You may have noticed that a cost of living adjustment for statutory royalties was front and center in the recent (and still ongoing) physical mechanicals rate setting. Unfortunately, the idea of a COLA seems to have disappeared in the streaming mechanicals proceeding.
Note that it’s different music users on the physical mechanicals than on streaming. The physical mechanicals are paid by record companies and streaming mechanicals are paid by some of the biggest corporations in history, namely Amazon, Apple and Google and other wealthy public companies like Spotify and Pandora/SiriusXM. All these companies have market capitalizations greater than the gross national product of some countries.
You may have also noticed that after years of frozen subscription rates, Apple is the first of the streaming subscription services to raise rates by $1 on several of its services including Apple Music. Tim Ingham is asking if Spotify will follow (you know, one of those price fixing agreements inferred from conduct). Who knows, but what’s interesting about this is the effect it will have on streaming mechanical rates, or more pointedly the effect that the Big Tech cartel would like you to think it will have.
The calculation for streaming mechanicals is absurdly complicated. You do have to wonder which of the genii came up with that one. About the only thing that is certain is that the negotiation of that rate every five years (and judicial appeals occasionally) guarantees employment for lots of lawyers and lobbyists on both sides, although definitely skewed toward Big Tech’s share of the 46 lawyers on the docket.
The streaming rates are so bizarre that the Copyright Royalty Judges seem to have lost trust in the process and have issued two separate orders instructing the participants in the streaming mechanical proceedings to either disclose or “certify” that they have come clean with the Judges as to any side deals that may have artificially lowered the rates–the second order makes for interesting reading.
Unlike the physical mechanical, the settling parties rejected a cost of living adjustment in these historically inflationary times. Why they rejected a COLA is hard to understand aside from the fact that they thought they could get away with it.
One thing that is clear, however, is that any argument that a COLA is not necessary with streaming mechanicals because the rate is theoretically based on increases or decreases in revenue is a particularly insulting form of trickle down gaslighting.
It must be said that the record company group of music users that pays the physical mechanical rate voluntarily agreed a COLA on their rates that is currently pending approval by the Judges. There really is no excuse for the streaming services to rely on the discredited trickle down theory to pawn off their Rube Goldberg royalty structure on songwriters for streaming mechanicals.
The American Association of Independent Music, the independent label trade association, filed comments with the Copyright Royalty Board opposing increasing the mechanical royalty to songwriters from the “frozen rates” to the 12¢ (plus cost of living adjustment) settlement rate of the participating record companies with the NMPA and NSAI. I wrote a reply to the A2IM comment that was timely filed with the CRB–barely. I will repost that comment in a few parts here on MTP. As I had about 10 minutes to write the comment due to the lateness of the A2IM filing, I will add some bracketed language to make it a bit less inside baseball.
Unfortunately, A2IM chose not to participate in the Phonorecords IV proceeding and came in a bit late to the party complaining of the check. Nobody stopped them from participating; it appears they put it all on red and it came up black. This is important because unlike independent songwriters who cannot afford the cost of participating at the CRB hearings, A2IM could have participated but chose not to.
As I told the Judges in my comment, I will focus on a few issues raised by A2IM regarding the CRB settlement process in general, the penny rate structure of the mechanical royalty system in the United States, and their proposal that mechanical licensing for physical configurations be handed over to the Mechanical Licensing Collective.
The Longer Table
I actually was pleased to join A2IM at their annual Indie Week conference recently in New York on a panel devoted to this very topic. I am well aware that they believe their members will be disproportionately affected by the increase in cost although I have not seen the data. After many years in the music business, I will take on faith for purposes of this letter that they are correct.
I completely concur that the negotiation process for CRB needs a relook if not an overhaul. I made the point on the A2IM panel that David Lowery and I intend to host a conference devoted largely to this subject [on November 15] at the University of Georgia at Athens. Dr. Lowery and I are both of a mind that this issue needs to be vetted by the Copyright Office in their roundtable format.
However, I do not concur that the Subpart B resolution should be derailed at the 11th hour because of these structural issues that lawmakers no doubt will need to resolve. The time for A2IM to have made their views known in Phonorecords IV has long passed. They had the opportunity to participate in the proceeding, which individual songwriters could not afford to do, and they did not. They had the opportunity to comment on the first and second comment periods for what became the rejected settlement and they did not. They had the opportunity to insert themselves in the second settlement and appear not to have done so until filing a comment on the last day at the 11thhour.
