May 12, 2021 Feature

Music Rates And Royalties In Today’s And Tomorrow’s World

By Jeff Brabec and Todd Brabec

With much of the live concert business on hold, many motion picture theaters closed, Broadway and the musical theatre unable to open until at least until June 1, 2021 music licensing deals based on a percentage of net revenues or advertising gross receipts showing losses and television and motion picture production only recently getting somewhat back on track, the Covid virus has had a significant effect on the worldwide music business, Some areas have taken a substantial hit with others remaining relatively stable and others showing significant gains.

To understand today’s environment and the continuing economic effect it has on the music industry, it is important to understand how rates and royalties are set as well as how they are distributed to songwriters, composers, recording artists, music publishers and record labels.

The following article discusses some of the most important rate and royalty areas, how and by whom they are set or determined as well as some major possible changes due to legislation, litigation, Copyright Royalty Board decisions and the intervention of the Department of Justice in the Consent Decree process.

Songwriters/Publishers (Musical Compositions)

1. Mechanical Licenses (2018-2022)

The owner of a musical work under the U.S. Copyright Act has the exclusive right to make and distribute phonorecords of the work (i.e. copies in which the work is embodied, such as CDs, vinyl and other physical copies, downloads, limited downloads, interactive streaming, digital files, etc.). This “mechanical” right is subject to a compulsory statutory license under Section 115 of the Act.

Downloads, Physical Recordings and Ringtones: Composition statutory rates for physical recordings and downloads are 9.1 cents or 1.75 cents per minute for musical works over 5 minutes. The statutory royalty for a ringtone is 24 cents.

Interactive Streaming: The real area of present and future growth which is continually being shown in year end and monthly royalty income reports is the mechanical income earned from the interactive streaming services (e.g., Spotify, Apple, Amazon, Google and, to some extent, Pandora) where the listeners are allowed to select the specific track/composition that they want to hear.

Interactive mechanical streaming rates (which apply to audio only streams and not to audio visual streams) are based on a number of factors including the revenue of the digital music service, the fees that the service pays to license and use the master recordings, the number of subscribers if a subscriber funded service vs. an ad supported service, the type of offering and the amount of royalties that the service pays for the licensing of the performance rights.

The calculations that are employed to arrive at the statutory mechanical per play interactive stream royalty rate are complex but in its simplest form, if a service were an ad supported service, the rate would be the result of taking the greater of a specified percentage of the digital music service’s revenue and a specified percentage of the costs to the service of licensing the master recordings containing the compositions (e.g., primarily payments to record companies which own and/or control the masters) and then subtracting the amount of money that the service is paying for performance rights (e.g., payments to the performing rights organizations such as ASCAP, BMI, SESAC and GMR). The result would be the income pool for mechanical rights which would be shared by all compositions streamed by the service according to the number of streams on a composition by composition basis. It should be noted that if the offering is a subscription based service as opposed to an ad supported service, a per subscriber penny rate (e.g., $0.15 or $0.50 depending on the type of offering) multiplied by the number of subscribers is introduced into the “greater of” calculation.

For informational purposes, with respect to the “greater” starting point of the royalty calculation, the percent of service revenue rates initially established by the Copyright Royalty Board (the “CRB”) started at 11.4% in 2018 and increased on an annual basis until it reached 15.1% in 2022. The percent of service total content costs (“TCC”) started at 22.0% in 2018 and increased on an annual basis until it reached 26.2% in 2022. For reference, the rates for 2020 were established as 13.3% of the service revenue and 24.1% of the TCC with 2021 at 14.2% of service revenue and 25.2% of the TCC.

The 2018 CRB decision on interactive streaming rates with respect to very important aspects (e.g., failure to give adequate notice to the digital music services of the final rate structure as well as failure to provide the basis and authority for changing the definition of service revenue with respect to bundling offerings, among others) was appealed by Spotify, Pandora, Amazon and Google (Apple did not appeal) to the U.S. Court of Appeals for the District of Columbia which, in a 65 page decision, remanded the case back to the CRB on August 7, 2020 for further proceedings and determinations. Since the decision did not address the issue of what the operative rates and terms should be on an interim basis pending the remand determination, this matter represents the initial decision which must be determined by the Copyright Royalty Judges.

For informational purposes, the National Music Publishers’ Association (“NMPA”) and the Nashville Songwriters Association International (“NSAI”) submitted a motion to the Copyright Royalty Judges to set interim rates and terms that explicitly maintain the current rates and terms and which would remain in effect until the Judges publish a new final determination in the remand proceeding.

