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  1. 1.8 Value Web Perspective

1.8 Value Web Perspective

Derek Sellin and Timo Seppälä in Digital Music Industry Background Synthesis synthesized the current state of the music industry with the factors that have led to a lack of transparency and complexity in the industry.547 Sellin and Seppälä frame their synthesis from the viewpoint of musicians, a central stakeholder that is concerned with inadequate royalty rates and a lack of transparency from streaming services as streaming services have finally raised revenue for the digital music industry for the first time since the 1990s.548

The ire over royalties is very apparent for musicians, especially for composers because musicians do not receive royalties until the end of the following year, or even later.549 Other than delayed payment, there is also the issue of black box royalties, royalties held by entities on behalf of an unidentified rightsholder, that are distributed arbitrarily, according to the market share of known rights holders. 550

Sellin and Seppälä articulated a non-exhaustive list of reasons why black boxes may occur:

  • “the inability to identify rights holders despite payments made for the use of their compositions;

  • “the lengthy time required for filling domestic and ultimately international copyrights, often begun only when a recording is actually released”;

arbitration agreement, non-arbitrability of subject-matter, right to present a case, right to be heard and right to present an evidence and defences.”).

541Shermin Voshmgir. How do Design a Token System. en. Mar. 2020. url: https://medium.com/@sherminvoshmgir/how-dodesign-a-token-system-6a19e73c56f3 (visited on 05/12/2020).

542Ibid.

543Ibid.

544Ibid.

545Ibid.

546Ibid.

547Derek Sellin and Timo Seppälä. “Digital Music Industry “Background Synthesis”. In: ETLA Working Paper (Feb. 2017).

548Ibid.

549Ibid.

550Ibid.

  • “multiple claims for the same rights exceeding 100% of ownership, resulting in indefinite disputes”;

  • “international collaborations with less than all creators asserting their rights”;

  • “international legal inconsistencies regarding what type of performances result in payments (most visible in the fact that radio play does not generate royalties for recording artists in the United States)”; and

  • “the slow and often manual processes to report usage and clear payments under international reciprocal agreements.”551

Sellin and Seppälä discussed that the issues described above cannot be remedied by technology yet, but applying better record keeping and rights data sharing methods with real-time consumption data among stakeholders would greatly improve the speed and completeness of royalty payments to musicians.552

Sellin and Seppälä outlined the music industry in a layered approach to weave through the industry’s complexity.553 Sellin and Seppälä divided the music industry into three layers:

  1. Ownership Data (Layer 1),

  2. Consumption Data (Layer 2), and

  3. Payment Systems (Layer 3).554

Sellin and Seppälä describe the current state of the music industry in Layer 1.555 Sellin and Seppälä further delineated the scope of Layer 1 into three sub-layers:

  1. Future Music,

  2. All Formats, and

  3. Royalty Rates.556

Future Music covers the creation of new music and systems built for new music.557 All Formats covers underlying ownership, consumption and payment issues for physical and digital formats.558 Royalty Rates covers solutions that increase the efficiency of royalty payments and enable direct licensing schemes.559

Sellin and Seppälä also discussed the sources of complexity in the music industry.560 A major source of complexity in the music industry is the constant reaction to technological innovations, and correcting for perceived market abuses.561 The reaction to technological innovations and perceived market abuses led to the rise of Collective Management Organizations (CMOs), and subsequent legislation and regulation to protect copyright holders.562 The complexity is evident in the United States, and even more so when considering the global music.563

In describing the global music industry value web, Sellin and Seppälä created a generalized model describing two (2) copyrights (musical composition and sound recording), three (3) licenses (performance, mechanical, sound

551Sellin and Seppälä, “Digital Music Industry “ Background Synthesis”.

552Ibid.

553Ibid.

554Ibid.

555Ibid.

556Ibid.

557Ibid.

558Ibid.

559Ibid.

560Ibid.

561Ibid.

562Ibid.

