Saturday, August 29, 2015

Neighbouring rights: The growth engine of the music industry

(This story was initially published in Music Week)

By Emmanuel Legrand

If you work in the music industry, try running the following simple test. Ask around you the question, "What are neighbouring rights?", and most likely the answer will be, "Neighbours what?", except for those who work directly in this specific field of the music business. But behind this unawareness hides one of the fastest growing segments of the music industry, and one without which neither performers, nor labels would be able to survive in today's digital environment.

Simply put, neighbouring rights, also known as related rights, are the rights attached to sound recordings (as opposed to those attached to compositions, or authors' rights, benefiting songwriters and publishers), whose beneficiaries are the performers and producers (from a financial perspective) of the works. Compared to authors' rights, these are relatively new rights as they have only been around for some 60 years, but have really taken off in the 1980s, mostly in Europe.

Today, the global market for neighbouring rights represents about €2 billion (£1.43bn), according to a recent study published by French society Adami (see below). It is also a highly concentrated market with close to 50% of all collections taking place in Europe, and about 30% in the USA. The top 10 markets account for 82% of the overall collections.

"This is a market that has been growing in a number of territories where these rights already exist," says Peter Leathem, CEO of the UK's rights society PPL. "In these countries, societies are also doing a better job at monetising those rights. That's going to continue. The whole area of neighbouring rights is looking very encouraging."

In the UK, revenues from neighbouring rights have been growing consistently throughout the past 15 years. At its recent AGM early June, PPL disclosed that overall collections and distributable income reached an all-time high of £187.1m and £161.2m respectively, both up 6% over the previous year. "In the UK, the market has grown considerably in last few years," confirms Leathem. "There has been a significant amount of money collected and passed back to performers and labels, when at the same time revenues were not growing elsewhere. Over the recent years, the importance of neighbouring rights has been increasing and that will continue. In the UK, we have potential to grow and we are gearing ourselves up for this."

Alongside societies like PPL and the dozens sister societies existing around the world, there is now a growing number of companies involved in the collection and distribution of neighbouring rights. With the business growing, and a larger pot available, competition has increased to a point that some believe that there might a saturation soon, with margins dropping and making the businesses less sustainable. "A €2bn euro market should be able to support a few players," says Andrew Gummer, the , the President of the Music Division of independent global music, film and TV rights company Fintage House.

Indeed, the rise and rise of neighbouring rights as a source of revenues for performers and labels has attracted a wide range of companies collecting on behalf of rights holders. Some companies have been established for a while, such as Fintage or Premier Muzik International, others are relatively new like Irving Azoff's Global Music Rights, leading music publisher Sony/ATV or Kobalt. "For someone like me with a background in labels and publishing, it is a fascinating market," says Gummer. "It is fascinating because it is growing when not much else seems to be. And because it is growing, there is more competition from other agents and collections societies, so that in order to grow, more people want to collect internationally on behalf of national artists."

With offices in the Netherlands and the UK, Fintage is an established firm in the sector active as a music publisher, master rights licensee and rights management company. Gummer says, "Our strength is that we can provide a large range of services so that people can chose. We always look at what the market needs so that we can start supply the market. We have fluidity, which is the mark of a small company and I like the idea that we can offer combined services. We are also becoming increasingly creatively involved with writers and performers so that we can offer something more."

Meanwhile, rights management and service company Kobalt, with operations in London and New York, has expanded its footprint in rights collection and rights management from authors rights and publishing rights to the neighbouring rights sector, applying the same level of data sophistication and expedited payments. "Neighbouring rights is a good to place to be in at the moment," says London-based Ann Tausis, Managing Director of Kobalt Neighbouring Rights. "People are much more aware that neighbouring rights exist and this is a very good thing. As other income sources are going down, performers and labels look at its as a new revenue stream."

In over two years, KNR has secured deals with such artists as Bruno Mars, Sam Smith, Calvin Harris, Björn Ulvaeus (of ABBA), Roxette, Nero, American Authors, Christina Perri and Hurts, among others. Tausis says KNR had to build a specific pitch to attract these artists as they were a young company with initially a competence in publishing and expanding into neighbouring rights. KNR benefits from Kobalt's expertise in data management, which allows to pay on a monthly basis and provide clients with a dashboard reflecting the use of works around the world.

