Frozen Mechanicals Crisis: @SealeintheDeal’s Comment to the Copyright Royalty Board

Gwendolyn Seale, Esq.

Chief Copyright Royalty Judge Jesse M. Feder
Copyright Royalty Judge David R. Strickler
Copyright Royalty Judge Steve Ruwe

U.S. Copyright Royalty Board

101 Independence Ave SE / P.O. Box 70977
Washington, DC 20024-0977

July 26, 2021

IN RE DETERMINATION OF ROYALTY RATES AND TERMS FOR MAKING AND DISTRIBUTING PHONORECORDS, DOCKET NUMBER 21-CRB-0001-PR (2023-2027)

(Phonorecords IV)

Honorable Judges,

I am a music lawyer in Austin, Texas, and represent songwriters throughout the state of Texas. Over the last two months, I have spent a considerable amount of time educating songwriters about the proposed settlement (“Proposed Settlement”) presented by the three major labels, the National Music Publishers Association (NMPA) and Nashville Songwriters International (NSAI) (collectively “Settlement Parties”) to freeze the statutory mechanical rate in connection with physical products and digital downloads through 2027.

The feedback I received was straightforward and foreseeable: songwriters do not wish to see this rate frozen for yet another five years. As someone who works with songwriters far removed from the major music industry hubs, like Los Angeles, Nashville and New York, and from the place where the rules are made, Washington, D.C., you quickly recognize that a significant education gap exists, and many songwriters do not comprehend basic copyright and music publishing concepts. Naturally, if songwriters do not grasp music publishing basics, they do not know about this Phonorecords IV proceeding, or government rate-settings in general.

We must remember those songwriters as this rate-setting progresses – as they too are copyright owners who are entitled to due process and transparency. There would be no music publishing business without them.

Thank you for the opportunity to comment in this proceeding and please note that the views I am expressing here are not made on behalf of any client or the State Bar of Texas.

I.              Private Party Settlements Between Willing Buyers and Willing Sellers Representing Different Sides of the Same Corporate Coin Do Not Reflect an Effectively Competitive Market.

With the passage of the Music Modernization Act in 2018, the Copyright Royalty Board (CRB) was instructed in future Section 115 rate-setting proceedings, like this Phonorecords IV proceeding, to “establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” Pub. L. No. 115-264, § 102(a)(3), 132 Stat. at 3680. In establishing such rates and terms, the Copyright Royalty Judges (“CRJs”) are to base their decision on “economic, competitive and programming information presented by the parties.” 17 U.S.C. § 115(c)(1)(F).

While Phonorecords IV is the first proceeding by which this “willing buyer/willing seller” standard will be applied in the Section 115 context, this standard and the aforementioned language have been the basis for Section 114 rate-settings which provide instructive precedent. Both the CRB and D.C. Circuit in prior Section 114 proceedings understood that proposed rates are to reflect an effectively competitive market. “Legislative history supports the conclusion that

§ 114 directs the Judges to set rates that reflect the workings of a hypothetical effectively competitive market.” 81 FR 26316, 26334. And the CRB “can and should determine whether the proffered rates reflect a sufficiently competitive market, i.e., an ‘effectively competitive’ market.” SoundExchange, Inc. v. Copyright Royalty Bd., 438 U.S. App. D.C. 332, 346, 904 F.3d 41, 55 (2018). Thus, the CRB should examine whether the mechanical rate freeze proffered by the Settlement Parties reflects an effectively competitive market.

While there has been much discourse and disagreement regarding the true meaning of the “willing buyer/willing seller” standard in prior CRB rate proceedings, this Phonorecords IV proceeding has presented a novel conundrum that the CRJs must inspect: what happens when the willing buyer and willing seller are effectively the same parties at the corporate level?

On one side of the Proposed Settlement sits the three major record labels (Sony Music Entertainment, Warner Music Group and Universal Music Group), who are to pay these mechanical royalties to music publishers and songwriters. On the other side of the proposed settlement sits the NMPA and NSAI. The NMPA’s board is comprised of representatives of the publishing company corporate affiliates of the three major labels on the other side of the negotiating table.1 Further, these major publishing company board members appear to have greater voting power than other NMPA board members on account of their gross annual revenue.2 It is also worth noting that the NSAI represents only fragment of the songwriter community, and that two of the three songwriters who penned the “SONGWRITERS REFUTE FALSE CLAIMS REGARDING COPYRIGHT ROYALTY BOARD” letter3

1 https://www.nmpa.org/boardmembers/ .

