Copyright Royalty Board Unveils New Royalty Rates

Meet the new statutory mechanical rate, same as the old statutory rate. The United States Copyright Royalty Board (CRB) has set rates for compulsory mechanical licenses, which will be in effect until December 31st, 2012. The rates, which cover royalties for the reproduction of physical recordings, permanent digital downloads, and mastertone ringtones, were the result of intense lobbying from various interested parties. The board heard from representatives of record labels, publishing companies, online music sellers like Apple, mobile phone companies, and others before reaching its decision.
What is most striking about the “new” mechanical rate is that it is identical to the old rate. Songs up to 5 minutes long have a rate of 9.1¢, with an extra 1.75¢ added for each additional minute beyond that (rounded up to the next minute). The CRB made this rate apply to both physical phonorecords (CDs) and permanent digital downloads. A “permanent” download is in contrast to temporary downloads from subscription services that often expire when the subscription lapses and also from interactively streamed songs streamed from sites like MySpace and Last.fm. These downloads will be discussed later.
However, the decision was much more than just a reaffirmation of the old rates. The CRB, for the first time, introduced a rate for the download of mastertone ringtones. The rate applies only to ringtones created from original master recordings, and not to monophonic and polyphonic ringtones that electronically reproduce a melody. A flat rate of 24¢ per download will apply until the end of 2012 for all mastertone ringtones.
Representatives of the mobile industry have criticized the rate as being too high, though it is unclear if and how they would contest the ruling. The National Music Publishers Association (NMPA), on the other hand, had proposed a rate of 15% per download, with a minimum of 15¢ per download. Since ringtones tend to cost $1.99 or more, their asking rate would have been 30¢ for an average ringtone purchase. The CRB opted to stay with a flat royalty, which it has favored.
Likewise, the announcement that the statutory rate for records and downloads would not budge was a rebuke to the Digital Music Association (DiMA), who had lobbied for a change to 6% of wholesale price. That would not only effectively lower the statutory rate for most albums, but would signal an alignment with the European model. Most countries outside of the U.S. base their royalties on a percentage of wholesale, rather than a flat, per-song rate.
There were also some proposals to create two different mechanical rates for physical records and downloaded albums. The argument was that physical albums are more expensive to make and sell, while digital downloads are cheaper. Apple lobbied for a 4¢ rate for each song under 5 minutes sold as a download. This was of course strongly opposed by the music publishers. The NMPA’s proposal took the opposite stance: instead of lowering the rate for downloads, it sought to raise the rate for physical records to 12.5¢ and keep it at 9.1¢ for downloads. The CRB’s decision should probably, then, be considered a good compromise.
In addition, various interested parties had previously reached an agreement on interactive streaming and limited downloads. Services offering these kinds of services will pay 10.5% of revenues, most of which will come from advertising and subscription fees. Any performance royalties the companies might owe will be deducted from this amount. This rate does not include what the agreement called “non-interactive, audio-only streaming,” which, it was agreed, does not require licensing. An 8.5% rate will be applied retroactively from December 31, 2001 until the end of 2007.
All parties hailed the ruling as a great step forward. David Israelite, President and CEO of the National Music Publisher’s Associated said, “This agreement will ensure that songwriters and music publishers continue to thrive in the digital age. I am grateful for the good faith efforts of everyone involved in the discussions leading to this important announcement.”
Of course, the fact that this rate is acceptable to everyone is part of the reason why everyone is so happy with. But there is definitely more to it. Many in the industry feel that the services covered by this have thus far been underdeveloped. It is thought that because of fears over unpredictable royalty costs, development of new models has been discouraged. Since this agreement apparently sets the royalty rate indefinitely, new businesses will, everyone hopes, begin to expand and bring in new revenues for everyone.
It’s amazing all the implications that can come from a rate that, at first glance, seems to have remained entirely unchanged. The Copyright Royalty Board may have decided to keep the status quo in place for most music purchases, but that decision was only reached after intense study and argument from those who wanted to both raise and lower the rates. These rates will remain in place until at least 2012, when the physical and permanent download rates expire. In such a rapidly changing industry, four years is quite a long time.

By Mark Schafer

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