"We had to go out and tell people that we existed, that we have a portal, that we are transparent, that we go direct to societies,' says Tausis. "For us it's been a lot of happy clients talking to friends and the list of clients coming to us has increased."

Some players in the field are even more recent entrants than Kobalt, like Sony/ATV, which set up a year ago a neighbouring rights division. "Our approach for the first year was to keep it quiet," explains London-based George Powell, a former PPL executive who moved to Sony/ATV over a year ago to set up a neighbouring rights shop within the music publishing company. Clients signed to the service include Snoop Dog, Mark Ronson, Pharrell Williams, Nile Rodgers, the estate of Lou Reed, Robin Thicke or Clean Bandit.

. "We are quite selective on who we work with," says Powell. "Some agencies who do this work have in excess of a thousands clients. If you want to do the job correctly you'd need a team of a hundred. We try to keep our client numbers lower and keep a high level of service."

Adds Powell, "The whole point of having low numbers [of clients] is that I can liaise with managers or lawyers and be on hands directly. We are offering more personal services, and we have someone with society experience to back them up. And in addition, we are 100% transparent."

Powell adds that the first thing he's done was to "naturally approach clients that Sony/ATV published and with whom we already had relationship," but it is not exclusive. "It can be anyone at all," he adds. However, Sony/ATV does not at this stage collect on behalf of labels. "This is something that we could do but we do not wish to," says Powell. "I know how to do the work but I have more expertise on performers."

The focus on performers is also the forte of established company Premier Muzik International, which has been in the business for over 15 years. With over 1500 entities as clients (performers, labels and publishers), Premier Muzik is one of the leading agents dealing with international rights collections, in partnership with Paris-based All Right Music, launched in 2004 by Christophe Piot. PMI's founder Olivieri says his company focuses more on the performer's side of neighbouring rights than the label side, which is outsource to Global Master Rights. "The master side is a bit more labour intense, and do not have the manpower to dedicate to this task," he explains.

For Olivieri, the existence of companies like his, active in the rights collection business, can be explained by the need from clients -- labels or performers -- to ensure that they are properly receiving their royalties,which can sometimes be a challenge if left only to the collecting societies. "I have to say that one of the biggest resistance is coming from societies that are looking at agents as a bunch of crooks," he says. "But we did not get this big by bullshitting performers. We provide transparency. Yes, we've seen agents sending cheques without itemisation. Do they think people are stupid? It is important that statements are as clear as possible. Clarity is probably the most important thing, but communication between societies could be improved."

Some other structures are providing a boutique service like Double Six Rights, an offshoot from UK's indie label Domino. Henry Thomas, the London-based neighbouring rights manager at Double Six Rights, says he brings an indies' ethos when he works with labels and performers. "We look after labels and performers and are quite tapped into the indie community as Domino has good relationship with many other labels," explains Thomas, who adds that Domino has a controlling stake in Rights Retriever in The Netherlands which specialises in rights management. "Together we have a bit more experience, knowledge, clout and reach."

Thomas says that the service is first offered to artists signed to Domino, but it is up to the artists to chose to do it, a choice made by the Arctic Monkeys for example. "It's a separate service that is offered," he says. "But most of Domino's signings have elected to sign with Double Six." The company takes a percentage of the sums collected to cover admin costs and redistributes the rest to the rights holders. "We only get paid if our clients get paid," he says.

Thomas is also very much aware of the level of competition in the market. "We are never going to be competing with the like of Kobalt because they have so much money, staff and technology," he says. "We target the middle tier of artists and try to serve that sector better. From my perspective, we are stakeholders in the world of neighbouring rights, and I am also looking to supporting societies and try to help the development of the whole sector."

Ag the other side of the spectrum, a company like Believe Group, which operates a digital distribution network in 32 territories, focuses on labels' rights. "We are not involved in artist collection," says Lee Morrison, General Manager UK, and SVP Rights Management, at Believe Group. "There seems to be a huge amount of competition for artist collection." He adds, "Believe is in 32 territories so it is important for us to track [royalties] in all countries. But from a business standpoint we focus on the top 10-15 [markets], because that's where the money is."

