What They'll Never Tell You About the Music Business

by Peter M Thall

  At present, neighboring rights money comes predominantly from radio and television broadcasters that play music for profit. While these broadcasters are used to paying fees to music publishers and songwriters for performances of their music, in many countries—including the United States—they have no obligation to pay record producers or artists a similar fee. These rights have been debated for years in the United States, but resistance to the passage of broader neighboring rights laws has been generally effective in the United States. Broadcasters are resistant to the expansion of their payment responsibilities beyond intellectual property holders, and performing rights societies are also resistant to this expansion because they fear that the fees applied to neighboring rights licenses would come out of a fixed-fee pool, thereby reducing monies traditionally paid to them. (However, the Digital Performance Right in Sound Recordings Act [DPRSRA] of 1995 broke some new ground by permitting the owners of digital rights in sound recordings to license these rights for fees—particularly via satellite radio transmission. Since this new right is actually incorporated into the US Copyright Law, technically, it is a “copyright” right, not a “neighboring right.”)

  Internationally, there is a growing trend toward expanding neighboring rights protection. Canada has recently instituted a neighboring rights law that, for the first time, allows Canadian recording artists (such as Celine Dion, The Weeknd, Drake, and Avril Lavigne) to share in the broadcast success of their CDs, just as the writers and publishers of the songs do.

  The lesson to be learned here is that where recording artists or record producers are citizens of countries that recognize neighboring rights, there is a substantial likelihood that they will earn these rights not only in their own country, but in all other countries of the world that recognize neighboring rights. A citizen of the United Kingdom who produces an American artist will have an opportunity to increase his or her income significantly if someone registers the records he or she produces with all of the organizations in the European Union. There are, as one would expect, international collecting federations whose strength is the identification of works around the world via sophisticated data-processing techniques. They can assist artists and record producers in asserting their claims to neighboring rights money that would otherwise simply drift away to someone else via the Black Box or disappear entirely.

  Unfortunately, the neighboring rights traditionally vesting in United States citizens who produce artists or who perform as recording artists cannot substitute the status of a foreign citizen for theirs. Therefore, an American producer who has a foreign manager is unable to access neighboring rights simply by assigning them to the foreign citizen. Simply put, the societies will not permit these transfers of rights. This rule will apply even if the manager, for example, acquires the services of the producer as an employee for hire, a concept which in itself is “foreign” to the societies outside of the United States.

  BROADCAST MECHANICALS

  Ironically, the very technology that has made it possible for radio stations to automate the broadcast process (gone are the days when DJs actually spun discs; music is stored on file servers and selections are accessed via computer) has also made it possible for various rights societies to collect broadcast mechanical fees. Broadcast mechanicals are royalties payable to copyright holders when their music is played on broadcast radio. The act of reproducing the sound recording on a broadcast tape for automated play gives rise to a mechanical reproduction “event,” and many countries in the world—including Canada (see below), many European countries, and some Asian countries—are right there pursuing song and sound recording reproduction rights. Not so the United States. Sorry. In fact, the United States Copyright Act creates a specific exclusion: On the theory that it is not possible to broadcast a song without first copying it from the medium in which it originated (that is, the CD distributed by the record company) onto a broadcast tape, or CD, the copyright law provides a safe haven for broadcasters by permitting them to make such copies as are necessary to fulfill their principal goals—the broadcast of the sounds on the tape.

  Nevertheless, as noted, there is a font of money available, outside of the United States, to publishers and record companies from broadcast mechanicals, and unless this pool of money is specifically designated as a source of income in music publishing administration agreements—for example, subpublishing agreements—it will reside in the ozone with so much other royalty income that the copyright owner so often fails to claim. No one else will tell you about broadcast mechanicals. I have. Go find them!

