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Will new a royalty deal mean more money for labels and musicians?


Ever wonder how musicians and music publishers get paid for all the digital music distributed by streaming services, stored in media lockers, and distributed via playlists and special bundles? Music publishers and artists have been wondering, too — because, for most artists anyway, the money from these new services hasn’t amounted to a hill of beans.

Now, there’s an answer: A new agreement between music publishers, record labels, digital media services, and mobile phone companies for the first time establishes payment standards and mechanical royalty rates for new digital music business models. Assuming the settlement is approved by the Copyright Royalty Board, that means music publishers, record labels, and even actual songwriters will be able to participate in the royalty stream from new digital music services, like Apple’s iCloud and streaming outfits like Spotify.

What’s the new deal? How will it benefit artists and publishers — and does it mean that digital music is going to cost more?

How royalties work


It’s tempting to think that every time an artist’s song is played on the radio, bought on CD, downloaded from a digital music store, or streamed the via Internet, some money — maybe a few pennies, but some money — drops into the artist’s bank account. That’d be great, right? When pressed, most people might concede a few pennies might need to drop elsewhere too: For instance, if a song is a cover, some money should go to the original songwriter, right?

That is the basic idea behind the music royalty system in the United States, but the reality is far more complicated — and the amount of money most artists see is usually indistinguishable from $0.

Here’s the current music royalty system for digital music in a nutshell. There are basically two groups entitled to royalties for a music recording: recording artists and songwriters/publishers. Sometimes those people are the same — for instance, performers who write and record their own material. Usually they’re separate: musicians doing covers, or who have signed away some (or all) of their publishing rights to their material. The songwriter/publisher situation can get very complicated, thanks to recording contracts, publishing agreements, copyright transfers, inheritance, and a myriad of other issues.

There are also four primary type of royalties: performance rights (when music is broadcast or performed live), mechanical royalties (when a recording is reproduced for distribution), synchronization royalties (use in TV, movies, commercials, etc.), and print royalties (sales of printed sheet music).

The only instance where a performing artist gets performance royalties is subscription-based, non-interactive digital services. (Here, “non-interactive” means users can’t pick and choose what they want to hear: users subscribe, and hear what the services send, pure and simple). In the digital arena, everything else a recording artist receives comes from mechanical royalties.

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When a music recording is legitimately released to the public, music copyright holders and publishers are required to license that music for redistribution and even re-interpretation. This is called a compulsory mechanical license under section 115 of the Copyright Act. Anyone wanting to distribute music under a mechanical license is required to provide notice to the copyright holder (or the Copyright Office, if no copyright holder can be located) before they start distribution; once they start distributing recordings, they must pay a royalty for the privilege. The royalty rates and terms are set by the Copyright Royalty Board. The Copyright Royalty Board consists of three judges permanently appointed by the Librarian of Congress.

The Copyright Royalty Board does not collect royalties; instead, that task is handled by SoundExchange, a performance rights organization which started off as a division of the RIAA — yes, the same people who sued people for sharing music via peer-to-peer file sharing services — but now operates as an independent non-profit. SoundExchange collects royalties on behalf of members from many (though not all) music distribution sources, including some international rights organizations. SoundExchange says it paid out about $292 million to members in 2011. Despite that seemingly-large figure, SoundExchange’s record is mixed. For instance, plenty of broadcasters (especially webcasters) are exempt from reporting because they aren’t deemed to reach a significant number of people or fail to report accurately. (In cases of incomplete reporting, SoundExchange now has permission to take its best guess (PDF) about who should be paid.) Some internal SoundExchange documents that leaked at the beginning of the year described its royalty processing and distribution system being in “crisis mode.” To be sure, tracking Internet plays on an artist-by-artist and track-by-track basis is no small task, but the situation rankles many artists — particularly independents.

The new deal

The new settlement between the National Music Publishers Association (NMPA), Digital Media Association, (DiMA) and the Recording Industry Association of America (yes, the RIAA again) sets mechanical licensing rates for five new categories of digital media:

  • Paid locker services
  • Purchased content lockers
  • Mixed service bundles
  • “Limited offerings”
  • Music bundles

Paid locker services are subscription-based music lockers that provide on-demand streaming and downloads — these include these like Amazon Cloud Drive, Apple’s iTunes Match, or the music component of Google Play. The new deal entitles publishers to either a 12 percent mechanical royalty, 20.65 percent of total content cost, or 17 cents per subscriber, whichever is greater.

