A few months ago, we published an article about mechanical royalties not being properly paid out to publishers and songwriters. At that point, there was not yet a sense of how this issue would be resolved, beyond vague reports that Spotify and the National Music Publishers Association (NMPA) were collaborating on a musical works database and a method for distributing unpaid royalties, estimated by some to be 10-15 percent of songs on the service.

Since then there have been several lawsuits—first with a case against Spotify from David Lowery of the bands Cracker and Camper Van Beethoven, followed by Flo & Eddie of vintage pop act The Turtles, who earlier sued digital radio services for not paying royalties on pre-’72 sound recordings. Then came a suit against Spotify by singer-songwriter Melissa Ferrick. And just this week saw an infringement claim from Yesh Music LLC and John Emanuele, who allege nonpayment from several music services, including Tidal, Beats Music (now Apple Music), Google Play, Slacker, Deezer, Microsoft and Rdio (the latter’s assets now owned by Pandora, pending successful Rdio bankruptcy).

What the heck is going on here?

To answer that question, we’ll need to back up a bit. First, you should probably check out our original post. If you don’t have time for that, here are a few basic points to understand:

1. There are two copyrights in a piece of music: the sound recording (imagine performances captured on tape or hard drive) and the musical work (imagine notes on paper and lyrics). A music service like Spotify must license both “sides” of the musical copyright in order to run their business.

2. Under U.S. law, anyone can obtain a license to make a reproduction or distribution of an underlying composition without having to directly negotiate permission with the copyright owner(s), provided they follow the guidelines laid out in Section 115 of the Copyright Act. To be eligible for a compulsory license, a user has to send a Notice of Intent (NOI) to at least one of the publishers of a musical work no later than 30 days before making the reproduction/distribution (for streaming, the understanding is that the reproduction and distribution happens at the time of transmission). The compulsory license—which you may hear people refer to as just “the compulsory”—also lays out specifics for reporting and royalty distribution. The user has to send monthly accounting statements and pay on a 30-day schedule. If a user cannot locate one of the publishers to serve, they can file notice with the US Copyright Office, which, for a small fee, will publish the until a publisher comes forward. Failure of a licensee to comply with any of these provisions renders them ineligible for the license and potentially liable for infringement.

It has come to light that not all of the mechanical royalties owed for songs played on digital music services like Spotify have been paid out to rights holders, a fact uncontested by several of the services. In Spotify’s case, the amount owed is allegedly anywhere from 16 to 25 million dollars. Lowery had been pointing to discrepancies in licensing and royalty distribution well before it came to the attention of NMPA, the trade industry group that representing music publishers. Rather than waiting around for the matter to be settled by the large corporate players, on December 28, 2015, Lowery filed a lawsuit against Spotify seeking class status so that other songwriters could be awarded damages should the case for infringement prevail.  Since then, we’ve seen a flurry of litigation, though it remains to be seen where these cases end up.

So what does it all mean?

Well, first off, it means that many songwriters and composers are not receiving money owed, and that’s straight up wrong. From a legal standpoint, the fact that songs were played for which no license was obtained is a violation of federal statute. The Copyright Act establishes a framework for the compulsory (rightsholders cannot refuse to offer this license), with rates set by federal judges. However, the process is complicated by the fact that there is no central repository of information for musical works ownership, nor are there standards for matching sound recordings to compositions. The information exists; it’s just in different places all around the planet. To be clear: this does not absolve services for failure to comply with the law. The Copyright Act says that licensees must send an NOI to at least one of the publishers or the US Copyright Office within 30 days before making a reproduction/distribution. If a service fails to do that, and continues to play the music, they face liability.

There is another option outside of the compulsory, however. In fact, record labels use it all the time when they release music as a CD, download or vinyl. If you have a look at our “How the Money Flows” charts, you’ll see that in certain situations, it’s the record labels who are required pay publishers in order to reproduce underlying compositions “embodied” in audio tracks. But they are only obligated to do so for physical media and download. Streaming services like Spotify are required to pay publishers directly, according to industry agreements going back more than a decade. This is because interactive services deal with a high volume of instantly accessible content and are the parties most able—theoretically—to track plays and match that activity to publisher/songwriter compensation. Given the high level of complexity, services often utilize the NOI for content not directly licensed from the publishers. According to a series of renewed agreements between the Recorded Industry Association of America (RIAA), NMPA and the Digital Media Association (DiMA), Harry Fox Agency (HFA) has long been positioned as the publishers’ designated agents to process NOIs and are hired by the services to figure out the publisher splits based on information provided about which sound recordings are streamed.

That’s a lot different than how things work for downloads and physical reproductions. Here, labels typically choose the “negotiated mechanical”—or “mechanical,” if you’re into the whole brevity thing—which requires obtaining a license for each portion of a copyrighted work from all parties who own those portions. If a song has 10 separate publishers, the label has to find them all and agree to terms directly with the publisher. And they all must be accounted to and paid separately. Labels choose this route in part because they don’t always have all of the publisher/songwriter information on hand at the time of release, and also because it allows them to come in at only 75 percent of the compulsory rate, due to a bit of contractual jujitsu known as the “controlled composition clause.” Major labels have had their own issues with tracking and paying out mechanical royalties, a situation made even more confounding when you consider that these companies share corporate parentage. In 2009, the labels, represented by RIAA, entered into an agreement with NMPA to distribute $264 million in unmatched funds owed to publishers. They chose to make this distribution by market share, meaning that if you weren’t a major publisher or a member of NMPA, or if there was no possibility of matching the recording to the musical work, you probably didn’t get your money.

