2.1 The Canadian music industry

According to testimony by Jean-François Bernier, Director General of Cultural Industries at the Department of Canadian Heritage, the Canadian music sector contributes nearly $3 billion annually to the Canadian economy. Over 10,000 people are employed in the sound recording and concert sectors, and there are 30,000 professional songwriters. In addition, music contributes to other economic sectors, such as tourism and advertising.[3]

In terms of its corporate structure, the Canadian music recording industry is made up of three major entertainment multinationals – Universal Music Canada, Sony Music Entertainment Canada and Warner Music Canada – and hundreds of small- to medium-sized Canadian-owned entrepreneurs – the so-called independents.[4]

Mr. Bernier described the successes of Canadian artists. Between 2001 and 2012, their share of total domestic album sales increased from 16% to 26%.[5] In a brief
submitted to the Committee, the Department also noted that royalties paid by the Society of Composers, Authors and Music Publishers of Canada (SOCAN) for the public performance of Canadian music abroad had increased by 43% between 2001 and 2012, from $33.1 million to $47.3 million.[6]

Despite the many successes of the music industry, the digital revolution has changed the way music is produced, distributed and consumed. The revenue streams in the industry have been fundamentally altered.

As explained by composer Jim Vallance, the business model for the music industry remained unchanged for 100 years, but in 1999, there was a perfect storm with the confluence of the Internet and MP3 technology. This allowed for the development of Napster and other online services that facilitated the free distribution of music online.[7]

As a result of this revolution, the total value of music sales has declined over the past decade. Alain Lauzon, the General Manager of the Society for Reproduction Rights of Authors, Composers and Publishers in Canada (SODRAC), gave the Committee an overview of the situation:

According to Music Canada statistics, for the period 2001 to 2012 … revenue for physical recorded music went from $765 million in 2001 to $217 million in 2012. That decrease represents a cumulative lost revenue of over $3.147 billion.

The digital industry only truly started generating revenue in 2004, and reached $196 million in 2012, with cumulative revenue of $787 million. The Canadian recorded music market therefore suffered a net loss of $2.380 billion from 2001 to 2012. The decrease was similar for the francophone market in Quebec, proportionally speaking, although the decrease in sales began a few years later.[8]

The federal government supports the Canadian music industry through a series of direct and indirect measures. Canadian Heritage plays a key role through the Canada Music Fund (CMF). The CMF supports the work of Canadian music creators, artists and entrepreneurs to enhance access to a wide range of Canadian music choices. The CMF consists of four separate components: New Musical Works, Music Entrepreneur, Collective Initiatives, and Canadian Music Memories. The New Musical Works and the Collective Initiatives components are administered by third-party agencies: Fondation Musicaction and the Foundation Assisting Canadian Talent on Recording (FACTOR). Library and Archives Canada receives funding to administer the Canadian Music Memories component. In 2012–2013, the CMF’s budget was $24.6 million.

The Canadian Radio-television and Telecommunications Commission (CRTC) has introduced policies and regulations to ensure that Canadian works are played on Canadian radio stations.[9] Licensed stations must devote a percentage of their weekly music broadcasting to Canadian content. It is worth noting, however, that the CRTC does not regulate online music streaming services.

The Copyright Act is an important legislative tool that recognizes and protects the rights of Canadian creators in the sound recording industry. The Copyright Board of Canada is a regulatory body empowered to establish “the royalties to be paid for the use of copyrighted works, when the administration of such copyright is entrusted to a collective-administration society.”[10]

2.2 Digital distribution and streaming

Many witnesses told the Committee about the impact that new distribution methods are having on the music industry. The Committee also heard from distribution services about the challenges they are facing.

