As an addendum to the Last.fm story today, what are the actual royalty rates we’re talking here? They’re not much – precisely the reason musicians will have to get broadcast-style play counts to ever see anything worth counting. For instance, Last.fm makes the comparison with the BBC in the Wired story. The BBC has more hegemony than even a giant US ClearChannel radio station, and I suspect it’d be virtually impossible for an unsigned artist to see that number of plays.

How little? Try $0.0005 per play, as Steve of sighup writes in comments. (I think that’s just radio plays; assuming you get both radio and on-demand plays, you should do a little better – but, still, you might be better off with your CD sales out of your guitar case.) Keep in mind, that’s on top of other revenue, like performance royalties from ASCAP, BMI, and such, but it’s still not much.

Low as that may sound, it’s in the same ballpark as traditional webcasting rates. Prior to the big shake-up over Copyright Royalty Board rates here in the US, its rate was US$0.0008. And that’s only in the US, whereas Last.fm is international – and some of that goes to SoundExchange, and some goes to your label, and … you get the picture.

The CRB and record industry did successfully pass higher rates, up to $0.001 (okay, still not putting your kids through college). Those rates caused an uproar from webcasters, but they were also initially associated with punishing minimum fees, which depending on the definition of what a “channel” is could have driven millions of dollars in fees for some webcasters. Those requirements, not the relatively tiny per-song rate, were what concerned artists and writers, because the new rules threatened to take away important channels for getting their music out there and driving sales to more lucrative enterprises like CD and concert sales.

As it happens, that debate continues as we speak. In the June 5 RAINcast (Radio and Internet Newsletter), Paul Maloney points to reports that Pandora’s chief executive is personally lobbying against these rules, because they’d suck up 70% of that services revenue, for a total US$18 million in royalties. You can do the math: that’s enough to bury Pandora, but not enough so that you’d ever see any of the change. Everyone loses. RAIN also notes that SoundExchange hasn’t actually been enforcing its new rates, so we haven’t yet seen what happens to Internet broadcasting with the new rules – even though they were ratified last summer.

So, Last.fm’s rates, while small, go straight to the artist, they’re transparent, and they’re in the ballpark of webcasting fees in the past. Since they’re set by Last.fm, we can assume CBS isn’t destroying its own business, either. And keeping things in perspective, this is really about Last.fm, not the entire universe of music. That’s the good news. The bad news is, they’re so impossibly small that for most people, it won’t really matter. And, yes, if Last.fm’s main business model is advertising, you have to wonder if artists won’t be more successful directly selling ads. Even Google AdSense could wind up being better for the artist, partly because it’s unclear how much ad exposure Last.fm can cram into its service. In the long run, my guess is you’ll see all of these – given the amount of ad inventory out there, and the rising consumption of music, and new ways of consuming music, I don’t think this is a zero sum game.

But the bottom line: cool as the Last.fm announcement is, even I’ll quickly admit that royalty rates in general are unlikely to make or break most artists’ lives. The real business is elsewhere, at least for now. If Last.fm can massively expand the number of listens, though, the whole game could change – and that means even that fraction of a penny could wind up being an important precedent. Stay tuned.

As music listening takes new forms, that builds new business models. But who calls the shots? Who gets to play, and who reaps the benefits? One immediate danger is that major label deals will dominate as outlets vie for position. Online outlets like MySpace have started to look a bit like the same-old, same-old world of major labels and big deals. “Indie” music sometimes makes an appearance, but nearly always in the form of signed artists and often in the shadow of the majors. Unsigned artists can get onboard, but the playing field often isn’t level – and while majors negotiate lucrative deals for their music, unsigned artists and indies have to give theirs away for free. At the other end of the spectrum, unsigned artists often don’t get paid by services that benefit from their work (like MySpace).

That’s why Last.fm’s announcement yesterday was a potential bombshell. Now fully available after months of development, the Artist Royalty Program will pay artists royalties on plays directly – no label required. Unsigned and independent artists can sign up to earn royalties from on-demand plays and Last.fm’s streaming radio.

Last.fm Artist Royalty Program (last.fm/uploadmusic)

Royalties 101

To fully understand what that means, let’s back up and talk about where royalties come from in on-demand online music. This is entirely separate from downloadable music – that’s pretty straightforward. If you, for instance, sell a track on your band’s website for 50 cents, people pay 50 cents, own the track, and you get 50 cents. If you sell it through another vendor, then you get a slice of the sales pie.

