The flow of royalty payments, counted in pennies and nickels, may be the least glamorous part of the music industry. But because those royalties are the foundation of almost everyone’s paycheck, any change to the system can be controversial.
Sirius XM Radio set off a flurry of complaints from trade groups and labor unions late last month. It was trying to bypass the standard method of paying for digital streams — through a royalty clearinghouse called SoundExchange — and negotiate directly with record labels.
Sirius’s move was only the latest example of a gradual shift in the financial infrastructure of music. Many companies, from major labels to providers of background music, have been trying to reduce costs and gain control by circumventing the large organizations that have historically processed licenses and royalties.
Such direct deals are perfectly legal. But opponents of the move by Sirius say that it could result in less money and more complications for artists.
Mel Karmazin, the chief executive of Sirius, said in a statement Friday that direct agreements with labels offer more flexibility than is available through the basic compulsory licenses processed by SoundExchange.
“We think rights holders should benefit from a more competitive and open environment created by inviting individual labels to set their own value on their content rather than having to follow the industry collective,” Mr. Karmazin said. “We are giving rights holders a choice and, if they are not interested, we will continue to work with them through SoundExchange.”
Michael J. Huppe, the president of SoundExchange, said it was clear that Sirius was also seeking to pay less than the rates set by federal statute. “At the end of the day, what they’re trying to do is get content for less money,” Mr. Huppe said Thursday in an interview. “Our mission is to maximize the value of the content.”
The issue is vital for Sound-Exchange because Sirius is by far its largest contributor of royalties, with about $150 million in annual payments. Sirius pays 7.5 percent of its gross revenue to SoundExchange. That will rise to 8 percent next year by statute. It also pays royalties to other agencies. At the end of November a panel of judges in Washington will begin proceedings to negotiate rates for 2013 and beyond.
SoundExchange, a nonprofit group, was founded in 2000 and is authorized by the United States Copyright Office to collect one kind of royalty for digital music. The royalty, the performance right for sound recordings, pays performers and record companies when their songs are played on digital streams like satellite radio and Pandora. (In a rule that has annoyed record companies and musicians for decades, terrestrial radio pays only songwriters and publishers.)
SoundExchange paid artists and labels almost $250 million in royalties last year. But it has been criticized for its slow progress in tracking down and paying artists. In 2009, it held $154 million that it had called “unpayable,” including $66 million for bad or missing data and $43 million for artists who had not filed paperwork.
The organization, which last year charged a 6.7 percent administrative fee effectively paid by artists and record labels, has also had difficulty getting artists to sign up to receive royalties. A spokeswoman said it has lists of “tens of thousands of artists” who are owed money.
Les Watkins, an executive at Music Reports Inc., a music licensing service that is working with Sirius in its licensing deals, said his company can process the data better, allowing it to reduce expenses. “There are inefficiencies at SoundExchange which result in money going in which does not come out,” he said.
In recent years other major music companies have sought alternatives to the large licensing agencies. EMI now licenses some of its digital rights directly instead of going through ASCAP. And DMX, which provides background music to restaurants and shops, has won federal court cases allowing it to make exceptions to blanket license agreements with ASCAP and BMI.
Proponents of direct deals say that by cutting out the middleman they can realize lower costs and improved information all around.
“This is about transparency and access to information that was not readily available before,” said Patrick Sullivan, whose company, RightsFlow, competes with the Harry Fox Agency in processing mechanical licenses, which pay songwriters and publishers for record sales.
But some worry that the weakening of such centralized organizations could hurt artists. That concern is especially acute in the case of SoundExchange, which pays artists the digital performance right income directly, instead of routing that money through a record company or other third party, as is typical.
In coordinated statements last month, the American Federation of Television and Radio Artists, the American Federation of Musicians and the National Academy of Recording Arts and Sciences (the group behind the Grammy Awards) warned musicians that if their labels sign direct deals with Sirius, the payments they now receive directly from SoundExchange could instead be sent to the labels, and therefore be subject to deductions.
“Even a cursory read of American music business history will tell you that oftentimes these deals were fairly onerous, and the deck was stacked against the artists,” said Casey Rae-Hunter, deputy director of the Future of Music Coalition, an artists’ advocacy group.
Mr. Watkins said that artists’ contracts with their labels would determine how they are paid. “What’s offensive about the industry group arguments that this is bad for artists is that they essentially assume that all labels are dishonest or corrupt,” he said.
Mr. Huppe said that SoundExchange would continue to push for higher statutory rates for satellite radio, which would cover all music that Sirius cannot license directly.
“We believe that content is already undervalued,” he said. “We just want to make sure that our constituents get their fare share.”
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