Copyright Royalty Board
Last week, Bloomberg reported that Spotify will be raising prices for its premium subscription in five markets later this month and do the same in the United States at an unspecified time later this year. For about $1 to $2 extra per month, depending on the market, premium users will receive audiobooks alongside podcasts and ad-free music listening in their subscription — but the change will have a knock-on effect for mechanical royalty rates for songwriters and publishers.
Once the price increases are launched, all premium subscribers will automatically be subject to the new offering unless they manually change their subscription tier. While the increased price will result in Spotify getting increased revenue, a representative for Spotify believes it also qualifies the popular premium tier for a discount on its royalty rate on U.S. mechanicals because it is now considered a “bundle,” similar to how Amazon bundles Prime and Amazon Music and Apple bundles Apple Music and Apple News.
“Spotify is on track to pay publishers and societies more in 2024 than in 2023,” a Spotify rep said, citing the company’s Loud and Clear report that says the streamer has paid nearly $4 billion to publishers, PROs and collection societies in the last two years.
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“As our industry partners are aware, changes in our product portfolio mean that we are paying out in different ways based on terms agreed to by both streaming services and publishers. Multiple DSPs have long paid a lower rate for bundles versus a standalone music subscription, and our approach is consistent,” the company added. Though Spotify premium users have already gotten access to audiobooks on the service since October for no additional charge, the company clarified to Billboard that its re-classification of the tier as a “bundle” is not retroactive to when it began testing audiobooks but only begins when the subscription price increases.
Music publishers have made it clear they are not going to accept the change without a fight. David Israelite, president/CEO of the National Music Publishers’ Association (NMPA), called out the service for the move, saying that “it appears Spotify has returned to attacking the very songwriters who make its business possible.” He went on to add that the company’s attempt to “radically reduce payments” to publishers and songwriters is “a cynical and potentially unlawful move.” If it is determined that Spotify’s move is not properly categorized as a bundle, the trade organization says it will consider “all options,” including the MLC or publishers taking Spotify to court or before the Copyright Royalty Board (CRB), the entity that sets mechanical royalty rates for streaming in the United States. “We will not stand for their perversion of the settlement we agreed upon in 2022,” he warned.
Nashville Songwriters Association International (NSAI) took to Instagram, urging their followers to cancel their subscriptions: “NSAI, along with the the @nmpaorg, is contemplating our next steps to fight this move. Stay tuned, but in the meantime remember they are doing all this in the worst possible show of disrespect to the songwriters who make them billions.”
Songwriters of North America CEO Michelle Lewis shared the perspective of songwriters, telling Billboard, “We are disappointed, but not surprised, to see Spotify once again on the forefront of finding ways to pay songwriters less. This reclassification, which we see as a deliberate misclassification, dangerously undermines the good faith of the last CRB settlement. It’s also duly noted that it is always the same company leading in this way.”
Phonorecords IV Settlement
Every five years, the CRB reconsiders the royalty rate for mechanicals in the United States. It is a complex, multi-pronged formula, setting the rate that each streaming service must pay to publishers and songwriters based on a number of contingent factors, including the subscription price, the amount the service pays to record labels and more. There are other caveats to consider when setting the rate based on how the user is subscribed with their streaming service, including whether the music was streamed on a free, ad-supported tier or on a paid, premium tier and whether the user is subscribed to the service through a bundle of other products.
In late 2022, NMPA, NSAI and Digital Media Association (DiMA) jointly announced that they had come to a voluntary settlement about what the U.S. mechanical royalty rate would be for the period of 2023-2027 (also called Phonorecords IV or “Phono IV”).
Even though the changes to the way bundling worked were considered a concession to streaming services, many in the music business celebrated the Phono IV settlement as an overall win, especially because the previous five-year rate (Phono III) was fought over for years, causing confusion over rates in the interim. When it was announced, the NMPA touted the Phono IV settlement as delivering the “highest rates in the history of digital streaming,” and many felt it signaled a new era of cooperation between streaming services and the music business. Israelite says now in his statement that Spotify’s latest move to bundle audiobooks “ends our period of relative peace.”
How Bundling Affects Mechanical Revenue
Even though the price of Spotify premium is rising, that additional revenue does not benefit songwriters and publishers. Now that premium is considered a bundled service with audiobooks, some of the subscription price is owed to book publishers and authors to license their works, too.
Mechanical revenue for bundles is calculated by seeing what audiobooks are valued at as a standalone offering ($9.99) and weighing that against the price of the premium bundle offering ($10.99), according to Phonorecords IV. The value of music is found by dividing the total premium price ($10.99) by the two services (audiobooks only and premium) together ($21), which results in music being valued at about 52% of the total bundle, or around $5.70 per subscriber.
How Bundling Affects the Total Content Cost
The first step in calculating the mechanical royalty rate a streaming service owes to songwriters and publishers is to find the “all-in pool.” This is the greater of either the headline rate (which ranges from 15.1% for 2023, 15.2% for 2024, 15.25% for 2025, 15.3% for 2026, and 15.35% for 2027) of Spotify’s revenue (which is now lowered to around $5.70 per subscriber) or the percentage of total content cost (TCC), a.k.a. what royalty Spotify pays to labels.
Previously, Spotify premium qualified for the full rate of the lesser of 26.2% of TCC for the period or $1.10 per subscriber. Now, after deciding to change its premium offering to include audiobooks, Spotify argues it qualifies as a “bundled subscription offering,” which moves its rate down to 24.5% of TCC for the accounting period.
Regardless of whether Spotify calculates its royalties due to songwriters and publishers based on the percentage of TCC or the headline rate, both options are affected by Spotify reclassifying premium as a bundle. One source close to the matter tells Billboard that Spotify has been paying based on the TCC recently.
While the Mechanical Licensing Collective’s announcement last month about the “final final” Phonorecords III Copyright Royalty Board rate determination adjustment seemed to imply songwriters and publishers were due another roughly $400 million to, sources say the number likely overstates the coming financial windfall.
After a more than two year wait that included an appeal process, a remand, a new partial rate trial, and then the time to recalculate and resubmit adjusted play reports, sources say that number may correctly assess how much more money was earned and reported due to the CRB determination covering 2018 through 2022 — but it also likely includes payments that have already been made.
