Dispelling the utopian dream: the complex reality of music royalties (Guest column)

This is a guest column from Virginie Berger (below), a music and tech industry executive with over 20 years experience in rights management and digital transformation, and currently an international advisor to companies including IRCAM Amplify. Here, she breaks down in detail the individual elements that the challenge of rebuilding and updating the music industry’s royalty system presents – and offers recommendations on how it could all happen.

The music industry is on a rollercoaster ride, marked by digital disruption and the emergence of new business models. In the midst of all the chaos, one consistent demand from artists and industry stakeholders has been for a transparent and efficient royalty payment system.

Enter the world of fintech, with companies like Utopia boasting their motto, “Fair pay for every play.” After acquiring multiple industry companies, they’re now on a mission to revamp music royalties. Utopia’s CEO, Mattias Hjelmstedt, told Billboard that a faster, more transparent royalty process will “help all facets of the industry earn more money.” But are companies like this the white knight we’ve all been waiting for?

There’s no magic wand (or is there?)

The music industry has been grappling with the challenge of royalty payments for a long time. The royalty payment system involves multiple stakeholders, including record labels, publishers, and performance rights organizations (PROs), which can make the process opaque and complex. This can result in mistrust within the industry and lead to difficulties in tracking and distributing royalties accurately.

Fixing the royalty system is a herculean task, and it’s going to take more than just one company waving a magic wand. It demands a combination of technology, collaboration, and industry-wide commitment. The music industry is like a giant jigsaw puzzle, with legal frameworks, copyright laws, and multiple stakeholders all playing a part. To really make a difference, we need a collective effort from the likes of rights organizations, publishers, artists, and tech companies, various publishers’ organizations, artist organizations, CISAC, DDEX, and guess what? They’re already working on it.

These stakeholders are well aware of the outdated processes, lack of standardization, fragmented industry structure, and inadequate legal frameworks. They’re already striving to develop international standards, implement modern technology (AI, machine learning, and blockchain, anyone? ), enhance data quality, and advocate for legal reform. But, of course, it’s hard, slow, and complicated, involving millions of stakeholders and significant costs in terms of budget, human resources, and education.

The challenges

Music royalties are essential for ensuring artists, songwriters, and other stakeholders receive fair compensation for their work. The challenges in the royalty system are numerous, including:

Transparency: One of the key challenges in the royalty payment system is the lack of transparency. In a 2015 survey by the Future of Music Coalition, 55% of respondents reported having difficulty understanding their royalty statements, with many citing lack of transparency as a major issue. This lack of transparency can make it difficult for artists and rights holders to determine if they are receiving their fair share of earnings as the royalty payment process can be tricky, with many intermediaries involved.

Complexity of royalty calculations: The music royalty landscape is incredibly complex, involving multiple types of royalties, such as performance, mechanical, and synchronization royalties. Calculations vary depending on the type of royalty, the medium in which the music is consumed, and the contractual agreements in place. This complexity often makes it difficult for artists and rights holders to understand and track their earnings accurately.

Inaccurate metadata: Incomplete or incorrect metadata, such as songwriting credits, can lead to lost or misallocated royalties. Proper metadata management is crucial for ensuring that royalties are distributed accurately, but the process can be time-consuming and prone to errors.

Delayed payments: Royalties are often paid out months or even years after the music has been consumed, making it challenging for artists to manage their finances and plan for the future. The delay in payments can be attributed to the complex nature of royalty calculations and the multiple intermediaries involved in the process. Delayed payments are another issue in the royalty payment system. Royalties are often paid out months or even years after the music has been consumed, making it challenging for artists to manage their finances and plan for the future. The delay in payments can be attributed to the complex nature of royalty calculations and the multiple intermediaries involved in the process.

Global discrepancies: Different countries have unique rules and regulations governing music royalties, which can make it difficult for artists and rights holders to navigate the international royalty landscape. Additionally, collecting royalties from foreign territories can be cumbersome and involve added costs.

The impact of streaming: With the shift to streaming platforms, royalty rates for artists have been significantly impacted. Streaming services typically pay out lower royalty rates compared to physical sales or downloads, and the “per-stream” payment model can result in smaller earnings for artists, especially independent and emerging musicians. Royalty rates for artists have been significantly impacted. Streaming services typically pay out lower royalty rates compared to physical sales or downloads, and the “per-stream” payment model can result in smaller earnings for artists, especially independent and emerging musicians. According to a 2021 report by Digital Music News, the average streaming royalty rate for a single stream of a song is $0.003 to $0.005, depending on the streaming platform.

