What is SoundExchange? An Interview with Michael Huppe about Digital Royalty Streams

Whether you’re a recording artist or label owner, it’s easy to feel apprehensive about the seemingly chaotic state of digital music distribution. While there’s plenty to debate when it comes to proposals for the future, there’s one thing we can all agree on: things will never be the same in terms of how musicians and rights holders get paid when their work is served over satellite, cable, and the Internet.

Besides direct downloads, listeners currently access music through one of two types of services: interactive streaming services such as Spotify and Rhapsody, where users can choose what they hear; and non-interactive streaming services, such as SiriusXM Satellite Radio and Pandora, which are more radio-like because the listener can select a station (based on an artist or genre) but not the exact song that he or she hears.

The radio-like paradigm of non-interactive services yields a radio-like royalty stream, but with a major difference. Just like with terrestrial radio, non-interactive services get a blanket license with the performance rights organizations (PROs) such as ASCAP, BMI, and SESAC—in this case for a non-interactive stream—that is used to compensate the composer and publisher of a musical work that is played by the service. These rates are made public.

However, unlike terrestrial radio, the non-interactive streaming services also pay a royalty that is divided among featured recording artists, non-featured recording artists, and owners of the master recording (typically a label). A federal organization called the Copyright Royalty Board (CRB), which is appointed by the U.S. Library of Congress, sets these rates based on public negotiations with interested parties that participate in a public rate-setting process every 4 to 5 years.

The Library of Congress put SoundExchange, a non-profit performance rights organization, in charge of collecting and distributing these statutory rates. Musicians and master-recording owners that have music that is being streamed online can register with SoundExchange for free, even if they already belong to ASCAP, BMI, and SESAC. That’s because SoundExchange collects a different type of royalty from digital streaming services than the traditional PROs do. In fact, if you write, publish, perform and release your own material, you’ll reap the maximum benefits by belonging to both types of performance rights organizations.

In December 2012, I had a chance to speak with Michael J. Huppe, the President of SoundExchange, about the current state of digital music delivery and how his organization fits into the puzzle.

Can you give me a quick overview of how SoundExchange works?

In a nutshell, we help enable the entire digital radio space. What we do is pay musicians and performers directly—the 50 percent that goes to performers.

Many of the most popular digital radio services—Pandora, SiriusXM Satellite Radio, iHeartRadio, and even the digital radio services on your cable and satellite systems such as Music Choice—use a statutory license from the federal government so they don’t have to go to 20,000 record labels and sign deals. They get the right to stream their music by utilizing a part of federal law that gives them that right. That’s a much more efficient way for them to set up their business and get access to all the masters so they can run their business.

If they use the statutory license, as most of them do, then SoundExchange is the entity that basically helps administer it. They send us the royalties and the data of what they’ve played, and then we take it, and we clean up the data. We make sure they’re paying what they’re supposed to. We work with them to streamline all the operational aspects related to that. And then every quarter, we send out checks to 25,000 musicians and rights owners.

This is, obviously, a growing and important revenue stream. In 2005, we distributed $25 million: half to artists, half to the owners of the masters. Typically this goes to a record label, but not always. That $25 million in 2005 is well over $400 million in 2012—so, significant growth along the way.

Are there different rates of pay in the digital radio category?
There are 12 or more different types of licenses—different categories of service, and even different categories within the same genre. For instance, let’s take webcasting. There are lots of webcasters, but within webcasters we have one rate category for non-commercial webcasters, another one for college radio, and another one for folks that simulcast. Basically there are different rates for different services depending on the unique aspects of their business.

We have over 2,000 services that send us information every month, and it’s our job to know who they are, what category of license they’re using, and then we take it from there and make sure they’re paying under the right rubric.

How long does it take for the process to complete, from when you get a payment from a webcaster to when the artist and label gets money?
It depends. A lot of times a service may send all the materials, but they’ll have a problem in their logs. There will be some stray data problems that mess up the log that we have to work with them to fix. Sometimes they won’t send the proper payment, or it doesn’t match up with the invoice. When things like that happen, it sort of delays the issue. But assuming everything is submitted properly, the vast majority of our royalties go out the door in five to six months. I don’t have an exact number, but it’s north of 80 percent, I would imagine.

How does terrestrial radio fit into what SoundExchange does?
If you mean for the over-the-air signal, terrestrial radio doesn’t pay us anything, which is a battle the recording industry has been fighting for eight decades. SoundExchange has been actively involved in that over the past 4 to 5 years.

When an FM station broadcasts over the air, they still pay the songwriter [and publisher], as they should, through ASCAP, BMI, and SESAC. But they don’t pay anything to the performer or the record company.

However, when they take that very same signal and simulcast it online and turn it into a digital broadcast on the Internet, then they do pay the performer and the record label, as well as the songwriter [and publisher] again. We don’t dispute that the songwriter [and publisher] deserves their fair share, as well.