Within the total adjustment, about $250 million in net extra mechanical royalties will be paid out thanks to the adjustment, with practically all of that coming from the 2021-2022 period. Those royalties will be paid out beginning in May by the Mechanical Licensing Collective, the agency created by the Music Modernization Act to collect and disburse mechanical royalties from on-demand digital streaming services. This means adjusted monies paid out by the MLC will probably begin reaching songwriters from their publishers in the following quarter.
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The rest of the roughly $400 million adjustment comes from performance royalties. But sources at the U.S. performance rights organizations say they are surprised by the MLC’s claim that another $138 million has been discovered in the resubmitted play reports required by the final rate determination.
The MLC may be the best positioned to understand this, though. Because the mechanical rate formula calls for the digital service providers to report how much they paid in performance royalties each month — or estimate how much they will pay — the MLC has insight into how much was reported collectively for mechanical and performance royalties for the period of 2018-2022 before the rate determination was finalized. It also has insight into how much performance royalties totaled after the play reports were resubmitted with the adjustments due to that final determination. The final determination happened in August 2023, eight months after the 2018-2022 term ended, with the resubmitted reports due Feb. 9, 2024.
In contrast, the PROs themselves only know what they each individually have been paid, and each digital service only knows what they individually have paid out to each PRO. Neither of those sides can see the whole performance revenue pool like the MLC can, unless they share information with competitors, which is unlikely but possible. Consequently, sources at PROs and digital services say they are surprised and puzzled by the MLC’s announcement that more performance royalties were found due to the adjusted reports. Others say the MLC’s announcement has caused consternation between songwriters and PROs. One source at a PRO suggests that the MLC including performance royalties in its report was a “marketing mishap.”
PRO sources insist that whatever performance royalties came in have largely already been paid out, and they don’t expect any new windfalls. And sources at the digital services say that, from what they can tell, the streamers have already paid out all the performance royalties that were due and they don’t expect to be making further payments.
Meanwhile, sources at PROs say the MLC’s announcement has caused significant confusion, leading songwriters to inquire about when they will get additional payouts for performance and why they were not made aware of this sooner.
Even if the performance royalties have already been paid, many executives in the music industry are speculating about what caused such a significant increase. The all-in mechanical formula that was determined by the CRB in Phonorecords III, by itself, doesn’t do anything to change performance royalties, which are typically decided by private negotiations between PROs and streaming services.
It’s possible digital services made mistakes when they reported the monthly performance royalties the first time around. The MLC could also have made a mistake either when it added up all the interim royalties paid while parties were awaiting a final determination or when it subsequently adjusted performance royalties for the period.
Alternatively, some of the PROs could have negotiated deals that tie their performance rates to the statutory mechanical rate. That would mean when digital services reverted to paying a lower mechanical rate while the 2018-2022 rate was still being determined, they wound up paying lower performance royalty rates, too — which later increased after the final CRB rate determination. But while some PRO sources concede that they try to negotiate for at least 50% of the statutory rate as a floor, they also say they don’t have any deal triggers specifically tied to the mechanicalrate.
Another theory is that one or two of the PROs might have been operating under an interim royalty rate with one or more streaming services while working through negotiations, which hypothetically weren’t finalized until recently. If those performance royalty rates have now been decided, the adjustments could be reflected in this total reported number. But several sources say they aren’t aware of any instances where this has happened.
It isn’t unusual for there to be streaming royalty adjustments after the fact, even without a new subsequent “final final” rate determination, sources point out. As it is, streaming services will sometimes need to make estimates on reporting monthly performance and mechanical royalty payments and then later adjust if necessary once the period has closed. At that time, the new payment would be made and the expense adjustment would be reported to the MLC — not two years later, sources say.
Performance and mechanical royalties have a see-saw effect where an increase in one will result in a decrease in the other. That’s because the formula for calculating the mechanical rate includes a first step in the formula that initially acts as a cap for an all-in publishing royalty pool that combines the two. This has publishers worried. If the services have already fulfilled all of their performance payments and the PROs have paid out all the received performance royalties, then how can the services now claim that $138 million as an additional deduction in the resubmitted reports? By claiming additional performance payouts, that would likely reduce the potential mechanical royalty payouts on the resubmitted report.
Aside from whether more money is coming, how these publishing royalties are paid — as performance or mechanicals — matters to publishers and songwriters.
For example, if that newfound $138 million in performance royalties needed to be paid out, it would likely mean that only about $120 million to $125 million of it would flow to songwriters and publishers because of the PROs’ overhead expenses.
If, instead, that $138 million was mechanical royalties, the songwriters and publishers would get all of that because the MLC has no overhead expense deduction since digital services finance the operation. But, instead of it getting paid out separately and directly split between publishers and songwriters, these royalties are paid to publishers, who then distribute royalties to their writers, but usually after recouping. So, the difference in where the payment comes through matters significantly to songwriters and publishers.
Overall, this adjustment seems to weigh more favorably for the mechanical royalty pool. Previously, during the interim period, the $2.77 billion in total publishing royalty payouts from digital services were weighted 50.93% to mechanical and 49.07% to performance. But after adjustments, including subtracting a slight overpayment in mechanicals for the years of 2018-2019, the $3.16 billion in total publishing royalties paid out by digital services to the PROs and the MLC works out to 52.63% paid in mechanical and 47.37% to performance, or nearly a two-percentage point increase for the former.
Eventually, when the MLC digs into the resubmissions and compares them to the earlier monthly play reports, it will likely be able to discern if the additional $138 million is coming across the board from all services or if a specific service or two accumulated the bulk of the new reported performance royalties. But if that doesn’t solve the mystery, another process is beginning that could bring in an answer. Last month, the MLC served notice on some 50 digital services that it is performing audits on them. If all else fails, that should bring some clarity to the mystery.
Songwriters and publishers are due nearly $400 million in additional payouts following the Copyright Royalty Board‘s Phonorecord III final determination in August, according to information the Mechanical Licensing Collective (the MLC) released on Friday (Feb. 23). During the Phono III blanket license period (2021-2022), the MLC reports that digital service providers like Spotify, Amazon Music, […]
When it comes to songwriters’ income, streaming services are regarded as both heroes and villains: They saved the music industry from unbridled piracy, but, some say, pay a pittance to most creators. In his first interview as the new president/CEO of the Digital Media Association (DiMA), Graham Davies says he’s focused on convincing the industry they’re the good guys.
