Ed Christman and Billboard broke the news today that Music Reports, Inc. (MRI) — a music rights administration service — is attempting to directly license music from record labels to be used on Sirius/XM satellite radio.

Currently, Sirius/XM pays digital public performance royalties to SoundExchange for the music it plays; SoundExchange then distributes this money to sound copyright owners (usually the labels) and performers — simultaneously and directly. How much Sirius/XM pays SoundExchange is based on a rate set by the Copyright Royalty Board with input from stakeholders, in compliance with federal statute. Currently, Sirius/XM pays 7.5 percent of its gross revenue. The rates are currently set through 2013, after which they will be revisited to cover a period from 2013-2018.

So why is this move by MRI potentially a big deal? To answer that question, we need to quickly go over some history.

In 1995, Congress passed the Digital Performance Right in Sound Recordings Act, which granted a performance right for the digital transmission of sound recordings (like Sirius/XM and webcast plays). Previously, US copyright law contained no provisions for a performance right in sound recordings. Ultimately, SoundExchange was designated as the non-profit organization that collects the license fees and distributes royalties to those whose recordings were played digitally.

SoundExchange receives the licensing fees and playlists from Sirius/XM, Pandora and other digital webcasters. Then, royalties are distributed to the sound recording copyright owner – which gets 50 percent —  and the performer — who gets 45 percent. The non-featured performers receive the remaining 5 percent. The money doesn’t pass through the record labels first; the payments are made directly and simultaneously, which means the performer gets his/her money for the digital performances whether they’ve recouped or not. And in some cases, performers are receiving checks with four or five figures on it, and the money keeps growing with each distribution.

Here’s why the MRI scheme raises three red flags. As Billboard reports:

As part of its move to direct licensing, SiriusXM will pay the full royalty rate directly to the labels, as opposed to the way SoundExchange makes payments, splitting royalties evenly between the artist, which it pays directly, and the label. So labels that directly license their masters to Sirius would then be responsible for paying the artist royalty. MRI would provide a full accounting on a per song basis to labels. [emphasis added]

In plain language, SiriusXM and MRI are proposing to have all the money flow through the record label, instead of paying performers their share directly. FMC knows and loves many record label people, but history has demonstrated that these passthroughs are subject to money being diverted to pay for album costs, or lack the same level of transparency that’s available to artists when receiving a check directly from SoundExchange. Having heard many stories about clever accounting practices in which even successful artists never “recoup,” we worry about whether performers will recieve their share of a growing revenue stream.

Then there’s this. Billboard reports:

The question arises if the labels will pay the artist half the royalty, or 50 percent, they receive for each time a song is played, or will some labels choose to pay them their artists the regular royalty rate, which typically ranges between 15 percent and 20 percent.

Yep. There’s also a chance that, under this direct licensing arrangement, performers would see their royalty rates reduced.

And finally, this move is also an attempt to expand what Sirius/XM is allowed to do with these licenses. According to Billboard:

In moving to directly license masters, the company is seeking expanded licenses that will allow for more functionality. For example, it wants to allow subscribers to record programming blocks and be able to rewind and fast-forward that segment. It also is seeking to allow music to be cached locally on devices and applications that have that capability. In seeking the former, it is in effect asking for a waiver from the sound recording performance complement of the Digital Millennium Copyright Act, which limits how many times songs from an artist can be played within an hour.

That would make satellite radio much closer to on-demand services like Rhapsody, MOG or Spotify, which operate under an entirely different licensing structure. Even non-interactive services like Pandora currently pay a different rate than satellite radio. By bypassing SoundExchange, Sirius/XM could up paying an even lower fee for expanded offerings.

Here at FMC, we want artists to get the money they’re owed for the use of their music on any platform. The statutory rate for digital performance plus direct payment via SoundExchange is an important piece of the compensation puzzle for creators. Bypassing it might benefit the bottom lines of major corporations in the short run, but it’s a dangerous thing for performing artists. And in the long run, we wonder whether bypassing the benefits of collective licensing through SoundExchange, with its ability to fight for good rates and to keep the administrative costs low, might actually be harmful to the bottom line of labels considering the Sirius/XM offer. We’ll be keeping an eye on how this shakes out.