On Boxing Day, my wife and I went to see The Big Short, a brilliant movie about how Wall Street created the 2008 banking crisis. What the film made abundantly clear was that the financial instruments surrounding mortgage-backed securities were so complicated that no one—not even the people trading them—knew how they worked. No one was paying attention to the giant house of cards being built, partly because the situation was so hard to explain. And because the banks were making so much money, they didn’t want to know the truth. They partied like the one-percenter bastards they were until it all fell apart.
The media, which had a chance to crack what was going on, was too confused to follow the story. Heck, if the people who created credit default obligations didn’t know how they worked, how could anyone? Meanwhile, the public didn’t care. All they knew was the value of their houses kept going up and up and up–until they didn’t.
On a certain level, we’re entering the same sort of WTF territory with streaming music services and the music they play. What I’m about to describe to you isn’t going to bring down the global economy. It’s nowhere near as awful as the criminality displayed by Wall Street bankers. But it is a very complicated situation and it is seriously impacting the livelihood of artists around the world as we move into an era where streaming is moving towards dominance. We’re building toward a financial crisis for musicians that will not fix itself–and not enough people understand so that they demand action.
Let me try to sort through everything in a way that makes sense.
How Licensing for Streaming Music Services Works
Royalties for music is complicated. Some musicians make royalty free music and put them on sites where you can find the best royalty free music for businesses to use without having to pay them royalties; whereas other artists and music companies expect to be paid royalties if companies to use their music in things like their commercials. Due to the fact royalities is such a complicated subject, streaming services have always been a murky area. Well, word came down yesterday of a $150 million class-action lawsuit filed against Spotify alleging that the company has been using music without licenses and also owes millions in unpaid royalties. The suit alleges that Spotify “knowingly, willingly, and unlawfully reproduces and distributes copyrighted compositions without obtaining mechanical licenses.” In other words, it’s alleged that Spotify is making money on the backs of musicians without paying them. How? Spotify failed to secure all the required licenses that would give them the right to play this music as part of their business model.
Well, it’s probably an oversight, right? Well, no. The suit alleges that Spotify “knowingly, willingly, and unlawfully reproduces and distributes copyrighted compositions without obtaining mechanical licenses.” Therefore, they are not paying the creators of this music the money they legitimately earn when Spotify streamed their songs.
That’s bad. If true, this is up there with Grooveshark and the original Napster.
Here’s a summary from Music Business Worldwide:
Lowery’s case, represented by law firm Michelman & Robinson, claims that Spotify “unlawfully reproduces and/or distributes copyrighted musical compositions… despite its failure to identify and/or locate the owners of those compositions for payment”.
It suggests that Spotify’s alleged neglect of the rights of Lowery and his fellow writers is “willful, intentional and purposeful”, and has led to Daniel Ek’s company “profiting off its own unlawful conduct” – a reference to possible interest earnt on ay unpaid royalties.
Lowery’s lawsuit applies for class-action status, which if successful would allow other songwriters or rights-holders to join and demand money from Spotify.
It reads: “As a direct and proximate result of Spotify’s conduct alleged herein, [we are] entitled to recover all proceeds and other compensation received or to be received by Spotify for its failure to pay royalties. This includes any interest accrued on the royalty funds inappropriately withheld from [us]… [we] have been damaged, and Spotify has been unjustly enriched, in an amount that is not as yet fully ascertained but which [Lowery] is informed and believes is not less than $150,000,000, according to proof at trial.”
Lowery cites as evidence a document submitted by Spotify’s Global Head Of Publisher Relations, James Duffet-Smith, to the US Copyright Office in May 2014, in which the exec describes the difficulties faced by digital services when trying to ascertain details of mechanical rights-holders in the market.
Duffet-Smith wrote that “in some cases, Spotify will be licensed for performing, but not mechanical rights in the same composition”.
In October, Spotify was publicly criticised by indie label Victory Records after its publishing operation, Another Victory, alleged that due mechanicals for thousands of its songs remained unpaid by Spotify.
Spotify ended up temporarily removing the songs from its service before reinstating them.
David Isrealite, CEO and President of The NMPA subsequently estimated that as much as 25% of royalties are not being paid to publishers by streaming services – or are being distributed incorrectly – due to metadata matching issues.
Justin Kalifowitz, CEO of Downtown Music Publishing, told the MBW Podcast earlier this month: “The record companies, on a weekly basis, upload thousands of new sound recordings that utilise underlying song copyrights without including the metadata of who the publisher and songwriter are. The amount of uncleared music that goes online is insane – even for big hits.
“My guess is that Spotify is not pleased with songwriters complaining about low levels of payment… it’s inexcusable that it’s assumed less than 80% of [due money] is making its way to songwriters and publishers because of data issues.”
