Tag: Section 115

Phonorecords V and the “39 Steps” Problem: Time for the CRB to Fix Streaming Mechanicals

Everybody knows that the boat is leaking, everybody knows that the captain lied….
Everybody Knows by Leonard Cohen

We are now well into the next Phonorecords proceeding at the Copyright Royalty Board (CRB) where the government sets mechanical royalty rates for songwriters. Readers may remember that the last rate-setting was Phonorecords IV where Trichordist helped spread the word about the attempted end run around songwriters to freeze physical rates (vinyl & downloads) at 9.1¢ for another five years but instead resulted in an increase to 12¢ plus a cost of living adjustment which has now increased to 13.1¢. (In a demonstration of humility and lack of pomposity, these proceedings are given Roman numerals like the Super Bowl, so the current example of gladiatorial combat is titled Phonorecords V.)

Inside the years-long litigation-like proceeding, there is an issue hiding in plain sight inside the existing and ancient streaming mechanical royalty rate structure that we fondly call “the 39 steps” in honor of John Buchan, Alfred Hitchcock and Richard Hannay. Despite the blood lust for complexity from the ancien régime that clings to its one sided royalty pool, there is one part of this unfair business practice that the CRB can and should address this time around.

Start with the basics. The streaming mechanical formula—the so-called “39 steps”—is built on a simple premise: we are calculating royalties for the use of musical works protected by the Copyright Act. The inputs and deductions in that formula are not abstract accounting categories. They are supposed to reflect real payments for real statutory rights.

That premise is now under pressure because of…wait for it…artificial intelligence and the AI slop that is flooding the market.

The rise of generative AI has introduced a new category of output that does not fit neatly within the Copyright Act. The U.S. Copyright Office has made clear that works generated entirely by AI are not copyrightable, and that protection exists only to the extent of meaningful human authorship in a proportion yet to be determined. (Courts have moved in the same direction, and the Supreme Court’s denial of cert in Thaler v. Perlmutter leaves that framework intact.)

Yet the streaming mechanical formula has no explicit mechanism to deal with AI slop. That creates a risk on two fronts.

We have to consider the royalty pool itself. The compulsory mechanical license applies when the exclusive rights of a copyright owner in a musical work are implicated. If a so-called “AI track” is not a protected musical work, then there is a serious question whether it belongs in the section 115 system at all. Treating non-copyrightable output as if it were a statutory musical work risks diluting the pool for actual rightsholders.

And then, of course, we have the Step 2 deduction for performance royalties. The regulation allows services to subtract payments for the public performance of musical works before calculating the payable pool. But what happens if a service characterizes payments to a platform like AIMPRO as “performance royalties”? If those payments are not, in fact, for the public performance of a copyrightable musical work, they should not reduce the pool. Otherwise, the 39 steps formula starts to leak money, and eventually leak in a big way.

Not only that, but if the U.S. Copyright Office ultimately articulates a workable “human authorship” framework for AI-assisted works during the Phonorecords V rate period, the downstream impact on the Copyright Act section 115 system could be profound: for the first time, the “39 steps” calculation may have to accommodate fractional copyrightability within a single work. Instead of treating a musical work as an either/or, services and the MLC could be forced to parse which portions of a track are attributable to human authorship and therefore eligible for royalties, and which are not. That would introduce a new layer of allocation on top of an already complex formula—effectively embedding micro-level authorship determinations into macro-level royalty calculations—and raising the administrative, evidentiary, and dispute-resolution burdens across the entire system.

The key point is that the CRB does not need to resolve all questions of AI copyrightability to act here for purposes of the 39 Steps. It can simply clarify what is already in the statute and the regulation: The formula applies only to payments that correspond to rights in nondramatic musical works, and deductions are limited to payments that genuinely compensate the public performance of such works. That is not a policy innovation outside the scope of the CRB’s mandate from Congress. It is a classification rule.

If there is doubt about whether a category of material such as purely generative AI output qualifies as a “musical work” for these purposes, that is a question the CRB can refer to the Register of Copyrights in a pinch. But the CRB should not leave the door open for the mechanical royalty pool to be diluted by payments for things that fall outside the Copyright Act altogether. If you get a paycheck every week this may not be that important to you, but if you live off of royalties it damn sure is.

This may also be the moment to ask a more fundamental question: whether the industry should abandon the “39 steps” construct altogether. Whatever its historical justification—particularly in Phonorecords I back in 2009, where publishers were trying to shield early services like MusicNet from crushing retroactive exposure—the current formula has outlived its usefulness. Today, it functions less as a fair pricing mechanism and more as a constraint, allowing services to use their complementary oligopoly market power to effectively cap mechanical royalties by anchoring them to a royalty pool determined in part based on what labels get paid. The result is a structurally odd feedback loop in which sound recording deals influence the value of adjacent musical works. A cleaner alternative would be a flat, escalating penny-rate framework, like what the Judges adopted for both physical and downloads as well as webcasting royalties—simpler, more transparent, and far less susceptible to strategic manipulation.

