The Music Modernization Act is Flimsy and Being Overlooked

This article is an attempt to breakdown and pick apart the proposed Music Modernization Act, I will attempt to do so in a concise format, however there is inevitably a lot of jargon and a lot to cover:

  1. An Overview of the Music Modernization Act (MMA)
  2. The Concentration of Bargaining Power
  3. The Creation of Negative Incentives
  4. Willing Buyer/Willing Seller Model

*I will refer to the pages within the actual Music Modernization Act, which can be found here.

An Overview of the Music Modernization Act (MMA)

The Music Modernization Act is on route to the White House after passing by unanimous votes in both the House of Representatives and Senate. The Act is in place to bring music copyright laws in line with the digital age of music streaming. Currently the music industry operates under laws established in 1909, that has left artistic creators generally being underpaid and loopholes allowing some artists to not be paid at all. For example any music released before February 1972 currently receives no royalty payments if streamed. There is no doubt that such reform is necessary and that the MMA is a step in the right direction, however the act also cements the concentration of power in a new era of music distribution. On the surface it may appear as if the Act has emerged in order to level out the playing field between artists and the music industry (streaming services, record labels and music publishers). However the Act is just as important for music corporations to secure control in the digital world.

The MMA will create an organisation called the Mechanical Licensing Collective (MLC). This collective maintains a public, free and searchable database of most of the worlds music and the respective copyright owners. However the responsibilities of the MLC is a long list:

Pg 20–23

  • Offer and administer blanket licenses (the right to play copyrighted music)
  • Collect royalties from digital music providers (such as Spotify, Apple Music) and distribute them to copyright owners
  • Engage in efforts to identify musical works and their copyright owners
  • Maintain a database of musical works and their copyright owners
  • Administer the process of royalty claims from copyright owners
  • Distribute unclaimed and unmatched royalties equitably
  • Administer payments from licensees and digital music providers to the MLC
  • Engage and respond appropriately to audits

Digital music providers such as Spotify will pay the MLC the royalties owed every month based on the number of streams a respective piece of music receives. It is then the responsibility of copyright holders to claim royalties from the MLC, this will likely be carried out by a music publisher representing the songwriter. Royalties will then be split between the music publisher and songwriter, the songwriter must earn no less than 50% of the royalties earned pg 41. The value of the royalties will be based on a free market model of willing buyer and willing seller, negotiated on an individual basis. Currently royalty payment amounts are set by the Federal Government and more often than not underpay artists based on their true market value. From an artists’ initial point of view, this is a vast improvement to the current law. However the devil, as always, is in the detail.

Concentration of Bargaining Power

The MLC effectively acts as a regulating body to music license holders. Therefore independence is critical and the representatives of the MLC should typify such independence. The MLC will be made up of 10 voting board members, 2 of which will be songwriters, this is immediately a big flaw in the Act. 2 out of 10 seats is a negligible amount of representation for the profession that this law is meant to protect, moreover the definition of ‘songwriter’ is ambiguous and leaves significant room for unrepresentative members to sit on the board, pg 104 — Definition of Songwriter: “The term songwriter means the author of all or part of a musical work, including a composer or lyricist”. The other 8 voting members will be representatives of the music publishing industry, despite the fact that the MLC is effectively an administrative technology company, not a music publisher. There will also be an addition of 3 non-voting members, one of which representing the digital music providers. An Advisory Committee will be set-up to advise the MLC board, however this committee will be selected by the MLC board themselves and will include an equal number of copyright owner representatives and digital music provider representatives, with no room for direct songwriter representation pg 26. Considering that the MLC is being put in place to ensure creators are paid fairly, there seems to be a heavy bias of representation for music corporations who will be profiting from the creative works of songwriters. Moreover, there is little reason for license holders such as Spotify — a digital music provider — to hold formal positions on the advisory committee.