Davies assumed the top role at the U.S. organization — which represents the interests of Amazon, Apple Music, Pandora, Spotify, YouTube and feed.fm — in January, succeeding the organization’s longtime leader, Garrett Levin.
Before taking the job, he worked on the other side of the negotiating table as head of the Ivors Academy, the United Kingdom’s foremost songwriter advocacy organization. It’s a career change equivalent to a district attorney becoming a defense lawyer, but Davies says his extensive knowledge of song creators’ needs will help him make a real impact at DiMA.
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A classically trained pianist, Davies began his career in the mid-1990s at British collection society PRS for Music, where he assisted with the more than 100-year-old organization’s transition from physical to digital in a time of great uncertainty and record low collections. He also worked alongside the Swedish and German performing rights organizations (PROs) to form the International Corporate Enterprise, a licensing and processing hub that serves over 250,000 rights holders and multi-territory digital music companies that combined and modernized the societies’ back offices.
In 2018, Davies became CEO of what was then the British Academy of Songwriters Composers and Authors and determined the organization needed a better fundraising initiative, greater outreach to other industry partners and, he says, a “stronger voice” among songwriters. As one of the first orders of business, he rebranded BASCA as the Ivors Academy to align with the most well-known and successful part of the organization, the Ivor Novello Awards, named after the Welsh singer, composer, actor and dramatist who was one of the most revered British performers of the first half of the 20th century.
Davies also formed partnerships with other musicians’ unions and groups for greater advocacy reach, including the Musicians Union, the Music Producers Guild and the Featured Artist Coalition. He worked with songwriter Tom Gray to push the #BrokenRecord grassroots campaign, which called for improved rights and remuneration for U.K. music creators and, Davies says, made “radical progress on the diversity of membership and the board.”
To accomplish all of this, Davies says the academy needed money, and that’s where his relationship with streaming services and DiMA began. He connected with Apple Music, Amazon Music and Levin for funding and support.
Davies now intends to similarly rebrand DiMA as a global organization to, as he puts it, “educate about the value that streaming services bring to the music business” and to advocate in favor of its members regarding legislation and other global issues.
In the wake of the contentious five-year-long Copyright Royalty Board (CRB) Phonorecords III proceedings, which marred DiMA’s relationship with music publishers, Davies says he intends to use his background in publisher and songwriter advocacy to find areas of “common ground” so the two sides can navigate the age of artificial intelligence (AI) together.
Why do you think you’re the right fit for DiMA?
I think of this as the new start of DiMA. It’s [the progression] of things that started happening during Garrett Levin’s tenure. Now DiMA is evolving to be a more global voice for music streaming. That’s the core of our vision and strategy. My non-U.S.-ness makes sense for this vision. Music streaming is a global industry, and lots of the issues are the same across jurisdictions. We will definitely continue to have a very sharp focus in the U.S. on activities here, though.
What is on the docket for your first year?
First is ensuring that DiMA is visible. It’s important that people see that DiMA is building on Garrett’s legacy. I’m also still in the listening phase to hear everyone’s perspectives and combine that with what I know from my time in the United Kingdom.
What message do you want to send to the industry?
[There is still] pressure on services to pay more into the industry. People want to know where the money goes. How much are the streaming services paying into the industry through both royalty payments and also investing? There are hugely notable investments that our members are making — not just [regarding] consumers’ wants and needs in the evolving streaming market. They are funding a lot of initiatives in different territories to bring forward a healthy pipeline of music. For example, there is a Rising Star program at the Ivors Academy that was funded by Apple and is now funded by Amazon. I’m not sure there’s enough awareness, and I’m ready to push that education.
What do you say to songwriters who criticize your move to the other side of the bargaining table?
I think [my desire to] listen and understand where everyone is coming from and find common solutions is seen to be really positive. To have someone who has worked from a PRO perspective, a songwriter advocate perspective and now [represents] streaming services is good. There will be some points of difference. You know, a CRB negotiation is a CRB negotiation. But so far, the vast majority of the voices have all been positive.
For Phonorecords IV, DiMA’s members joined with the National Music Publishers’ Association [NMPA] and the Nashville Songwriters Association International to reach a settlement. This was viewed as a major improvement from Phono III, which took five years to determine a rate and was quite contentious. Do you foresee similar collaborative CRB negotiations in the future?
There is absolutely a need for a close connection between the rights holders and the streaming services because if the streaming market doesn’t thrive, almost no one thrives. Our successful settlement with Phono IV was a great indicator of our ability to coordinate. I have big shoes to fill, but I hope to build on that. I think everyone is looking for as much collaboration as possible.
How will AI affect DiMA’s members?
The thing that we are looking at most intensively right now is the personhood legislation that’s being discussed in the United States. We believe that there should be appropriate safeguards to protect an individual’s personhood — name, image, likeness and voice — but the law has to be appropriately bound for all parties.
We are favoring a federal approach as opposed to the patchwork of state laws. It’s got to balance the individual’s ability to control this and the foundational protections that streaming is built on. Secondary liability has really provided our members with certainty. The focus has to be on those that are directly active in producing content that is problematic without shifting that liability to the streaming services. There’s lots to be discussed within this.
Does that mean you’re in favor of creating a process for taking down works that violate an artist’s right of publicity, similar to how the Digital Millennium Copyright Act works for copyright infringements?
That’s right. There has been clarity on the issue of liability to date, and this has provided certainty [for the streaming services.]
What else will you focus on in your first year?
The organization of licensing and operations. You would expect this coming from my background. I’m used to collecting societies and back-office entities focused on transparency, efficiency and neutrality.The Music Modernization Act is a really great example of the industry coming together to solve problems with efficient and effective solutions. I think we feel that the Mechanical Licensing Collective re-designation process is a really important [example] where the MMA was successful. The re-designation process is an important process to speak to all the people involved, figure out what’s working, what isn’t working and where we can improve. We definitely see areas to be looked at [at the MLC].
Can you elaborate on the MLC re-designation process?