  NEIGHBORING RIGHTS IN OUR OWN BACKYARD: CANADA

  Canada—the largest trading partner of the United States, with a land mass larger than the “lower 48”—is merely one of many countries that have figured out how to fine-tune the dissemination of authors’ and artists’ rights (that is, royalties) to a degree that United States legislators and lobbyists cannot begin to fathom, and reviewing the Canadian model is an excellent introduction to how neighboring rights (and certain other rights) can work. What does our northern neighbor know that we don’t know? I’ll tell you.

  Two Canadian societies are responsible for collecting neighboring rights royalties on behalf of their members: the Society of Composers, Authors, and Music Publishers of Canada (SOCAN), which also serves to collect performance royalties in much the same way ASCAP and BMI do in the United States; and the Neighboring Rights Collective of Canada (NRCC), a nongovernmental organization that administers the rights of performers and makers of sound recordings. (I am using the word “makers” rather than “producers” for reasons that will be evident later.)

  As mentioned above, Canada has secured a tariff (some call it a tax) on music broadcast over Canadian radio stations: The rate for all formats but talk radio is 0.8% of the station’s gross, and is distributed on the basis of airplay data (now easily collected thanks to automation). This money, which is a form of broadcast mechanical, is collected by the Société du Droit de Reproduction des Auteurs, Compositeurs et Éditores au Canada (SODRAC) and by the Canadian Musical Reproduction Rights Agency—Canada’s Harry Fox (CMRRA). Together they are a joint venture named CSI—not the TV show. (The imaginative Canadians have dared to demand other rights affecting income-generating sources of the 21st century: direct licensing of digital downloads, tethered downloads (downloads that disappear after so many listenings or so much time), and interactive streaming. CMRRA, and its fearless former leader David Basskin, cleverly utilized the leverage that comes with those rights to increase the amount, the accuracy, and the timing of payment of mechanical royalties that these new technologies generate. Similarly, the Canadian Recording Industry Association (CRIA), rather than spending its time and its capital suing its best customers (unlike the Recording Industry Association of America [RIAA]; see chapter 23, this page), has made inroads in effecting a change in the mechanical license rate from specific per-song rates, as in the United States, to a percentage of the selling price of records. This revolutionary change (revolutionary for a North American country at least) would eliminate the controlled-composition clauses. Music publishers in Canada, as in the United States, are strenuously resisting such a change by, among other things, insisting on a minimum fee per song, which of course negates the purpose of a percentage rate. But, as stated above, things are changing, and Canada is certainly one of the prime movers behind the changes.

  LOST, MISPLACED, NEGLECTED, OR ABANDONED: WHICH CATEGORY ARE YOUR ROYALTIES IN?

  Every year millions of dollars of royalty monies that might be paid to musicians and songwriters are never collected, or misplaced and ultimately abandoned, due to the failure of our country—more specifically, our industry’s legal and financial community—to keep current with (1) international copyright developments that provide certain entitlements to intellectual property holders and (2) relevant advances in technology. Even lawyers who regularly practice entertainment law find it difficult to keep current with the “initials of the day”: GVL, AHRA, W
IPO, GONG, GATT, and TEA, to name just a few. However, the economic health of the music industry is strongly impacted by the laws and treaties and interests represented by these letters. Here I will mention two of the most important, GVL and AHRA.

  Gesellschaft zur Verwertung von Leist​ungss​chutz​rechten mbH

  One neighboring rights organization, Gesellschaft zur Verwertung von Leis​tungssc​hutzre​chten mbH (GVL), due to the strength of the deutschmark during the 1990s, has become one of the more financially successful versions of income-generating organizations that go beyond the traditional mechanical, performance, synchronization, and print classifications. This German collective captures compensation for neighboring rights in Germany and beyond. GVL is not the only organization in the world that has succeeded in enforcing claims of record producers (that is, independent producers as opposed to record companies under whose auspices records are “produced”), but it has generated large sums of money for those producers who are citizens of European Union countries. Record producers’ claims are based on the argument that producers’ contributions to the creation of the ultimate master recordings are as worthy of ongoing fees commensurate with the success of the recordings as are artists’ contributions, and hence producers are just as entitled to neighboring rights income as the artists themselves.

