Will SoundCloud Take Advantage Of Artists, Or Save Them?

devilangel

 

The following guest post comes from Jeff Price, founder of Tunecore and Audiam.  

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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.

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Image by Johnathan Nightingale, licensed under Creative Commons Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).

21 Responses

    • Anonymous

      Many of Universal Music’s current licensing deals with streaming partners expire at the end of this year, according to a person familiar with the matter.

      “Everything’s on the table. We’re working to create as many opportunities [as possible] for people to buy, or pay for their music,” he said. “I see a world very, very soon where there will be a whole series of price points for the consumer.” – Lucian Grainge

      New sheriff in town? “Free” is not a “price point”…

      Reply
    • Musicservices4less

      If you are at all serious about this discussion and related issues, you must acquaint yourself with the US Government regulations regarding the compulsory license. Please go to:
      http://www.law.cornell.edu/cfr/text/37/part-385/subpart-B
      Overall, here is what should jump out at you especially if you are familiar with or deal with actual licensing terms and conditions with the US streaming companies:
      1. It appears that the entirety of these regulations were drafted by and/or extremely influenced by the streaming companies/major record labels
      2. The regs are drafted to reduce royalties and protect the licensees (streaming companies)
      3. If the licensees “act in good faith” nothing can happen to them. So even if they totally misapply or don’t account or some other egregious action or non-action, as long as they show reasonable “good faith” it’s just too bad. In the olden days, if your accounting was off by 5% or 10% and you were audited, the licensee had to pay for the audit no matter what the cause.
      Here we have regulations that are in effect totally drafted by one side of the table. Good luck trying to do anything in everyday business when the game is legally stacked against you.
      Maybe Obama’s foray into the net neutrality issue will finally open the door to some government oversight in this area. One can only hope.

      Reply
  1. Nina Ulloa

    as soon as they get into the “streaming service subscription” game they’re going to lose a sizeable portion of their original audience (small time producers & labels who needed a tool to share their songs with others). i’ve seen rumblings of users migrating over to Mixcloud.

    Reply
  2. JTVDigital

    Jeff,

    Are you referring to a US-centric situation with that statement “no interactive streaming music service has paid the artist/songwriter/publisher all (or any) of the money they earned.”?
    As an example, recent (public) data from SACEM shows that in 2013 they paid out close to 30 M€ to songwriters/publishers for downloads and around 15 M€ for streaming.
    This is certainly the case everywhere else in Europe where we have collecting societies.

    Then, Soundcloud is a special case.
    For some reason, they never paid a cent to collecting societies for streaming the works they represent.
    So far the only “explanation” / answer I had about this from a Soundcloud rep was “we are in talks with collecting societies”, it was 2 years ago.
    Nothing happened since, they still don’t pay.

    Coming back to some of your points (with all due respect you tend to mix issues about master rights and issues about publishing/songwriting rights, which makes the article slightly confusing imho).
    The biggest “problem” is to identify what’s on Soundcloud.
    I believe a ContentID-like technology would do the trick, it has proven to be much more reliable (even if not perfect) than metadata.
    And no there is no “evil conspiracy” at major labels to keep the data bad. I spent several years there and believe me or not, there are hundreds of people working on these topics, trying to make the data accurate.
    One of the problem being that the core data relies on label copies, which are usually badly filled in by people completely clueless about the consequences.
    Instead of educating or calling to order the people responsible for the sh$* data entry, labels prefer spending millions in very sophisticated (= labyrinthine) systems for trying to fix semi-automatically the billions of human errors made upstream.

    With a technology based on fingerprinting that would scan Soundcloud, it would be possible to:
    1. identify any piece of copyrighted audio on the service
    2. consequently identify any right holders (record labels, songwriters, publishers, indie artists / producers..etc.)
    3. create an ecosystem for making sure these people get paid when their content is used (or when they upload and share their own content)
    Monetizing would certainly imply ads, since the number of paid Soundcloud users is probably extremely small.

    Reply
    • jeff price

      its not US centric, its a global problem. Fingerprinting does not solve the problem as new recordings don’t match old ones.

      I have met with the CEOs and owners of the majors. They have stated to me in person and clearly that Audiam “fixes the breakage” and it will “cost us money”.

      They are aware of the data problem but as there is no financial incentive to fix it (they have already been pre-paid and it costs them money if they do fix it), its not a focus

      Jeff

      Reply
      • JTVDigital

        Ok I misread the post then.

        So, data is bad, and will remain as is for a while since some of the involved parties may have limited interest in fixing it completely (even though there ARE constant efforts made to improve the metadata).
        The global switch to DDEX is also drastically improving the situation.

        Fingerprinting: what are “old recordings”? 1 recording = 1 ISRC = 1 fingerprint.

