UK competition watchdog finds major record labels are not ‘making significant excess profits that could be shared with creators’

Picture credit: Michael D Beckwith

It was a probe into the music business that, for a good moment, had the major record companies rattled. But in the end, following a thorough study of the local music market, the UK’s leading regulatory competition watchdog has concluded that large-scale record labels are “[not] likely to be making significant excess profits that could be shared with creators”.

In July last year, a cross-Parliamentary committee made up of UK politicians called for a “complete reset” of music streaming following an inquiry into the economics of streaming.

An associated report recommended that the majors’ dominance of the UK recorded music industry should be referred to the UK’s competition watchdog – the Competitions and Markets Authority (CMA).

The CMA then launched a ‘market study’ into the power dynamics of the record business. The CMA’s final 165-page report on the matter was published in the UK on Tuesday (November 29).

During the CMA market study, some lobbyists in the UK music business suggested that artists and songwriters weren’t pocketing enough money from streaming services, and accused certain music companies of holding on to outsized profits from royalties.

The CMA ultimately concluded that remuneration from streaming is an elite pursuit, with over 60% of streams in the UK being of music recorded by only the top 0.4% of artists.

The CMA study also concluded that music consumers have benefitted from ‘real terms’ price drops in music streaming services. Due to inflation, the unchanged price paid by consumers in the UK for a service like Spotify Premium fell by more than 20% between 2009 and 2021, said the CMA.

On the topic of major label profits specifically, the CMA explains in its new report that it undertook a profitability analysis, and has not “found evidence of substantial and sustained excess profits by the majors that could be competed away to benefit consumers, for example through more investment in music”.

It adds: “While there are limitations with the profitability analysis, the results of this analysis are consistent with our overall finding that competition elsewhere in the value chain is helping to ensure positive outcomes for consumers.”

Commenting on the impact that streaming has had on the music industry in the report’s concluding remarks, the CMA notes that “the music market has experienced profound changes in recent years from piracy through to the introduction of streaming”.

It also says that “it is widely acknowledged that consumers have benefited from streaming through access to full catalogues of music and innovative services for free or at a fixed monthly price, which has reduced in real terms”.

The CMA believes, however, that “there are real questions as to whether creators – those who write and perform the songs – have benefitted to the same extent.”

“there are more artists than ever and, therefore, creators face more artists and songs to compete with for streaming revenues.”

CMA report

The report notes further that while “outcomes are generally improving, we note that to some extent changes in the sector, precipitated by streaming, have made it harder for some creators”.

Factors that have made it hard for some creators, according to the CMA, include “reduced barriers to entry and more choice on how to distribute music”, which means that “there are more artists than ever and, therefore, creators face more artists and songs to compete with for streaming revenues.”

This particular observation by the CMA – that there are more artists and more songs than ever before – hits home even more following the news that there are around 100,000 tracks being uploaded to music streaming services each day.

Other challenges faced by artists in today’s streaming economy as outlined by the CMA include, “that it is challenging for music companies to know who among the growing pool of creators will be successful”.

The CMA adds that “this inherent uncertainty combined with consumer tastes that tend to tip to a relatively small number of artists means that there are even greater challenges faced by creators.”

It concludes, however, that it does not “think that these factors are caused or exacerbated by issues relating to how firms in the market compete”.

“we heard from many artists and songwriters across the UK about how they struggle to make a decent living from these services. These are understandable concerns, but our findings show that these are not the result of ineffective competition – and intervention by the CMA would not release more money into the system that would help artists or songwriters.”

Sarah Cardell, the CMA

Announcing the final report on Tuesday (November 29), Sarah Cardell, Interim CEO of the CMA, said: “Streaming has transformed how music fans access vast catalogues of music, providing a valuable platform for artists to reach new listeners quickly, and at a price for consumers that has declined in real terms over the years.

“However, we heard from many artists and songwriters across the UK about how they struggle to make a decent living from these services. These are understandable concerns, but our findings show that these are not the result of ineffective competition – and intervention by the CMA would not release more money into the system that would help artists or songwriters.

“While this report marks the end of the CMA’s market study, which addresses the concerns previously posed about competition, we also hope the detailed and evidence-based picture we have been able to build of this relatively new sector will provide a basis that can be used by policymakers to consider whether additional action is needed to help creators.”

Some other key conclusions from the report include:

On the power of the majors:

“It has been put to us that the CMA could break up the majors, intervene in historic contracts between artists and labels, impose firewalls between the majors’ publishing and recording arms, remove clauses in contracts between streaming services and labels, impose a code of conduct governing the financial relationships between music companies and creators, or otherwise intervene to increase creator remuneration. We have not found significant competition concerns overall, in particular those that are likely to be leading to substantial excess profits.

“This means a competition intervention is unlikely to release more money from within the system in a way that could significantly improve overall outcomes. In such circumstances there is also a greater risk of a competition intervention causing unintended consequences for both consumers and creators.”

“For example, an intervention to separate the publishing and recording businesses of the majors could create incentives for standalone recording businesses to refuse to accommodate any increase in the ‘publishing share’ through a reduction of the recording share, since any losses to their recording revenues would not be mitigated by gains to their publishing share.

“Moreover, the intervention is unlikely to significantly shift the allocation between recording and publishing because, for the reasons we set out in the report, these may be due to licensing negotiation frictions and bargaining power of rightsholders inherent in the market which will not be overcome by more intense competition for songwriters.”

On profits at music streaming services:

“We have also currently found no evidence of streaming services earning excess profits – indeed, we find low or negative operating margins for the music streaming services whose accounts we have been able to analyse. This profitability evidence is consistent with strong competition between music streaming services to provide services to consumers.

“#Broken Record Campaign and a record company raised the concern that music streaming services may not be generating excess profits due to investments in unrelated services that are being cross-subsidised by music streaming (notably Spotify’s entry into new formats such as podcasts and audiobooks).

“Investments in other content formats might partially explain the lower margins of music streaming services. However, investment by music streaming services to expand the range of content a music streaming service offers is also consistent with strong competition. Further, offering new bundles of audio-formats may also serve to expand the market of those attracted to music streaming services and we note that streaming services anticipate that over time those additional services will become profitable.”

On the chances of future intervention:

“The music streaming market is changing rapidly, and further technological advances in the years to come may spark further change to the way we listen to music.

“During our study we have noted the significant innovations introduced on streaming services and that there are now new ways of accessing music such as through UUC platforms with consequential new opportunities for revenue growth.

“It is likely that these changes will continue to raise questions about how these developments will impact consumers and creators. The CMA may intervene in future if changes in the market restrict or distort competition and harm consumers’ interests.”Music Business Worldwide