SONGS Music CEO Matt Pincus: Why Music Publishing's Two-Class System Could Spell the End for New Indie Firms

There's an ominous moment in George Orwell's Animal Farm when the seven ­commandments that govern the farm have gradually disappeared. Replacing them is a simple rule: "All animals are equal, but some are more equal than ­others." Needless to say, things don't go well after that.

We may be at such a moment in the music business, and I'm ­concerned for the future.

Performing rights ­organizations (PROs) like ASCAP and BMI are under attack by tech ­interests trying to lower songwriter royalty rates. At the same time, tech companies are approaching my ­company, SONGS, offering direct deals at higher than statutory or otherwise regulated rates. The higher rates may sound like a positive ­development, but be careful what lurks within.

Behind the headline rates lies a grave threat to the music ­publishing business: the ­possibility that shares of songs controlled by larger ­companies could earn more for digital uses than shares controlled by smaller ­companies or by self-published writers. There has never been a two-class system in music publishing. If one develops, it will stifle ­competition in our ­industry and the ­creativity and ­ingenuity that come with it.

I started SONGS Music Publishing in 2004 with a strong belief that contemporary ­songwriters were underserved by the then-­current market. In the past 11 years we have assembled a diverse group of writers, including global superstars like The Weeknd, Lorde and Diplo. This summer we had three No. 1 pop songs, and shares of 19 of the top 100 songs. We are the definition of new ­competition entering the market.

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SONGS became successful because our team ­convinced writers that we were the best creative fit for them, and we have the technology, ­collections and reporting best-suited to their needs. In the early days, ­writers took a chance on us.

Would they have done so if their shares earned less with us than their co-writers' shares did with already established companies?

Thankfully, that wasn't the case for us. In 2004 the mechanical rate on a song was 8.5 cents — for everyone. The PROs licensed works for public performance rights at the same fair blanket rates for radio, TV and general licensing. Synchronization rates were equally weighted across co-owners and ­masters. We operated under the same equitable system that exists today.

But that system is straining because PROs are so regulated that they can't get fair rates for writers and publishers. If that continues, I'm afraid it won't be possible for a young publisher in the future to start a ­company like SONGS.

Last summer, Apple Music launched its streaming music ­service, seeking licenses directly from ­publishers. Apple offered a higher rate (13 percent) than the ­current ­statutory rate for on-demand ­streaming (10.5 percent). Great news.

But there are two ­troubling aspects to Apple's offer. Traditionally, deals with digital service providers (DSPs) contained a most favored nations (MFN) clause protecting any one licensed publisher from receiving a lower rate than another. Apple refused to include an MFN clause in its license, citing its June loss in the ebooks price-fixing case.

Apple says that it will offer all publishers the same rate. Given its equitable treatment of ­publishers in the past, I am confident the company will keep its word. Unfortunately, I am now being approached by other large DSPs, which lack Apple's track record, looking for deals with no MFN protection. The likely result? More money to bigger companies, less money to everyone else.

Second, in a break from ­industry convention, the Apple offer called for 100 percent ­licensing. This means Apple will accept licenses from a publisher for an entire song, even if the publisher only controls a ­fraction of it. Though it never has been the custom in music ­publishing, by copyright law ­publishers are allowed to issue a 100 percent license and account to the other rights holders owning shares of the work. That's right: A competitor can license your shares to Apple whether you like it or not. Now, other DSPs are asking for 100 percent licensing as well. What will happen if DSPs accept 100 percent licenses from their largest licensees (who have shares of more songs)? More control to the bigger ­companies; less control to everyone else.

Digital companies need to treat all publishers fairly and equally on a work basis, or they will destroy ­competition in our business.

Today's music publishing ­industry was created by innovative ­independents: Chappell and Hill and Range gave rise to the Warner system; Jobete, Virgin and Screen Gems made today's EMI; Rondor, Zomba and the original BMG Music underpin the modern-day Universal Music Publishing Group, while ATV, Famous and Acuff-Rose are major pieces of Sony. Great independents like peermusic, Carlin America and MPL still thrive today.

These companies introduced much of the Great American Songbook. They were started by entrepreneurs who understood songs and took financial risks to invest in them. Would any of them have started if they were at a structural ­disadvantage to larger companies from the get-go?

When I testified before the U.S. Senate about the consent decree in 2014, I heard a plethora of ­complaints from DSPs about the lack of ­competition and innovation in music publishing. If they undermine us by disabling the PRO system and compensating shares unequally, they will have only themselves to blame for that.

Matt Pincus is founder/CEO of SONGS Music Publishing.

This article was originally published in the Oct. 7 issue of Billboard.