Increasingly, music is being sold on a song-by-song basis through music download services such as iTunes or through streaming services. This has had a significant impact on the music industry’s business model. As pointed out by Jodie Ferneyhough, President of the Canadian Music Publishers Association (CMPA), each song may sell for 99¢[11] or, in the case of music streaming services, “each play is worth micro-pennies, 0.005¢. It's hard to make a living on micro-pennies.”[12] Stuart Johnston, President of the Canadian Independent Music Association (CIMA) put it this way: “The old cliché is that it used to be a dollars business. Now it's a pennies business, and you have to find those pennies from a multitude of sources.”[13]

Musician Paul Hoffert said the music content business is thriving, but noted that Internet companies and Internet service providers (ISPs) are monetizing music, as opposed to the old music business – record companies, publishers, artists and composers.[14] Graham Henderson, the President of Music Canada, which represents the three major record companies, made the same point, saying: “There has been an enormous shift in wealth away from creators into technologically driven intermediaries who are amassing fortunes on a scale that at times beggars the imagination.”[15] A number of witnesses, including Stéphanie Moffatt, President of Mo'fat Management, called for these intermediaries to share some of the money they are making.[16]

Brad Keenan, Director of the Alliance of Canadian Cinema, Television and Radio Artists’ Recording Artists’ Collecting Society (ACTRA RACS), said that recording artists rely on a number of different copyright royalty streams, some of which have decreased as a result of digital distribution. One of these is the private copying levy, which applies to blank cassettes and CDs. Mr. Keenan said that because the levy does not apply to digital audio recorders, the amount available for distribution to rights holders has dropped from $35.6 million 10 years ago to less than $10 million per year.[17] Indeed, a number of witnesses raised this concern.

Gilles Daigle, General Counsel and Head of Legal Services for SOCAN, said that even if good royalty rates applied to revenues generated through free online music services, “if those rates applied to almost nothing, the amount we would receive would also be almost nothing.”[18]

On the other hand, some witnesses said that it is possible to make a living in the new environment. Simon Mortimer-Lamb, President and Chief Operating Officer of Nettwerk Music Group, said when consumers buy a CD, it is a one-time sale. With digital streaming, he said there is a pay-for-performance model, under which the artist is paid every time the consumer interacts with the content.[19] Steven Kane, President of Warner Music Canada, acknowledged that songs sell for pennies, but he said the marketplace is increasingly a global one and “those pennies can add up.”[20]

Christian Breton, Vice-President of the Music sector with Groupe Archambault of Quebecor Media Inc., said it is necessary for artists to have a digital presence in order to promote their work.[21] Similarly, Mr. Mortimer-Lamb of Nettwerk Music Group pointed out that in today’s marketplace, “you have to be everywhere, on every platform, monetizing every behaviour of your artists’ fan base.”[22] He said that “we need to get on with building Canada’s retail marketplace” of which streaming should be a big component.[23]

Jason Kee, Public Policy and Government Relations Counsel for Google Canada, made a similar point and noted that the establishment of more legitimate digital services would help address the issue of illegal music downloads, because people would not need “to go to the hassle of using illegitimate ones.”[24]

Vanessa Thomas, Managing Director for Canada for Songza, one of the unregulated online streaming services, said that the growth of streaming music content in Canada lags behind that of the United States. Last year, streaming revenues were 7% of the Canadian market, whereas in the U.S., they were 21% of the market.[25] She said that one of the reasons for this is that the “regulatory framework in Canada doesn’t foster innovation. The rate-setting process through the Copyright Board of Canada takes far
too long,”[26] sometimes up to four to five years, for an industry where business models
are changing rapidly.[27] Indeed, a dozen witnesses said that the reason why the Copyright Board of Canada takes so long to issue decisions is because it does not have sufficient resources.

The issue of royalties was also raised by Justin Erdman, Managing Director for Canada with Deezer, a subscription-based music streaming service.[28] Deezer has a self-imposed mandate to deliver a minimum of 33% Canadian content. Mr. Erdman expects subscription rates to rise over the next 10 to 15 years,[29] but said it is difficult to build a business with current royalty rates.[30]

Eric Albert, Executive Vice-President with Stingray Digital, said that a sustainable pipeline of high-quality musical content is crucial for the success of services like Galaxie, Stingray Digital’s continuous music service that is included with most digital cable and satellite television services.[31] Saying that it is difficult to establish a sustainable business model while paying 50% to 70% in royalties, he felt that increased royalties might not be a long-term solution for the industry.[32]

