The MBW Review is where we aim our microscope towards some of the music biz’s biggest recent goings-on. This time, we delve into documents filed by music streaming services with the US Copyright Royalty Board, proposing songwriter royalty rates for 2023 and 2027. The MBW Review is supported by Instrumental.
Music streaming service owners including Spotify [2,603 articles]”>Spotify, Apple [873 articles]”>Apple, Amazon [542 articles]”>Amazon, Pandora [487 articles]”>Pandora and Google [643 articles]”>Google recently filed proposals with the US Copyright Royalty Board (CRB) containing what they think they should pay songwriters for the five years between 2023 and 2027.
The CRB has now made all of those proposals public.
Before these filings were public, the National Music Publishers’ Association claimed that the music streaming services were trying to cut the amount of money they pay songwriters in the US to the “lowest royalty rates in history”.
The NMPA has filed its own proposal and is asking for the current headline rate (i.e. the proportion of a service’s annual revenues paid to songwriters) to be increased to 20%.
That would be a 4.9% raise from the 15.1% rate National Music Publishers’ Association (NMPA) [149 articles]”>the NMPA secured in the previous CRB process, which is currently being appealed by the likes of Spotify, Amazon [543 articles]”>Amazon and Google [643 articles]”>Google.
In a recent MBW Podcast interview, NMPA CEO David Israelite [80 articles]”>David Israelite explained why the NMPA is demanding that songwriters in the US effectively get 20% of revenue generated by any streaming service.
He told us that he “completely rejects the idea that [music streaming companies] can’t afford higher rates”.
“Without the songs there would be no recordings – and there would be no music store.”
David Israelite, NMPA
Writing in a Billboard [776 articles]”>Billboard op/ed published last week, Garrett Levin, the CEO of the Digital Media Association (DiMA) – the organization that represents music streaming companies including Amazon, Apple Music [945 articles]”>Apple Music, Google/ YouTube [1,199 articles]”>YouTube, Pandora [488 articles]”>Pandora, and Spotify [2,606 articles]”>Spotify – articulated the other side of this debate.
Levin agreed with Israelite over one point, at least: “For both streaming services and music to exist, we all need songwriters.”
“Streaming services operate in a highly complex licensing landscape that no one would have designed if we were starting from scratch.”
Garrett Levin, DiMA, speaking via Billboard
Levin also argues his belief there is a “seeming cognitive dissonance between headline after headline about the value that streaming delivers to the entire music industry with the very vocal claims that streaming doesn’t value creators”.
So what’s David Israelite so mad about – and what’s Garrett Levin defending?
What are the actual rates being proposed by the likes of Google, Spotify and Apple [875 articles]”>Apple for songwriters in the US during the five years in question?
MBW has rifled through each of the filings that have been made public.
Here, we break down exactly what each company is asking for, in the plainest language possible…
Spotify proposes in its filing that the songwriter pay rate for 2023-2027 should be set at 10.5% of a streaming service’s revenues. That’s nearly half the size of what the NMPA is proposing.
That 10.5% is also the same proportion of revenues as the CRB-approved royalty rate that existed in 2017.
Remember, in January 2018, the CRB announced the landmark decision to increase that 10.5% up to 15.1% over the next five years, a ruling that Spotify, Amazon and others (apart from Apple) are legally appealing against.
So with SPOT’s proposal of 10.5% of service revenue for 2023-2027 matching what was paid in 2017, how can NMPA boss David Israelite claim that Spotify et al have proposed “the lowest royalty rates in history”?
This comes down to how Spotify proposes to define the revenue this 10.5% should be calculated on.
Writing in a new op/ed, David Israelite and Bart Herbison, Executive Director of the Nashville Songwriters Association International, argue that Spotify proposes the 10.5% rate while at the same time “carving out huge parts of its revenue,” and that “the carve outs are so extreme, in some cases it could amount to zero revenue per subscriber”.
Israelite and Herbison also have another problem with Spotify’s proposals. The duo claim that SPOT’s new CRB plan “eliminates the percentage of record label revenue safety net”.
This “safety net” is a reference to alternative models – or ‘prongs’ – that the CRB puts in place to insure that, should the headline payout rate system ever fall to an unacceptably small amount, streaming services are still paying songwriters a fair chunk of royalties.
