When it launched in the fall of 2007, RightsFlow comprised four people working out of the living room of president/CEO Patrick Sullivan's apartment on Manhattan's Upper East Side.Today, the company has established itself as a disruptive upstart in the growing field of mechanical rights management, employing a staff of 23 and capable of processing licenses for 30 million compositions owned or administered by 60,000 publishers.
It has done so by capitalizing on a business model pioneered by Music Reports Inc. (MRI) -- handling publishing royalty accounting on behalf of music licensees, instead of rights holders.
RightsFlow is also encroaching on territory that is the natural domain of the Harry Fox Agency, the leading U.S. provider of mechanical licensing services and a subsidiary of the National Music Publishers' Assn.
Sullivan, who was director of research and development at the NMPA and HFA from 1999 to 2004, says RightsFlow's primary mission is ensuring that publishing companies and songwriters get paid for use of their work. But he acknowledges that the company approaches the processing of publishing royalties from a perspective that diverges from HFA's traditional publisher-oriented focus.
"For music users, licensing can be a painful issue," he says. "So our business was built from their point of view, to help the user manage that responsibility, and not from the licensor point of view."Building a business around the needs of clients who license music is the latest sign of how the shift to digital distribution is reshaping the landscape of the music industry.
During the past decade, the emergence of entire new classes of online music outlets -- like download stores, video-sharing sites, Internet radio stations and on-demand, cloud-based streaming services -- have made the business of licensing music dramatically more complex.
That's provided an opening for enterprising companies eager to grab a share of the music rights management market, inevitably resulting in their pursuit of strategies that overlap with those of incumbent player HFA.
These service-oriented companies-as well as others like Counterpoint and RoyaltyShare, which provide software solutions to labels and other clients-have one thing in common: business models that revolve around licensing music and accounting for it so that the proper payments can be made to songwriters and publishers.
About half a dozen other, smaller service providers, such as the American Mechanical Rights Agency, fulfill specific roles in the digital licensing maze. But industry observers say the greatest level of competition is emerging among HFA, MRI and RightsFlow.
When record labels release albums and digital tracks, they do so with the understanding that they have to license the rights to songs from music publishers and pay mechanical royalties on the use of those songs. The U.S. statutory rate is 9.1 cents per song, which applies to digital tracks and to songs that appear on CDs and in album downloads. When a label sells a CD through Best Buy or a digital track through iTunes, it's responsible for securing the licensing rights to songs and paying publishers mechanical royalties.
But labels usually aren't responsible for licensing songs when their recordings are consumed through streaming services or tethered subscription downloads. In most of these instances, the onus of handling the licensing of compositions fell on service providers because the market went so long without a statutory rate while waiting for the U.S. Copyright Royalty Board to establish one. The CRB eventually approved a settlement among labels, service providers and publishers on a mechanical royalty payment formula.
In addition, the ability of unsigned acts, church choirs and high school marching bands to sell CDs of their renditions of pop songs or to upload them to an online service for sale or streaming has opened up yet another client base in need of mechanical licensing services.
It's in these parts of the digital marketplace where most of the competitive maneuvering occurs among RightsFlow, MRI and HFA, as each vies to win business from the multitude of digital services and other clients that must license songs from publishing companies.
"When we started RightsFlow, we saw an opportunity to grab a market that was established but not accounted for," Sullivan says.
In addition to working with digital music outlets, RightsFlow deals with international labels and independent labels in the United States that need comprehensive rights management services including licensing, reporting and royalty accounting. It also helps some clients with more specific tasks, such as assisting YouTube in identifying songs uploaded to its video-sharing service or working with Beatport to report music usage to European collection societies.
One of the fastest-growing parts of RightsFlow's business, according to Sullivan, is its Limelight music service at SongClearance.com. It enables anyone to license the mechanical rights to record and sell or stream a cover version of a song. It competes directly with HFA's Songfile rights-clearing service at Songfile.com.
Sullivan says musicians or labels in 96 countries have used Limelight so far and estimates that the average customer transaction grosses $186, of which $140 goes to publishers and songwriters, while RightsFlow's service fees account for the rest.
"Limelight is less than a year old and already it's a multimillion-dollar business," Sullivan says. While he declines to disclose RightsFlow's total annual revenue or that generated by Limelight, he says those who use the service have collectively become "our No. 1 client."
RightsFlow wasn't the first rights management company to take aim at HFA. MRI launched in 1995 as a provider of music administration services for TV stations that had to pay performance royalties for the use of sound recordings. But in 2001, MRI moved into the mechanical marketplace when it was hired by early download retailer MusicNet.
Today, MRI clients include Verizon, Myspace, Slacker, Rdio and Sirius XM.
"When we started getting into mechanical licensing, it was very controversial and there was a tremendous amount of resistance from the publishers and HFA," says Les Watkins, MRI senior VP of business affairs and development. "But we soldiered on . . . We led the way for service providers, helping to create an environment where there is competition in a place where there wasn't before."
When RightsFlow launched in October 2007, it had little going for it other than an innovative spirit and the know-how of co-founders Sullivan and chief financial and strategy officer Ben Cockerham, who had previously worked together at the Orchard. In August 2009, RightsFlow secured $1.5 million in an initial round of funding from Bethlehem, Pa., venture capital firm Originate Ventures, which helped finance investments in new products and services while allowing the principals to remain majority owners.
As RightsFlow has grown, it's rattled the cages of other players in the market. While HFA says it began offering mechanical licensing services to non-publishing clients as far back as 2005, it only began marketing those services in earnest during past two years.
As part of the NMPA, HFA has worked for decades to secure mechanical royalties on behalf of music publishers. The mere threat of an HFA audit long struck fear in the hearts of record label accounting staffers.
But today, HFA president/CEO Gary Churgin notes, HFA also counts Napster, MediaNet, the Independent Online Distribution Alliance and even U.K. indie label Cooking Vinyl among its clients.
"We say there are no sides to the table-it is a round table," Churgin says. "It is our job to make sure people can license quickly no matter which side you are on."
Beyond the increased competition in the emerging digital marketplace, he concedes that the shrinking mechanical royalty pie has also prompted HFA to step into new lines of business, where it competes against RightsFlow and MRI.
"What's interesting is that some of these providers use our data and information to obtain licenses," Churgin says. "That is the greatest compliment we can get . . . If that isn't an endorsement of what we do, what is?"
As RightsFlow expands its footprint in the market, competitors have taken to deriding it as a low-cost service provider. But that's a description that Sullivan is eager to embrace.
"We aggregate licensing for multiple users so we can drive down legal, technology, licensing and staffing costs," Sullivan says. "As the market compresses, our vision is to sit on the middle of that platform."