When a record is played on “terrestrial� broadcast radio in the United States (i.e., over the air), who makes money? Since a radio broadcast is a “public performance� of the song in the record under the U.S. Copyright Act, the songwriters and publishers make money through their performing rights organization, whether ASCAP, BMI or SESAC. But does the artist? Does the session drummer? Does the record company?

Not in the United States.

If the same record is played in Canada, the United Kingdom, Japan, or any one of a host of other countries, not only do the songwriters and publishers get paid a royalty through their PRO, but the artists, session players and copyright owner of the recording also get paid through a sound recording PRO.
But—due to changes in US law in the 1990s–if the same record is played in the U.S. on Yahoo! Music, the new Napster, or on DMX, XM Radio or Sirius, not only do the songwriters and publishers get their royalty, but the artists, session players and vocalists and record companies also get a royalty through a new PRO for sound recordings.
But—due to changes in US law in the –if the same record is played in the U.S. on , the new or on , or , not only do the songwriters and publishers get their royalty, but the artists, session players and vocalists and record companies also get a royalty through a new PRO for sound recordings.

Weird, you say? True. But no stranger than the tax laws. Just like the tax laws, our copyright laws are the result of deals cut in Washington between interested parties, and the deal that cut out sound recordings from a performance royalty was made a long time ago between the broadcasters and the record companies. The goal of the recording community is to bring the U.S. in line with the laws of most other countries–the broadcasters oppose that goal because it makes the music they play more costly, and they have had the clout to win the issue in Washington, just like so many other changes in the laws that have created the most severe media consolidation in the world. If you were a cynical person, you might say that’s because there is a radio station in every Congressional district, but record companies in only a few.

Congress amended the Copyright Act in the 1990s to establish a limited public performance royalty for digital transmissions of sound recordings. “Digital transmissions� includes satellite radio like XM, webcasting (or “Internet radio) like Yahoo! Music, and the Internet broadcast (or “simulcast�) of terrestrial radio stations like when your favorite radio station simulcasts its broadcast signal over the Internet. Although this limited performance right is a small step forward, it is a huge victory against the broadcasters, particularly as the industry moves toward digital radio.

These new laws established what is commonly called a “statutory� or “compulsory� license to stream sound recordings as long as the music being streamed complies with the restrictions on the license limiting the use to public performance, sequencing, and a few other restrictions. (This is the same license that is at issue in the XM Radio litigation.) This statutory license does not include on-demand streaming or downloads (such as the Napster subscription service).

The statutory license eliminates the need to get a separate license from each copyright owner as long as you comply with the rules and pay the royalty. (We already have a compulsory license for mechanical royalties paid on songs when a digital or physical record is sold.) The statutory license only applies to streaming, not to downloading or any other interactive use of music that involves the user choosing which specific tracks they want to listen to.

These amendments to the Copyright Act divided sound recording royalties among four groups: copyright owners (50%), featured artists (45%), nonfeatured musicians (2.5%) and nonfeatured vocalists (2.5%). “Copyright owners� typically means record companies, but independent artists, or any artist who owns their own recordings, qualifies as a “copyright owner.� It does not include songwriters or music publishers, although their right to public performance income requires no change in the law.

The Act also established the first sound recording PRO in the U.S. called SoundExchange. Until recently, SoundExchange was a division of the Recording Industry Association of America, but was recently “spun off� to be a stand alone nonprofit organization with a board of directors divided equally between artist and sound recording copyright owner representatives.

Through a rather tortured set of regulations (which have the force of law), SoundExchange collects royalties from the subscription radio providers, webcasters and radio simulcasters, and pays that money out to the four groups. The nonfeatured musicians and vocalists, also known as session players and singers, have their money paid to trust funds established by the American Federation of Musicians and the American Federation of Radio and Television Artists. Featured artists and sound recording copyright owners are paid directly by SoundExchange.

While the Congress established how the pie was to be split in 1995, they only set a rate for certain satellite radio providers (effectively 6.5% of gross revenues). They didn’t establish any other rates, though, and the interested parties could not agree among themselves on what the rate was to be. That started a long process of negotiation in a Copyright Arbitration Royalty Panel that ended last year, and was supplemented by a law protecting small webcasters a few months later after the small webcasters strongly objected to the new rates.

Because the CARP took so long, the rates that were set would have expired almost immediately. No one wanted to go through another CARP, so the interested parties negotiated a new rate that will last until the end of 2004. The new webcasting rate is, more or less, $0.000762 per performance. The structure is a little complicated, and doesn’t cover certain groups such as simulcasting of radio stations, noncommercial webcasters, or small webcasters.  You can review the rates on the SoundExchange website (www.soundexchange.com) or on the U.S. Copyright Office website (www.copyright.gov).