Purchased content lockers provide free cloud storage for purchased music. Publishers get either 12 percent of the revenue, or 22 percent the total cost of content, whichever is greater. Again, Apple, Google, and Amazon all have services that fall into this category.

Mixed service bundles are offers that roll music services in the cost of a service — for instance, a mobile phone plan that includes a music service. Music publishers will receive 11.35 percent of the revenue or 21 percent of the total content cost, whichever is greater.

“Limited” interactive services put a few toes over that line between streaming services (where users are passive listeners) to where they can control the content they receive. Limited interactive services limit music to, say, selected playlists or genres. Pandora is a good example. Publishers will get either 10.5 percent of revenue, 21 percent of the total cost of content, or 18 cents per subscribers, whichever is greater.

Music bundles includes things like a physical CD that comes with downloadable content. Publishers would get either 11.35 percent of revenue or 21 percent of the total content cost, whichever is greater.

That’s it. The rest of the agreement maintains a per-song mechanical royalty of 9.1 cents for downloads, CDs, and other physical formats, 24 cents for ringtones. These rates rates will remain the basis for determining mechanical rates for different sorts of interactive streaming services, whether free or via paid subscription — remember, interactive services are ones like Spotify where users get to pick and choose the music they hear.

The agreements still needs to be formally approved by the three judges on the Copyright Royalty Board. If approved, it’ll run through 2017.

What does it mean for artists?


It’s important to note that this agreement applies only to the compulsory mechanical licenses that are required under Section 115 of the Copyright Act. Online music operators don’t need to get permission from copyright holders to use material under these licenses, so long as they provide notification and pay royalties.

Royalties for mechanical licenses go only to the copyright holder, publisher, or songwriter of a particular work. In other words, when users stream a song from their favorite artist using Spotify or Pandora, the artist doesn’t see even a tiny fraction of a penny from that in the United States unless:

  • the performing artist is also the copyright holder, publisher, and/or songwriter, and
  • the performing artist hasn’t signed away copyright or publishing rights, and
  • the performing artist (or their label) is a member of SoundExchange, and
  • the streaming service accurately reports play information to SoundExchange.

Streaming music operators are fond of complaining that they pay royalty rates in excess of those charged to radio stations. The music industry traditionally positions higher royalty rates as a way to support new digital business models — and, somehow, to forestall the threat of digital music piracy.

The upshot for performing artists is largely that the new royalty rates enforce the status quo: They aren’t being paid when their material is streamed, and they will continue to not be paid.

What does it mean for Spotify, Pandora, iCloud, and others?

The most intriguing clauses in the new royalty rates surround separate terms for total costs of content. Basically, if music labels are able to negotiate a particularly lucrative deal with a music distributor — think about what Apple probably paid EMI for the Beatles’ catalog — then music publishers would be in line for a higher royalty.

The new agreement essentially defines the royalty playing field for emerging digital music businesses — until now these services have all been operating on shaky ground because they had no idea if they were pricing their services in a way that would be sustainable once royalty rates were set in place. Operating in that limbo can be very dicey: When the Copyright Royalty Board proposed doubling rates for streaming online services back in 2007, Pandora very nearly had to shut down: It was forced to negotiate its own deal with SoundExchange. Similarly, Apple threatened to shut down iTunes when the Copyright Royalty Board considered raising the per-track royalty rate for permanent downloads to 15 cents per track.

With the new agreement, new forms of digital music services should be able to settle down and expand their offerings with much less financial guesswork. In theory, that should help to expand the music marketplace, which is still trying to find a way to cope with more than a decade of sales drop-offs from the hey-day of CD sales in 1999. It’s just a shame little (or, most often) none of that money will reach performers.

Les Paul image via Shutterstock / Sethislav
Busker image via Shutterstock / Allison Achauer
Broken record image via Shutterstock / SeDmi

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