Business

On Feb. 21, The Mechanical Licensing Collective (The MLC) announced to its members that it had hit an important new milestone roughly two years after launching — distributing $1 billion in royalties to music rights holders with a current match rate of over 89% for streaming data to a musical work in the MLC database for 2022.
The MLC is a Nashville-based non-profit which was established by the Music Modernization Act (2018) as the designated organization to collect and distribute mechanical royalties under a blanket license for streaming services. At the time, the industry was fraught with a growing pool of royalties from streaming services that were sitting unallocated because the composition’s owners could not be found. The creation of the MLC was designed in hopes of alleviating this issue.

The organization officially opened its doors Jan. 1, 2021 and since then, it has been tasked with not only collecting and distributing current mechanical royalties currently coming in but also trying to match that pool of $427 million in royalties from before its inception that never made it to its proper owners. So far, it has matched over $300 million of that $427 million pool. While some in the industry have nicknamed this pool of money “black box” royalties, The MLC prefers to use the term “historical unmatched royalties.”

To explain how The MLC reached its $1 billion milestone and to answer questions about how the Copyright Royalty Board’s Phonorecords III ruling will affect The MLC and when unmatched royalties will be divvied to rights holders based on market share, CEO Kris Ahrend gave an exclusive interview to Billboard.

The MLC has paid out $1 billion to rights holders thus far. Why does this first billion feels so significant to you and your team?

It’s a massive amount of money and to know that we have built a process that has allowed us to make connections that that have generated that much revenue is incredibly rewarding for us but more importantly for rights holders. That’s a billion dollars that has gotten to rights holders that will allow them to continue to create. With the rates going up for Phono IV, I think we’ll reach our second billion much quicker than we reached our first, so we’re excited and looking forward to see how much more we can pay out this year alone.

What are some of the initiatives that the MLC has taken on that has helped you achieve this 90% match rate per month?

By establishing this central place for rights holders to go to register works and to see the results of their work, whether it be the public search of our database or within our member portal, we have increased visibility that has led to an enormous influx of data on our part. We’ve received and processed well over 18 million registrations for songs since we began full operations a couple of years ago. The simple formula for us is data drives dollars. The significant amount of data we’ve received has been a big factor in helping us drive up match rates.

This is a lot of data to handle and a quick influx of info over just a few years. Have you scaled up your staff to make sure that the data is being monitored properly?

We’ve been growing from the beginning. From the time I joined a little over three years ago until today, we now have a team of more than 110 people working at the MLC. For the first two years our largest team was our support team. We recognized that the big initial challenge was helping people understand how the MLC works. In the last year, the group that eclipsed our support team is our matching team. These people try to make the connections between the sound recording data they receive and the song data in our database. They’re reviewing millions of lines of data every month to try to make more connections every month to impact overall match rates.

We are waiting on the Copyright Royalty Board to fully finalize Phono III rates. This could happen any day now, and whenever that happens, streaming services and the music business will have to come together to go back in time and make sure payments from 2018-2022 are in alignment with the new headline rate. How will the MLC handle this recalibration?

As for Phono III, we will certainly be ready when the Phono III rates are finalized. The DSPs [digital service providers] will have some time after the rates are finalized to redeliver all of their data and likely to make some incremental payments, but when that happens, we’ll be able to hit the ground running. There are three different areas of royalties that will be impacted when this happens. Two of these involve the MLC, one does not.

The one that doesn’t is all the royalties that DSPs paid out in 2018, 2019 and 2020 before the MLC’s blanket license began. The DSPs have to correct the royalty payments that they made. That’s not something we can be involved in.

But the second and third pieces we will be involved in. The second part is correcting the unpaid royalty data that the DSPs transferred to us. We will need to correct that. For all the historical unmatched royalties that we received that relate to the Phono III period, the DSPs will have to redeliver all of their data for 2018, 2019, and 2020. Potentially in incremental payments. Once we have that new data, the payments will begin processing and paying out within a matter of months.

The third piece is the 2021 and 2022 blanket royalties that we paid out under guidance from the Copyright Office. We’ve paid out royalties thus far at the Phono II rates so we know those will have to be corrected. Again, the DSPs will have to redeliver their data for 2021 and 2022 to us and then we have to calculate how much each stream is owed under the new rates and process the adjustment.

This is a process that will begin within a matter of months after we get the data from the DSPs and that process will play out probably throughout next year.

Is there a more specific timeline you are trying to follow with reconciling these 2021 and 2022 royalties?

Right now we are hopeful we can process a year of adjustments over six months. That’s across all DSPs. We would look to process the adjustments for 2021 in the first half of 2024 and then the 2022 adjustments in the second half of 2024.

Do you have staff members that are aiding this process specifically?

We’ve been building the technology that we need to do all of this for several years now. It’s something we’ve been preparing for from the beginning because the rates for Phono III weren’t finalized when we launched. There’s no extra people, it’s the same teams that are dealing with our technology and DSP relations that are managing that transition.

NMPA chief David Israelite has recently spoken about his hope to reform the CRB and increase the likelihood of timely settlements between publishers and streaming services to avoid something like Phono III happening again. What is the MLC’s stance on CRB reform?

We aren’t active participants in the CRB process, but the headline message that you’re hearing is the one that we would echo: It’s imperative that rates be set ahead of time so that we can manage our process with the right rates from the outset. Anytime we introduce additional complexities into a process that is already quite complex, we have to redo work.

There are more DIY creators than ever. What are some ways The MLC is trying to help meet these creators where they are at, tell them about the MLC and help them collect the money they are owed?

There are three different ways.

