You may recall that earlier this year the House IP Subcommittee held a hearing entitled “Five Years Later – The Music Modernization Act.” It’s customary in such hearings for members to ask the witnesses “questions for the record” in writing which are responded to in writing. This allows the witnesses to have a deep think about what they want to say and give really complete answers without being rushed for time. The questions may give you an idea of what topics are important to particular members.

The MLC’s CEO Kris Ahrend testified at the hearing and answered questions for the record. Here’s the first one about the black box which is an important issue because it will no doubt be the subject of the first royalty audit of The MLC currently being conducted by Bridgeport Music. Bridgeport is a serious defender of its copyrights as we saw in Billboard’s coverage of the audit. If you want to read ahead or see the footnotes which I omitted for formatting purposes, you can find the full text of the Subcommittee’s Questions for the Record here.

Questions Submitted by Representative Darrell Issa, Chair of the Subcommittee

Question 1. With respect to the “black box” royalties the MLC has accumulated to date, please provide the following information:

The total amount of such royalties currently in the custody of the MLC, the total amount of such royalties that has been distributed based on specific songwriter matches, and the total amount of such royalties that has been distributed based on relative market shares.

The total amount of those royalties that has been successfully matched with one or more specific songwriters, and the total amount of those successfully matched royalties that have been claimed.

The total amount of those royalties that are being held due to the Phonorecords III case.

RESPONSE:

It is important to first clarify that, while there are still unmatched royalties, “black box” royalties no longer exist under the U.S. compulsory mechanical license – The MLC fulfilled the MMA’s directive that the black box be illuminated. “Black box” is a term to describe unpaid royalties connected to undisclosed uses of works. “Black box” captured the intensely frustrating situation that rightsholders faced prior to The MLC, when there was no transparency about uses connected to royalties. Prior to The MLC, if a streaming service did not pay royalties on a particular song, there was often no way for rightsholders to know if the lack of royalties was because no royalties were due or because the streaming service had failed to identify the proper song or rightsholder. Streaming services further did not provide information on the amount of royalties at issue or even the general size of the unpaid “black box” royalty pools. Estimates varied wildly throughout the industry: in 2019, the industry publication Billboard estimated the size of the “black box” was $250 million, while a figure of $4 – 5 billion was raised in this Subcommittee’s hearing on Oversight of the U.S. Copyright Office.2 In February 2021, The MLC reported the exact size of the unmatched royalty pools that each digital music provider turned over to The MLC pursuant to the MMA [with no verification], and the total was approximately $425 million (with approximately $2 million in additional royalties coming in after that date, bringing the total to approximately $427 million).

Pursuant to the MMA, The MLC then went to work making available to the public the data about what recordings and songs were connected to these royalties, and we have completed that process. The MLC is proud to have closed the chapter on “black boxes” in this corner of the music industry. Not only does The MLC identify and publicly disclose exactly how much in royalties remains unmatched in the aggregate, but even more importantly, The MLC also identifies the unmatched recordings and unclaimed shares of songs in a searchable database that is free to the public, together with easy-to-use tools that rightsholders can use to register their song ownership and identify any of the listed uses that they believe match to their songs. To be clear, this is not to say that The MLC leaves it to rightsholders to do the work of matching. On the contrary, the vast majority of matching is done by The MLC based on its extensive and growing works database. As discussed at the hearing, The MLC devotes substantial resources to matching, and has been a leader both in expanding and developing its database of songs, and in matching those songs to the ever-increasing number of recordings in the market.

Rather, the end of the “black box” represents the fruition of a value that appears throughout the MMA, namely that rightsholders are essential to making the process the best that it can be, and so they must be given access to the data so that they can play their part.

Turning now to the specific data points requested, there are two very distinct pools of royalties that The MLC is managing now: (1) the approximately $427 million in historical unmatched from uses before the blanket license; and (2) the blanket royalties that The MLC collects and processes and distributes on a monthly cadence. I will address each of these pools in turn. I will aim to provide below all of the details requested for each pool, but also want to stress that this information and much more about our matching and distribution activities is available in our detailed 2022 Annual Report and its 42-page Appendix.

Also, before turning to the two pools, I will offer some general statements on the data

requests:

The answer to the request for “the total amount of… royalties that has been distributed based on relative market shares” is zero. There has been no market share distribution of any royalties, nor does The MLC have any such distribution planned in the coming year. The MLC is focused on matching uses and distributing royalties to the identified rightsholders, and it has not yet turned to the evaluation of what remaining royalties might be appropriate for a market share distribution, let alone begun the process to effectuate such a distribution, which will occur with significant public notice and transparency as Congress intended.

The requests for “the total amount of… royalties that has been distributed based on specific songwriter matches” and “the total amount of those successfully matched royalties that have been claimed” appear to address the same data. Generally, when a share of a matched musical work has been claimed, the associated payable royalties are distributed to rightsholders. There are discrete exceptions to this process. First, if the work or share is subject to a legal or dispute hold, then royalties are not distributed.

