Online content royalty audits arriving in Canada, but are they early?

As with every other traditionally pen-and-paper-based profession, accounting has largely made the leap to working electronically. But other opportunities still beckon in the digital world, and one Canadian firm is beginning to offer digital royalty audits for use of musical works online, even though it's not clear yet where the market demand will come from."A royalty audit, whether it's digital or conventional, is just a way to ensure that a licensee or content provider is getting all the revenue they're entitled to," explains Steven Rayson, royalty compliance team leader at Toronto accounting firm Mintz & Partners. "There's no textbook for this yet - it's very much a new field in Canada...we really don't know how big this market is."Although an emergent area for Mintz & Partners, Rayson believes royalty audits will be profitable. There are several standout differences that differentiate the digital royalty audit process from more conventional auditing practices, making it a greenfield business opportunity.For starters, digital content is more prone to "revenue leakage," owing to the fact that the goods sold aren't physical, digital content isn't an exhaustible inventory, and it's possible to copy digital media files repeatedly without any discernable loss in quality. When only one virtual "item" that can be sold over and over again is required to set up shop, it can complicate transaction tracking for audit purposes. Then, there's the plethora of platforms available for consuming digital content, including mobile, gaming consoles, video on demand, and satellite radio, each of which have their own formats, such as ringtones and full-track MP3s on mobile phones, as well as proprietary compression algorithms, such as the AAC audio format used by Apple Inc.'s iTunes music service.While he says the process varies depending on each client's business model and particular circumstances, Rayson adds there's usually a more pronounced IT component when enumerating digital royalties compared with other forms of audit.And although providers of content and licensing agencies may have their own procedures in place for gauging who's made use of their works, and to what extent, Rayson says, "It's always good to have someone who's not part of that process come in and validate those results."However, the head of the agency that collects royalties on behalf of music publishers for reproductions of their work in Canada says the need for independent royalty audits hasn't yet presented itself, at least not for digital music sales over the Internet."It's a little early in the game for us to conduct any audit of the online music services," says David Basskin, president of the Canadian Musical Reproduction Rights Agency. Service such as iTunes and the homegrown Puretracks only have a few years of operating history in Canada at the most, meaning any information gleaned from their sales would be non-indicative."If our auditors went in right now, they wouldn't have the raw data they'd need," adds Basskin. "But, rest assured we will be pursuing royalty audits of online music services eventually in the future."Rayson, however, is confident that his team can turn up at least some revenue slippage in almost any licensing arrangement. "It's amazing - most don't realize how much they're losing until they see it in black and white," he says. "There's always something, whether it's intentional or not."While he agrees that there are often "omissions and oversights" on the part of record labels, online music services and other users of musical works, Basskin says he would prefer to work with such entities on a friendly basis than adopt an adversarial tone, and approach the matter of royalty audits as if the burden of proof rests with the licensee."Whatever antagonism might exist between us and the record companies, even I wouldn't say that they're always doing something wrong," he says. "I do not approach the subject of audits as if I'm Elliott Ness about to bust up the speakeasies."

Online content royalty audits arriving in Canada, but are they early?

Broadcast | September 10, 2007

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