SESAC, SoundExchange, SoundScan: Why Are Music Royalties So Confusing?

Many indie artists are confused about the difference between ASCAP, BMI, SESAC and SoundExchange, not to mention SoundScan, the Harry Fox Agency, and the role of their own publishing company and record label when it comes to collecting and paying money under the exploitation of their music.

The problem with not understanding these concepts is that you could get taken advantage of by unscrupulous players in the business or just simply lose out on valuable revenue.  A 2015 Berklee College of Music report found that anywhere from 20-50% of music payments do not make it to their rightful owners!

This post aims to provide independent songwriters and musicians some basic information to help them understand various music royalty issues.

Music Copyright Basics

To understand music royalties, it helps to understand the underlying legal framework behind music copyright in the U.S.

Under our Copyright Act, any musical work that has been reduced to a recording has two copyrights: (1) one for the sound recording embodying the performance, and (2) one for the underlying composition (musical arrangement and lyrics).

 

Happy Birthday Composition
Happy Birthday Sound Recording

A composition or sound recording copyright gives you the following bundle of rights:

  • The right to reproduce the work (make physical or digital copies)
  • The right to distribute the work (sell, share or give away for free)
  • The right to make derivative works (made other arrangements or cover versions)
  • The right to publicly perform the work (a “performance” can be live or a replay of the recording of the work)

Additionally, there is one more right specially provided in the law for only for sound recording copyrights:

  • The right to perform the copyrighted work publicly by means of a digital audio transmission.

A lot of the confusion regarding music royalties comes from the fact that each of these distinct rights may produce royalty money for the copyright holder or the performer (or both!).   Moreover, over the years, different organizations have taken charge of managing or administering these rights for songwriters and performers, and certain “rules” have been established not based on the law, but on industry practice.

One example: the industry divides composition copyrights into a 50% “publisher’s share” and a 50% “songwriters share”, even though there is nothing in the Copyright Act dividing legal rights in this way.

Another example: composition copyrights are often assigned to publishing companies, whereas sound recording copyrights are often owned by the record label who paid for the production and promotion of the recording.  Meanwhile, a number of special royalty-collecting organizations have sprung up to address the practical realities of monitoring the use and performance of music on a nation-wide scale.

The Public Performance Right (Traditional vs. Digital)

ASCAP (American Society of Composers, Authors, and Publishers), BMI (Broadcast Music, Inc.)[1] and SESAC (formerly, the Society of European Stage Authors and Composers) are U.S. public performance organizations (PROs) who help copyright holders collect performance royalties for the public performance of music compositions.

Radio stations, concert venues, sports arenas, bars, restaurants, malls – any place where the public is generally free to enter and music might be played – all pay fees to PROs.  In exchange, they get a blanket public performance license that gives them permission to play live or recorded music at their location.  The PROs pass these collected license fees on to the composition copyright owners.

Complicating the understanding of how PROs work is that they follow the 50% publishers share and 50% songwriters share scheme, so even if a composer or songwriter has assigned 100% of their composition copyright to a music publisher, the composer/songwriter will still get money directly from their PRO.  If a composition copyright owner does not have a publishing company, they will receive both halves from their PRO.[2]

Meanwhile, SoundExchange is a PRO that collects performance royalties under a different right under copyright law.  SoundExchange assist copyright owners of sound recordings (not compositions) under digital performances (not traditional performances) of those works.

While there is huge amount of music that is transmitted over the Internet and other digital formats, it is key to realize that SoundExchange only collects digital performance royalties on non-interactive streaming services where the listener cannot control what they hear (i.e., a DJ or an algorithm is selecting the songs).  Thus, music providers such as SiriusXM, Pandora and cable music stations pay licensing fees to SoundExchange.  SoundExchange splits up the royalties it collects into 50% for the record label, 45% for the “featured artist”, and 5% for the “non-featured artists” (i.e., sessions musicians, background vocalists, etc.).  Again, SoundExchange does not pay royalties to composition copyright owners.

SoundExchange does allow its royalty payments to expire if an artist does not register and collect them within a certain time frame, so if you are an artist who is in any way featured on recorded music, you should create an account with this PRO right away!

The Reproduction and Distribution Right

Songwriters and performers who want to sell their music to the public generally desire contracts with either a record label, record manufacturer or a distribution company (sometimes, a combination of these), in which they will license their rights under copyright to reproduce and distribute their works.  There are many ways to arrange these relationships and if you can, you should negotiate for an arrangement that works best for you.  Then, make sure you have a straightforward written agreement that correctly reflects the understanding you reached with the record label, manufacturer or distribution company.

