The CRB Rate Trial Explained: How Publishers, Digital Services Weighed In At The Time

Spotify
Thomas Trutschel/Photothek via Getty Images

 The logo of the music streaming service Spotify is displayed on a smartphone.

It’s clear why the likes of Sony/ATV Music Publishing chairman/CEO Martin Bandier, Warner/Chappell Music co-chairman/COO Carianne Marshall and NMPA president/CEO David Israelite are criticizing the decision by digital services to appeal the Copyright Royalty Board’s rate decision this month. They are all well-versed in how the songwriter formula that sets publishing rates work -- and realize the peril that could accompany the decision to appeal.

But what, specifically, is at stake for songwriters?

Last year, the CRB decided to continue using the three-pronged rate formula to come up with publishing payments for on-demand services that use the compulsory license. (The decision went into effect this January.) That formula built three buckets of money, two of which were based on percentages, and the third of which was calculated at 50 cents per subscriber, and was referred to as the mechanical floor. (Read a full and complete breakdown of what that means here.)

For the past five years, the percentages in that formula created one bucket made up of 10.5 percent of a service’s total revenue, and a second bucket made up of 21 percent of a service’s payments to labels (22 percent for ad-supported tiers). Whichever of those two buckets that contained the most money would move on to a second step in the complex mathematical equation that the CRB called the rate formula, determining the amount of money on-demand services like Spotify had to pay music publishers and, thus, songwriters.

But in January 2018, the CRB updated its rate formula, after a trial in which publishers, songwriters and the digital services themselves all put forth opinions on how that formula was calculated. The result: a rate increase that, by 2022, would rise to 15.1 percent of total revenue and 26 percent of payments to labels for the two percentage buckets, and keep the mechanical floor at 50 cents per subscriber.

That was a big win for songwriters and music publishers. But the appeal by the likes of Spotify, Google, Amazon and Pandora has put that final determination in doubt. And, while songwriters and publishers were pleased with the result, it wasn’t actually what they had asked for -- and the requests from each party helps explain why the issue has now become such a point of animosity.

What Publishers Wanted

While many of the arguments that publishers made during the rate trial contributed to a decision that was widely seen as in their favor, it’s not exactly what the publishers were asking for.

In the rate trial, the publishers asked for a simplified formula that would do away with the percentages, and instead produce two different buckets: a flat per-stream rate of $0.0015, or a mechanical floor that jumped from 50 cents per subscriber to $1.06 per subscriber -- whichever produced the most revenue.

But they also asked for one more significant thing: Instead of the rate formula being “all-in,” the revenue amount would solely cover the mechanical royalty payment. In other words, not only were the publishers asking for a much higher rate than before, but they wanted that increase to be applied only to mechanical royalties.

What Does “All-In” Mean?

First, it’s important to know that digital services like Spotify must pay two royalties: the mechanical royalty, which allows a service to host a song; and the performance royalty, a fee they pay to Performance Rights Organizations (PROs) every time a song is played, and which for Spotify generally hovers around six percent of total revenue in the U.S. each month.

Previously, the three-pronged rate formula was “all-in,” meaning that in addition to helping determine the mechanical royalty (which is its primary function), the first two percentage buckets -- the percent of total revenue and the percent of payments to labels -- incorporated the performance royalty, too: the performance royalty was subtracted from whichever bucket was largest in determining the final payout.

(That payment to PROs was not a part of what the CRB determined. That amount is determined through negotiations between the PROs and the on-demand services; or, if those talks failed, then through a consent-decree-imposed rate trial held in U.S. Federal Court in the Southern District of New York.)

Effectively, then, an “all-in” rate would always end up with a smaller payout to publishers and songwriters, since it subtracted the performance royalty payment. So if publishers had succeeded in the CRB rate trial to remove the “all-in” distinction, and have the rate formula include a per-stream rate that only applied to the mechanical royalty, it would have had big implications for the on-demand services -- particularly Spotify.

What About The Per-Stream Rate?

The publishers weren’t the only ones to ask for a per-stream rate: Apple Music also suggested one, although its amount was lower at $0.0009 per stream. That was it: Apple didn’t ask for any other element to help determine rates. Regardless, the CRB judges ruled against a per-stream rate entirely.

