The Copyright Royalty Board’s final determination for royalty rates for making and distributing phonorecords for the 2018-2022 term (aka Phonorecords III) were published by the Federal Register late last week, following a legal review — and close check for typos — by the office of Register of Copyrights Shira Perlmutter.
The majority of the rates determination is no surprise. Since the official remand by an Appeals Court in October 2020 — which followed a March 2019 appeal by digital services of the CRB’s February 2019 rates determination for the 2018-2022 term — the CRB judges had been wrestling with different aspects of the complicated mechanical rate formula cited by the appeal courts, with various aspects of the rates determination coming out in dribs and drabs over the last eight months.
As is already known, the CRB judges stayed with the escalating rate structure for the all-in percentage of revenue prong, which covers both mechanical and performance royalties, for on-demand streaming for the 2018-2022 period.
(The 21% of total content cost is for performance royalties are determined by a separate process but whatever was agreed to be paid to ASCAP, BMI and the other performance royalty organization is subtracted from the all-in bucket in one step of the process to determine one of the mechanical rates bucket.)
That rate structure escalated from 10.5% in the prior five-year term of 2013-2017 to 11.2% in 2018, 12.3% in 2019, 13.4% in 2020; 14.2% in 2021, and 15.1% in 2022. But in moving to the other all-in prong — the total cost of content prong, i.e. what the services pay the record labels — the CRB judges re-installed the ceiling, which prevents publishers and songwriters from automatically being rewarded when labels and artists negotiations higher rates from the services; and the judges abandoned the earlier escalating rate structure from its initial 2019 determination for the total cost of content prong, which similarly rose in annual increments from 21% of what’s paid to labels to 26.1% over the five year term. Instead, the judges stuck with 21% of total content cost for the full five-year term — the same percentage it had been in the previous five years.
(This article mainly uses the percentages from what’s known as the stand-alone portable streaming model, i.e. the main on-demand streaming vehicle, which at Spotify is known as the paid subscriber tier. The ad-supported rate is 22% of what’s paid to labels.)
In other moves, the CRB stuck with 9.1 cents per song for physical and downloads and 24 cents per ringtone for Phonorecord III. In Phonorecords IV, for 2023-2027, the royalty rate for ringtones would remain the same but the per song rate will earn 12 cents per track or 2.31 cents per minute of playing time or fraction thereof, whichever amount is larger for physical products and permanent downloads. Also, that rate will be subject to an annual cost-of-living adjustment.
Before an Appeals Court remanded a significant part of the CRB rate determination for 2018-2022 back to the CRB, digital streaming services were adhering to the structure of the initial determination which means that for some 33 months the formula applied the higher rates for the total cost of content prong without a ceiling. As such, industry sources speculate that some digital services overpaid during that period — and Billboard estimates that they might have over paid by $50 million.
But after the remand most services reverted back to the 2013-2017 rates of which used the headline rate of 10.5% of revenue, and consequently most industry financial sources suggest that the service underpaid from October 2020 through December 2022. Consequently, Billboard estimates that digital services collectively might owe $200 million to $250 million for the latter period. Looking at the two period, with the earlier one 2018-2020 partially offsetting the later period of 2021-2022, that could mean a $200 million windfall for publishers and songwriters.
Now that this has all been settled, the Mechanical Licensing Collective—working with required updated information from the digital services—has six months from the Aug. 10 date to make adjustments in what has been paid and what may still be owed from 2021 and 2022, the two years the MLC has been in operation. It will also have to rectify any under or over payments for unclaimed and unpaid royalties from the earlier periods before it began operations— a responsibility it was handed as part of the Music Modernization Act.
But besides the unpaid royalties, any needed adjustments to the rest of the payments made to publishers and songwriters during the 2018-2020 period will be handled by the digital services, likely with the help of their third party vendors, i.e. Music Reports Inc and the Harry Fox Agency.
The Phonorecords IV rate determination for 2023-2027 preceded the final determination for Phonorecords III, as it was published in the Federal Register on Dec. 16, 2022.
