Why We Wrote This Guide

This guide serves as a comprehensive resource to grant interested parties a better understanding of SoundExchange and its unique function within the music industry. The reader will gain insight into the complex world of digital performance royalty administration. In today’s music industry, as streaming and other digital platforms predominate the market, it is vitally important that artists, record label employees, songwriters, music publishers, and anyone else involved or interested in music business familiarize themselves with SoundExchange and its digital performance royalty distribution.

Who This Guide Is For

  • Artists who would like to better understand SoundExchange in order to take advantage of its services and collect possible outstanding digital performance royalties.
  • Record Labels who wish to better serve their artists and capitalize on royalties from non-interactive streaming from digital radio platforms.
  • Those interested in gaining a deeper understanding of the connection between performance royalties and non-interactive streaming.
  • Those wondering if they should sign up and submit their metadata to SoundExchange.

Content

What Is SoundExchange?
How SoundExchange Works
What Is a Master?
What Is a Performance License?
Interactive vs. Non-Interactive Streaming
Digital Performance Royalty Rates from Non-Interactive Streaming: Consent Decrees (And The Lack Thereof)
Background / History
Should I Sign Up For SoundExchange?
Do You Have To Be a SoundExchange Member To Receive Royalty Payments?
Territory
The Counterpart - None

What is SoundExchange?

SoundExchange is a non-profit collective rights management organization, meaning that they administer the copyrights of others. Pandora, SiriusXM, and webcasters are required by law to pay for streaming musical content. SoundExchange collects and distributes digital performance royalties from the use of sound recordings on behalf of more than 155,000 recording artists and master rights owners (typically the record label) and administers direct agreements on behalf of rights owners and licensees. It is the only organization officially designated by the U.S. Congress to do so. SoundExchange pays featured and non-featured artists (think background vocalists, session musicians, etc.) and master rights owners for the non-interactive (you don’t choose which song plays) use of sound recordings under the statutory licenses set forth in 17 U.S.C. § 112 and 17 U.S.C. § 114.

It is important to reiterate for the purposes of this report that SoundExchange administers performance royalties and deals only with the sound recording (master) copyrights attached to a song.

How SoundExchange Works

Pandora, SiriusXm, Music Choice, and other webcasters are required, by law, to pay when they stream music content. SoundExchange receives these payments along with complete playlists of all music that was played in a certain quarter. This essentially makes SoundExchange an intermediary between the digital radio services and the artists and labels. Digital radio services and webcasters first pay SoundExchange for the use of musical content on their service. SoundExchange receives these royalties as a bulk sum along with the detailed playlists from these services in order to know exactly which songs have been streamed or played and how many times. Then, SoundExchange distributes royalties to the corresponding featured artists, labels, and non-featured artists (e.g. session musicians) based on a split of percentages: 45%, 50%, 5%, respectively.

  • SXWorks

SXWorks provides administrative services to publishers in order to support multiple license configurations. For example, CMRRA might collect mechanical royalties for a songwriter in Canada and digital performance royalties through SoundExchange in the U.S. if this songwriter is also a recording artist.

SXWorks recently launched a Notice of Intention (NOI) Lookup which allows songwriters and publishers to search and identify their copyrighted work in a copyright database if the user of said copyright claims to be unable to identify them.

  • CMRAA

SoundExchange acquired Canadian mechanical rights society CMRRA (Canadian Musical Reproduction Rights Agency) in 2017, which means it now also conducts music publishing administration. CMRRA is similar to the Harry Fox Agency and Music Reports Inc. in the United States.

  • Money

Joining SoundExchange is free. There are no fees associated with sign-up, but they charge a 4.6% administrative fee.

As required by 17 U.S.C. § 112 and 17 U.S.C. § 114, SoundExchange participates in periodic rate-setting proceedings with the Copyright Royalty Board (CRB) to establish rates that properly compensate copyright holders and performers for the use of copyrighted sound recordings. The CRB was created by Congress to determine rates and terms for copyright statutory licenses. Rates tend to vary from service to service. The graphic below shows the royalty breakdown for each one:

Screen-Shot-2018-07-27-at-12.23.53-PM

A Case Study: Suppose SiriusXM, a non-interactive streaming service and popular Internet radio provider, wants to offer a 24-hour Pearl Jam satellite radio program to listeners (they currently do so). SiruisXM is bound by royalty specifications from the DMCA (Digital Millenium Copyright Act) to pay 15.5% of royalties from its total revenue earned. After a particular quarter, SiruisXM will write a “check” for 15.5% of revenue to SoundExchange along with a full report in the form of an Excel spreadsheet detailing exactly what songs were played in the quarter. SoundExchange then distributes this money to the proper artists and rights holders. SiriusXM may earn roughly $100 million in a particular quarter. The report from SiriusXM to SoundExchange may specify 15,000 Pearl Jam songs played in the quarter out of 500,000 songs played from all other artists on the service. 15,000 songs is 3% of SiriusXM’s total plays, which, taken from the 15.5% of SiriusXM’s total revenue for the quarter ($15,500,000), equals $465,000. However, remember that SoundExchange charges a 4.6% administrative fee. Therefore, the final total paid to Pearl Jam’s “team” is: $443,610.Based on the percentages specified above, the band itself would earn 45%, or $199,625 of this amount. The record label(s) would earn 50%, or $221,805. The non-featured artists (background vocalists/ musicians) on the record would earn 5%, or $22,180.50.