563Ibid.

recording/neighboring rights), and their functional roles.564 Sellin and Seppälä discussed the general functions of each copyright in its lifecycle from creation-to-consumption.565

In the Musical Composition566 Copyright section of the value web, Sellin and Seppälä described the functions as follows:

  • Songwriters create and copyright original musical works;

  • Songwriters assign the copyright in the original musical work to Publishers;

  • Publishers promote the use of Songwriters’ musical works in exchange for fifty percent (50%) of licensing revenue; and

  • Rights Societies (aka CMOs) track and estimate public performances of Songwriter’s musical works to collect and distribute royalties to Songwriters and Publishers.567

In the Sound Recording Copyright section of the value web, Sellin and Seppälä described the functions as follows:

  • Recording Artists (including performer and producers) create a recording of a performance of a musical work, generally on behalf of a record label, in exchange for royalties on sales;

  • Labels fund the recording of a performance of a musical work, promote and distribute the sound recording through sales channels, and pay sound recording royalties to Recording Artists and composition royalties to CMOs; and

  • Distributor/Aggregator distributes sound recordings through physical and/or digital distribution channels on the behalf of Labels.568

In the Consumption section of the value web, Sellin and Seppälä described the functions as follows:

  • Performance Use of a musical composition requires a license from a Songwriter (or Publisher or CMO) where music is broadcasted or consumed in a public forum;

  • Mechanical Use of a musical composition requires a license from a Songwriter (or Publisher or CMO) when a music recording is available for purchase; and

  • Sound Recording/Neighboring Rights requires a license whenever a sound recording is used for commercial purposes. Neighboring Rights are rights distinct from the Songwriter of the musical work, and generally also requires a license.569

Sellin and Seppälä shortly discussed the payment flows from the end user to rightsholders in the music industry.570 Citing to Berklee College of Music’s Rethink Music project, Sellin and Seppälä mentioned eight (8) unique scenarios for payment flows in the United States, each with its own delays, its own information & reporting standards, and its own commissions. 571 Additional factors that amplify the complexity of the value web are:

  • poor metadata identifier and transmission standards;

  • incompatible rights databases among stakeholders;

  • “error-prone and labor-intensive human processes”; and

564Ibid.

565Sellin and Seppälä, “Digital Music Industry “ Background Synthesis”.

566ibid. (Musical Composition is defined as “the creative output of songwriters, lyricists, composers, and arrangers.”).

567Ibid.

568Ibid.

569Ibid.

570Ibid.

571Sellin and Seppälä, “Digital Music Industry “ Background Synthesis”.

  • the numerous relationships between musical compositions and sound recordings (multiple parties involved).572

Sellin and Seppälä then identified the following inefficiencies in the current infrastructure that contribute to black boxes and slow royalty payments:

  • database replication: stakeholders do not share one common database for rights data (thus, stakeholders must replicate the same rights data in each of their private databases);

  • manual matching: CMOs needing to identify relevant foreign CMO to collect royalties from, and manually synchronize their databases;

  • identification codes: multiple standards that may or may not be applicable to identify a musician; and

  • metadata: commercial databases for mapping artists to works does not exist, commercial databases are “voluntary, incomplete and centralized by a single commercial entity,” and the metadata in the music file can be modified later.573

Sellin and Seppälä summarized the features the music industry lacks as the following:

  • “[e]fecient processes for sharing comprehensive rights data”;

  • “[s]ystematic adherence to rich metadata standards”;

  • “[s]calable systems for the growing pace of digital music releases and detailed per-stream reporting”; and

  • “[w]illingness to share rights and reporting data openly with others in the industry.”574

Lastly, Sellin and Seppälä recommend that any proffered solution to the issues in the music industry should meet the four following requirements:

  1. “[i]t must be proven to be more efficient than the current system, or else payments to creators will, by necessity, decrease”;

  2. “[i]t must be scalable to handle the demands of both the pace of digital music releases and the growth of global per-stream consumption data”;

  3. “[i]t must embrace common standards, enabling interoperability and selective sharing of data”; and

  4. “[i]t must recognize the reality of a fundamental lack of trust within the industry, or the resistance by many to reveal data, even that which simply represents factual ‘musical historical events.’ “575

572Ibid.

573Ibid.

574Sellin and Seppälä, “Digital Music Industry “ Background Synthesis”.

575Ibid.

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