And this is just the start.
Another lawsuit is set to be filed next week Another lawsuit is about to be filed alleging pretty much the same thing but with oodles and oodles of hard data to back up the claims. Before you go any further, take a look at this video. Meet Audiam, potentially Spotify’s worst nightmare.
But before you go any further, take a look at this video. Meet Audiam, potentially Spotify’s worst nightmare.
The data we’re now going to talk about comes straight from Jeff Price, founder of TuneCore and now founder/CEO of Audiam.
Audiam is a mechanical royalty collection agency that works for songwriters and music publishers, making sure they get paid for the “interactive” streams (think Spotify, not Pandora) of their music from companies like YouTube, Spotify, Apple Music, Google Play, Rhapsody, Beats, Amazon Prime and all the other interactive streaming digital music services. It operates like the Canadian Performing Rights organization SOCAN by licensing, policing, auditing, collecting and distributing royalties owed to its member songwriters/publisher.
Audiam currently represents the publishing catalogs for Bob Dylan, Red Hot Chili Peppers, Metallica, Jack White, Jason Mraz, Steve Miller, Hyvetown (a Canadian publisher), Round Hill Music, Imagem Pretty Lights, Ruthless Records’ publishing catalog, Jimmy Buffett, Victory Records’ publishing catalog, Epitaph Records’ publishing catalog, Sumerian Records’ publishing catalog and thousands more. Any publishing administrator (either self-published or a larger publishing entity) can join as long as they represent the administrative rights to the songs.
Audiam’s secret sauce is a database that contains the information—known as metadata—on 68 million sound recordings that are available digitally on the on-line music services around the world. It then finds every sound recording of a specific song, providing a complete set of information on who wrote the song and who performed every recording of the song. This is very, very accurate because each sound and video recording is assigned an ISRC, a unique number from a globally-recognized numbering system. Think ISBN for books or the Dewey Decimal System at the library.
For example, there are currently over 800 recordings of the Bob Dylan song “All Along the Watchtower” out there and Audiam has found them all. Each and every version has its own ISRC. With this complete set of data, Audiam is then able to tell for which recordings a songwriter is and is not getting paid.
In order for a streaming music service to use music as part of their business model, they must license the music from whoever holds the rights and then pay them. For songwriters in the US, there’s something called a “compulsory license” which essentially allows a company like Spotify to use a song simply by sending a “Notice of Intent” to the rightsholder
A Notice of Intent is a letter or an email to the rightsholder of a song that says “Hey, this is a notice to let you know that we intend to stream this recording of your song on our service.” By sending this heads-up to the rightsholder, it shows the services knows who you are. If they know that, they know who to pay. Plus, the rightsholder gets to know who is recording and using their songs.
The amount paid by the interactive streaming service is based on how many times the recordings is streamed at the US government set royalty rate (called the “statutory rate”).
The current rate in the US for an interactive stream is about 10.5% of the services monthly gross revenue minus an expense divided into the number of streams. At this point, the per stream royalty rate for songwriter mechanical royalties is about (US) $0.00067. The number changes each month.
US law dictates that these songwriter royalties must be paid DIRECTLY TO THE SONGWRITER/PUBLISHER (not the label, not the distributor, but the songwriter/publisher directly no matter where on the planet—or on which planet—they live) on the 20th of the month for the previous month. At the end of each year, these payouts must be certified by a certified public accountant. Apparently neither of these things is happening either.
And note this: a rightsholder CANNOT refuse to grant the interactive service the license provided the service sends the Notice of Intent. It does not matter where the rightsholder lives (i.e. Canada, France, Turkey, Kazakhstan, etc.), the Notice of Intent still must be sent in order for them to have a license.
Here’s the weird part. It’s alleged that Spotify (and other services) have NOT been sending out these Notices of Intent for a large number of the songs in their libraries but have nevertheless gone ahead and streamed those recordings.
Here’s an example of how this can go wrong: If you live here in Canada and you wrote a song and control the rights to it, and that song was recorded by you, or someone else, and made available to stream on Spotify in the US, Spotify had to send you, and only you, a Notice of Intent to get a license. If they did not send you one, then Spotify is using your music without a license. And, of course, they’re not paying you.
These songs are unlicensed. And because they’re unlicensed, there’s no agreement on how much you should be paid for the use of your songs. Therefore, Spotify is infringing on your copyright and streams recordings of your songs without a license. And they don’t pay.
To make matters worse, in the event they do send a Notice of Intent, and do actually have a license, Spotify did not build any systems to figure out who wrote the song that was recorded.