Know Your Customer (KYC): Proper identification of rights holders is crucial for ensuring accurate royalty distribution. The KYC process involves verifying the identities of artists, songwriters, and other stakeholders in the music industry to prevent fraud, money laundering, and misallocation of royalties. However, the KYC process can be time-consuming and labor-intensive. And, surprisingly, very few stakeholders have a KYC process in place.

Exception issues: Exceptions, like sound effects: Some audio content, such as sound effects (e.g., rain sounds), may not be recognized as eligible for royalties due to their nature or the lack of clear ownership. These exceptions can create challenges in the royalty distribution process, as platforms may still distribute and monetize such content.

Fraudulent accounts, covers, etc: Individuals or entities create fake accounts or release unauthorized covers of songs to exploit the work of original artists and rights holders. These actions can lead to the misallocation or loss of royalties, as the earnings generated by the fraudulent activity are wrongly attributed to the perpetrators rather than the legitimate rights holders.

DSP claiming and backclaim periods: The time gap between the end of the Collection Period and when DSPs make the final Residual Payments can create inconsistencies and delays in royalty payments.

Multi-Rights, Multi-Territory management: Managing royalties across multiple rights (e.g., mechanical, performance, synchronization) and territories adds to the complexity. This requires a thorough understanding of each territory’s legal frameworks, as well as efficient tracking and collection systems that can handle multi-rights and multi-territory scenarios.

Collection Mandates: With repertoire carve-ins and carve-outs, rightsholder registrations, sister society mandates, rightsholder affiliations, BIEM rules, and Anglo-American repertoire rules, the music royalty landscape becomes even more intricate. Ensuring accurate payments and accounting for these complex arrangements can be challenging and may demand collaboration among various stakeholders, including rights organizations, publishers, and tech companies.

And many other things: Royalty payments are often based on predetermined schedules; there’s a lack of connection between distributors and rights organizations to reconcile ISRC and ISWC; the complexities of UGC and non music video; the various types of Common Works Registrations; and let’s not forget about the different formats of cue sheets used around the world!

Is there a solution?

So, what’s the real challenge here? The root? Data accuracy and quality. Royalties hinge on the accuracy and quality of data from multiple sources. Discrepancies, inaccuracies, or missing information can lead to incorrect royalty calculations or misattributions. Many industry stakeholders don’t implement a data quality process that allows them to control the data from the moment they receive it. That is the biggest issue—how people in the industry control the data, metadata and identify the rightsholders.

The music industry is exploring technological solutions like blockchain, AI, and big data analytics to improve transparency, streamline royalty calculations, and ensure accurate metadata management. Blockchain technology can provide a secure, decentralized platform for managing music rights and royalties, while AI and big data analytics can streamline royalty calculations and ensure accurate metadata management.

In addition to these technological solutions, industry stakeholders should prioritize data accuracy and quality. The accuracy of royalty data is essential for ensuring that royalties are distributed fairly and accurately. The music industry should focus on interoperability to consolidate and organize data, enhance transparency, and establish fair compensation models.

To address the challenges in the royalty payment system, industry stakeholders must work together. Collaboration among various stakeholders and regulatory bodies can help simplify the royalty landscape and establish fair compensation models. The music industry stakeholders should also work towards developing international standards and legal reforms that can help streamline the royalty payment process. For example, the International Standard Recording Code (ISRC) and International Standard Musical Work Code (ISWC) can help improve data accuracy and simplify royalty distribution by providing a unique identification system for musical works and recordings (GRD anyone?).

Furthermore, stakeholders should focus on improving the accuracy of metadata, especially songwriting credits (ISNI), to prevent lost or misallocated royalties. Incomplete or incorrect metadata can result in lost royalties, and this problem can be compounded in the case of cover songs, remixes, and other derivative works. Industry stakeholders should work towards developing systems that can accurately track and distribute royalties for these types of works.

In addition to technology and data accuracy, the music industry should focus on improving transparency in the royalty payment system. This can be achieved through the use of standardized reporting and auditing processes that can provide artists and rights holders with clear, detailed information about their earnings. Industry stakeholders should also explore the use of smart contracts and decentralized platforms to provide a transparent, secure, and efficient system for royalty distribution.

This column expands on a post Berger previously published on her blog