Most record labels and manufacturers will collect all revenues from any exploitation of the copyrights, then pay royalty payments to the songwriter or artist on a predetermined percentage based on units sold.  A big negotiate point is also whether the label or manufacturer will “advance” money to the artist to produce, press or promote the music, and how they get to recoup those costs.

To keep track of units sold, much of the music industry uses SoundScan, a service that tracks sales of music products throughout the United States and Canada.  Record labels often rely on SoundScan to determine the royalties earned or due to one of its contracted artists.  SoundScan is also the data source for the Billboard music charts.

Mechanical Royalties are payments made for the rights to include a composition in a sound recording (under a copyright owner’s right to copy and distribute).  Under U.S. copyright law, once a song has been published, anyone can record it as long as the statutory mechanical license is obtained and the fee established by the Copyright Act is paid (the current statutory rate is 9.10¢ per copy for songs 5 minutes or less).  Many composition copyright owners (including publishing companies) authorize the Harry Fox Agency to issue mechanical rights licenses on their behalf, and the law treats these royalties for physical products (CDs, vinyl) and digital products the same.

Synchronization or “Sync Licensing” is when a composition copyright owner grants permission to use their work in an audiovisual setting, such as a movie, a TV show, a videogame or in a commercial.  There is no statutory or industry standard rate for this.  It is negotiated based on a number of factors.  Sync licensing is becoming an ever more important source of income for songwriters and publishers.

A “master license” is needed in conjunction with a sync license if someone wants to use the sound recording of the licensed composition as well.  It is possible to get a sync license and simply re-record your own version of the work if you do not want to pay for, or are unable to obtain, the master license for a certain song.

International Royalties

A discussion of the many different music laws, royalty schemes, PROs, and other supporting organizations located outside of the U.S. is beyond the scope of this post, but many international schemes are similar to ours, so if you understand the underlying copyright law and framework here, you will have a leg up as you begin to distribute and sell your music internationally.

If you have questions or corrections about any of this information, or needs assistance with a publishing contract or record contract, give our Arts & Entertainment team a call!

 

 

 

 

 

 

[1] Inside tip: If you’re an artist who constantly performs your own compositions in live concerts, but you’re not on the radio or TV, you can sometimes make special arrangements with BMI (but not ASCAP) to get paid.

[2] Another inside tip: If you sign up with ASCAP without a publishing company, you will need to register a “vanity publishing company” – make something up for ASCAP. If you don’t do this, you will only get half of your money.

Playing Music at Your Small Business under Copyright Law

Today, music is cheap, easy, and everywhere.  

Sound recordings can be instantaneously accessed via terrestrial, Internet or satellite radio, YouTube, online streaming, or downloading.  Nearly all of us carry around a mobile device that gives us access, whenever we desire, to vast catalogs of recordings. We play our music in the car, at home, and at work, and when we go out, it’s played for us at coffee shops, bars, gyms, stores and restaurants.

Perhaps because music has become so ubiquitous, many have a hard time understanding when and why anyone would have to actually pay for it.

Public Performance Licenses

A growing number of small businesses and nonprofits are thus unpleasantly surprised when they receive a letter, phone call, or even a personal visit from a performing rights organization (“PRO”) agent warning that they are playing music without the proper license and are thus participating in copyright infringement.  

These business owners may be hostile to the idea of paying for something that they perceive to be free or to already own. Music sales among American record labels have plummeted since the early 2000s and in 2008, 40 billion songs were downloaded illegally.  It is also estimated that 95 percent of music tracks are downloaded without payment to the artist or music company that produced them.  

Nevertheless, under U.S. copyright law, owners of copyrights in sounds recordings have the exclusive right to reproduce, adapt, distribute and publicly perform the recordings.  This means that under the law, purchasing a copy of a sound recording, whether an entire album or downloading one digital track from iTunes, does not permit the purchaser to further reproduce, distribute or perform the recording in public.  

Performing Rights Organizations

PROs are responsible for licensing the music of the songwriters and music publishers they represent, collecting royalties whenever that music is played in a public setting, and distributing quarterly royalty checks to the copyright holders of their catalogs.  

There are three PROs in the U.S.:  (1) the American Society of Composers, Authors and Publishers (ASCAP); (2) the Broadcast Music, Inc. (BMI); and (3) Society of European Stage Authors and Composers (SESAC).   A copyright holder can only sign up with one of the three PROs, which means each PRO holds rights to completely different catalogs of musical works.