2 “NMPA shall have two classes of voting members: executive members and general members. A member shall be an executive member if its Gross Revenue is equal to or in excess of One hundred million dollars in the prior calendar year. A member shall be a general member if its Gross Revenue is less than One hundred million dollars in the prior calendar year.” “Each executive and general member shall be entitled to one vote for each one-hundred thousand dollars of gross revenue of such member (including its affiliates) with respect to any matter to be voted on by members; provided that (i) each member shall have at least one vote, and (ii) with respect to a particular calendar year, each executive member shall have no more votes than the number of votes held by the General Member with the greatest number of votes for such year.” NMPA Inc. 2018 IRS 990, Schedule O, at 27.

3 SONGWRITERS REFUTE FALSE CLAIMS REGARDING COPYRIGHT ROYALTY BOARD, available at

https://www.nashvillesongwriters.com/songwriters-refute-false-claims-regarding-copyright-royalty-board .

(presumably published in response to negative press on account of this proposed freeze) sit on NMPA boards, one on the board of NMPA Inc., and the other on the board of the NMPA SONGS Foundation.4

How these organizations wish to conduct their business is wholly up to them, as is how they choose to represent their members. Nonetheless, when I see a phrase in a motion reflecting the intentions of a group of parties riddled with conflicts of interest, “the settlement represents the consensus of buyers and sellers representing the vast majority of the market for `mechanical’ rights for [the 37 CFR 385] Subpart B Configurations”5 – I believe it is important to acknowledge that there are countless millions of copyright owners that these parties do not represent. While the Proposed Settlement may represent the “consensus” of the wealthy major music publishing companies and their record label counterparts, in no manner does this settlement speak for the consensus of songwriters and independent publishers, who lack the overwhelming resources needed to participate in this proceeding and whose views were not solicited.

In sum, none of these factors lead me to believe that this Proposed Settlement reflects an “effectively competitive market.”

II.            The Dire Need for Transparency.

In addition to the proposed settlement, the Settlement Parties (less the NSAI) also referenced a separate Memorandum of Understanding (“MOU”):

“Concurrent with the settlement, the Joint Record Company Participants and NMPA have separately entered into a memorandum of understanding addressing certain negotiated licensing processes and late fee waivers.”6

If this “Memorandum of Understanding” is irrelevant to the proposed settlement, why would it be referenced in the motion to adopt the settlement? Setting aside the broadly drafted “certain negotiated licensing processes,” the phrase “late fee waivers” is exceptionally concerning. I interpret this language to mean that money is changing hands as consideration for this proposed rate freeze – but ultimately, I cannot know this with certainty since neither the Proposed Settlement nor the MOU have been published.

As songwriters worldwide may be bound to the decisions rendered in this Phonorecords IV, it is of the utmost importance for the CRB to work to afford songwriters with complete transparency. In a letter dated July 13, 2021,7 Representative Lloyd Doggett (TX-35) asked,

“May the CRB disclose (or compel the settlement participants to disclose) the unredacted actual settlement agreements referenced in the Motion, including the MOU?”

4 https://www.nmpa.org/boardmembers/ ; https://www.songsfoundation.org/our-board-1 .

5 Motion at 4, available at https://app.crb.gov/document/download/25288.

6 Id. at 3.

7 July 13, 2021 Letter from Representative Lloyd Doggett, available at https://thetrichordist.com/2021/07/18/letter- from-congressman-lloyd-doggett-about-frozen-mechanicals-to-librarian-of-congress-and-register-of-copyrights/.

I would also like to know the answer to this question. Further, in the event the CRB does not reject this Proposed Settlement, it should publish both the actual, unredacted proposed settlement, along with the MOU, not merely the regulations giving effect to the settlement. If songwriters and independent music publishers worldwide are to be bound to these terms, they deserve to have the opportunity to review and to be able to provide meaningful comment on these actual documents at a minimum.

III.          Songwriters and Independent Music Publishers Should Not Face a Rate Freeze In The Midst of a Vinyl Resurgence, During a Worldwide Pandemic.

