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A year ago, when President Donald Trump signed the Music Modernization Act, publishers and streaming services agreed on how to build a mechanical licensing organization. Now they're debating how much it's going to cost.
If digital service providers like Spotify and Amazon Music and the publisher-run Mechanical Licensing Collective (MLC) created by the MMA can't reach an agreement on how much it will cost to build and operate the agency by Feb. 18, 2020, the two sides will head to a Copyright Royalty Board (CRB) fee-assessment proceeding. Both sides are now preparing for that, even as they adhere to a timeline constructed to help facilitate settlement negotiations.
The MLC will officially begin operating on Jan. 1, 2021. In order to make that possible, the MLC board is requesting $37.25 million in startup funding and a first-year operating budget of $29 million, according to a document the organization filed with the CRB on Sept. 13. As mandated in the MMA, the digital music streaming services must pay these expenses.
Despite having agreed to cover these costs, however, the services have yet to sign off on the MLC's proposed price tag. And in a first round of negotiations, which ended Sept. 6, the two sides were unable to come to a consensus, setting up the possibility of a CRB-moderated proceeding. National Music Publishers' Association president/CEO David Israelite tells Billboard that negotiations showed very early on that the digital companies were not serious about adequately funding the organization.
Garrett Levin, CEO of the Digital Media Association, says, "The streaming services remain unwavering in their commitment to pay for the reasonable costs of the MLC." However, "accomplishing the MMA's critical goals will require, above all else, a meaningful commitment to transparency and accountability."
The CRB process also will create a formula for weighing each digital music service's pro rata share of the MLC's overall cost, as well as set a payment schedule and a minimum payment for each service.
The MLC, which is the most consequential provision of the MMA, is intended to address missing and delayed mechanical royalties, a longstanding problem for music publishers and songwriters in the digital age. Billboard estimates that there are $250 million worth of unpaid mechanical royalties — so-called "black box" funds — because it can be difficult to match recordings with compositions and the relevant rights holders.
To do this, the MLC will build and maintain a public database to match every song recording on a digital music service to a composition and show what portion of each song is owned by which publisher so that it can collect and disburse mechanical royalties.
But since the MMA became law, several issues — such as Spotify, Amazon, Google and Pandora's March appeal of the CRB rate court's decision on royalties — have caused the differing sectors to retreat to their respective corners and away from the consensus that forged the MMA.
In the CRB process, the digital service providers are represented by the Digital Licensing Coordinator, run by leaders from Apple, Spotify, Google, Amazon and SiriusXM. The DLC board is expected to negotiate with the MLC board to reach an agreement on costs in order to avert a fee-assessment proceeding.
The MLC will be based on Nashville's Music Row, and testimony from new board members breaks out its budget by department. The filing is heavily redacted, but presumably gives salary amounts for the 95 staff employees, among other costs, and says the organization expects to hire a full-time CEO by January 2020. The MLC didn't respond to questions about when it will start hiring.
The DLC has until Nov. 15 to investigate the MLC's proposals and must respond by Nov. 19. The MLC then has until Jan. 23, 2020, to reply. A second negotiation period will run from Jan. 14 to Jan. 28. If no settlement is reached, the proceedings would begin Feb. 18, and the CRB would make its determination by July 8.
In building an MLC big enough to initially handle at least 100 blanket licenses, the collective will administer, process and pay royalties on every blanket mechanical license in the United States starting Jan. 1, 2021. That means processing trillions of transactions and paying billions of dollars in royalties around the world. At the same time, it must build a musical-works ownership database and claiming portal, plus manage the inevitable conflicting ownership claims.
Right now, between 30,000 to 40,000 recordings are uploaded daily to the major services. For songs and recordings where no matching publisher is found, those royalties become black-box revenue, which can be distributed on a market-share basis per service to publishers if they are still unmatched after three years.
Instead of having the digital services handle the responsibility of matching songs with rights owners, the MLC will act as a centralized clearinghouse, thereby cutting costs for digital music services. The blanket licence created by the MMA also provides legal cover for digital music services that stream songs where rights owners cannot be found.
In order to handle these responsibilities, the MLC will have to build complex technology systems, using multiple software platforms in its operations, supplemented by outside vendors, according to its filing — thus the millions in startup and operating costs.
Seventeen tech firms submitted proposals to help handle the matching, royalty processing and reporting that is required. Four are being seriously considered, according to the MLC filing: ConsenSys/The Harry Fox Agency/Rumblefish/SESAC, IBM/SACEM, Music Reports and SXWorks.
There's still a question of what each digital service provider will pay — and how. The MLC recommends that each provider report its service revenue, whether from paid subscriptions, advertising or buying digital music. The MLC and DLC could then calculate what percentage of the proposed first-year $29 million operating budget each digital service should pay. If one service has a 10% market share, for example, its annual fee might be $2.9 million.
Other metrics also could be used, a decision that will fall to the CRB if the DLC and MLC boards can't reach a settlement by Jan. 28. Instead of looking at revenue, sources suggest, the cost for each streaming company could be determined by its mechanical royalty payments, number of streams or number of subscribers.
Rep. Doug Collins tells Billboard his office will be closely monitoring the implementation of the law. "It is my hope," he says, "that the music industry will continue the constructive and collaborative efforts borne out of the Music Modernization Act and work together for the betterment of the music ecosystem for years to come."
This article originally appeared in the Oct. 12 issue of Billboard.
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