SoundExchange & Neighboring Rights Explained

In this continuation of Disc Makers’ series on music copyright and royalties, CEO Tony van Veen dives into the concept of neighboring rights and how the organization SoundExchange tackles tracking and paying royalties earned from said neighboring rights to the relevant party.

Guest post by Tony van Veen of the Disc Makers Blog

In our sixth video about music copyrights and royalties, Disc Makers’ CEO Tony van Veen discusses neighboring rights and SoundExchange, the organization that tracks and pays those royalties.

In my last video I talked about performance rights and the PROs who collect these royalties — including ASCAP, BMI, and SESAC. Those royalties are paid to the owners of the composition, i.e. the songwriter or publisher, when the song is publicly performed.

Neighboring rights refer to the “neighboring” performance right on the sound recordings. Where performance royalties are paid to songwriters and publishers by the PROs, neighboring rights royalties are paid out to the artist and to the master owners — the owner of the sound recording — which is frequently the record label. Around the world, neighboring rights royalties are collected by performance rights organizations when music is played on radio or performed on TV and are paid to rights’ holders as a royalty for those plays. In the US, it’s a different story.

You see, the US does not recognize traditional neighboring rights. US broadcasters are exempt from paying performers and labels when sound recordings are performed on terrestrial radio or TV. This is because the broadcast industry has successfully lobbied and argued that their playing your music promotes you as an artist, therefore, they should not have to pay a royalty.

What’s amazing is that the US is one of only four countries in the world that does not pay a royalty to the sound recording owner. The other three are the democratic bastions of North Korea, Iran, and China.

In all, this is pretty unfair, and many music organizations, including the Recording Academy and A2IM continue to lobby to change the law. And not only do US artists and labels not get paid royalties when their music is performed in the US, they also don’t get them if their music is performed on the radio or TV in other countries, even though those countries DO collect and pay royalties to sound recording owners!

Here’s the thing: because the United States does not have traditional neighboring rights, it does not have reciprocal agreements in place with collection societies in other countries to exchange neighboring rights royalties owed to performers and master owners when sound recordings are broadcast. Therefore, collection societies in other countries collect neighboring rights royalties for US records getting played on their radio stations, but they withhold those payments to US-based performers and labels.

As a result, thousands of song plays from American artists and labels go uncollected every day. These royalties end up as what is known as “Black Box” royalties and get redistributed to the members of the collecting society in the country where the US artist got airplay based on their market share. Knowing how much US music is played on radio and TV daily in every country in the world, this ends up costing American artists and labels a ton of money each month — money that is actually being collected and that they should be entitled to! Clearly, this is unfair towards US artists, thanks to a weakness in US copyright law. And we can thank the National Association of Broadcasters and their allies for that. Thanks a lot, guys!

Now, there is a bit of good news. While the US does not have a traditional collection society for neighboring rights royalties, there is an agency called SoundExchange that collects digital radio royalties for broadcast on non-terrestrial radio — i.e. satellite radio like SiriusXM, and Internet radio like Pandora, iHeartRadio, and other webcasters.

Digital royalties collected from satellite and Internet broadcasters get paid as follows:

• 45 percent gets paid to the featured artist(s) (the one whose name is probably on the album cover).
• 5 percent gets paid to non-featured artists through a fund for session players, back-up musicians, etc.
• 50 percent gets paid to the owner of the recording, i.e. the artist or label.

If you are an independent musician releasing your own music, you are both the featured artist AND the rights holder (label).

Here’s how it works: SoundExchange collects a statutory royalty per play from the digital broadcasters. Those royalties are calculated according to a number of different formulas, but are in the general vicinity of $.002 per play.

The artist portion — 50 percent of the total — is paid by Pandora or SiriusXM directly to SoundExchange.

• SoundExchange is obligated by law to pay the featured artist part of the royalty (45 perecent) directly to the artist. It cannot go to your label or distributor. That is why it’s critical that you register directly at soundexchange.com – even if you’re on a label.
• SoundExchange pays the “non-featured artist” royalty (5 percent of total) to an organization like the American Federation of Musicians (AFM) and SAG-AFTRA.

The recording owner portion (the other 50 percent) is a different story. SoundExchange used to mostly collect the label royalties and pay them out. However, in recent years, in order to reduce their royalty burden, the big digital broadcasters have made direct royalty deals with the majors, many independent labels, and — important for independent artists — the big digital distributors.

Today, the digital broadcast royalty owed to the owner of the recording is paid by (let’s say) Pandora directly to the distributor of the sound recording. Your distributor will then pay those royalties to the owner of the recording.

So, if your distributor has made a direct agreement with a digital radio station like Pandora, then Pandora will pay the label share of your digital performance royalties directly to your distributor. I know CD Baby collects the sound recording owner royalty on behalf of its artists, but make sure to ask your distributor.

In summary, US artists get the short end of the stick compared to artists in other countries with regard to neighboring rights royalties. However, SoundExchange does collect them in the US for satellite and digital radio broadcasts. In order to get your artist royalties, you need to register at www.soundexchange.com. You may be able to collect your sound recording owners’ share (aka the label share) through your digital distributor.

Check out the entire “Copyrights & Royalties” video series and more at Disc Makers’ YouTube channel.

Tony van Veen is the CEO of DIY Media Group, the parent company of Disc Makers, Merchly, and BookBaby. As a college student, he played in indie bands, created his own LPs, cassettes, and t-shirts, and sold them at shows. Today, he collects CDs, vinyl LPs, and concert t-shirts to support the artists he loves.