With the constant consumption of music via the streaming services, many do not realize the degree of revenue generated from the sale of physical products (vinyl, CDs) and digital downloads in the United States. Notwithstanding the devastating pandemic which forced the majority of musicians to pivot, and resulted in at the very least the temporary shutdown of a significant amount of businesses, revenue from the physical music sales amounted to $1.13 billion dollars in 2020.8 Additionally, vinyl record sales increased by more than 28% from 2019 to 2020.9 Further, physical and downloads accounted for 15% of worldwide revenue for U.S. recorded music in 2020.10 Just within the last couple of months, Taylor Swift broke the modern- era weekly vinyl album sales record.11 Record Store Day Drop #1 sparked 1.3 million vinyl album sales during the week ending June 17, 2021, with 942,000 records sold at independent record stores — resulting in the largest weekly vinyl sales at the indie sector in MRC Data history.12 Those Record Store Day figures represent over $1.1 million dollars in mechanical royalties generated within a weekly period (assuming 10 tracks per album at the current statutory rate of 9.1 cents) – which I believe is economically significant for songwriters.

Given the vinyl resurgence, mechanical royalties from physical product sales are a crucial revenue stream for all songwriters, and particularly for independent songwriters who have struggled financially on account of COVID-19 and do not have the resources to compete for the streaming numbers generated by top artists signed with major labels. The effects of COVID-19 are properly taken into account when approximating a free market agreement because of what

U.S. Treasury Secretary Janet Yellen described as “long-term scarring”13 which is projected to exceed the period of the Phonorecords IV rate setting. For context, the mechanical royalty “rate” pertaining to streams on Spotify Premium during April 2020 amounted to $0.00059 per

8 Year-End 2020 RIAA Revenue Statistics, available at https://www.riaa.com/wp-content/uploads/2021/02/2020- Year-End-Music-Industry-Revenue-Report.pdf .

9 Id.

10 Id.

11 Keith Caulfield, Taylor Swift’s ‘Evermore’ Breaks Modern-Era Record for Biggest Vinyl Album Sales Week, BILLBOARD (May 31, 2021), available at https://www.billboard.com/articles/news/9580407/taylor-swift- evermore-record-breaking-vinyl-album-sales-week/ .

12 Keith Caulfield, Record Store Day 2021’s First Drop Sparks 1.3 Million in U.S. Vinyl Album Sales, BILLBOARD (June 22, 2021), available at https://www.billboard.com/articles/business/chart-beat/9590304/record-store-day-2021- first-drop-sets-record.

13 David Lawder, Andrea Shalal, ‘Act Big’ Now To Save Economy, Worry About Debt Later, Yellen Says In Treasury Testimony, Reuters (Jan. 19, 2021), available at https://www.reuters.com/article/us-usa-biden-yellen- idUSKBN29O1WX.

stream (according to the Audiam U.S. Mechanical rate calculator14). The “rate” for the ad- supported tier of Spotify was even lower.

Not only is the music industry experiencing a vinyl resurgence, but also, even CD sales are seeing a boost. According to a July 14, 2021, report from Billboard:

“Vinyl sales, which have grown for the past decade, more than doubled between January and June, up 108.2% to 19.2 million from 9.2 million in the first six months of last year. Even CD sales, which have been steadily and precipitously declining, posted a modest 2.2% gain, to 18.9 million units.”15

IV.            What’s Changed Since 2014? The Willing Buyer/Willing Seller Standard was Supposed to Result in Fairer Rates.

Every person reviewing the comments in this proceeding should go back and review the Copyright Office’s 2015 “Copyright and the Music Marketplace Study.”16 Copyright owners and their representatives within the study shared a common judgement: the then-current 801(b)(1) four-factor test standard resulted in deflated rates — however, this quagmire could be remedied by the adoption of the “willing buyer/willing seller standard.”17 According to the NMPA and Harry Fox Agency’s joint comment in 2014:

“Continued application of the 801(b) standard will ensure that the statutory royalty rate is held artificially low, and that songwriters and music publishers will continue to be treated unfairly in the marketplace.”18

Phonorecords IV is the first proceeding in the Section 115 context by which this “willing buyer/willing seller” standard is to be applied. If the Proposed Settlement is accepted by the CRJs, songwriters and music publishers are no better off than they were under the former 801(b)(1) standard; the statutory rate will continue to be held artificially low through 2027, and songwriters and music publishers will continue to endure unfair treatment in the marketplace.