PROs spend much of their time negotiating with television and radio broadcasters and large entertainment companies who operate stadiums, clubs and theaters.  However, a not-insignificant amount of time is also spent educating small business owners all across the country that they are legally required to pay for the music they use.  

Today, researching small businesses has never been easier for PROs thanks to the Internet.  PRO agents watch for small businesses who advertise live music, karaoke or dancing, but under the law, any business that plays music is likely responsible for paying PRO licensing fees, including grocery stores, hair salons, sports venues, retirements homes, and funeral parlors.  

Although “education” is the key word as far as how PROs view their work with small businesses, individuals who get a visit or phone call may remain resistant to the idea of paying fees to play music.  Some small business may find PRO’s license fees to be cost-prohibitive.  However, many simply believe that playing music is free or that we should be able to do whatever we want with the music we already own.  

As an example of such resistance, the owner of Roscoe’s House of Chicken and Waffles ignored ASCAP for seven years before they finally sued him for copyright infringement The 9th Circuit Court of Appeals eventually found Herbert Hudson and his corporation liable for nearly $200,000 in damages and attorney’s fees for playing eight unlicensed songs that were held by ASCAP!

This risk of lawsuit is real.  ASCAP files between 250 and 300 copyright infringement lawsuits annually and BMI files between 100 and 200 lawsuits annually.  

Do I Need a License?

Any store or other small business playing musical recordings through a playback device or radio receiver is engaged in a performance under the Copyright Act.  Those who “participate in, or are responsible for, performances of music are legally responsible” for obtaining permission from music copyright holders.  The law applies very broadly, so it is safer to assume you do need a license than don’t!

If a PRO is bringing a charge of copyright infringement against a business owner, generally there are two defenses:

  1.   Section 110(5) Exemption (the “Homestyle Exemption”)

The Copyright Act provides an exemption for the reception of radio or television broadcasts in an establishment open to the public for business.  This means a business can switch on the radio or TV and play broadcasted music performances without paying for a license.  This exemption does have more nuanced rules that consider gross square footage, number of loudspeakers, number of devices, etc., and does not explicitly include Internet radio or streaming serves like Pandora.

  1.   No “Public Performance”

Under current copyright law, a “public performance” occurs when music is played “in a place open to the public or at any place where a substantial number of persons outside of a normal circle of a family and its social acquaintances is gathered.”  

This means that playing music from a purchased CD at your 500-attendee family reunion is not a public performance, but playing the CD for just 2 patrons sitting in your bar on a Wednesday afternoon is.  Courts have ruled public performance occurs even where the customers are not directly charged for listening to the music.  Gray areas are “semi-public” places such as factories or condominium common rooms.  The legislative history of the 1976 Copyright Act makes it clear “semi-public” performances are to be treated as “public performances” under the statute, but this language did not actually make its way into the final law.  

As such, arguably music being placed for relatively-small work staff, say, the kitchen employees at a restaurant, that is not distinguishable to customers is likely not a public performance.

How to Avoid Copyright Violations for Playing Music

  1. Play music broadcasted from radio or television only.

As stated above, this could fall under the Homestyle Exemption, but care must be taken that your performance falls within the boundaries of the exemption rules.  If your location is more than 3,750 square feet for a food or drinking establishment or 2,000 feet for any other type of business, you may be subject to additional rules that impact whether you need a license or not.

  1. Pay the annual PRO fees.

Licenses can range from $200-$500 up to $8,000 annually, depending on the type and size of business, how many speakers or playback devices are in the establishment, and the prominence of the music to business operations.  Again, because there are three different PROs, businesses must either obtain three separate licenses or be carefully selective of the music played to ensure only one PRO’s catalog is used.

  1. Use music licensed from the Creative Commons.

Music publically performed from the Creative Commons typically still requires a license, but costs significantly less than the PRO fees.  However, music under this license includes primarily less well-known songs from independent and emerging artists.

  1. Play only original content.

A business can host live bands and musicians, but generally the performers must be instructed that they cannot play cover songs unless the performer has already formally obtained permission from the original songwriter to play it.  

A business owner can also write his or her own original compositions to be played at the establishment.

  1. Enroll with a music service provider.

Music services providers like PlayNetwork or SiriusXM for Business do the dirty work.  They charge service fees that include the public performance licenses from all the necessary PROs.

Have you received a letter from ASCAP, BMI or SESAC?  Are you opening a new business and need help navigating the licensing process or rules?  Contact the Law Offices of Daniel T. Goodwin today to speak with an attorney.