Wired gets it wrong: The facts on SoundExchange

In an article featured in this week's Wired Listening Post, writer Eliot Van Buskirk lays down claims that SoundExchange has been "caught lobbying." He alleges that SoundExchange is not authorized to fund musicFIRST, which is currently at war on Capitol Hill with terrestrial radio over performance royalties.

In essence, Wired is accusing that SoundExchange of acting illegally... or "apparently" acting illegally. Because section Section 114(g)(3) of the Copyright Act limits how the nonprofit can spend the money it collects. Eliot Van Buskirk feels that SoundExchange has violated this section of the law, and that "SoundExchange should immediately sever its ties to musicFirst and any other lobbying group it funds or assists, and fulfill its role as a neutral administrator of fees."

The problem? Wired doesn't have the facts straight. And I need to call them out on this.

First, some background.
Let me preface this by saying that I don't like SoundExchange. SoundExchange was founded by the RIAA to handle the performance royalty side of the business. And the long-arm of the RIAA rubs me the wrong way on many different levels. I feel the music industry has used legislation, as opposed to innovation, to further its cause in light of a rapidly changing digital music revolution. So in general practice, I'm skeptical of everything coming from the music industry.

That said, I'm also in favor of performance artists getting paid. The artists who physically make the music we hear on the radio (be it terrestrial, satellite or internet) should be compensated - fairly - for that airplay. By "fairly" I don't mean the ridiculous rates that SoundExchange is currently asking for (from both internet and satellite radio). But I also don't think there should be a differentiator between analog and digital radio. The delivery method should hold no bearing on royalty compensation. Period.

Bottom line: I'm in favor of leveling the playing field. Whether I personally like the music industry makes no difference - all forms of radio should be treated equal. And it's my personal opinion that if terrestrial radio was treated on equal ground as other forms of radio, then the burden on internet radio and satellite radio wouldn't be so high.

So that's my opinion, now let's get to the facts, shall we?

SoundExchange is 501c(6) non-profit trade association that's authorized to advocate on behalf of its members for a common business interest. By definition (and by law) that's what a 501c(6) organization does.

Here's how it works:
SoundExchange sends royalty checks to all artists (members and non-members) whose songs have been played. Period. If an artist is a SoundExchange member, a portion of their royalties can be allocated to programs the organization believes in (such as musicFIRST). These members don't determine how these funds are used - that's why they have an executive board - and the SoundExchange board makes this decision. If you've ever been part of an organization, you know that the board makes decisions based on the interests of the organization and its members. Usually by a vote.

And the SoundExchange board unanimously approved the funding and participation in the musicFIRST Coalition. So, if musicFIRST is successful and the performance royalties for terrestrial radio are granted, this will obviously benefit SoundExchange's members. It all goes back to that "advocating for its members" concept.

Now I'm no lawyer, so for the legal terminology, here's what Michael Huppe of SoundExchange's general counsel had to say about everything:

"Like most performing rights organizations, SoundExchange operates as a 501(c)(6) membership organization to benefit its members and their interests. In that capacity it advocates on behalf of and offers services to its members as directed by its board. In supporting musicFIRST, SoundExchange is operating in this capacity and only utilizes member funds after approval of the board. It does not use non-member funds for this purpose."

(You lawyers reading this will enjoy the next section.)

"As the collective responsible for receiving royalties under section 114 of the Copyright Act, SoundExchange collects and distributes royalties for all artists and labels regardless of whether they are members of SoundExchange. When operating in that capacity, SoundExchange is guided by 114(g)(3), which lists what deductions may be taken for costs. In such cases, administrative costs may be covered by royalties to all payees (members and non-members alike)."

Wait. Now read that bolded sentence over again. The money that the SoundExchange Board is authorized to use for musicFIRST comes only from member royalties, not royalties collected from non-members.

The Wired article seemingly ignores this fact, even though Michael Huppe even provided this info in the article itself.

What the Wired article does do, is seek the advice of other legal experts. But... those legal experts don't make any definite conclusions:

"Jessica Litman, a law professor at the University of Michigan, could not point to any legal grounds for SoundExchange's move, saying, 'I'm not aware of any statute that authorizes the contribution.'"

That does not mean the legal grounds aren't there or don't exist just because she could not point to them. They’re actually very clear: the incorporation of SoundExchange as a 501c(6) gives it the authority to advocate for its members.

"Shoshana Zisk, a music attorney in San Francisco, said, 'Upon reading Copyright Act Section 114(g)(3), it would appear that funding a lobbying or PR organization (such as musicFIRST) is a violation of this provision.'"

Now this looks to be Wired strongest argument. But, Zisk doesn't distinguish between funding based on authority granted by 114(g)(3) of the statute, which applies to all domestic royalties collected by SoundExchange. Again, the funding is authorized by members of SoundExchange, not all the copyright owners and performers who SoundExchange pays. This may sound like legalese, but there's actually a very distinct difference between them.

Members, and only members, paid for musicFIRST.

Understanding this, Wired's accusations fall flat on their face. Not surprising, considering that the article was all based on what "a source familiar with SoundExchange told [Eliot Van Buskirk] on condition of anonymity".

Many organizations, especially a 501c(6), use different operating funds for operations and for advocacy. In accordance with the law, the SoundExchange board only approved the funding to support the artists and copyright owners that they represent. That's all.

More importantly none of this spewing of misinformation does a bit to help anyone. Not listeners. Not musicians. Not even Wired. It only leads to benefit organizations - like the NAB - who oppose the thought that musicians should be paid when they get airplay.

The real issue at hand is that we're supporting 70-year old rules that give terrestrial radio a free ride. And we're one of the only countries in the world that do this (along with Iran, China, Rwanda, and North Korea).

Terrestrial radio is an industry that pulls in profits that nearly double what the music industry makes. These aren't small 'mom and pop' stations, but huge media conglomerates. There is absolutely no reason why Internet Radio and Satellite Radio should foot the bill, while terrestrial sits idly by enjoying an obscene government-sanctioned profit margin.

[Read the original Wired article]