Proposing a freeze for the Subpart B rates during the first Section 115 proceeding applying the “willing buyer/willing seller” standard produces a disastrous ripple-effect with respect to other current and future rate-settings. In the current Phonorecords III remand, Pandora not only has used the Proposed Settlement to make the case that the streaming mechanicals rate in the 2012 settlement was a “good benchmark,” but also used this argument to rationalize the 2012 rate being too high.19

14 Audiam Spotify U.S. Mechanical Rate Calculator, available at https://resources.audiam.com/rates/ .

15 Ed Christman, Audio Streams Up 15%, Vinyl Sales Double in First Half of 2021, BILLBOARD (July 14, 2021), available at https://www.billboard.com/articles/business/9600940/streams-vinyl-cd-sales-genres-midyear-2021- analysis/ .

16 See generally, Copyright and the Music Marketplace (February 2015), available at https://www.copyright.gov/policy/musiclicensingstudy/copyright-and-the-music-marketplace.pdf. 17 Id. at 82-83.

18 NMPA & HFA First Notice Comments at 15-16, available at https://www.copyright.gov/policy/musiclicensingstudy/comments/Docket2014_3/NMPA_HFA_MLS_2014.pdf. 19 Testimony of Michael Katz at 65-66, available at https://app.crb.gov/document/download/23858 .

Equally perplexing upon retrospect is commentary from the NSAI. After stating the organization’s support of eliminating Section 115 entirely (which as an aside, I agree with), the NSAI stated:

“We favor a willing buyer-willing seller free marketplace approach to determining mechanical royalty rates. We believe the underlying work is more valuable that the present 9.1 [sic] rate established by the Copyright Royalty Board.”20

It does not sit well when the organization representing songwriters is party to a settlement proposing extending the freeze at 9.1 cents, seven years after advocating for a “willing buyer/willing seller” rate-setting standard because songs were more valuable than the 9.1 cent rate.

V.            Rates Should not be Frozen Just Because Certain Settlement Parties Deem a Format is Not Worth the Fight.

It is evident that trade organizations representing the publishers and songwriters in this proceeding and prior proceedings have not wished to advocate for an increased mechanical rate for physical products, as they prefer to concentrate on categories that they believe to be economically significant, such as the interactive streaming categories.21 This lack of advocacy was not intended to demonstrate that rate freeze at 9.1 cents reflected the appropriate value of mechanical royalties for physical products, but instead that physical medium revenue was not going to make much of an economic difference within the next five years.22 It is understandable that the NMPA and NSAI have concentrated their efforts on the abysmal streaming services and I applaud the organizations for such efforts. The NSAI also reechoed these sentiments in early June, 2021:

“Based on industry revenue analysis, it is anticipated that physical mechanical royalties will amount to less than 1% of the total mechanical royalty revenue in the United States during 2023-2028, the rate period this CRB proceeding covers. History and experience told us not to create a powerful opponent when there is a strong possibility of losing with little to gain. So, we decided to focus on the digital streaming services and streaming rates during the next trial. While 1% of revenue is meaningful, waging war was not worth the risk, especially since the rate may have been lowered!”23

To date, I have not seen this industry revenue analysis claiming that physical mechanical royalties will amount to less than 1% of the total U.S. mechanical royalty revenue over the next five years. Even if this is the consensus of various industry experts, the figure is simply a prediction. And as the data in Section III shows, the physical format has become increasingly

20 NSAI Reply Comments at 7, available at https://www.copyright.gov/policy/musiclicensingstudy/comments/Docket2014_3/extension_comments/Nashville_S ongwriters_Association_International_NSAI.pdf.

21 See Phonorecords III Open Session, available at https://app.crb.gov/document/download/13897 at 3583-88; https://www.nashvillesongwriters.com/songwriters-refute-false-claims-regarding-copyright-royalty-board .

