Standoff Continues In German Mechanicals Dispute

Despite a seven-hour hearing July 28, the arbitration committee of the German Patents and Brands office failed to reach a ruling on a dispute over the country's mechanical royalty rate between the Ger

MUNICH -- Despite a seven-hour hearing July 28, the arbitration committee of the German Patents and Brands office failed to reach a ruling on a dispute over the country's mechanical royalty rate between the German affiliate of music trade body the IFPI and local authors' rights society GEMA.

Observers say they were surprised at the extent to which the arbitration committee discussed details of the dispute.

The committee adjourned the session and plans to hear the case again at the end of the year, according to an insider.

The IFPI in January announced its decision to slash the mechanical royalty rate on sound recordings to 5.6% from 9.009% of the PPD (published price to dealers). Under German procedures, the new rate had to be confirmed by the arbitration committee at the German Patent and Brand Office.

GEMA decried what it saw as a one-sided attempt by the labels to cut mechanical royalties.

Until a final agreement is reached, the difference between the previous rate of 9.009% and the labels' proposed rate of 5.6% will be held in an account by the record companies.

IFPI Germany says it took the unprecedented step because of the dramatic declines in the German music market and the need for labels to cut costs.

The conflict is taking place amid an active European context for such issues.

London-based IFPI, which represents the major labels, and Paris-based BIEM, which represents European rights societies on mechanical rights issues, have failed for the past two years to agree on a new "Standard Contract" mechanical rate applicable in Europe.

The European Commission announced in April that the role of national royalty-collection societies was under scrutiny. The EC has warned 16 authors' rights societies that the way they cross-license repertoire is "potentially in breach of European Union competition rules."

Meanwhile, Universal Music International in 2002 lodged an antitrust complaint with the European Commission against BIEM, followed in March 2003 with another submission before the EC. UMI considers the Standard Contract unfair and accused collecting societies of acting as a cartel.

Recently, the notion of a single rate of 8% for mechanical rights for CD, DVD and online music was circulated between the IFPI and European collecting societies. Known as the "triple-eight agreement," the proposal was apparently rejected in May by a majority of collecting societies, including GEMA.

"Triple-eight could provide a way through the impasse," says a label source familiar with the situation.

Another scenario envisioned by observers is one in which certain collecting societies break rank and independently agree to specific deals with the labels. It is understood that one of the five major record companies has already put into place with one of the main European societies a mechanical deal for online distribution.

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