Phil Hardy - Nickels & Dimes: Music Publishing & Its Administration in the Modern Age 

Copyright 2013 Omnibus Press
This edition 2014 Omnibus Press
(A Division of Music Sales Limited, 14-15 Berners Street, London W1T 3LJ)

EISBN: 978-0-85712-877-5

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The Music Publishing industry depends on twin pillars:

Copyright laws which keep pace with changes in distribution platforms

Technology evolution which provides new platforms and creates new revenue sources

(From the prospectus prepared by Bertelsmann for the sale of BMG Music Publishing in 2006).

I n 2010, the music-related revenues of the societies authorised to collect royalties on behalf of music publishers, composers and writers rose by 6.3% to $8.7bn. In the same year, according to the global record industry association the International Federation of the Phonographic Industry (IFPI), the trade value of global recorded music sales fell by 8.4% to $15.9bn. These divergent trends have continued since 2010.

Why is there such a difference? After all, its all music.

Another way to contrast the differing levels of success of record companies and music publishers is to look at the various valuations they attract. When both the record division and the publishing division of EMI were sold in February 2012, Citigroup secured $1.9bn for EMI Music and $2.2bn for EMI Music Publishing. This was despite EMI Music accounting for 71% of group revenues of 1.7bn ($2.6bn) and music publishing for only 29% in 200910, the last year for which full accounts for the EMI Group were published. For investors, the difference between the two divisions lay not in their revenues (and costs) but in their profitability. Although publishing only accounted for 29% of group revenues, it accounted for 45% of group profits, 150m ($234m). Further confirmation of the disparity between the size of the two divisions was their profit margins (profits as a percentage of revenues). EMI Music had a margin of 15.7% but EMI Music Publishings margin at 31.4% was double that. EMI was no exception here. The same was broadly true for all the major companies that had both record and publishing divisions. For example, the Warner Music Group had total revenues of $2.9bn for the year 201011, of which 81% came from recorded music and 19% from music publishing. However, of its profits of $429m, music publishing accounted for 34% ($147m).

Yes, music publishing revenues are less than recorded music revenues; indeed, music publishing has traditionally been called a nickel and dime business, reflecting the small amounts collected per performance or recording of a song. But the trajectory of publishing revenues upwards rather than downwards is in marked contrast to that of the record industry which has seen the value of its sales halve in the last 10 years. The prospectus prepared by Bertelsmann in 2006 for the sale of BMG Music Publishing concisely summarises the difference between a music publisher and a record company:

Music publishing, as compared to the recorded music business, is a business of low capital intensity that requires significantly less operating costs, marketing and A&R expenses. The recorded music industry earns its profits by selling sound recordings of music that it creates by discovering, developing and recording artists. A music publisher earns its profits by acquiring musical copyrights and licensing them to record companies, movie-producers, ringtone aggregators, advertising agencies and other users of music.

The lower capital of operating costs of publishing apart, the reason for the disconnection between the record and publishing businesses is that record companies primarily rely on one source of income, the sale of recorded music in digital or physical form, whereas music publishers have more revenue streams. These include revenues from sheet music, live performance, the sale of recorded music, the broadcasting of their copyrights and the use of them in film, television, commercials and games. (In recent years record companies have with some success concluded what have been called 360-degree deals, deals in which they take a share of all the earnings of their recording artists, such as monies from live performance and the sale of T-shirts and suchlike, with new signings. However, that modest increase in revenues has been largely offset by the desertion of major acts, such as The Eagles, Radiohead, Madonna and others who have chosen to finance their recordings through alternative means.) Once the CD bonanza came to an end, the digital revolution was dramatically disruptive for the record industry.

In Download!: How The Internet Transformed The Record Business, I explained how the digital revolution (and the entry into record retailing of the super- and hypermarkets that took place at around the same time) cost the record industry its control over its own product and led to significantly reduced profits. For Apple, the dominant Internet player, and the likes of Wal-Mart Stores, Inc. (which at one point accounted for 20% of US recorded music sales while music represented 1% of its turnover) music was a means to an end selling iPods and increasing footfall. Such was their power that these two companies could, and did, impose conditions on record companies, especially in the US, over the sale of CDs and downloads.

Although the date has had to be pushed further and further forward, it is clear that digital sales of recorded music will eventually become greater than the revenues from physical sales. But those revenues will never compensate for the lost physical sales. Moreover, they dont bring with them the same profit margins. Digital sales are primarily of single track downloads; physical sales are primarily of CD albums. Even when the likes of Wal-Mart push and push on wholesale prices, CDs are far more profitable as bundles than single track downloads. And then suddenly, seeing a decrease in footfall, Wal-Mart et al cut the shelf space devoted to CD albums and physical sales fell at an even faster rate.

The impact of the digital revolution on publishing revenue streams was far less. In 2010, digital sales grew to account for 29% of the value of global recorded music sales. In the same year, digital musical royalties only accounted for 1.7% of music publishing revenues. One reason for this was that the digital revolution also posed problems for the music publishing community, albeit far less serious than those it caused the record industry. As well see, the digital licensing of music copyrights was not without its own dilemmas.

The history of the record industry is largely a story about control. In the pre-digital era, the majors so called because they oversaw the manufacture and distribution of their copyrights financed talent, produced their recordings and controlled the production, distribution, promotion and sale of those recordings (sometimes, as in the case of EMI, through their own retail outlets). On occasion squabbles would occur at the various linkage points in the chain, such as the hostility retailers had towards the major-formed record clubs, which cut them out of a huge sales stream, but such disputes were essentially family matters: all the parties believed in and depended on supporting the value of music. That harmony was shattered by the digital revolution, since the new entrants to the chain, such as Apple and Wal-Mart, had their own radically different agendas to that of the record industry.