J. Serge Sasseville, Vice-President of Corporate and Institutional Affairs with Quebecor Media Inc., noted that international players such as Apple are more powerful than ever and said that there is price discrimination because its iTunes service does not charge the sales tax.[33] He also noted that it is difficult to obtain promotional space on digital platforms.[34]

Andréanne Sasseville, Director for Canadian Content Development and Industry Relations with SiriusXM Canada, a satellite radio company that is regulated by the CRTC, said that a level playing field is important to supporting Canadian artists. She pointed out that unregulated music streaming services do not have “any requirements to feature Canadian content or any other means that would aid the discovery of new music.”[35]

2.3 Music education

The positive effects of music education came up repeatedly during the Committee’s study. Several witnesses stated that music education should be supported, as it fosters critical thinking, imagination, self-esteem and self-discipline. These assets are useful in an economy based on information technology and communications.

Allan Reid, Director of MusiCounts at the Canadian Academy of Recording Arts and Sciences (CARAS), emphasized the need to “create musical talent in Canada to support the music industry.”[36] The MusiCounts program promotes this goal by awarding nation-wide grants and scholarships to support music education in schools and communities. Officials from SiriusXM Canada[37] and the Polaris Music Prize[38] stated that they work regularly with MusiCounts.

Mark Tetreault, Director of Symphonic Services with the Canadian Federation of Musicians, remarked that many orchestras across the country are active in the schools and gave the example of El Sistema, an orchestral youth training initiative that offers “coaching and rehearsing … leading to exciting performances.”[39]

Witnesses also highlighted the negative impacts that illegal downloading has on music creators and artists. Most young people do not realize the damage done by illegal downloads. According to Pierre-Daniel Rheault from the Société professionnelle des auteurs et des compositeurs du Québec (SPACQ), illegal downloading is impersonal and “hides the violation of rights.”[40]

Among the negative impacts of illegal downloading, Greg Johnston, Vice-President of the Songwriters Association of Canada, noted the impact on artists’ revenues, saying, “every album downloaded off the Internet for nothing is just some pennies that I don't get anymore.”[41] Mr. Henderson of Music Canada said: “Ad-supported piracy continues to plague creators. The digital landscape is littered with illegal services that do not pay artists or copyright owners.”[42] In a brief submitted to the Committee, musician and independent record-label owner Loreena McKennitt wrote about the impact on the music industry as a whole: “Where once there was a predictable and viable business model, now there is none.”[43]

2.4 Music tourism

Canada’s music festivals, events and performances play an important role in supporting the Canadian music industry. Canadians flock to these shows to be entertained and to have fun. For Canadian artists, music tourism offers a means of showcasing their talents and promoting their work.

Mike Tanner, Director of Operations for North by Northeast (NXNE), an annual music festival held in Toronto, explained how the concert industry “can generate tremendous growth in tourism across the country.”[44] Riley O’Connor, Chairman of Live Nation Canada, an international concert promoter, called live music “an economic success story in Canada.”[45] According to Patti-Anne Tarlton of Ticketmaster Canada, the public’s appetite for concerts means that the “government strategy with the live music sector needs to shift to be current with our 21st century reality.”[46] She also noted that foreign tourists and artists sometimes have difficulty obtaining permits to enter Canada.[47]

Greg Klassen, President and Chief Executive Officer of the Canadian Tourism Commission (CTC), explained how his organization incorporates music, festivals and cultural events into its tourism marketing strategy. The CTC “focuses on the opportunity of leveraging existing Canadian festivals and events”[48] to encourage youth to travel within Canada. Internationally, the CTC works closely with Festivals and Major Events Canada to encourage foreign tourists to discover Canada’s music festivals. David Goldstein, President and Chief Executive Officer of the Tourism Industry Association of Canada (TIAC), remarked that music and culture are “leading drivers for American visitation.”[49]

2.5 Current funding – future investment

Witnesses were generally pleased that the government had announced in its 11 February 2014 Economic Action Plan that beginning in 2015–16, the CMF would receive ongoing funding. A number of witnesses thanked the government for this measure, including l’Association québécoise de l’industrie du disque, du spectacle et de la vidéo (ADISQ), CIMA, Québecor, Nettwerk Music Group, Mo’fat Management, Music NB and Manitoba Music.

