webcasting royalties and soundexchange

Webcasting Royalties and SoundExchange

(A version of this article first appeared in Music Connection Dec.

2003)

When a record is played on "terrestrial" broadcast radio in the United

States (i.e., over the air), who makes money? Since a radio broadcast

is a "public performance" of the song in the record under the U.S.

Copyright Act, the songwriters and publishers make money through their

performing rights organization, whether ASCAP, BMI or SESAC. But does

the artist? Does the session drummer? Does the record company?

Not in the United States.

If the same record is played in Canada, the United Kingdom, Japan, or

any one of a host of other countries, not only do the songwriters and

publishers get paid a royalty through their PRO, but the artists,

session players and copyright owner of the recording also get paid

through a sound recording PRO.

But--due to changes in US law in the 1990s--if the same record is

played in the U.S. on Yahoo! Music, the new Napster, or on DMX, XM

Radio or Sirius, not only do the songwriters and publishers get their

royalty, but the artists, session players and vocalists and record

companies also get a royalty through a new PRO for sound recordings.

Weird, you say? True. But no stranger than the tax laws. Just like the

tax laws, our copyright laws are the result of deals cut in Washington

between interested parties, and the deal that cut out sound recordings

from a performance royalty was made a long time ago between the

broadcasters and the record companies. The goal of the recording

community is to bring the U.S. in line with the laws of most other

countries--the broadcasters oppose that goal because it makes the

music they play more costly, and they have had the clout to win the

issue in Washington, just like so many other changes in the laws that

have created the most severe media consolidation in the world. If you

were a cynical person, you might say that's because there is a radio

station in every Congressional district, but record companies in only

a few.

Congress amended the Copyright Act in the 1990s to establish a limited

public performance royalty for digital transmissions of sound

recordings. "Digital transmissions" includes satellite radio like XM,

webcasting (or "Internet radio) like Yahoo! Music, and the Internet

broadcast (or "simulcast") of terrestrial radio stations like when

your favorite radio station simulcasts its broadcast signal over the

Internet. Although this limited performance right is a small step

forward, it is a huge victory against the broadcasters, particularly

as the industry moves toward digital radio.

These new laws established what is commonly called a "statutory" or

"compulsory" license to stream sound recordings as long as the music

being streamed complies with the restrictions on the license limiting

the use to public performance, sequencing, and a few other

restrictions. (This is the same license that is at issue in the XM

Radio litigation.) This statutory license does not include on-demand

streaming or downloads (such as the Napster subscription service). The

statutory license eliminates the need to get a separate license from

each copyright owner as long as you comply with the rules and pay the

royalty. (We already have a compulsory license for mechanical

royalties paid on songs when a digital or physical record is sold.)

The statutory license only applies to streaming, not to downloading or

any other interactive use of music that involves the user choosing

which specific tracks they want to listen to.

These amendments to the Copyright Act divided sound recording

royalties among four groups: copyright owners (50%), featured artists

(45%), nonfeatured musicians (2.5%) and nonfeatured vocalists (2.5%).

"Copyright owners" typically means record companies, but independent

artists, or any artist who owns their own recordings, qualifies as a

"copyright owner." It does not include songwriters or music

publishers, although their right to public performance income requires

no change in the law.

The Act also established the first sound recording PRO in the U.S.

called SoundExchange. Until recently, SoundExchange was a division of

the Recording Industry Association of America, but was recently "spun

off" to be a stand alone nonprofit organization with a board of

directors divided equally between artist and sound recording copyright

owner representatives.

Through a rather tortured set of regulations (which have the force of

law), SoundExchange collects royalties from the subscription radio

providers, webcasters and radio simulcasters, and pays that money out

to the four groups. The nonfeatured musicians and vocalists, also

known as session players and singers, have their money paid to trust

funds established by the American Federation of Musicians and the

American Federation of Radio and Television Artists. Featured artists

and sound recording copyright owners are paid directly by

SoundExchange.

While the Congress established how the pie was to be split in 1995,

they only set a rate for certain satellite radio providers

(effectively 6.5% of gross revenues). They didn't establish any other

rates, though, and the interested parties could not agree among

themselves on what the rate was to be. That started a long process of

negotiation in a Copyright Arbitration Royalty Panel that ended last

year, and was supplemented by a law protecting small webcasters a few

months later after the small webcasters strongly objected to the new

rates.