22 See https://app.crb.gov/document/download/13897 at 3583–88.

23 SONGWRITERS REFUTE FALSE CLAIMS REGARDING COPYRIGHT ROYALTY BOARD, available at

https://www.nashvillesongwriters.com/songwriters-refute-false-claims-regarding-copyright-royalty-board.

popular and provides a meaningful revenue stream for songwriters and publishers — despite prior economic predictions from industry leaders.

In sum, songwriters should not face a continued rate freeze for Subpart B configurations due to trade organizations deeming that these formats are not worth the fight.

VI.            May the CRJs Determine this Proposed Settlement Applies only to the Settlement Participants?

Given the volume of songwriters who are self-published (or self-administered, as the Mechanical Licensing Collective calls it), and the number of independent music publishers who are not NMPA members and have no ties to the major publishers, the question becomes, what recourse do they have when private parties with endless resources decide to convene with their major label counterparts and propose a mechanical rate freeze? May the CRB determine that this frozen rate only applies to the Settlement Parties, but hold that a higher rate will apply to everyone else?

Conclusion

This is the first time I have commented on a CRB rate-proceeding — I was in high school during Phonorecords I and was completing law school when Phonorecords III commenced. This Phonorecords IV proceeding has taught me a lot, and has also raised a lot of questions in my mind about the process of rate-proceedings in general. Ultimately, a settlement to freeze the mechanical rate for the physical format, forged by parties who are one and the same at the corporate level during a vinyl boom in midst of a worldwide pandemic neither reflects an effectively competitive market nor is in the interest of songwriters. Making this situation all the worse is the fact that some of these Settlement Parties advocated for the repeal of the prior rate- setting standard in favor of this “willing buyer/willing seller” standard because they contended the former resulted in deflated rates and the latter would bequeath songwriters with higher rates. If this is truly the end result of CRB rate-proceedings, a process must be established by which copyright owners without the financial resources will have the ability to not only participate in such proceedings, but also have their own independent advocacy arm which can represent their interests. Because as it stands, I do not see the interests of songwriters being adequately represented in Phonorecords IV.

Thank you,  

Gwendolyn Seale

Guest Post by @SealeInTheDeal: A Foreseeable Result of the Phonorecords IV Private Settlement: Opening Pandora’s Box

By Gwendolyn Seale

Over the last six weeks, the Trichordist has chronicled the frozen mechanicals saga occurring at the Copyright Royalty Board in the government’s rate setting for the compulsory mechanical license commonly called “Phonorecords IV.” (Congress mandated that these government rate settings occur every five years and are numbered sequentially.) 

Songwriters, independent music publishers, music lawyers and advocates have penned articles and contacted their representatives in Congress to express their concerns about the private party settlement which would extend the existing freeze on the statutory mechanical rate with respect to physical products and permanent downloads for yet another five years.  That private party settlement among the Big Three record companies, the National Music Publishers Association and the Nashville Songwriters Association International is expected to be opened to public comment later today.  (Friday news dump?)  These entities then submitted that settlement to the Copyright Royalty Board asking the CRB to impose the terms of that private settlement on the rest of the world.  And it now appears that these secret deals may be backfiring.

The frozen rate most prominently applies to permanent downloads and physical sales like vinyl.  Why the Big Three want to freeze mechanical royalty rates on the booming vinyl business is anyone’s guess.

The sticking point for most people commenting in the Trichordist is that the terms of the private settlement are not disclosed to the CRB or to the public, especially a side deal between the Big Three and the NMPA.  Songwriters around the world have no way of knowing the terms of these deals unless the Copyright Royalty Board forces their disclosure.

These entities who are before the CRB in Phonorecords IV, along with those vocal in opposition against their private party settlement have been in this arena for far longer than I. When the Phonorecords I proceeding occurred in 2006, I was merely a freshman in high school — and I was completing my final year of law school as the Phonorecords III proceeding began. Needless to say, there has been a significant amount of information and procedure to digest.

Upon learning of the settlement by the Big Three labels, the NMPA and the NSAI, several thoughts came immediately to mind:

1) The settlement and side agreement referenced must be disclosed immediately.

 2) How can this freeze be rationalized, especially during the midst of a worldwide vinyl resurgence?