Brett Kissel, winner of the 2014 JUNO Award for Breakthrough Artist of the Year, testified that FACTOR had funded his album and his first national tour[50] and said “If I didn't have the funding from the Government of Canada, the answer is that I would not likely
be here.”[51]

Other witnesses also said that the funding was crucial for the success of Canadian artists, particularly in the face of competition from the United States. For instance, Mr. Kissel’s manager, Louis O’Reilly, said that to compete with American entertainment giants, government funding is needed.[52] Mr. Mortimer-Lamb of Nettwerk Music Group said that government funding had allowed his company to develop its systems and marketing initiatives.[53] Mark Monahan, Executive Director of the RBC Royal Bank Bluesfest in Ottawa, said that government support has contributed to the success of festivals such as his.[54] He also felt that the government’s temporary two-year Marquee Tourism Events Program had been too short.[55]

Witnesses identified a number of challenges that could be addressed by government funding. Mr. Kane of Warner Music Canada said that the development of musical artists should be seen as research and development (R&D) and as such, should receive the same kind of support received by other industries that rely on R&D, such as the film and television industry.[56]

Mr. Johnston of CIMA said that Canada’s English-language independent music industry needs sufficient revenues to support production, marketing and promotion and that access to capital is the main challenge.[57] Martin Smith, President of the Gospel Music Association of Canada, said that tapping into government funding is the biggest challenge for those in the gospel music genre, because many of them are independent artists who do not sell their CDs in major retail outlets.[58] He pointed out that this was one of the
criteria for FACTOR funding.[59] However, Duncan McKie, President of FACTOR, said that FACTOR now considers other criteria in addition to the physical sale of CDs.[60]

Brian Hetherman, President of Cerberus Management and Consulting, noted that international marketing and touring are extremely expensive.[61] Shawn Cooper, President and Co-Founder of Volu.me, a digital platform that allows artists to create mobile apps, noted that platforms such as his require highly paid technical staff and can be, initially, a money-losing proposition.[62] In a similar vein, Sébastien Nasra, President and founder of Avalanche Productions and Sound Publishing, said that support is needed for hiring specialists, particularly in areas of online marketing and social media.[63] Alain Chartrand, Executive and Artistic Director of Coup de cœur francophone, a pan-Canadian music festival, made the same point.[64]

Jean Surette, Executive Director of Music NB, suggested that the government could fund programs with a focus on artist development on a grassroots level, on industry development and mentorship and on international export activity, digital platforms, promotion and marketing. Music NB said that provincial music industry associations are best positioned to help local industry.[65] Richard Petit, Director of Artisti and Union des artistes, said that creators must often work without pay while they are creating an album.[66]

Not all witnesses supported the idea of the government providing funding for creators, however. Mr. Vallance said government funding “keeps the patient alive, but it doesn't cure the illness.” He added that funding is artificial and creates an industry of dependence.[67]

2.6 FACTOR/Musicaction

FACTOR and Fondation Musicaction (FACTOR/Musicaction) administer the CMF’s New Musical Works Component and Collective Initiatives Component for the English-language sector of the music industry and the French-language sector, respectively. Slightly more than half of the CMF’s budget is administered by FACTOR/Musicaction. These public-private partnerships are funded in part by private and satellite radio broadcasters.

There was a consensus among witnesses that FACTOR/Musicaction plays a key role in supporting the creation of home-grown musical content. The organizations sharing this point of view include the CIMA, Music BC, ADISQ, the Songwriters Association of Canada, the Alliance nationale de l'industrie musicale (ANIM), the Polaris Music Prize, Warner Music Canada, Nettwerk Music Group, Deezer, Music NB and Manitoba Music. Mr. Kissel, the singer-songwriter, told the Committee that support from FACTOR was essential to his success.[68]

However, some witnesses were critical of funding allocation, program recipients and the overall administration of the two organizations.

