the countdown to the DOJ investigation. Apple got slapped down for trying to introduce competition to Amazon in the ebook space (a move that greatly benefited content producers in contract terms, if I recall). Seems like they’ll be put under the microscope again. It’s a good thing they like to charge a premium for their hardware. If they priced things competitively with Asus and Samsung, they’d probably be investigated for that, too.

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