There is an opportunity for more insight into the metrics and how the MLC is operating. It is still quite early in its setup, and DiMA members have been absolutely supportive of that journey. But you would expect any back-office operation to have efficiency in its next phase. And we’ll be keenly wanting to see how the MLC improves that. Garrett set some of this out in the field hearing earlier last year [which discussed the successes and failures of the MMA five years after it was passed]. We feel neutrality is an area that needs particular attention. In terms of decision-making on these kinds of policy issues, it’s a good idea to have these five-year reviews.
When you say neutrality is an area that needs attention, are you referring to the MLC and the NMPA having the same outside counsel, as Garrett noted at the MMA field hearing, or something else?
Exactly. The services as well as other songwriters are concerned about just how neutral the MLC is operating. Our understanding is that the MLC was established in the interest of all stakeholders and to operate in a neutral way.
This story appears in the Feb. 10, 2024, issue of Billboard.
Songwriters and publishers will see a royalty bump in the new year for physical sales (including vinyl, cassettes and CDs) and digital downloads. According to a new document, published in the Federal Registrar on Tuesday (Dec. 12), the Copyright Royalty Board (CRB) upped the U.S. statutory mechanical royalty rate from the current rate of 12 cents to 12.40 cents if the song has a run time of five minutes or less. (If over five minutes, the rate is 2.39 cents per minute.)
This rate change is based on the Consumer Price Index for All Urban Consumers (U.S. City Average, all times) that was published by the Secretary of Labor.
This form of publishing royalty is paid to songwriters and publishers by record labels, which license their compositions for sound recordings that are then made into digital downloads or physical copies. This system is unlike that for U.S. mechanical royalties for streaming, which are paid to publishers and songwriters by streaming platforms like Spotify, Apple Music and Amazon Music.
Consistent Cost of Living Adjustments (COLA) have been an important (but controversial) part of the conversation around U.S. mechanical royalty rates in recent years. Prior to January 2023, the minimum statutory mechanical rate in the United States had been stuck at 9.1 cents since 2006, losing value each year as inflation climbed. January 2023’s raise represented a 32% rate increase.
In May 2022, when the 2023 adjustment was announced, BMG made a statement criticizing the majors, saying in part, “The entire songwriter community owes a huge debt of thanks to those who fought for this increase in the face of the opposition of major record companies and indifference of music publishers. … Without their belief and commitment, the [Recording Industry Association of America] RIAA (representing record companies) and the [National Music Publishers’ Association] NMPA (representing music publishers) would not have been forced back to the negotiating table.” This is a sentiment also held by independent songwriter George Johnson, who has consistently led the fight for a COLA adjustment through his participation in the Copyright Royalty Board proceedings.
For years, the NMPA didn’t push for the rate to be raised beyond 9.1 cents, while all sides weighed how to first establish streaming models and what rates should be paid for the fast-growing income stream of the music publishing business. While dealing with those larger issues, the NMPA and the labels continued the cycle of a 9.1 cent settlement for every five-year term from 2008 through 2022, and they were ready to do so again for the 2023-2027 term, as indicated in their initial settlement.
When Johnson, followed by other songwriter advocates like the Songwriters Guild of America and Music Creators of North America, pushed against the initial settlement rate of 9.1 cents for that term, the NMPA noted that litigation is costly, running into the tens of millions of dollars — which is why the organization initially focused on adjudicating streaming rates rather than the penny rate for physical and downloads. To litigate for both streaming and the penny rate would be even more costly than the millions the NMPA was already spending.
Moreover, it was argued that spending money fighting for the rate change for digital downloads and physical sales could be a wash for publishers when weighing the legal costs against how much additional revenue a possible rate increase could achieve. While physical and downloads back in 2021 accounted for 15% of market share for labels, for publishers it was a 5% market share. Some in the publishing business were also afraid that if they pushed for a higher penny rate, they would lose the support of the major labels in their quest for better streaming rates.
The CRB judges ultimately tossed out the 9.1 cent settlement for 2023-2027, and then the publishers and major labels came together to put together a second settlement for that term featuring a 12 cent penny rate and a COLA adjustment.
In a Dec. 7 statement about the upcoming adjustment from 12 cents to 12.4 cents for 2024, NMPA president/CEO David Israelite, said: “We are pleased that the Copyright Office has approved a Consumer Price Index (CPI) increase for physical products like vinyl records and digital downloads. Last year NMPA, the Nashville Songwriters Association International (NSAI) and others worked to raise these mechanical royalties from 9.1 cents to 12 cents — a 32% increase with the added insurance of including a mandated Cost of Living Adjustment (COLA) lift each year. While these forms of consumption are not top revenue streams in the current market they still represent a meaningful piece of the music industry and it is important that they continue to grow.”
Rarely does an accounting issue move markets and surprise people throughout the music business. But that’s what happened Monday when Hipgnosis Songs Fund, the publicly traded investment trust backed by the catalogs of such artists as Neil Young and Stevie Nicks, announced it will cancel a planned quarterly dividend payment to shareholders.
According to Hipgnosis Songs Fund’s board of directors, the decision was the result of the company’s independent valuation expert, Citrin Cooperman, reducing its expectations of “industry-wide” retroactive payments from the Copyright Royalty Board’s Phonorecords III (a.k.a. CRB III) ruling that increased the royalties music publishers receive from on-demand music streaming services for the years 2018 to 2022. Billboard estimated that the music industry would gain over $250 million in total, and another industry expert recently told Billboard they estimated the industry-wide retroactive payment will approach $400 million.
Hipgnosis’ adjustment was substantial: down roughly 54% from $21.7 million to $9.9 million. Meanwhile, Billboard continues to stand by its previous estimate and no other publishers or rights funds that spoke for this story have had to decrease their projections.
“Frankly, I’m shocked… I really do not understand this,” says one music publishing executive.
Multiple sources say there have been no new updates regarding CRB III in recent weeks that would cause a publisher to cut their expectations for accruals by more than half, and it must be an accounting error unique to Hipgnosis and Citrin Cooperman. “None of the data points have changed,” explains another publishing executive. “The ruling is what it is, so they must’ve made a mistake here.” Citrin Cooperman did not respond to Billboard’s request for comment.
