Welcome to the ‘Royalty Black Box,’ the Music Industry’s $2.5 Billion Underground Economy

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It’s an entire underground economy that nobody likes to talk about.  Especially the people making billions off of it.

Delve into the music industry’s sordid past, and you’ll find tawdry details of mobbed-up labels and Soprano-style venues.  Indeed, crooners like Frank Sinatra were notoriously implicated with organized crime.  But the way he explains it, there wasn’t any alternative.

So who’s replacing the mobsters in the digital economy?  Welcome to a more sophisticated racket that’s just as lucrative.  And it involves billions in unclaimed, unmatched, delayed, or otherwise unpaid digital royalties.  And holding the golden bag is a mish-mosh of well-positioned middlemen, including a gaggle of PROs, mechanical rights licensing administrators, and others who mysteriously can’t figure out where that check should be sent.

So who’s holding all this cash?

Like the problem itself, the answer is complicated.  And it’s hard to pick out the bad guys.  Many times, it’s just simple incompetence instead of actual malice.

Like SoundExchange.  Over the years, we’ve blasted SoundExchange for holding hundreds of millions in unclaimed royalties.  Indeed, the deeper we clawed into SoundExchange’s unclaimed database, the more we found glaring examples of obvious copyright owners not getting paid.  We’ve even found fraudulently claimed royalties — lots of them — fueled by disorganization and maybe even purposeful obfuscation.

Intentional or not, the result ends up being the same.  And it turns out that’s just scratching the surface.  Now, as Spotify battles hundreds of millions in unpaid royalty claims, a little startup in London wants to shine the light on this dirty butt-crack of the business.

The company is called Paperchain, and their mission is to clean up an estimated $2.5 billion in blocked funds.  They’re ready to seriously rock the boat.

Paperchain was started in Sydney, Australia, and migrated their HQ to London.  That’s still far from the epicenter of the music industry (pick one: New York or LA); though its closer to the rat’s nest of overlapping European PROs (more on that cesspool later).

Here’s just some of the depressing info that Paperchain emailed Digital Music News this morning.

• More than 46 million instances of unidentified songwriters or unknown copyright owner ‘Notice of Intents (NOIs)’ have been digitally filed with the US Copyright Office by streaming services since April 2016.
• Royalties are unpaid and go into “royalty black boxes” until the owner is identified or dispersed into the industry.
• The global value of these royalty black boxes is estimated to be $2.5 billion.

That’s right: $2.5 billion, with a ‘b’.  And given an absolute avalanche in plays and associated metadata, this is a problem compounding exponentially every year.

So ask yourself: where’s this $2.5 billion going?

In the case of Spotify’s unpaid mechanical licenses, the answer is absolutely nowhere.  At least until recently.  That’s because Spotify simply wasn’t paying any of it (much less matching it to anybody).  But in many other cases, the cash is paid by radio stations, apps like Pandora, and streaming music services to a range of royalty collection agencies.

Then it simply lands in a big black box.

Sadly, those ‘black boxes’ often become massive, interest-bearing accounts.  After all, a pile of $100 million doesn’t just sit there.  Rather, it’s fodder for financial markets and lenders, all eager to put that money into play.  All of which generates comfy dividends to cover administrative overhead, CEO salaries, and expensive company lunches.

See how this works?

Enter Paperchain’s founding duo, who want to break that racket apart.  “We now have 46 million instances of ‘author unknown’ from the US Copyright Office ingested into our database and we’re helping publishers find out if their catalog has been affected and what the financial impact is,” explained Paperchain founder and CEO, Daniel Dewar.

Actually, the broader digital supply chain isn’t broken.  It works pretty well.  It’s just that little part that involves payments.  “Our focus is not to replace the current digital supply chain, but to make the flow of rights data work better,” said Paperchain’s co-founder and CTO, Rahul Rumalla.

Obviously, these guys have identified a massive problem in the music industry.  But by attempting to solve that problem, Dewar and Rumalla are about to make themselves into a massive problem themselves.  That is, for an underground industry economy that has grown fat over accounting chaos and subterfuge.

So will these guys last?

In the old days, these two would probably ‘be disappeared’.  But in a less mobbed-up digital music industry, maybe ‘disruption’ is less life-threatening.  Though fair warning: entrenched middlemen rarely give up so easily.  In fact, their very existence depends on stalling cute little upstarts like Paperchain.

That said, there’s already hope for a better tomorrow.  Over the past year, Paperchain has been in ‘closed beta testing’ with select labels, publishers and some undisclosed intermediaries.  Now, success depends on seriously rattling the cage, come what may.