  The Audio Home Recording Act

  In 1990, Congress passed the Audio Home Recording Act (AHRA) in direct response to the concern of music rights owners that home copying of recordings was having an enormous impact on the sale of records through traditional means. (This source of royalty income is not a “pure” neighboring right, since it does not relate to performances of sound recordings, but neither is it a pure copyright right.)

  The AHRA requires the manufacturers of devices whose primary purpose is to make digital music recordings for private use (for example, audiocassettes and Minidisc and DAT recorder/players) to pay a statutory royalty on each device and piece of media sold, with the receipts to be distributed to those whose income would be directly diminished by unauthorized copying: songwriters, record companies, and musicians’ unions. It also requires manufacturers to implement either the Serial Copy Management System (SCMS), which prevents all but first-generation copies, or a system that has the “same functional characteristics” as the SCMS.

  The royalty, about 2% of manufacturers’ revenue, is collected and divided into two funds—the Sound Recordings Fund and the Musical Works Fund—as follows:

  Sound Recordings Fund: 66 ⅔%

  Nonfeatured musicians and vocalists (via AFTRA and AF of M): 4% (of 66 ⅔%)

  Featured recording artists: 40% of balance

  Copyright holders: 60% of balance

  Musical Works Fund: 33 ⅓%

  Songwriters: 50%

  Music publishers: 50%

  But the AHRA is less than meets the eye. First, it does not cover copying via computer hard drives and CD-Rs (CD-recordable devices), the method of choice for 99% of today’s music copiers. Microsoft and its allies in the computer industry can be thanked for this successful lobbying disaster to rights owners. Second, there are numerous possibilities for technically circumventing systems designed to prevent any but first-generation copying. In other words, Congress in its wisdom (or lack of it) actually passed a law that ties itself to a particular technology rather than to the use sought to be protected against. As with neighboring rights, the fallout reaches beyond our borders. Why would countries whose laws do cover AHRA-excluded copying methods pay royalty income to US interests when the United States does not provide reciprocal rights to their copyright holders? They won’t.

  The Musical Works Fund is administered jointly by ASCAP, BMI, and the Harry Fox Agency. The Sound Recordings Fund is administered by the Alliance of Artists and Record Companies. The Alliance of Artists and Recording Companies (AARC) is in fact the only US collective representing featured artists and recording companies regarding domestic and foreign home taping royalties.

  With respect to the collection of home-taping (and rental) royalties from certain other territories in the world that have laws similar to the AHRA and that authorize AARC to act for them, the list of countries is small, but growing. (Home-taping royalties overseas are sometimes referred to as private copying remunerations.) Over time, AARC hopes to be in a position to collect any and all home-taping and/or rental royalties owed to featured artists and independent labels on US sound recordings. Currently, such royalties generated in Spain, the Netherlands, and Japan are represented exclusively by AARC. Remember, many countries do not have similar laws (for example, England and Ireland), but with a lot of foresight, AARC is busy negotiating with foreign collectives such that when and if such laws are passed, AARC will be the collecting agent for them in the United States. AARC’s executive director, Linda R. Bocchi, quite naturally recommends that individual artists sign up with AARC not only for the royalties they currently collect, but for those that will eventually come into their control in the future once they enter into appropriate agreements with respect to countries that have laws similar to the AHRA.

  The AARC maintains a list of artists whose money is “on hold” because they are not registered with AARC. Notwithstanding herculean efforts to locate these artists, in a huge number of instances, they cannot. To the extent the monies reflect home taping and rental royalties originating outside of the United States, AARC is permitted to hold these monies for a period of three years while they try to locate the artist who is entitled to them; however, to the extent such royalties originate within the United States, if the artist is not registered, the money otherwise allocated to the unregistered artist will go into the AHRA “pot” and the artist’s entitlements, in such cases, may be lost. I invite you to check the list of artists for whom AARC is holding royalties, which it generously provides on its website. You will be surprised when you see how many artists (or their heirs) have not bothered to collect royalties due them.

