Copyright Royalty Board? Statutory, Mechanical Performance? A Primer for the World of Music Licensing and Its Pricing
The Copyright Royalty Board (CRB) is currently fielding proposals from stakeholders around a new rate-setting process that will cover 2018-22, a process that is causing high drama in the music industry as stakeholders debate publicly over each others' proposals.
The highest-profile of these disagreements stems from the National Music Publishers' Assn. (NMPA) and the Nashville Songwriters Assn. International (NSAI), which have jointly criticized Sony Music Entertainment for its participation in the rate-setting process. Essentially, publishers and songwriters are on one side, and on-demand (or "interactive") digital music services like Spotify are on the other. Why does the NMPA/NSAI think Sony is "meddling"? And, if it's true that Sony Music is, why? The answer to these questions will have an impact on the income for songwriters, artists, music publishers and record labels for five years.
If you're not familiar with the Copyright Royalty Board, the NMPA, the NSAI, or the statutory/mechanical/performance licenses they're arguing about -- well, you're not alone. There are a lot of moving parts in the machinery of the music business, and almost doubly so for the digital industry and how it stays on the up-and-up. To help readers better understand this labyrinthine world, we've put together an explainer, organized from simple to complex.
What is the Copyright Royalty Board?
It is a part of the Copyright Office, itself a division of the Library of Congress. The CRB was created by the Copyright Royalty and Distribution Reform Act of 2004, replacing the Copyright Arbitration Royalty Panel. The CRB's three judges are appointed by the Librarian of Congress, and serve six-year terms that are staggered. The CRB's main role is to determine the rate services pay for statutory licenses -- we'll explain what those are next -- created under copyright law.
What are statutory licenses?
U.S. Copyright Law gives music creators the ability to license music to "music users" -- or licensees, like Pandora -- in exchange for compensation. That compensation makes up the royalties which songwriters and artists, and their labels, receive. Usually, a music creator signs a contract with a music publisher that gives away a portion of their copyright ownership of the music in exchange for that publishing company to help license that music. These licenses can take many forms.
In addition to giving music creators and/or their publishers the ability to license music, U.S. Copyright Law also gives legislators the authority to create standardized licenses which music creators and users must abide by. These licenses would allow music users to license music in exchange for paying royalties to rights owners/holders. These licenses aren't written by the creator or the agent, but are created by law or statute and thus are called statutory licenses, or compulsory licenses.
What kinds of licenses can music publishers issue?
Music publishing licenses include mechanical, performance, and synchronization licenses.
What are mechanical licenses?
These types of licenses give record labels the ability to release music on a "phono-record" -- the catch-all term for any format that contains music, whether vinyl, cassette or a digital stream -- in exchange for paying royalties to the music publishers and songwriters.
What are performance licenses?
In addition to music publishers, music creators also sign with a performance rights organization -- in the U.S., the vast majority of creators sign with either ASCAP or BMI -- which license music on behalf of songwriters and publishers, and collect royalties when that music is played on the radio, and in public-facing businesses like bars and restaurants. These are performance licenses. (These are also the subject of another heated debate that the Dept. of Justice kicked off on Aug. 4.)
What are synchronization licenses?
When music is used in a television or movie (or commercial, or music video... you get the idea) it's called "synchronization." Publishers and songwriters receive royalties for the use of their compositions in these things. It's important to note that that composition is not the recording of that song -- it's just the song. This television show likely wants to use a recording of the song too, so the owner of that recording (the "master rights owner") also needs to be contacted for a license. This applies whether the recording is a cover or the original.
Doesn't the master rights owner also have a performance license?
Yes, they do. The owner of a sound recording can license their music to digital and satellite radio in the U.S., and collect royalties from that use.
Are all of the above licenses issued voluntarily by the music creators and their agents with royalty rates negotiated under market conditions?
No. Music users like Pandora sometimes have the option of using the statutory or compulsory license, too, especially when they think that direct negotiations will result in them paying too high a rate. If the songwriter and publisher of a song are not known -- as in literally unable to be found -- then the music user will have no choice but to employ the compulsory license. This is one reason why statutory and compulsory licenses were created.
What's the difference between compulsory and statutory?
These terms are sometimes used interchangeably, but the quickest way to explain it is a statutory license is created by law, giving licensees/music users the right to a compulsory license. That means that the owner must grant a license -- making it "compulsory" -- if requested by a music user. In some instances, a compulsory license has a statutory rate. In other instances the rates are negotiated.
Does the CRB play a role in setting statutory rates for compulsory licenses?
That's the main reason the CRB exists.
What statutory licenses and rates does the CRB have jurisdiction over?
For music publishing, the CRB oversees rate-setting for statutory mechanical licenses for phono-records, whether a CD or a stream.
The CRB also sets rates for statutory master recording performance licenses for programmed digital and satellite radio, such as Pandora and Sirius XM. These can't be used by services like Spotify, which are "on-demand."
What rate is the CRB currently determining?
The current rate-setting process is to determine mechanical rates and terms for making and distributing phono-records under the compulsory license. It will apply between the years 2018-2022. There are three phases to this process. The first phase, referred to as "Sub-Part A" -- yep! -- is for music publishers, the licensors, and record labels, the licensees. It will determine the mechanical rates for songs on CDs and for downloads. Whatever rate is determined by the CRB will be the statutory rate for places like the iTunes Store.
While the publishers get mechanicals for downloads, it is not paid by Apple, but by the labels who use what's known as a "pass-through" license, i.e. the label licenses the music from the publisher and then passes through that license to Apple. Apple pays the wholesale price and the labels carve out the mechanical rate and pay it back to the publishers. On-demand services, meanwhile, pay the publishing royalties directly to the publishers.
What else is the CRB determining?
They are also setting rates for on-demand (or "interactive") streaming, which is best exemplified in the U.S. by Spotify, and known in CRB parlance as "Sub-Part B." The CRB is also setting rates for five business models created by the previous CRB determination back in 2011-2012, that have seen limited use since their creation. (These five models are known as Sub-Part C. They are mixed service bundles, i.e. a locker service that allows for limited interactive service, downloads or ringtones, bundled and priced together with a non-musical product such as mobile phone or some other internet device; a paid locker service, which Amazon and iTunes offer; a purchased content locker, a free locker provided to a music purchaser; limited offering, i.e. a subscription services offering limited genres or playlists of music; and/ or music bundles, say vinyl combined with digital downloads.)
I hear there is already a settlement between publishers and labels that covers the rates for Sub-Part A -- CDs, downloads and ringtones. What's this settlement about?
Already, the National Music Publishers' Assn. and the Nashville Songwriters Assn. International have settled with the Universal Music Group and the Warner Music Group to keep the existing statutory rates -- 9.1 cents per song and 24 cents per ringtone -- in place through 2022.
Sony Music Entertainment, however, didn't participate in the settlement. If the settlement between the NMPA/NSAI and the two majors isn't approved by the CRB across the board and an arbitration process is needed to determine rates, then the NMPA is asking that rates for other labels come in at a statutory rate of 12.5 cents per song and 27 cents for ringtones.