By Chris Castle

This post first appeared on MusicTechPolicy, continued from Part 1

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 11^th 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 11^thhour.

Derailing the settlement for this purpose at the 11^th 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.]