SoundExchange: Membership Has Its Benefits

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This is Celia Hirschman with On the Beat for KCRW.

SoundExchange is an organization uniquely situated to collect and distribute digital performance royalties. The agency was directed by Congress to be the sole performance collector for royalties from satellite and Internet radio. SoundExchange provides a very important income stream for artists and labels, big and small.

It was created by the RIAA as the record industry began to feel the weight of economic loss from digital piracy. But recently, a growing number of record industry players have begun to question the practices of the organization. That's because the little collection agency has grown into a bureaucratic monolith with massive expenses in no time. In 2003, as the organization began its nonprofit status it required less than $3 million to run. Today, that annual requirement is over $16 million.

In its first year of royalty distribution, Sound Exchange collected more than $15 million. By 2009, the nonprofit organization was collecting over $280 million annually. The huge surge of income was due to congressional changes in the copyright laws, identifying the rate and scope of royalty collection.

But the SoundExchange bureaucracy grew exponentially as well. Now with 49 employees, the average pay is $91,000. The Executive Director and COO of SoundExchange each earn 50% more than their counterparts at other nonprofit membership organizations.

Why should a public, nonprofit collection society require so much money to distribute federally mandated rates to its members? Or maybe the more important question is…who is paying for all of this?

The answer is the rights holders themselves. While SoundExchange claims their service is free, the royalties pay for the salaries, the lobbying, the lawsuits, the public relations, travel, conferences and the legal entanglements. The organization also pays to license and enforce the rights of copyright holders.

So if you're a copyright holder, be careful before you sign any agreements. The SoundExchange contract authorizes them to deduct any costs prior to the distribution of royalties, as authorized by their board. And you might have guessed it -- the SoundExchange board is made up primarily of private music interest groups, each who live on the survival of their own membership organization. A nonprofit organization run by other organizations that needs members themselves to survive.

Sure SoundExchange is reminiscent of the Old Boy Network of record business past, but someone gave them the rights to do that. If you object to it, talk to your congressman about it.

And next week, we'll explore the different royalties that stations and websites pay.

This is Celia Hirschman with On the Beat for KCRW.