MusicRow recently sat down with SoundExchange President Michael Huppe to discuss the performing rights organization. SoundExchange collects statutory royalties on behalf of artists and master rights owners (typically record labels) from satellite radio, internet radio, cable TV music channels and other non-interactive streaming services. Pandora and Sirius/XM are two of the biggest companies that pay artists and label royalties through SoundExchange. The Copyright Royalty Board, created by Congress, has entrusted SoundExchange as the only entity in the United States to collect and distribute these digital performance royalties.

Huppe’s career includes time as Senior Vice President for Business & Legal Affairs and Deputy General Counsel with the RIAA. He also serves on the Leadership Music Board of Directors.

MR: How does SoundExchange’s royalty distribution process work?
Huppe: We collect the royalties and split them 50-50 with the labels and artists. We pay the artists directly, not through the record label, regardless of whether or not they are recouped.

We pay out quarterly. A huge chunk of our money is out the door between 45 to 60 days, and 80 to 100 percent is out the door within about three months.

We’re non-profit, so there are things we do that you wouldn’t do if you were driven by profit, but we do them because it’s the right thing. For instance all P.R.O.s have black box money, which accumulates when they don’t know where to send royalties. According to the law, once we process money and assign it to an account, the person has three years to collect that money. If they don’t collect it, we can absorb it to offset costs. But we routinely push that off and we still have money going back to 2003 and 2004 that rights holders could come collect. There’s no way we would do that if we were driven by profit.

As a non-profit, we take our operating costs off the top and everything else goes out the door. Our admin rate in 2011 was 5.3 percent. We do what we do very efficiently. Our board is made up of people who have an interest in keeping the admin rate low. The board includes members from indie and major record labels, trade associations, unions, and artist representatives such as lawyers and managers. So, who better to oversee what we do?

The growth of SoundExchange has been phenomenal. Six or eight years ago we were the little engine that could. In 2005, we distributed $25 million in royalties. This year, that number will top $400 million. That kind of growth is unbelievable. Since its inception, SoundExchange has paid more than $1 billion in royalties.

Does this significant growth reflect changing consumer habits?
The way people consume music is changing. It’s not about ownership, it’s about access. It’s not about buying, it’s about listening. You combine that with penetrating broadband across the country and smartphones that collapse everything on to one device, and Bluetooth and internet access that allows people driving across the country to get Pandora over their cell phones and then delivered through their car stereo. Given these technological advancements, it’s an unbelievable time in the music industry. These new ways people consume music, these new business models—we’re very bullish about where it’s going.

Tell us about SoundExchange’s data collection process.
What we do is extremely complicated. Over 2000 services send us data every month. And sometimes the data is not great, either you can’t read it, or fields are missing, or they submit the wrong information, such as listing the distributing label, which doesn’t own the master rights. We clean it up and process all the money. Then we have the payout side, with 70,000 artists accounts, and more than 20,000 rights owner accounts, mostly labels. SoundExchange has 100 employees and another 40 temps.

We’ve always resisted sampling because if we picked a two-week sample per quarter, it would [miss a lot of song plays]. Since it is digital royalties, and everything runs through computers, we get census reports. Every month Pandora sends us data of which recordings were streamed and how many people heard that recording.

This means that a lot of the middle, working class artists get checks. In 2011, 90 percent of our annual payments were $5000 or less. Those are the stories that make you feel good.

What is SoundExchange’s role in the fight for royalties?
We are first and foremost there to protect content and the long term value of music. I’m proud of that, but we are also very much a technology company. We are at the intersection of technology and music. We are starting to occupy a role as advocates for artists and labels; honest information brokers. We have the benefit of not having to meet our numbers every quarter. Digital is the future of the industry and streaming is a big part of that.

We are trying to get over-the-air radio to pay artist royalties. We love our songwriting brothers and sisters, and we don’t want to encroach upon what they earn, but the other side tries to divide us by telling songwriters that the artists royalties would come out of their piece of the pie. We love songwriters, and we think they should get their fair share, but we think performers and record labels should too. It is tough to get artists to speak out in favor of the terrestrial performance right because they are worried about retribution.

Recently, it was great to see artists speak out against the Internet Radio Fairness Act through an advertising campaign. [Last month Huppe testified against the act which would have lowered rates paid by Pandora and similar services.]

www.SoundExchange.com.