Songwriters and music publishers have received royalties for the public performance of songs since before “Felix the Cat” first purred over the airwaves on W2XBS, but the fight to get public-performance royalties for sound recordings in the United States has a story that is long, distinguished and largely unsuccessful.

When a record is played on broadcast radio in the U.S., who makes money? Under the U.S. Copyright Act, a radio broadcast is a “public performance” of the song in the record, and thus the songwriters and publishers make money through their performing rights organization (PRO), whether it be ASCAP, BMI or SESAC.

But does the artist make money? Does the producer? Does the session drummer? Does the record company?

Not in the United States.

If the same record is played in Canada, the United Kingdom, Japan, or any one of a host of other countries, not only do the songwriters and publishers get paid a royalty through their PRO, but the artists, session players and copyright owner of the recording also get paid through a sound recording PRO.

COPYRIGHT AMMENDMENT
The U.S. Congress took a relatively small step to compensate artists, session players and vocalists, and copyright owners of sound recordings with amendments to the Copyright Act in the 1990s that established a limited public performance royalty for digital transmissions of sound recordings.

“Digital transmissions” includes satellite radio like XM, webcasting (or “Internet radio”) like Yahoo! Music, and the Internet broadcast of terrestrial radio stations, such as when your favorite radio station simulcasts its broadcast signal over the Internet. Although this limited performance right is a small step forward, it is a huge victory against the broadcasters.

The new laws established what is commonly called a “statutory” or “compulsory” license to stream sound recordings, as long as the music being streamed complies with the sequencing rules. What that means is that there is no need to get a license from each copyright owner as long as you comply with the rules and pay the royalty because your license is written into the Copyright Act. (We already have a compulsory license for mechanical royalties paid on songs when a digital or physical record is sold.)

The new laws only apply to streaming, not to downloading or any other interactive use of music that involves the user choosing which specific tracks they want to listen to.

There is a rather complex set of rules that were established in 1995 that specify how many tracks and by which artists can be played in sequence to qualify for the statutory license (called the “sound recording performance complement”). The idea at the time (which seems quaint now) was that the Congress wanted to discourage taping of albums streamed over the Internet.

I’m addressing these rules and laws at a high level here, but if you want to get into the details, check the U.S. Copyright Office website or the website of the Producers & Engineers Wing of the Recording Academy.

The Act also established the first sound recording PRO in the U.S. called “SoundExchange”. Until recently, SoundExchange was a division of the Recording Industry Association of America, but was recently “spun off” to be a stand alone nonprofit organization with a board of directors divided equally between artist and copyright owner representatives.

Although Congress established the right, they only established a royalty rate for a limited category of satellite radio services at the time the statutes were passed. That resulted in the controversial Copyright Arbitration Royalty Panel (CARP) addressing webcasting and simulcasting royalty rates, which resulted in the equally controversial decision of the Librarian of Congress last year establishing rates, along with subsequent legislation regarding “small” webcasters who have reduced rates available to them.

CURRENT SITUATION
Because the CARP took so long, the rates that were set would have expired almost immediately. No one wanted to go through another CARP, so those rates were revisited recently by a negotiation between the RIAA and the Digital Media Association, which established rates through 2004. The new webcasting rate is, more or less, $0.000762 per performance.

The structure is a little complicated, and doesn’t cover certain groups such as simulcasting of radio stations, noncommercial webcasters, or small webcasters, all of whom are treated differently under the various laws and regulations about digital transmissions. You can review the rates on the SoundExchange website or the U.S. Copyright Office website. (Direct links for both of these websites provided above.)

The good news for producers (and anyone who has a contractual record royalty, such as mixers, remixers, and engineers) is that they are finally cut in for some royalties. The bad news: Royalties won't come to them automatically.

The Copyright Act divides “webcasting” royalties among four groups: copyright owners (50 percent), featured artists (45 percent), non-featured musicians (2.5 percent) and non-featured vocalists (2.5 percent). Missing are producers, who typically have a contractual right to royalty income from sound recordings they produce.

However, as one member of Congress wrote to me, it is “absurd to think that it was the intention of Congress to interfere with private contracts between producers and artists.”
So in order to get their share of webcasting royalties, producers will have to rely on their contracts. Producers' royalties on physical records are typically deducted from an artist’s “all-in” royalty (“all-in” means including the producer’s royalty).

If a producer gets a retail royalty of 3 percent and the artist gets an “all-in” retail royalty of 14 percent under the artist’s record deal, the producer’s share of the “all-in” royalty is 3/14, or about 22 percent.

