Apple’s proposal could transform how streaming services pay songwriters and music publishers ... but beware the fine print

There is plenty of evidence that on-demand streaming music services like Spotify and Apple Music are disrupting the way people listen to music. Between them, the two companies have almost 50 million paying subscribers and are generating annual revenue in the billions.

As streaming grows, much attention is being paid to the problems between Spotify and recording artists. Whether it’s the arguments about “windowing” made by Adele and Taylor Swift, or complaints by artists like Radiohead about record labels not compensating artists for streaming, they get a lot of press.

While these are important issues, there is one troubling fact that gets lost in the shuffle: Songwriters have yet to benefit in any significant way from streaming. If we don’t change the current system for paying them, there’s a chance they never will.

My company, Songs Music Publishing, represents a cross-section of today’s songwriters, from global superstars who write music for themselves — like The Weeknd, Diplo, Lorde and Desiigner — to many others working behind the scenes writing music for others to perform. So I see, in real time, the money they are paid by streaming services. The current system — without question — is unfair to songwriters, and it needs to change.

Apple recently made a proposal that could fundamentally transform the way streaming services pay songwriters and music publishers. As part of a government rate-setting process known as the Copyright Royalty Board tribunal (CRB), Apple recommended that services pay a fixed penny rate per stream. This structure is a major departure from the way streaming services have traditionally paid royalties. Moving to a penny rate would be a tremendous step toward transparency in music publishing. But be careful of the fine print.

A penny rate would bring some much-needed transparency to streaming royalties for music copyrights, which are absurdly opaque compared to the other compulsory licenses to which songwriters are subject. With digital downloads, for example, it’s pretty easy to determine how much revenue is owed to a songwriter. There is a statutory rate set by the CRB, currently 9.1 cents per song. SoundScan or BuzzAngle tell you how many downloads are sold on a daily basis. It’s easy math to know how much money is in the pipeline.

With streaming? Good luck. There are five rate structures that cover the different streaming music offerings (e.g., free with ads, paid with no ads, mobile streaming, etc.), and they are all complicated to the point of being useless. For example, the rate for the premium subscription services is the greater of 10.5 percent of the services revenue, 21 percent of its total content costs (i.e., how much a streaming service pays out to labels and publishers together), or 50 cents per subscriber.

Confused yet? Add to this the fact that these rates cover two types of payments: A mechanical royalty paid to us directly from the streaming services and a separate performance royalty that is paid to performing rights organizations (known as PROs, for example, ASCAP and BMI), large government-regulated bodies that collect public performance payments to songwriters.

So our fractions of a penny are divided in two and paid through two separate parties. To boot, we don’t know how much is for each, because the deals between the PROs and the streaming services are private. Remember in “The Karate Kid” when Mr. Miyagi teaches the kid to catch flies with chopsticks? We’re catching fleas with tweezers.

Even worse, this abysmal lack of transparency disguises a paradox in the way streaming services currently pay songwriters. As the streaming market explodes in consumption, payments to many songwriters could — wait for it — decline on a per-work basis. This is because current compulsory rates for songwriters and publishers are not based on consumption, but rather on revenue or content costs generated by a streaming service overall. Therefore, the royalty pool is a fixed amount, no matter how much music is consumed on a service.

If people stream more music as they engage with services (which they will) but subscriber growth slows (which eventually it will), then the amount of money a songwriter is paid for an individual stream will drop. We’ll be left fighting it out with one another as our collective earnings are capped. Proponents of the current structure will say that what you lose in price, you make up in volume, so economics are equalized. However, as streaming services increasingly compete with pop radio in playlisting and radio platforms, will demand increase ratably across all genres? Or, as with every other medium, will it skew disproportionally to top hits? This could easily result in the most popular music getting paid way more while less-mainstream genres see their per-stream earnings plummet. So much for democratization in the streaming economy.

Apple’s proposed structure accomplishes a lot in bringing transparency to rates and tying earnings to consumption — a good development. But as is often the case with digital music, the words giveth and the numbers taketh away. The rate Apple proposes is soundbite-worthy: 100 streams equals the current mechanical rate on a download ($0.00091 per stream X 100 = 9.1 cents). That’s the same 100-to-1 ratio used to determine stream equivalent tracks on the Billboard charts.

The problem is that streams, by law, require a performance license in addition to a mechanical license, and Apple’s not paying for that. If it did, the price would be much higher. With digital downloads — where there is only a mechanical right — publishers and songwriters collectively get paid about 13 percent of what labels and artists get paid ($0.091 to the former and $0.70 to the latter). Meanwhile, it has been widely reported that Pandora — which exploits only performing rights — licensed music publishers and the major PROs at a rate of 20 percent of the rate the service pays to artists and record labels.

Taken together, one could argue that the indicated price of performance plus mechanical rights rights could be as high as 33 percent of label earnings ($0.0023 per stream if one grossed up Apple’s offer 2.5 times higher than its current proposal). In the young, fast-developing streaming market, reasonable people may disagree about the value of the component rights of any offering. Nonetheless, it seems clear that Apple’s opening offer is not nearly where it needs to be to fairly value our music.

This article originally appeared on Recode.net.