Label Direct Deals With Digital Broadcasters Are Dire Threat To Artists’ Sound Exchange Royalties

Unlike terrestrial radio,  since 1998 the satellite radio (now mostly SiriusXM), webcasters and other digital broadcasters pay performance royalties to performers and record labels.  “Performers” in this case are both featured artists, and session players (“non featured artists”).  Normally these royalties are paid directly to performers and labels–separately–through the non-profit entity SoundExchange.   SoundExchange pays  45% of these revenues DIRECTLY to featured artists and 5% to union trust funds for non featured artists.

For featured artists this means no recoupment.  No waiting.  No middlemen, no funky accounting and no funny business.  (Other than a big aside with pre-72, which I’ve written about regarding the Turtles landmark law suit.)

And these digital royalties to performers have been growing quite quickly.  They now represent more than 8% of all recorded music revenues. For performers there are few costs to generate these revenues so the artist’s net profit on SoundExchange payments is probably higher than most other income streams.  SoundExchange royalties truly have been a positive story in a decade of otherwise grim news for performers.

Unfortunately, the law also allows record labels to cut “direct deals”  with digital services outside of SoundExchange.   And in the last couple months that is what we’ve seen. We found out that The Orchard (now part of Sony) cut a direct deal with Sirius.  In November, the large independent label licensing consortium Merlin cut a deal with Pandora.  We’re still looking for the artist signed to any label distributed by The Orchard or a Merlin label that got a heads up about these direct deals, much less asked if they wanted to opt out.  In the case of Merlin labels, somebody–presumably Merlin–negotiated lower royalties  in exchange for Pandora “steering” listeners to Merlin artists.  Never mind that this smells like payola, here’s the real problem:

Labels doing direct deals with digital services for SoundExchange royalties could require the service to pay 100% of the revenue to the label and not pay the performer’s share through SoundExchange–that is, require the digital service to pay the artist’s share directly to the label to be applied against any unrecouped balances.  It’s unclear to me what would happen to the union trust fund payments at least for labels that are not “signatories” to the AFM and SAG-AFTRA collective bargaining agreements.  Even if the label is a signatory, it’s unclear to me which would dictate the rules, the Copyright Act or the collective bargaining agreements.

If the labels take the money, artists would probably get paid at their label royalty rates and not 45% of gross revenue.

As far as I can tell, the labels are not obligated under the Copyright Act to pay artists their share of the SoundExchange royalties without recouping.  It’s even less clear whether labels could take away their contributions to the AFM/SAG-AFTRA Intellectual Property Rights Distribution Fund, but it appears that labels are under no obligation to make those payments, either.

None.

Nada.

Zilch.

They may choose to let SoundExchange keep paying artists directly, but when the dust settles they may also choose not to.  And if the labels choose to take the artist’s share directly, the labels can apply it to any unrecouped royalty accounts regardless of whether the accounts pre-date the existence of the sound recording performance royalty.  The Orchard deal with Sirius and the Merlin deal pay the performers’ share through SoundExchange, but as far as I can tell there’s nothing stopping the labels from changing their minds later on.

So far the labels that have publicly disclosed making direct deals say that they will continue to pay the performers their share through SoundExchange.   So that’s good right?   Sort of.   SoundExchange can deduct its costs from royalties it collects (and I have no beef with SoundExchange on their costs–very low.)  The problem with direct deals is that the label’s share of royalties is outside of SoundExchange, but the performer’s share is not.  This forces the performers to bear the administrative cost when labels do not.

Another problem with direct deals is that SoundExchange are unlikely to be able to audit the digital broadcasters on behalf of performers.   And since the performers are not party to the direct deal they wouldn’t have any rights to audit either. Even if performers could audit that’s an enormous burden to transfer to individual performers.

So performers would have to rely on the record labels to do the auditing, and frankly this scares me.  The very fact that labels are cutting payola-like direct deals with digital broadcasters is a sign that they are cozying up.

SoundExchange also has reciprocal agreements with their counterparts in other countries. It’s not clear how performers will then collect their foreign royalties if their labels cut direct deals.  Would they have to collect directly?  Would SoundExchange still be able to collect. There is a good chance that performers might lose some foreign royalties as a result.

Clearly this is not gonna end well for performers.  But frankly I don’t think it’s gonna end well for labels either. Why?  these direct deals are already being used in attempts to lower ALL digital royalties at royalty board hearings.  That hurts the labels as well.

After the streaming math fiasco I’m not optimistic labels are gonna figure out that these deals are  bad for them until it’s too late.  To put it mildly labels do not appear to be engaging in much long-term thinking these days.  And the digital broadcasters have been  playing the labels like a cheap violin.

As usual it looks like it is up to the performers to do the critical thinking and to try set this straight.  We need to fight this. Now.

Perhaps we need to amend the law to prevent labels from direct licensing the performers share of digital broadcast royalties. If labels want to direct license and take a lower rate for their share let them.  But don’t let them get their hands on our royalties.

 Respect Act II? anyone?

 To summarize:

Benefits to performers from SoundExchange:

  • Performers paid directly
  • Not Recoupable
  • Independent performers get same deal as major label performers
  • SoundExchange audits on behalf of all performers
  • Payola-like deals not allowed
  • SoundExchange collects foreign royalties for performers
  • Collective bargaining increases leverage with broadcasters

Dangers to Performers under direct deal.

  • Labels under no obligation to pass through the performers digital royalties.
  • Labels could apply royalties to un-recouped balances
  • Independent performers could get lower rates than major label performers
  • Performers lose ability to audit digital broadcasters
  • Payola type deals shut out independent performers
  • Potential loss of foreign revenue
  • Performers are burdened with entire administrative overhead of compulsory license system.
  • Fragmented bargaining decreases leverage with broadcasters