As Competition Heats Up, Performance Rights Organizations Respond To Market Changes

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Kendrick Lamar performs during the third day of Lollapalooza Buenos Aires 2019 at Hipodromo de San Isidro on March 31, 2019 in Buenos Aires, Argentina.

Giving advances to superstar artists is pretty much the norm in the music business. But increasingly, the idea of giving out non-recoupable advances has entered the performing-rights organization (PRO) space.

Earlier this year, Kendrick Lamar's management team were shopping a deal asking PROs for an advance north of $10 million -- with, industry sources say, a significant portion non-recoupable -- and in April, he signed with BMI (the terms of the deal were undisclosed).

Meanwhile, an an e-mail exhibit filed on May 29 in the Central District Of Los Angeles Superior Court in a legal dispute between Tom Petty’s daughter Adria Petty and his wife Dana Petty, the daughter wrote in a March 5, 2018 e-mail that ASCAP gives out “bonuses every 3 years from 200-500K non recoupable. Just a straight up signing bonus.” She suggested moving the catalog every three years to get the signing bonus.

Five years ago, these non-recoupable advances were rare, but as competition heats up from the two invite-only PROs, SESAC and GMR, they’re no longer unheard of.

“Non-recoupable advances have become an expectation of almost every megastar deal,” says one PRO executive. In fact, sources say that all four PROs at some point have done deals that do contain a non-recoupable component. But most sources familiar with PRO operations say the PROs have only agreed to such deals in very specific, rare circumstances, and that the overwhelming majority are instead recoupable advances.

Besides those type of advances, songwriters are also seeking guaranteed payouts of a certain level from PROs, sources add, although the latter deals often don’t have a non-recoupable component.

As for-profit companies, SESAC and GMR can determine the size of the royalty pool they will distribute to songwriters and publishers. While the amount of profit either of those two companies currently keeps is unavailable, in 2016, Blackstone acquired SESAC, paying what sources say was $1 billion, so it follows that the PRO has a handsome profit profile.

Sources say GMR, on the other hand, has a rate card that shows what it will pay to songwriters based on activity, which means they all get the same amount for each activity. As for-profit entities, they make their songwriter affiliates happy on what they agree to pay out to songwriters who sign with them, and don’t need to disclose how much they are keeping in profits.

So if either SESAC or GMR decides to pay a non-recoupable advance, it’s not the same thing as when ASCAP and BMI, which do not operate as for-profit entities, do.

But ASCAP and BMI operate under consent decrees signed with the Department of Justice and must take any songwriter who wants to join. Moreover, ASCAP is run as a non-profit, while BMI is a corporation that runs like a non-profit, with both paying out all collections beyond keeping a reserve and covering overhead -- the latter of which typically runs 10-12% of revenue in recent years. In order to compete with the for-profit PROs, ASCAP and BMI have had to change their practices when doing deals, sources suggest.

Here’s the way a deal with a non-recoupable component works: Typically, advances are structured to allow the PRO to recoup the advance over the life of the deal. But if it is not all recouped, the PRO can lose out. So if a PRO pays out a recoupable advance of $5 million, and only makes back $3.8 million, a songwriter would have to pay back $1.2 million to leave when the term was up, or stay beyond the deal’s terms until the PRO had earned back all $5 million of the advance. If that advance had a $1 million non-recoupable portion, and if during the term of the deal the PRO only earns back $3.8 million from that songwriter’s activity, the songwriter would only have to pay back $200,000 to that PRO if she/he wanted to leave.

When that happens, the money for what turns out to be an un-recoupable portion of the advance must come from somewhere, whether it’s counted as part of the royalty pool distributed among all songwriters or as an overhead expense. Some in the industry say making such deals with a non-recoupable portion could hurt other songwriters because if they aren’t recouped, they take money away from the overall pot. In such instances, says one publishing executive, “every single writer and publisher is subsidizing a very few elite writers.”

