Copyright Royalty Board Asks If It Can Set Different Rates for Suppliers: Is This About Majors vs. Indies?

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The Copyright Royalty Board, which is currently deliberating for webcasting rates, may have just opened a Pandora’s box for record labels. The panel asked the Copyright Office whether it can set varying royalty rates for different music suppliers.

That question can be interpreted a number of different ways, but boiled down, it appears the Board is looking into whether it can set a higher rate for music licensed from the major labels over music licensed from the independents.

“They are essentially asking an abstract legal question,” says one music industry lawyer in the label camp. “It’s almost presumptuous to think you know what angle they are considering.”

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Another label source agrees: “It doesn’t necessarily mean that they are asking if they can give different royalty rates to the majors and indies,” he says. “It could be a reference to giving different rates for different genres of music.”

Nevertheless, most industry executives assume it has to do with giving the majors, and their significant market share, a higher rate than the independents. That conclusion presumes the Board's definition of a major and of an independent (see Billboard's explanation here).

How the Judges came to asking this question is unclear.

Sources say that none of the interested parties in the CRB rate proceedings -- which include labels, Sound Exchange, the digital services and other parties -- suggested in particular that different licensors would get different rates, because the assumption has always been that whoever got more plays would get more money. But sources speculate the CRB came at that question themselves while considering whether the Merlin direct deal should be considered a benchmark market rate; and because of looking at the different direct deals cut with iHeartMedia and by indie labels and the Warner Music Group; and finally due to one Sound Exchange economist who apparently analyzed the difference between some iTunes radio direct deals with the majors and indie labels.

Whatever prompted the question, the CRB Judges are seeking legal guidance from the U.S. Register of Copyright, Maria Pallante. Since the U.S. Register of Copyrights must ultimately review their rates determination for legal error, and since all three judges are relatively new to the CRB, they apparently are turning to the Register earlier in the process, instead of waiting for the review at the end. Previously in the CRB process, the CRB judges asked the Copyright Office if Pandora’s direct deal with Merlin could be used as a benchmark; and the Pallante response went beyond that question but also included an okay that the Merlin deal could be considered, although she didn't specifically mention that deal by name.

On Sept. 11, the CRB judges asked if Section 114 of the Copyright Act, or any other provision of the act, prohibits the judges from setting rates and terms that distinguish among the different types or categories of licensors. Interested parties had until Friday (Oct. 2) to file a brief on the question and then there will be a chance for the parties to review each other’s briefs and make a response. Armed with the initial briefs and responses, Register Palette will have 30 days to make her determination.

Sources say that the Sound Exchange -- which is supposed to be the main advocate for the music industry, for both labels and recording artists -- has become paralyzed by this issue, since its board has representatives from both camps. “Sound Exchange can’t unify around a single response,” says one source familiar with the situation.

Other sources say that the Universal Music Group and Sony Music Entertainment are in favor of allowing for separate rates. In fact, some sources suggest that the two majors will work together on a response and hired one law firm to make their case. Representatives for both companies weren’t immediately available for comment, but a source in one of those camps acknowledges that they were putting something up but declines to say what stance they were taking.

Sources suggest that the two majors won’t outright argue that they should get a higher rate than the indies, but rather argue that different rates for different kinds of music licensors makes sense.

But just because the two majors aren't standing united with the indies on a single rate doesn't necessarily mean they are taking their stance in hope of getting a higher rate than the indie sector. "If the Register decides 'no there can only be a single rate,' then they would have to live with that forever," says a source familiar with how the majors are approaching the issue. "While they might support a single rate now, it doesn't mean that there will be different circumstance down the line where it might make sense to have multiple rates. They are trying to maintain the highest value for artist content and if multiple rates lead to the highest value, than that's what they are after. If a single rate leads to less money overall for artists, they wouldn't see that as a positive result."

Meanwhile, in the independent sector, A2IM has put a statement on its website saying it favors a single rate. “A2IM remains committed to achieving a level playing field in the digital music marketplace for all of our member labels, regardless of their size,” the organization said on its website. “When it comes to radio play (or digital radio play in the United States) a single rate is the foundation of collective licensing worldwide; a track equals a track, regardless of genre, the identity of the performer or the size of the label releasing the track. This simple principle underpins all of the advantages we receive from collective licensing. It minimizes the opportunities for gamesmanship by some participants. The biggest or most-well-connected companies have no advantage over everyone else, and there is less opportunity for them to abuse their scale advantage.”

It said it made a filing to the Copyright Office in conjunction with artist unions, SAG-AFTRA and AFM, putting forth a strong argument for a single statutory rate

Meanwhile, it’s unclear what side the Warner Music Group would take. Sources say that WMG has decided to stay silent even though internally, they were leaning toward a single rate. Over the last few years, the WMG has successfully positioned itself as being more friendly to the indie sector than the other two majors. But even if it does favor the single rate, if the CRB decides to go with multiple rates based on market share, WMG could benefit from such a determination, regardless.

If the CRB decides to reward market share, it could be a problem to define a major versus an indie. Or would they give one rate to Merlin, a separate rate to each major, and another rate for all other indies?

What happens in cases like Taylor Swift, whose label is a member of A2IM but is distributed by a major? Will Lady Gaga get a higher rate because she is on a label, Interscope, owned by a major, than Swift, who is on Big Machine, a member of A2IM, but is also distributed by UMG?

Digital services are said to favor the single rate, says one source in the digital service camp, who adds, “The indie labels must be apoplectic.”

But while indie labels may worry that they would get a lower rate, which would put them at a disadvantage when signing artists, it could also play to their benefit. If services wanted to lower the cost of the royalty payments, they could play more indies than previously intended.

Finally, some see an even bigger worry coming from all of this. Currently, so much is up in the air on copyright, with key legislation like the Songwriters Equity Act and Fair Play Fair Pay proposed and a possible overhaul of copyright law expected to occur over the next few years. “If the CRB decides to pay out different rates, it would be extremely damaging for the music industry to be divided over this issue,” says one label executive.