It should also be noted that, despite the remand of the various issues related to the 2018-2022 rates, the CRB proceedings which will determine the statutory mechanical rates for the five year period 2023 through 2027 are scheduled to commence in early 2021.

Copyright owners can also directly license works in lieu of the Statutory License.

The Mechanical Licensing Collective And Interactive Streaming Royalties: Pursuant to the Music Modernization Act (the “MMA”), a new not-for-profit organization was established to issue blanket licenses to the digital music services for this interactive mechanical streaming right. This organization which is called “The MLC” has the responsibility of issuing such licenses, creating a publicly accessible data base of composition information so that royalties will be paid to the correct copyright holders/representatives, collecting the statutory royalties from the services and paying out the royalties on a monthly basis. Another very important aspect of its mandate is to build a portal so that composition information can be viewed and corrected in the event of errors which will assist in the matching of unmatched works to the correct royalty recipients.

The digital music services are funding The MLC so that no fees will be deducted from the royalties that are paid to the copyright owners/representatives. With respect to said funding, the Copyright Royalty Judges provided that the initial Start Up Assessment billed to the primary digital service companies would be $35,500,000.00 with an assessment for 2021 of $28,000,000.00. For calendar year 2022 and subsequent years, the amount of the annual assessment would be based on the lesser of three percent (3%) and the percent change in the Employment Cost Index for Total Compensation (the “ECI”) as published on the website of the Department of Labor, Bureau of Labor Statistics.

The MLC is a fully staffed operation located in Nashville with a board of directors consisting of ten music publishers (both major and indie) and four self-administered songwriters. In addition, there are three non-voting directors representing trade organizations for songwriters, music publishers and digital music providers, respectively. There are also three primary advisory committees: one for unclaimed royalty oversight (comprised of songwriters and music publishers); one for dispute resolution (comprised of songwriters and music publishers); and one for operations (comprised of music publishers and digital music providers).

The operational date for The MLC to begin operations is January 1, 2021. Substantive information on its role, registration procedures and operation can be found on its website themlc.com.

2. Performance/ Performing Rights Organizations (PROs):

In the United States and in most foreign countries, the Performance Right is one of the most important rights of Copyright and, in many cases, the most lucrative. In the U.S., there is no Statutory License under the Copyright Act for this right. Songwriters, composers, lyricists (jointly “writers”) and music publishers join these organizations which in turn negotiate licenses with the users of music, collect the license fees from those users and distribute the monies to writers and publishers based on surveys of performances, specific payment schedules and distribution rules as well as other factors. All performance monies are distributed 50% to writers and 50% to music publishers.

The four primary PROs in the U.S. are the American Society of Composers, Authors and Publishers (ASCAP, 1914), Broadcast Music Inc. (BMI, 1939), SESAC (1930) and Global Music Rights (GMR, 2013). As to revenue, the four U.S. PROs collected in the area of 3 billion dollars in 2019 with ASCAP and BMI being responsible for close to 1.3 billion dollars each.

License fees are arrived at through voluntary negotiations between each PRO and an individual user or an industry wide negotiating committee (e.g. the Radio Music License Committee, the Television Music License Committee, etc.) If an agreement cannot be reached in the case of ASCAP and BMI and any user, Federal “Rate Courts” (Southern District of New York) pursuant to Consent Decrees with the government dating back to 1941, determine “reasonable” license fees, terms and what is actually licensable. In the case of SESAC, license fees are arrived at through voluntary negotiations, but due to antitrust settlements involving the local radio and local television area, mandatory arbitration takes effect for those two media if voluntary agreements cannot be reached. As to Global Music Rights, all license fee negotiations are voluntary as there is no Consent Decree, Rate Courts, mandatory arbitration or other dispute resolution procedure other than copyright infringement litigation in effect.

The most common license used is the “Blanket license” which allows unlimited use of a PRO’s repertory for a negotiated fee. Additional types of licenses include the “Adjustable Fee/ Carve Out Blanket license” which is a blanket license reduced by the amount of direct licenses negotiated, the “Per Program license” which involves only programs that contain the specific PRO’s repertory which is not directly licensed by the writer or publisher copyright owner and the “Through to the Audience license” with a fee that takes into account the “value of all performances made pursuant to the license including all further transmissions by users with an economic relationship to the licensee”.

Copyright owners, normally the music publisher, can also Directly license or Source license copyrighted works to broadcasters, streaming services and other users of music or program producers thereby bypassing the PRO licenses completely even though they are a member, affiliate or contracting party of such organizations. With the exception of GMR, all U.S. PRO writer and publisher membership or affiliation agreements are non-exclusive which permit the copyright owner to license a work directly if they so choose or if a user or producer requests or demands a direct or source license. A number of U.S. PROs also administer the direct licenses negotiated by their members or affiliates.