Not everybody sees it that way. Some wonder if the two PROs are simply forgoing their administration fees in such deals. “They know their business so well that when they do a deal with a songwriter, they know if they are going to bring in enough to cover the guarantee/advance,” suggests one artist lawyer. But another executive suggests that may only be true if the non-recoupable portion remains under 12% of the advance.

Others point out that by using advances to retain superstar songwriters -- and thus, market share -- ASCAP and BMI can continue to maintain, and even increase, the rates they charge music users. So those advances help all writers eventually: a rising tide lifts all boats. Likewise, if they lose superstar songwriters and rates fall, that hurts all writers signed to the PRO.

ASCAP CEO Elizabeth Matthews defends the use of advances, saying they help the songwriter while improving the PRO’s competitive stance. "Advances are sometimes used throughout the entertainment industry as a pre-payment of future forecasted royalty streams because creators (to whom advances are paid) are not typically employees of large corporations and need reliable and steady income sources as they work on various projects,” Matthew said in a statement. “For songwriters, we all know that there is a lot of time that transpires between the time that a song is written to the time that it is released to the world, and to the time that it begins to earn royalties for a songwriter. In an increasingly competitive environment, advances against future earnings in the pipeline is one way for us to secure market share and help our ASCAP creator members manage their finances, pay their bills and support their creative work. ASCAP is one of the main sources of income for songwriters and on occasion we will consider paying advances for competitive reasons. It makes sense for the membership as a whole when we are able to retain and attract writers whose catalogs are material to the overall licensing value of our repertory."

As for BMI, a rep says in a statement that “an advance is just what it says, an advance of royalties. It’s what a songwriter will earn under our payment system, so by its very nature, it’s recoupable. Advances are a part of the music industry, they’re used by publishers and record labels and have been part of BMI’s toolbox since the very beginning and will continue to be. We evaluate many factors to determine if and when to give an advance. When given, the vast majority of advances are about helping songwriters so they can create music. Over the years we’ve helped people pay medical bills, buy and keep homes, pay tuitions, anything you can imagine. And we continually hear from songwriters about how helpful those advances were to their lives and careers and that they remain grateful to this day.”

Meanwhile, sources say BMI ultimately did not give Lamar a non-recoupable advance. And other sources deny that ASCAP engages in non-recoupable signing bonuses, as suggested in the Petty e-mail.

“We offer advances to support songwriters,” said a SESAC rep in a statement. “A hallmark of our business model is a flexible approach in our negotiations with prospective and existing affiliates in an effort to best meet their needs and objectives.”

GMR declined to comment.

Songwriters Guild of America president Rick Carnes says he understands that the PROs are just responding to the market. “If [the PROs] don’t maintain their market share, then radio will pay that PRO less money, which will hurt all of its members,” Carnes says. “That’s just the nature of competition.”

Yet Carnes adds the PROs should limit how much they are paying out for non-recoupable advances, adding that at least ASCAP have songwriters on the board. “If I was a songwriter on the board, I would be saying, ‘Wait a minute, that’s our money you are giving out,’” he says.

One publisher says he understands why PROs engage in offering non-recoupable advances, which are the cost of doing business. “But I would like to see how the PROs are accounting for these payments,” he adds. “There should be more transparency with the PROs. If they are paying out non-recoupable advances, they should disclose it because that money impacts what’s paid to other songwriters and publishers.”

Yet another music publisher says he is not worried if ASCAP and BMI lose market share, and says they shouldn’t be paying out big advances with a non-recoupable component just to compete. “Here’s another perspective: Even if they lose some superstar writers, they will still have enough valuable copyrights that licensees will still have to engage them,” he argues. “So what if they have their market share reduced, and so what if writers go to the for-profit PROs? Let’s look down the road. If [ASCAP’s and BMI’s] market share was reduced significantly, there wouldn’t be the need for consent decrees -- and that’s a better outcome and a better system then we have today.”