The following guest post comes from Jeff Price, founder of Tunecore and Audiam.
To date, for a variety of reasons, no interactive streaming music service has paid the artist/songwriter/publisher all (or any) of the money they earned.
There is an estimated $100+ million in earned un-paid money just sitting there. This number grows each and every day. To this point in time, SoundCloud has not been part of this equation, but that is about to change as can be seen with the recent announcement of its deal with Warner Bros. setting it up to become an interactive streaming service like Spotify.
The question is, will SoundCloud take advantage of the artist or not?
So why haven’t the artist/songwriter/publisher been paid what they earned, none of them built the infrastructure needed to pay them and outsourced the job to third party companies. (For example, if there is a recording of a song called “Butterfly,” whom does the streaming service pay the mechanical royalties to: the person that wrote the Maria Carey song? The Jason Mraz song? The Crazy Town song? Or perhaps it’s a new song with that title, complete with new rights holders to find).
This problem—combined with the existence of a US compulsory license, bad meta-data, advances paid to major publishers, lack of accountability, confusing royalty rates and no ability to audit—created the perfect storm for hundreds of millions of dollars to be earned but not paid.
The end result is that interactive streaming mechanical royalties made from 15% to 30% of the sound recordings don’t get matched and paid to the person who wrote the song. Of the money that does get paid out, about 7% of it is paid to the incorrect person or company due to wrong information.
And that’s just the tip of the iceberg, as, in a very bizarre twist, the major music companies do make money off the use of their music, its just their clients and songwriters that do not.
It works as follows. The interactive music services usually must pay the large music companies sizable up front cash advances and give an ownership percentage of their company in order to get the rights to the major music company’s music. For example, Warner now owns an equity position in SoundCloud and the major music companies collectively own about 6% of Spotify.
This aligns the interests of the major music company with the interactive music service allowing the existence of the ominous “Trial Subscription”; a new way to exploit the artist/songwriter/publisher to the sole benefit of the label and music. A “Trial Subscription” allows a customer to try out the interactive music service for free for about a month. However, the contractual terms of the streaming services state they will not pay any royalties for “trial subscriber” music streams. This allows the service to increase its subscriber numbers, thereby increasing its perceived value, while not costing them anything to use the music.
One would think that the major music companies would not allow this, but think again. The music companies make hundreds of millions of dollars off the “exit” of the streaming music service (i.e. it gets bought and/or goes public) but the artist/songwriter/publisher make nothing. Their contracts with the labels only pay them for the sales/streams of the recordings; there is no “exit” royalty.
Okay, granted, it’s not SoundCloud’s fault that the major music companies keep all the “exit” money, but SoundCloud should agree to pay artists/songwriters/publishers when “trial” customers stream their music.
After all, why should the people that create the music be asked to forgo their royalties so they can be screwed twice; once by not getting paid for the stream of their music and again when an exit is reached that they cannot participate in?
But as bad as the above sounds, things get even worse due to the cash advances paid by the interactive music services. If the data in the digital music services database is inaccurate/bad (and a lot of it is), the impact on the major music companies is to make more money as they don’t have to account and pay royalties out on the advance they received (they call this “breakage”). In other words, there is financial incentive for the major music companies to deliver and/or keep the data bad/wrong in the database of the streaming music service.
If the artist calls in an audit on the major music company, the statements don’t show what was NOT paid out and/or what is bad/wrong in the digital music services database. A solution would be to financially audit the streaming service, but this is not possible as, in the US, there is no audit clause in the compulsory license. This means there is no way for the artist/publisher to get into the data of the music service to see what has not been paid out and accounted for.
The end result is the major music companies get to keep the money that should have been paid to the artist/songwriter.
Yeah, it’s the same old thing being done in a new way. But let’s bring this all back to SoundCloud. SoundCloud has not yet launched its streaming interactive music service, but it’s about to….
So now SoundCloud, a company built on the philosophy of helping and serving the artist/songwriter/publisher, has a choice; take advantage of the artist/songwriter/publisher while creating legal liability for the company OR build the necessary infrastructure to pay what’s owed under fair contractual terms. If they choose the later, not only will the artist/songwriter/publisher get paid more of the money they earned, but SoundCloud would also have a competitive advantage over every other music service in the world due to paying the artists more.
And for the venture capitalists that put the $100+ million into SoundCloud, I understand your motivation is to get, at any expense, the highest “return on investment” as possible. But, think of it this way, if SoundCloud rights these wrongs, it will get you more market share and therefore revenue providing a higher return on your investment (and I bet even Taylor Swift will even let her use her music).
And with the giant YouTube train leaving the station in a moment, you’re going to need to do something to set yourself apart.
The question is, will SoundCloud’s founders, its board and it’s investors take advantage of the opportunity?
If they don’t, and this issue comes more to light, it means SoundCloud will lose rights not only to Audiam’s publisher clients, but also compositions to many others.
In which case it better try to rush to the finish line, leaving another trail of decimated artists, and get its “exit” before the inevitable lawsuits begin.
Image by Johnathan Nightingale, licensed under Creative Commons Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).