John Simson of SoundExchange at Harvard Law School

John Simson, Executive Director of SoundExchange, gave a talk yesterday at the Harvard Law School.  SoundExchange is a non-profit organization set up to collect performance royalties from digital media such as internet and satellite radio and distribute them to artists and record labels.  Simson and SoundExchange unabashedly represent the interests of the copyright owners in maximizing their revenue, but  Simson 's talk explained the motivations of all of the  stakeholders in this game and the complexities of arriving at a  fair  level of compensation in what is essentially a political process.

Simson traced the history of music copyrights from 1848 when French composer Ernest Bourget heard his music being played in a nightclub and refused to pay for his dinner.  The court ruled that he did need to pay, but so also did the café owner, leading to the founding of SACEM and 150 years of legislation and litigation as the recording industry and later radio, television, and the internet created new ways for people to obtain and listen to music.

There are a number of factors that make music copyright complex, from the evolving concept of intellectual property which attempts to balance compensation of creators with the benefit to society, to the variety of stakeholders: composers, musicians, music publishers, radio, movie, and television producers, and listeners of all types.  Add to that the way digital technology enables making cheap, perfect copies and blurs the distinction between performance and ownership and you have a world in which there is little precedent for how to apportion the benefits and the spoils go to whichever group can muster the best lobbysists as well as the best arguments.

Simson, who was a musician and an attorney before becoming a registered lobbyist himself described his education into the ways of Washington, where legislators are expected to vote on 2500 issues a year and may only be expert on five of them.  As said was explained to him, a congressman looks at his mail.  If it is all on one side, the decision is easy, but if there are even a few letters on the other side, he will go talk to a colleague who is an expert, such as Rep. Howard Berman (D-Cal) on entertainment law.

One thorny problem is the way business models are evolving on the Internet.  This manifested itself in the debate over the royalties that Internet radio would pay.  The largest Internet radio sites have plenty of subscription and/or advertising revenues and can pay royalties similar to those paid by terrestrial radio, but the smaller ones may have no income at all.  Given the way the Internet economy works, some companies may eventually monetize by building a large user base and then being acquired, as happened when Last.fm was purchased by CBS for $280 million.  It seemed that Simson and the interests he represents are pained by this scenario and if they can not partake in such gains would prefer to see all Internet radio pay on a per-use basis even if that prevents some of them from getting started.  I asked him after his talk if SoundExchange would be open to more creative financial arrangements with emerging businesses.  He said they would gladly participate as a clearing house for anything the Internet companies and the artists could agree upon, but the anti-trust exemption SoundExchange operates under limits its abilities to initiate schemes outside what the Congress has defined.

One interesting bit of data was on the long tail nature of Internet radio.  SoundExchange brings in $140 million per year in revenue which is split 50/50 between the performers and the owner of the copyright of the recording.  There are 31,000 performers SoundExchange has tracked down who represent 75% of the performers share of the revenue.  However, there are another 40,000 performers who have yet to be tracked down.  Most of them are owed $50 or less, but occasionally SoundExchange gets in touch with one and sends them a check for $8,000 or more.  Simson said they are always glad to get the money, but these days people are very suspicious when they get an unsolicited email or a phone call from a total stranger offering them a check.  [The preceding paragraph was edited to incorporate comments I received.]

Another aspect of the long tail is the need to get accurate data on which songs are being played.  When SoundExchange compared the results of using the sampling done by ASCAP and BMI to getting actual census data, they found that the sampling method missed 41% of the artists and 26% of the titles.  This phenomenon has caused no small amount of grumbling from "middle class" artists who are waiting for their first royalty check and SoundExchange would like to avoid this problem, but the Internet radio businesses have claimed that gathering this information is too cumbersome and expensive.

After the talk, I asked Simson about Pandora.  They have been paying SoundExchange as if they were an Internet radio station, but under the Digital Performance Right in Sound Recordings Act of 1995 (DPRA) the license which SoundExchange administers does not apply to an "interactive service" which is defined as "one that enables a member of the public to receive, on request, a transmission of a particular sound recording chosen by or on behalf of the recipient."  One could argue that since Pandora creates a separate stream for each user that it is "interactive" but no one wants to rock the boat right now since (a) they are paying real money, (b) there is no other convenient way for Pandora to pay, and (c) there are other pending cases seeking to define what is interactive.

In summary, Simson's talk highlighted the complexity of innovation in music licensing.  The only thing everyone can agree on is that the music industry is in trouble and needs new business models.  This talk illustrated how challenging that will be.

Comments

[Fred]

I think you've got some of the numbers wrong. Under the SWSA, artists are entitled to only 45% of the royalties paid out by SoundExchange, not 75%. The labels get 50% and the remaining 5% goes into a fund for session players and back up singers.

Is it possible that Simson said that they are paying out 75% of their revenue to all these recipients and the other 25% is being used for operational expenses?

[Christopher Herot]

Fred, thanks for your comment. I corrected the paragraph in question. Simson did say that of the 50% that gets allocated to the performer, 45% goes to the "featured" performer and 5% goes to the others, such as the backup band. Sometimes that assignment is difficult to make. If the artists can't agree among themselves, the funds are held in escrow until they agree.

[Fred]

Thanks for the update, Chris, but I have to admit that the correction puzzles me.

Because SoundExchange must rely so heavily on sampling to allocate royalties, there is really no way of knowing what percentage of the artists' share is going to the 31,000 who have registered, despite what Simson claims. I do know that, in the past, they have established reserves of up to 40% of the amount allocated to artists so that they can pay claims from artists who had not registered. This tends to make me think the 75% Simson claims to be paying out is an optimistic estimate. This isn't really a quibble, the difference is counted in the millions every year not paid to the artists who have earned it.

Just to give you an idea how the numbers can be manipulated, you mention the situation in which members of a group may not agree on how money will be split up, so the money is held in escrow. SoundExchange counts each of those registered individuals as one of the 31,000 they have found. Four Beatles equal four artist accounts (I doubt their money is in escrow, they are just an example). On the other hand, a group that SoundExchange found only counts as one of that 40,000 entries in the "unfound" category. The Beatles are one entry, just like Elvis would be. If you use the conservative rule of thumb that 40% of all recording artists are "groups," and that the average number of group members is approximately 3.5, then the "missing" individual group members total 56,000, and the remaining soloists account for another 24,000 of the missing, thus doubling to 80,000 the number of individuals who SoundExchange can't find.

It makes their performance look worse, so SoundExchange doesn't explain their math. It also explains why that 75% figure Simson used is dubious.

[alant]

Let me also guess: Simson didn't mention SoundExchange's 3-year royalty forfeiture policy?