The Complexities And 'Price' Of SoundCloud Going Legit

BERLIN, Germany (Hypebot) The debate on the future of the music business and the streaming economy is often framed by discussions of user base and per stream payments. What these parameters leave out is the business practices which bring about these rates. This article utilizes SoundCloud as a contemporary case study to examine these practices and reveal the backdrop of complexity.

Combined with the interests and music business practices of different parties: content owners, recording artists, songwriters, and users – the situation becomes as tangled a set of neglected Christmas tree lights. Sorting through this entanglement and being conscious of how the wires cross is a crucial exercise in informing and shedding light on the frustrated discourse that accompanies the streaming debate.¯

Why Does SoundCloud Need a License

SoundCloud is the latest music streaming service to go legitimate, by actively seeking the permission of content owners whose music SoundCloud¡¯s users have or might upload.

Without this permission, SoundCloud relies upon the notice and takedown procedures of the Digital Millennium Copyright Act (DMCA). Under the DMCA system, SoundCloud only had the responsibility to remove any infringing content they are made aware of (Davis). Although simpler in theory, mere DMCA adherence exposes SoundCloud to major copyright liability, impairs its legitimacy, and ultimately its commercial viability.

So SoundCloud needs a license. More accurately, SoundCloud needs a number of licenses from different parties and for different rights.

What Licenses Does SoundCloud Need

Legally SoundCloud is deemed an interactive streaming service, as users can select specific music to stream on demand. In the music press, it’s otherwise known as Spotify but includes numerous other firms, such as Google Play and Rhapsody. This classification specifies the licenses required as well as the parties who can issue them.

In the simplest construction these are the licenses SoundCloud needs:

1.(i) Composition (Songwriter/Publisher) Performance Royalty

An interactive service has to pay a royalty to the songwriters of the song its users play (Ritala 46). Typically an interactive service would seek a blanket license from a Performing Rights Organizations (PROs). The three major PROs represent publishers who administer or control the songwriting rights in the vast majority of popular music. However, unlike non-interactive internet radio services, there is no statutory rate for this royalty. The negotiation is entirely between the parties. Therefore, the highly publicized ¡ consent decrees¡¯ litigations are not relevant.

1.(ii) Sound Recording (Record Company) Performance Royalty

Similarly, an interactive service has to pay a royalty to perform the sound recording. Identical to above, there is no compulsory license for interactive performances (Ritala 47). This license needs to be acquired by the owner of that sound recording master. The owners of sound recording masters are usually ¡°record companies,¡± namely record labels, record label associations (such as Merlin) and similar entities like music distributors. Signed artist¡¯s do not typically own their master rights.

1.(iii) Composition (Songwriter/Publisher) Reproduction Right

Mechanical royalties, typically associated with physical CDs sales, are also payable to the songwriter or publisher. The mechanical royalty rate is determined by a third party, the Copyright Royalty Board. The license for these reproduction rights are typically obtained on mass from a dedicated collection agency such as the Harry Fox Agency (Ritala 47).

1.(iv) Sound Recording (Record Company) Distribution Right

An interactive licensing service also needs a license to distribute and copy the musical works on its platforms. In practice this license is not discussed separately, rather it¡¯s a wider part of the negotiations for license (ii).

1.(v) Further Complications ¨C Artwork, Downloads, User Generated Content and Lyrics

The licenses above give SoundCloud the bare minimum protection. Additional licenses would be required for hosted artwork , lyrics and downloads. Further complexity arises from user generated content such as remixes, or DJ mixes (Davis). There is no clear line between when such work might be fair use (e.g. not require a license) or not. Regardless, even presuming that a license is required, there are numerous other issues; how much of a work¡¯s complete license is attributable to a given mix and how is any percentage of song/mix formula applied to mix material across the entire service.

How Are These Licenses Negotiated

To get these licenses, SoundCloud needs to approach all the parties of the music they envision using or a third party that can clear these rights. Given SoundCloud¡¯s clout, the parties have negotiated directly.

