The Age-Old Battle over Paying the Mechancial.
This is an essay adapted from my thesis work. Recent conversations around the ethics of streaming are providing many avenues for discourse. However, the US needs to open discussions around the elements underpinning its regulatory structure to enact meaningful change.
The players that reign over the music licensing marketplace have changed dramatically over the last twenty years. Digital service providers (DSPs) distribute music versus record companies, consumer behavior demanding music instantly and seamlessly, and entry barriers for creators are lower than ever. Congressional actions to balance these forces have resulted in the Music Modernization Act. However, an issue of great importance to the industry will be navigating the economic impact of a successful appeal to CRB’s decision and its lasting implications for songwriters and rights holders.
As has been the case since the inception of the mechanical royalty, federal regulations governing various uses of compositions in the marketplace have pinned creators from advocating for the value of their work. While publishers, songwriters, and creators enjoyed a thrilling victory in the preliminary results of the Copyright Royalty Board Phonorecords III (CRB III) decision to raise the mechanical rates; a successful appeal set forth by a group of major DSPs stands to complicate the future for creators of all shapes and sizes.
In this essay, I will break down the rate structure as passed by CRB III, the appeal and the interest of various parties, and lastly, I will supply a few considerations to the current rate appeal and how that will set the table for CRB IV which commenced in Jan 2021.
A federal regulatory body — called the Copyright Royalty Board (CRB) — currently sets the mechanical royalty or the amount paid to the Performing Arts copyright owner to reproduce and distribute phonorecords (a right for songwriters since 1909). In most cases, digital service providers (Spotify/Amazon/Apple etc) pay the proposed rate in exchange for a blanket license which grants use of any compositions under that license on their platform (Gilbertson 2). The latest rate announced by the CRB (CRB III) is the greater of two different calculations based on the DSP’s gross revenues and amount they pay to license sound recordings (2). The percentage of DSP revenue model — most often called the headline rate in industry slang — is slated to start at 11.4% and increase yearly by 1% for a five-year period (Rose). The second is a percent of the Total Cost of Content (TCC) the service pays to license all sound recordings used on their platform (Rose). This approach’s reasoning was to find a way to begin integrating the sound recording licensing market into the CRB’s rate setting procedure (Victor 55). Essentially, the greater of the two percentages is determined to be the “all-in” license rate. The all-in rate reflects the total amount attributed to publishers divvied up between performance royalties and mechanicals. This is due to the unique fact that a on-demand stream is considered both a performance and a reproduction/distribution. Pinging the need for both a mechancial and a performance license. Since U.S. Performing Rights Organizations currently handle the digital performance licenses negotiation, the resulting mechanical rate is “all-in” rate minus the performance license (Gilbertson 2 & Victor 47).
The CRB’s announcement was met with an appeal from Amazon, Spotify, Google, and Pandora/SiriusXM (Rys). The appeal critiqued the CRB’s ruling as overly complex and rife with significant flaws that could lead to rates for rights holders ballooning out of control (Ross). The heart of the objection was a procedure appeal that the CRB’s determination lacked DSPs’ due process to object (Ingham). Songwriter and publisher advocate groups met the appeal with unified outrage. Claims of DSPs suing songwriters circulated on headlines across the internet. David Israelite of the National Music Publisher’s Association echoes in an interview with Rolling Stone that “whether we win or lose, what [the DSPs have] done here is so offensive, it will never be forgotten.”
On July 28, 2020, the D.C. Court of Appeals upheld the DSPs appeal to remand the rates set by CRB III. In a statement from the appeal, the court felt the “Copyright Royalty Board…failed to give adequate notice or to sufficiently explain critical aspects of its decision making. Specifically, the Board failed to provide adequate notice of the rate structure it adopted.” While the ruling doesn’t change in the rates proposed by CRB III, it does point to a few key facts: 1) whatever rate decision the CRB ultimately comes too will be retroactive to Jan 2018 and 2) uncapping the TCC percentage exposed a major loophole interplay for major recording companies who own publisher arms to artificially manipulate and potentially inflate the court’s rates through private negations (Ross & Christman). Today, within months of the MLC’s first issuance of the blanket licenses, these licenses’ introductory rate is still in question.
Urgent actions is needed from the CRB in the coming months. As 2020 wound down, publishers and their representatives advocated for current payments of mechanical licenses to reflect CRB III rates until clarification was reached. However, representatives for DSPs disagree that, in a remanded decision, the rates set before CRB III (CRB II), are the only valid rates with which can be applied (Dredge). NMPA and Nashville Songwriters Association International (NSAI) publicly have urged the CRB to “take steps to avoid significant confusion and disruption in in the mechanical licensing market” (Christman). The issue complicates further in that if the rates finalized to be lower than CRB III, publishers are entitled to pay DSPs for overpayment on mechanicals dating all the way back to Jan 2018.
If one fight wasn’t already enough; the next rate setting period for the CRB is set to begin in January 2021 for CRB IV in what Israelite told Rolling Stone will be “the most important CRB trail we’ve ever had” with fiery clashes expected between service provides and rights holders. It can’t be stated enough that the resulting situation we are in was meant to be simplified by passage of the Music Modernization Act. Yet, years after its passage, some of the key hallmarks — the coming together of different industry parties over a common goal — seem to be simply dissolving.
