Up until then, the record labels were happy to use the pass-through license, which means the labels retain the responsibility to pay mechanicals to the publishers while passing on the license for the music to the digital services. When all the pass-through licenses required was keeping track of less than a billion transactions a year in the U.S. the labels didn’t mind handling that responsibility because it meant the publishers money flowed through their hands -- they're not so eager to assume that responsibility when the number jumps to hundreds of billions. This year alone, with streaming still growing, it looks like about 300 billion or so transactions will take place in the U.S.
Let's not forget that the major record labels, who supposedly built systems to collect songwriter information and make proper payments from the get-go, also couldn't totally handle the responsibility and needed to enter into a $260 million settlement with publishers to make good on those payments back in 2009.
Also noteworthy is that the PROs have had at least 75 years of experience of building systems to keep track of song splits, publishers and songwriters, and had the benefit of adding that data one song at a time, instead of having to play catch-up to 75 years of data all at once, like the digital services have had to do.
Moreover, Spotify, like others, may not have adequately initially built the systems to handle the processing of correct payments and reporting to music publishers, and maybe they placed too much reliance on outside services like Music Reports Inc. (MRI), the Harry Fox Agency's Slingshot operation, Medianet and RightsFlow, which were created or diversified into the space to help deal with this data problem.
But it's not like the publishers and companies operating in that sector, at least initially, did all they could to insure payments flowed through to them. In fact, until Audiam started making noise about this issue, publishers admitted to Billboard they were unaware of the problem.
Publishers are -- and have been -- aware that streaming services haven’t been properly licensing every single track, as the law requires. If they wanted to, publishers could keep track of every notice of intent that the services are required to send under the compulsory license and match those NOIs against their song databases to reveal which songs are up on the digital services site and not licensed. Instead of doing that, publishers looked the other way, because they didn’t want to take on the legal burden and expense to challenge streamers on this issue, let alone possibly interrupting the flow of revenue for the 75 percent of songs properly licensed. At the least, they could have collectively written a letter to digital services asking them not to put up songs that weren’t properly licensed until they got clearances. That, of course, would have infuriated the labels and artists who want their master recording royalties from plays.
On the flipside, digital services could say they are not going to put up recordings until the labels provide the publishing for each song, and you could be sure that the labels would scramble to comply, rather than miss out on master recording performance royalties.
What's ultimately needed is a global database that ties songs to recordings and so far all efforts in that direction have failed. In the meantime, one of the good things to come out of the discovery that there might be as much as a hundred million dollars in unpaid -- or incorrectly paid -- mechanical royalties floating around from interactive digital services, is that the National Music Publishers Assn. is not only negotiating a settlement, but will also resolve the larger issue.
NMPA president and CEO David Israelite says that he hopes that the talks with the digital services will yield a slate of best practices that will reduce, if not eliminate, the pending and unmatched files and black boxes at digital services, similar to the outcome with the record label settlement back in 2009.
Regardless of what occurred with Audiam and Victory, sources familiar with Spotify's stance on the issue say the company's management is aware of the problem surrounding proper payments to publishers and songwriters and is involved in discussions to not only ensure that the current outstanding payments get to where they are supposed to go, but is interested in working with publishers and the NMPA to resolve the issue.