Over the Past 12 Years, Streaming Services Have Failed to Pay $100 Million In Royalties…

The following guest post comes from Jake Smith, head of Digital Services at Audiam.

Every month for almost 12 years, somewhere between 10% – 30% of the money owed to songwriters/publishers is not paid by many streaming services.  Just ask Microsoft/ Zune, LaLa (now Apple), Spotify, Rhapsody, Beats/MOG, Rdio, etc., how money was not paid out and they are still sitting on.  

Of the money that is paid, in many cases it is being paid to the wrong entity due to wrong data.

Each month, the digital services provide a list of every stream of a sound recording that occurred in the digital music service in that month to these third party companies. This list is called a “Usage Log.”

The third party company must:

• Match the sound recording to the composition.
• Match the composition to the publishing administrator.
• Have a name, address and other contact information for the publisher
• Run the royalty formula.
• Provide the statements and the interactive mechanical royalty payments to the music publisher administrator on time.

Some of the third parties are not paying on time. Some are paying up to 115 days late. In addition, most are not paying accurately.

In almost all cases they are only able to match/map and pay Interactive Streaming Mechanical royalties on 70% to 85% of the sound recordings in the interactive music service’s usage log.  This means each month, since the launch of the first interactive streaming service 12 years ago, 10% to 30% of the money owed to publishers for Interactive Streaming Mechanical royalties has never been paid out.

There is no transparency and no audit trail that we have been able to find for this un-administered money. The only thing we can be certain of is it has not been paid out.

In addition, for the money being paid out, we don’t know if they are paying the right publisher.

Audiam estimates the amount of misallocated or unpaid revenue over the past 12 years from streaming services around the globe is over $100 million.

This means every single service is not providing accurate statements and payments.  This is a material breach of the compulsory which, if not cured, terminates the license.

That last few months offer ample evidence of the problem.  Some music services (about 1⁄4) have paid some royalties to Audiam for the months of May, June, and July.  We expect these payments to be administered to our members by October.

That means the majority of the digital music stores (about 3⁄4) have not paid and/or provided accurate statements for royalties to Audiam for May (67 days past due), June (37 days past due) or July (7 days past due).  Some music services have lost the compulsory license and others have not.

For the services that have paid, Audiam has discovered multiple errors in their reports; i.e. not including compositions and/or reporting fewer streams than actually occurred.   For the services that have not yet paid, Audiam has sent legal letters to all of these services notifying them of their breach and giving them an opportunity to rectify the problem.  For the services that fail to fix the problem, they will lose the compulsory license to your compositions.  This means the compositions can now only be direct licensed to them via Audiam under customized Terms.

If the services continue to use the compositions without a license, it can be construed as willful infringement.  The laws around music services are important to know and understand to assure you are getting paid on time and accurately.

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Streaming services like Rhapsody, Spotify, and Rdio make hundreds of thousands of songs available to stream on demand, with thousands of new songs being added every day.  But why do they want the music and how do they get the necessary rights to use it?

Long answer short, these music services want to use music to: make money, sell hardware, sell subscriptions or increase their valuation.  In order to do this they need licenses and they need to pay for the use.

Specifically, they need two separate licenses to make a song available to stream – one license for the sound recording (which they get from the label/distributor), and a second separate license for the underlying composition (i.e. the lyric and melody).

There are two ways to license the underlying composition – a compulsory license or a direct license.

A compulsory license is in place as soon as a recording of the song is commercially released.

Let’s say you write and record a song today called “Special Lady”.  Let’s say you distribute that song to a service like Spotify.  Let’s say it’s available to stream RIGHT NOW.  As the person who controls the underlying composition, Spotify already has a license in place with you provided it either (1) sent you a notice of intent or (2) entered into a direct license with you (more on that below).

If you were sent a Notice Of Intent, you don’t need to do anything or sign any contracts for them to have a license.  Them sending you the Notice Of Intent causes the license to happen.  If a recording of your composition is available on their service, they owe you a songwriter/publisher royalty (called a “mechanical royalty”) every time your song is streamed*.

*There are a few exceptions where no royalty is due; for example during a non-paid consumer trial subscription or from a “preview” clip.

A direct license is what it sounds like – the publisher, or the entity representing them, enters, voluntarily, into a direct deal with a music service.

There are different reasons one may enter into a direct deal with a service.  It may include an audit clause.  It may allow you to receive a higher per-stream royalty than you would receive under the compulsory and/or to get paid under a different time-table, etc.

About now, you’re probably saying to yourself “That’s all very interesting… so when do I get my money?”  I’m glad you asked.

The Overall Problem That is Stopping Most Music Publishers and Songwriters From Getting Paid Mechanical Royalties

The US-based mechanical royalty system for paying publishers mechanical royalties from interactive streams appears to be broken and does not work.  We have found almost all songwriter and music publishers are not being paid on time.  When they are paid, the payments are not accurate.  In addition, many royalties are not paid at all.

At the time of the writing of this article, Audiam has received no payments or statements for its music publishing clients from about 3⁄4 of the interactive services for the following periods:

• May, 2014 (67 days past due)
• June, 2014 (37 days past due)
• July, 2014 (7 days past due)

Of the few statements and payments we’ve received, most are not accurate. The existing system simply doesn’t seem to work. Songwriters and publishers are not being paid in full, on time, or, in some cases, at all for the use of their music copyrights. There are tens of millions of dollars left unpaid or not paid at all.