We have been here before. The history of section 115 is, in many ways, the history of closing gaps between statutory language and market behavior.

Phonorecords V presents another such moment.

The CRB should take it.

by Trichordist

Kafka’s Hypothetical Market Strikes Again: The DSPs’ Latest Move to Silence Songwriters by Throwing GMR Out of Phonorecords V

If you want to understand how the streaming services really view songwriters, look no further than their joint motion to exclude Global Music Rights (GMR) from Phonorecords V. It is not subtle. It is not principled. It is an attempt to narrow the field to those voices the services already know how to manage. (All of these services are being investigated by the Texas Attorney General “over alleged payola schemes in which they accept bribes to artificially promote certain songs, artists, or content.”)

Services’ Joint Motion to Exclude GMR (For Filing)Download

The Services—Spotify, Apple, Amazon, Pandora, and Google—argue that GMR lacks a “significant interest” because it licenses performance rights rather than mechanical rights. That argument is technically obvious and substantively hollow, a mile wide and an inch deep, if that. GMR represents songwriters whose mechanical royalties are directly at issue in this proceeding. The idea that those songwriters somehow lose their “significant interest” because their representative also licenses performance rights is not just formalism. It is exclusion by design.

Let’s be clear about what is at stake. GMR affiliates include some of the most commercially significant songwriters in the world—writers like Drake, Bruno Mars, The Weeknd, Pharrell Williams, Nicki Minaj, Post Malone, Pearl Jam, Prince, and Tyler, the Creator. Nobody else in this proceeding speaks for them. Not the NMPA, which represents publishers. Not the services, who are adverse. And certainly not a system that already tilts toward the parties who can afford to litigate at scale.

When songwriters affiliated with Global Music Rights made a choice about how to license their work, they chose a free market model. They chose to be represented by GMR and to negotiate performance royalties directly with users, in arm’s-length, private negotiations reflecting real-world value. That decision matters. It reflects a preference for market pricing over regulatory pricing, and for merit over compulsion.

But the moment you shift from performance rights to mechanical rights, that choice disappears. Why?

Well, that’s a good question, but the answer for now is that under section 115 of the Copyright Act, those same songwriters are forced into a compulsory license regime administered in large part through the CRB which sets the rates. They cannot opt out. They cannot negotiate freely. Instead, their work is swept into a statutory system where rates are set through a complex, expensive, and heavily lawyered process that bears little resemblance to a functioning market. It is a hypothetical market.

So we end up in a strange place, a Kafkaesque place. The same songwriter who can negotiate directly for the public performance of their work is denied that freedom when it comes to the reproduction and distribution of that same work. One side of the market is competitive and arms length. The other is managed and hypothetical.

That is not a neutral design choice. It is a structural constraint—one that continues to shape outcomes in favor of the services.

The Services claim that GMR lacks a “direct financial interest” in the outcome. That is a remarkable position. The entire proceeding is about setting the value of musical works in streaming. If the rate goes down, songwriters get paid less. If the rate goes up, they get paid more. That is the definition of a direct financial interest. The Services’ attempt to redefine “direct” to exclude the very creators whose works are being priced is not statutory interpretation. It is outcome engineering.

The Services also argue that GMR’s interest is merely “indirect” or “attenuated.” This requires ignoring the bargaining power of the songwriters who effectively are GMR. But this is the same playbook the services have used for years: isolate each rights silo, then argue that no one outside the narrowest licensing box is entitled to speak. The result is a fragmented system where the only voices that remain are those structurally aligned with the services’ preferred outcome.

Then there is the efficiency argument—the Services’ claim that allowing GMR to participate would make the proceeding “lengthy, complex, and expensive.” As opposed to what? Nasty, brutish and short?

That would be more persuasive if it were not coming from the very companies that have turned CRB proceedings into multi-year, multi-million-dollar wars of attrition. These are the largest corporations in commercial history (at least one of which is an adjudicated monopoly) arguing that the problem is too many songwriters having a voice.

Let’s call this what it is: a coordinated effort by a handful of dominant platforms to use their collective market power—and their litigation budgets—to shape the CRB process in their favor. The same companies that work relentlessly to drive down the royalties paid to songwriters are now trying to limit who is allowed to advocate for those songwriters to get fair treatment in the first place.

And here is the practical reality the Services are ignoring: even if the Judges exclude GMR, they are not solving the problem. They are postponing it. When the decision is released for public comment, the absence of these voices will not go unnoticed. It will be exposed—and it will undermine the legitimacy of the outcome. Because they’ll be back for comments which will attack the entire proceeding as arbitrary.

