A message from Brett Cottle AM, Chief Executive, APRA AMCOS
Financial 15 has been an extremely positive year for APRA AMCOS in the face of continuing upheaval in the music industry and a deterioration in the economic outlook and business confidence in Australia generally. Of particular note have been the significant growth in foreign royalty earnings for Australian and New Zealand songwriters over the course of the year, and the strong financial performance of our New Zealand operation, with our joint licensing venture with the NZ recording industry, OneMusic, as the centrepiece.
Key financial statistics for the year are as follows:
- Domestic performing right revenue: up 5.6% to $195m
- Foreign performing right revenue: up 26% to $34m
- Reproduction right revenue: up 2% to $68m
- Group revenue (excluding management fees): up 6.4% to $300.84m
- Group operating expenses (including amortisation): up 3.2% to $38.2m
- Group expense ratio: reduced from 12.7% to 12.4%
- Net distributable revenue: up 6.9% to $262.7m
- Two historic benchmarks reached during the year: Group gross revenue surpassing $300m and APRA stand-alone net distributable revenue surpassing $200m (having doubled over the past decade)
In Australia, the cornerstone of growth during the year was the transformation of the digital market from one based on downloads to one centred on subscription streaming services. In Financial 14 downloads accounted for nearly half of digital licensing revenue. In 15 they accounted for less than a third of digital revenue and in the year ahead they will comprise less than a quarter of a revenue pool that will have grown from $15m pa to more than $24m pa in two years. Perhaps the biggest news on the digital front during the past year was the launch, in June, of Apple Music, Apple’s music subscription service. Our licensing arrangements were completed with Apple shortly before the close of the financial year.
The low returns for individual writers and copyright owners generally deriving from streaming services are often blamed on inadequate or comparatively inequitable royalty rates. In fact, royalty rates for writers and publishers are considerably higher than they ever were for “old” media and are rapidly evolving to positions of equity and reasonableness. The true underpinnings of derisory returns from these services are two-fold: a lack of critical mass in consumer take-up and the huge volume and diversity of content “consumed” within the ecosystems of these services. By our calculations, consumer take-up of music streaming services needs to increase four-fold within Australia and NZ to bring writers and publishers to an income position equivalent to that which was obtained before the steep decline in the record business.
Somewhat overlooked in most commentary on the music industry is the fact that video on demand – in both its manifestations (a la carte and subscription) – has, over the past year, become a major factor in the film and TV market in Australia and New Zealand, and will undoubtedly be an increasingly important source of growth in music performing royalties in the years ahead. Satisfactory licensing arrangements are in place with all key players.
Offsetting the above growth factors was a decline in Australian public performance licensing revenue during the year under review (in the order of $4m) arising from an important change in business and accounting practice. In past years it has been APRA’s general practice to charge and book annual licence fees at the beginning of the year to which the licence relates. Towards the end of 2014 we introduced quarterly billing cycles to most licensees, with the result that during Financial 15 and Financial 16, a reduced portion of total licence fees will be taken into account. A return to full-year take-up of annual licence fees will effectively occur in Financial 17.
As noted, our New Zealand operation has performed with great distinction during the past year. Total revenue generated in NZ in fact increased by 28.5%, to NZ$31.1m – an outstanding result which accounted for more than half of total domestic growth during the year. One Music – the fully integrated joint licensing operation with the NZ recording industry – continued to drive the strong performance, with overall revenue from public performance licensing more than doubling to NZ$12m, and APRA members’ share of that figure increasing by more than 20%.
APRA members’ performing right export earnings reached an unprecedented level during the year, growing by 26% to $34m. This is an incredible and singular achievement by our writers and their business partner publishers. The huge international success enjoyed by Sia, Lorde, Gotye, AC/DC, Vance Joy and so on was mirrored by many, many other writers in a variety of musical genres, and is a direct reflection of the rapid internationalisation of our business. Nashville is becoming as important as Melbourne to our members just as London is becoming as important as Auckland. This phenomenon will dramatically alter the management of our business and the provision of services to members in the years ahead.
Despite the continuing decline in traditional sources of mechanical royalty income – our estimate of total annual mechanical royalty revenue from sales of physical product in Australia/NZ is $16.5m compared with an equivalent figure of $40m a decade ago – AMCOS revenue grew by 2% during the 15 Financial year.
By far the biggest market factor in the current commercial landscape for AMCOS is the shift from digital downloads to music subscription services, with the major concern being cannibalisation of the former by the latter. In fact, although the take-up of streaming subscriptions is occurring at a fairly rapid rate (our figures show, as we go to press, that there are approximately a million such subscribers in Australia and NZ), and a decline in digital download revenue is certainly occurring (currently at about 10% pa), it appears that there will be room for both kinds of services and that the ownership model of music consumption will persist for some time yet. Overall, AMCOS’ revenue from digital services increased marginally, by 3.7% to $28.8m, during the year.
In the other key sectors of AMCOS’ business, while declines occurred in physical product (noted above – down 23% for the year) and production music licensing, significant growth was achieved in Educational licensing (up 23% to $10.2m – now the third largest source of AMCOS revenue), broadcast mechanicals (up 5.2% to $15.3m) and B2B licensing (up nearly 10% to $5m).
Group operating costs for the year were up, as noted above, by 3.2% to $38.2m. Although APRA and AMCOS operations are effectively fully merged, costs are allocated separately to the APRA and AMCOS revenue streams according to employee workloads across the company, which are monitored and surveyed annually.