The Role of SoundExchange

Persons using the statutory license, such as Yahoo! Music, must account and pay royalties to SoundExchange. SoundExchange must then account to individual members of the four groups. Establishing the databases for Sound Exchange to track plays and pay royalties is a monumental undertaking. Because the compulsory license is unlimited in scope, SoundExchange effectively must be prepared to account for every recording in the history of recorded music, both U.S. and foreign repertoire. SoundExchange has received massive downloads of label copy and accounting data from its record company members to establish its own database for accounting. This means that whatever information that an artist’s record company has in its accounting system is likely now in the SoundExchange database, which is updated periodically.

It is important to note that featured artists who are signed to record companies are paid their webcasting royalties directly—regardless of whether they are recouped in their accounts with their labels.
Independent artists, however, may not have been included in the SoundExchange database. You can confirm whether you are listed in the database by signing up for an account on the “PLAYS� system at www.soundexchange.com. Remember, if you are a “featured artist�, that just means that you are the artist who is featured on the recording, not that you have to be signed to a record company, so independent artists qualify for webcasting royalties, too, and probably qualify as copyright owners as well.

The Price of Liberty is Eternal Vigilance

It would be a very unusual result indeed if every piece of data in the SoundExchange system was exactly correct, and I frankly don’t think it’s fair to expect perfection under the circumstances. I will say that I believe that John Simson, its Executive Director, and his staff are committed to running a tight ship and giving people a straight count.

I would strongly suggest that everyone with a stake in this royalty pool check to confirm if you are in the SoundExchange system, and if you are that your information is correct. You can do this by yourself by getting a PLAYS account and looking up your recordings. If you haven’t registered yourself with SoundExchange, you should assume that there’s something incomplete or incorrect about the data and you need to review it to make sure it’s complete and correct. If it’s incorrect, the SoundExchange staff will work with you to correct it.

In my practice, the two most common problems are absence of information, or someone incorrectly claiming copyright ownership. Absence of information is often providing the missing link on data that is in the database, or inputting data for the first time.
The trickier problem is the problem of the incorrect copyright owner. Most of the time I believe this to be innocuous and innocent mistakes. For example, if a major label distributes an independent label—and only distributes, i.e., takes no ownership interest—they are not entitled to the copyright owner’s share of royalties because they are not the copyright owner. Yet very often the distributor ends up being reflected in the SoundExchange database as the copyright owner.

The more insidious problem—and let’s just call it a head scratcher without casting aspersions or assigning blame—is when a content aggregator is reflected as the copyright owner when the artist is not registered. This means that the SoundExchange database recognizes that independent artist Joe Smith is the artist for Joe’s Song but has no contact information for Joe Smith. However, Joe Smith has done a digital distribution agreement with one of the aggregators to represent his catalog and SoundExchange reflects the aggregator as the copyright owner and pays the copyright owner’s share to the aggregator. No aggregator agreement should ever allow an aggregator to do this, or to have anything to do with SoundExchange in my view. It’s not really SoundExchange’s fault, either, as they can only do so much to police the information they are provided in the first instance.

At the end of the day, its up to each interested party to make sure that their business is organized and that they are correctly registered with SoundExchange, just as they would expect to be correctly registered with ASCAP, BMI or SESAC.

Foreign Royalty Collection and the Future

At the moment, the money that collects and pays is pretty small. Most royalty checks are less than . However, SoundExchange has begun collecting foreign public performance royalties which can be real money. The total performance royalties in the alone are in excess of. SoundExchange currently has reciprocal agreements with its counterparts in the United Kingdom, Mexico and the Netherlands.

But the real significance may arise when and if Congress passes legislation that extends these royalties to regular radio and television broadcasts. SoundExchange will very likely be the administrator of these royalties, and that will be real money. So it’s a good idea for artists to get their business straight with SoundExchange now.

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Chris Castle is a music attorney in Los Angeles where he represents artists (including KOAR fav 10 Years), producers, music industry executives, songwriters, independent publishers and record companies, and technology companies. Chris is a contributing editor to Entertainment Law & Finance and writes the Music-Tech-Policy blog (http://music-tech-policy.blogspot.com/). He is on the board of directors of the Austin Music Foundation and moderates the digital panel at SXSW. Before law school, he was the drummer for Jesse Winchester, Long John Baldry and Yvonne Elliman.
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