Why We’re Not Concerned About SoundExchange Royalty Payments

Oct 26, 2016

We’ve worked with a number of artists to help them sell their digital public performance royalties as distributed by SoundExchange. In fact, we have such a listing up right now from R&B veteran “Joe.”

So when recent developments from major digital music services like Pandora sparked some press chatter questioning SoundExchange’s ongoing role in the value chain, we decided to investigate further.

In doing so, we found that SoundExchange remains a viable and critical component of the digital music landscape, and that this is unlikely to change anytime soon.

For those unfamiliar, SoundExchange tracks, collects, and distributes payments made for digital public performance music royalties. In particular, the company collects these rates from so-called “non-interactive” music services—those that broadcast music in a radio-like manner over the Internet (Pandora), satellite (SiriusXM), or TV (MusicChoice).

These services originally obtained their licenses to stream music through compulsory rates set by an entity of Congress called the U.S. Copyright Royalty Board (CRB). Services using these licenses are restricted from things like on-demand playback and must impose limits on skipping or pausing tracks (hence the “non-interactive” designation). In return, labels must comply with the rates the board sets (hence the term “compulsory”).

But now many of the services that SoundExchange collects from are establishing direct licensing deals with the major labels instead of using the compulsory rates, both to secure better terms and to offer more interactive features. The biggest of these is Pandora, which alone contributed over half of the $800 million that SoundExchange distributed last year.

That’s caused some concern from those who see direct licensing as an “end run” around SoundExchange. One of the notable features of SoundExchange is that it pays artists and labels 50/50 regardless of what the artist’s deal with the label might be. So if Pandora and others are now going to pay the labels directly, both artists and those investing in artist revenue streams want to know how this revenue stream will flow to them going forward.

According to SoundExchange CEO Michael Huppe, there won’t be much of a change. While Pandora may have established direct deals to offer more interactive services, it will still offer a free tier of service governed by the same non-interactive rules of their compulsory licenses. Huppe says SoundExchange will continue to administer distribution of payments for these non-interactive uses just as it always had. Warner Music Group for one has confirmed this is the case.

While the rates the services pay labels may be different from the compulsory rates set by the CRB, collecting and distributing those payments still requires a lot of work. Processing all the data behind millions of streams, resolving conflicts in ownership claims, and paying for millions of individual streams across hundreds of thousands of artists for dozens of services is something that labels are just not set up to manage.

Which brings us back to Pandora. While SoundExchange may continue to process Pandora’s payments, others question whether Pandora will continue to be as large a source of those payments.

Pandora’s listener base has decreased slightly in year-over-year comparisons, most recently from 78.1 million a year ago to 77.9 million. Its revenues, while growing, missed analyst expectations, and as such its stock is falling.

But we’re more concerned with those investing in artists’ royalty revenues, not Pandora’s revenues. And by that measure, the stats look better. While Pandora may have fewer listeners, those they have are listening more. Total listener hours actually increased 5% to 5.4 billion over this time last year.

Finally, while Pandora is by far the largest contributor to SoundExchange collections, it’s hardly the only one. The company just submitted a rate proposal to the CRB the 2018 – 2022 term that, if accepted, could effectively double the rate those like SiriusXM pay, while also increasing rates for other services it administers, such as Muzak and Music Choice.

Since it was first established in 2003, SoundExchange has distributed more than $3.5 billion to the music business. The maturing of the digital marketplace has caused its year-over-year growth to slow from 28% two years ago to 4% last year, but it still expects payouts this year to top $860 million.

Given SoundExchange’s central role in this industry, it’s natural to question how these developments will affect it and those who rely on it for their income. But by that same measure, SoundExchange has become simply too essential to the flow of money for anyone to benefit from disrupting that position.

Interested in learning more about buying or selling SoundExchange and other types of royalties? We can help