One such ‘prong’ is Total Cost of Content (TCC), which ensures streaming services are at least required to pay music publishers a minimum percentage of what they pay to record labels.
Back in 2018, when the CRB ruled that that the 10.5% rate rate paid by for streaming services to publishers would rise to 15.1% (by around 1% annually), the CRB also ruled that services would alternatively have to pay publishers up to 26.2% of TCC by 2022 (see below).
Additionally, the CRB ruled that this TCC figure would be uncapped from 2018 onwards, meaning the 26.2% calculation could be drawn from an unlimited amount of royalties paid to record labels.
Spotify and Amazon [543 articles]”>Amazon argued at the time that “the [CRB’s] decision both to uncap the Total Content Cost prong and to increase the percentages used to calculate the revenue prong and total content cost prongs [are] arbitrary and capricious”.
In its new filing, Spotify argues that “since 2015, the music industry has experienced a historic turnaround. Nearly every passing week brings news of record-breaking earnings for record labels and music publishers, and eye-popping valuations for music publishing catalogs.
“Spotify, and other services like it, are among the primary reasons for this 180-degree shift from the state of the industry a decade earlier.”
“There is no reason or basis for radical change [in the rate streaming services pay songwriters and publishers].”
It adds: “There is no reason or basis for radical change. Accordingly, in this proceeding, Spotify asks the Board to set a rate… which embodies the deal that a “willing buyer” and “willing seller,” in an effectively competitive market, would enter to keep “growing the pie” for all of the relevant stakeholders.
“That in turn means preserving today’s prevailing approach a rate level and framework the industry twice adopted in charting its current course of unprecedented shared success, under which the more money digital services make, the more royalties they pay out subject to a variety of modest amendments to the technical terms that implement the mechanical license, reflective of the evolving marketplace.”
Google has proposed that the rates 2023-2027 “remain unchanged” from those that are “finally determined” in the Phonorecords III proceeding for 2018-2022.
The final determination of those rates (2017-2022) haven’t yet been set in stone… because the likes of Google and Spotify are appealing the 15.1% rate previously agreed by the CRB for the period.
Remember, that 15.1% rate was a hike on the previous CRB rate (for pre-2018) of 10.5%.
Therefore, Google is proposing either 10.5% or 15.1%, depending on what the judges’ final decision is for 2018-2022.
Within the Music Modernisation Act (MMA), it was decreed that at CRB’s next songwriter royalty rate setting proceedings (for 2023-2027) should use the “willing buyer, willing seller” (WBWS) standard, which in theory would see a rate determined by the judges as if the services and publishers were negotiating it themselves in the market.
“The real-world marketplace evidence strongly suggests that the shift to the WBWS standard should not affect the statutory rates and terms substantially, if at all”.
According to Google, “The publishers may argue that rates should increase with the shift to the WBWS standard (all else equal)”. However, Google adds: “Presumably, the basis for this argument would be that the ‘fairness language in the Section 801(b)(1) factors has resulted in statutory rates set in the prior proceedings that are suppressed relative to a WBWS outcome.
“However, the real-world marketplace evidence strongly suggests that the shift to the WBWS standard should not affect the statutory rates and terms substantially, if at all”.
Like Google, for the five years between 2023-2027, Apple suggests adopting the same headline rate decided by the judges in the previous (Phonorecords III) remand proceedings (for 2018-2022), “provided the rate is reasonable under the WBWS standard”.
Remember, unlike Google, Apple didn’t challenge the CRB’s decision to increase those songwriter royalty rates to 15.1% for the 2018-2022 period.
However, by relying on the outcome of those prior proceedings, Apple’s new proposal (for 2023-2027) could mean a 10.5% rate if the Judges side with the ‘Big Tech’ appealers of the 2018-2022 rate.
Apple says that its proposed rate structure “is based on its previously negotiated direct deals with publishers, which offer a simplified structure to Phonorecords II (and Phonorecords III), while retaining the existing all-in percent of revenue rate structure and mechanical and all-in floors from Phonorecords II (and, likely, Phonorecords III)”.