3) Why would an organization representing songwriters agree to such a freeze? (As an aside, as I was teaching a course on copyright and songwriter revenue streams to 30 older songwriters two weeks ago, they were shocked and moreover disheartened to learn this — as physical sales, not streaming revenue, pays their bills. One said: ”I can stand out on the street in Smithville, Texas, with my guitar and a tip jar and earn more in a couple hours than I will ever earn from streaming”).

 4) This is perfect ammunition for the streaming services to use to justify their already abysmally-low mechanical “rates.”  

While there is much to say on points 1-3, the focus here is on point 4. Chris Castle echoed the same sentiments on June 1:

“Streaming Royalty Backfire:   If you want to argue that there is an inherent value in songs as I do, I don’t think freezing any rates for 20 years gets you there.  Because there is no logical explanation for why the industry negotiators freeze the rates at 9.1¢ for another five years, the entire process for setting streaming mechanical rates starts to look transactional.  In the transactional model, increased streaming mechanicals is ultimately justified by who is paying.  When the labels are paying, they want the rate frozen, so why wouldn’t the services use the same argument on the streaming rates, gooses and ganders being what they are?  If a song has inherent value—which I firmly believe—it has that value for everyone. Given the billions that are being made from music, songwriters deserve a bigger piece of that cash and an equal say about how it is divided.” (link: https://thetrichordist.com/2021/06/01/healing-with-sunlight-a-rate-based-solution-for-the-frozen-mechanicals-dilemma/)

It did not take a soothsayer to foresee this result; the private settlement opened Pandora’s box – begetting misery for every songwriter. Since the CRB has been quiet for the last month with respect to this proceeding, yesterday, I began delving through some of the more recent Phonorecords III remand filings. And much to my unsurprise, I came across a statement from Pandora Media’s expert witness, Professor Michael Katz, who understandably used the proposed settlement as evidence that the streaming rates were fine as is. Katz’s statement was filed on April 4 – two months before songwriters became aware of the quiet filing of the private settlement and began speaking out.  Here’s the link to Professor Katz’s testimony and you’ll find the text below beginning on page 65:  https://app.crb.gov/document/download/23858 .

Pandora not only used the settlement to make the case that the streaming mechanicals rate in the 2012 settlement was a “good benchmark,” but also, even more disastrously, used this argument to rationalize the 2012 rate being TOO HIGH.

This is what happens when there are only a select few gatekeepers, privileged with endless resources and far removed from the plight of independent songwriters, making decisions that affect literally every songwriter’s future. This is why CRB proceedings must be more easily accessible for independent songwriters and their staunch advocates. This is the consequence of the “willing buyer” and “willing seller” appearing on different sides of the same corporate coin – (and if anyone wishes to challenge me on this point be ready for some “interlocking board” remarks based on extensive research into conflicts of interest).  Songwriters deserve better than to have this crucial revenue stream frozen – especially  immediately following an eighteen-month-long worldwide pandemic.

After the release of misery and misfortune with the private settlement, hope remained at the bottom of pandora’s box—hope that the CRB would allow the songwriters affected by the private settlement to at least have an opportunity to be heard in the exclusive and expensive environment of the Copyright Royalty Board. Once the CRB publishes their request for public comments (on the Friday before the July 4 weekend), songwriters may at last have their chance.

And I firmly believe that by the CRB providing every songwriter the opportunity to express how this settlement and the proposed regulations freezing mechanicals for another five years fails to represent her interest, it will exbibit to all the inherent value of songs and restore hope that every voice matters.

Today: Music Biz Association Panel: Buyer Beware: What Does the Legal Future Hold for TikTok?

Chris Castle will moderate a panel entitled “Buyer Beware: What Does the Legal Future Hold for TikTok?” as part of the Music Business Association’s Entertainment & Technology Law Conference today at 1:35 pm ET.  Sign up here, registration fee is required.

The all-star panel has experts from inside and outside the music business:

  • Rick Lane, CEO, Iggy Ventures, LLC
  • Gwendolyn Seale, Attorney, Mike Tolleson & Associates
  • David Sterns, Partner, Sotos Class Actions
  • Trent Teyema, Principal, Global Threat Management

The panel will discuss the legal basis for the TikTok sale and potential ban as well as TikTok’s massive infringement problems.  The focus will be on understanding how we got here and what exposure TikTok will have even after a sale.

If you can’t make the panel, Chris has promised to make the panel materials available next week.