Instead, in a split two-to-one decision, the CRB judges decided to keep the old formula in place, including the mechanical floor, with one minor change: eliminating an intermediate step that was rarely, if ever, triggered. The elimination of that step -- a kind of mechanical ceiling, although it wasn’t called that -- also pleased songwriters, which had advocated for its removal. (The logic: why have a ceiling on how much money we can make?) So while the judges ruled against a per-stream rate, the publishers picked up two wins on those points.

Finally, the CRB judges assigned new percentages for the rate formula, which escalate by a percentage point each year. For the percentage of total revenue, that starts at 11.4 percent in 2018 and increases to 15.1 percent in 2022; for the percentage of payments to labels, it escalates from 22 percent in 2018 to 26 percent in 2022.

How Did The CRB Judges Come Up With The New Rate Formula?

In reading the decision, it sounds like the judges got the idea for the new rates from a document submitted by Google, which apparently was submitted after the trial testimony ended, when the judges were asking for clarification on points made during testimony.

The ultimate decision is so heavily redacted -- in order to protect what was considered proprietary information -- that it’s hard to tell if the Google rate submission, which was apparently based on direct deals with publishers, is the whole story behind how the new rates were established. But the majority judges made clear that their decision to keep the mechanical floor came from the publishers’ argument on why that is needed.

Wait, Let’s Go Back To The Per-Stream Rate. What Would It Have Meant?

The rate that the publishers asked for -- $0.0015 -- makes sense when seen through the eyes of publishers and songwriters. According to Billboard calculations based on Harry Fox Agency reporting on payments to publishers, the per-stream payment rate to publishers on Spotify’s portable subscriber tier averaged a tick below $0.0011 in 2018 -- so a $0.0015 per stream would have represented a 36.4 percent increase. It also would represent a home run when compared to the much lower per-stream rate paid out by the ad-supported tier.

Moreover, from the songwriters’ and publishers’ point of view, a rate of $0.0015 would sound pretty good: according to Billboard calculations, Spotify’s per-stream payouts had dropped from  almost $0.0015 per stream in 2014 to $0.0011 in 2018 under the previous CRB rate.

That Sounds Like It’s Getting Better... Right?

On the other hand, hit songs are rarely written by one songwriter these days.

If a song has four songwriters, with each having a 25 percent credit for the song, and each songwriter has a straight 50-50 publishing deal, then Spotify's average $0.0011 per stream paid out in 2018 would mean that the four songwriters get to split $0.00055.

Divided between four of them, that would come out to $0.0001375 per stream. That means it would take 291 streams of that song for all four songwriters to each earn a penny in royalty payments. And the ad-supported per-stream rate in 2018 was half that $0.0011 amount, so the per-stream payouts to songwriters look microscopic when four writers are sharing them.

Like it or not, that’s how songwriters view their cut: not by the overall dollar amount; nor by percentages; nor by amount per subscriber. By the per-stream rate. And that example is why the songwriters’ per-stream payouts look infinitesimal -- and why songwriters and artists have been constantly posting their royalty statements to social media over the past five years.

It takes hundreds of millions -- and billions -- of plays for songwriters and artists to make serious money. And while there are plenty of artists and songwriters making serious money, there are also many independent songwriters and artists -- who used to at least earn a living -- that are now struggling to justify a career in music.

There’s Another Thing, Too...

Although songwriters, publishers, or everyday people may not be aware, Spotify -- like YouTube -- has now moved to a model that auto-plays songs after a user listens to one they selected.

Previously, users had to opt in to Spotify’s auto-play mechanism. It’s unclear when Spotify switched to automated plays. But now that automated plays have become the standard delivery system for Spotify, users now have to opt out by changing their settings -- if they are even aware they have that option.

On the plus side, what this does is keep listeners engaged on the site, which is a benefit that Spotify likes. And it has the potential to turn listeners on to more music, a benefit that all rights owners, publishers, songwriters, labels and artists should like. And it steers payments to artists and songwriters whose songs weren't chosen to be played.

But it represents a downside in per-stream payments for songwriters and artists, too. Since the payout pool is divided by streams, the more streams that occur in a month, the further the per-stream payout decreases. In addition to songs that users choose to play, their devices will automatically play other songs after they hear the song they wanted. Who knows how many additional plays accrue due to automation -- but it’s safe to say those plays are further diluting the per-stream payout for artists and songwriters whose songs the consumer chooses to play.

Up Next: Looking at these issues from the digital services’ point of view and what would have happened to their business model if the publishers had gotten what they asked for from the CRB.

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