Key factors impacting on costs during the year were as follows:
- The implementation of a general licensee audit program for public performance licensees – adding $123k to costs;
- The implementation of music recognition technology (MRT) to our armoury of distribution data sources – adding $100k to costs;
- An increase of 4.6% in our total wage and salary bill – taking it to $22m;
- A 20% increase in our NZ office costs – directly attributable to the process of growing our revenue (in the event, by 28%) through the full implementation of OneMusic;
- The non-recurrence of our past costs associated with the GRD project (saving approximately $620k year on year);
- The commencement of our major system replacement project – CLEF – referred to below.
In July 2014, after an extensive period of due diligence, the APRA and AMCOS Boards committed the organisations to a major project involving the replacement of existing computer systems. Microsoft AX and CRM systems were selected as core components of the new system, and the consulting firm Accenture was engaged as the systems integrator, along with its sister joint Microsoft venture, Avanade. We are now over a year into the project and well advanced in the build phase. The new system is scheduled to go live in mid-2016 and will modernise our business across the board and provide the springboard for major business change.
The project represents a major, but essential, investment of approximately $25m, with core components to be amortised over 4 to 10 years. 75% of costs will be borne by APRA and 25% by AMCOS, in accordance with the general comparative schedules of operating costs. In Financial 15 costs expensed in the project totalled $975k (including amortisation), but these costs were offset by a reduction in IT project costs elsewhere of $929k. When the project goes live and amortisation of full capital expenditure begins, the investment will add about 1% to our annual costs, before efficiencies and revenue gains are taken into account.
There is an international push on the part of some rights holders to withdraw their digital rights from collective administration, and one significant publisher has notified APRA AMCOS of its intention to do so in respect of Australia/NZ, at least in relation to global digital services. APRA AMCOS respect and accept the right of individual rights owners to organise their business affairs as they see fit, but assert that a rational decision to withdraw rights should be based on sound principles of establishing benefits to all in the value chain – from writers to music users.
Where market failure occurs in the administration of copyright – as it does in many parts of the world – APRA AMCOS believes that new multi-territory systems should and must be found, and indeed we are leading the way in that regard in relation to the licensing of rights into Asia. In our view, the questions to be asked are: is the current system broken, or can the current system be made substantially more effective, efficient, transparent and user-friendly? If the answer to either part of the question is yes, then there is a case for direct multi-territory licensing.
On-line infringement continues to be a major threat to the sustainability of Australia’s and New Zealand’s content industries. Users of illegal sources of music no longer have available the excuse of lack of access to affordable on-line content. When it comes to music, Australian and New Zealand consumers have unprecedented access – for free if they choose – to the world’s repertoire of music. Ignorance, and a wilful disregard and disrespect for those who create and make music – combine, however, to continuously hinder the growth in licensed services necessary to give writers and artists a decent living.
During the year the Australian Government, to its credit, introduced into the Copyright Act so-called “site blocking” provisions enabling copyright owners to apply to the Court for orders blocking access to illegal or ‘pirate’ sites. As we go to press the first of those legal applications is being prepared.
The core business of APRA AMCOS is, of course, to grant licences for the use of music, collect the related royalties and then distribute those royalties as quickly and efficiently as possible. The Boards and Management of the organisations regard it as fundamentally important that equal weighting be given in resource allocation and planning to both the royalty collection side of the business and the royalty distribution side of the business. This philosophy is certainly reflected in our planning and design of the new system referred to above, CLEF, which will provide the platform for us to launch, in 2016, a monthly distribution cycle for member payments to replace the existing quarterly cycle, along with complete and immediate transparency for member accounts and data analytics.
During the past year our Writer Services portal launched and our Publisher Services portal will launch in 2016.
Royalties paid for the year through to 30 June 2015 totalled $260.5m for the group, an increase of 6.45% on the previous year. As noted, APRA distributable royalties increased by 8% to exceed $200m for the first time, while AMCOS distributable royalties increased by 2.5% to $62.1m.
Key distribution-related metrics appear elsewhere in this report, but of particular note are the continuing rise in both the number of musical works figuring in the year’s distributions – from 917,687 to 1,011,262 – and the significant rise in the number of our writer members now earning royalties from overseas sources.
THE YEAR AHEAD
As we go to press with this report the new financial year is of course well advanced, and it seems slightly redundant to talk about our plans for the year, which are well into execution stage. Nevertheless, we have clear and vital goals to be achieved – most importantly, the completion and deployment of our new core system and the completion of new licensing arrangements with a number of key digital service providers.
But in addition to our business plans, perhaps the most important development that we see in many manifestations at the moment is the one that we are most excited about: a new and rapidly emerging level of direct and two-way engagement with our members. Driven by many factors, not least the diminution of other institutions and support services upon which writer/musicians have traditionally relied, the development is most welcome and perhaps most in evidence in the fact that we have a field of 20 writer members contesting two available Board positions this year – an unprecedented number.
And finally, mention of two individuals who have had a remarkable impact on APRA’s history. Mike Perjanik steps down from Board responsibilities this year, after 30 years on the Board, 25 of them in the Chair – a truly extraordinary achievement. To Mike, our undying gratitude and best wishes. And sadly, news reached us shortly before these comments were written, of John Sturman’s death. John was APRA CEO from the mid nineteen sixties until the end of the eighties. He strode the copyright and music industries in Australia like a colossus, and our responsibility is to continuously build and improve on the terrific organisation that he and his colleagues left to us.