NOTE: The masters for all Pearl Jam albums created within or before 2006 are owned by Sony Music Entertainment. All masters from albums after 2006 fall under the ownership of Pearl Jam itself. Additionally, often the songs played on the actual SiriusXM channel are live recordings, which might also fall under the proprietorship of Pearl Jam. The splits within Pearl Jam as a business entity may vary from member to member. All of these factors influence the actual monetary breakdown in this case study.

  • Advocacy Efforts

SoundExchange is an outspoken advocate of music licensing reform to ensure music creators earn fair market value for their work. During the 115th Congress, SoundExchange actively supported the Fair Play Fair Pay Act of 2017 and the CLASSICS Act. It is also a founding member of MusicFIRST, a coalition of organizations representing musicians, recording artists, managers, music businesses, and performance rights advocates.

  • Critical Relationships

Core: SoundExchange only handles digital performance rights attached to sound recordings, so the organization works predominantly with artists and record labels (owners of the master copyright). SoundExchange does not handle mechanical rights in the U.S., but does so in Canada through CMRRA. In addition, SoundExchange recently introduced MDX (Music Data Exchange), a software that facilitates the exchange of sound recording and publishing data and ownership claims between record labels and music publishers.

Royalty Collection: SoundExchange is a digital performance license administrator. It serves as an intermediary between sound recording copyright holders and those wishing to exploit them.

What Is A Master?

Remember: two distinct types of copyrights exist for every recorded piece of music. One of these is the underlying composition (notes/lyrics/melody) and the other is for the sound recording or master. SoundExchange only deals with the performance right of a master and not any other rights.

What Is a Performance License?

In music publishing, a distinction is made between “mechanical rights”—which allows one to reproduce and distribute a copyright, and “performance rights”— which allows one to perform it, communicate it, or it make available. When you press a CD, for example, you exploit the mechanical rights but not the performing rights. When you play a song on the radio you exploit the performance rights but not the mechanical rights. For more information on this distinction, please check out the guides for “performance rights” and “mechanical rights.”

According to BMI.com, public performance occurs when a song is sung or played, recorded or live, on radio and television, as well as through other media such as the Internet, live concerts, and programmed music services. Traditionally, the Performing Rights Organizations (PROs) are responsible for collecting all performance royalties, and for administering licenses between copyright holders and those wishing to use copyrighted works publicly in locations such as shopping and dining venues. Readers may have deduced by now that a performance royalty does not necessarily require a musician to “perform” the work live. A performance is considered public when music is played “in a place open to the public or at any place where a substantial number of persons outside of a normal circle of a family and its social acquaintances is gathered” (ASCAP.com).

Music transmitted via traditional radio, meaning over AM/FM signals, garners a performance royalty; however, due to the nature of copyright law, traditional radio broadcasters and TV broadcasters pay performance royalties to songwriters, but not the recording artists—to the owner of the underlying composition copyright, not to the owner of the master copyright. As an example, when Jeff Buckley’s “Hallelujah” gets played on FM radio, Jeff Buckley earns $0, because he did not write the song and therefore does not own the underlying composition copyright. On the other hand, Leonard Cohen, the songwriter, earns a royalty on the play. An ongoing battle exists in the current music industry to award master-use royalties to recording artists for use of their sound recordings on terrestrial radio performances. SoundExchange has been at the forefront of lobbying efforts for bills like the Fair Play Fair Pay Act, which if enacted would create a performance right for sound recordings on terrestrial radio.

However, with the advent of streaming and digital transmissions (music played over the Internet), the U.S. Copyright Office determined that digital non-interactive performances (e.g. Pandora, iHeartRadio, etc.—not Spotify, TIDAL, etc.) require digital performance royalties to the songwriter AND a recording digital performance royalty to the master owner.

The digital streaming services (Spotify, TIDAL, etc.) enter into deals with record labels to distribute sound recordings on their platforms. Generally, in the music industry, a digital delivery is considered both a reproduction and a communication, meaning both performance and mechanical rights are exploited. However, in the U.S., these distinctions get more specific: a digital download (from the iTunes Store, for example) only exploits the mechanical right, while a personalized non-interactive radio service (like Pandora, iHeartRadio, etc.) only exploits the performance right. With on-demand (interactive) streaming, the industry acknowledges that both mechanical and performance rights are being exploited, and therefore requires licenses and the subsequent payment of royalties for each.

SoundExchange collects the performance royalties for a sound recording played on non-interactive streaming services and distributes these royalties to owners of this copyright.

  • Performance Royalty Distribution

Screen-Shot-2018-07-27-at-12.29.02-PM

Non-interactive streaming exploits two types of performance royalties: those for the master and those for the composition.

