Chapter 3 The Creation of Music
The creation, live and recorded performance of music is different in the case of popular music and classical music, and has special characteristics for jazz and world music.
Throughout the world, and even more in the CEE region, the cultural sectors, and music in particular, are dominated by freelancers and micro-enterprises. In European countries, freelancers and micro-enterprises are subject to various simplified tax and financial reporting requirements, and are exempted from most mandatory statistical reporting. Furthermore, they often creatively combine various economic activities, such as performing arts and technical services. As a consequence of this, the creators of music are often invisible for policymakers.
3.1 Market Players
When analysing the creation of music, we have to design specific surveys after carefully mapping the activities of musicians.
We have to bear in mind that the simplified financial accounts of most music enterprises do not allow for sophisticated financial analysis.
As a consequence, national statistics offices only estimate the combined economic performance of such related activities as sound recording, music publishing, film- and TV production.
Any more music-specific analysis must rely on industry-specific surveys that are usually not included in the government statistical programme, and the industry itself has to organize it.1
CEEMID used the three income streams model presented in subchapter 3.3, which is essentially a value chain based model that was developed in the United States and adopted by the European Commission’s Joint Research Centre for European creative and cultural industries for policy purposes. We made minor adaptations in the three-income model for applicability in Central Europe, and created survey programmes to estimate the strength of demand and the actual income in the three main streams.2
In the original American music business model recording income is the “main” income stream. In the 21st European music business, just like in the early 20th century, live performance creates far more revenue than recordings. The author’s income stream is the oldest, traditionally and analytically first business-like revenue, which is dominated in the US by music publishers. In the fragmented and less developed European markets, most artists are not represented by publishers and the relevant revenues are collected by collective management societies. We modified our model’s labels according to these regional differences. See, for example, the mapping we used in Croatia (see Figure 3.1 Mapping the Music Industry).
The most important difference between the emerging markets of the CEE and the mature markets of the US or the UK is that only 5-10% of the artists have a publishing agreement or an (exclusive) recording agreement.
Because royalties are low for both compositions (copyrights in the common law countries) and for the neighbouring rights of recordings (sound recording copyrights in the common law countries), publishers and labels do not see a business opportunity to represent music, and musicians do not see the added value to pay for these services. Similar to the hard to reap opportunities in the live music market, here is another chicken-and-egg problem of the emerging market: publishers and labels do not have a sufficiently large income base to invest into new music and promotion, which undermines their credibility. Many artists do not believe in the necessity of label and publisher services, even though they do not have the time and the skills to sell or claim revenues in many music uses. Most of the artists remain self-managed and self-published, even though in the absence of label and/or publisher representation, they have to perform the roles of accounting, promotion, marketing, auditing or rights management.
In our view, one of the most important business challenges in the region is the development of adequate record label and, especially, publishing services that are tailored for the lower monetary value and lower cost bearing capacity of the emerging market repertoires. Existing market practices, technology used and regulation should be reviewed in the light of designing cheaper services to tap new or not well managed revenue flows. We believe that this is the only way forward to professionalize the publishing and recording side of the business.
3.2 Creators of Music
Musicians and their bands create new music works, they record them, and in the CEE region in most cases they are self-producing and self-publishing their work. Because of the small revenues in these markets, there is little specialization. Creators often must play several artistic, managerial and technical roles, and even this way they cannot make a living from music alone.
For example, technical roles related to the production and distribution of sound recordings belongs to division 59 of the
Section J Publishing, audiovisual and broadcasting activities of the statistical classification of economic activities in the EU countries, whereas creating music works and performing them belongs to
Section R Arts, entertainment and recreation.3 Creative workers usually build a multi-path career that incorporates various economic activities. Many musicians, even rather popular, successful ones have a other jobs because they cannot make a living alone from these music related activities.
This is one of the reasons why creative and cultural industries, and particularly music is so hard to understand for outsiders. Freelancers and microenterprises carry out various economic activities, which are not related in the governmental economics statistical system or in the tax systems. Statistical offices do not create detailed economic statistics where most of the activity is carried out by microenterprises and mixed profile businesses. In these cases, the music industry can only represent itself on a factual basis if it organizes the representative collection of this information.
CEEMID has been organizing representative music industry surveys since 2014. These music professional surveys are very important inputs to our datasets, and our national policy documents, advocacy reports and royalty valuations.
3.3 The Three Income Stream Model
In every country, the relative majority of artist income is earned in live performances, with important differences. In Figure 3.3 The Relative Importance of Income Streams by Country we depicted the average share of live music income with light blue.
The other colours:
Brown shades: other music related income, such as teaching, management, technical roles besides primary artistic role
Yellow shades: public grants and private sponsorship
Green shades: various forms of collectively managed royalties
Blue-to-green: various forms of label, publisher and individually managed royalties
It is notable that recording revenues are only significant in the richest market, i.e. Austria. In Bulgaria they appear strong, but in fact this is mainly a result of the weakness of other income streams. In Hungary, royalty levels are high because of the high level of collectively managed royalties. In this country, as we have shown in more in-depth analysis, the decline of small venues and the collapse of the concert infrastructure hit performing musicians especially hard.4
Slovenia is a particularly interesting country. Even though it has one of the strongest live music markets in Europe, because of the small size of the country, many services, for example YouTube, are just not monetizing the music products. Furthermore, Slovenia did not have any meaningful private copying compensation in the past 10 years. While the country has very strong fundamentals for growth, the market building tasks are the most pressing in this territory.
