How Does iTunes Radio Pay Artists?

For consumers, iTunes Radio may feel a lot like another version of the popular “predictive” radio service Pandora. Plug in an artist or genre, and an algorithm spits out sonically related tracks. But while the experience for listeners may be similar up to a point, the revenue flow behind the scenes isn’t an exact match.

In order to break down how money gets from iTunes Radio to the artists, it’s first important to remember that every song has two copyrights: one for the underlying composition (think notes and lyrics on paper), and one for the sound recording (think music on CD, tape or hard drive).

Broadcast royalty payments for the songwriters and the publishing companies that own the rights to the composition are negotiated and distributed by the Performance Rights Organizations (PROs). In the United States, that’s ASCAP, SESAC and BMI. Keep in mind that algorithmic “radio” is still considered a “broadcast”—but instead of a DJ there’s an intelligent robot that knows you secretly love Miley Cyrus. So, for the most part, the mechanisms that get the songwriters paid on Pandora and iTunes Radio are governed by the same principles: the broadcaster secures a blanket license with the PRO in exchange for unlimited access to their repertoire at a negotiated rate (overseen and enforced by a court under a consent decree established in the middle of the last century).

But when it comes to sound recordings, things look a little different. In 1995, Congress passed the Digital Performance Right in Sound Recordings Act, which created a compulsory license for sound recordings. (AM/FM radio continues to enjoy an unfair exemption.) The upshot is that all webcasters, iTunes and Pandora included, are required to pay the owners of master recordings. Typically, these royalties are collected from the broadcaster by SoundExchange and then distributed to the performers and record labels who own those rights. However, it’s important to note that this statutory rate is only “compulsory” in that the rightsholders can’t opt out; the digital broadcasters can still choose to negotiate directly with the record labels and pursue direct licenses.

And that’s what iTunes Radio has decided to do.

While Pandora continues to utilize the statutory license, iTunes is leveraging Apple’s deep pockets (and established relationships) to make direct deals with the labels. Although iTunes Radio is a non-interactive service (meaning, users can’t select which songs to hear when and skipping tunes is limited), the direct deals look a bit different than other internet radio arrangements.

Interestingly, because iTunes is not relying on government-mandated compulsory rates, it can move more deftly into new markets. While Pandora only operates in the U.S., Australia and New Zealand, iTunes Radio already has plans to expand to the U.K., Canada and beyond next year.

Not surprisingly, the details of iTunes’ deals with the major labels have not been disclosed. However, the form contract sent to the indie labels was leaked and provides some insight into how artists will be paid.

So what’s the deal?

The first line of the contract may be the most telling: “By clicking to agree to this Digital Music Download Sales Agreement… COMPANY agrees with ITUNES to the terms and conditions set forth herein…” So, essentially this is a take-it-or-leave-it offer that doesn’t leave room for negotiation by the indie labels or the aggregators that represent them. It’s safe to assume that the major labels had more leverage than this and were able to actively negotiate their terms. So, the specifics of the majors’ deals could very well be different.

As to the substantive part of the contract, Apple will pay the indie labels a royalty of $0.0013 per song plus 15% of net advertising revenue for the first year. The royalty rate will subsequently increase to $0.0014 per song play plus 19% of net advertising revenues.

What makes iTunes so different than Pandora is that it is actually three services in one. The iTunes Store and the scan-and-match cloud are all part of the contract package, so when an indie label hands over an “eMaster” to iTunes, that track is going to be available on all three platforms.

This also means that revenue generation is not necessarily confined to a per stream basis. When you stream a song on iTunes Radio, you also get a link to download the song from the store. And the payout for that stream is variable depending on if it’s a “complete-my-album play” or a “heat-seeker play.”

Ostensibly, the main goal of iTunes Radio is to increase downloads from the iTunes store, which does offer a better payout for the artists than a single stream (and this is true whether the service is “radio-like” or on-demand listening like Spotify). Whether this will serve to preserve Apple’s dominant download market in the face of competition from on-demand streaming remains to be seen. Perhaps users will just prefer the easy, all-in-one interface iTunes offers. Maybe global positioning will keep the Cupertino, CA company at the top of the music-tech pile.

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