Why the CRB Threw Out the Major Labels and NMPA’s Rate Settlement

Why the CRB Threw Out the Major Labels and NMPA’s Rate Settlement

Sony Music Publishing chairman and CEO Jon Platt is lauding the songwriters who swayed Copyright Royalty Board judges to throw out a proposed settlement between the major labels and the National Music Publishers’ Association that would have kept the mechanical rate at 9.1 cents per song for physical formats and digital downloads for the upcoming 2023-2027 term.

“The CRB judges listened to the voices of songwriter advocates who made a strong case for higher physical and download rates and agreed that they should be increased,” Platt wrote in an e-mailed letter to Sony’s songwriters and composers last week. “While it is still too early to predict the outcome, we are pleased that the CRB is receptive to higher rates, and we stand by these songwriter advocates and applaud their grassroots efforts and achievements.”

That higher rates for the rate period of 2023-2027 might become a reality is due to independent songwriter George Johnson, the sole participant in the rate proceeding to object to the settlement that was agreed to by the three major labels, the NMPA and the Nashville Songwriters International Association. That settlement was predicated on the basis that getting higher rates for the much more lucrative streaming market was more important and should be the focus of CRB rate litigation, instead of wasting time and money on the rate for the much less revenue-rewarding song downloads and physical formats, referred to as subpart B configurations in CRB rate proceeding parlance.

But a subsequent CRB-mandated comment period on the rate settlement brought out other interested parties — songwriters, songwriting trade groups, and their representatives — who hadn’t been formal participants in the CRB rate proceeding like Johnson, but who nevertheless buttressed many of his objections to the rate settlement.

The 9.1 cent rate has been in effect since 2006, but thanks to Johnson’s and the interested songwriting parties’ objections, the CRB judges didn’t rubber-stamp the settlement this time around — something that they had been doing every five years since the “Phonorecords 1” first settlement for streaming services, which included the 9.1 cent rate, went into effect for the period of 2008-2012. Since then, the 9.1 cent component of that settlement was carried forward by the industry and the CRB judges during the subsequent rate proceedings, i.e. for 2013-2017, or Phonorecords II; and 2018-2022, or Phonorecords III, which is still in remand after an appeals court threw out aspects of the rate determination; and the pending Phonorecords IV, for 2023-2027. Now, for the 2023-2027 rate term, the judges appear willing to consider a higher rate for the subpart B configurations.

For a decade and a half, the CRB rate proceedings have mainly focused on streaming rates, because back then the issues were new and hotly debated, and now because streaming accounts for 83% of the U.S. recorded music market. Billboard estimates that U.S. on-demand streaming services paid out some $1.8 billion in performance and mechanical royalties in 2021 to publishers and songwriters. And while songwriters argue that sale formats like CDs and downloads still comprise 15% of the market, that’s for record labels. For publishers, the NMPA estimates those formats produce just 5% of U.S. publishing royalties. And some suggest that if streaming continues to grow at its current pace, within three years these sales formats that are covered by the subpart B configurations might only contribute 1% of publishing royalties.

Rate litigation is costly, as the NMPA also points out, running into the tens of millions of dollars — which is why it has focused on adjudicating streaming rates rather than subpart B formats. Spending money adjudicating the latter rate could be a wash for publishers when weighing the legal costs against how much additional revenue a possible rate increase could achieve . Nevertheless, now that the CRB judges indicated they are open to discussing a higher rate for the subpart B formats, the NMPA applauded the independent songwriters for their efforts in advocating for higher rates.

But that doesn’t change the fact this royalty rate for CDs, vinyl, downloads and other subpart B formats has remained the same for 16 years, as Johnson and songwriting groups like the Songwriters Guild of America argued. At the very least, they contended that the rate should at least get periodic cost-of-living adjustments (COLA).

If a 31.9% COLA that has occurred since 2006 is applied to that year’s rate of 9.1 cents, it would yield a rate of 12 cents per song for 2022, it was argued.

