The public debate in the digital music industry in recent months has largely boiled down to a single question: Is free music all right? The main bogeyman for record companies and unhappy artists has become Spotify, which offers a free ad-supported service alongside its paid subscription service and is working on a fundraising round that could value it at $8 billion. But an industry report released on Tuesday has singled out an additional massive destination for free online music—YouTube—and called for legal changes that would fundamentally change how music on Google’s video-sharing service works.
The International Federation of the Phonographic Industry’s 2015 report on digital music paints a picture of a stagnant industry, with overall revenue dropping slightly. But while the overall pie is about the same size, the way the pieces are sliced is changing drastically. Global digital music sales have pulled even with physical sales for the first time. Over half of digital sales still come via downloads, but subscription services make up 23 percent of the digital market.
The good news from IFPI’s perspective is that 41 million people now pay for a subscription service, and 16 percent of consumers have used one in the past six months. Still, 35 percent of consumers accessed free music streaming services over the same period. These free services put money in the pockets of artists and record labels, who get a cut of their ad revenue. But per-song rates are much lower. While the record industry made $1.6 billion in revenue from companies that run paid subscription services, it brought in just over half that—$641 million—from companies that offer only free music.
The argument from the record industry is that people are willing to pay and that more would subscribe if streaming services didn’t make it so easy to avoid doing so. Spotify faces increasing pressure to pare back its free service. Whether this would work or not isn’t clear. Not all of the $1.6 billion coming from subscription companies stems from people paying for subscriptions; the IFPI says more than 100 million use the free tiers of services such as Spotify and RDio. If that free tier were eliminated or restricted, record industry revenue could drop if enough people stop streaming free tracks while not enough users pony up the $10 monthly fee.
Increasing the likelihood that cutting back on free subscriptions would be counterproductive is the existence of free music on YouTube, which doesn’t have to reach direct licensing agreements with record companies. Jay Z, for instance, pulled his seminal album, Reasonable Doubt, from Spotify, but it is still available on YouTube. Companies such as YouTube that host videos uploaded by users aren’t liable for copyright infringement so long as they cooperate when copyright holders ask for videos to be taken down.
Frances Moore, chief executive officer of IFPI, thinks the arrangement runs backward. She pairs Google's exploitation of copyright law with piracy as major reasons the recording industry isn't financially sustainable. She believes that YouTube should have to license music in advance, just as Spotify does. “Laws that were designed to exert passive hosting companies from liability in the early days of the Internet—so-called ‘safe harbours’—should never be allowed to exempt active digital music services from having to fairly negotiate licenses with rights holders,” she said in a written statement accompanying the report. “There should be clarification of the application of ‘safe harbours’ to make it explicit that services that distribute and monetise music should not benefit from them.”
There has been a lot of discussion about how Google approaches copyright issues over the years. IFPI's recommendation would amount to a major break with the approach policymakers have settled on until now. Changing safe harbor laws would also affect much more than just YouTube or the record industry. For its part, Google—which has been increasingly experimenting with paid services for YouTube—says that the logic behind IFPI's argument is fundamentally flawed.
"We pay hundreds of millions of dollars to the music industry every year, have deals in place with hundreds of independent and major labels around the world, and provide rightsholders with tools to control their copyrighted work," says a Youtube spokesperson.
For record labels struggling to replace revenue from continually decreasing sales elsewhere, this apparently isn't enough.