From The Trichordist:
Spotify could have completely avoided its legal issues around paying songwriters. The company could have sought to obtain the most recent information about the publishing and songwriters for every track at the service. The record labels providing the master recordings to Spotify are required to have this information. All Spotify (and others) had to do, was ask for it.
Here’s how it works.
For decades publishers and songwriters have been paid their share of record sales (known as “mechanicals”) by the record labels in the United States. This is a system whereby the labels collect the money from retailers and pay the publishers/songwriters their share. It has worked pretty well for decades and has not required a industry wide, central master database (public or private) to administer these licenses or make the appropriate payments.
This system has worked because each label is responsible for paying the publishers and songwriters attached to the master recordings the label is monetizing. The labels are responsible for making sure all of the publishers and writers are paid. If you are a writer or publisher and you haven’t been paid, you know where the money is – it is at the record label.
Streaming services pay the “mechanicals” at source which are determined by different formulas and rules based upon the use. For example non-interactive streaming and web radio (simulcasts and Pandora) are calculated and paid via the appropriate performing rights society like ASCAP or BMI. These publishing royalties are treated more like radio royalties.
. . . .
Every physical album and transactional download (itunes and the like) pays the “mechanical” publishing to the record label directly, who then pays the publishers and writers. This publishing information exists as labels providing the master recordings to Spotify have this information. All Spotify (and others) have to do, is ask for it.
Link to the rest at The Trichordist
PG says the system doesn’t sound all that simple, but he’s not in the music business.