As noted by the NMPA’s David Israelite and NSAI’s Bart Herbison in their recent op/ed, like Spotify, Apple’s proposal within its filing for what ‘revenue’ should be defined as could mean that the 10.5% (or 15.1% depending on which way the judges swing in the appeal), could end up being a percentage “of a much smaller amount” of revenue.
In addition, Apple proposes to “eliminate” the TCC (“safety net”) prong, arguing in its proposal that it “is neither economically justifiable nor compliant” with the Willing Buyer, Willing Seller standard in these proceedings.
Adds Apple in its filing, in a reference to its dealings with record labels: “The TCC overrides all the careful work of this tribunal by importing rates from an entirely different set of negotiations with an entirely different set of rights holders into the proceeding.
“This is inappropriate under a WBWS standard, which is supposed to look at negotiations between the owners of the mechanical right and licensees.”
Apple continues: “The TCC also introduces … the complementary oligopoly power of the three major labels, Sony Music Entertainment [1,066 articles]”>Sony Music Entertainment, Universal Music Group [2,449 articles]”>Universal Music Group, and Warner Music Group [1,846 articles]”>Warner Music Group.”
“For the sake of the industry, this proceeding must make sure all of the participants in the music ecosystem benefit from the healthy growth in interactive streaming in a fair and balanced way.”
Elsewhere in the filing, Apple suggests that: “For the sake of the industry, this proceeding must make sure all of the participants in the music ecosystem benefit from the healthy growth in interactive streaming in a fair and balanced way.
“The royalty rates and terms should encourage creators to create and services to innovate to connect songs with music fans and continue to drive paid consumption of music in a diversified and competitive market that serves a wide range of consumers.
The company notes in its filing that “Marketplace transactions do not take a one-size-fits-all approach, and Pandora respectfully submits that statutory rate-setting should not do so either”.
“Marketplace transactions do not take a one-size-fits-all approach, and Pandora respectfully submits that statutory rate-setting should not do so either”.
It also adds: “Although concerns expressed by music publishers in past Copyright Royalty Board proceedings that services might engage in revenue deferral or otherwise charge below-market rates do not apply to Pandora’s product offerings – Pandora has sought aggressively to maximize the revenue it generates from interactive streaming.
“Pandora’s proposal accommodates those concerns by incorporating an alternate rate prong consisting of a capped percentage of the payments made by services to record labels for the sound recording rights for the same products (referred to in industry parlance as “total cost of content” or “TCC”).
“Because those sound recording rates are inflated by the market power of major record labels, the cap is an important feature of this proposed alternate rate prong for standalone subscription offerings.”
Additionally, it accuses music publishers, in tandem with record labels, of wielding “complementary-oligopoly power” in the marketplace.
Instead of that previously mentioned “safety net” – a percentage of TCC – Amazon proposes what it calls “non-revenue-based backstops” for its paid tiers.
It suggests these should have “an all-in floor of 80 cents per subscriber per month for the standalone portable tier, and 40 cents per subscriber for the less-expensive non-portable tier”.
For Free, Amazon proposes what it calls a TCC “backstop” percentage of 19.1%, which it says “roughly mirrors the structure agreed to” in the Phonorecords II proceedings.
For Prime Music, Amazon propose a single, all-in rate of $0.00085 per play.
Added Amazon in the filing: “That standard requires the Judges now to disregard the policy considerations that (incorrectly) spurred a rate increase in Phonorecords III. Instead, the Judges here must set rates and terms that would prevail in a hypothetical market characterized by ‘effective competition.’
“But the real-world market segment at issue is not effectively competitive. Music publishers, even more than record labels, shun price competition. Their rights are complements, not substitutes.
“This case offers the Judges a needed opportunity to look at those rates anew. With a new legal standard and better economic evidence, the Judges now should set rates at levels that would prevail in an effectively competitive market. In doing so, the Judges should adjust for the effects of the complementary-oligopoly power that publishers and record labels wield.”
The MBW Review is supported by Instrumental [127 articles]”>Instrumental, one of the music industry’s leading growth teams for independent artists. Instrumental uses data science to identify the fastest growing independent artists on the planet and then offer funding, premium distribution and marketing support to take them to the next level, without taking their rights.Music Business Worldwide