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THE PATH TO TRANSPARENCY in the music industry. Who is to blame and what to do?

The music industry has faced the challenge of royalty payments for almost its entire existence. The royalty distribution infrastructure brings together various stakeholders, such as record labels, publishers, collective management rights societies (copyright societies), as well as various intermediary services. This creates complexities and opacity in the royalty payment process, leading to mistrust in the industry and hindering the accurate distribution of funds.

Improving the royalty payment system is a complex task that cannot be solved by a single company waving a "magic wand." It requires a collective effort from the entire industry, a combination of technologies, collaboration, and commitments. The music industry is akin to a puzzle where legal frameworks, copyright issues, and numerous stakeholders play their roles. To achieve real changes, it is necessary to unite the efforts of rights protection organizations, publishers, artists, and technology companies, as well as major players like CISAC and DDEX, who seem to be already working on this issue.

Participants in this industry are acutely aware of issues related to outdated processes, a lack of standards, a fragmented structure, and an inadequate legal framework. They are already working towards developing international standards, adopting modern technologies (such as artificial intelligence, machine learning, and blockchain) to enhance data quality, and advocating for legal reforms. However, this is a complex and slow process, given the involvement of millions of stakeholders and the substantial resources required in terms of budget, personnel, and education.

Let's raise the curtain: Issues Encompassing the Royalty Payment System

In the music business, royalties are an integral part of ensuring fair compensation for artists, songwriters, and other contributors whose creativity takes center stage. However, in royalty payments, the industry faces numerous challenges that hinder achieving complete transparency and fair income distribution. Let's explore some of these issues.

Transparency is a key barrier on the path to fair payments.

One of the main challenges facing artists and rights holders is the lack of transparency in the royalty payment system. In a survey conducted by the Future of Music Coalition, more than half of the respondents reported difficulties understanding their royalty statements, with many citing a lack of transparency as the primary issue. This unclear situation creates barriers to determining whether artists and rights holders are receiving fair compensation, as the complex royalty payment process involves numerous intermediaries.

The complexity of royalty calculations is a labyrinth where it's easy to get lost.

Musical royalties, according to american law, constitute a highly intricate system that includes compensation for various types of rights, such as performance royalties, mechanical royalties, and synchronization royalties. In European law, these payments cover both author's and neighboring rights. Calculations vary depending on the type of royalty, the manner in which the music is used, and the contractual agreements between authors, artists, and producers. Such complexity often perplexes participants in the process, leading to difficulties in understanding and accurately tracking their earnings.

Metadata is the cornerstone of accurate royalty distribution.

The consequence of incomplete or inaccurate metadata is the loss of royalties or errors in distribution amounts. The absence of ISNI or CAE/IPI codes in metadata can lead to the incorrect identification of performers or authors, requiring significant time to rectify the situation.

Many authors initially overlook the importance of metadata, leading to conflicts between different versions of metadata among platforms and distributors. Consequently, disputes arise regarding the accuracy of royalty calculations.

MediaRights Revolution uses a data management model based on international standards. It includes information about rights holders in various languages, rights holder codes, percentage ownership details, links to rights holders' profiles in different systems, and can be enriched with user tags. We also take into account the inclusion of rights holders in groups and collectives, as well as periods of such participation.

The streaming era – growth or decline in royalties?

The growing digitization and development of streaming platforms add further complexity to royalty management. Accounting and royalty distribution systems designed for traditional music distribution models face challenges due to rapid technological advancements and the emergence of new content formats.

With the rise of streaming platforms, artist royalties have significantly decreased despite an increase in the number of plays. Streaming services often pay lower royalty rates compared to physical sales or downloads, and the "per-stream" payment model can result in lower earnings for artists, especially independent and emerging musicians. According to a 2022 report from Digital Music News, the average royalty rate per stream on a streaming platform ranges from $0.003 to $0.005, depending on the platform.

For instance, with the emergence of video-sharing platforms and social networks, more users create and upload their own musical content. However, accounting and monetizing such content become challenging due to the need to determine copyright ownership and identify the corresponding rights holders. This can also lead to issues of incorrect royalty distribution or even loss.

What kind of content generates royalties?

Various types of content, such as sound effects or background music, are not always recognized as eligible for royalties, which creates additional complexities in the distribution process. Platforms assess and classify such content differently, leading to disagreements and inconsistencies in compensating rights holders.