Derailing the settlement for this purpose at the 11th hour is inappropriate. Whether the Judges can even accomplish what is asked of them, I respectfully leave to Your Honors to decide, but I do think there’s a question of authority here. I do support including all these topics being on the table for Phonorecords V as do many other commenters.
What is the Actual Cost to Labels of the New Rates?
While I am prepared to take disproportionate impact on faith, I am less prepared to take disproportionate financial impact without more data. There is an assumption that A2IM labels all will have a one-to-one increase in costs because of the new rates, whatever they end up being. I’m not so sure about that and would want to know a few things including the following.
Many indie labels operate on a revenue share basis with their artists (or licensors). In those revenue share deals, the artist or licensor is paid a percentage of revenue that includes all mechanical royalties. In that structure, the new rates have arguably zero impact on the [independent] label.
Because of rate fixing dates in deals [with controlled compositions clauses] where the label does pay the mechanicals, the new rates would only apply to records delivered during the rate period, i.e., after January 1, 2023. Term recording artist agreements would typically include a controlled compositions clause as the Judges have noted in the Withdrawal Notice. In such an arrangement, the label would be paying a modest increase and could easily tell the artist that unless the artist-songwriter agreed to take still lower rates based on the previously frozen rates, the label would be unable to release their records.
A2IM does make a good point about the bull-headedness of the DSPs on permanent download rates. Perhaps the Judges could refer this issue to the Register for subsequent referral to the Department of Justice Antitrust Division to investigate these pricing practices. Congress seems focused on these kinds of issues at the moment.
[It is unfair for A2IM to complain of being excluded from settlement negotiations by the labels who did participate in the proceedings and who did negotiate a settlement with the NMPA publishers who also participated in the proceedings. Participating in the proceedings is a threshold condition for participating in a settlement of the proceedings. It’s hardly the case that the major labels conspired against the indies this time. If A2IM labels were concerned about being included in these negotiations there are a number of steps they could have taken, starting with participating in the bifurcated Subpart B proceeding–a much less expensive proposition than the streaming side.
There is also a threshold question–that A2IM does not really address–as to whether the CRB has the authority to unilaterally change U.S. mechanical licensing structure that Congress initiated in 1909 and has been based on a penny rate ever since, not to mention hundreds of thousands of term recording artist agreements and licenses incorporating those statutory rates. The entire US recording industry is built on statutory rates and controlled compositions clauses, not to mention the valuations of music publishing catalogs.
That change requested by A2IM is a question of such “magnitude and consequence” that it should require Congress to act based on both the CRB’s statutory authority, the U.S. Supreme Court’s recent holding in West Virginia vs. EPA as well as common sense. Not to mention there are other reasons why getting a CRB case before the Supreme Court could backfire and disrupt a process that in other important ways is working quite well.]
A2IM, the independent label trade association, filed comments with the Copyright Royalty Board opposing increasing the mechanical royalty to songwriters from the “frozen rates” to the 12¢ (plus cost of living adjustment) settlement rate of the participating record companies with the NMPA and NSAI. I wrote a reply to the A2IM comment that was timely filed with the CRB–barely. I will repost that comment in a few parts here on MTP. As I had about 10 minutes to write the comment due to the lateness of the A2IM filing, I will add some bracketed language to make it a bit less inside baseball.
Unfortunately, A2IM did not participate in the Phonorecords IV proceeding and came in a bit late to the party complaining of the check. Nobody stopped them from participating; it appears they put it all on red and it came up black.
As I told the Judges, I will focus on a few issues raised by the American Association of Independent Music regarding the CRB settlement process in general, the penny rate structure of the mechanical royalty system in the United States, and their proposal that mechanical licensing for physical configurations be handed over to the Mechanical Licensing Collective.
The Clean Slate
A2IM raises the idea of compensating songwriters on a percentage of wholesale basis which is how mechanicals are paid in many if not most other countries. I understand why labels favor this structure but I also understand why publishers and songwriters do not.
First, I am of the view that a percentage of wholesale royalty is incompatible with a compulsory license. [To my knowledge, the European countries operating on a percentage of wholesale basis do not have a compulsory licensing regime.] Imposing a compulsory obligation to have a third party set the “just compensation” for rights the government takes from the songwriter has that unconstitutional ring to it [see 5th Amendment and Takings by Prof. Richard Epstein, an oldie but goodie].
And that really is the problem with a percentage of wholesale royalty—it allows the conflicted record company to call the tune [for songwriters] which is the very definition of moral hazard. Having said all that, I am happy to have a conversation about a clean slate and reimagining of the entire structure as long as it really is a clean slate. Of course, that will mean throwing away the entire controlled composition structure.