In terms of funding, Robert D’Eith, Executive Director of the Music BC Industry Association, spoke of a regional imbalance in the funding allocated by FACTOR.[69] However, Mr. McKie of FACTOR pointed out that, although 80% of English-language music entrepreneurs are based in Ontario, only 59% of the applications approved are from Ontario.[70] He added that FACTOR supports artists, businesses and initiatives in every province and territory.[71]

The Committee heard some criticism about eligibility criteria for FACTOR/Musicaction funding. Steve Jordan, Executive Director, Polaris Music Prize, was not sure that it is still a “useful measure” to evaluate success based on record sales.[72] Mr. Smith from the Gospel Music Association of Canada pointed out that gospel music artists “have not been able to receive support from FACTOR.”[73] Representatives from the CMPA[74] and the SPACQ[75] called for increased funding for their respective segments of the music industry. As the CMPA’s representative explained, funding focuses “almost exclusively on supporting the record labels, not the publishers who represent the creators.”[76] The SPACQ representative stated unequivocally, “Government support for creators is clearly insufficient.”[77]

Greg Terrence, President of the Canadian Independent Recording Artists' Association (CIRAA), believes that FACTOR does not adequately support independent artist entrepreneurs. The CIRAA called for FACTOR to restructure the way in which it allocates funding and for a new funding organization to be established for independent artist entrepreneurs.[78] Similarly, Mr. Vallance feels that FACTOR “should be building new careers, not supporting old ones.”[79] As he explained to the Committee, “My criticism of FACTOR, if any, is: when do you stop funding?”[80]

Certain witnesses suggested further modifying the support allocated by FACTOR to reflect the digital environment in which the music industry operates. Mr. Reid from CARAS suggested that FACTOR consider how it can help entrepreneurs “compete in the digital economy.”[81] Mr. Cooper from Volu.me recommended that “the collective initiatives program administered by FACTOR and Musicaction see their project timelines and budgets for technology-based projects increased.”[82] Mr. Albert from Stingray Digital recommended that some of FACTOR’s support be directed to the creation of Canadian broadcasting platforms, including streaming platforms.[83]

The persons representing independent artists had the sense that they were not eligible for FACTOR support because they did not meet the program eligibility requirements. Zachary Leighton, Executive Director of the CIRAA, said that “of Canada's 19,000 recording artists, only 3,400 have even bothered to register with FACTOR, due to widespread apathy.”[84]

During their appearance before the Committee, representatives from FACTOR and Fondation Musicaction addressed some of the criticisms that had been directed at their organizations. Mr. McKie of FACTOR reported that the organization had recently made significant changes to some program criteria to reflect changes in the music industry. As noted in section 2.5, when evaluating funding applications from record companies, FACTOR now considers not only the physical sale of CDs but also digital sales and placements in advertisements, TV and film.[85] The application criteria for artists have also been overhauled and now include such elements as number of performances, success on social media and ad placements.

Speaking on behalf of Fondation Musicaction, President Pierre Rodrigue stated that funding has been allocated to collective digital projects since 2010–2011, “to increase the amount of digital content available.”[86] However, he admits there is a need to “invest more and better in the new digital ecosystem.”[87] Funding programs must be flexible in this environment, and exporting to target markets has “become essential.”[88]

FACTOR/Musicaction stated that their programs are open to a wide range of applicants. However, they have limited funds and a large number of applicants. Mr. Rodrigue noted that it is not unusual for applicants to try several times before they are successful.[89]

Mr. McKie was asked about the roughly $35 million FACTOR has in its reserve fund. He said that FACTOR decided to set the money aside for a time when there is a reduction in the financial contributions (tangible benefits) that it receives as a result of commercial transactions approved by the CRTC. He said that FACTOR expects these financial contributions to begin diminishing in 2017. At that point, the reserve money will be used to generate income in order to keep FACTOR funding at a constant level until 2020. Mr. McKie said that beyond that, it will depend on the conditions.[90]