  Note that while AARC collects AHRA royalties, these are not the same as digital performing rights—true neighboring rights, which are collected by Sound Exchange. In other words, you will require at least two collectives to capture all of the money to which you may be entitled—and probably more. Keep reading.

  Sound Exchange

  In 2008, Sound Exchange became the official negotiator on behalf of copyright owners and performers with Internet radio services. While their role was limited in time, Sound Exchange probably will continue to serve the needs of their participants in negotiating webcasting rates without ruffling the feathers of these radio services as had a previous decision by the Copyright Royalty Board in 2007. Sound Exchange collects and distributes royalties generated by the use of sound recordings, on the World Wide Web, via satellite services, and via cable services only. The beneficiaries are both featured artists identified on the recording and nonfeatured artists. Spoken-word artists are covered as well. These are the only digital performances for which DPRSRA has created a special category of rights that are “neighboring” to traditional copyrights. The royalty arises solely from the public performance of a sound recording via digital audio transmissions (performances on analog radio or television are not covered by this act) and has nothing to do with the underlying copyright in the musical composition. The royalty rate is statutorily determined; performers are paid their shares directly, and not through recording artist agreements

  There are, of course, exceptions to when digital performance royalties are generated—for example, a digital audio transmission that is part of an “interactive” service does not generate such royalties. (Interactive refers to services that allow a subscriber to a digital radio or television service to select one song rather than a genre-channel list, and/or manipulate the transmission by fast-forwarding, rewinding, or downloading.) In fact, the exceptions are so numerous and complex as to be absolutely mind boggling. All the more reason to have an expert collection agency deal with these rights.

  The royalties collected by
Sound Exchange are split as follows:

  1. 45% to the featured artist

  2. 5% to artists performing auxiliary functions—paid to AFTRA and AF of M

  3. 50% to the sound recording record company (which may not be the actual label)

  Sound Exchange not only collects applicable royalties generated in the United States, but collects those generated outside of the United States as well, to the extent the foreign laws permit it and they can negotiate to collect them. Note that the fees collected outside of the United States are subject to the same limitations as the fees collected in the United States: performing royalties for which the United States Copyright Law provides reciprocal relief for foreigners—in other words, digital performing rights only. And they don’t collect from Canada!

  Sound Exchange, as of this writing, does not have an “unpaid” or “unregistered” list of artists like the list available at AARC’s website and at Royalties Reunited’s site (see below). This convenience will come soon. Sound Exchange pays quarterly and is working on a “play service” that members (at no charge) can use to check real-time information as to their (hopefully) accumulating royalties.

  SHOW ME THE MONEY

  Unfortunately, with some exceptions, a recording artist or songwriter based in the United States, even with top attorneys and business management, will experience enormous difficulty trying to identify—let alone collect—all of the varied royalties that are just sitting out there waiting to be collected. This is not just because there are a bewildering array of performance rights collection societies throughout the world, but because, as I have stated previously, the various countries that offer neighboring rights will do so only for their own citizens or for citizens of those countries that offer reciprocal rights. And, as also stated previously, the sole piece of legislation in the United States that provides for what can be considered a neighboring right is the DPRSA of 1995. Notwithstanding the fact that a broader rights system works quite well in almost every other country of the world, the broadcast industry in the United States has so far successfully blocked neighboring rights legislation by raising the specter of the virtual apocalypse that would ensue were they required to pay anything more than they already do for rights to perform music. The electronics industry (in particular the computer industry) has also had a good run in blocking tariffs on recordable cassette tapes and CDs that, in other countries, serve to compensate, in some small part, for the losses resulting from illegal or excessive home taping and computer copying.