The new digital sales channels are very important in the emerging markets where collective management cannot produce significant income – this is particularly true in the former Soviet republics and most of the countries of the Balkans.
It is not easy to compare the income levels of musicians from Vienna to Yerevan, or from the Lithuanian countryside to Salzburg province. In our survey research, we used the same subjective income question that has been asked in Pan-European surveys for more than a decade. We asked how often the music professional had difficulty with paying his or her bills.
With the exception of Bulgaria our respondents were more likely to have difficulty with paying their bills from time-to-time or almost all the time than the general population.
3.4 The Royalty Gap
The biggest difference between how the music business works in the CEE region and in mature markets is determined by the total amount and the level of royalty payments. In the region, fewer composers, producers and performers receive royalties, and the level of royalties is lower6.
Households in the region have lower income than in mature markets
Out of this lower income, a higher percentage of the available household budget goes on necessities and less on entertainment and culture
Participation in music is lower than in the mature markets
The music business can achieve a lower market share in the recreational and cultural spending in the region than elsewhere in Europe
The first two factors are demographic, macroeconomic factors that need to be quantified, but music stakeholders can do little about them. The third and the fourth factors can be directly influenced by better or worse policies and business practices in the sector.
As Fig.3.5 Digital Revenue Gap shows, digital music business revenues are disproportionally low from household recreational and cultural spending, which is already adjusted for lower household income and lower percentage of recreational spending in the region.
With significant national differences, we found the following problems:
In almost all countries, recently including Austria, the taxation of music is less favourable than in other sectors of the economy. In most countries, there are no credible economic impact assessments that could change the tax profile of the industry in the forthcoming regulatory debates around the modernization of the EU VAT system.
In some countries, the participation level in music, both on active, singing, playing, and passive, listening levels is very low. We believe that an important factor is the inadequate music education. The institutions and stakeholders of popular music must take the initiative, because music education in many countries only serves the needs of classical music.
A far smaller portion of the households is paying for music, and a higher portion is engaged in home copying and torrenting. Some countries, like Hungary and Slovakia, significantly increased their private copying compensation levels. Others, for example, Lithuania, Poland, Romania, Bulgaria or Slovenia, do not compensate private copying as it would be required by the EU law. Outside the EU, such compensation is minimal.
Royalty levels in some collective management channels are low. In some cases, this is due to mis-pricing, i.e. too high or too low royalty tariffs, and in some cases this is due to problems with market monitoring or enforcement. In many countries, we see serious problems with public performance royalty collection in background music; and in almost all countries there are serious problems with the way broadcasting royalties are administered or collected. Some countries have very unfavourable legislation for enforcing payment in the case of unlicensed, illegal uses.
In some cases, the pricing of digital streaming services appears problematic, and there are no clear national marketing or roll-out strategies present.
Some national market protection quotas are present, and most countries spend significant taxpayer money on public broadcasting, but the efficacy of these government actions is questionable. This reduces the market share of the domestic repertoires.
Music promotion in the new, super-competitive global sales channels, such as on YouTube, Apple Store, Spotify or Deezer, requires significant R&D investment, and an understanding of AI, machine learning and data-driven algorithms. Given the small repertoire sizes in the region, this is challenging even on a national level and poses an impossible challenge for small local labels.
Revenues are collected from more and more sources, which means that royalty payments are increasingly micropayments. The cost of collection requires extremely high levels of transactional efficiency at the level of labels, distributors and collective management. The cost of collection often exceeds the actual income, yet throughout the region, isolated, costly, small systems are being developed. This is extremely problematic in the SEE markets.
After years of policy and regulatory debates, the new DSM directive7 gives hope to close the value gap and increase royalty revenues from certain platforms, including YouTube and Facebook. However, in most countries, no calculations and case studies have been made, and there is very little preparedness on the side of rightsholders for the national transposition of the DSM directive.
In some countries, the granting of popular music is non-existent, like in most SEE countries, or uncoordinated among different levels of government, like in Czechia. Grants are usually not based on ex ante assessment of the needs of music stakeholders, and often follow the logic of classical music, jazz or authentic folk music grants, even though such areas of the music scene have distinctly different needs.
In many cases, the music sector faces similar problems to the film sector, broadcasting or other performing arts, including theatre, ballet, opera. Cooperation in policy advocacy, grant design, research and development, market research and business development is very weak.
We hope that the subsequent chapters will help national stakeholders to re-assess their strategies in these fields, where the initiative clearly must come from the music business.
This statistical nomenclature is largely harmonized worldwide, and the problems mentioned here are relevant in the United States, Australia or elsewhere, too. In the European Economic Area, Regulation 1893/2006 makes the use of this statistical system mandatory in all countries.↩
Our research is well representative of Hungary, Czechia, Slovakia, and Austria, and to a lesser degree in the other countries, and more in-depth research in those countries may lead to slightly different results. We surveyed ‘hobby’, ‘part-time’ and ‘full-time’ musicians. Because of the low revenues, much of the national repertoire are produced by individuals whose income is only partially made from music events and recordings. Many individuals work in music-related technical or managerial roles, too, or in completely different walks of life.↩
Directive (EU) 2019/790 of the European Parliament and of the Council of 17 April 2019 on copyright and related rights in the Digital Single Market and amending Directives 96/9/EC and 2001/29/EC↩