The future of PROs; cost focus, competition, rights exclusion, commoditisation
Should founders be targetting PROs for disruption, or just building around them?
Introduction
Often the topic of Performing Rights Organisations (PROs) comes up when attending a music industries event. The narrative usually goes something like "PROs are old fashioned organisations, not fit for purpose, a tax on creativity, they don't work for songwriters, they don't understand data" and so on.
But how true is this, and if so, why are they still in the position that they are? A well operating marketplace is incentivised to disrupt organisations that work in a suboptimal fashion, there are no free $100 bills lying on the ground, so why haven't the PROs been disrupted yet?
It's not for lack of trying. Having worked in and around strategy teams examining the PRO business model for a number of years, I've had countless conversations with founders and people inside the industry who have this challenge in their sights. And yet, 2021 is nearly over and the market is structured largely in the same way as it was when I first started looking at it. Why?
A disclaimer, my experience is primarily within European PROs, which leads a large amount of this analysis. There are differences across regions, although the general conclusions should largely hold.
The state of PROs
PROs exist to licence, collect, and distribute money for songwriters and publishers. There is some variety in the mode of operation depending on territory, but on the whole there is a single entity to do this job within a country (key exceptions being the US and Brazil). Traditionally, a songwriter will join their local PRO, and it will go out and get as much money for the rights it has as possible, using collective bargaining to drive value. Local PROs have an agreement in place with each other, so that royalties can be paid across borders when music is played in a different territory.
However, the world is changing, music is now largely digital, and the logic of defining markets by territory is being tested. We can see this in Europe, where after consideration of different approaches, "option 3" licensing was approved , enabling joint ventures to license DSPs for the region rather than on an individual basis.
What that means for a PRO is that its source of royalties is evolving, and so is its business structure.
Comparison of PRS's financial accounts in 2016, 2019 and 2020 gives an indication of the typical breakdown of royalties coming in to a PRO is evolving, and how that was affected over the past 18 months:
2016: 13% Online, 20% Broadcast, 29% Public Performance, 38% International
2019: 22% Online, 16% Broadcast, 27% Public Performance, 34% International
2020: 29% Online, 20% Broadcast, 13% Public Performance, 38% International
Focussing on the pre-COVID numbers first, its clear that Online grew and Broadcast was declining. International is a reflection of similar changes in other territories, so can be largely ignored at this point. Public Performance numbers (collecting from pubs, hairdressers, and gigs) are generally a function of a PRO's ability to monetise this form of licensing, which is relatively constant in developed markets, and in general growth is inline with business growth/GDP etc. (there was a large up-tick in the above numbers between 2018-2019, but that is likely down to delayed accounting; the important thing is the long term trend).
This is an important move when considering it against the admin rate that a PRO takes against different streams of royalties. For clarity, nearly all PROs operate in effect as a not-for-profit membership organisation, comparing the cost vs. royalties collected to calculate a differentiated admin rate against the money coming in. The difference is fairly large, as you can see from PRS's published rates. For Broadcast, admin rates range from 13-20%, whereas for Online it is 10%. This trend in royalties being increasingly from Online sources directly impacts the bottom line of a PRO.
Obviously Covid has had a large impact across the music industries, but outside of Live, arguably none has been affected as severely as PROs. As we can see from the numbers above, a third of royalties (when adding in International, it is likely nearer to 40%) come from Public Performance, which was annihilated as a source of income for songwriters in the pandemic. While the numbers from PRS show that 13% of royalties came through this segment in 2020, in reality a percentage of that will have been carry over from the year before (Public Performance money is slow). Public Performance is also generally collected and distributed with a far higher admin rate than other sources, 19-23% in the PRS rates.
As the pandemic starts to ease, this will correct itself. But the recovery will be relatively slow, and it will be interesting to see if there are any longer lasting impacts.
Going back to the point around music becoming increasingly digital, this causes a problem for PROs when considering their position and relevance in the market. Online is not like Radio, TV, or Live, in that its use is less easily defined within a specific territory. Sure, there are some licensing schemes that are single territory only, but increasingly licensees and consumers expect to be able to secure rights for a region within a deal (or even, surprised pikachu, globally). At this point, PROs are no longer collaborators, but competitors with each other for the rights that they represent. So, not only is a PRO's ability to pay for its costs diminishing, but it is also increasingly in a competitive marketplace.
Competition between PROs
As previously mentioned, competition between PROs has traditionally existed in some territories, notably the United States. ASCAP, BMI, SESAC and GMR all vie for attention of high earning songwriters through a number of tactics. But ultimately, it often comes down to upfront money through an advance. As music becomes increasingly global and online...which obviously it is already...more accurately, as the money in the system become increasingly global and online, PROs will become increasingly in competition with each other, and if the key differentiator is ability to advance money upfront, then the previously mentioned declining financial position becomes even trickier.
"But", you say, "you can only join one PRO". That's not actually 100% true. Yes, a songwriter can only join one PRO in a territory, but they can join multiple PROs directly in different countries. So at the very minimum, a writer could reduce the time and cost involved in the international network by getting distributed directly in each main country. Obviously, there is a certain amount of effort involved, and it becomes an accounting headache, but major writers have been doing this for a number of years now.
Furthermore, a relatively less tested area of interest is in a rightsholder's ability to withdraw a category of rights from a PRO. Known as the "Gema categories" the European Commission defined 12 "utilisation categories" a member of a society could withdraw their rights for, while remaining a member of the PRO. To my knowledge there hasn't yet been a significant online-only PRO to emerge (despite numerous press releases), but it is conceivable in the future. That said, the only public reference for Gema categories that I can find is from before Online became a relevant area of rights exploitation, so it isn't explicitly detailed.
