This week had some very important rate decisions by the Copyright Rate Board. For over a year, they have been hearing testimony about the statutory mechanical rate as well as the rate that subscription services should pay for publishing royalties. Both rate structures were announced this past week. Since it affects nearly everyone in the music business, I think it’s important to give you my initial take on these rulings.
Since 1909, there has been a set royalty rate the record companies had to pay publishers whenever a reproduction occurs (i.e., LPs, cassettes, CDs, etc.). From 1909 to 1976, the rate was 2¢ per track per unit sold. It was increased in 1976 to 2.75¢ and has risen regularly to 9.1¢ in 2006.
That rate expired December 31, 2007. So for the past 21 months, the rate has been unchanged and everyone has been awaiting the new rate structure. The major battle here has been between the publishers on the one hand (represented primarily by the NMPA). On the other hand, there are the music services and the record labels represented by DiMA and the RIAA respectively. The publishers had been arguing for an increase in the mechanical rate. They sought a rate from approximately 12¢ to 15¢ pre track per unit. DiMA and the labels wanted the rate reduced to 5-6¢.
So, after a year of testimony and months of deliberations, the rate has been finally set at…. the same rate of 9.1¢. This is now the official mechanical rate for all physical goods and permanent digital downloads (e.g., iTunes, AmazonMp3, etc.). The most important fact to know is that this rate is fixed for the next five years.
In the same ruling, the CRB has set a statutory rate for ringtones that involve master recordings commonly known as ringtunes, master tones and trutones. The rate for these ringtone products is 24¢ per tone. This does not apply to polyphonic or monophonic, MIDI ringtones, however.
On the subscription side, the rate ruling is much more complicated. Early last week, the parties agreed (and the CRB will likely validate) an agreement whereby publishers will earn 10.5% from subscription revenue (which includes streams and tethered downloads) after the cost for the performance royalty license has been deducted. There is actually a very complex and confusing grid of rates and services that will apply.
There are two important considerations to remember. First, this means that the bold threat iTunes made to close down its store, in the event of a royalty hike, is now meaningless. I really didn’t think that this was a likely, or even a possible, scenario. Fortunately, that bullet, real or otherwise, was dodged.
Secondly, the rate is now going to be stable for five years. This may seem like a long time. But before you know it, there will be the start of discussions for the next rate adjustment. If the predictions of the death of the CD and the rise of the subscription services live up to general expectations, then it is quite likely we may be looking at a fundamental change in the statutory royalty structure. Instead of a “penny” rate, it is probably that this will be converted to a percentage rate.
This remains to be seen. In any event, I laud the CRB’s decision. I look forward to a period of modest stability during which all sides of the table can continue to develop business models that support the artists and labels while meeting a consumer’s needs.
In the meantime, it is too early to understand how these recent rate changes will affect indie labels and their aggregators. We will try to keep you informed about any new developments.
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