The most important part of the business, says Morrison, is ensuring that the repertoire of its clients is properly registered with the societies with the appropriate data. "From a producers standpoint, the learning curve is that they need to have proper data and make sure works are registered correctly," says Morrison. "I have a team that checks every single registration. We make sure the repertoire we represent is clean. It is all about data and having that nailed. We teach our producers a lot about what right they have. Many people do not understand the rights: educating is important since it is a huge part of their income. Even in the UK, people think that once they have registered with PPL that's it, but there is so much more going on out there. That's part of the education."

London-based Scott Cohen, co-founder of digital distribution company The Orchard, agrees with Morrison on the importance of data and timely payments. Although the neighbouring rights service is available only to clients of the Orchard, Cohen says it has been fully integrated into other aspect of the organisation. "A big part of what we are trying to do is to take the data that comes with neighbouring rights and integrate that with other data from marketing and sales," says Cohen. "We can we plug that data into our analytics platform, and provide a dashboard that shows close to real time the activity."

This holistic use of data allows The Orchard to bring value added to the data. As Cohen says, collecting neighbouring rights is no longer simply about "sending a cheque to rights owners every quarter and people are happy to get it. Now it's more about 'let's see how we can map that'. What is happening with your Spotify streams, your sales, your iTunes sales, your Facebook promotion, your Twitter campaigns and let's see how we can use the data to understand what is driving the market."

The various agencies and companies involved in neighbouring rights collections surveyed for this spotlight all agree that the biggest issue with neighbouring rights is the quality of the data and the flow of data. "We are great believers in data of course and if we get data right in one place, it will be right in other places," says KNR Tausis. "The business is still reliant on the record companies because that's where the info comes from, and up until now the labels did not have have a good attention to the data. If the line up is not complete or accurate, it does not affect the bottom line of the label but it can seriously affect other rights holders. At Kobalt, we interrogate that data and try to find the income that is missing."

Premier Muzik's Olivieri says that the "real big problem is the communication of data between societies. If we had a common platform it would be better for everybody because royalties would flow better. We need a centralised database but I assume that not everybody would want it."

"As a global industry the music industry is a long way from having good metadata," echoes the Orchard's Cohen. "There is still a long way to go to get the titles, the performers, the labels right. The data is still not cleaned up and this will take some time."

The heart of the business, says Olivieri, is to ensure that data pertaining to the creative works is correct and then that all the uses of music are accounted for and paid to the appropriate rights owners. Says Olivieri, "Our data is based on our clients and we are ready to provide it to societies for free if they want it. If everybody has same platform all money will flow quicker. This could be a tool that they could use with their own tools."

For Fintage's Gummer, the neighbouring rights societies' system "feels hopelessly out of date" and would benefit greatly from huge improvements. He explains, "PPL has modernised very effectively and SoundExchange came from a standing start with record performance. Both are very progressive and both have a huge advantage in that they are dealing with English-speaking repertoire that travels better than any other. But there are societies that are still absolutely terrible in how they see the world, how they deal with claims and follow-up claims. CMOs are not changing fast enough. Yes, we need to modernise the system so that it becomes a really modern businesses. I have never seen a business in this Century with so much paper..."

PPL's Leathem admits that there is two major issues that societies like his need to tackle -- establishing a global reliable database and improve communication between societies. As he said during PPL's AGM in June, "managing sound recording data and the related IT technology is not easy and is an area where it makes absolute sense to collaborate and for CMOs to move away from all building their own solutions at varying costs and with varying degrees of success and sophistication."

Leathem says that PPL is now in a position to license some of its back office tools, especially its IT systems and its sound recording data solutions. He considers that there is much to gain in time and efficiency in passing on these technologies to other collective management organisations (CMOs). In addition, PPL, alongside a group of over 30 CMOs representing performers -- including SoundExchange in the USA, VPL in Germany, Adami in France, among others -- and under the aegis of trade body SCAPR, are working on developing new IT systems and new ways to exchange data between themselves.

At the moment, all the players active in the field complain that there are too many different reporting systems and databases that do not talk to each other. The main project between these CMOs is called VRDB2, which stands for Virtual Recording Database, and is about developing a more inclusive approach to data and to the exchange of data.

