Nov 25, 2014 · 8 minutes

As most people know, when a song is streamed on Pandora or Spotify, the royalties from that play, often worth only a fraction of a penny, are split between the record label, the songwriter, and the performer.

But there's another less-talked about constituent that receives a cut of the revenue: Performance rights organizations or PROs. For a small administration fee, these groups collect and distribute royalties to the appropriate rights holders, songwriters, and performers. But now, a major distributor has distanced itself from one of the largest and most important PROs in the world, and the implications could spell bad news for artists' bottom lines.

Last week, the Sony-owned music distributor The Orchard, whose clients include independent labels Daptone Records and Frenchkiss Records, sent an email to its stable of artists informing them that SiriusXM radio will now report royalties directly to The Orchard. This will cut the PRO known as SoundExchange, which traditionally collects and distributes royalties to rights holders and performers for all digital radio streams, out of the loop. It will also allow the Orchard to bypass SoundExchange's 4.5 percent administration fee.

In theory, this will lead to more royalty money to go around for both labels and musicians. That's the outcome the Orchard stresses in its email, anyway. And with industry revenue flatlining thanks to the death of physical sales -- and now, the death of digital downloads, too -- artists and labels need every (fraction-of-a-)penny they can get.

Does that mean more labels and distributors should follow suit, cutting fourth-parties like SoundExchange and other PROs out of the royalty distribution process?

It's complicated. First, it's important to consider the history of these organizations and why they were established. In the first half of the 20th century, as recorded music and radio rose to prominence, songwriters and publishers needed a way to collect royalties on all these new avenues for music delivery. They lacked the resources to monitor every radio station, bar, and jukebox in the country that played a song from their repertoire, and so ASCAP and BMI were created to help collect and distribute these royalties.

So how does SoundExchange differ? Historically, only songwriters and publishers received royalties from terrestrial -- meaning AM/FM -- radio play. Performers did not, the logic being that radio exposure offered such a huge promotional boon that the free publicity was payment enough. But unlike AM/FM stations, Internet radio services like Pandora do not broadcast the same ten or twenty songs to millions of Americans every day. As such, the promotional benefit of having a song played on Pandora is negligible. So thanks to legislation passed in Congress, a new type of royalty was invented that sends money to performers whenever their songs are played on satellite or Internet radio -- and SoundExchange was created to distribute these payments.

When digital radio was still in its infancy, perhaps lawmakers expected royalty collection to be as unwieldy as it was during the days of terrestrial radio, fragmented across thousands of platforms. That's probably why the industry thought it needed a separate organization like SoundExchange to handle these payments. But as the digital radio space matures, these broadcasts continue to consolidate around a handful of major platforms like SiriusXM and Pandora, which together reach over 100 million monthly users. With these larger services dominating the digital airwaves, doesn't it makes sense for labels to negotiate directly with these platforms as the Orchard has done, bypassing PROs and their administration fees?

Not everyone is convinced. David Lowery, frontman for the band Cracker and one of the biggest critics of the new digital music economy, thinks it's a play by Sony to deprive performers of even more money.

"Hey, I’m sure you can totally trust Sony/The Orchard to pay you your royalties without taking any deductions right?" he asks disingenuously. "They’d never do that. They are the most organized distributor ever."

Lowery goes on to explain that one of his albums happens to be distributed through the Orchard, though he has never received royalties nor even a statement from the company. They don't even answer his phone calls or emails, Lowery writes.

Lowery's experience with the Orchard could be an isolated case. But even if we assume that, there's reason to be wary of Sony's position. Currently, the rates SoundExchange demands from Pandora and other digital radio platforms are set by three federal judges that make up the Copyright Royalty Board. With the exception of some smaller webcasters that pay based on a percentage of their revenue, these rates are the same regardless of the platform or artist. In other words, Pandora pays the same amount per play whether the song is by Taylor Swift or by my college band. By striking a proprietary deal directly with SiriusXM that exists outside the purview of federal judges, however, Sony could theoretically leave artists in the dark about how much they're owed, while taking a bigger chunk of the royalties for themselves.

Is it unfair to preemptively assume that Sony (or the next label giant to pursue a similar arrangement) will screw over artists before the ink is even dry on this deal?