It must be said that in countries with a percentage of dealer price mechanical royalty there [are] no controlled composition terms at all. So if we are to have the discussion, let’s have all the discussion for all the record companies including catalog. If we want to be like Europe, let’s be European.
We cannot overlook that changing that compensation system will throw royalty compliance examinations of every record company onto the table with great force. How can songwriters be asked to give up a system that has been in place since 1909 without knowing whether they have gotten a straight count heretofore?
It must also be said that if A2IM members feel justified in changing the entire U.S. mechanical rate system, there is nothing stopping them from creating such terms in their new signings under controlled compositions clauses. In fact, such arrangements might be a good laboratory to experiment with these alternative structures.
Here it is. The US economic data is undeniably leading to a stagflationary outlook reminiscent of the 1970s. If you don’t have first hand knowledge of the inflation that started under Nixon and Arthur Burns, burned through Ford and Carter and finally came to rest with Federal Reserve Chair Paul Volker and President Ronald Reagan that ultimately resolved in the low inflation that began trending downward in 1983, trust me; it was awful.
This is why it is insane–if not actually cruel–to force songwriters to take a fixed five year mechanical rate with no downside inflation protection in the form of a cost-of-living adjustment. What is bizarre is that this just happened in the streaming mechanical for the Phonorecords IV proceeding, in case you didn’t hear it over the sound of the backslapping.
It appears that songwriters will get the cost of living adjustment (or “COLA”) on the physical mechanical side–you know, the one the smart people told us was unimportant–but failed to get it on the streaming mechanical side which the smart people tell us is critical to the continuation of life as we know it. Even though it certainly looks more likely than not that growth of the money supply and government debt produces the rocket fuel for the inflation that took 1200 points off of the DJIA in one day. 1970s all over again, including James Taylor crooning “Fire and Rain.”
But economists are beginning to remind us that what makes anyone think the 1970s is the worst it can get? There’s a tendency to think of 1970s stagflation as a downside boundary. It’s not. It just happens to be the worst sustained economic times in living memory as the Depression-era Greatest Generation settles into the silence of old age. However, there’s nothing magical about the 1970s.
As it stands today, over 40 countries already have an inflation rate in the double digits, America is a debtor nation, Wall Street has sold a huge number of jobs off shore, productivity growth is lower than the 1970s and we’ve gone along with the central banks’ zero interest rate policies in the years since the 2008 crash. The piper must be paid for the Lehman Bros. of this world leading us all over the cliff in the great recession, even though the central banks’ easy money policy has delayed that payback. All of these are reasons why there must be a cost of living adjustment in any government imposed statutory rate that takes away bargaining rights. But wait, there’s more.
When Federal Reserve Chair Jay Powell changed the Fed’s inflation targeting (remember “transitory inflation”?), he blew an opportunity to start fixing the real problem. But no more. The chickens are coming home to roost with increases in interest rates and yet-to-materialize promise of quantitative tightening. Now that Mr. Powell was reconfirmed for another term.
If there’s even a chance—any chance—that 1970s style stagflation and depression-level demand destruction may be the best we can hope for, anyone setting a wage control like the statutory mechanical royalty rate simply cannot order that rate for five years and fail to take into account the potential for a coming inflation spike even if the smart people sign a suicide pact. Yet this is exactly what just happened with the settlement of the streaming mechanical rates for Phonorecords IV at the Copyright Royalty Board.
Admittedly, the Copyright Royalty Judges are boxed in given the preference for voluntary settlements baked into the Copyright Act. That gives the smart people far too much credit and fails miserably to allow the Judges to do what judges do—bring contemplative thought to the problem. This is what judges do, it is not what lobbyists and their lawyers do. But unless the public raises the failure to include a cost of living adjustment in comments, so far there’s little basis for the Judges to correct the defective settlement.
It is essential that the Judges are allowed to do their job outside the hurley burley of the commercial relationship with the biggest corporations in history whose lawyers are hell-bent on conducting a scorched earth litigation campaign to crush songwriters. This is especially true of Google, Amazon and Spotify who have demonstrated truly vile behavior during the entire proceeding, a bully-fest beyond category.
George Johnson hit upon a potential solution in his recent comment. If one applies the COLA to the royalty pool after the mind-numbing “greater than/lesser of formula” created by those seeking full employment for lobbyists, lawyers and accountants, that’s actually a pretty elegant solution. I would quibble a little bit with the idea and apply the COLA as an uplift to the actual royalty statement so that the royalty recipients could see how that uplift was arrived at (which in theory would make them less likely to audit the MLC). That “show your work” approach would allow the payee to see how the MLC got there and make it easier to audit upstream for obvious mistakes.
