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

Welcome to the music industry

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.

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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.

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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.

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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.

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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.


8 Responses

  1. Anon

    “Obviously, these guys have identified a massive problem in the music industry.”

    Is this really news to anyone familiar with the industry?

    Reply
  2. Musicservices4less

    You are right Anon. We all know this has been around since the very start of the music industry back in the 30’s. But the question is what will Paperchain be able to accomplish with their business model other than using existing data to do exactly what? Tell everyone in the music copyright business to enter their data in some sort of data base(s)? Good luck with that.
    The real problem that the tech industry has it that will not acknowledge that issues, especially those surrounding copyright ownership/control, cannot ALL be solved with just technology “the internet of things.” You may just have to hire real, live people who are knowledgeable about finding out who the correct payees are. This is not only difficult and time consuming but is sometimes an impossible task until and unless these people come forward to claim their piece of the pie.
    And of course, the tech music distributors and retailers don’t want to do this and it is never in their business model because, wait for it, IT COSTS ALOT AND I MEAN ALOT OF MONEY!!!
    So now you seen even proposal from the US legislature to have what, the US government build a data base?! Huh? What does BMI/ASCAP and other combined with SoundExchange already have? Chopped liver?
    I am sorry to say that some creators of music will never bother to properly register and enter data to claim their royalties.
    Gee, it looks like this will continue to be an costly aspect of the music industry and at least for the foreseeable future, not solved.
    By the way, I want my share of that Black Box! I guess the Stones hit it on the head with “You may not get what you want but if you try sometime . . .”

    Reply
    • Donnie Trump Jr.

      Hey, “ALOT” is not a word, even if you use it twice in the same sentence. It’s “a lot”. Just trying to be helpful.

      Reply
  3. Dan

    “But the question is what will Paperchain be able to accomplish with their business model other than using existing data to do exactly what? Tell everyone in the music copyright business to enter their data in some sort of data base(s)? Good luck with that.”

    To this point—no. We’re aware of why such proposals haven’t worked in the past.

    Think of it more as a data exchange, if you’re familiar with such protocols. Proprietary remains as proprietary. Access is given on permission. We’re about connecting existing databases, not promising a silver bullet central database.

    Happy to chat more – [email protected]
    Dan

    Reply
  4. Chris

    I can’t take you seriously anymore. Between the click bait headlines and the ‘ad as article’, you have no credibility anymore.

    Reply
    • Wurd

      Ditto that chris. Paul, in the spirit of the transparency you right about so much, could you please tell your audience how much these tech companies pay you?

      Reply
      • Not Journalism

        LOL. Seriously. Can’t remember the last time these guys did an honest piece.

        Reply
  5. Jay

    BMI and ASCAP are very intentionally making it nearly impossible for anyone but the very largest artists to get paid radio royalties. They rely on the Neilsen satellite and quarterly samples reported by radio and refuse to look at anything else when considering who gets paid how much. This means that for the most part, only their biggest artists are going to make money, and everyone else is a bookkeeping expense as far as they’re concerned. If they really wanted to pay their artists they’d be monitoring the internet streams of every radio station in the US. Instead, they monitor none of them. It is an intentional effort to not pay the majority of their artists.

    Reply

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