Business

The MLC Is Open for Business -- Now The Hard Part Begins

Illustration by Dan Page

The Mechanical Licensing Collective just started collecting and distributing mechanical royalties while managing new disagreements with streaming services about how much it's owed.

On Jan. 1, the Mechanical Licensing Collective officially began operations to collect and distribute mechanical royalties under a blanket license for streaming services. In preparations for its official launch, the Nashville-based nonprofit, led by CEO Kris Ahrend, has hired 44 employees; contracted with companies to build technology to track ownership of 17.65 million musical compositions; developed a system to check the accuracy of its information; and participated in 100 online conferences to explain it all. In April, the MLC plans to start paying royalties to over 8,000 rights-holder members, who by spring should be able to review their ownership data and register new compositions through an online portal.

"The MLC has spent more than a year preparing for the License Availability Date, developing numerous resources for creators and music publishers to help them navigate the changes to mechanical licensing, conducting crucial outreach with well over 50 digital service providers (DSPs) and undertaking a widespread outreach campaign to educate music publishers, administrators, self-administrated songwriters and others in the broader music industry about The MLC’s mission and purpose," Ahrend said in a Jan. 1 statement on the launch.

Likewise, Garrett Levin, representative for the Digital Licensing Coordinator — which represents the digital services that pay for the MLC’s operations — said in a statement, "The arrival of the new mechanical licensing system is an important moment for songwriters, digital services, publishers, and the broader music community. The hard work and collaboration among industry stakeholders has laid the groundwork for the MLC to efficiently and effectively fulfill its mandate."

But it turns out that the MLC’s preparations so far may have been the easy part. Two questions now loom over the MLC, dividing the industry stakeholders that came together to lobby for the 2018 Music Modernization Act (MMA) that created it. The first is how much to collect, or more specifically what rate should be used to calculate mechanical royalties now that an appeals court in June 2020 remanded a Copyright Royalty Board rate determination for further deliberation. The second is how much "black box" money — mechanical royalties owed by streaming services that haven’t been distributed because the owner of the composition couldn’t be determined — will the digital music service providers turn over to the digital music service providers turn over to the MLC. The MLC is charged by the MMA to attempt to match and then disburse such royalties to rights holders — and if that’s not possible within two years, it will be eligible to distribute to publishers according to market share. The answer to the second question could be between $250 million to $450 million, Billboard estimates, depending on which funds will be included.

The first question should be answered soon, even though the CRB declined to rule on a motion by the MLC to set an interim rate, until the remand process produces a new — and final — rate determination. Some streaming services have said that in light of the remand they would return to paying the 2013-17 rate of 10.5% of on-demand service revenue for all publishing royalties rather than the higher escalating-rate structure of 11.4% to 15.1%  that the CRB set for 2018-22 before that determination was remanded. (Mechanical royalties for on-demand streams are set in a complicated multi-step process that involves determining total publishing royalties, then subtracting performance royalties.) Before the remand, the CRB’s escalating rate structure — initially determined in January 2018, and finalized in March 2019 — had been implemented retroactively back to Jan. 1, 2018, with a rate of 13.3% of revenue employed for 2020.

After a heated debate on what rate to use, sources suggest both sides have an interest in reaching a compromise on how to proceed to allow the MLC to make its first payments on schedule in April. Besides the going-forward payments, without a rate compromise, it also will be hard to calculate how much streaming services should turn over in unmatched royalties by Feb. 15, the date mandated by the MMA.

Then there’s the $250 million — or is it the $450 million? — question that could have an even more substantial impact on how much the MLC will receive on Feb. 15. The law calls for the MLC to receive — then try to match to rights holders — royalties "accrued" but not matched or paid out by streaming services. But how to calculate that is the subject of a fierce but so far quiet dispute about how to account for "unmatched" royalty money that streaming services already paid out in legal settlements and through direct "voluntary" licensing agreements. And that dispute involves determining exactly what "accrued" means in the context of the law.

Over the past five years, some publishers and streaming services have made private agreements on how to handle — and payout — unmatched royalties or reached legal settlements that covered them: Spotify made a deal with the National Music Publishers’ Association in May 2016, for example, and settled a putative class action about a year later. The question is whether those payments should be deducted from the total amount of unmatched royalties that streaming services are supposed to give to the MLC — and how to account for them.

The MLC and the NMPA say the prior settlements don’t count as royalty payments and instead contend they were payments for a release of liability for copyright infringement. They say the services should pay all unmatched royalties — as the law calls for — so the MLC can allocate them properly.

The streaming services counter, saying that under generally accepted accounting principles, the money they paid out in settlements "de-obligated" that amount of royalties, so they would no longer count as "accrued." Thus, the DLC strongly objected to what it termed double payments and asked the Copyright Office to rule on the issue. Even under the streaming services' interpretation, however, the MLC would still receive several hundred million dollars in unmatched royalties, according to documents filed with the U.S. Copyright Office.

On Jan. 11, the Copyright Office issued a regulation that laid out a process for how services could calculate what they owe, but sidestepped the issue of whether prior settlement payments count as accrued royalties under the law. The regulation seems to put the burden on rights holders to take streaming services to court if they can’t agree on how much money should be given to the MLC.

But going the legal route could also throw into question one of the main benefits the streaming services receive from the MMA: Under the law, if services don’t fulfill their obligations — which are now the subject of debate between the two sides — they can lose the limitation on liability for copyright infringement relating to mechanical rights for uses before Jan. 1, 2019, granted to them by the MMA.

If services choose to hold onto the disputed portion of the black box funds as they did prior to the enactment of the MMA, that is contrary to one of the law’s intents, which was to place all unmatched royalties with the MLC. After all, the MLC was designed to search beyond the matching efforts already made by services and their consultants and hopefully match more compositions to master recordings and the proper rights owners, and then issue payments, thus reducing black box monies. After a two year period, whatever royalties haven’t been successfully matched, then the MLC has the option to use market share disbursements to right holders.

Even once both sides come to some kind of deal on how to handle accrued royalties and what rate to use, they will still have plenty to disagree about: Both the new rate set by the CRB and the subsequent MLC process for matching the royalties due Feb. 15 could result in a royalty recalculation that either require streaming services to pay more or allow them to claw back overpayments.

A version of this article originally appeared in the January 16, 2020 issue of Billboard.