Royalty Distribution and Data Tracking Under the Music Modernization Act: Are NFTs the Solution?
By: Moish E. Peltz, Esq. and Carolyn Stoller, Law Clerk at Falcon Rappaport & Berkman and J.D. Candidate at University of Maryland Carey School of Law
Introduction
The music industry is ever evolving, given the vast advancements in music consumption technology. At the tap of a button on any device, you can listen to billions of songs on your favorite streaming platform, including Spotify, Apple Music, Pandora, and more. While streaming companies allow us to enjoy more music than ever before, the digital age of streaming has perpetuated discrepancies concerning the royalty distribution process and royalty data collection.
In 2018, Congress passed The Orrin G. Hatch-Bob Goodlatte Music Modernization Act (MMA), modernizing licensing relationships between digital streaming providers (DSPs) and copyright holders of music recordings. Prior to passing the MMA, a third party could pursue a mechanical license from the federal compulsory license system. Mechanical licenses stipulate the exact amount of royalties an artist receives for the recreation and distribution of a copyrighted work. The royalty rate for distribution through streaming, however, was set as a percentage of a particular streaming service’s total revenue by the Copyright Royalty Board (CRB). This system requires DSPs to obtain licenses for more than 10,000 compositions per day, creating potentially lengthy wait periods. The MMA tries to remedy royalty data tracking and distribution issues.
MMA: Blanket Licensing
The MMA combines three different titles that primarily establish a statutory “blanket license” for digital music services and a non-profit organization known as the Music Licensing Collective (MLC). Blanket licensing “grants an outside entity access to a rightsholder’s entire catalog,” rather than negotiating with each individual copyright holder for licensing. This blanket license system is intended to make it easier for DSPs to license songs without concern of copyright infringement if fees are not properly matched. Those who seek to obtain blanket licenses, primarily larger DSPs, must abide by the requirements of the MMA:
- File a Notice of License (“NOL”) with the Music Licensing Collective (MLC).
- Submit monthly and annual Reports of Usage. Reports of Usage ensure royalties are allocated to the right parties, including producers, artists, and publishers.
- Deliver royalty payments in a manner determined by MLC. The MLC "issues monthly royalty payments and statements approximately 75 days following the end of each calendar month."
- For some DSPs, the MLC maintains discretion to request additional data, such as the use of samples.
MMA: The Music Licensing Collective (MLC)
The MMA also established the MLC, a nonprofit organization that administers the new blanket licensing system established by the MMA. The MLC receives notices and reports from digital music providers, collects and distributes royalties, and identifies musical works and their owners for payment. It establishes and maintains a publicly accessible database containing information relating to musical works (and shares of such works) and, to the extent known, the identity of the copyright owners of such works and the sound recordings. DSPs will pay the MLC to distribute payment to the correct rights holders. The MLC will take tracking data off the shoulders of streaming services and ensure rightsholders are paid.
Shortcomings of the MMA
While the MMA’s initiatives are a great start to remediating any grievances with the royalty collection process for rightsholders and DSPs, the current system still lacks a uniform data standard and at times, an incomplete compensation process. Every song has two copyrightable layers: musical composition and sound recording. These copyrights are often held by different owners. The authors of a musical composition are composers and songwriters. The author of a sound recording is the performer of the musical composition, but the author can also include the record labels who mix the sounds into the recording. Currently, no uniform standard exists to link musical composition to sound recordings (both copyrights are tracked using different systems). Without a consistent data standard and a central location to find all copyright ownership information, rightsholders will continue to see their work unmatched and unclaimed. In fact, $424 million unmatched royalties are still being held by the MLC to date, exemplifying the MMA’s process of matching royalties as “slow and arduous.”