"We are involved overseas in a range of projects to see how can do things together better," says Leathem. "We all have different ways of working and, moving forward, we need to streamline our operations and we need to better standardise things. VRDB2 will help CMOs move data faster and better."

For The Orchard's Cohen, this is long overdue. "Some of the reporting from PROs could be brought to the 21st Century," he claims. "The lag in reporting is tremendous. There is no reason we should not get close to real tine reporting especially with radio. The technology exists so why do we have to wait? I guess it must make [societies] feel uncomfortable."

The data issue is crucial as the market keeps growing with the arrival of new countries which are as many potential sources of revenues for international and local repertoire. A society like PPL, not content by being the second largest society in the world in revenues collected, after SoundExchange in the US, has become the world's leading society for international collections on behalf of record companies and performers.

International collections have played a crucial role in providing PPL and its members with on going growth over the past few years. In 2014, they represented 20% of PPL's overall revenues at £36.4 million, up 6% over the previous years, a growth fuelled by better collections systems and also an increasing number of reciprocal agreements with sister societies -- 75 in total.

The international market had been recognised a few years ago by PPL's outgoing chairman Fran Nevrkla as a major driver for growth and his successor Peter Leathem believes that one of the ways to pave the way for a better flow of royalties is to be very active on the international scene and playing a major role in helping other societies develop best practices and tools to increase the efficiency of the collections and the circulation of these royalties to their legitimate rights owners around the world.

The neighbouring rights market is highly concentrated, with 15 countries delivering the bulk of the revenues (see sidebar). Europe, as the birthplace for these rights, is by far the biggest region, with 50% of the collections, but North America is catching up fast. "There's revenues now that did not exist ten years ago, especially in the US where these rights did not even exist," enthuses The Orchard's Cohen. "That said, in the US it would be great if there were applied to terrestrial radio as well."

Adds Leathem: "Clearly the US is the biggest generator of revenues for neighbouring rights, with the development of internet radio and that's going to continue. The UK is one of the biggest collectors. But beyond that, if we look at the Far East, there are now rights societies created in large countries like Indonesia, Singapore and South Korea, and Malaysia has already decent collections. There is got to be potential across the markets."

For Premier Muzik's Olivieri, the main territories that deliver the highest revenues are the US, UK, France, Spain, South America, the Netherlands. "Italy has just come back in the pile, and I am happy about that," says Olivieri, noting that some Eastern Europe countries "are also starting to pay neighbouring rights."

Believe's Morrison looks with interest at some emerging markets showing potential such as Mexico where a brand new society is starting to collect rights. "They sued a major radio station that did not want to pay, and then fell into line," says Morrison. "In emerging territories, music not valued as well as in Europe. And there is a lot of pressure to not have legislation."

Sony/ATV's Powell also notes with interest that new territories coming into the club. "More and more countries are paying out," he notes. "In Russia and Brazil, there were just nickels and dimes and there's a bit more of a buzz lately." But the region with real growth potential is Asia, especially China and India, were nothing is collected at the moment. "More Asian territories have to come in line," says Olivieri. "There are huge populations in these countries and rates for music are pretty low."

For Kobalt's Tausis, the Far East is enjoying a rapid development of its rights market, but it will take some time to materialise in deeds. "At the moment, there is not really much in place, compared to publishing rights," she says, "but when everything will be in place, it could be quite lucrative."

[Sidebar 1]
 A two billion euros global market

The global market for neighbouring rights was worth slightly over two billion euros for 2013 (€2.034 billion), according to a report unveiled at Midem byFrench neighbouring rights society for performers Adami. The actual figure is probably slightly superior due to the lack of data on a certain number of countries, according to the writers of the report, former SoundExchange CEO John Simson and Music Week US editor Emmanuel Legrand.

The report covers all the countries where neighbouring rights are in existence, and encompassing all repertoires (music, audio-visual) and all types of rights owners (performing artists, musicians, producers of recordings, and artists from the audio-visual sector).