Delays in payments – who is responsible?

There is also an issue of coherence and coordination among various participants in the royalty payment process. Distributors, rights organizations, and technology companies must collaborate and synchronize data on tracks, authors, and rights holders to ensure the accuracy of calculations. The lack of effective collaboration and synchronization can lead to errors and delays in royalty payments. Another reason for delays is the periodic nature of work. Companies are accustomed to closing balances at reporting periods due to the requirements of the tax system.

​In MediaRights Revolution, you can utilize both real-time continuous reporting and periodic reporting closure. Each approach has its own advantages.

Entering the international market – what's next?

When a rights holder operates in the local market, things are more or less clear, but as soon as the distribution of works extends beyond the country's borders, international aspects of royalty management introduce additional complexities. Different countries have their own rules and regulations regarding royalties, requiring musicians and rights holders to navigate various norms and procedures in different territories.

Another facet of the issue is the disparity in describing the ways musical works are used, in the structure and completeness of licensing rights directories used by music market companies in the accounting and distribution processes.

Collecting royalties from foreign territories often requires collaboration with international royalty collecting societies such as ASCAP, BMI, PRS, and others. Copyright societies and intermediary companies typically handle the intricacies of international relations, but this often leads to extended timelines for receiving and distributing payments, and the income of rights holders decreases due to commissions.

Diverse accounting systems, different standards and processes, as well as linguistic and cultural differences between countries only complicate the precise and fair calculation of royalties.

Reliability and trust

Accounting for rights and royalty management faces challenges of transparency and auditing. Authors and rights holders often encounter difficulties in obtaining complete and reliable information on how exactly their music is used and how the collected royalties are distributed. Lack of transparency can lead to distrust and disputes between parties, as well as result in unfair income distribution.

Overall, royalty management remains a complex and multifaceted process that requires continuous improvement and adaptation to the changing digital environment. It is necessary to develop more efficient and automated systems, enhance collaboration among different industry participants, and increase transparency to ensure fair and effective accounting and distribution of royalties.

Where is the solution?

The music industry is tirelessly exploring modern technologies, including blockchain, artificial intelligence, and big data analytics, to find solutions for improving transparency and optimizing royalty calculations. Blockchain provides a secure and decentralized platform, while artificial intelligence and big data analytics make royalty calculations more straightforward and efficient. Unfortunately, blockchain has not yet addressed the core challenge of the music industry: dealing with minimum guarantee contracts, which are a frequently used financial model in contracts between labels and artists. The transaction costs in blockchain are also a limitation capable of reducing the income of rights holders.

First and foremost, solutions that can simplify working with metadata need to be considered – collecting, cleaning, and enriching metadata, as well as implementing automated royalty distribution schemes and reducing the time for reconciling reports between licensees and rights holders. One such solution is the MediaRights Revolution platform, which not only enables tracking but also facilitates licensing agreements among platform participants. The storage of rights transfer chains ensures complete transparency and guarantees quick and fair royalty distribution.

However, technology is only part of the solution. Industry participants must prioritize accuracy and data quality. Precision is the key to fair and precise royalty distribution. The music industry needs to focus on consolidating and organizing data, enhancing transparency, and establishing fair compensation models.

To find a solution to the challenges in the royalty payment system, collaboration among all industry participants is essential. Joint efforts and interaction among rights holders, artists, regulatory bodies, and other stakeholders can simplify the royalty system and establish fair compensation models. Promoting international standards and legal reforms, such as the use of the International Standard Recording Code (ISRC) and the International Standard Musical Work Code (ISWC), can contribute to improving data accuracy and streamlining royalty distribution.

It is important to recognize that collaboration and interaction among all industry participants also play a key role. Independent resources where artists, rights holders, regulatory bodies, and other stakeholders can exchange ideas, share experiences, and find common solutions are needed. This will help establish common standards and make decisions that reflect the interests of all parties.

Let's summarize: on the path to a progressive solution to issues in the royalty payment system, one can begin by organizing their own metadata and business processes using modern technological solutions. Of course, it is worthwhile to adopt unified data exchange standards or systems that allow working with various data formats, storing, and generating reports in these formats. Let's discuss how you solve the transparency issue in royalty calculation and distribution. What tools do you use?

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