Blockchain Technology, NFTs and Royalty Distributions Under the MMA
New leaps in technology, like music which is authenticated by blockchain technology, such as non-fungible tokens (NFTs) shows promise make music royalty collection even more transparent and the data collection more reliable against manipulations from digital service providers (DSPs) and other music platforms. NFTs (while having a variety of definitions and associated standards) are generally a “unique non-duplicatable code, giving buyers public proof of digital asset ownership verifiable through blockchain and buyable through several cryptocurrency platforms with terms outlined in a smart contract.” An NFT purchases the token itself, proving ownership, as well as the asset itself associated with the token. Prior to the insurgence of NFTs, it was nearly impossible to authenticate online digital works in a publicly verifiable way. However, NFTs make it possible to track digital asset ownership and verify the authenticity of music and other types of digital media.
To accomplish the MMA’s goal of uniform data tracking and streamlined royalty distribution, NFTs can be traded or sold across third party platforms, including DSPs and record labels. For instance, when a record label records a song, “that specific sound recording's royalty can be split, and song information can be added to the composition’s smart contract code.” This process ensures “automatic, immutable attachment of the sound recording to the composition for future royalty distribution purposes while eradicating future unmatched works.” The song’s smart contract, which includes both composition and sound recording royalty allocation data, would be minted as an NFT. The NFTs could then be tracked on a main blockchain governed by the MLC, ensuring all parties use a uniform standard when inputting data.
When customers engage with the NFT, or in this case play a song, this would trigger the smart contract to record the use and distribute the earned royalties to the allocated rightsholders. Incorporating smart contract terms that outline what third party organizations owe money to song rightsholders revolutionizes the royalty collection process under the MMA, while using an NFT to connect a song’s ownership data enables instantaneous royalty distribution. It also enables immediate and worldwide transparency for all industry participants to view the public flow of funds.
Conclusion
Continuous updates or modifications to U.S. copyright law are imperative for the survival of copyright holders, artists, and their work in any creative space. The Music Modernization Act (MMA) marks a turning point in the music industry by providing a well-needed update as to how royalty distributions should be conducted in terms of music streaming. However, Congress should consider the use of innovative new technologies, such as NFTs, to streamline royalties between artists, record labels, DSPs, and other market participants. Until amendments to the MMA are set in place, the Act will not fulfill its overarching goal of modernizing royalty collections within the digital streaming universe.
Sources:
Majekolagbe, Faith O., and Kunle Ola. ‘The Complexities of Music Licensing in the Digital Environment and the United States’ Music Modernization Act “Solution.” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4832190. Accessed 28 June 2024.
“MMA Notices and Reports.” U.S. Copyright Office, https://www.copyright.gov/rulemaking/mma-notices-reports/. Accessed 28 June 2024.
PUBL264.PS. “Orrin G. Hatch–Bob Goodlatte Music Modernization Act.” https://www.congress.gov/115/plaws/publ264/PLAW-115publ264.pdf. Accessed 28 June 2024.
“Royalty Payments.” Mechanical Licensing Collective, https://www.themlc.com/faqs/categories/royalty-payments. Accessed 23 July 2024.
What Is a Blanket License? https://help.songtrust.com/knowledge/what-is-a-blanket-license. Accessed 28 June 2024.
What Is a Digital Service Provider (DSP)? https://help.songtrust.com/knowledge/what-is-a-digital-service-provider-dsp. Accessed 28 June 2024.
Worldwide, Music Business. “NFTs: What Songwriters and Music Publishers Need to Know.” Music Business Worldwide, 1 Apr. 2021, https://www.musicbusinessworldwide.com/nfts-what-songwriters-and-music-publishers-need-to-know/.
2023 ELI Writing Competition Runner-Up Essay: Addressing the Music Industry’s Biggest Broken Record: Why Blockchain, Smart Contracts, and NFTs Are An Unmatched Solution to the Music Industry’s $424 Million Unmatched Royalty Problem. https://www.americanbar.org/groups/entertainment_sports/publications/entertainment-sports-lawyer/winter-2024/why-blockchain-smart-contracts-and-nfts-are-unmatched-solution-music-industrys-royalty-problem/. Accessed 28 June 2024.
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