2019 Year-End Charts

Digital Services Question Mechanical Licensing Collective Costs as Funding Remains Up in the Air

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Even though the Mechanical Licensing Collective (MLC) has proposed a $29 million annual budget, which is in line with the $30 million that the U.S. Congressional Budget Office projected as part of the process to get the Music Modernization Act (MMA) passed, the digital services which must fund it are dragging their feet on approving that budget, according to sources familiar with the negotiating process.

But the budget isn’t the only issue at stake. Other potential conflict points include the $37.25 million proposed start-up funding; which formula would be used to assess each digital service’s share of such costs; setting a minimum payment that each service should have to pay; and how to ensure transparency in the process.

But one of the selling points in setting up a blanket mechanical license to be administered by the MLC was that it was supposed to save the digital services money. Until now, each digital service had its own way of matching rights holders with sound recordings, usually with the assistance of a service provider like the Harry Fox Agency (HFA) or Music Reports Inc. (MRI). The centralized clearinghouse is supposed to eliminate those duplicate efforts, and thus provide savings, collectively if not individually -- at least in theory.

At $29 million each year, however, the digital services aren’t sure they’ll save any money after all. In fact, one executive familiar with the cost structure involved in handling publishing, reporting and royalty payments to music publishers estimates that that responsibility currently costs a collective $13 million across all the U.S. services— less than half the proposed cost put forth by the MLC.

But that $13 million assessment has built-in savings: the consultants the services use now already have databases containing the information they need, while the MLC will have to build and operate such a database, with its ongoing costs expected to be larger on the front-end than the costs that the consultants pay for maintaining their long-established databases.

But there’s still an issue of what each digital service provider will pay, and how. In order to assess each digital service’s pro-rata share of the costs, the MLC recommends each digital music provider report its service revenue, whether from paid subscriptions, advertising, or buying digital music, for a certain period. But other metrics could be used to assess an equitable share, such as mechanical royalty payments, the number of transactions -- whether streams or downloads -- or the number of subscribers or customers, sources suggest.

In addition, some wonder why it’s any of the publishers’ business how the digital services pay for the MLC, with industry sources suggesting the digital services work that out among themselves.

As it is, even without the publishers’ input, the digital services will likely have to wrestle among themselves over what payment method they prefer. To some in the industry, the MLC’s suggested formula of using service revenue would favor services like Spotify, which has a low-revenue-generating ad-supported tier, over services like Apple, which has a fully-paid, higher-revenue-generating on-demand tier and a download store with fewer transactions at much higher costs than the avalanche of streams paying micro-pennies. In any event, there is likely to be plenty of maneuvering on that issue.

But how the fee is assessed brings up two more issues. The MMA says that not only do the digital services using the MLC’s services have to bear the costs of the MLC, but so do on-demand services with direct deals who may not, as will download stores, which for the most part operate on pass-through licenses. (The labels license the music from the publishers and informally pass it through to the stores). Publishers wanted to do away with the pass-through license during the MMA negotiations so that they could get mechanical royalties directly from the stores, sources say. But while they lost on that issue, publishers still roped those stores into covering the MLC’s costs.

While the likes of Apple and YouTube are well aware of this component of the MMA, some wonder if smaller niche/genre on-demand services and download stores are aware of the costs they will soon be saddled with -- which brings up the minimum-fee assessment required by the law. In its proposal, the MLC suggests that each service pay a minimum of $5,000 a month, or $60,000 a year. With the MLC expected to be dealing with about 100 digital services on its 2021 launch date, that immediately ensures $6 million in annual payments. But will those smaller digital services be able to handle the minimum payment?

As it stands, the MLC’s funding is still undecided, and could remain that way until July 2020 at the latest, or six months before launch. Until then, the law allows for voluntary contributions from digital music providers that can be offset by adjusting their assessment fees later on, when the funding is finalized. But the MLC proposal filed with the CRB in September says that, so far, no contributions have been received. In the interim, sources say the NMPA is willing to provide some funding toward the startup, though it’s unclear how all its costs will be covered.

Yet, the MLC’s funding proposal suggests that the digital music providers “can now deposit all of the ‘black-box’ royalties attributable to their use and exploitation of copyrighted compositions with the MLC, and the MLC will take over the administration and distribution of such royalties.”

If that occurs, the MLC can use any money it has on hand to fund the startup of its operation, provided it replaces that money and pays it out to rights holders once it’s up and running, says a knowledgeable source in the digital services’ camp. But the MMA statute says that digital services don’t have to turn over the black-box money until 45 days before the official launch date -- mid-November 2020. Says that source, “Have you ever heard of a chief financial officer turning over a penny in payment before the day it’s due?”


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