A Bundle of Mechanicals

Legislators have tried to adapt copyright law to new inventions since the time of piano rolls. This is because creators beg remuneration in new media. In the Copyright Act of 1909, the exclusive right of the copyright owner to make mechanical reproductions of music was secured through the provision of a mechanical license, a term that is now used as well for electro-acoustical and digital reproductions.

In 1995, bowing to the pressures of the Internet era, Congress passed the Digital Performance Right in Sound Recordings Act. It broadened mechanical licenses to include digital phonorecord deliveries online. According to section 115 of the US Copyright Act, publishers and songwriters are obliged to issue mechanical licenses to companies that follow proper procedure and pay the rates set by law for songs that were previously recorded and released. These royalty rates, commonly known as statutory rates–as well as the terms, and the different categories in which music can be distributed–are defined by the Judges of the Copyright Royalty Board (CRB) every five years. In 2008, the CRB defined new regulations effective through 2012.

In April 2012, main music industry stakeholders led by (i) the Recording Industry Association of America (RIAA) representing the record labels, (ii) the National Music Publishers Association (NMPA) for the publishers and songwriters, and (iii) the Digital Media Association (DiMA) for the  digital service providers—all reached agreement on rates and terms for the next quinquennium and defined new standards to support five prior unlisted categories of digital distribution. The effort was meant to jump-start potentially novel music business models.

This agreement maintains the eight categories set in the past, extending the same rates through 2017. This means that for physical copies and permanent digital downloads the rates are still 9.1 cents per track or 1.75 cents per minute of playing time per unit distributed; for ringtones, the rate also stays put at 24 cents a track. The complicated formulas and structures for the preexisting subscription and ad-based interactive streaming services like Spotify also remain in place. The parties in the agreement confirmed as well that non-interactive, audio-only, streaming services do not require reproduction or distribution (mechanical) licenses from copyright owners.

The five new categories are for businesses operating with Mixed Service Bundles, Music Bundles, Limited Offerings, Paid Locker Services, and Purchased-Content Lockers. The legislation will bring more clarity to these providers, enabling them to better plan for their intellectual property costs. Moreover, new investors should come forward, for the risk of unforeseen legal developments hurt them too. All the categories above have their rates based on either a percentage of the service revenue or a percentage of the payments made to record companies for sound-recording rights, whichever is greater. There is at last some basis to exploit the new consumption of music.

On closer look, the agreement defines Mixed Service Bundles as the combination of locker services, limited interactive services, downloads and ring tones with other non-musical products such as a mobile phone, a consumer-electronics device, or Internet access. Music Bundles are defined as a packet of music products such as CDs, ring tones and permanent digital downloads. The third category, Limited Offerings, are usually subscription-based and offer access to certain genres of music or specialized playlists at reduced prices, and for that reason have a slightly lower rate than the other categories. Paid Locker Services, encompasses subscription-based cloud music storage for streaming and download, such as those offered by Apple, Amazon, Google and a growing list of technology companies. Lastly, Purchased-Content Lockers, are defined as those services that offers free cloud storage for digital music previously bought by the user as a permanent digital download, ringtone, or CD.

The agreement was sent to the CRB. It then published the proposed regulations to garner public comments and objections until June 18, 2012. Since the CRB encourages parties to agree on terms and rates, the agreement will likely turn into federal law, with minor changes after a review of the US Copyright Office.

Recognition should be given as well to the recording and publishing companies that are clearly taking digital-music providers more seriously—and coming to terms with them. After the dimming of physical music sales, this may not surprise (although sales have been falling for quite some time). This new business represents only a small fraction of the music industry’s income, but its potential is what likely brought all the parties together.

It is important to mention that although this new agreement has extensively covered the mechanical licenses issued by publishers and songwriters for the reproduction and distribution of their copyrighted material, this is only one of the elements of the royalty obligations of digital music services.  They still need to factor in their calculations the royalties paid to record companies for the use of their masters, as well as the public performance rights that are covered by blanket licenses from ASCAP, BMI and SESAC.

By Luiz Augusto Buff and Nicholas Spanos

Resources:

Federal Register / Vol. 77, No. 96 / Thursday, May 17, 2012 / Proposed Rules – LIBRARY OF CONGRESS – Copyright Royalty Board 37 CFR Part 385 [Docket No. 2011–3 CRB Phonorecords II] -Adjustment of Determination of Compulsory License Rates for Mechanical and Digital Phonorecords

“Meeting Of Minds: New U.S. Publishing Rates Deals”, Susan Butler’s Music Confidential, April 13, 2012.

Us Music-Industry Groups Agree On Mechanical Royalty Rates And Standards For New Digital-Music Services. Music & Copyright, Issue 456. April 18, 2012.

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