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Congress & Music Industry Royalties

07.24.2018 | Ben Phillips, CFA

 

music regulation legislation

RESEARCH HIGHLIGHTS

 

  • Songwriters and artists generate intellectual property rights when they compose a song or produce a sound recording. To manage intellectual property rights, a songwriter or artist typically engages a music publishing company.

 

  • To address complex and outdated the system of music royalty payments, stakeholders from across the music industry, including digital music companies Spotify and Apple, record labels, artists and the largest performance rights organizations, are coming together in support of a congressional effort to modernize music royalty payment.

 

  • The legislation, known as the Music Modernization Act (MMA), has already cleared both the House and a crucial Senate committee without a single opposition vote. If enacted, the current bill would: (1) improve digital royalty payouts to songwriters, (2) begin paying artists and labels a digital royalty for songs recorded prior to 1972 and (3) create a new licensing collective to oversee digital mechanical licensing.

  • Some of the impacted companies by the MMA include Online Music Streaming Service Providers (AAPL | P | SPOT), Radio Broadcasting Groups (SALM | BBGI | ETM), and Various Media & Entertainment Properties (NFLX | CBS | VIA). 

 

  • The theme among each of the categories is the potential for decreased legal liability due to a new licensing collective that would assume responsibility for establishing a database of music copyrights and music royalty payments.

  

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Congress & Music Industry Royalties
 

 

 

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Music Publishing Companies and Royalties

 

Songwriters and artists generate intellectual property rights when they compose a song or produce a sound recording. With the copyright granted, only the owner of the song has the right to reproduce or make copies of the song. However, a copyright owner can grant one of the below music licenses granting permission to reproduce of make copies of his or her song.
 
  • Master Recording License: A license that gives the licensor the right to use a recording someone else made. In this type of license, licensors generally deal with a music publishing group, such as one of the big three record labels (e.g. Universal Music Group, Sony Music Entertainment Group, or Warner Music Group).

 

  • Synchronization License: Like a recording license but allows the licensor to “sync” the song with visual media, such as a movie or TV series theme song.

 

  • Performance License: These licenses are needed when a song is performed in public, including when its streamed or played on the radio or TV. Business establishments that play music in their stores generally must obtain a performance license.

 

  • Mechanical License: A license that is paid every time a song is reproduced, whether it’s a CD produced or streaming. Mechanical license payments typically go to the songwriter.
 
To manage intellectual property rights, a songwriter or artist typically engages a music publishing company. The company performs the administrative tasks of issuing licenses, collecting royalties, etc. In addition, a songwriter can sell the song to a music publishing company.
 

music regulation concert

MUSIC MODERNIZATION ACT

 
The system of music royalty payments can be complex and outdated in today’s digital streaming world. To address this, stakeholders from across the music industry, including digital music companies Spotify and Apple, record labels, artists and the largest performance rights organizations, are coming together in support of a congressional effort to modernize music royalty payments.

The legislation, known as the Music Modernization Act (MMA), has already cleared both the House and a crucial Senate committee without a single opposition vote. If enacted, the current bill would:

  • Improve digital royalty payouts to songwriters;
  • Begin paying artists and labels a digital royalty for songs recorded prior to 1972; and
  • Create a new licensing collective to oversee digital mechanical licensing for songwriters and music publishers.

While all three would change the music industry, it’s the final proposal, a licensing collective, that is considered most vital to the legislation. As it currently stands, the burden of identifying songwriters and paying them the royalties they are owed falls on streaming companies such as Spotify and Apple. This can result in expensive lawsuits against streaming companies for using songs without the proper license.

By agreeing to a licensing collective which oversees digital licensing, the streaming companies can eliminate the potential for legal liability. This would be advantageous to companies like Spotify, which is currently the subject of $1.6 billion lawsuit from Wixen Music Publishing that claims it used thousands of songs illegally. 
 

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music regulation radio stations

IMPACTED COMPANIES

 
The theme among each of the categories is the potential for decreased legal liability due to a new licensing collective that would assume responsibility for establishing a database of music copyrights and music royalty payments.
 
Below are some of the companies that may be impact by the MMA:

Online Music Streaming Service Providers: Companies that stream music, such as Apple (AAPL), Pandora (P), and Spotify (SPOT), may be the biggest beneficiaries of legislation that modernizes music royalty payments and creates a new licensing collective. These companies can be named in music publishing group lawsuits, and a new licensing collective that assumes responsibility decreases their potential legal liability.

Radio Broadcasting Groups: Like music streaming service providers, companies involved in the radio broadcasting industry may also see decreased legal liability. Companies such as Entercom Communications (ETM), Beasley Broadcast Group (BBGI), and Salem Media Group (SALM) are radio broadcasters that pay music royalties.

Various Media & Entertainment Properties: Various companies engaged in the media and entertainment industry may also see less legal liability. Companies such as Netflix (NFLX), CBS Corporation (CBS), and Viacom (VIA) each license and pay royalties when they use music in their content.

A currently unknown variable is how the dollar amount of royalties will impact each company’s model. For example, an increase in digital royalty payments to pre-1972 songs or the royalty payment amount may mean lower profitability. While margins may shrink under increased royalty payments, the elimination of a legal overhang would be a positive in our opinion.

 

 


 

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Important Information

Active Weighting Advisors LLC ("AWA") is an SEC-registered investment adviser that manages ETFs under the brand name EventShares Funds. Mr. Phillips is the Chief Investment Officer of AWA. The views expressed are subject to change, and no forecasts can be guaranteed. The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. AWA is not soliciting any action based on this document. In preparing this document, the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. Investing involves risk, including the possible loss of principal and fluctuation of value. Mr. Phillips and AWA disclaim responsibility for updating information. In addition, Mr. Phillips and AWA disclaim responsibility for third-party content, including information accessed through hyperlinks. For more information about EventShares, contact us by calling 877.539.1510 or visit our website at www.EventShares.com.