Just How Much Money Is There in Unclaimed Black Box Royalties?

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According to Billboard estimates, it's significantly less than the $2.5 billion figure that's been thrown around.

How much black box money is built-up from on-demand digital services? Billboard estimates at most $250 million.

Black box money was a big topic at Wednesday's (June 26) House Judiciary Committee hearing on oversight of the U.S. Copyright Office and that may have contributed to a misconception of how much unmatched royalties on-demand digital services like Spotify and Apple Music actually owe to songwriters and publishers. 

Blackbox royalties are monies due to songwriters and publishers where digital music services -- and the companies they hire to help them in processing such payments -- are unable to match compositions to recordings, either because of poor or inadequate metadata or a lack of registration to the Copyright Office, often by DIY indie artists and songwriters.

With the Music Modernization Act creating the Mechanical Licensing Collective, black box monies has become a hot topic as the MLC will be responsible to collect those funds that have built up at digital services. The MLC will also try to reduce that pool generally by finding the proper rights holders. If those royalties can not be placed after three years of being categorized as unmatched and one year after being turned over to the MLC, that money is eligible to be distributed by market share to publishers, who in turn will pay it out to songwriters by market share.

In the meantime, someone in the past two years publicly estimated a sum of $2.5 billion in built up black box money sitting with on-demand digital services instead of being paid to songwriter and publishers. That number has been repeated publicly in blogs, op-eds and news stories many times since.

On Wednesday, during the hearing, Rep. Sheila Jackson Lee, D-Cal., quoting Audiam founder Jeff Price -- who is one of the industry executives behind the American Music Licensing Collective competing against the MLC application sponsored by the National Music Publishers' Association (NMPA) and two songwriter organizations for the Copyright Office's designation -- in saying there might be as much as $4 billion to $5 billion in black box monies to be doled out by the MLC. While that could be misinterpreted to mean that is how much money is currently there, the amount is apparently a going-forward estimate Price has made -- not how much black box money will be initially turned over to the MLC. Sources say he has privately estimated current black box at $400 million to $500 million.

Let's analyze together how much black box money has built up since streaming's inception. According to the RIAA, streaming revenue at a retail value has totaled $17.2 billion since 2014. There is a three-tier formula employed to determine what type of publishing royalties that revenue would produce, but most simply let's note it has often produced a rate above the 10.5% of revenue headline rate during that period. 

Billboard analyzed these streaming revenues year-by-year and based on knowledge of that formula and other circumstances, did an estimate that yielded a publishing rate of 12.3% of revenue. That means that during that period the services paid out $2.108 billion in total U.S. publishing royalties. (So much for that ridiculous, often repeated $2.5 billion estimate in supposed black box monies.)

That $2.108 billion represents both performance and mechanical royalties; and remember the MLC is only dealing with the royalties from the latter right. Billboard subsequently estimates that performance royalties typically comprise 6.1% of a digital service's total revenue and after subtracting that from the $2.108 billion, it would leave $1.058 billion -- or roughly 6.15% for mechanical during that five year period. (Again, the mechanical percent varies by year, ranging from an estimated 5.4% of revenue in 2014 to 6.4% in 2018.)

So with mechanical payments now standing at $1.058 billion, how much of that is black box money? Sources say that on first pass through, the firms hired to perform the task of matching recordings to the composition owners -- so that the correct publishers and songwriters can be paid -- usually can identify 78% of the performances. That means black box revenue built up during 2014–2018 totals about $233 million, right? Almost. There is more to consider: Services like the Harry Fox Agency and Music Reports Inc. may identify 78% on first pass through, but on subsequent passes, as they do research into the unmatched royalties, they identify more and more of that money to match as much as 90% or more in total. Meanwhile, new unmatched royalties are being dumped into the black box. So overall, Billboard will stand with at most $250 million in blackbox money as its estimate.

One senior music publishing executive, who says he has often seen the incorrect $2.5 billion blackbox money number, says that the savvy industry players should have known that number was way exaggerated.

"[NMPA president and CEO] David Israelite's ability to smell problems like that is unparalleled," that source says. "If there was that much in unpaid royalties floating around, he would have been the one screaming about that amount."

However that observation shouldn’t overlook that he appears to be the impetus prompting the industry to create the MLC.


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