SoundExchange Explained

SoundExchange is an independent nonprofit organization that is dedicated to collect and distribute royalties resulting from digital performance rights of sound recordings. When it was created in 2000, this organization was a division of the RIAA but in 2003 it became an independent organization, currently representing the interests of more than 110,000 artists and copyright owners. As reported by SoundExchange, they have already successfully paid nearly $3 billion since they first started doing business.

Early Beginnings

Before the enactment of the Digital Performance in Sound Recordings Act of 1995 (“DRPA”), artists and sound recording copyright owners in the US couldn’t collect any royalties from digital performances because legally those rights didn’t exist in any medium, unlike other countries in the world. The DPRA attempted to resolve this situation by creating a statutory license for subscription-based non-interactive digital audio transmissions, but it wasn’t enough since music technology was developing much faster than what the law was encompassing. That’s why another law, that would replace the former, was enacted in 1998: The Digital Millennium Copyright Act (“DMCA”). With this new law, statutory licenses were expanded to include non-subscription non-interactive digital audio transmissions. This resulted in digital radio services being obliged by law to pay copyright owners for the digital performance of the content they were using.

Royalties resulting from digital performance rights are fees that digital music providers are required to pay copyright owners by law. The manner in which these payments are able to reach its corresponding beneficiaries is through an intermediary, in this case, SoundExchange. Currently, this organization is the “sole entity entrusted by the Copyright Royalty Board (which is appointed by the U.S. Library of Congress) with administering statutory license fees paid by non-interactive digital radio services.”1 Formerly, there was a two-tier structure, in which the roles were divided between receiving and designated agents. Back then, when SoundExchange was part of the RIAA, the latter and the webcasters negotiated a payment structure where all of the royalties were going to be paid to a single receiving agent: SoundExchange. By federal regulations, the receiving agent had to distribute the payments to the designated agents, which in this case was also SoundExchange and another company, Royalty Logic. In 2002, the Library of Congress found that system inefficient because it “added expense and administrative burdens to a process meant for prompt, efficient and fair payments to copyright owners and performers with a minimum of expense.”2 They kept the two-tier structure but they stopped recognizing Royalty Logic as a designated agent, so SoundExchange became the sole receiving/designated agent. The CRB reviewed this situation and in 2007, when the royalty rates were published, and finally decided that there wasn’t going to be a two-tiered agent system anymore but a single collective, an organization that would have the responsibility of both collecting and distributing royalties under the law. As a result, they declared SoundExchange as the sole designated agent.

Collection and Distribution

SoundExchange charges digital music providers a statutory license (determined by the Copyright Royalty Board), which allows them to stream content while paying a fixed rate for each play. Subsequently, the organization collects the royalties and distributes them to the featured artist and the copyright holders for the use of their music and other content broadcasted on a non-interactive digital source, such as Internet radio, cable TV music channels, satellite radio and other digital services that stream sound recordings. They do not, however, collect public performance royalties from publishing, which are already covered by PROs or royalties resulting from digital downloads. For this service, SoundExchange charges its clients an administrative fee of 4.6%, which, the organization claims, is the lowest fee of its kind among the major collective management organizations in the world. Along with the payments, digital music services also provide SoundExchange with playlists of all their recordings. When SoundExchange receives said payments, they allocate them between the different recipients.

SoundExchange distribute royalties among its beneficiaries as follows: 45% are paid directly to the “featured artist” on the recording (by “featured artist”, SoundExchange is referring to the individual or group that is featured the most on the record). 5% goes to a fund for non-featured artists, which typically consists of session musicians and background singers. Finally, the remaining 50% is paid to the copyright owner of the sound recording, the owner of the “master”, which is mainly the record label or the artist who owns its own masters.

SoundExchange and Sound Recording Rights

SoundExchange has always claimed to be an organization that wants to fight for a music industry that is fair to its musicians. Consequently, it has a clear stand regarding the lack of regulation towards public performance rights of sound recordings, also known as the AM/FM Radio Royalty Loophole. Currently, terrestrial radio doesn’t pay royalties to the labels and artists when their records are played on the air. In other words, radio doesn’t pay royalties for the sound recording, only for the composition, which is protected by the Copyright Law. Even though digital radio can be accessed in a similar way as AM/FM radio (meaning that both of them can be played in cars, for example, and consequently can reach similar audiences), only digital radio is obliged by law to pay sound recording royalties for the music they broadcast. Instead, terrestrial radio gets to keep an estimated $17 billion of advertising revenue a year in blissful ignorance of the sound recordings that drive audiences to it in the first place.

This is not the only problem SoundExchange has identified in relation to the protection of sound recording rights. Sound recordings made before February 15, 1972, have a different legal treatment: they are not protected by federal law. Instead said rights are currently under the scope of various state laws until 2067, “at which time all state protection will be preempted by federal law.”3 Even though state law protects “pre-72” sound recordings, some digital music services are currently using those recordings without paying any royalties or simply without any permission at all. SoundExchange estimated that the amount of money lost by copyright owners due to this situation amounted to $60 million in 2014. This number is supposedly going to increase to more than $70 million by the end of this year. In order to try to fix this problem, SoundExchange launched the Project72 initiative in May of 2014. The purpose of this campaign was to ensure that artists who recorded before 1972 could be rightfully paid. One of the things the organization did was introduce the RESPECT Act in the House of Representatives during the 113th Congress. With this Act, digital music services providers would be required to pay royalties for all the content they broadcast, regardless of the year they were recorded.

Most recently, the Copyright Royalty Board approved a settlement between SoundExchange and the public radio networks. This settlement will compel public radio stations such as, NPR, Public Radio International, Public Radio Exchange American Public Media and all others named by the Corporation for Public Broadcasting to pay $2.8 million annually, divided into in 5 installments, through 2019. That rate is up from the $2.4 million in annual payments made during the previous term.Also, as part of the settlement, all public stations have to pay a minimum of $500 in royalties a year and 5% of all payments will serve as compensation for ephemeral rights, “which allow for storage of the reproductions of recordings that are broadcast on the stations’ servers. According to the determination, the payments cover 285,132,065 aggregate tuning hours, or the total hours of programming.”5 All of these payments are going to be made to SoundExchange, so the latter can distribute them between the artists and copyright owners. Even though this part of the settlement has already been approved by the CRB, the board hasn’t approved the section of the settlement in which they designate the public radio sector as a collective entity. This decision is going to be approved when the CRB sets statutory rates for all webcasters, not only for the public sector. Afterwards, said determination has to be reviewed by the Register of the US Copyright Office to see if the settlement is in accordance with the law.

By Eduardo Loret de Mola











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