But on-demand, streaming music, via radio stations or elsewhere, works differently. Since the days of radio, broadcasters have wanted broader access to music. Obviously, if they had to negotiate rights individually for each track, they couldn’t exist. So the solution has always been a system of blanket royalties. In the online space, there are two kinds of royalties, coming from two different licenses. Here’s the simplified version (lawyers, feel free to clarify):

1. A license for the recording – the “statutory license.” These fees are set by the Copyright Royalty Board and collected by SoundExchange. It’s called “statutory” because webcasters don’t need your explicit permission to broadcast music. They’re paid to the owner of the recording. If you’re a signed artist, that’s your label.

2. A license for the “performance rights” of the copyrighted work itself. These fees are negotiated with performing rights organizations like ASCAP, BMI, and SESAC.

That sounds odd (Last.fm isn’t “performing”), but it makes more sense if you think about the actual music. There’s the recording of the music, and the “work” itself. So, for instance, you might record a cover of a song. There’s the songwriter, and the artist recording the work; they may not be the same person.

If you’ve written and recorded your own song, you own both of these rights. You might sign with a label and give them the recording rights, but either way, the basis remains the ownership of the recording and the musical work.

So where does ARP fit in?

First, regardless of whether you’re part of ARP or not, you’ll always receive the performing rights if you’re the writer of your musical material. That’s why it makes sense to join an organization like ASCAP if you’ve ever produced anything; unless you do nothing but cover other people’s music, they’re there for you. They’re not the RIAA – they represent writers and publishers. In fact, even if you release your music under a Creative Commons non-commercial license, you are eligible to receive royalty payments collected by these bodies. (That’s the topic of an upcoming article.) If you join ARP, you’ll continue to receive income for this music.

What ARP does is to provide additional income for unsigned artists. A spokesperson for CBS Interactive (parent of Last.fm) tells CDM:

If you participate in the ARP, you should not be signed up with a recording rights society. In effect, Last.fm is cutting out the middle man here by paying the artist directly without going via the collection society. Writers benefit from the publishing rights royalties that Last.fm pays to the publishing rights societies. ARP is for recording rights only.

Who Benefits from ARP?

Here’s where ARP makes a difference. Previously, the system for the artist was to go get a label, and then get that label to collect royalties on the recording. The label, in turn, had to go to SoundExchange, formerly part of the RIAA but now an independent organization, to get the money. Result: fees get set by a board of judges chosen by the Copyright Office (the Copyright Royalty Board), and you’ve got multiple middle … men, actually.

Under the ARP, you go to Last.fm, and Last.fm pays you. You upload the music where you want it to go. And, via Last.fm’s community pages, you actually have some tools for your music:

Last.fm for labels and artists

In addition to royalties, that includes stats, event management, and the ability to connect with fans. And the other thing that’s interesting about this whole system is that both parties essentially have to be happy. Artists have to be getting value from Last.fm’s service, and royalties that make sense for them. Last.fm can then, in turn, build an ad-based revenue model that works for them as a business. That’s a far cry from a giant battle between the recording industry and large performers’ organizations in front of a group of judges. It’s new, so we’ll have to see how it works, but it’s nothing if not appealing.

(See also a similar announcement from imeem, though that one required working through SNOCAP for distribution, and comes from, arguably, a less popular service. I also think some of Last.fm’s unique tools for data collection and fan management make it more interesting than imeem. But this is all the more significant if other sites do the same thing in the future.)

ARP for Labels, Getting Paid

The ARP system isn’t limited to artists, either. New labels could embrace the system. Again, a Last.fm spokesperson clarified for CDM:

A label can participate in the ARP Program IF they own the WORLDWIDE rights to the content and have NOT signed up with any collection societies.  (Basically only startup labels that aren’t collecting any royalties would be interested in participating in the program since they’d only receive revenue from Last.fm in that case)

One other simple upshot of all of this is that people actually get paid. That’s not the case with MySpace. As Eliot Van Buskirk writes for Wired’s Listening Post:

We’ve had a bone to pick with MySpace about this for a while, because it plans to compensate major labels with a share of ad revenue without similarly compensating indie labels, unsigned artists, or possibly even the artists signed to them.

The headline says it all:

Last.fm Compensates Artists, Unlike Some People We Know [Wired.com Listening Post]

It’s well worth the full read. Eliot notes that even Last.fm doesn’t maintain the amount of money will be huge, partly because online streaming is still growing gradually (though I think listening habits will continue to grow). The money is coming from ads that appear with the streams. But Wired notes over 450,000 tracks are available on Last.fm as part of the Artist Royalty Program. And they also observe that, unlike MySpace, indie artists aren’t left in the dark, and unlike almost everyone, payouts are transparent – you can actually monitor what you’re earning.