Secondly, the MMA creates extremely weak audit powers for creators while blatantly protecting digital music providers. Firstly, the MLC can only audit digital music providers once in any 3-year period and may not audit records twice pg 51. Furthermore, the MLC will pay the costs for any such audits unless an underpayment of 10% or more is found, in this case the digital music provider will bear the costs of the audit pg 53. Therefore, it is in the interest for digital music providers to always underpay royalties in any 3-year period by 9.99% — particularly to smaller artists who hold significantly low bargaining power due to additional clauses — as there will be no financial reparations for such action apart from paying the full royalties owed. Artists are afforded the opportunity to carry out an audit of the MLC, however an audit may only be carried out once a calendar year, it must be conducted by a qualified accountant and the copyright owner will bear the cost of the audit even when an underpayment is found pg 42. These clauses are a huge loophole, particularly for smaller artists who cannot afford the legal fees of an audit and could be underpaid in any 3-year period before an audit by the MLC can even lawfully occur. It should also be noted that there is no government oversight in any of these processes, there is no clause making audits mandatory and no details of any other form of governmental regulation.

Where copyright owners are unknown and thus royalties paid to the MLC are unmatched to any owner, the MLC is tasked with holding the royalties for a 3-year period to then be distributed ‘transparently and equitably’. Though the word equitably and fair are synonyms and so to the words transparent and clear, I struggle to see the similarities in this case. Unclaimed royalties will be paid out based on data indicating relative market share of copyright owners as reflected by digital music providers royalty payments pg 35. Effectively the bigger corporations, who are likely to have few unmatched royalties will be given a pay-day. Moreover, the MLC will safeguard the confidentiality of sensitive data used to calculate market shares, thus eliminating any forms of accountability and therefore proof of equitable and transparent distribution.

Lastly, the number of functions of the MLC as previously mentioned above will require a significant amount of staff, planning and administrative work. However there is no clause in the Act that discusses the requirements for business planning, budgetary controls or staff wage caps. All of these costs will likely hinder the end payout to creators, particularly due to the funding mechanism of the MLC. The MLC will be funded by the digital music providers themselves based on an administrative assessment, of which there are no details as it will be established separately before the Copyright Royalty Judges pg 9. However there will also be opportunities of voluntary funding from digital music providers and non-blanker license holders pg 67. It seems unwise for the entities that are to be regulated to hold influential positions and to fund the organisation that is meant to be regulating them.

Negative Incentives

Voluntary funding also leaves scope for illicit collusion and persuasion, particularly with digital music providers holding seats within the MLC. Any allocation or reallocation of voluntary contributions between or among digital music providers or other licensees shall be a matter of private negotiation, outside the scope of the administrative assessment proceedings pg 68.

Throughout the whole Act it is clear that bargaining power is given to those who dominate by market share. Due to how unmatched royalty payments are paid out by market share, there is an incentive for the MLC to not engage in proactively finding copyright owners of music since the largest copyright owners (music publishers), who are likely to be well represented by the 8 voting members of the MLC board will receive the payments of unmatched royalties. In conjunction with the difficulties associated to artists auditing the MLC, smaller artists will effectively be propping up the larger artists and the even larger corporations.

Willing Buyer/Willing Seller Model

The use of the willing buyer/willing seller model to calculate royalties appears to be fairer than the current fixed rate system. However, this undeniably puts the power in the hands of the large digital music providers. The market for music streaming is known as a monopsony, with a few large music license buyers. Smaller artist who would be selling their royalties to the steaming firms will have little to no bargaining power compared to the likes of Drake, Kendrick Lamar or Ed Sheeran. This model leaves room for collusion between streaming services to fix royalties at any price they wish for smaller artists and it may be the case that certain artists could be paid less per stream then they now. Again with no government oversight this is highly likely, particularly with the positions of power afforded to the digital music providers by this Act.

Conclusion

There are several other well documented problems with the new proposed law. One of which is the fact that once in place, digital music providers will be immune to any legal actions regarding unpaid royalties in periods prior to this law. For more details and another critical point of view on the MMA, I would recommend reading Maria Schneider’s open letters and giving the MMA a read for yourself. The creation of the MLC is a classic big government ‘private sector’ solution, in reality the MLC will be a bureaucratic mess controlled by the corporations that profit off others’ work. It gives control to the ‘Big 3’ record labels, the larger music publishers and the digital music providers of which all of the former hold equity in.

Nick is a consultant to Mulberry Green Capital & Engaged Tracking

Consultant, Sustainable Finance & Private Equity, Freelance Writer - uncommon stories

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