Because the CARP took so long, the rates that were set would have

expired almost immediately. No one wanted to go through another CARP,

so the interested parties negotiated a new rate that will last until

the end of 2004. The new webcasting rate is, more or less, $0.000762

per performance. TTTThe structure is a little complicated, and doesn't

cover certain groups such as simulcasting of radio stations,

noncommercial webcasters, or small webcasters.

You can review the rates on the SoundExchange website

(http://www.soundexchange.com/) or on the U.S. Copyright Office

website (http://www.copyright.gov/).

n Royalty Panel. not agree among themselves on what the rate was to

be.

The Role of SoundExchange

Persons using the statutory license, such as Yahoo! Music, must

account and pay royalties to SoundExchange. SoundExchange must then

account to individual members of the four groups. Establishing the

databases for Sound Exchange to track plays and pay royalties is a

monumental undertaking. Because the compulsory license is unlimited in

scope, SoundExchange effectively must be prepared to account for every

recording in the history of recorded music, both U.S. and foreign

repertoire. SoundExchange has received massive downloads of label copy

and accounting data from its record company members to establish its

own database for accounting. This means that whatever information that

an artist's record company has in its accounting system is likely now

in the SoundExchange database, which is updated periodically.

It is important to note that featured artists who are signed to record

companies are paid their webcasting royalties directly--regardless of

whether they are recouped in their accounts with their labels.

Independent artists, however, may not have been included in the

SoundExchange database. You can confirm whether you are listed in the

database by signing up for an account on the "PLAYS" system at

http://www.soundexchange.com/. Remember, if you are a "featured

artist", that just means that you are the artist who is featured on

the recording, not that you have to be signed to a record company, so

independent artists qualify for webcasting royalties, too, and

probably qualify as copyright owners as well.

The Price of Liberty is Eternal Vigilance

It would be a very unusual result indeed if every piece of data in the

SoundExchange system was exactly correct, and I frankly don't think

it's fair to expect perfection under the circumstances. I will say

that I believe that John Simson, its Executive Director, and his staff

are committed to running a tight ship and giving people a straight

count. I would strongly suggest that everyone with a stake in this

royalty pool check to confirm if you are in the SoundExchange system,

and if you are that your information is correct. You can do this by

yourself by getting a PLAYS account and looking up your recordings. If

you haven't registered yourself with SoundExchange, you should assume

that there's something incomplete or incorrect about the data and you

need to review it to make sure it's complete and correct. If it's

incorrect, the SoundExchange staff will work with you to correct it.

In my practice, the two most common problems are absence of

information, or someone incorrectly claiming copyright ownership.

Absence of information is often providing the missing link on data

that is in the database, or inputting data for the first time.

The trickier problem is the problem of the incorrect copyright owner.

Most of the time I believe this to be innocuous and innocent mistakes.

For example, if a major label distributes an independent label--and

only distributes, i.e., takes no ownership interest--they are not

entitled to the copyright owner's share of royalties because they are

not the copyright owner. Yet very often the distributor ends up being

reflected in the SoundExchange database as the copyright owner.The

more insidious problem--and let's just call it a head scratcher

without casting aspersions or assigning blame--is when a content

aggregator is reflected as the copyright owner when the artist is not

registered. This means that the SoundExchange database recognizes that

independent artist Joe Smith is the artist for Joe's Song but has no

contact information for Joe Smith. However, Joe Smith has done a

digital distribution agreement with one of the aggregators to

represent his catalog and SoundExchange reflects the aggregator as the

copyright owner and pays the copyright owner's share to the

aggregator. No aggregator agreement should ever allow an aggregator to

do this, or to have anything to do with SoundExchange in my view. It's

not really SoundExchange's fault, either, as they can only do so much

to police the information they are provided in the first instance. At

the end of the day, its up to each interested party to make sure that

their business is organized and that they are correctly registered

with SoundExchange, just as they would expect to be correctly

registered with ASCAP, BMI or SESAC.

Foreign Royalty Collection and the Future

At the moment, the money that SoundExchange collects and pays is

pretty small. Most royalty checks are less than $500. However,

SoundExchange has begun collecting foreign public performance

royalties which can be real money. The total performance royalties in

the European Union alone are in excess of $500 million annually.

SoundExchange currently has reciprocal agreements with its

counterparts in the United Kingdom, Mexico and the Netherlands.But the

real significance may arise when and if Congress passes legislation

that extends these royalties to regular radio and television

broadcasts. SoundExchange will very likely be the administrator of

these royalties, and that will be real money. So it's a good idea for