A similar situation happened in 2011, when YouTube agreed to pay publishers a “synchronization” royalty rate of 15 percent of net advertising monies, based on—you guessed it—the publishers’ pro-rata market share of musical works. To calculate splits, NMPA used the mechanical royalties as a proxy, which again would depend to a large extent on the data HFA kept for such purposes. Publishers were given until Jan. 16, 2012 to sign up with NMPA to be included in the settlement, though there was no requirement of being a member of HFA. Which is weird, because HFA was the firm providing the data to identify the publishers whose repertoire had been uploaded to YouTube. We’ve heard from a number of independent songwriters and publishers that they never received any money from the settlement, which is unsurprising given the distribution by market share and the fact that HFA may not have had information on these songs to begin with. But the matter was declared solved when NMPA chief David Israelite appeared onstage with Google’s Zahavah Levine at the 2013 World Creators Summit in Washington, DC (an event in which FMC took part). The way Israelite described the agreement, you’d have thought there was never a problem at all, nor would there ever be an issue in the future. But to this day, songwriters have no idea what the terms were, due to non-disclosure agreements.

By now you can see that NMPA and HFA-member publishers do not represent the entirety of songs available on an interactive service. And we care just as much about that repertoire as it is largely the work of independent songwriters and composers who also need to be paid when their music is commercially exploited or when settlements are reached to compensate for unmatched uses.

Who got us into this mess?

Like you, we at FMC have read the news reports. We’ve also witnessed some vigorous debates about where to lay the blame. We know that Spotify and other services that failed to acquire the proper licenses are not in compliance with the rules laid out in federal law. But is that the entire story? Some fault HFA, whom Spotify and other streaming services hired to do the matching and provide publisher members the necessary info regarding licenses.  Fun fact: music publishers owned HFA until in September 2015, when it was sold to the performing rights organization SESAC. (SESAC itself is majority owned by a private equity firm.) Barely a month later, we began to hear complaints of unpaid mechanicals going back nearly a decade. Music publishers themselves have come under criticism for not ensuring that HFA was properly equipped to process NOIs, issue licenses and make sure that the sound recordings that get played on the service are matched to the underlying composition. Given the massive repertoires controlled by the three major publishers, it’s probable that the big rightsholders were not actually aware that everyone wasn’t getting paid. This lack of knowledge could stem from the fact that the 20 percent of publishers who didn’t get theirs aren’t members of HFA or even NMPA. But we think—as do the individual songwriters who have sued the services—that “some” or even “most” is unacceptable when it comes to artist compensation. Beyond the outcome of these lawsuits, we remain fundamentally concerned with making sure this problem is solved once and for all.

So what’s the fix?

As history indicates, this depends on your definition of “fixed.” We think the only real remedy is for 100 percent of the songwriters and publishers to be paid for the use of their music. And this is also a requirement of federal statute, regardless of whether the license is negotiated or compulsory. Others take a different approach. This week, news broke that NMPA was close to an agreement with Spotify to pay for uncompensated plays, build a data matching system—likely with HFA and the major publishers providing the data. But isn’t the problem that HFA doesn’t have that information to begin with, and Spotify perhaps assumed that they did? NMPA says they are working with Spotify and HFA to match as many songs as possible, and use that as a method with other services. Spotify will compensate the publishers that are successfully identified, and agree to a $5 million dollar fine to be paid to NMPA and distributed by—you guessed it—the market share of their publisher members. Which means that Sony/ATV, Warner-Chappell and Universal Music Publishing Group may end up getting paid twice, with the second payout for works they may not even own. Lowery equates HFA doing the matching with the (Harry) fox guarding the henhouse. More infuriating to him is the fact that he has only recently begun to receive back dated NOIs from HFA, in some instances five years after the date that Spotify made his songs available.

This is not the way to run an efficient, 21st century music industry based on fairness and accountability. If we don’t solve the problem now, it will just keep snowballing into new platforms and licensing environments like virtual reality and augmented reality, realtime videocasting, and a whole bunch of stuff that we can’t even think of.

Here’s what needs to happen:

1. All music services must be required to have systems to match copyrights to sound recordings and these systems should be standardized and compatible with any third-party service that is tasked with licensing songs on behalf of publishers.

2. Music publishers must agree to make all repertoire information available using standardized metadata, starting with a uniform numeric identifier that is globally recognized and matchable to a paired identifier for sound recordings (we have these standards already; they just need to be broadly deployed and accessible). This information will be publicly searchable on their own websites or those of their designated agents, with clear information about which third-party agency maintains these data.

3. Music services must commit to the scheduled and routine squaring of both datasets to identify and reconcile anomalies and gaps.

4. Any third-party agency that represents rightsholders must accept musical works ownership information in standardized form from any publisher—even those not currently members of NMPA. Fees for inclusion in the repertoire will be based on the number/portion of songs the rightsholder controls.

5. Third-party agencies must be required to conduct periodic audits of the services to ensure that proper information exists for musical works that are independently controlled.

We can start there, but the industry should also commit to exploring new technologies that make tracking and reporting easier and less prone to mistakes or fraud. This is the year we start to push for these reforms. We want all of the music community—including major labels and publishers—to join creators and independents in our push for a global music industry built on trust and accountability. Stay tuned for ways that you can help make this vision a reality.

[image: shutterstock.com]