It is important to understand the types of license agreements-whether negotiated or court set- that the PROs enter into with the users of music as changes in economic conditions can have significant effects on both incoming PRO revenue as well as user payments. License fee deals can take many forms including a % of gross revenue or advertising gross receipts, flat dollar rates, industry-wide non-revenue based fees with allocations based on market size, viewership and number of stations in a market, different percentages of revenue based on the intensity of music use (i.e. music intensive v. general entertainment v. talk, news and sports), number of full time students for universities, seating capacity, number of attendees and ticket prices for live performances, annual expenditures for all entertainment on the premises, etc.

A good example of one type of license fee structure deal are the current ASCAP, BMI, SESAC and GMR agreements with terrestrial radio. The ASCAP and BMI current agreements, which run through 2021, are relatively similar with basically a 1.78% of revenue fee structure less a standard deduction of 12% with digital revenues subject to an increased deduction of up to 30%. The Per Program license has a base fee of 0.31% less the same deductions. Included are the stations “new media” platforms related to internet websites, smart phones and other wireless devices. The current SESAC agreement, which runs through 2022, has a fee of 0.255% of net revenue with an all talk rate of 0.575%. As the RMLC’s antitrust litigation against GMR remains ongoing at this point, GMR has extended to stations an interim rate agreement through March 31, 2021.

Another type of arrangement is illustrated by SESAC’s recent agreement with the Television Music License Committee (“TMLC”)) for the local television industry as to fees for the Blanket and Per Program license for the period 2020-2023. The industry wide blanket license fees for the term totaled $151,000,000 with individual year allocations of $36.5 million for 2020, $37.5 million for 2021, $38.5 million for 2022 and $38.5 million for 2023 with a set methodology for allocations to individual stations within a market. A separate Per Program license was also negotiated.

Keep in mind that many of these agreements are complex documents taking into account within the agreement many different factors as well as alternatives to the blanket license. The above examples represent license agreements in their “headline” rates only-the actual signed agreements run many pages with particular emphasis on the scope of the agreement, specific definitions, fee structures and payment dates, music use information, breach, default, indemnity and termination clauses, among other items.

It is important to note that the Department of Justice in 2019 opened a review of the ASCAP and BMI Consent Decrees as to whether they should be modified, remain the same, be eliminated or be given a “sunset” date. ASCAP and BMI presented four principles which should be retained: users have automatic access to the repertory with an immediate right to public performance contingent on fairer, more efficient and less costly mechanisms for interim fees, retain the current Rate Court process as reformed by the Music Modernization Act (rotating judges and the ability to introduce sound recording rates into any judicial determination), continue the concept of non-exclusive rights and preserve the current forms of licenses. Additional issues that were brought up involved the ability to “bundle” rights, the concept of treating “similarly situated users”alike, the maximum duration of 5 years for a license and the “harmonization” of both the ASCAP and BMI decrees, among others.

As to the additional parties heard, songwriter and composer organizations (NSAI, SCL, SGA, SONA, etc.), though they were in agreement with the four basic principles set forth by ASCAP and BMI, were concerned about, among other issues, the ability of music publishers to move their works to another PRO or remove their works from a PRO without writer consent as well as any attempts by Congress to pass a compulsory license. The National Music Publishers’ Association (NMPA) primary position was that publishers be permitted to selectively withdraw works from the PROs so that they could be directly licensed in the digital space similar to how they license full catalogues in unregulated music copyright areas. On the user side (NAB, RMLC, DIMA, NCTA, MPAA, National Restaurant Association, etc.), practically all wanted no changes in the decrees as they were “the cornerstone of contemporary music licensing”, “remarkably effective and efficient”, “predictable” and a “protection against copyright infringement”. In addition, ASCAP, BMI, GMR and SESAC should all be under the same restrictions.

3. Synchronization:

As there is no statutory license for synchronization under the U.S. Copyright Act, all “synch” licenses, with very few exceptions, are voluntary negotiated licenses between the copyright owner/administrator and the production company or studio. This includes the use of pre-existing compositions in motion pictures, television programs, commercials, e- cards, apps, video games, holograms, etc. In many cases, the fee is a one-time payment. For example, a one-time synch fee for a life of copyright all media excluding theatrical dramatic series television license. In other cases, such as music and dance centric television programs where there are multiple options exercisable by the producer, additional monies can be added to the initial payment. In the case of music and dance centric video games (as opposed to other types of dramatic or sports games), the royalty formulas can range from per unit royalties, to additional monies paid based on the game reaching certain sales plateau levels to a % of net revenue for compositions downloaded into the game subsequent to a game’s release.