Not if the major labels' existing deals with Spotify are any indication. Because those agreements are also made in the shadows, they give labels the opportunity to pocket as large a percentage of the royalty payments as possible. This is allegedly happening in Spotify CEO Daniel Ek's home country, Sweden, where artists have threatened to sue Universal Music Group and Warner Music Group, accusing them of collecting big advances from Spotify and keeping the lion's share of that cash out of the hands of musicians.

Or there could be something even more devious afoot. This isn't the first time Sony has tried to bypass a PRO to negotiate directly with a music platform. Last year, Sony entered into talks with Pandora to directly license its music catalog to the radio giant. Sony's goal was to set a royalty rate on the open market that was higher than the rates collected by ASCAP, which are set by a federal court. The deal fell through, however, after a judge ruled that Sony, by refusing to provide Pandora with a list of its complete works, had not acted in good faith nor in the spirit of competitive markets during these negotiations.

"ASCAP refused to provide Pandora with the list of Sony works without Sony’s consent, which Sony refused to give," Judge Denise Cote wrote in her ruling. "Without that list, Pandora’s options were stark. It could shut down its service, infringe Sony’s rights, or execute an agreement with Sony on Sony’s terms." Sony had essentially put a gun to Pandora's head and said, "Either agree to our terms, or we'll sue you for infringement."

Kenneth Steinthal, one of the lawyers representing Pandora, goes so far as to suggest that ASCAP was a party to the scheme and colluded with Sony. ASCAP's rates, though set by the courts and reviewed periodically, are nevertheless designed to reflect a "hypothetical free market." ASCAP's plan, Steinthal alleges, was to let Sony abandon ASCAP so Sony could negotiate higher royalty rates with Pandora. The rates would be artificially boosted thanks to Sony's unwillingness to play fair in these negotiations by refusing to provide Pandora with a full list of its works. Then ASCAP could point to that new rate as indicative of a "free market" negotiation and convince the courts to increase the rate for all of ASCAP's remaining clients.

“This is part of a plan," Steinthal said. "Major publishers basically announced they were going to pull out, try to get outside the context of the consent decree and not be subject to court scrutiny, get new rates, then ASCAP would take that rate and use it as a benchmark.”

This collusion scheme is supported by an email sent by ASCAP Chairman Paul Williams. While Williams is most famous for penning "The Rainbow Connection," the touching hit song made popular by Kermit the Frog, here he is plotting back-handed tactics to squeeze more money out of Pandora:

My job is to make this transition as smoothly as possible in the board room . . . to assuage the fears of the writers who may see this as an ASCAP death knoll . . . . [W]e are in fact giving [the major publishers] the right to negotiate. The end result being that they will set a higher market price which will give us bargaining power in rate court.
Of course it's not just the labels or PROs that can take advantage of negotiations done behind closed doors. Earlier this year, YouTube's subscription streaming service was nearly discredited before it even launched, after the platform was accused of bullying smaller labels into signing below-market deals. YouTube even threatened to remove these independent artists from its free video service if they didn't agree to the new subscription service's lousy terms.

In turn, by breaking free from judicially-mandated rates, platforms like SiriusXM would not be required to pay the same amount to every artist, thus allowing them to license small-time acts at bargain prices while saving the significant cash for superstars like Taylor Swift or Katy Perry. Don't believe me? Spotify already does this, paying artists who make up a greater share of total streams a higher per-stream rate.

To be fair, SoundExchange has its own set of problems. Singer-songwriter Ari Herstand describes a nightmarish experience he had with the group, which he claims was only paying him royalties on around one-tenth of the songs for which he was owed. Their customer service team was so abysmal that he had to track down the company's VP of Communications at a music industry conference in search for answers. After all that, she cancelled her meeting with Herstand at the last minute.

But despite SoundExchange's flaws, direct licensing deals could ultimately prove much worse for artists. When royalty negotiations between labels and tech platforms are pushed into the shadows, as opposed to the imperfect yet transparent rates paid by SoundExchange, it gives labels and platforms alike an opportunity to skim even more from an industry that's been cut in half since 2000. And almost without fail, the people who end up losing money to line the pockets of these shady dealmakers are the artists creating all this great music.

[illustration by Brad Jonas]