First, education. We recognize that administration is very complicated and that very few creators get into the business of creating with an interest in administration. We’re trying to put out materials that explain in really simple terms how digital administration works.

Second, tools. We also now have a suite of member tools that are as effective for the smallest creator as they are for large publishers and administrators. We have tools that allow members to register works individually or in bulk. We have a claiming tool that allows members to search all works for which not all of the shares have been claimed. And our matching tool now allows rights holders to search all of the unmatched data that came in under the blanket license with the exception of a few last files for one DSP, Spotify, that we’re still working through all the historical data from. This tool is not only a really helpful tool for rights holders, but it’s also illuminating the black box for the first time, which is a huge step toward eliminating it.

Lastly, we have our Distributor Unmatched Royalties Portal (DURP) which has allowed any distributor of sound recordings to access the data for unmatched uses of songs that we can identify as originating from their distribution platform. Those indie distributors are often serving people who both wrote and performed the recordings that are being distributed. They can literally see which of their customers might be missing out on mechanicals for the digital uses of their sound recordings and songs. Our hope is that those distributors will now use that data to engage with their customers directly,

Is there a distinction between what that The MLC considers to be an “unmatched” royalty or a “black box” royalty?

We don’t use the term “black box” anymore because we have largely illuminated the black box, which is to say our members have full visibility into the unmatched sound recording data that we receive and can search through it and propose matches to songs they have registered. The data is no longer in the dark – that’s a huge step toward helping people find their share of money that may have been missing.

We break down the royalties pending distribution into three buckets, two of which are most relevant for this conversation. Those two are “unmatched” and “unclaimed,” so an unmatched royalty dollar is a royalty dollar that we have not been able to associate with a song in our database. Unclaimed royalties or those royalties that we have been able to match to a song, but we can’t pay out because not all of the rights holders with shares of that song have claimed their shares. That’s a really important distinction because it’s not about our inability to make the connection to the song. It’s the fact that the writer or the administrator hasn’t claimed their share.

It’s hard to argue offering a transparent user portal isn’t a good thing, but still, allowing so many people the access to see what songs and royalties have and have not been claimed can leave them up for incorrect or fraudulent claiming. Why does The MLC believe this fully transparent outlook is the best system despite the risks it poses?

It is one of the stated objectives of the Music Modernization Act to bring greater transparency to this part of the market. I firmly believe that transparency is always a good thing, even where there may be bad actors. The more transparent the data, the more likely it is that rights holders can see evidence of those bad actors in order to address it. We certainly spend an enormous amount of time and effort looking for any evidence of bad actors. What we are hoping to create is a large group of knowledgeable empowered creators who are actively managing their rights, and as long as they are actively managing their rights, that diminishes significantly any opportunity that anyone else might have to to do anything inappropriate.

As generative AI tools become more and more popular for music makers to use, many anticipate a deluge of new songs into the market, even more than what we have now. It will likely also mean more DIY, unsigned creators than ever. Do you believe this could cause any challenge or strain to the MLC to try to reach this fast-growing cohort of new musicians?

The tools are always going to evolve. I think as long as AI powered tools enable real people to create meaningful and impactful music, they’re a good thing. If the tools make it easier for people to create, then that will increase the number of songs in the market. That will also increase the amount of data that we have to process, so it will be a challenge for the MLC. But we’re already talking about a market with well over 100 million sound recordings and we already have 30 million musical works in our database. [A number of these 30 million musical works have multiple recordings available, explaining most the discrepancy in the two figures.] So I’m not sure how much additional growth itself is going to change the challenge in front of us. We’re already managing an incredible amount of data.

The MLC is charged by the MMA to divide up whatever remaining unmatched historical money you have and distribute it out to rights holders based on market share after two years. Critics say this will provide a financial windfall to the major publishers. Since the MLC is about two years in, I wanted to check in and see if this distribution is in progress?

One of the misnomers about that mechanism is that it would only result in distributions to the majors or for the large companies. In reality, what the market share mechanism means is that we will distribute any remaining royalties on a pro-rata basis to anyone we’ve paid. Self-administered songwriters who collected from us in 2021 will be eligible to receive a pro-rata portion of any remaining royalties from 2021 that we are not able to distribute. So everyone who gets paid will essentially get paid a little bit more for each stream that they were paid on.

In terms of the timeline, the law said the historical activity had a two years window from the time the blanket licenses began, but the blanket license royalties is set to a three year period. We have not yet reached that three year period for the blanket royalties, and for all royalties — blanket or historical — we have not yet taken any steps toward eventual distribution on that basis.

In the case of the majority of historical unmatched monies, we still don’t have the final rates or the final amounts that we will have to distribute [because of the delay of Phono III.] We are not going to proceed with any market share distribution for the historical money until we’ve gotten all of the Phono III rates finalized and have attempted to match and pay out that money.

Again, for the blanket money, we haven’t yet hit that minimum period, but also we would not rush to that outcome. We’re going to let the data tell us whether there is still benefit to trying to match and pay out, or if we reached a point where we’re no longer seeing new progress. The whole point of that market share payout mechanism was to ensure that the MLC did not sit on pools of unpaid money indefinitely.

The intent behind that provision was to ultimately get that money back to rights holders and to make sure we don’t sit idle with it for years or decades. Given this was the intent of Congress, we will honor that intent. For right now, though, we are focused squarely on getting the data in and paying out as much as possible.

Will you be announcing when this market share payout process begins?

The MMA requires us to publicize when we do eventually move to a market share distribution for any period. So that is not something that’s going to happen as a surprise. Again, we’ve no plans to do any market share distributions this year at all. Probably not next year either.