There are numerous variations in the area of synch licensing depending on the type of production, term of the license, use of the composition, whether there is a change of lyrics and media requested by the production company with many times the fee being based on a most favored nations basis with the master recording if such a recording is used.

Sound Recordings/Artists and Record Labels

1. A Limited Performance Right For Sound Recordings:

This limited right which applies to sound recordings publicly performed “by means of a digital audio transmission” was created pursuant to the Digital Performance Right in Sound Recordings Act of 1995 (DPRA). Webcasting was included under this right by the Digital Millennium Copyright Act of 1998 ( DMCA). This Compulsory License/ Statutory License applies primarily to satellite radio services (SiriusXM, etc.) internet radio (Pandora and other non-interactive services), cable television audio music channels (Music Choice, etc.), certain business establishment services (Muzak, etc.) and similar platforms that stream music. This is an audio right only and does not apply to terrestrial radio.

The Statutory License as set forth in Sections 112 and 114 of the Copyright Act applies only to non-interactive services. For On Demand services (e.g. Spotify), the right remains with the Copyright Owner and is a negotiated agreement between the record label/ copyright owner and the digital service. These direct agreements can take many forms including a % of gross, net or ad revenues, an ownership or equity stake in the service, per stream rates, advances and guarantees, a trade off of services or a combination of these and other elements.

The Copyright Royalty Board, created under the Copyright Royalty and Distribution Act of 2004, is the entity that establishes the statutory rates and terms for the public performance of sound recordings under the Section 112 and 114 licenses. The following represents the current master recording rate structures in effect for the years mentioned:

2. Webcasting 2016-2020:

.0022 per stream for commercial subscription services and .0017 for non-commercial subscription services. The start of the two year Web V proceeding to establish the royalties for 2021-2025 for the non-interactive online streams of both local radio stations and pure play webcasters was delayed by the 2020 government shutdown.

3. Sirius XM 2018-2022:

15.5% of gross revenue; and Music Choice 2018-2022: 7.5% of gross revenue. As to the Sirius XM rates, they are locked in through the next term and will remain the same at least until 2028. As to the Music Choice rates (the “pre-existing service” rates), the rates could change in connection with Music Choice’s appeal of the last CRB decision. Whatever rates are final after the appeal and remand will be the final rates through 2027.

SoundExchange, a 501 (c)(6) tax exempt organization incorporated in Delaware and headquartered in Washington, D.C., is the sole entity designated by the Copyright Royalty Board (CRB) to collect royalties under the statutory license. In 2019, SoundExchange collected $963 million in royalties and distributed $908.2 million in sound recording performance royalties to registered artists and rights owners with 50% going to the copyright owner of the sound recording (normally the label), 45% to the featured artist and 2.5% each to non-featured vocalists and musicians. In addition, record producers, engineers and mixers can also receive a % of the featured artist’s royalties provided they provide a letter of direction signed by the artist. For recordings made before November, 1, 1995, a separate provision allows the same individuals, in certain circumstances, to receive a portion of the royalties absent a letter of direction. SoundExchange also administers record label/ streaming service direct licensing deals that bypass the statutory license. Finally, the Music Modernization Act of 2018 extended limited federal copyright protection and the right to digital public performance royalties to sound recordings made from January 1, 1923-February 15, 1972, thereby adding a substantial new group of recordings eligible for SoundExchange distributions.

4. Synchronization:

As with musical compositions, master recording synch licenses are negotiated agreements. Many times the license fee and terms will be on a Most Favored Nations (MFN) basis with the musical composition so that each will be paid at the same rate.

CONCLUSION

In this article, we have covered three of the primary areas of U.S. music rates and royalties for songwriters, composers, artists and record labels-mechanicals, performances and synchronization. Additional factors also come into play including, among others, the specific contracts that songwriters and artists sign with music publishing companies and record labels, direct licenses as well as, in many cases, a whole different set of rules, regulations and royalties in foreign countries. Suffice it to say, the complexity of the business and law of music has certainly not decreased in recent years.

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By Jeff Brabec and Todd Brabec

Jeff Brabec, Esq., is Senior Vice President Legal and Business Affairs BMG. Todd Brabec, Esq., is an Entertainment Law attorney and former ASCAP Executive Vice President. Both are Adjunct Professors at USC teaching Music Publishing, Licensing and Film, Television and Video Game Composer and Songwriter Contracts. Additional information on the subject matter of this article can be found in the 8th edition of “Music, Money and Success: the Insider’s Guide to Making Money in the Music Business” (Schirmer Trade Books/ 656 pages/Music Sales, Wise Music).