The CRB process already leans heavily toward those who can afford to participate. That is a structural fact. But actively excluding a representative of major songwriters—on the theory that those songwriters do not have a “significant interest” in how their own royalties are set—crosses a different line.

The Judges should reject this motion out of hand.

Because if the people who write the songs do not have a seat at the table, then whatever this process is—it is not a willing buyer, willing seller marketplace. Excluding GMR would raise the question of whether it was ever intended to be one.

by Trichordist Editor

@wordsbykristin: Legal Fights, Transparency & Neutrality: DiMA’s CEO On Improvements Streamers Suggest for the MLC

Kristin Robinson makes another important contribution to the artist rights conversation with her interview of Graham Davies, the new head of the Digital Media Association. Graham comes to DiMA from a background in the artist rights movement at our friends the Ivors Academy in the UK. We have high hopes for Graham who brings his intellect to clean up a long, long line of mediocrity at the DiMA leadership who are from Washington and here to help.

Kristin’s interview highlights DiMA’s recent filings in The Reup–the redesignation of the MLC by the Copyright Office that we’ve highlighted on Trichordist. He also has some well thought out analysis on how the MLC is not HFA, however similar the two may seem in practice.

This is an important interview and you can find it on Billboard (subscription required).

Here’s an example of Graham’s insight:

Do you think a re-designation every five years is not enough on its own?

I think it’ll be interesting to see what the re-designation process brings forward from the Copyright Office. Maybe the Copyright Office leans in on governance and says, “We’ve heard enough, and we can come forward with ideas.” But the re-designation process is a different thing than a governance review, which would bring in a special team to actually dig into governance-related issues and bring forward recommendations and proposals that could then be implemented. It would be something more specific and something the MLC could just do. You wouldn’t need the Copyright Office to sponsor it, though they could if they wanted to.

by Trichordist Editor

A Potential Solution in Phono IV To the Streaming Services’ “Lowest In History” Rate Proposals : Withdrawing The Settlement To Freeze

By Gwendolyn Seale

Last week, participants in Phonorecords IV filed the public versions of their written direct statements with the Copyright Royalty Board (CRB) – and since, countless articles have surfaced from the major music media outlets with headlines reading, “Streaming Services Propose Lowest Rates in History for Songwriters”(see here: https://www.musicbusinessworldwide.com/spotify-and-other-streaming-services-propose-lowest-royalty-rates-in-history-for-songwriters/) and tuneful soundbites equating this proceeding to a “war” (Id). 

It is absolutely accurate that the streaming services are pushing for abysmal rates and terms in Phono IV. Some services like Amazon, Pandora and Spotify actually advocate to a return of the rates and terms from prior rate setting “wars” in Phono I (2006) and II (2011).   Others, like Apple, suggest applying the rates and terms that are determined by the CRB in Phono III – which, mind you, covers 2018-22, and is being litigated simultaneously despite 2022 commencing in two months – because what an awesome system is this Copyright Royalty Board! Nevertheless, there is something that has been conveniently omitted from each of these media articles: “the why.” Why are the services proposing the “lowest rates in history?” What justification do the services provide for their positions? Unfortunately, the answer is not as simple as the streaming services playing the role of “the villains” in the “war” for songwriters’ livelihoods.

When you download the hundreds of pages of the services’ written direct testimony from the CRB, and wade through the arguments in the mire of heavily redacted passages, there is a surprising common theme used to bolster every last one of their positions: the proposed settlement by the NMPA, NSAI and the three major labels to freeze rates for physical product like vinyl and permanent downloads (the Subpart B configurations) (see here: https://app.crb.gov/document/download/25288).

Simply put, every service used the NMPA and NSAI proposed settlement for physical as a benchmark to support their abysmal rates on streaming. Surprised? Me, too. But for reference I’ve included some excerpts from the services’ filings at the end of this post. 

For those in need of catching up to this point, The Trichordist has chronicled this proposed settlement and the reactions thereto (i.e. “the Frozen Mechanicals Crisis” see here: https://thetrichordist.com/category/frozen-mechanicals/ ).  Songwriters, music publishers, and songwriter advocates penned articles for The Trichordist and some wrote comments to the CRB objecting strongly to the NMPA and NSAI settlement.  Some also wrote their representatives in Congress, expressing their dismay over this important revenue stream being frozen yet again for another five years due to a private settlement between “willing buyers” and “willing sellers” who are one and the same person at the corporate level. What’s more, Texas Congressman Lloyd Doggett submitted a letter to the Librarian of Congress and the Register of Copyrights inquiring about the matter (see here: https://thetrichordist.com/2021/07/18/letter-from-congressman-lloyd-doggett-about-frozen-mechanicals-to-librarian-of-congress-and-register-of-copyrights/).