The fallout Monday was immediate: With the sudden change in expected retroactive royalties, Hipgnosis Songs Fund was forced to cancel a dividend payment to not risk violating the debt covenants for its $700 million revolving credit facility. That dividend — 1.3125 pence per ordinary share — was announced on Sept. 21 and was to have a payment date of Oct. 27. The company’s share price dropped 10% on Monday’s news. Dividends are an integral component to the fund’s strategy of providing investors with stable returns from proven, successful music catalogs. Since its initial public offering in July 2018 through March, Hipgnosis Songs Fund had declared dividends of 21.6 pence per share, according to the latest annual report.
While the retroactive CRB III payments would be less than Hipgnosis Songs Fund expected and impacted a dividend payment this quarter, the resulting cash crunch likely won’t happen until 2024. Streaming royalties due for the period 2018 to 2020 will be paid directly to rights holders, with everything after that flowing through the Music Licensing Collective with a Feb. 9, 2024, deadline. Most of the adjustment will come from the 2021-2022 royalties owed to the MLC, according to sources. Considering the time it will take the MLC process the distributions, publishers probably won’t receive this tranche of royalties until the spring 2024.
In August, the Copyright Royalty Board stated its final determination for how songwriters and publishers would be paid for the period of 2018-2022. These rates were hotly contested between the music business and streaming services over the past six years. Though rates were nearly finalized in 2018, some streamers remanded it back to the CRB in 2019 in hopes of getting more favorable terms. In the meantime, the streaming services paid songwriters and publishers under the guidelines set by the previous period, Phonorecords II, which was lower than what was ultimately set for 2018-2022.
Ever since, the music business has been preparing for when the 2018-2022 rates would finally be settled, and streaming services would have to undergo a massive recalibration of what they had previously paid out. When the judges released their final determination in mid-August, it proved that these streaming rates overall would lead to more money for publishers and songwriters.
Other publicly traded publishing companies have also announced the amounts of their expected adjustments ahead of receiving the money. Universal Music Group-owned Universal Music Publishing Group, one of the world’s largest music publishers, expects to book a catch-up adjustment of nearly 30 million euros in the third quarter of 2023 related to Phonorecords III, UMG said in its July 26 earnings call. Warner Music Group, which often ranks as the third largest publisher, according to Billboard’s Publishers Quarterly, recognized a benefit of $20 million — less than the amount of Hipgnosis Songs Fund’s initial estimate — in the quarter ended Sept. 30, 2022, resulting from the CRB’s ruling July 1, 2022, ruling.
Reservoir Media accrued less than $3 million in royalties in the third and fourth quarters of calendar 2022 related to the CRB III decision, says CEO Golnar Khosrowshahi. Reservoir Media doesn’t expect to adjust the size of the CRB III adjustment. “We continue to believe our estimates are accurate,” says Khosrowshahi. “We’ve applied an appropriate level of conservatism in recording that revenue.”
The amount of the expected windfall appears to have received a great deal of consideration inside Hipgnosis Songs Fund. According to Hipgnosis Songs Fund’s latest annual report, the company compared the Phonorecords III accrual estimates to estimates provided by the independent valuer — Citron Cooperman — as well as the fair-value appraiser for the City National Bank-led revolving credit facility. The 182-page report mentions the term “CRB III” 49 times and includes lengthy discussions of the company’s regulatory environment and how the CRB III determination raised the headline royalty rate due to music publishers by 44% from 10.5% to 15.1%.
CRB III will give publishers less than a 44% rate increase, though. The amount owed to music publishers is a complicated formula that includes minimum per-subscriber fees and percentage-of-revenue calculations. Publishers typically received above the headline rate from streaming services from 2018 to 2022, meaning extra amounts owed retroactively will be less than they would otherwise. Sources tell Billboard the effective rate for some streaming services was in the range of 12% to 13% of service revenue rather than 10.5%.
Hipgnosis did not respond to Billboard’s request for comment.
Publishers should get ready to welcome a royalty windfall now that the Copyright Royalty Board has printed its Phonorecord III final determination in the Federal Register — the last step to make the new rate structure official, concluding a more-than-four-year royalty row between publishers and streaming services.
The question is, how much that bonus will be.
While various industry estimates are all over the place with some even reaching another $400 million, by Billboard estimates, the just announced determined rates — finalized eight months after the 2017-2022 term expired — could yield up to another $250 million in underpaid mechanical royalties flowing from digital services to publishers and songwriters.
Now, digital services like Spotify, Amazon Music, YouTube and Pandora have six months to review and adjust past payments made for U.S. mechanicals to the new rates. Doing that will take a complicated assessment of past payments and applying them under the new finalized structure.
The ruling increases U.S. mechanical royalties each year during the five-year period using a multi-pronged formula based on choosing between either the royalties calculated using a “headline rate” tied to a percentage of the streaming service’s total revenue; or another pool that is calculated by using the lesser of either a percentage of total content cost — i.e. what’s paid to labels — or 80 cents per subscriber. Under the new finalized determination — which for the percentage of service revenue prong, is the same as the initial determination for the 2018-2022 term — the headline rate increased from 11.4% of service revenue in 2018 to 12.3% in 2019 to 13.3% in 2020 to 14.2% in 2021 and to 15.1% in 2022.
From there, performance royalties that are negotiated with and paid out to rights organizations like ASCAP and BMI are subtracted from the all-in pool, leaving just the mechanicals behind. The mechanicals are then measured against a 50-cents-per-subscriber floor, and whichever is bigger becomes the final mechanical royalty pool paid out to publishers and songwriters.
Until an appeal of the initial CRB rate determination initiated by independent songwriter George Johnson and joined by most of the big digital services sent it back to the CRB in July 2020, most of the streamers had been paying royalties under the high escalating rates from the initial Phonorecords III determination. But with the remand, in the fall of 2020, most services reverted to paying music publishing royalties using Phonorecords II rates from 2013-2017 while the appeal was sorted out. As an example, looking at just 2020 rates, that meant digital services abandoned the royalty structure that paid 13.3% of service revenue or 24.1% of total content cost and switched back to using the prior headline rate of 10.5% of service revenue and 21% of total content cost.
(This article uses rates and math associated with what’s known as the stand-alone portable streaming model — i.e., a single paid subscription — because it’s the dominant model that produces the most revenue in the U.S. marketplace. The rate formula has different percentages and parameters for other models like bundled, ad-supported, family or student tiers.)
