While the music industry is stalled at a crossroads, SoundExchange President Michael Huppe feels his company is helping it turn for the best, pointing to last year when they paid more than $292 million in gross royalty distributions to artists and copyright holders. Digital performance royalties are growing at a good clip, which should be news well received by the music industry. However, SoundExchange faces challenges with artists and royalties still going unpaid because the company can’t pay out money that has not been claimed. This is where Michael Huppe comes in as he oversees one of the fastest growing segments of the music industry.
By Michael Parrish
Mike Huppe
SoundExchange is a nonprofit performance rights organization that collects and distributes royalties to the copyright owners and artists who performed on a music recording that was played on certain digital services, such as satellite radio, Internet radio, cable TV, or streamed as background music in some restaurants or stores. SoundExchange administers a Federal law allowing them to collect royalties on artists and label’s behalf. The organization maintains more than 20,000 rights owners and label accounts, and more than 48,000 payable performer accounts.
While the music industry is stalled at a crossroads, SoundExchange President Michael Huppe feels his company is helping it turn for the best, pointing to last year when they paid more than $292 million in gross royalty distributions to artists and copyright holders, with a record $89 million sent to 18,000 artists and labels in Q4 2011 alone. Overall, SoundExchange has distributed more than $900 million in royalties since its inception nearly 10 years ago. Needless to say, digital performance royalties are growing at a good clip, which should be news well received by the music industry.
However, SoundExchange faces challenges with artists and royalties still going unpaid because the company can’t pay out money that has not been claimed. But that is improving as SoundExchange is using partnerships with digital distributors and music services to encourage artists to register and collect money waiting for them.
This is where Michael Huppe comes in as he oversees one of the fastest growing segments of the music industry at the helm of a company that was named to Forbes Magazine’s “Top Names You Need to Know for 2011.”
Let’s start by talking about the incredible growth SoundExchange has experienced and what it has meant to the industry.
There is a bigger story that we like to tell about the growth of SoundExchange over these past five years, and what that means for the industry overall. When we first started, we were an interesting little legislative experiment. It was a nice thing to watch, but the money wasn’t that substantial. Nobody knew what would happen to this space. No one had any idea about Internet radio. Here we are ten years later, and we’re now a major part of the industry.
To give you a sense of our growth, in 2005 we distributed $20 million to artists and record labels and that has grown to $250 million in 2010 and over $290 million last year, and we’ll pay out more than $300 million this year. It’s a story of incredible growth, which is great since you hear so many things in the recording industry about “sales are down” and piracy, which is all true, and we don’t like that anymore than anyone else, but there are bright spots in the industry and we think SoundExchange is one of them.
SoundExchange is the number two digital revenue source for many artists and labels, behind only iTunes. Do you feel that’s something widely known throughout the industry, or is it still a hidden secret?
I don’t think it’s that widely known in the U.S. and we’d like it to be known better. It’s impactful when you realize we split royalties fifty-fifty between the artist and the rights owner, which is typically a record label, though some artists own their own masters. That money going to a record label is the number two digital revenue source, and it’s only half the money because the artists are getting their share directly from us. It almost understates the importance of this revenue.
Another thing we like to point out is we do send big checks to the big artists and the big record labels, but we send a lot of medium checks to the working class artists and the smaller labels out there in the world. To give you a sense, we sent out 60,000 checks last year. We pay out quarterly. Of the 60,000 payments from 2011, ninety-percent of those were $5,000 or less. So, part of what we’re doing is sending substantial money to the big artists and labels, but we’re spreading those royalties around to a lot of the population that don’t necessarily see such royalties, and that’s an important thing too.
SoundExchange signed a deal with CB Baby late last year to help open doors to artists that don’t realize they have these profits waiting for them. What ways do you reach out to let people know they have royalty checks they are missing?
We call things like the CD Baby deal matches. We did 60 or 70 matches last year, more than one a week with various groups. We basically say: Look, here are a bunch of artists we have money for. Whether it’s CD Baby, MySpace, or management agencies, etc., we do a lot of them in order to get the word out, and that definitely helps.
But we do a lot of things besides that. We attend all the conferences. We’re at a lot of events. We have staff that are focused on researching and trying to track people down. For events like South By Southwest, we compare our unpaid list to the list of artists playing and create posters and fliers that we put all over the place, saying: “Hey, do you know this group? We have money for them. Send them to Booth No. 315.” It’s funny because you have people coming up and saying: “Hey, my friend told me you have money for me. Is this a joke?”
So we do all sorts of creative things like that with matches and events. We sponsor a lot of things. We have a great relationship with a lot of artists groups. So we do all sorts of things to get the word out. As compared to five or six years ago, a lot more people have a sense of what we are now.
Do you have a big bank of money for artists that haven’t collected their payments yet?
We do have money. What happens is that companies like Pandora, SiriusXM, or iheartradio get a license from the federal government that gives them the right to stream every recording ever released. The Library of Congress has selected SoundExchange as the entity to collect those fees from this government license. That means that every month we get payments and data from recordings where we have never heard of the performer or the label, they’ve never heard of us, and part of our job is to find out and reach those folks.