Now that it is crystal clear the proposed settlement is being seized upon by the services as a way to benchmark and justify their lower-than-ever rate proposals (also called “hoist with your own petard”), it is time for the highly paid representatives of the copyright owners in this proceeding to truly rethink their strategies. This result was predictable – as I mentioned in my last post here: https://thetrichordist.com/2021/06/25/guest-post-by-sealeinthedeal-a-foreseeable-result-of-the-phonorecords-iv-private-settlement-opening-pandoras-box/ , “[i]t did not take a soothsayer to foresee this result; the private settlement opened Pandora’s box – begetting misery for every songwriter.” 

More disturbing, they should have seen this coming a long way off because they got called out for doing essentially the same thing in Phonorecords III.  For context, when there was a lull in the pace of Phono IV, I began delving through the filings in the Phono III remand. Much to my unsurprise, an expert witness for Pandora in that proceeding, Professor Michael Katz, foreshadowed the current debacle. Not only did he use the physical 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 in testimony filed on April 4, 2021. Chris Castle referred to this issue as the “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.  [Physical mechanical rates were first frozen at 9.1¢ in 2006.] 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.”

Chris Castle

The proposed settlement did not just open Pandora’s Box, it also opened Spotify’s, Google’s, Amazon’s and Apple’s boxes (don’t mind me, I’m Greek and enjoy every opportunity to make mythology references). So, when posed with the question, “why advocate for this settlement to freeze,” even following the filings of the services, the NMPA’s David Israelite provides the following commentary (heard most recently during last Wednesday’s Town Hall via zoom):

 (1) he refers to folks who articulate this concern as professional critics who like to blog from their couches, and that there’s a lot of misinformation going around;

 (2) the NMPA has previously (as far back as Phono I) tried to press for an increase to no avail after spending millions of dollars; and 

(3) the NMPA wishes to focus efforts on the streaming services as they do not wish to fight multiple fights at once and potentially risk the labels proposing an even lower than 9.1 cent rate. 

To respond to this commentary  — first, it is difficult to believe the major labels would propose a lower than 9.1¢ rate if the publisher negotiators did not cave if for no other reason that the willing buyer and the willing seller standard ought to work the other way, too.  However, if anyone has evidence to support this “labels will screw us” rationale, please reach out to me and I will immediately withdraw that premise. Notwithstanding, even in the hypothetical event that the labels counter with a lower than 9.1 cent rate, is it not the job of the prime representative of the “copyright owners” at the NMPA and NSAI to firmly state that this rate has been frozen for nearly 20 years and no longer will “we” (including their sister publishers) stand by this? In response to the other two points, I understand that I have spent no money in these proceedings and that I do not have the resources to do much more than write about this from the couch in my apartment in Austin, Texas. But, for what it is worth, I believe that an important part of advocacy is being open to critique, listening and learning – even if it is something that you do not wish to hear. 

Speaking of, the buried lede is that the CRB has reopened the public comments on the proposed settlement to freeze physical mechanicals – the CRJs are at least willing to listen and learn. Maybe they don’t think we’re couch commenters.

Now, I do not believe in presenting a laundry-list of problems without proffering potential solutions, and luckily, there is a solution that is entirely within the control of the parties that settled: withdraw the proposed settlement to freeze the mechanical rates for Subpart B configurations. Go to the labels and negotiate a voluntary increase. Submit that increase proposal to the CRB. This act will not only bring the entire songwriter and music publisher communities together, but it will also serve to extinguish one of the services’ key benchmarks in their testimony.

While we’re on the topic of strategies, I want to end on one note. Now is not the time to pit what artists are earning from digital radio in relation to what songwriters are earning ( see here: https://variety.com/2021/digital/opinion/digital-radio-guest-column-david-israelite-nmpa-1235092330/ ). One of the great things about working with songwriters in Texas happens to be that many are also recording and performing songwriter/artists. Thus, they value the rates from digital radio that are applied to recording artists, and they welcome the victory achieved by SoundExchange in Web V (which resulted in a rate increase plus index of rates in accordance with inflation — which seems wiser by the day and winter is coming). 

Instead, it is time for the focus to be on achieving the best possible results in Phono IV by expanding the revenue stream, not taking money from others which only benefits the services. 

THE RECEIPTS: Petard-Hoisting Excerpts from the Services’ Testimony

(Note: PDD = “permanent digital downloads,” and WBWS = the “willing buyer willing seller” standard which the Copyright Royalty Judges (CRJs) are to use as the basis for determining rates in this proceeding, pursuant to the Music Modernization Act.)

AMAZON

PANDORA:

APPLE:

GOOGLE:

SPOTIFY:

by Trichordist