The SoundCloud Conundrum: The intersection of copyright holders and revenue sharing on user-generated content platforms.

mike spinelliThis guest column was contributed by Mike Spinelli, a third-year law student at Quinnipiac University School of law, where he is studying music transactions and music licensing. He previously worked at SoundExchange. Contact Mike at mespinelli@quinnipiac.edu.

SoundCloud’s kettle boiled over this summer when major labels (“the majors”) started to enforce their intellectual property rights upsetting the service’s large community of Producers and DJs. After seven years of maintaining the same service, SoundCloud took drastic steps to change its design, and more importantly, its functionality. Many of the functionality changes likely occurred from the growing concern over potentially copyright-infringing works that inhabit the platform. Although SoundCloud has remedied the situation temporarily to satisfy the smaller artists, it could run into further problems down the road.

Until just a few months ago, SoundCloud was relying on the Digital Millennium Copyright Act (“DMCA”) as well as its “fingerprinting” technology called Audible Magic to police its content for copyright infringement. Audible Magic is severely limited in that it can only detect nearly exact copies of songs. Any further determination requires a copyright infringement analysis by the courts. Thus, most of the actual policing of content stems from the major labels submitting takedown notices of tracks they believe to be infringing upon their rights. This procedure is provided under the DMCA framework. The reliance on the DMCA and Audible Magic has proven to be a safe legal position when the service is based on user-generated content.

soundcloud-logo 200wAlthough a legally sound position, this solution did not please the service’s majority of users—Producers and DJs. Many users’ questionable tracks were removed through recent DMCA takedowns which angered the SoundCloud community as a whole. Well-known DJ Kaskade was able to garner support after publicly and vehemently speaking out about having a few of his tracks removed. In what was most likely an effort to do damage control and shy away from its reliance on the DMCA, SoundCloud entered into licensing deals with the majors. In exchange for percentages of ownership in the company, SoundCloud received music licensing deals from the majors. Thus, DJs and producers who are uploading potentially infringing remixes are now protected from having their work taken down.

In addition to the new licensing deals with the majors, SoundCloud recently announced an ad-based revenue-sharing tier to its service. This will likely cause new issues. The tier seems to be similar to the monetization of content for YouTube users. Currently, the revenue sharing tier, dubbed “Premier,” is invite-only. One can only wonder which DJs and producers will be invited to Premier. From an intellectual property standpoint, the answer seems to be only DJs and producers currently signed to the majors. These artists are likely to be releasing content on the service that is properly licensed. Although SoundCloud now has licensing deals with the majors to avoid DMCA takedowns, monetization of potentially infringing material that is hosted on the service would continue to pose legal problems.

Let’s take a likely scenario and assume that superstar Drake is invited to Premier. Because of the loose atmosphere of the service, Drake (along with the majority of the user base) uses SoundCloud to post songs that aren’t on formal releases. For example, a few months ago Drake released a track entitled “Draft Day,” featuring a pitched-up Lauryn Hill sample recurring throughout the track. Because this isn’t a formally released track, it is likely that the sample isn’t cleared by the copyright owner. However, let’s assume that unauthorized used is covered under the aforementioned licenses that SoundCloud recently inked.

It’s unknown how SoundCloud will display their ads. If the ads are attributable to songs in a way that is similar to YouTube video ads, then who would receive the funds earned from questionable tracks such as “Draft Day”? Did SoundCloud foresee this issue and work it into the aforementioned deals? Thus, any money earned would be pursuant to these licenses. How will the service decide who owns the rights in the first place? Would it allow users to claim they own all the rights to their songs and wait until the copyright owner comes around? Wouldn’t that take things back to square one and irritate the subscriber base? Maybe SoundCloud will follow YouTube with regard to “unofficial” uploads of songs, where the copyright owners receive the revenue and the uploader gets none. However, who are the copyright owners in a case of a potentially infringing work? It must be worked out on a case-by-case basis between feuding copyright holders. In addition, depending on the ubiquity of Premier, there could be a fair amount of argumentation over who owns what rights.

The service is running into these issues is because it is trying to modify how a user-generated content service can make money. SoundCloud was originally built as a “music collaboration hub.” The way it predominately earned money was through users purchasing accounts with more space to upload collaborative work. Since SoundCloud opened its digital doors, the focus has shifted away from collaboration and toward DJs and producers showcasing their latest tunes. The abundance of potentially infringing works on the service creates a logistical nightmare for an ad monetization model. In all likelihood, we won’t see much of SoundCloud’s user base in the revenue-sharing tier any time soon.

Michael Spinelli

One Comment

  1. If SoundCloud really wants to go legit, the much more vexing problem – glossed over in this article – is how to pay the rights owners of the songs used in major, organized indie and amatuer recordings. Deals with the PROs alone won’t do it.

Comments are closed.