Under the CRB judges’ final determination published in the Federal Register, the Phonorecords III royalty calculation keeps the escalating rate structures for on-demand streaming for the percentage of revenue prong in the formula but abandons an escalating rate structure for the cost-of-content prong. So, in the case of a single paid subscriber, that prong will apply 21% of total content costs to build an all-in pool to cover both mechanical and performance royalties, instead of the previously used — from the initial 2018-2022 determination announced in 2019 — annual escalating rates that in 2022 would have culminated at 26.1% of total content costs. That means in months where the total content cost became the all-in prong, the streaming service most likely overpaid publishers under the new rate structure.
In addition to eliminating an escalating rate structure for that prong, the CRB judges reapplied a ceiling for the total content bucket limiting what digital services would have to pay publishers. The initial 2018-2022 determination took out the ceiling mechanism, which would have meant that every time labels negotiated a higher rate, the music publishers and songwriters would also automatically benefit by a higher rate. Now, services reviewing their previous payments will need to measure the total cost of content bucket against the 80-cents-per-subscriber ceiling. Whichever of those two buckets is lower is then measured against the headline bucket and, this time, whichever is larger is chosen as the all-in bucket.
Reinstating the ceiling and jettisoning the escalating rate structure for the total content all-in pool could mean publishers were actually overpaid tens of millions of dollars for the 2018-2020 years, Billboard estimates based on Mechanical Licensing Collective and Harry Fox Agency royalty calculations data obtained from publishing sources. That amount, however, will be more than offset by the hundreds of millions of dollars in additional payouts that digital services will have to make for 2021 and 2022.
Billboard doesn’t have all the data necessary to calculate mechanical revenue on a month-by-month basis for each digital service, but looking at overall payments and reports to the Mechanical Licensing Collective can provide a simplified ballpark estimate on how much is owed to publishers and songwriters over the Phonorecords III five-year period.
First, let’s look at the first three years when it’s likely that services overpaid publishers and songwriters because they used the since-abandoned initial determination’s escalating percentages for the total content pool when calculating royalties. With Spotify, for example, according to data obtained by Billboard for the streamer’s Premium Individual tier, the headline rate royalty bucket won out most of the time for two of those years — 2019 and 2020 — to become the all-in bucket. Since the headline bucket rates are the same before and after the remand, it’s likely there were relatively minimal overpayments during that period. In 2018, however, Spotify’s total cost of content bucket appears to have won out all year — and that was at a higher rate of 22%, not the remanded 21%, and without a ceiling. So, in that year alone, Spotify likely overpaid by as much as $10 million on that tier alone, Billboard estimates, and is due to receive that money back from publishers and songwriters.
Based on that, and not knowing what kind of label licensing deals all digital services have, Billboard calculates — and some industry financial sources agree — that as much as $50 million in over-payments might have been paid by the digital services to publishers and songwriters overall during the 2018 through October 2020 period.
For that period, any overpayments will mostly be sorted out directly between the digital services and the publishers because the Mechanical Licensing Collective — created following the Music Modernization Act was signed in 2018 — hadn’t begun operating yet. Though, the organization will need to be involved in in recalibrating royalty payments that came from unmatched and unpaid royalties, which digital services turned over for those years at the MLC’s inception.
For 2021 and 2022, however, once the MLC began operating, the organization will be responsible for managing any royalty adjustments, once the new data and additional funding is received from the digital services.
In 2021, U.S. digital services reported $9.76 billion in estimated service revenue to the MLC, while the all-in publishing revenue totaled $1.31 billion — or 13.38% of service revenue — according to Billboard estimates based on MLC data obtained by Billboard. Taking a simplified across-the-board approach applying that year’s 14.1% headline rate against the total revenue of $9.76 billion would deliver nearly $1.39 billion in mechanical royalties — a $80 million bonus to publishers and songwriters.
For 2022, the payouts will likely be even greater. That year, digital services reported $10.78 billion in service revenue to the MLC and paid out a total of $1.45 billion in mechanical and performance royalties — or 13.5% of total revenue. Applying the 15.1% headline rate for that year produces about $1.63 billion in all-in publishing revenue — making for an extra $175.1 million in mechanical royalties.
Combined, 2021 and 2022 could yield an additional $255 million in mechanical royalties, by Billboard‘s best estimates. Depending on how much services can claw back from overpayments made during 2018 through October 2020, Billboard estimates publishers and songwriters will receive a windfall of $200 million to $250 million.
Once those payments are settled, it will be up to publishers to figure out payments to their songwriters under the new rate structure.
Beyond the windfall expected due to adjustments for over payments in 2018-2020 and the much larger underpayments in 2021-2022, Billboard estimates that the MLC holds an additional $350 million or so in unmatched or unclaimed royalties. In March of this year, the MLC reported to Billboard that it had paid out over $200 million of the $427 million pool in mechanical royalties it was handed from the years prior to when it began operating on Jan. 1, 2021. Sources say that since then, the prior 2021 unclaimed and unmatched pool has been further reduced with a total of almost $300 million now paid out. That leaves around $130 million in unclaimed royalties.
But what about 2021 and 2022? Since the MLC began, it has been matching about 90% of royalties from recordings to songs. In addition to the remaining 10% of songs that are not yet matched to recordings, there are songs building up the unpaid royalties pool because their credit claims do not add up to 100%. If a portion of a song’s credits are not claimed, that portion of the song’s royalties goes into the unclaimed and unmatched pool. Consequently, the overall payout rate the MLC is making nowadays comes out to about 84% of mechanical royalties received from digital services, according to sources, which is a considerable improvement compared to the 68–72% digital services matched and paid prior to the MLC’s launch.
In 2021, digital services paid the MLC about $675 million in mechanical royalties, Billboard estimates, and in 2022, they paid about $740 million. If 16% of the royalties for those two years are unmatched or unclaimed, that would make for another $225 million. And when 2018-2020 is added in, the MLC has a little more than $355 million in unmatched or unclaimed royalties still to be doled out to publishers and songwriters.
In addition to the publishing royalties still held by the MLC, Billboard estimates the finalized CRB rate determination will result in $50 million in overpayments to publishers for the 2018-2020 period and about $250 million in underpayments for 2021-2022. Within those totals, some of those adjustments will impact the $350 million or so unmatched and unclaimed royalties still held by the MLC.