So if an artist is paid a flat fee (such as a license for a motion picture), or a royalty rate in pennies (such as the webcasting royalty), the producer would get 22 percent of the money paid to the artist. If the artist is an independent artist, the artist will likely qualify for the copyright owner’s share of webcasting royalties. If the producer develops an artist on spec, or otherwise owns some or all of the sound recording, the producer may also qualify as a copyright owner of that master.)

FEE SPLITS
One of the problems with administering producer royalties in a compulsory license is that there is no flat percentage that all producers receive, since the flat fee split is based on a ratio of the producer royalty (which is usually, 3-5 percent), or the mixer royalty (usually 1-2 percent) to the artist royalty (which is 12-20 percent or more). It would be a lot easier to have Congress say, for example, that all producers get 22 percent or all mixers get 7 percent, but that would not recognize the bargaining power of some producers.

Producer royalties are usually paid by the copyright owner of the sound recording, generally a record company. That payment is usually accomplished by the artist sending a “letter of direction” to the record company, that says “don’t pay me, pay her” up to the amount that the producer receives under the producer contract. That avoids the producer having to chase the artist for payment. Record companies have thousands of letters of direction in their files.

With SoundExchange, the record company is not receiving the performance royalty (because SoundExchange wisely decided to pay the royalty through to the artist directly and the record company members of SoundExchange agreed not to try to capture those royalties to be applied to any unrecouped balances). SoundExchange pays the artist directly, and so should pay the producer directly, too.

In some instances, if a record company provided SoundExchange with the accounting data to account to producers when the company gave SoundExchange its accounting information for the artists, SoundExchange may already be accounting to producers. If the production was for an independent artist, it is likely that SoundExchange will not have any instructions at all, unless the independent artist gave it to SoundExchange.

Unfortunately, producer payments of performance royalties is a bit of a hit and miss proposition, so the only way for a producer to know with certainty whether the producer is being accounted to properly is for the producer to confirm with SoundExchange if the producer is in the database, and if so at what rate of payment. If the producer is not in the database, it may be necessary to provide letters of direction (and tax forms) to SoundExchange.

The question is whether the producer should have to submit a separate letter of direction to SoundExchange above and beyond what the producer has already given to the record company releasing the records concerned.

If the record company did not provide producer payment and royalty split information to SoundExchange, SoundExchange currently requires a separate letter of direction from the artist in order to pay producers, even if the producer has already sent a similar letter to the record company or copyright owner.

NEXT STEPS
There are a few ways to fix the producer payment problem.

SoundExchange should adopt a policy of taking flat-fee rates and payment instructions from existing letters of direction that artists have already provided to the record company copyright owners for recordings that have been previously released.

SoundExchange should provide Web access to part of its database so that artists and producers can confirm if they are included and are receiving royalties properly. (This has been done effectively by Phonographic Performance Ltd. in the U.K. for performance royalties in that country.)

Producers should require artists to send a confirming letter of direction on a go-forward basis to SoundExchange for new recordings produced, which could be included in the producer agreements. This is a “just in case” move that is designed to protect producers until the producer payment situation is resolved.

Producers and artists should agree on a fixed share of performance royalties to be paid to producers and call upon Congress to amend the Copyright Act to include producers.
If none of these steps are followed, producers may have to ask artists to sign new letters of direction for each old recording, a process that will likely involve lawyers and cost at least hundreds of dollars for each letter.

When one considers that some recordings could be 20 to 30 years old or older, it may be difficult to find the artists in the first place.

THE FUTURE
At the moment, the money that SoundExchange collects and pays is pretty small. Most royalty checks are less than $500, and sometimes quite a bit less. (It is unclear whether this is due to underreporting of royalties by statutory licensees, problems with the SoundExchange database, or the effects of “census” accounting.)

However, SoundExchange may begin collecting foreign public performance royalties (including radio and television performances), which can be real money. The total performance royalties in the European Union alone are in excess of $500 million annually.

Not only will that money be coming through SoundExchange, but the International Federation of the Phonographic Industries, the international version of the RIAA, has announced that they have adopted a global webcasting license. SoundExchange will likely collect those royalties.

The real significance of SoundExchange will arise if Congress passes legislation that extends the limited performance royalties in the U.S. to terrestrial radio and television broadcasts. Together, all of these streams will likely constitute a significant amount of money.

These current and future income streams are all good reasons for producers to get their act together now or risk further frustrations down the road when there will be much more money at stake.

Christian L. Castle is senior counsel in the music group at the law firm Akin Gump Strauss Hauer & Feld in Los Angeles. Contact him. Copyright 2003 Christian L. Castle. A version of this article was previously published in Mix and in RPM. For more information regarding this issue and other policy issues of importance to producers and engineers, visit the Producers & Engineers Wing.