So the fact is that over-the-air radio pays nothing to the performer. The problem, as I’m sure you know, is that the U.S. stands alone as the sole industrialized country that does not pay the performer for that right. FM radio makes somewhere in the neighborhood of $15 billion (with a B) dollars a year on revenue, and the revenue is because people come to the radio to listen to the music. The fact that they don’t share a penny of that $15 billion with the performer, who brought the song to life, is very unfair in our view.

How are the payments to the different parties involved in a recording sorted out by SoundExchange?
The musical work, itself — the notes and the lyrics — we have nothing to do with that. A streaming service has to work that out with ASCAP, BMI, and SESAC. Most [listeners], when they say “song,” they really mean “recording.”

So, let’s take Pandora. When Pandora publicly performs the recording, the statute tells us how to split that money. And it splits it as follows: 50 percent goes to the copyright owner of the master; 5 percent goes to background vocalists and background musicians; and the remaining 45 percent goes to the “featured artist,” whichever artist is featured as the primary performer in that recording. And that’s how we split up the money. It’s set by statute [to be divided] between the featured performer, the non-featured performer, and the owner of the masters.

Is it the record label that makes sure that these streams go to the right people, or are they sent directly to the featured artist, the background musicians, and so forth?

We have direct relationships with the featured performer and they will get a check from SoundExchange, with the SoundExchange logo on it. In fact, we will not send it through the record label. If we get a Letter of Direction from a performer telling us to direct their royalties to their record label, we won’t honor that because it is a core policy and a fundamental tenet of SoundExchange that we believe in artist-direct pay. So we pay the featured performers the 45 percent directly.

That 5 percent reserved for non-featured musicians — background vocalists, background musicians — goes to a fund that the two unions, AFM and AFTRA, run. And that fund (AFM & AFTRA Intellectual Property Rights Distribution Fund) takes care of distributing that money. And the reason it goes to them is that the fund is set up to do a whole bunch of other things. They get payment for other collective bargaining monies and such. So they’re the ones who handle payment of the non-featured performers.

What if the non-featured performers are non-union members?
You do not have to be a union member. It’s operated by the union, but you do not have to be a union member to sign up for those royalties. You sign up through the fund.

For the 45 percent at SoundExchange, they should sign up with SoundExchange. And so should the record labels. We’re talking about musicians right now, but we have 25,000 rights owners who get the master-owner half of the money, and most of them are record labels. But even if it’s an individual artist, if they also own their masters, they should definitely sign up for that half of the money too.

Do the digital radio payments include play on interactive services such as Spotify?

The statutory license only covers radio-like services. It has to be “non-interactive,” which is a not a totally clear term. Spotify, until recently, didn’t have a radio product. They were doing on-demand streams. SoundExchange doesn’t have anything to do with that, because that isn’t covered by the statutory license. Spotify had to go to the record labels and get the rights directly for all of that stuff. However, a few months back, Spotify actually started a radio service, and for that non-interactive digital-radio product they can use the statutory license. They have filed with us, and for that they have started to pay us.

Considering how little each digital radio performance yields for independent artists, is it worth it for them to sign up with SoundExchange?
The payments have grown over time. The beauty of what we do is that it doesn’t all go to the big acts or the big record labels. We all know that terrestrial radio has heavy spins of the bigger acts and the bigger labels. We all know that when you want to sell something at WalMart and you’re fighting over limited shelf space, obviously the larger entities have a bit more leverage. The beauty of the Internet is that there’s no limited shelf space, there’s no limited bandwidth, and there aren’t a limited number of FM stations in a market: It’s unlimited. And because of that, the money that we pay out is much more dispersed than the other revenue streams. For instance in 2011, 90 percent of the payments were $5,000 or less in annual payments. But in terms of it being small or big, I can tell you that with most of the record labels, we are the number two digital-music revenue source behind iTunes.

I don’t know if all the payments are that small. For instance, take Pandora: Their typical subscriber does the free service and they listen for 20 hours a month. And they pay us, basically, a little more than a tenth of a penny per stream per person. For someone listening 20 hours a month, every month all year long, the royalties that Pandora pays us are a little less than $4 for that user. And remember, that $4 gets divided half-and-half between the record label [the master owner] and the performers.

So from that perspective, yes, it’s a small payment. But when you add all these micropayments up, we’re expecting to pay out more than $400 million this year [2012]. So all of those little tenths of a penny add up. And I do think that people are starting to notice this is a more substantial source of revenue.

Is the revenue is going up because you’re getting better at collecting?
It’s going up for lots of reasons. Usage is trending this way; there’s more people getting their music digitally. As people are getting it on their mobile devices, they can listen to it in more places, through more platforms.

The consumption of it is more and more a listen instead of a purchase. A lot of people like just having the access to the music and having it stream to them, as opposed to going and buying downloads. And the more that happens, the more it’s going to fall under that statutory license. So, I think it’s a factor of usage, and it’s a factor of the rates going up every so often. I think those are the two big reasons. Increase in rates and increase in usage.

For more information and to sign up for SoundExchange, visit soundexchange.com.
And while you’re there, check out the rates paid for the various types of non-interactive streams.

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