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Time to Modernize the Entire Mechanical Licensing System (Guest Column)

A2IM president Richard James Burgess believes there's a better way forward on mechanical royalties paid on physical and download formats.

I understand songwriter frustration with the so-called “frozen mechanicals” settlement reached by NMPA, NSAI, and the major record labels last year, which the Copyright Royalty Board rejected earlier this year, and believe that we need to find a way to ensure that songwriters are better compensated from all formats. I believe this even though my members — independent record labels —- are the very people who will bear the brunt of an increase in mechanical royalties paid on CDs, vinyl, and downloads.

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The business has changed and songwriters – who are a vital part of the music ecosystem – must be supported.

The new settlement with respect to the physical and download formats, unfortunately, misses the mark. Eager to quickly resolve that part of the mechanicals proceeding, so that the major companies could focus on streaming and other issues, the new settlement locks in the existing “penny rate” structure and relies on the consumer price index to adjust the rates for the duration of the term. This is a mistake and a missed opportunity to come up with a new, better solution. That is why A2IM filed comments at the end of June asking the Copyright Royalty Board to reject the new settlement and invite the parties to start a true, pan-industry negotiation.

As we explained in our comments, in those negotiations, we think all stakeholders should explore the following three key ideas:

First, it’s time to reject the “penny rate” model for mechanical royalties altogether, in favor of a percentage of revenue. The penny rate structure has been “frozen” since 1909 and the rates have simply been increased periodically, through processes seemingly disconnected from the marketplace. Tying future increases to inflation sets the penny rate on a path to being even much more detached from reality: the price of CDs has fallen over time while downloads have been the same price since 2006; meanwhile, the price of vinyl has increased faster than the consumer price index, although much of this is related to product enhancements. There may even be future physical or digital formats that command a higher price in the market. Bottom line, the rate structure in the new settlement puts some formats at risk — since the cost of the mechanical royalties may go up at the very time that consumer demand for the format drops — while potentially leaving songwriters underpaid for other formats. In addition, the burden of the current rate structure, coupled with the sudden increase now and CPI adjustments in the future, falls disproportionately on independent labels and puts some genres at greater risk than others, including jazz, blues, and rock – genres which depend heavily on traditional formats. This is an unfair and untenable situation.

Second, it’s time for the industry to transition to a system in which all mechanical royalties are administered centrally. That would bring the U.S. marketplace into alignment with the rest of the world and would also dramatically reduce the costs of administering mechanical royalties, to everyone’s benefit. The Music Modernization Act went halfway there, creating a system in which streaming mechanicals are handled centrally (by the MLC); meanwhile, physical formats and downloads are still administered under the old haphazard and inefficient system that has been in place for decades. While a CRB settlement can’t change the MMA, renewed settlement discussions would present a critical opportunity for all stakeholders to discuss changes to propose to Congress.

Third, and in a similar vein, A2IM believes the CRB process generally needs to be reformed, with a particular focus on encouraging — and adopting — early settlements of CRB proceedings and ensuring any such settlements reflect a truly broad consensus. In this proceeding, the parties reached an early settlement, but that settlement was neither adopted promptly nor did it reflect broad industry consensus. Instead, after the CRB rejected the parties’ first settlement (nearly a year after it was first proposed), the parties, eager to get this part of the case behind them, quickly reached an agreement they believed the CRB would adopt. But they moved too fast, and their new settlement suffers from the same problem as the first: It doesn’t reflect broad industry consensus – including input from the independent label community. The CRB process works best when the parties reach early settlements that reflect a true consensus, and any CRB reform should ensure that all stakeholders should have an opportunity to weigh in on proposed settlements earlier in the process.

Now is the perfect time to have a discussion among all stakeholders about a new and rational approach to mechanical royalties, and to pursue important CRB reforms. We look forward to engaging with our fellow stakeholders and to improving the system for everyone.

Dr. Richard James Burgess MBE is president and CEO of the American Association of Independent Music (A2IM).