Music Royalties Under Pressure: Streaming Fraud and New Rates
October 2026 | Music Industry Insights
The music industry is facing renewed scrutiny over how streaming royalties are generated, calculated and distributed.
Three recent developments in the United States highlight the financial challenges ahead: an $8 million AI-assisted streaming fraud scheme resulting in a prison sentence, a new investigation into streaming manipulation by the US Copyright Office, and proposals for new mechanical royalty rates covering 2028–2032.
While these developments address different areas of the music business, they share a common concern: the accuracy, transparency and fairness of royalty distribution.
For artists, songwriters, labels and publishers, the implications extend beyond regulation. They directly concern how music revenues are calculated, protected and ultimately paid.
$8 million streaming fraud case exposes weaknesses in royalty systems
In October 2026, Michael Smith was sentenced to 18 months in prison for operating a large-scale streaming fraud scheme involving AI-generated music and automated streaming activity.
According to US prosecutors, Smith used artificial intelligence to create hundreds of thousands of recordings and deployed automated accounts to generate billions of fraudulent streams across major digital streaming platforms.
The operation generated approximately $8 million in fraudulent royalty payments over several years.
How does streaming fraud affect legitimate royalties?
Many streaming services operate on a pro-rata royalty distribution model, where eligible revenues are allocated according to each recording's share of total eligible streams.
Under this system, fraudulent streams can distort royalty distributions by increasing the proportion of revenue attributed to artificially generated activity.
In practical terms, this can divert money away from legitimate artists and rights holders.
The financial consequences extend beyond the fraudulent payments themselves. Manipulated streaming data can also affect revenue reporting, catalogue performance analysis and the reliability of information used for royalty accounting.
For labels and publishers managing large catalogues, the integrity of streaming data is fundamental to accurate financial reporting.
US Copyright Office launches investigation into streaming fraud
Following growing concerns about streaming manipulation, the US Copyright Office announced a formal inquiry into music streaming fraud in October 2026.
The investigation seeks to understand the scale of fraudulent streaming activity, its financial consequences and the effectiveness of existing prevention measures.
It will also examine the role of artificial intelligence in enabling large-scale manipulation.
Among the areas under consideration are fraud detection, reporting transparency, data sharing and potential measures to protect legitimate royalty distributions.
Why this matters for royalty accounting
Streaming fraud is not solely a platform compliance issue. It is also a financial reporting concern.
Royalty accounting depends on several interconnected processes: accurate usage data, reliable ownership information, contractual royalty calculations and reconciliation of amounts received.
When fraudulent activity enters the reporting chain, it can compromise the accuracy of those processes.
For music companies, stronger detection and reporting standards could ultimately improve confidence in royalty statements and revenue reconciliation.
However, the outcome of the Copyright Office inquiry remains uncertain. Its findings may inform future policy discussions, but the investigation itself does not establish new royalty rules.
Mechanical royalty rates: New proposals for 2028–2032
While the industry addresses streaming fraud, another significant development could affect how much songwriters and publishers receive from streaming services.
In October 2026, participants in the Phonorecords V proceedings submitted proposals to the US Copyright Royalty Board for mechanical royalty rates covering 2028–2032.
Mechanical royalties compensate songwriters and music publishers for qualifying reproductions and distributions of musical compositions, including interactive streams.
Under the current Phonorecords IV framework, the headline percentage rate for qualifying streaming services is scheduled to reach 15.35% of applicable service revenue by 2027, subject to the relevant calculation rules.
The new proceedings will determine the framework applicable from 2028 onward.
A proposed shift toward per-stream payments
Among the proposals is a mechanical royalty rate of $0.003 per interactive stream, with inflation adjustments in subsequent years.
This would represent a different approach from the current revenue-based framework.
However, the proposal is not an approved rate, and the final outcome of the proceedings remains subject to negotiation and regulatory determination.
The distinction is important: a proposed per-stream rate cannot be directly compared with the current revenue percentage without considering the full calculation methodology.
Publishing revenues continue to grow
According to figures highlighted in the Phonorecords V discussions, US music publishing revenues increased by approximately 30% between 2022 and 2025.
Digital Music Association representatives have pointed to this growth in the context of the rate negotiations.
However, higher industry-wide publishing revenues do not necessarily mean individual songwriters are receiving proportionally higher royalties.
The distribution of those revenues depends on factors including streaming consumption, ownership shares, licensing arrangements and applicable royalty calculations.
Another important issue is subscription bundling, where streaming services combine music access with other products.
Depending on how these bundles are treated under the royalty framework, the revenue base used to calculate mechanical royalties may change.
For publishers and songwriters, the eventual outcome of Phonorecords V could therefore have a meaningful impact on future income and financial forecasting.
What these developments mean for music rights holders
Taken together, these developments highlight two fundamental financial questions facing the music industry:
How can royalty revenues be protected from manipulation, and how should those revenues be calculated and distributed?
Streaming fraud raises concerns about the reliability of the underlying usage data. The Copyright Office inquiry could lead to recommendations for stronger industry safeguards, while Phonorecords V addresses the financial framework used to compensate songwriters and publishers.
For artists, labels and publishers, these issues reinforce the importance of accurate royalty accounting, transparent reporting and effective financial oversight.
Rights holders should be able to understand how their revenues are generated, which royalty rates apply and whether reported amounts reconcile with the underlying data.
Changes to royalty calculation frameworks can also affect financial planning, particularly for publishers and companies managing substantial catalogues.
The bigger picture: Protecting music revenues
As streaming continues to evolve, so do the financial systems supporting the music industry.
Artificial intelligence has introduced new opportunities for music production, but it has also enabled fraudulent activity at a scale that challenges existing detection systems.
At the same time, ongoing royalty rate negotiations demonstrate how the economics of music streaming remain subject to change.
The common denominator is the need for greater financial transparency and accountability.
For music creators and companies, understanding how royalties are calculated and distributed is essential to protecting the long-term value of their rights.
Sources
Music Business Worldwide, October 2026
