SoundExchange Sat on Fewer Unclaimed Royalties at End of 2014

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The release of the status of various accounts, like unclaimed royalties and account issues, shows better efficiency at paying digital performance royalties.

With a significant webcasting rate hike coming in 2016, the music industry might be wondering about the efficiency and effectiveness of SoundExchange, the organization that collects and distributes the digital performance royalties from services such as Pandora and iHeartRadio. The information from its breakdown of its 2014 year-end account balances shows the organization has continued to improve how it collects and pays out royalties.

Some account balances can answer questions about a collection society. Is money getting to its intended recipients? Is it getting those intended recipients faster than the year before? Do these intended recipients know they have money waiting to be collected?

A cursory glance will show many account balances either declined or increased only slightly. But standalone numbers lack the proper context. These numbers look better when taking into account SoundExchange's growth. Distributions to labels and recording artists jumped $183 million, or 31 percent, to $773 million in 2014 from $590 million the prior year. Adjusting for growth requires looking at a balance s a percent of distributions.

Take the balance of unclaimed funds, a closely watched number the music business. These are royalties that cannot be distributed because record labels and recording artists haven't registered. The balance at the end of 2014 was $109 million, up 13.5 percent from $96 million in 2013. However, as a percent of distributions, unclaimed funds dropped to 14.1 percent from 16.3 percent.

Unclaimed funds make a collection agency look bad -- after all, its job is to collect and distribute royalties, not collect and hold royalties. SoundExchange has been unusually transparent about the royalties it can't match to a label or artist. A few years ago, that openness showed a backlog of royalties that weren't getting to the intended recipients. In 2011, unclaimed royalties accounted for 32.5 percent of that year's distributions. Its improvement to 26.2 percent in 2012.

Where this metric needs to stand, what level of unclaimed royalties is acceptable, is another matter that should be debated in the music business. But unclaimed funds have clearly become less of a problem. SoundExchange, at 12 years old a relatively young organization, has improved how it educates and locates labels and artists that are owed money. Another factor is a pool release, a distributions of unclaimed royalties from previous years, in both 2013 ($9.3 million of unclaimed royalties from 2004 to 2008) and 2013 that has reduced the unclaimed balance. SoundExchange is allowed by statute to release unclaimed royalties after 3 years, although it waited 2 years for the first release.

The total year-end balance was $422 million. The size of the balance often attracts attention and criticism; unreleased royalties speak for themselves, but not all components of that balance deserve criticism. Money comes and goes and is not always held for long. The amount of 2013 royalties already distributed in 2014 was $96 million, an improvement from $143 million a year earlier. Getting royalties out faster means there were fewer 2013 royalties to distribute in the beginning of 2014. The improvement suggests SoundExchange is getting better at distributing royalties quickly. It tells Billboard the decrease "was primarily due to reducing our distribution processing time and as a result, we distributed an extra month during 2014."

Fewer royalties were also held back for account issues that range from incorrect paperwork to returned checks (some artist and recording artists prefer to be paid by check). This "account issues" balance was $14 million, down from $26 million in 2013. As with unclaimed royalties, a decrease in royalties held for account issues is a positive sign that royalties are getting into the hands of intended recipients.