Once we process the money through our distribution engine, we spread it across a bunch of accounts, and let’s say there are a handful of accounts where we cannot find the performer. The law says, after three years, if that performer has not come forward, we are permitted to take that money and absorb it to offset costs. Some people think that sounds nefarious, but it’s actually not. If we offset our costs, all it means is we’ve lowered the admin rate in that year, and more money goes out the door to the artists and record labels. We have historically resisted doing that though. Against our interest we have basically said: We’re not going to release that money yet and we’re going to hold onto it to give people another year to come forward. That’s actually to our detriment. We catch a lot of heat because we have this money in the bank. But we think it’s the right thing to do, because we want to give these people a chance to come forward.
So, yes, we have millions in the bank that could have been absorbed to offset our costs and we have elected not to do so. Now, that’s not going to happen forever. We’re going to come to a point where we have to start releasing this money because you can’t hold onto it forever, but we’ve tried to do the right thing and give people the extra time that we could to have them come forward.
What are your thoughts on SiriusXM seeking to direct license music from the copyright owners?
First of all, they absolutely have the right to do this. I don’t deny that one bit. And there may be others that try to do it at times, but the statutory license we administer has a lot of benefits for the industry. The whole reason there is the statutory license is to save transaction costs and enable a lot of these business models that would not be out there today. Pandora, for instance, absolutely could not exist if SoundExchange didn’t handle this part of their business. My guess is it would be overly burdened for them to go through all of the licensing with the tens of thousands of labels and artists that they would have to deal with.
So, we think we serve a benefit to the industry and we do it very efficiently. Our administrative rate is extremely low. When you’re an entity like us, people judge you in a couple of different ways. One of them is how much money you take to run your business. Just like when you pick a charity to give money to, you’d like to know that 50 percent of it isn’t going to the people at a charity and it’s actually reaching the people you want to reach. Our admin rate for 2010 was around six and one-half percent. That is, by far, one of the lowest admin rates out there. So we do it very efficiently.
Another thing that is important is we pay the artists directly. So when we get the money from a service like SiriusXM, we’ll take the artist’s share and send it directly to them, which is very important to the artist community.
There are benefits to the statutory license and how it’s part of how the industry works overall. I don’t dispute that SiriusXM has every right to do whatever they can to keep costs down. We obviously seek to maximize the rates. We represent rights owners and artists who pour a lot of effort, emotion and capital into these recordings that are the backbone of these services. What would SiriusXM be without recordings? Nothing. So, yes, we are out there fighting to have our constituents properly compensated. It’s an incredible gift to these services to have this statutory license so all those services don’t have to go around and do all the transactions to do all these licenses. If someone uses the statutory license, they are entitled to every sound recording. So the least we can do is make sure the people we represent get their fair share of whatever the business model is.
Going back to the matches for a moment, some of the new artists coming up today are likely paying attention to this type of stuff, but do you feel the older artists are being reached as well?
It’s definitely true that if you were an artist in the ’70s and ’80s, why would you know about this because you didn’t have these rights concerns at that time. At that time, artists made sure they signed up ASCAP, BMI, or SESAC. We hope now that people coming into the industry pick one of those and they also sign up with SoundExchange too. It’s definitely the case that older artists have less of a reason to know about it, but there are plenty of newer artists that have also not yet registered even though it doesn’t cost any money to register. It’s free. In fact, if you sign one of our membership agreements, we’re getting artists money from overseas from reciprocal deals with entities like ourselves in other countries. They’ll collect for our folks over in their country, and we’ll collect for their folks here, and then we’ll swap the money. So, I don’t want to leave with the impression that most of the people we’re looking for are older legacy artists, because that’s definitely not the case.
Do you make the list of bands owed money available on your website?
What we have on our website is a vehicle people can use to search for the names and repertoire. There will come a time in the near future where we will probably post a list online. It’s a controversial issue because some people don’t want the whole list posted because they feel we’re posting personal information and there is worry about people who might use that list in an unscrupulous way.
We’re at the point now where people should know who we are if they’re active in the industry. So there are ways to search for the repertoire and ways to search for bands on our site. We’re going to be revising how we post some of that later this year and there’s going to come a time in the near future where we are just going to post the whole list.
When your company’s name comes up in conversation with some people that work in radio, I get the sense that radio feels SoundExchange is an adversary of theirs. Are you aware of this perception?
I would say that our relationship with radio is not as simple as that. In fact, let me back up. Let’s forget about specifically radio and talk about the services that we deal with. We have a great relationship with many services. Yes, we fight with all of them over rates now and then. It’s natural. They want to achieve costs as low as possible because they want to maximize their profits and I’m fine with that. It’s the American way. So, it’s natural that we fight now and then over the rates. But in between those times, we actually work and consider ourselves to be business partners with all the services, including iheartradio and CBS radio, because in between the rate battles, we want them to blow it out as much as they want to blow it out. It is in everyone’s best interest for these different platforms to diversify and flourish and thrive and explode. So I would say we have a positive relationship with radio, generally.
[eQB Content by Michael Parrish]
