For the second tier, while the formula previously called for the pool to choose the lesser of two buckets -- either 80 cents per subscriber or 21 percent of what's paid to record labels -- now the first bucket is eliminated, leaving in place the 21 percent of revenue bucket, which is escalated to 26.17 percent of revenue during the five-year term, going from 22% of label content cost to 23.1% in 2019; 24.1% in 2020; 25.2% in 2021 and finally 26.2% in 2022.
Unlike music publishers, whose rates are mostly regulated by the government, record labels get to negotiate in the open market with music services for what rate they will be paid to license their music. Depending on the service and its offering, record labels can get anywhere from 52 percent to 60 percent of revenue from such negotiations.
The elimination of the half step that produces a lesser bucket of revenue represents a two-fold win for publishers and songwriters in that previously the 80 cents per subscriber bucket always won out as the lesser pool. While that resulting pool would in turn be measured against the 10.5 percent of revenue, to see which formula produced the greater bucket of revenue, it eliminated a larger pool of revenue along the way.
Now not only is the less-than test eliminated, they left in place the calculation that consistently produced the greater bucket; and they raised that percentage of that bucket to boot, from 21 percent to 26.17 percent. In other words, they took off the ceiling on the middle tier, leaving in place the two largest buckets of revenue to be measured against to see which produces the greatest revenue.
The third tier, 50 cents per subscriber, remains in place. (Why the middle step had 80 cents per subscriber but the final tier had 50 cents per subscriber is a whole other, now moot, issue).
With the simplified process, all three tiers of the formula are calculated and whichever pool is the largest that's where royalties are drawn from. But that pool also includes revenue for performance licenses as well, which are negotiated by the various performance rights organization.
While before the headline statutory rate was set at 10.5 percent rate, the three tier process often produced a headline rate closer to 12.5 percent of revenue. In the past, the four U.S. PRO's typically were paid about 6 percent of revenue, which means that the mechanical usually came to about 6.5 percent of revenue. It remains to be seen if the simplified three-tier formula produces a rate higher than the new headline rate of 11.4 percent next year.
The full 250 page document, mostly regulations on how to implement the rates for the other five business models as well as the paid portable subscription model is now being read so that private information from each participating company can be redacted, meaning that probably won't be available for another two weeks.
In the meantime, the rate determinations and the regulations are passed to the Register of Copyright, to make sure no errors of law were made. The register has 60 days to review the decisions and, if no errors of law are found, then it gets printed in the Federal Register and becomes law.