June 23, 2009 | Publishing
In a new feature, Billboard analyzed sales after the introduction of variable pricing and found that unit sales had slightly decreased but overall spending at retail and net revenue to labels had increased.
While total track sales dropped about 5% in the six-week period following the switch, the top 200 tracks had dropped 8.5% while the top 40 tracks fell 10.8%. Even so, selling those amounts of units is fine given 30% increase in retail price.
But, publishers are not in the same boat as record labels. They receive a fixed mechanical royalty for each track sold. If the statutory rate is paid, it is 9.1 cents per track. (The statutory rate paid for tracks five minutes or less is 9.1 cents. For longer tracks, the statutory rate is 1.75 cents per minute or fraction thereof over five minutes.) When the unit sales of tracks decline, publishers' revenue from the sale of those tracks declines an equal amount.
In the ten weeks since the switch to variable pricing, the weekly average of track sales has declined 5.8% (versus the average for the six prior weeks). At the full statutory rate, that comes out to a loss of $114,250 per week, or $5.94 million per year. That's not an astronomical sum given the total size of the market, but it's lost revenue that is taken straight out of publishers' bottom lines.
In practice, the full rate is not always paid. Labels often pay a reduced amount by negotiating a controlled composition clause in an artist's contract. That rate requested by labels for songs controlled by the artist under contract is often 75% of the statutory rate for full-price downloads. At that rate, the loss to publishers would be about $4.5 million per year. In reality, the actual annual loss to publishers as a result of higher download prices, assuming the slowdown in sales continues at the same rate for 12 months, is somewhere between the full-rate $6 million and the reduced-rate $4.5 million.
In an average situation, publishers would collect about 10% less in mechanical royalties for a hit song. Billboard analysis shows a 10.8% drop in unit sales for the top 40 songs over a period of six weeks after the switch to variable pricing. For a hit song, that kind of decline would result in a modest loss of mechanical royalties. Using this example, a track that would have sold two million units at $0.99 will sell about 1.78 million units at $1.29. Assuming the label pays the full 9.1 cents, that sales drop represents a $20,000 decline in mechanical royalties.
Again, these numbers are based on Billboard analysis of a brief period of time after variable pricing was introduced. They are offered for illustrative purposes to show how the two content owners - of sound recordings and compositions - are affected by changes in sales volumes and per-track pricing.
Labels say they have lowered prices on more tracks than they have raised prices. But the songs that are priced at 69 cents are slow-moving titles. An uptick would be beneficial for publishers. If there has been any uptick in sales of those titles, Billboard has not noticed. And as has already been pointed out, total track sales - not only sales of the top 40 tracks - are down since the switch to variable pricing.
In many cases, the publishers' loss and the record labels' gain may cancel each other out. All four major music groups, the ones with the hit songs most likely to have a higher price, own both recorded music and publishing assets. One company's loss is a gain for another company under the same ownership. In some cases, the net effect for the parent company may be a wash. Although the transfer of revenue may be in balance at the corporate level, a publishing division has its own performance expectations that would not take into account the gains made in the recorded music division.
Outside of the majors, companies stand to lose from lower unit sales of track downloads. An independent publisher is exposed to the pricing strategies of record labels if it has current hits in its catalog. The most popular songs tend to carry the higher price, and their unit sales are sure to be lower than if they carried a lower price.
A difference in recorded music and publishing market shares could spell trouble. If a company has more hit songs in publishing than in recorded music, it loses more on the publishing end than it saves on the record label end. On the other hand, a company with a greater market share in recorded music than publishing will save more from payments of mechanicals more than it loses in mechanicals received. Of the four major music groups, EMI stands out as one obvious example of an imbalance - at least on a global level. EMI's global share of recorded music was 9.6% in 2008, according to figures released last month by Informa, while its publishing division had an estimated 18.3% global market share.
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