Exclusive: SoundExchange Holding Over $200 Million In Unpaid Artist Royalties

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At SXSW recently, SoundExchange was trying to match $1 million in unpaid artist royalties.

But the non-profit is holding an unpaid royalty account of more than $200 million, according to documents obtained by Digital Music News and information shared directly by the company.  And, given the growth arcs, the amount may be quite a lot more.

According to IRS returns (filed under federal non-profit Form 990), SoundExchange was holding the bag on a ‘fund balance’ of nearly $260 million by the tail end of 2008.  Subsequently, SoundExchange executive Laura Williams told Digital Music News that the figure was closer to $200 million at the beginning of 2009 because of ongoing payouts.  The organization could not offer more up-to-date figures, due to ‘auditing phase’ confidentialities.

The number has been skyrocketing year-over-year, highlighting the problems this organization is facing locating performing artists.  At the end of 2007, the outstanding ‘fund balance’ was roughly $192.7 million, and at the end of 2006, $96.7 million, also according to the filings.

This is happening despite a huge ramp-up in artist outreach.  Or perhaps, the swelling account is motivating the increased efforts.  Either way, the payout totals themselves have also been growing aggressively.  And across the board, formats like simulcast terrestrial stations, satellite radio subscriptions, and apps like Pandora are booming and pushing non-interactive royalty amounts through the roof.

In fact, SoundExchange noted that the amounts paid to artists are growing faster than the growth of the unclaimed pile.  For example, 2007 featured an artist payout of $36.2 million, 2008 was $100 million, 2009 was $155.5 million (not yet audited), and the first quarter of 2010 – also unaudited – was $51.7 million.

Williams noted that the ratios are “all well within proportion – just big increases across the board,” while also pointing to a huge growth curve for non-interactive radio in the US.  “The whole industry is increasing year-over-year.  We’re just a part of, or more accurately a reflection of, that explosion,” Williams relayed.

But more than $200 million sitting there, undistributed?  This sounds like a monstrous number, and one that should be drawing some scrutiny.  One attorney reviewing the situation noted that “any non-profit carrying more than $200 million on its books has a serious problem,” and indeed, it remains unclear if such a massive logjam can be adequately resolved and paid out.

And what about Pandora, a company nearly bankrupted by royalty demands?  Earlier, Pandora founder Tim Westergren noted that Pandora accounts for roughly half of the total, non-interactive payout to SoundExchange, a figure confirmed by SoundExchange itself.  But Pandora currently carries a major royalty overhang – and variable cost structure –  that makes long-term profitability an uncertain bet.

That raises the question: why is Pandora paying such heavy royalties if the money ends up in a holding tank, with large amounts undistributed?  In a discussion with Digital Music News, Westergren was unaware of the unpaid royalty total, though he sympathized with the difficulties involved in reaching artists.  “I think, and I say this as a musician myself, that musicians need to step up here,” Westergren relayed.  “I don’t think SoundExchange is trying to hold on to money.  It’s just remarkably hard to get musicians to take the initiative.”