The key finding of the studies are the following:
> Regionally, Europe is the main market for neighbouring rights with close to half of all the revenues collected in the world (48.33%), followed by North America (30.40%), South America (12%), Australasia (8.59%), the Middle East (0.45%) and Africa (0.23%).
> With 28% of all collections, the USA is the largest market for neighbouring rights even if the rights are limited to digital non-interactive platforms such as Pandora, satellite services (Sirius/XM) or simulcasts of existing radio signals (iHeart Radio).
> The global neighbouring rights business is concentrated in 10 main countries that account for 82% of all collections. After the USA, the nine other key markets are: the UK (12%), France (11%), Japan (7%), Brazil (7%), Germany (7%), Argentina (3%), the Netherlands (3%), Canada (2%) and Norway (2%).
> Aside from the top 10 markets, the rest of the world accounts for 18% of all collections, with European countries accounting for 80% of this amount.

There are also signs that the market will extend rapidly to new markets in Africa and in Asia. On the African continent, collections are almost non-existent. North African countries have not contributed so far, but some encouraging signs are coming from Kenya where a young society, PRISK, launched in 2012 has started collecting neighbouring rights, with a million US dollars in revenues in 2014 and $10m projected in 2017. In Senegal, a new PRO has been created early 2015 to collect both authors and neighbouring rights not only for music but for other repertoires.

"The important learning from this study," comments Bruno Boutleux, CEO of Adami, "is that we have major pockets of growth in the world. The European market is quite mature and stable, but the North and South American markets are full of promises, while in Africa and SE Asia, almost everything has to be built from scratch. There is still a lot of work ahead of us to develop a truly global neighbouring rights market."

[Sidebar 2]
The USA is becoming a powerhouse

The United States have become over a decade the biggest market in the world for neighbouring rights, but the paradox is that the country does not have "proper" neighbouring rights legislation on par with that of Europe.

Neighbouring rights were introduced in the States as part of the DMCA (Digital Millennium Copyright Act) sponsored by the Clinton administration in 1998. The DMCA – in article 114 – grants performers and producers of sound recordings a remuneration for the use of sound recordings via non-interactive services via cable, satellite or the internet. Other ways of transmission such as terrestrial radio and TV are excluded, which means that the 9,000 FM radio stations in the US do not pay neighbouring rights, unless they re-broadcast their programmes on the internet (simulcasting), nor do interactive services like Spotify.

The 1998 DMCA also called for the creation of a new collective management organisation to collect and distribute the proceeds of the neighbouring rights. The non-profit society SoundExchange was set up in 2003 to fulfil this mission. Based in Washington, DC, SoundExchange has collected $656 millions in 2013 and distributed $590.4 million to rights owners (up 28% over 2012). In 2014, SoundExchange collected $788m, and since its creation, it has distributed to rights holders over $2.7 billion (€2.45 billion). "Clearly, the US is the biggest generator of revenues and that's going to continue," says PPL CEO Peter Leathem.

The bulk of SoundExchange's revenues come from two services experiencing major growth: Pandora, an online radio platform, which claims over 76 million users, and Sirius/XM, a satellite radio platform, with 25 million subscribers. SoundExchange collects also from simulcasters like iHeartRadio (formerly Clear Channel) and from more than 2,500 radio stations simulcasting their programmes online.

SoundExchange has reciprocal agreements with over 30 societies outside the United States, but less than 1% of its revenues come from international sources. This situation relates to the absence of ratification of the Rome Convention by the United States. The lack of neighbouring rights linked to the public performance of recorded music by terrestrial broadcasters penalises performers and producers of recordings who cannot claim similar rights outside of the United States. In the Spring 2015, a new Bill was introduced before Congress, the "Fair play, Fair Pay Act, which proposes to grant performers and labels performance rights for the use of sound recordings on terrestrial radio.

Of course, the perspective of the US joining the fold will have a lot of implications, not least allowing US performers and labels to go collect neighbouring rights overseas, but also non-US artists and labels being at last able to benefit from terrestrial rights for their works. The uptake could be quantified in hundreds of million dollars in additional revenues for performers and labels. "It is going to be interesting to see what is going to be happening if they implement legislation in the US," says Ann Tausis, Managing Director of Kobalt Neighbouring Rights. "That would take away all the reciprocity problems that the Americans would have now. US artists would benefit tremendously by qualifying outside of the US for neighbouring rights. But we've been there before, so we'll see if it happens this time around."

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