The Copyright Royalty Board’s final determination for royalty rates for making and distributing phonorecords for the 2018-2022 term (aka Phonorecords III) were published by the Federal Register late last week, following a legal review — and close check for typos — by the office of Register of Copyrights Shira Perlmutter.
The majority of the rates determination is no surprise. Since the official remand by an Appeals Court in October 2020 — which followed a March 2019 appeal by digital services of the CRB’s February 2019 rates determination for the 2018-2022 term — the CRB judges had been wrestling with different aspects of the complicated mechanical rate formula cited by the appeal courts, with various aspects of the rates determination coming out in dribs and drabs over the last eight months.
As is already known, the CRB judges stayed with the escalating rate structure for the all-in percentage of revenue prong, which covers both mechanical and performance royalties, for on-demand streaming for the 2018-2022 period.
(The 21% of total content cost is for performance royalties are determined by a separate process but whatever was agreed to be paid to ASCAP, BMI and the other performance royalty organization is subtracted from the all-in bucket in one step of the process to determine one of the mechanical rates bucket.)
That rate structure escalated from 10.5% in the prior five-year term of 2013-2017 to 11.2% in 2018, 12.3% in 2019, 13.4% in 2020; 14.2% in 2021, and 15.1% in 2022. But in moving to the other all-in prong — the total cost of content prong, i.e. what the services pay the record labels — the CRB judges re-installed the ceiling, which prevents publishers and songwriters from automatically being rewarded when labels and artists negotiations higher rates from the services; and the judges abandoned the earlier escalating rate structure from its initial 2019 determination for the total cost of content prong, which similarly rose in annual increments from 21% of what’s paid to labels to 26.1% over the five year term. Instead, the judges stuck with 21% of total content cost for the full five-year term — the same percentage it had been in the previous five years.
(This article mainly uses the percentages from what’s known as the stand-alone portable streaming model, i.e. the main on-demand streaming vehicle, which at Spotify is known as the paid subscriber tier. The ad-supported rate is 22% of what’s paid to labels.)
In other moves, the CRB stuck with 9.1 cents per song for physical and downloads and 24 cents per ringtone for Phonorecord III. In Phonorecords IV, for 2023-2027, the royalty rate for ringtones would remain the same but the per song rate will earn 12 cents per track or 2.31 cents per minute of playing time or fraction thereof, whichever amount is larger for physical products and permanent downloads. Also, that rate will be subject to an annual cost-of-living adjustment.
Before an Appeals Court remanded a significant part of the CRB rate determination for 2018-2022 back to the CRB, digital streaming services were adhering to the structure of the initial determination which means that for some 33 months the formula applied the higher rates for the total cost of content prong without a ceiling. As such, industry sources speculate that some digital services overpaid during that period — and Billboard estimates that they might have over paid by $50 million.
But after the remand most services reverted back to the 2013-2017 rates of which used the headline rate of 10.5% of revenue, and consequently most industry financial sources suggest that the service underpaid from October 2020 through December 2022. Consequently, Billboard estimates that digital services collectively might owe $200 million to $250 million for the latter period. Looking at the two period, with the earlier one 2018-2020 partially offsetting the later period of 2021-2022, that could mean a $200 million windfall for publishers and songwriters.
Now that this has all been settled, the Mechanical Licensing Collective—working with required updated information from the digital services—has six months from the Aug. 10 date to make adjustments in what has been paid and what may still be owed from 2021 and 2022, the two years the MLC has been in operation. It will also have to rectify any under or over payments for unclaimed and unpaid royalties from the earlier periods before it began operations— a responsibility it was handed as part of the Music Modernization Act.
But besides the unpaid royalties, any needed adjustments to the rest of the payments made to publishers and songwriters during the 2018-2020 period will be handled by the digital services, likely with the help of their third party vendors, i.e. Music Reports Inc and the Harry Fox Agency.
The Phonorecords IV rate determination for 2023-2027 preceded the final determination for Phonorecords III, as it was published in the Federal Register on Dec. 16, 2022.
The U.S. Court of Appeals for the District of Columbia Circuit ruled last week to uphold the Copyright Royalty Board’s Web V rate determination, published in the Federal Register on Oc. 27, 2021.
That determination, which impacts non-interactive, programmed plays on digital radio like Pandora and iHeartRadio, set inflation-adjusted rates at $.0026 per paid subscription stream, up from $0.0024 cents. For ad-supported streams, the CRB set a rate of $0.0021, up from $0.0018 per play. (On-demand streams from services like Spotify and Apple are not included in this determination.)
These payments from digital radio, webcasters and simulcasters are made to SoundExchange, which in turn distributes royalties to labels and recording artists. Some labels have direct deals that get them paid directly from the large radio networks — in which case they turn over the artist’s share to SoundExchange, for distribution to artists.
The Web V rate determination covers the five-year term of 2021 through 2025, but since it includes inflation-adjusted rates, on Dec. 1, 2021, the 2021 rates set in the determination were adjusted to higher rates of $0.0028 per paid subscription stream and $0.0022 per ad-supported stream.
Around the same time as the adjusted rates were set, various participants in the Web V proceedings appealed certain aspects of the initial rate determination. They included the National Association of Broadcasters (NAB), which sought lower rates than the determination; and SoundExchange, which sought higher rates for commercial non-subscription, ad-supported services than the determination; and the National Religious Broadcasters Music License Committee. The Appeals Court ruling rejected their arguments.
In addition to upholding the per-play rates, the Appeals Court also reaffirmed the doubling of the minimum rate to $1,000 per station, up from $500 per station annually, with a maximum aggregate minimum fee of $100,000 for large commercial radio broadcasters with more than 100 stations.
In a statement, SoundExchange said: “We appreciate the court’s thoughtful attention to our appeal regarding royalty rate-setting methodology, and we are pleased that the appeals court rejected broadcasters’ efforts to reduce royalty rates at the expense of hard-working artists and creators and preserved the status quo for webcasting rates through 2025.”
This ruling confirms that broadcasters compete with audio music services for listeners and, therefore, should continue to pay royalty rates on a level playing field. The appeals court determined that the broadcasters failed to adequately give reason why artists and rights owners should subsidize the broadcasting industry even more than they already do. After all, broadcasters still inexplicably get a free pass for the use of sound recordings on their AM/FM transmissions.
