Business

An Open Invitation for Unity as CRB Rate Battle Drags On (Guest Op-Ed)

Chris Harrison
Courtesy of Subject

Chris Harrison

The Phonorecords III rate determination is still up in the air even with Phonorecords IV getting underway earlier this year. Can you spell settlement?

Bipartisanship. Cooperation. Compromise. These are not words commonly associated with Washington, D.C., particularly during the Trump Administration. And if there was a group of people more locked in mortal combat than Republicans and Democrats, it was the music industry's relationship with digital service providers, or DSPs.

At the time I described the relationship among record labels, music publishers and DSPs like the end of a Quentin Tarantino movie, where everybody is pointing guns at each other and claiming it's the other person's fault.

Despite this hostile environment, a remarkable thing happened: Congress passed the Music Modernization Act (or MMA) without a single "no" vote. The MMA resolved two seemingly intractable problems -- so-called Pre-1972 recordings and mechanical licenses for songs -- giving record labels and creators the royalties they sought, music publishers access to $400+ million in unclaimed royalties, and DSPs certainty that they wouldn't be "sued out of existence."

I was the CEO of the Digital Media Association when the MMA passed. As the person responsible for negotiating on behalf of DSPs, I know first-hand how difficult it can be to tone down the rhetoric, search for common ground, and find the win-win-win solution. It is based on this experience that I remain optimistic that the music industry and DSPs can come together once again and agree on a more sustainable approach to licensing music.

There's one place where an agreement among the parties could be crucial: music publishers and DSPs are set to resume Phonorecords III, the Section 115 mechanical license rate proceeding before the Copyright Royalty Board (CRB), due to a remand from an Appeals Court. Phonorecords III began before Trump was elected and sets rates for 2018 through 2022. While the MMA was being negotiated in January 2018, the CRB issued its Initial Determination, in which a 2-judge majority determined that the rate DSPs should pay music publishers and songwriters should increase incrementally each year during the new term from 10.5% of music service revenue to 15.1% in the last year, 2022.

In addition, the majority tied the amount that DSPs pay music publishers to what DSPs pay record labels, by eliminating a cap that had been a part of the rate formula between 2013-2017.

In his dissent, CRB Judge Strickler pointed out that by "uncapping" the rate that DSPs pay music publishers, "whenever the record companies demand and obtain a higher sound recording royalty rate… the [DSPs'] royalty rate must increase as well." Said differently, the formula adopted by the majority means that 15.1% is likely the minimum rate DSPs will pay, but that rate could be much higher. Faced with this uncertainty, the DSPs appealed. The DC Circuit then agreed with the dissent and remanded the case back to the CRB to reevaluate the majority's uncapped royalty rate.

The music publishers and DSPs will soon file briefing in the Phonorecords III remand. It should surprise no one if the parties basically take the positions of the majority and dissent, respectively. Publishers will likely argue that the 15.1% uncapped rate is reasonable and the DSPs will argue that the 2013-2017 CRB-determined 10.5% capped rate should remain in place. And I fear that the record labels — whose participation in the MMA negotiations was key in achieving the grand bargain and whose royalty rates with DSPs have been directly cited by Strickler and the Appeal Court decision — will sit silently on the sidelines to avoid sparking a fight with publishers. Instead of encouraging the parties to reach a negotiated settlement, the rate-setting process has locked the parties into their previous litigation positions, preventing either side from adopting a position in between the majority and dissenting opinions with which both sides could agree.

If Congress created the CRB to quickly and inexpensively determine the royalty rate for statutory licenses, then the process is broken. We are more than 3/5ths of the way through the period covered by Phonorecords III and DSPs still don't know what their royalty obligations will be. In fact, so much time has passed that in January the CRB announced the commencement of the Phonorecords IV proceeding that will set rates for 2023 – 2027.

With the parties about to submit rate proposals for Phonorecords IV, neither the music publishers nor the DSPs can realistically move off of their previous positions in Phonorecords III, even if the parties' true settlement postures actually overlap.

So why do I have any optimism? Two reasons.

First, the music industry is making money again. My friend Will Page, former chief economist at both PRS for Music and Spotify, calculates that in 2019 revenue from music copyrights grew by more than $2 billion to $31.6 billion, driven almost entirely by the growth of digital streaming services. As I said during the MMA negotiations, it is a lot easier for labels and publishers to take a chance (i.e., compromise) when they are optimistic about future revenue growth.

Second, the MMA demonstrates that all parties can put aside their differences and achieve something that benefits everyone. It is important to remember that the DSPs continued to negotiate the MMA even after the CRB issued what was, from the DSPs' perspective, a massive rate increase. And to be fair, the music publishers didn't walk away from the MMA when the DSPs appealed the CRB's decision.

Hopefully, as Phonorecords III winds its way towards its inevitable conclusion and Phonorecords IV begins, the parties can seize the opportunity to achieve a longer-lasting peace.

Chris Harrison works as a consultant to the music and technology industries. Previously, besides serving as DiMA CEO, other prior music industry positions included VP of music business affairs at Sirius; and VP of business affairs at Pandora.