The bargaining table further tangles the licensing process . The relevant parties, most specifically the major labels negotiating rights (ii) and (iv), do not simply grant licenses and wait for revenues. Since their consent is required (e.g. the licenses are not compulsory by law) they can demand much more.

When negotiating with streaming service, music companies, after seeing, a rosy presentation about the user base, streaming economics and viability of a service¡¯s model, will structure a deal around two deal points (Price):
1.1. Cash Up Front – significant advance on future royalties

2.2. A Stake – a percentage of the service¡¯s equity

Both are justifiable from the record company¡¯s perspective. First, earnings on paper are fine but to commit their music to a service, money needs to be put on the table. Secondly, the intellectual property portfolios of these companies is the foundation of why users go on this service, so if the service succeeds a part of that is attributable to the music made available. As such the other parties should benefit from the service¡¯s growth. (NB Warner reportedly has a 6% ownership stake in SoundCloud)

However, there are significant issues with this structure. First, recording contracts typically specify that artists, or songwriters are paid per sale and stream, not on these advances or equity (Price).

The debate between streaming services and artists over miniscule payments often leaves out the middleman ¨C the music publishers and record companies. Who benefits from the ownership of equity stakes, as well as the conflicting interests they create is a significant and often neglected issue.

Secondly, as an advance is recouped (e.g. earned streaming royalties are off set against an upfront payment) royalties will be distributed to the artists. However, terms of negotiation dictate that certain streams are either discounted or exempt from earning royalties. For example royalties earned from users on a free one month trial may not be used. Note that recording artists don¡¯t negotiate these discounts or exemptions, the record companies do. Secondly, this advance is often significant and not fully recouped; furthermore, the advance is nonrefundable. If the advance for a given period is not recouped against royalties earned during the label nets the difference. This is called breakage (Price). Breakage is not necessarily distributed to artists. In practice, allocating such, breakage is difficult ¨C how do you determine what artists and the proportions in which to distribute these funds. The details of how record companies distribute advances and streaming revenues in general to their artists is confidential. Given the track record of the music industry it¡¯s perhaps not surprising that a cynical eye is glanced in their direction (See Seabrook).

Another source of breakage is bad metadata in which tracks streamed cannot be matched to the responsible artists/songwriters (Price).

The standardization of metadata such as songwriter information and splits is a significant issue. Standardization is pickety process while not being ¡°core to the business of any entity in the value chain¡± (Miller).

The ability for artists to audit streaming revenues is another noteworthy problem (Price).

Functional Effects of Licensing on User-ability

The novelty of SoundCloud as a streaming service is that is a user-centric system. As discussed, this means that its legality depends largely on other parties; users playing by the rules¡¯ of SoundCloud¡¯s terms of service and not uploading infringing content and (the true) content owners notifying when infringing content is uploaded.

The user centricity has important implications beyond dry conversations of the copyright law. SoundCloud¡¯s success, and large user base came because of its ingenious design which allowed users to share music easily.

As Matthew Trammell of the Fader remarks, SoundCloud arrived ¡° in the era of MGMT and M.I.A., when new music moved via sloppily coded MP3 blogs, MySpace profiles, and unstable anonymous services like Hulkshare, SoundCloud's smart, distinctive design stood out.¡±

SoundCloud has the distinctive attribute of fostering music discovery, often from DJ mixes or unofficial mixtapes (which feature unauthorized samples). SoundCloud¡¯s ¡°laissez-faire¡± copyright policy to remixed content and DJ sets is undoubtedly a reason for its popularity (Davis).

As a loyal user I¡¯ve found SoundCloud a great discovery platform. With a more tailored musical focus (¡°SoundCloud producer¡± is basically a genre in itself), discovering new independent artists feels organic. As a listener, I search YouTube for music I already know, but search for new music on SoundCloud, often through its social home feed. The user friendly social feed, following tabs, user profiles, as well as the type of content, (e.g. DJ mixes, remixes) facilitates such discovery in an non-invasive manner.

This is one of the reasons record companies have taken a soft stance in regards to this apparent infringement. Content on SoundCloud, authorized or not, often has promotional value.