So, how do PROs get disrupted?
As noted above, the core business of PROs is declining, though there will remain long term residual activity in the more analogue areas of business, particularly Public Performance. Disrupting an incumbent in an already declining business is usually a fairly foolish endeavour, unless you can turn its fortunes around through technology or scale benefits.
Due to the distributed nature of licensees, it's unlikely that any play around competing for licensing of Public Performance is going to be effective or scalable, outside of maybe the large international concert groups. However, Live as one part of the general performance category of rights means that to licence Live directly would mean doing the entire category, which is unrealistic as an approach. A number of startup ideas that I have seen or assisted in the past have looked at improving the process of data capture from businesses and venues, though as the current processes rely on analogous distributions, increased data points are likely to add further cost rather than save it (albeit with increased accuracy).
Broadcast licensing is in a similar situation, however, there is a key trend to be understood where an increasing percentage of the large national blanket licences are dedicated to online activity (video on demand etc.). For clarity, broadcasters are usually licenced in blanket licenses to cover all activity, with weighting attributed to different types of activity.
There are technical limitations stopping the roll out of regional licenses in Europe currently, but this will not always be the case and it is likely that this entire sector moves to Option 3 type licensing, as DSPs are licensed, sooner rather than later. Once this occurs there will be more competition for rights to be licensed, across existing JVs/SPV “hubs” (e.g. Solar, Mint, ICE) and possibly new entrants or alliances. Although there would need to be a distinction of multi-territory licences (one entity licensing the rights it controls for use within multiple countries) vs. national licences for rights withdrawals to enable hub entities to do this licensing. A more extreme situation would be for analysis to make the case that the benefit to rightsholders withdrawing rights for licensing the major broadcasters direct on a multi-territory deal outweighs the value that would be lost from smaller national broadcasters, and so they do it anyway.
Online as a category has already been disrupted to a degree. The majority of value is being licensed in Europe through hubs and then distributed to PROs for onward payment. This will likely remain the case unless a new entrant manages to aggregate catalogue and its writers effect category withdrawal. In terms of existential threats to PROs in terms of rights and licensing, this is likely the greatest (when combined with Broadcast). That said, like online music distribution, it is likely a low margin business.
Creating a new rights management organisation to cherry pick out the highest value writers is a model that has been done in the past with GMR, and could be done again. A national PRO is required to be open in terms of who it accept as members, meaning that it must serve all types of songwriters. Due to the extreme power law that dictates how value is spread across creators, c. 5% of songwriters are responsible for c.95% of royalties. The cherry picker model is an attractive alternative model and may well become increasingly popular, especially looking at how the market for high performing heritage rights is evolving.
Where does Crypto Music fit in with all this?
Crypto makes all of this more complicated, but also simpler.
It is nascent enough as a model that there is no clear understanding of the role of rights organisations, outside of rough mapping to digital exploitation (e.g. some would argue that an NFT drop should count as a download for rights licensing, but others would reasonably argue it is a completely different thing). Equally, while centralised marketplaces offer a target for the law, copyright doesn't have the same level of protection in a decentralised industry.
Unlike the rights industries though, tech moves quickly through experimentation and a cohort of the next generation of creators will be crypto native. Rights management organisations risk ostracising them through drawing red lines around what they can and can't do, which would be myopic.
It is likely that the crypto music industry grows in parallel to the analogue and digital music industries, with an entirely different set of stakeholders providing services and representation. As with fragmentation of digital away from national-based licensing, forward looking creators and rights management organisations will seek to proactively define crypto as a separate area of activity and put together the best route to market and financial resolution options available to them.
Specifically, in the world of songwriters, there needs to be care taken in not creating friction for the sake of attempting to hold on to control. As that road leads to songwriters being cut out of the potential upside of a new industry, with work for hire or buy-outs likely being the mode of payment.
Commoditisation rather than disruption
Outside of the aforementioned rights and licensing options I think the strongest play for disrupting PROs is actually not disruption at all but through commoditisation. They are already increasingly becoming low value-add service providers for long tail licensing and collection. Creating a layer on top that interacts with PROs directly, on behalf of songwriters is an opportunity.
There is already a platform that operates in this way, Songtrust. Songtrust has direct relationships with PROs and hubs around the world and provides service management, education and support for its customers. Songtrust, through its grouping with Downtown and CD Baby, typically works with medium to long tail rights, so while its service is relatively disruptive in model, it doesn't have the market share to effect market restructure. But it provides an example of how things will likely evolve.
Of course, it's important to consider all types of songwriters when thinking through the impacts of a move in this way. If platforms that focus on the management of high value rights emerge, forcing PROs further down the cost focussed route, then longer tail songwriters could find themselves under-served. Then again, they probably are already.
Looking forwards
The PRO network is already being disrupted by the internet; it is taking some time, the business of rights management is relatively robust to change, but it is an unstoppable march. PROs are naturally being forced back towards the national analogue licensing and collection that requires simple processes and business activity.
Improving the efficiency of these operations will continue to be a key focus, driven by an increasingly pressured bottom line. One aspect I haven't mentioned so far (honestly it's a whole piece by itself, which I’ll probably write soon) is around data, industry-wide systems, and governance. For now I'll just say that step changing the underlying infrastructure of an industry is very challenging when market positions and incentives are defined and mature.
Likely developments when looking to the future will expedite this situation but there will be significant friction. Regardless of what happens, there is going to be an increasing pressure on monolithic organisations through creators thinking more granularly around the best partners for specific exploitations of their rights, and platforms providing a service to make that easy to manage.
Founders thinking about developing in this space, or near to it, would be wise to think through how these trends are evolving and how they can build a better solution for the next generation of creator.