It will also make it easier for the Judges to add the COLA because the building blocks of the calculation won’t change from the voluntary settlement (TCC, revenue share, etc.).
If songwriters are forced to stay in the confines of the statutory license trap, at least a COLA keeps the cheese from melting before their eyes. Plus they’re not required to guess today what the cost of food at home, shelter and gasoline will be five or six years from now.
The Judges would also have the opportunity to bring the services into a new era of fairness and wipe out the bullying of process as punishment that we all had to endure through two different proceedings.
Remember, as you have probably read or realized yourselves, all the US needs is one more good exogenous roundhouse shock to the economy (such as the world abandoning petrodollars for a basket of currency such as the ruble, the renminbi and the real to pick a few out of thin air), and we are in serious economic straights with hyperinflation as the real bugaboo.
Remember also that the US bonds pay interest at less than the inflation rate.
The decline of the dollar as the premier world reserve currency will put a stop to that interest/inflation spread practically overnight. The US government will not be able to borrow from a seemingly bottomless pit of lenders paying US dollars for US bonds at any price for the stability and transferability. What happens then? Probably interest rates will increase–a lot–to make it worth the lender’s money. Which means the debt service will take up an even bigger chunk of the US budget which will give us less to spend on the “Cross of Iron” weaponry that got us into the petrodollar business in the first place. And so it goes.
Songwriters may not be able to do anything tangible to stop cataclysmic economic events, but they can demand at least a bare minimum of downside protection through a COLA.
You may say, why so cynical? I’m not altogether cynical, I hope that I’m just cynical enough. The numbers don’t lie. If you know anyone who was a child during the Great Depression, or is the child of that person, ask them what it was like.
The overarching point is why would you want to take a chance and bet it all on the smart people?
Remember how the physical mechanical increased from 9.1¢ to 12¢? And it applies to each record sold? If a songwriter got a cut and the artist sold 100 records, the songwriter got $12. That’s $12 today, next month, six months from now. You could plan. You could complain about a statement to the record company. If the record company wanted you to write more songs for their artists, they’d listen and might even fix an error on your statement. Remember: On records and downloads, the record companies pay.
But what about streaming? The record companies don’t pay on streaming, Big Tech pays. The biggest corporations in the world pay: Spotify, Amazon, Apple, Google, Pandora, and their dozens of lawyers. Artist Rights Watch posted a series of Tweets that shows excerpts from the proposed regulations to calculate streaming royalties–and remember this is the one that we’re told is the important one, the one that dozens of lawyers spend millions in legal fees to come up with. It reads kind of like a drunk you can smell a block away but who sits down next do you and asks how do they look for three days?
The first think you realize is that unlike the 12¢ rate for physical, there’s no way anyone call tell a songwriter how much they’re going to make today or next year on a per play. They can’t even tell you how much you’re going to make today for a burger next Tuesday. Or Wednesday. Or Thursday. But one thing you definitely know is that the lawyers are going to make bank writing this crap, appealing this crap, renegotiating this crap. This section here is a big part of what the fight is all about, can you believe it? This is what the Big Boys and Girls think is important and you can understand why. It puts more legal fees on the table and you know who eventually pays for the legal fees one way or another? Take a look in the mirror.
And understand this: If you get a royalty statement for streaming royalties, take a look at the per-stream rate! It usually starts three or four or even five zeros to the right of the decimal place. It’s even worse than the recording royalty. And DIMA wants us to fight among ourselves against the record companies after all this?
In case you were wondering what an utter shitshow streaming mechanicals have become thanks to the dozens of lawyers and lobbyists getting rich from making it complicated–compare this to 12¢ a unit. This calculation gets made EVERY MONTH. https://t.co/rLwsCn5jVJpic.twitter.com/vLa8KgqVrc
Big thanks to Tom Truitt and the wonderful audience!
David and Chris discuss improvements in the Copyright Royalty Board rules and procedures including:
–A songwriter advocate as a permanent independent representative of songwriter interests and participant in the Phonorecords proceedings with full rights of a participant. All other participants would bear the cost of the advocate. Other participants would be prohibited from using the advocate as a way to engage in overreaching discovery against individual songwriters or their publishers.
–Each participant would be limited to one lawyer representing their interests in the Phonorecords proceedings. This would counteract the current abuses forced upon the CRB and intimidation tactics of Big Tech.
–Songwriters would be permitted to form a bargaining collective with a general antitrust examption.
–Music users who appeal the Judges’ rulings must pay higher rates pending appeal.