As harmonious as this sounds, the bigger SoundCloud gets the more pressure it feels to go legit¡and monetize. The difficulty becomes balancing the interest of users and content owners, not just from an equity standpoint, but in a way that allows the service to remain useful.

Already, SoundCloud¡¯s content ID system and its relationships with Universal has come under criticism for preferential treatment. For example, DJ sets by a major backed artist like Skrillex are untouched, while mixes from a non-major back DJ are being taken down (Davis).

Such preferential treatment is contra to SoundCloud¡¯s service. SoundCloud¡¯s value is in what its users upload. These users have traditionally had no facilitation with the traditional gatekeepers or producers of music. To remain attractive, SoundCloud needs to focus on that. By going legit and literally giving part of the control into the hands of music companies with different priorities, SoundCloud¡¯s user value is in threat.

Throw in other complications, such as implementing advertising in a non-invasive manner and finding a price and value point for subscriptions while maintaining its underground credibility is perhaps even more tangled than its licensing headaches.

Both SoundCloud¡¯s licensing and strategic dilemmas endanger them to becoming MySpace 2.0.

Conclusion ¨C Tangled Licenses and Interests

This article has demonstrated the myriad of licenses and the entangled Christmas Lights of the interests of music companies, creators, and users. This complexity needs to be massaged into a call for action.

Recently, indie music legend Steve Albini spoke about music in the era of internet distribution. While, the content of Albini¡¯s speech does not hold the answer, his rhetoric about how we talk about getting there holds rare value.

Albini points out the flaws in the call to arms, ¡°We need to figure out how to make internet distribution work for everyone.¡± This question and others often posited contain ¡°tacit assumptions¡± which should be called out:
¡ñ who is ¡°we,¡± currently it¡¯s ¡°the old record business,¡± with ¡°the bands, the audience, the people who make music and who pay for it¡­ conspicuously not in the discussion and;¡±

¡ñ What is this ¡°need,¡± is this really a want, a desire to re-establish an old outdated music ecosystem (Albini).

Albini, as he tends to do, slices through egos, formality, and the established order. The survival of record companies for record companies sake is not the end goal; rewarding creators is. We need to monitor both the record companies and the streaming services molding this new music economy to ensure that any model is artist-centric. Record companies as significant intellectual property owners naturally have strong bargaining power. The power of artists and their representatives (think Taylor Swift) are fractured among various personalities and management companies. Keeping check of record companies and streaming services for all artists regardless of representation or size requires commitment and further thought.

From a service perspective, making SoundCloud work as a legit services is incredibly difficult. It is ¡°literally impossible for a system to satisfy¡± the needs and desires of music companies, users, artists, and songwriters (Albini). Yet being clear, acknowledging these realities makes wandering through such issues easier. It¡¯s not going to be easy but the first step is to open the box and start untangling¡­


Albini, Steve. "Steve Albini on the Surprisingly Sturdy State of the Music Industry – In Full." The Guardian. N.p., 16 Nov. 2014. Web. 22 Nov. 2014.

Davis, Griffin. "Understanding SoundCloud's Copyright Woes." Future of Music Coalition. N.p., 21 July 2014. Web. 22 Nov. 2014.

Miller, Larry. "Metadata: How To Develop The Foundation For The Music Business Of Tomorrow." Licensing Journal 33.10 (2013): 1-5. Business Source Complete. Web. 22 Nov. 2014.

Price, Jeff. "Will SoundCloud Take Advantage Of Artists, Or Save Them? – Digital Music News." Digital Music News. N.p., 14 Nov. 2014. Web. 22 Nov. 2014.

Ritala, Sofia. "Pandora & Spotify: Legal Issues And Licensing Requirements for Interactive and Non-Interactive Internet Radio Broadcasters." The Intellectual Property Law Review 54 (2013): 23-52. Web.

Seabrook, John. "Spotify: Friend or Foe?" The New Yorker. 24 Nov. 2014. Web. 24 Nov. 2014.

Trammell, Matthew. "Do DJs Have A Future On SoundCloud?" The FADER. N.p., 11 Nov. 2014. Web. 22 Nov. 2014. —
Guest post by Alaister Moughan

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