Meanwhile, NAB said in a statement to Radio Ink and confirmed to Billboard that it was pleased that “the Court rejected SoundExchange’s aggressive and deeply flawed arguments in favor of higher digital royalty fees and acknowledged that broadcasters could pay a lower rate for simulcasts in the future.”
(The reference to possible lower rates for simulcasts in the future comes from the Appeals Court ruling “that future records may warrant new rate category distinctions” between simulcasting and other types of commercial webcasting.)
The NAB statement continued, “We will continue advocating for reasonable streaming rates that allow broadcasters to expand their digital offerings and stream music, which will benefit performing artists, songwriters and our tens of millions of listeners.”
The Copyright Royalty Board issued a landmark determination Tuesday (May 23) for Phonorecords III, maintaining an up to 44% raise for U.S. songwriters and publishers’ headline rate for mechanicals by the end of the period of 2018 to 2022.
The ruling increases those royalties each year during the five-year period — from 11.4% to 15.1% of service revenue by 2022 — but also affirmed key requests from streaming services during their lengthy appeal, limiting royalties based on total content cost (TCC) and reinstating a rate ceiling step in the formula. While the document is restricted from public viewing, an appendix to that determination containing the regulations at the heart of the restricted document was released to the public Wednesday (May 24).
To calculate how much is owed to songwriters and publishers, streaming services use a complex, multi-pronged formula dependent on numerous considerations. Many of these elements were revealed prior to the release of this week’s documents, so while it is noteworthy that the board is now in the last stages of finalizing the rules for Phono III after an appeal by digital services in 2019 was remanded back to the CRB, this determination cements what was previously reported. It has been described in the past as a “mixed decision” by insiders, with some stipulations favoring the interests of the music business while others favor streaming services.
Proceedings to decide how to pay songwriters and publishers for U.S. mechanicals during 2018-2022 began over five years ago. In 2018, a CRB determination set the headline rate moving upwards from 10.5% of a streamer’s revenue in 2018 to 15.1% in 2022 and increased the subscriber count calculations for discounted family and student plans to 1.5 times and 0.5 times respectively.
The 2018 determination also removed the publishing rate ceiling mechanism that prevents the publishers from automatically benefiting with higher payments when their label counterparts are able to negotiate higher rates for their master recordings. This was one of many qualms streamers had with this determination, given that many details were especially favorable to the music business. Spotify, Pandora, Google and Amazon noted then that they felt the board “acted arbitrarily and capriciously by simultaneously combining a TCC prong with an increase in the percentages of revenue prong, [or ‘headline rate’].”
Because some of the digital services hoped to regain some of the more streamer-friendly stipulations from the previous period — Phono II — Spotify, Pandora, Google and Amazon launched an appeal that was successful and resulted in a “remand” process that dragged on until now — after the 2018-2022 period was over. Apple, notably, did not participate in the appeal.
The new Phono III determination upholds the previous headline rate of up to 15.1% of streamer’s revenue by 2022, increasing each year by a full percentage point or by 0.9 of a percentage point, similar to how it was determined in 2018. This detail was revealed by the board in July 2022, as Billboard reported at the time. It also upholds the subscriber count calculations of 1.5 times for discounted family and 0.5 times for student plans, as proposed in 2019.
The appeal did, however, result in a few key wins for streaming services. It also reinstalled a rate cap of 80 cents per subscriber. Namely, the appeal lowered the total content cost calculations — which limits songwriter and publisher payouts to a percentage of what is paid to labels — from what the board determined in 2018.
While the music business was hoping for a TCC rate of 26.2%, the streaming services requested and received a range of different rates depending on the offerings, from the lesser of 20.65% of TCC up to 22% of TCC.
The U.S. mechanical royalty owed to music publishers and songwriters is calculated based on choosing between either the royalties calculated using the headline rate; or the lesser of either the percentage of TCC or 80 cents per subscriber. Whichever of the two pools is greater is selected as what’s known as the “all-in pool.” Afterward, the performance royalties are subtracted from the all-in pool, leaving just the mechanicals behind. The mechanicals are then measured against a per-subscriber pool, and whichever is bigger becomes the final mechanical royalty pool paid out to publishers and songwriters.
The most important TCC percentage rate for Phono III, the rate for standalone portable subscriptions, is 21% of TCC against 80 cents per subscriber.
Since the all-in royalty rates for this prong of the formula are determined based on the greater of the two options — either the headline rate or the lesser of the TCC pool or an 80 cents per subscriber calculation — it is feasible that the TCC rate will not be employed in certain future situations.
In the past, this prong of the formula has helped publishers get a percentage above the headline rate. For example, in 2021, when most services had reverted to the 2013-2017 term headline rate of 10.5%, the multi-pronged formula helped yield an all-in 13.4% of service revenue for publishing royalties.
Participants in the remand included the National Music Publishers’ Association, Nashville Songwriters Association International, songwriter George Johnson — who personally fought back against the streaming services on behalf of the independent songwriter in self-filed court documents — Spotify, Pandora, Google and Amazon.
Next, there is a 15-day window for rehearing motions. Then the Copyright Office will conduct a legal review for error, which could take up to 60 days. After that, the determination will be fully published, giving streaming services and the music business six months to go review and adjust past payments made for U.S. mechanicals to the new rates for 2018-2022 — a process that will likely be a financial boost for the music business.
Still, after this determination is published, the parties will have the opportunity to file a notice of appeal for 30 days.
“We are pleased the court finally has confirmed the result of Phono 3, a case which was decided in 2018. This initial remand decision upholds the 15.1% headline rate increase we fought for, however the length of time we have waited for this decision proves the Copyright Royalty Board system is woefully flawed. Now songwriters have some certainty about their rates, and we will ensure they receive the hundreds of millions of dollars that digital streaming companies owe them during this adjustment period,” said David Israelite, president/CEO of the NMPA.
“The testimonies of the three songwriter witnesses in this trial were powerful, convincing and illustrated the difficulty of songwriters earning a living in the streaming era — as well as the importance and value of the composition in the commercial music process,” said Bart Herbison, executive director of the Nashville Songwriters Association International (NSAI).
“Steve Bogard, Liz Rose and Lee Miller, all NSAI board members, were moving and informative and played a huge role in the historic increase,” Herbison added. “The process is long and difficult requiring time and preparation. We are thankful to these songwriters and to the NMPA.”