–Discovery would be extremely curtailed to protect songwriters from abuses by Big Tech to punish and intimidate songwriters such as that currently being imposed by Google and other Big Tech companies without songwriter consent or even notification.
–Should songwriters get an across-the-board antitrust exemption under competition law (like the Sherman Act)?
If you are coming to Indie Week, Trichordist readers might enjoy a panel Chris Castle is on to discuss the impact on indie labels of the Great Unfreeze!
Speakers are Victor Zaraya: Concord (Moderator), Danielle Aguirre: NMPA (National Music Publishers’ Association), Glen Barros: Exceleration, and Chris.
If you want to read up on the issues that caused the Copyright Royalty Board to reject the failed settlement, here’s some background:
[Big thank you to the National Music Council for recognizing David with their American Eagle Award.]
Dear Mr. Lowery,
I am writing on behalf of the Board of Directors of the National Music Council, which is well aware of your inspiring and longstanding work in both music education and the championing of music creator rights (especially in regard to ensuring fair remuneration to composers, songwriters and artists). In that regard, I am pleased to inform you that the opportunity arose today (as we sat in our board meeting at the BMI Offices in New York) for NMC to honor with you with its American Eagle Award for 2022.
Unfortunately, due to the exigencies of the pandemic, we are on an incredibly short timeline regarding the presentation of the Award at the NAMM Conference Dinner just two weeks from now (the NAMM Dinner on June 2 at 7pm in the Los Angeles area). It was unclear until today that the Dinner Event would actually take place. Your transportation and lodging would be paid for by NMC, and the presentation would be made by your colleagues SGA President Rick Carnes and NMC Chair Charlie Sanders.
As you may know, the prestigious American Eagle Award is given each year to individuals who have made a truly significant contribution to the support, development and teaching of music in this country. Past winners have included Kris Kristofferson, Lionel Hampton, Dizzy Gillespie, Van Cliburn, Benny Goodman, Morton Gould, Dave Brubeck, Marian Anderson, Lena Horne, Roberta Peters, Clive Davis, Hal David, Tom Chapin, Sesame Street Productions, Herbie Hancock, Quincy Jones, Roberta Guaspari and many other musical and educational luminaries.
The awards presentation will be the evening of Thursday, June 2nd. The ceremony will take place in Anaheim, CA. The ceremony will coincide with the NAMM show.
Series 3 of The Artist Rights Watch Podcast is here! Nik, David, and Chris are joined by attorney Kevin Casini to talk about the latest with the Copyright Royalty Board and mechanical rates in the Phonorecords IV proceeding and discuss alternatives so songwriters are better represented at the CRB compared to the status quo.
ARW Podcast S3E1: Unfreezing Mechanicals show notes
On the this episode of the Artist Rights Watch, Nik, David, and Chris sit down to talk about the recent developments with the CRB and mechanicals with lawyer and advocate, Kevin Casini. The Copyright Royalty Board who herein will more than likely be referred to as the CRB, ‘is a US system of three copyright reality judges who determines rates and terms for copyright statutory licenses and make determinations on distribution of statutory license royalties collected by the US Copyright Office.’ The US mechanical royalties are determined by the CRB and they meet every 5 years to determine the rate. Songwriter groups argued for a higher rate, and the CRB agreed. On March 29, 2022 the CRB agreed to unfreeze the $0.091 mechanical royalty rate which would commence a fight for a new rate in the 2023-2027 period. Over the past few years, there has been numerous criticisms about the constant rule for freezing the mechanical royalty rate. The royalty rate currently is $0.091 which was set back in 2006, and frankly, songwriters are making less money due to economic inflation.
Many readers participated in the Physical and Download Mechanical Rates Survey that various organizations have sent to their members over the last few weeks. Here are the results of the main questions for which we had 361 respondents who self-selected their participation. (Other answers included comments which we chose not to publish for privacy reasons.).
The results suggest that participants were mostly informed songwriters who had never been asked before what they thought about the issues in the Copyright Royalty Board. We would have to conclude that any of our regular readers would be a bit skewed toward knowledgeable because between the Trichordist, MusicTechPolicy, ARW, Hypebot and Celebrity Access we were probably carrying a very high percentage of the available information on the frozen mechanicals issues.
It also is striking how few respondents said they had ever been asked what they think about any mechanical rates (physical, download, streaming), an important and easily measurable issue. This is something to add to the learning from this episode. It may be that our data is skewed, but even so we didn’t expect that 68% would say they’d never even been asked their opinion. An easy way to find out what people think about something is to ask them.
The Trichordist 
You must be logged in to post a comment.