Using RIAA 2021 statistics, Billboard estimates that record labels paid publishers and songwriters $130.7 million in mechanicals for downloads, CDs and other physical formats. (That figure may be on the high side given that the calculation is based on the full 9.1 cents per song rate and doesn’t consider the controlled composition clause often found in major label contracts that allows the label to pay the mechanical at a discounted 75% rate, or 6.825 cents per song, when the songwriter is also the featured artist behind the music.) Based on that estimate, if a COLA-adjusted 12 cent per song rate were applied to RIAA’s 2021 statistics, record labels would have had to fork over $173.1 million, or another $42.4 million, to publishers and songwriters.

When measuring market share by recorded master and label ownership, the three major labels collectively comprise 63.42% of the U.S. music marketplace. At the full 9.1 cent rate — or ignoring the controlled composition clause — that amounts to an $82.9 million payment from the majors. At a possible full 12 cent per song rate, the major labels’ mechanical payments for 2021 would have been $109.7 million, or $26.8 million more. For indie labels, that means their payouts would grow from $47.8 million to $63.4 million, or $15.6 million more.

In explaining its decision to throw out the 9.1 cent song rate, Chief Copyright Royalty Judge Suzanne Barnett, who authored the ruling, noted that Chapter 8 of the U.S. Copyright Act encourages parties to enter into settlement negotiations, but ultimately the decision on whether a contested settlement is approved is up to the judges’ discretion.

That settlement was contested when Johnson objected to it and the judges noted his objections didn’t come in a vacuum, thanks to the comment period. Furthermore, the ruling also stated that the subpart B configurations are not inconsequential to rights holders, especially in light of the incredible growth of vinyl record sales. Consequently, the ruling said, “The royalties [that subpart B configurations] generate should not be treated … as a throw away negotiating chip to encourage better terms for streaming configurations.”

Moreover, a rate applied since 2006 cannot continue to bind the parties 16 years later if the retail marketplace for music has changed dramatically, the ruling stated, calling the static rate “unreasonable.” It added that at the very least, adjudication of rates may provide the parties an opportunity to present evidence for an indexed increase, i.e. COLA.

The 16-year frozen rate is not, however, the only reason the judges decided to reject the settlement. There were also complaints from Johnson and interested parties that since the majors also own the biggest publishers, who are members of the NMPA, there might be a conflict of interest involved in the settlement.

During the comment period, questions also arose about a memorandum of understanding (MOU) between the major labels and the NMPA, which could provide for waivers on late fees that U.S. Copyright law allows when payment deadlines are missed. But the moving parties — the majors and the NMPA that put in the motion for the CRB Judges to accept the rate settlement — deemed the MOU as irrelevant and inconsequential to the settlement and further claimed that it was a private contract between private parties, according to the CRB Judges summary in their ruling. Yet, the CRB ruling counters that the MOU appears to be an attempt to modify the application of the terms of the statutory licenses and that the private contract appears to have implications for other non-contracting parties.

The CRB judges stated that they alone should decide what is irrelevant; and without seeing the whole agreement and having more complete knowledge of the implication of the MOU, they said they are unable to evaluate the proposed settlement as a whole. So besides the out-of-date reasons for keeping the rate frozen, the judges said the MOU provided them with additional cause to conclude that the proposed settlement does not provide a reasonable basis for setting statutory rates and terms.

It is now up to the CRB rate proceeding participants to fashion another settlement that appeases all parties, including Johnson. If that can’t be achieved, the parties will have to adjudicate the subpart B mechanical rate. That could be a best-case scenario for publishers and songwriters, if those proceedings yielded a higher rate for both streaming and subpart B configuration. Some are still nervous, though. If all parties can’t make a deal, that would put both streaming and the physical and download formats into the adjudication process — which could leave publishers and songwriters fighting a battle on two fronts.

Why the CRB Threw Out the Major Labels and NMPA’s Rate Settlement Sony Music Publishing chairman and CEO Jon Platt is lauding the songwriters who swayed Copyright Royalty Board judges to throw out a proposed settlement between the major labels and the National Music Publishers’ Association that would have kept the mechanical rate at 9.1 cents…