        Soundcloud: 2 main issues, the presence of copyrighted recordings on the service and the fact they do not pay collecting societies.

        What is the solution you are offering then? I still don’t get your point…

        Thanks,

        Reply
        • Andy

          @JTV, the point Jeff is trying to make is that fingerprinting only works with the original song, not with a cover song. If I cover someone’s song and put it on iTunes, the songwriter should get paid for their rights.
          What Jeff is saying is that this is not always happening.
          In the US, iTunes pays the songwriter’s portion to the label. In Europe, the PRO’s have direct deals with iTunes.

          So what’s been happening, is that people have been covering songs, putting them on iTunes and songwriters haven’t been getting paid. I know, because I’ve sold cover songs on iTunes in the US and I’ve tried to contact the songwriters’ publishers to pay them the money but no one ever replied to my emails.

          I have money sitting on my paypal account just in case they come knocking one day!

          I released a cover album recently. I used SongClearance to make sure everything was in order but no one’s ever contacted me to check the numbers either.
          I assume that SACEM, PRS and GEMA have collected the rights in Europe for cover songs I’ve sold on iTunes France, UK and Germany, but I have no way of knowing, no way of checking.

          The streaming services have the exact same issue, since they have to pay mechanical and performance rights to songwriters as well.

          So this is a real problem, and I know that Audiam (or someone else like them) can help solve it because they’ve been doing a pretty good job identifying cover songs (people covering my songs) on YouTube.

          And by the way, SoundCloud is already using Fingerprinting (but it doesn’t work very well!). I got a copyright infringement claim from Universal for a track on my SoundCloud account. They thought it was one of the songs from a movie soundtrack, when in fact it was the high hat track from the original stems of one of our own songs (in a remix kit we put on SoundCloud). The track was blocked for a few days until they realised it was a mistake.

          Reply
          • JTVDigital

            Alright, so it was about cover songs? That wasn’t made clear.

            Yes in common law countries iTunes pay directly the content owner (the entity that delivers the content and has the deal with iTunes; can be a label, a distributor) for mechanical royalties.
            Then right owners (songwriters and publishers) are supposed to claim these royalties.
            In Europe this is correct the collecting societies are getting paid directly, so there are not much issues here and no (or little) money not being paid to their members (payments are always late because of the slowness of collecting societies, but it’s still paid at some point).

            Cover songs / songclearance: for exploiting commercially a cover song in USA / Canada..etc. a mechanical license needs to be pre-paid. Songclearance (or HFA) collects directly and pay out the right owners after obtaining the license (= authorization for a fee).
            The person requesting the license is supposed to update the number of licensed units (downloads or streams) regularly based on real sales data; agree there is no control of this but in case you receive a claim from a major publisher you’d better be up-to-date with the license fees…

            Soundcloud may be using fingerprinting, however I suspect the claims are being done manually (given the huge error rate as you pointed out); my point about fingerprinting was not about policing Soundcloud but trying to monetize and make it a somehow viable service for right holders.

  3. Versus

    SoundCloud also must strictly police illegal uploads of infringing works. This is a major problem with the service, as it allows piracy.

    Reply
    • wallow-T

      “The Internet also must strictly police illegal uploads of infringing works. This is a major problem with the service, as it allows piracy.”

      Fixed that for you. 🙂

      I find this all sad and depressing, as, for me, Soundcloud is a framework where niche artists can put up samples of their work, and I can go hear those samples when I am following up on an Internet radio track, or on a print/web review of the artist. It can be important input into shopping decisions.

      Reply
  4. Mad Men

    It’s called an advertisement. The problem is identified, and then the solution, Audiem, was provided. covers were not specifically mentioned because that would make the ad tag line less interesting.

    I don’t dispute the overall issues, but this article seems, well, let’s just say slightly disingenuous. Again.

    Reply
  5. Wrong Again

    Why does every one keep crying to the tech companies to right the wrongs of the major labels and publishers? SoundCloud should do what they are allowed to and artists should cut out the middlemen, its a simple long term but effective strategy.

    And no one is moving to Mixcloud Nina, they will be sued the second they’re on the radar and already admitted to paying “some” royalties but not all. First their takedowns will come, just like SoundCloud, then the lawsuits will come.

    The cycle won’t stop until artists get to the root of the problem. Its the majors, ASCAP, etc.

    Reply
  6. DNM copyedtir

    Did you just copy and paste this without cleaning the copy to undermine Jeff Price and/or his message? Or was that to undermine your own?

    Reply
  7. Confused...

    So not to go too far off on a tangent, but did Price actually write for DMN after the freud about Audiam and his colorful history? Just shocked to see him write an article for DMN. Just thought DMN and Price would have still have a good amount of distance between them…

    Reply

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