Merlin CEO Charles Caldas on a Two-Tier Statutory Rate: Op-Ed

John Sciulli/Getty Images for T-Mobile
Merlin BV CEO Charles Caldas speaks at the the Launch of Google Music at Mr. Brainwash Studio with partner T-Mobile on nov 16, 2011 in Los Angeles, California.

When the decision to establish Merlin was initially set in motion, less than a decade ago, one of the key motivations was a growing fear that independents faced structural and commercial impediments that would prevent them from realizing their true potential in the digital market.

In many ways it was a frustrating time. On the one hand, there was already ample evidence that independents -- typically fleet-footed and early adopters of new technologies -- could thrive online, reach new audiences and take advantage of the limitless shelf space offered by digital stores, as illustrated by the global success of artists such as Arctic Monkeys and Arcade Fire, to name just two examples.

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But puncturing this optimism were the handicaps of market fragmentation and major label consolidation. There were real concerns (which have been shown in recent articles within these pages on digital breakage to be valid concerns) that the largest labels would wield their market dominance, bolstered artificially by including their distribution arms (as highlighted in the market-share by ownership figures published by A2IM) at the expense of our sector -- imposing crippling demands on digital services, and extracting excessive and disproportionate value for themselves, in the form of breakage, advances and other non-attributable payments. It was particularly interesting that it took the leak of the Sony/Spotify contract to get the majors to (in a very, very carefully worded way!) say they would pay breakage on streaming advances.

Nine years on, and although these challenges remain, I believe we are in a much more positive place. In the shape of Merlin, the independent sector now has an established vehicle to uphold the value of its members' rights and bring efficiencies to the licensing process. Meanwhile, it is now widely acknowledged that independent music is a “must-have” -- of paramount importance to fans, and therefore of fundamental importance to the success of digital services.

As evidenced by Merlin’s landmark partnerships with services like SoundCloud and Pandora, there is also an increasing recognition by services of the strategic importance of prioritizing negotiations with Merlin and securing access -- via a single deal -- to repertoire from the world’s most important independents. On streaming services in particular, plays of Merlin members’ music over-index considerably compared to the physical and download market. Merlin-associated catalog, I would argue, is actually of more value to the music-hungry, high-value users of those platforms than chart-chasing, disposable major label repertoire.   

It is in this context that the reaction to UMG and Sony Music’s recent CRB filing should be understood. Arguing for the legality of a two-tier rate for statutory licensing (or, in other words, one tier for the two largest majors; another for the rest of us), these proposals, if they prevailed, would risk turning back the clock to another era, with a devastating impact on development of the online market.

As I stated to Billboard a couple of weeks back, the document lays bare some of our long-held suspicions. The RIAA and majors love to proclaim that they represent the whole industry when arguing in the abstract for the value of music. But instances such as this clearly expose the fact that when it comes down to the crunch, they are actually concerned only about advantaging themselves, at our expense.

By comparison, the support for single rate collective licensing has been loud and clear from artist bodies and across the independent sector, and Merlin is united with our colleagues from WIN, AIM and A2IM on this issue. All copyrights start with the same value, and a single rate is the only fair way to reward creators.

Traditionally, Merlin has not been involved in negotiations with non-interactive services, believing that the single statutory rates, payable via SoundExchange, ensure a level playing field in a growing market sector. The one exception is our partnership with Pandora, a partnership designed to ensure our labels do even better on a platform where they already perform very well. However, in contrast to what we understand about other direct licenses by the major labels and their fully-owned subsidiaries in this space, our agreement, which is open to all independents who wish to join it, was deliberately and carefully structured to preserve our support for, and the health of, the statutory regime.

As a consequence, our license guarantees that Pandora pays out no less than it would at statutory rates under the statutory license, and has no effect on artist payment mechanisms. Artists signed to participating Merlin member labels continue to be paid direct by SoundExchange. The agreement also maintains SoundExchange’s administration fee on both artist and label distributions.

In short, the effective compensation under our direct license is no lower than the compensation record labels would have received from Pandora under the statutory license, rather than the result of an “open market” negotiation. Pandora CEO Brian McAndrews' statement in Billboard the day our deal was announced -- "We don't expect the deal to have a major impact on costs" -- should be ample evidence of that.

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We made these points very clearly in Merlin’s testimony on behalf of SoundExchange to the CRB earlier this year, and were encouraged to see the Register of Copyrights note, in her recent ruling, which concerns a class of direct deals in general, rather than Merlin’s agreement in particular, that she was "sympathetic to SoundExchange's argument that the direct agreements have been shaped by the availability of the Pureplay Agreement”. Contrary to recent press, she did not rule that Merlin’s deal is a "valid benchmark."

It is extraordinary to think, nine years from those first formative steps, that we are now seeing our early suspicions fully realized. There is no more doubt of the majors’ intentions to line their pockets at the expense of ours. These intentions now sit in the open, exposed for all to see. That the strongest critics of the statutory license (Cary Sherman of the RIAA said in Billboard that “We oppose compulsory licenses as a matter of principle”), who say they only want a free market in order to establish fair market value for their copyrights, will now very happily solicit the help of government to sidestep the actual marketplace in order to enshrine their unfair scale advantage via the statutory regime seems particularly cynical.

It is our firm view, that in order for a functional statutory regime to operate, there can be no division of rates dependent upon any class system of rights.

Charles Caldas is CEO of the independents' digital rights agency Merlin.