Pandemic: Digital music services should accelerate payments and liquidate any royalty minimums they are holding

You may not have noticed, but many music services have a clause in their direct licenses that allows them to delay royalty payments if your accrued royalties are less than a certain amount, often $50.  This is on top of paying quarterly in many cases (as opposed to the monthly payments required by the statutory mechanical license for example.)

Pandora’s direct licenses include this language which is as good a specimen as any:

Accounting and Reporting Obligations: Within forty-five (45) days after the end of each Quarterly Accounting Period during the Term, Pandora shall, or shall instruct a Third Party Contractor on its behalf to, (1) provide to PUBLISHER a Quarterly Sound Recording Report and a Quarterly Payment Statement for such Quarterly Accounting Period relating to mechanical royalties; and (2) pay to PUBLISHER all mechanical royalties due and payable for the Limited Interative Service and the On-Demand Service for such Quarterly Accounting Period; provided, however, that PUBLISHER agrees that it will not receive payment for royalties due until such amount due has accrued a balance of fifty dollars ($50). For the avoidance of doubt, no royalty reporting will be due to PUBLISHER unless and until a royalty payment is also due.

In normal times, one could understand why Pandora (and other services) would want to be able to pay quarterly, take 45 days to render statements, and avoid having to make payments until you were owed at least $50.

But these are not normal times.

Given the unprecedented constriction on the live music business, artists and songwriters are scrambling for cold hard cash.  Remember–you can always treat someone better than you are required to without amending a contract.  This type of accounting clause suggests three moves the service could make voluntarily that would show enormous goodwill:

1. Accelerate Royalty Accounting Periods:  All quarterly statements should be rendered monthly starting March 31 and continuing for the duration.  Realize they are already paying monthly to the extent they use the statutory license, so this shouldn’t be a burden.

2.  Accelerate Statement Window:  It is common for all royalty accountings to be rendered after the close of the accounting period for which the statement is rendered (which I call the “statement window”).  It is also common for the statement window to be way, way longer than the service actually needs and the number of days in the window is entirely arbitrary.  So let’s make it arbitrarily short for a change.  Instead of 45 days, let’s say 5 business days after the close of the month for payment.

3.  Liquidate Royalty Holdbacks:  It is very common for services to take an edge in voluntary direct licenses (that supersede the statutory license) and hold back an arbitrary minimum royalty payment, often $50.  Of course, the service also gives itself another benefit–they don’t need to send you a statement until you are payable–which means that if they are holding your holdback, they don’t have to tell you they are.  Neat trick, eh?  This may seem like small potatoes, but on an industrywide basis it’s got to be millions if not tens of millions.

It is also worth noting that the Copyright Office regulations really don’t permit this level of holdback.  37 CFR 210.16(g)(6) provides:

Royalties under 17 U.S.C. 115 shall not be considered payable, and no Monthly Statement of Account shall be required, until the compulsory licensee’s cumulative unpaid royalties for the copyright owner equal at least one cent. Moreover, in any case in which the cumulative unpaid royalties under 17 U.S.C. 115 that would otherwise be payable by the compulsory licensee to the copyright owner are less than $5, and the copyright owner has not notified the compulsory licensee in writing that it wishes to receive Monthly Statements of Account reflecting payments of less than $5, the compulsory licensee may choose to defer the payment date for such royalties and provide no Monthly Statements of Account until the earlier of the time for rendering the Monthly Statement of Account for the month in which the compulsory licensee’s cumulative unpaid royalties under section 17 U.S.C. 115 for the copyright owner exceed $5 or the time for rendering the Annual Statement of Account, at which time the compulsory licensee may provide one statement and payment covering the entire period for which royalty payments were deferred.

If the services fail to come to the aid of the artists and songwriters they profit from, we should all remember that the next time they want something from us.

There’s also another issue.  When the executives at these services are exercising their millions in stock options, they may wish to consider exactly who it is that made them so rich.  It would also be a nice gesture right now if they were to deposit $10,000 or so in the accounts of independent artists who are not affiliated with any of their current or former shareholders.  Another good time to think about that issue is when they are doing stock buy backs with the shareholders’ money to juice their share price for the benefit of insiders while the artists and songwriters twist in the breeze.