Ultimately, I think that’s the bottom line: Last.fm is actually paying people. And I don’t mean to make an argument against labels. On the contrary, ARP is a tool many artists will likely use while looking for a label – alongside other useful tools (some arguably more valuable than direct revenue) provided by the service. The one question I do have, though, is whether new upstart labels might forgo the complex recording collection process entirely and start to use services like this directly. That would allow them to continue to fill the business and promotion roles labels have always provided, which artists and writers often can’t handle on their own. But it could be the first glimpse of a new set of models in which music creators, publishers, and labels deal with online business directly, rather than dealing with a middle man.

Update: Labels not so happy

I missed this: Merlin, one of the aforementioned rights bodies representing the labels (12,000 independent labels total, controlling more music than EMI) has protested the ARP license:

Merlin Opposes Last.fm’s Artist Royalty Program [Wired.com Listening Post]

The grounds: no retroactive license fees, a breakdown in negotiations with Merlin, and vague licensing terms. Now, I’m not sure on any of those points – in particular, Merlin’s negotiations should theoretically be independent of ARP to begin with; it explicitly excluded people who have signed with labels who are part of separate negotiations. If you’re an independent artist, it doesn’t really matter what Merlin thinks or even what they deem “illegal” – particularly if you’re uploading and licensing your own music, which is presumed by the ARP deal.

But the main thrust of this argument is that past Last.fm plays were illegal and unlicensed.

Last.fm’s response is, basically, ARP is about indie artists, not Merlin. Merlin’s banner says “representing the rights of independent record labels worldwide,” by which they mean, of course, their members, not necessarily anyone else.

But Does it Add Up to Anything?

The big problem is, streaming rates in general are a tiny fraction of a cent per play. If Last.fm achieves greater volume, that could be good news for artists. Until, then, though, this is largely symbolic. Further discussion:

Fine Print: What Do Royalty Rates Actually Pay?

Latest case in point: Kevin Kelly posits the notion of 1,000 True Fans as the magic number you need to support yourself as an artist:

…defined as someone who will purchase anything and everything you produce. They will drive 200 miles to see you sing. They will buy the super deluxe re-issued hi-res box set of your stuff even though they have the low-res version. They have a Google Alert set for your name. They bookmark the eBay page where your out-of-print editions show up. They come to your openings. They have you sign their copies. They buy the t-shirt, and the mug, and the hat. They can’t wait till you issue your next work. They are true fans.

Can you put a dollar figure on this kind of fan? Sure you can: in this case that average number is US$100. It’s all made up, of course, but for someone it’s doable.

Chris Randall at Analogue Industries brings this all back to reality by suggesting you might want to not suck, not be a jerk to your fans, and not experiment with your style so much that you alienate your fans. (I’ll add: if you happy to be the Next Bob Dylan, maybe you can get away with that last one. Or even the second of those.)

It is an interesting idea, but I’d simply say, hit that spreadsheet a little harder. In the new music world, a handful of voices has tried to encourage classically-trained composers to bring back the commission. It hasn’t caught on, necessarily, but it’s still a great idea. Now, in this case, you might not want — or be able to get — 1,000 fans spending $100 as described here. But there might be one person willing to write a $5,000 commission, in exchange for seeing their name associated with a single, special piece of music. And you might get 200 starving musicians to see the concert for free. There are lots of different combinations here, and all that really matters is that the numbers add up for you. The 1,000 number isn’t quite as easy as it sounds, just because “you could count to 1,000″ or you could add one fan each day. (Remember, that’s true fan each day, which isn’t feasible for a lot of great artists.) Then again, maybe the most important thing is picking a plan and pursuing it.

The real reason I mention this, though, is after suggesting some ridiculous incentives Trent Reznor could use to increase his scale from Free to $300 to Free to $300,000, someone has done basically what I was going to suggest.

Canadian artist Jill Sobule, cited as an example in the 1,000 true fans story, says to fans for $10,000 “you get to come and sing on my CD. Don’t worry if you can’t sing – we can fix that on our end.” For $5,000, she’ll come perform a concert at your house. Wired News covers all the options.

Now, you could say, this is more marketing than business — and you’d be right. But as I chuckle at the “Gold Doubloons Level,” I’m reminded that marketing is the point of the whole thing. After all, it’s just music. So, gimmicky as the blogosphere hooks could be, maybe the artists are onto something. It’s just going to take a lot of follow-through, artistically and building your fan base.

And you definitely can’t afford to be a jerk.