Interactive vs. Non-Interactive Streaming

In the music business, streaming is subdivided into two categories: interactive and non-interactive streams. Although the main difference between the two is implied in the names, it is important to gain a full and accurate understanding of the distinctions between these two categories. Interactive streaming allows listeners to choose the songs played. Another way to describe interactive streaming is “on-demand.” Some examples of services which provide interactive streaming include Spotify, Apple Music, Rdio, Rhapsody, and Google Play. As mentioned earlier, interactive streaming garners two different types of royalties: performance AND mechanical. Mechanicals from interactive streaming are paid via Harry Fox and Music Reports in the U.S. Performance royalties from interactive streaming are paid by ASCAP, BMI, SESAC, or GMR songwriters and publishers.

Non-interactive streaming, on the other hand, DOES NOT allow listeners to choose the songs played. This form of streaming almost always comes in the form of Internet radio. Some examples of services which provide non-interactive streaming include Pandora, Sirius XM, and NPR. Users choose a station, but do not control which songs play within that station. This type of use generates a performance royalty for sound recordings, which is collected by SoundExchange for artists and copyright owners.

Digital Performance Royalty Rates from Non-Interactive Streaming: Consent Decrees (And The Lack Thereof)

BMI and ASCAP are governed by consent decrees (SESAC is not because it is a private company). This means an arm of the U.S. Judicial Branch (called a “rate court”) can set the royalty rates (per radio play, per stream, etc.). Consent decrees are enforced by the federal government to discourage competition between these two PROs which might result in unfair prices and lack of competition for smaller music publishers and songwriters. SESAC is not bound by the consent decrees which govern ASCAP and BMI, but is still forced to pay similar rates in order to compete economically with the other PROs. As a result, PROs are limited in their ability to negotiate by this rate court.

SoundExchange, however, is also not governed by any sort of consent decree, which means they can negotiate separate royalty rates directly with non-interactive streaming services. While recording artists don’t get paid for a public performance use when their music is played on terrestrial radio and broadcast television, they typically earn more royalties than songwriters from digital performances on non-interactive streaming services. This is a result of SoundExchange’s negotiation power for royalty rates with various Internet radio providers.

Background / History

SoundExchange was established as a division of the Recording Industry Association of America (RIAA) in 2000. One year later, major record labels and artist representatives agreed on a standard for paying royalties earned from cable and satellite music services, and SoundExchange made its first payment to recording artists and record labels. The Digital Millennium Copyright Act granted webcasters (transmit video and/or audio broadcasts over the Internet) an automatic license to play copyrighted music as long as a royalty was paid. Four years later, a royalty rate was set. In 2003, SoundExchange separated from the RIAA and became an independent non-profit organization.

The current executive director of SoundExchange is Michael Huppe, who also serves as the chairman for SXWorks. SXWorks is a subsidiary created by SoundExchange following its acquisition of the Canadian Musical Reproduction Rights Association (CMRRA).

SoundExchange is controlled by a Board of Directors composed of recording artists, representatives of recording artists, and sound recording copyright owners.

Should I Sign Up For SoundExchange?

An artist, master owner, or non-featured artist on any sound recording may find it beneficial to join SoundExchange. It is free, and the organization might have royalties stored up waiting to pay out. If one is curious about this, the link HERE allows copyright owners to check for not-yet-distributed royalties.

Do You Have To Be a SoundExchange Member To Receive Royalty Payments?

No. SoundExchange will distribute digital performance royalties to any artist or band that registers with payee information, i.e. a name, address, and tax info. To date, SoundExchange has processed more than 200 million performances. Not all artists have been paid, however, due to a lack of appropriate info. The best way to ensure payment is to register.

SoundExchange also offers membership to those who register. Membership is free and comes with added benefits. Benefits to membership include international collection, exclusive discounts, insider information, and increased advocacy efforts.

Territory

SoundExchange handles digital performance licenses and royalties for U.S-distributed content ONLY.

For similar services in other countries, click HERE.

The Counterpart - None

SoundExchange is designated by the Library of Congress as the sole organization in the United States authorized to collect royalties paid by services making phonorecords or digital audio transmissions of sound recordings or both under the statutory licenses set forth in 17 U.S.C. § 112 and 17 U.S.C. § 114. SoundExchange is also a non-profit. Due to its status as the sole organization designated by Congress to administer digital performance royalties, it has no domestic counterparts.

Sources

https://www.law.cornell.edu/uscode/text/17/112
https://www.law.cornell.edu/uscode/text/17/114
http://www.musicentrepreneurhq.com/what-is-soundexchange/
https://www.soundexchange.com/about/
https://en.wikipedia.org/wiki/SoundExchange#cite_note-Billboard_Sirius_Optimism-1
https://en.wikipedia.org/wiki/SoundExchange#cite_note-BB_muzak-18
http://digitalservices.npr.org/topic/soundexchange
http://futureofmusic.org/article/fact-sheet/soundexchange

Composed by
Luke Evans, Mamie Davis, Jacob Wunderlich, Rene Merideth, Jeff Cvetkovski, & Aaron Davis

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