Here’s how this goes badly wrong. Say you wrote a song called “Butterfly,” recorded it and it found its way to be streamed on Spotify. Great. But once your “Butterfly” is in the system, Spotify can’t pin down who wrote that particular song entitled “Butterfly.”
Is it a recording of the Jason Mraz song “Butterfly?” Could it be Mariah Carey’s “Butterfly?” Remember the Crazy Town song called “Butterfly?” A quick search of iTunes Store returns dozens of songs entitled “Butterfly,” all performed by different people, most of whom are not you.
So what happens to the money owed to you from streams of your “Butterfly?” You get stiffed. Either (a) your money is not paid out and thus sitting in Spotify’s bank account, or; (b) it’s being paid to the wrong songwriter, someone that is definitely not you.
So, yes, plenty of B-, C- and D-level artists aren’t getting paid. But according to Audiam, which has been monitoring the situation for years, some major, major names are having their songs streamed without payment. They know this because they’ve made their lists and are always checking against them. They know which recordings are NOT being paid for.
The results are terrifying. Many of the recordings of songs are by huge artists that have streamed collectively billions of times for which they have never been paid. One of the spreadsheets I saw listed 800(!!!) Bob Dylan recordings—Zimmy performing his own songs which are still streaming—and he’s not being paid for them. This is Bob freakin’ Dylan! If he’s getting hosed, what hope does a lesser figure have?
A recent article in Billboard reported on Chicago-based music company Victory not getting paid the songwriter royalties on over 53,000,000 steams of their own recordings. It also appears the songs were not licensed, meaning it was infringement.
So how many songs are affected by this lack of licensing issue? Maybe 20 million that account for 15 billion streams over the last two-and-a-half-years.
Meanwhile, things are a bit different in Canada. A collective called CMRRA/SODRAC licenses rights to the songs they represent for Canadian use to the Canadian services and then collect and pay the songwriter mechanical royalties back to their members for Canada-only streams. To do this, they get a what’s known as a “usage log” from the service that shows what recordings streamed in that month. They then identify which ones they represent and then send an invoice with the detailed backup to the streaming music.
Therefore, Spotify is aware of what compositions are being used in their Canadian service that are unlicensed. If they’re not the CMRRA/SODRAC list they are, by default, unlicensed. Despite this, it appears that Spotify will continue to use the songs without licenses and without making payments.
Bottom line is that Spotify is allegedly not paying for a great chunk of the music they’re using, despite having a valuation of $8 billion US. Those clouds in the distance could turn very dark very soon.
How Musicians Can Get to the Bottom of This
To learn which of your compositions are licensed, you (or your record label/publishing company) only need to ask HFA/Spotify to provide you copies/proof of the Notice of Intents along with date they were sent. Points of contact to email the request to are:
James Duffett-Smith <firstname.lastname@example.org>;
North American Publishing Spotify
Rachel Landy <email@example.com>;
General Council Spotify
John Raso <firstname.lastname@example.org>;
Point of contact at HFA for Spotify
Write an email that can be as simple as this:
Hi James, Rachel, and John
We are the publishing administrator to
Attached is a schedule of the compositions we represent.
As we administer more than 50 compositions, may I impose on you for electronic copies of the NOIs you sent for the compositions we administer along with a copy of the original notice via email.
Attach a schedule of your compositions to send with your email.
On a side note, the following is from the US copyright law. It is the regulations for Section 115. It is §201.18 “Notice of intention to obtain a compulsory license for making and distributing phonorecords of nondramatic musical works”
(5) In the absence of a receipt from the United States Postal Service showing the date of delivery or documentation showing the first date of attempted delivery by a reputable courier, the compulsory licensee shall bear the burden of proving that the Notice of Intention was served in a timely manner.
6) If a Notice served upon a copyright owner or an authorized agent of a copyright owner identifies more than 50 works that are embodied or intended to be embodied in phonorecords made under the compulsory license, the copyright owner or the authorized agent may send the person who served the Notice a demand that a list of each of the works so identified be resubmitted in an electronic format, along with a copy of the original Notice. The person who served the Notice must submit such a list, which shall include all of the information required in paragraph (d)(1)(v) of this section, within 30 days after receipt of the demand from the copyright owner or authorized agent. The list shall be submitted on magnetic disk or another medium widely used at the time for electronic storage of data, in the form of a flat file, word processing document or spreadsheet readable with computer software in wide use at such time, with the required information identified and/or delimited so as to be readily discernible. The list may be submitted by means of electronic transmission (such as e-mail) if the demand from the copyright owner or authorized agent states that such submission will be accepted.
UPDATE: More outlets are now on the story. Read more in The Hollywood Reporter.