The system needs to be overhauled.

THE CURRENT RULES AND LAW

Let’s revisit the “compulsory license” we talked about earlier. Any time a music service begins selling a new composition, they are required to send a “Notice of Intent” (NOI) to the publisher or publishing administrator. This way, the publisher or publishing administrator has a record of where their composition is being sold or used.

What happens when a new composition has been made available on a music service and they do not know whom the publisher or publishing administrator is?

The answer is usually nothing.  At any given time, it appears that over 10% of compositions in a digital music store are unlicensed; no NOI was sent to the publisher or publishing administrator and no direct license was entered into.  The services did not invest in systems or process to allow the songwriters/publishers to get properly licensed and paid.  Instead they out-sourced this job to third parties who also do not have a complete solution.

How is the Interactive Streaming Mechanical royalty calculated and when are the royalties (supposed to be) paid?

In the U.S., the mechanical royalty rate for on demand streams is based on an extremely confusing formula created by Congress.  The short version of it is: the music publishing administrator is to be paid their pro-rata share of 10.5% of the gross revenue the streaming music service makes in a month minus the expense of “public performance.”  The interactive streaming music services must provide royalty statements that show how they calculated the mechanical royalty that month.

As stated earlier, under the compulsory license, these payments are due monthly on the 20th of each month. May 2014 payments were due on June 20th, June payments were due on July 20th, and so on.

What happens if the Interactive Streaming Mechanical royalty is not paid on time or are paid inaccurately?

If the interactive streaming mechanical royalties are not paid on time and inaccurately, the publishing administrator, or an entity representing it, can send a legal notice to the interactive streaming service giving them 30 days to “cure” the problem. If the services do not account accurately and make payment within those 30 days, they automatically lose the “compulsory” licenses to the compositions.

If they lose the compulsory license, they CANNOT LEGALLY USE THE COMPOSITIONS unless the publishing administrator, or an entity representing it, issues them a direct license under whatever rates and term it wants.

If they continue to use the compositions without a license after notification, it is considered willful infringement. At that point they can potentially be sued for up to $150,000 per infringing use.

Do the interactive streaming mechanical services handle the administration of Interactive Streaming Mechanical royalties themselves?

No. Almost all of the interactive streaming music services do not have any infrastructure or desire to facilitate payments to the thousands of individual publishing entities. So, they hire third party companies to do this for them.

• The Harry Fox Agency (HFA) is hired by: Spotify, 7digital, Nokia, Rhapsody
• Music Reports Inc. (MRI) is hired by: Amazon, Rdio, Microsoft Xbox, Myspace, Guvera, Muve Music, Midwest Tape
• MediaNet provides this service for itself AND is hired by: Beats Music, MOG, iMesh, J. River, LAC, Synacor, Pulselocker, Wolfgang’s Vault, Liberation
• Google Play does this itself, in-house, with a service it owns called Rightsflow.

What does this mean for the compositions Audiam represents?

After receiving no payments from many of the digital music services, Audiam emailed each service and asked them to pay.  A week after those emails, no payments had arrived. Audiam then sent a legal letter to the services asking them to please pay us as required under the compulsory license agreement.  30 days later, Audiam still had still not received any accounting statements or payments.  Therefore, under the law, the licenses to the compositions expired.

When we spoke with the late paying interactive streaming services, some indicated that they can’t pay on time and they can’t pay accurately. More than one service has added, “there is not a lot of money” owed.  They also indicated they had no automated systems to allow for updates and/or corrections (for example, say Audiam finds another 158 sound recordings of a composition. It wants to deliver this information to the service to unlock back revenue and get the revenue moving forward.  Audiam can metaphorically throw the ball, but the services built no way to catch it.)

(On a quick side note, YouTube does have this system in place).

These services said the only way they can function is to have music publishers and songwriters agree to use the broken system and forgo their money in order to allow their business to grow, be more profitable or reach an exit.

This is our question back to those interactive streaming services: Would they be willing to only get paid 70% to 90% of the money they are owed each month from a third party company? Would they allow for the third party company to pay them late?

Just as it is reasonable for the interactive streaming services to be paid on time and accurately, it is also reasonable for music publishers to be paid on time and accurately.

Why does this problem exist, and what can be done about it?

As I touched on earlier, there are obvious problems with the compulsory license structure. If the compulsory license didn’t exist, it most likely would have forced the interactive streaming services to come up with a solution to get licenses, pay on time and pay accurately.

The second reason is that large copyright stakeholders (big labels/publishers) were paid very large advances and/or were given equity in many of these streaming music companies. Therefore, the problems of late and inaccurate payments do not exist for them. If they did have those problems, something more likely than not would’ve been done about it.

The third reason is that there is no transparency in the current system.  Instead of working with publishers to allocate these mismatched and unpaid royalties they either fall into a black hole or, possibly worse, get paid to the wrong publishers.

The final issue is that many digital music services are unwilling to invest the time and money to ensure they have the needed licenses and can make accurate and on-time payments.

Since many of these services seem unable or unwilling to fix this problem themselves, our goal is to provide publishers and the digital services a solution. Our commitment to fixing these problems is exactly why we’ve been granted to the right to work with so many large publishing catalogs.

The future of music use and consumption is digital. It’s going to grow. Let’s fix the problem now before it gets worse than it already is.

Yes, it is going to take hard work, time, resources and money to fix these issues.  If they think that’s hard, they should try being a musician or songwriter.