This is a knotty situation that I, amongst many academic and journalist sources, find quite complex. Though as an aspiring leader in this industry, I found it incredibly important to take a step back and use the past as context for understanding an issue which has been punted for over 100 years. A battle between the distributors and providers of music. Before DSPs, record companies sought any means necessary through controlled composition clauses, breakage, free goods etc. to lower the amount to creators. Before them, even the distributors of sheet music found ways to buyout creators. While it can’t be blamed for the attempt; anything done to lower expenses will improve profit margins. It always is done at the expense of the creator. Without radical action to free creators from government regulation, they will be suppressed to the value chain’s bottom rung. While dissolving the compulsory mechanical license in favor of a private/free market negotiation isn’t immediately feasible, supporting creators in a CRB rate increase is certainly a fair first step. If forthcoming CRB rate decisions confirm a “willing buyer/willing seller basis,” it’s possible that compositions’ rates could slowly mimic their sound recording counterparts, which would be a tremendous improvement for creators.
We must acknowledge that our creators are at a steep disadvantage in the current system. To move forward, we must see where we’ve been and go where we’ve never gone before.
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Christman, Ed. “Music Publishers Ask CRB to Set Interim Rates, Saying Further Delay May Lead to ‘Free-for All’.” Billboard, 3 Nov. 2020, www.billboard.com/articles/business/9477565/music-publishers-royalty-board-set-interim-rates-crb-nmpa. Accessed 19 Dec. 2020.
Christman, Ed. “An Extended FAQ on the CRB’s Rate Determination Battle.” Billboard, 24 Sept. 2020, www.billboard.com/articles/business/9454974/an-extended-faq-on-crb-rate-determination-battle/. Accessed 19 Dec. 2020
Dredge, Stuart. “Arguments over US songwriter streaming royalties kick off again.” Musically, 4 Nov. 2020, musically.com/2020/11/04/arguments-over-us-songwriter-streaming-royalties-kick-off-again/. Accessed 19 Dec. 2020.
“George Johnson, Appellant v. Copyright Royalty Board and Librarian of Congress, Appellees.” , United States Court of Appeals, 11 Sept. 2020, www.cadc.uscourts.gov/internet/opinions.nsf/720464D843B0D6C7852585C10074B11B/$file/19-1028-1856124.pdf. Accessed 19 Dec. 2020.
Ingham, Tim. “SPOTIFY VS. SONGWRITERS: PUBLISHERS REMAIN CONFIDENT THAT STREAMING PLATFORMS WILL BE FORCED TO INCREASE ROYALTIES IN THE US.” Music Business Worldwide, Aug. 2020, www.musicbusinessworldwide.com/spotify-vs-songwriters-publishers-remain-confident-that-streaming-platforms-will-be-forced-to-increase-royalties-in-the-us/. Accessed 19 Dec. 2020.
Ingham, Tim. “Songwriters Are Already Fighting For Better Pay. But in 2021, They Face an Even Bigger Battle.” Rolling Stone, 15 June 2020, www.rollingstone.com/pro/features/songwriters-spotify-amazon-crb-royalties-war-1015116/. Accessed 19 Dec. 2020.
Ross, Sam. “Music Streaming Services’ Procedural Victory in Songwriter Royalty Rate Legal Battle.” University of Miami Business Law Review, vol. 27, no. 2, 26 Oct. 2020, business-law-review.law.miami.edu/music-streaming-services-procedural-victory-songwriter-royalty-rate-legal-battle/. Accessed 19 Dec. 2020.
Gilbertson, John. “Play It Again, Sam: The Free-Market Case for Government
Intervention in the Music Streaming Sector.” Entertainment and Sports Lawyer, vol.
36, no. 2, Spring 2020, p. 53–56. HeinOnline.
Roche, Ava. “No, Spotify Isn’t Suing Songwriters.” Music Business Journal, Berklee College of Music, Apr. 2019, www.thembj.org/2019/07/no-spotify-isnt-suing-songwriters/. Accessed 19 Dec. 2020.
Rose, Meredith F. “Spotify’s Copyright Royalty Board Appeal, Decoded.” Public Knowledge, 19 Apr. 2019, www.publicknowledge.org/blog/spotifys-copyright-royalty-board-appeal-decoded/. Accessed 19 Dec. 2020
Rys, Dan, and Ed Christman. “Spotify’s Strategic Offensive Hits Three Fronts.” Billboard, 21 Mar. 2020, www.billboard.com/articles/business/8503527/spotify-strategic-offensives-india-copyright-royalty-brussels. Accessed 19 Dec. 2020.
“The Copyright Royalty Board Decision.” We Are SoNA, Songwriters of North America, Sept. 2020, www.wearesona.com/musicarmy/the-copyright-royalty-board-decision. Accessed 19 Dec. 2020.
Victor, Jacob. “Reconceptualizing Compulsory Copyright Licenses.” Stanford Law Review, vol. 72, Apr. 2020, review.law.stanford.edu/wp-content/uploads/sites/3/2020/04/Victor-72-Stan.-L.-Rev.-915.pdf.