These types of holds involve less than 1% of the royalties that we process. Second, sometimes The MLC does not have sufficient information to pay a rightsholder, i.e., The MLC does not have requisite tax forms, banking information, or other related issues.

The numbers below reflect the principal of the royalties collected and maintained. The

MMA also requires The MLC to accrue interest for unmatched royalties at the federal short-term rate and pay out that interest together with the principal when payable. As discussed below, The MLC has a program for maintaining cash royalty balances so as to accrue the interest mandated by the MMA, which is then calculated and paid with the principal when payable. [Another audit issue.]

Historical Unmatched Royalties (2007-2020)

As of the end of June 2023:

The MLC has received $426,879,731 in total royalties at then-operative statutory rates, covering periods from 2007 through 2020.

$402,862,507 is “the total amount of such royalties currently in the custody of the MLC.”

$373,585,703 of this amount relates to 2018-2020, years that fall under the Copyright Royalty Board’s (CRB) Phonorecords III rates which have recently been retroactively changed. This is the amount that answers the request for “the total amount of those royalties that are being held due to the Phonorecords III case.” However, please note that this precise total royalty amount is expected to change due to retroactive adjustments under the new CRB rates. As this amount is on hold due to the extended CRB process, it is not included in the numbers below related to matched, claimed, and distributed royalties.

$24,017,224 of the total royalties received has already been distributed and is thus “the total amount of such royalties that has been distributed based on specific songwriter matches.” This amount relates to periods before the Phonorecords III period which has been on hold.

It is currently not possible to identify precisely how much of the pre-Phonorecords III royalties transmitted to The MLC have been matched with songs (beyond the $24,017,224 noted above, which has been matched, claimed, and already distributed).

The reason for this inability is a Copyright Office regulation that allowed digital music providers to report historical unmatched usage to The MLC but not transmit the associated royalties to The MLC, where the digital music provider claimed to have settlements with copyright owners that it believed would ultimately be due those royalties. See 37 C.F.R. 210.10(c)(5). Spotify in particular did not transmit $30,027,057 in royalties for unmatched usage based on this regulatory provision. Thus, The MLC is matching against $30 million more in Spotify usage than we received royalties for, and even after The MLC matches some of that usage to a song, until the shares of the song are claimed, The MLC does not know if the match relates to royalties that it has in its custody or if the match relates to a settlement for which The MLC does not have royalties. $55,395,843 of the pre-Phonorecords III usage reported to The MLC has been “successfully matched with one or more specific songwriters,” but this amount might include matches that relate to settlements for which The MLC does not have royalties.

Blanket Royalties (2021-present)

From the inception of The MLC’s blanket license administration on January 1, 2021 through

June 2023:

The MLC has processed usage for $1,663,068,954 in total royalties at then-operative statutory rates.

Of that amount, The MLC matched usage related to $152,831,444 in royalties as covered by voluntary licenses between digital music providers and rightsholders. The MMA requires The MLC to carve out and not collect those royalties, so that they can be paid directly pursuant to the voluntary license terms.

After that carve out, the MLC has collected $1,510,237,510 in blanket license royalties.

Of that amount the collected amount of $1,510,237,510, The MLC has matched $1,332,927,689 (resulting in unmatched of $177,309,822) of these collected royalties to a work, which is thus “the total amount of those royalties [that have been in the custody of The MLC] that has been successfully matched with one or more specific songwriters.” Of that, The MLC has already distributed to rightsholders $1,179,255,058, which is the amount that answers the request for “the total amount of such royalties [that have been in the custody of The MLC] that has been distributed based on specific songwriter matches.”

Please note that while the question asks specifically for matching as a subset of collected royalties, a more accurate understanding of The MLC’s matching activity should factor in the amounts that are matched and then carved out for voluntary licenses, which can only occur after The MLC matches the royalties to a specific work.

Factoring in voluntary licenses, The MLC has matched more than $1,485,759132 of the $1,663,068,954 in total usage processed, an average match rate of 89% of royalties.

The MLC has also identified an additional $9,180,638 in royalties that had been associated with works ineligible for the blanket license (primarily non-musical works) and these will be paid out across all works pari passu as a true-up to their original royalties in subsequent rounds of adjustments.

That leaves $144,491,992, of which $132,314,670 are royalties for songs that have been matched, but for shares that have not been claimed by any rightsholder. The remaining $12,177,322 are royalties implicated in legal or dispute holds.

The unmatched, unclaimed, and royalties on hold total $321,801,814, and with pending adjustments, total $330,982,452, which is “the total amount of such royalties currently in the custody of the MLC.”5 The MLC provides this detail in our monthly newsletter sent to all Members and published on the MLC website;6 in our annual summary provided in our Annual Royalty Recap published in the February newsletter; and as noted above, in our Annual Report.