Since taking over Mary Beth Peters as Register of Copyrights in 2011, Maria Pallante has been listening and responding to the concerns of a number of her constituents, particularly those in the music industry, and it most certainly shows. In the last few months, several pieces of work product have been delivered by the Copyright Office and/or Congress that have significant impact on the music industry and, in particular, those of my readers who practice the craft of songwriting. If you are a songwriter, you should pay particular attentions to two of these things specifically. The first is the Copyright Office’s report, released in February 2015, titled Copyright in the Music Marketplace. The second, more directly aimed on the songwriting community, is the Songwriter’s Equity Act reintroduced to Congress in this term.
The Copyright in the Music Marketplace Report.
Anyone who works in the music or entertainment industry should take the time to read the full report, available here. The report begins in the Preface by pointing out that “both music creators and innovators that support them are increasingly doing business in legal quicksand” (Emphasis added). This “legal quicksand” that the Copyright Office references refers to licensing as it relates to both sound recordings and musical works, and the disparities that have developed over the past decade or so as a result of various amendments to the 1976 Copyright Act. For example, with regard to performance royalties for musical compositions, ASCAP and BMI have operated under consent decrees issued by the Federal Courts for years. In addition, the rate courts establish the rates that must be paid for public performance under what is referred to as a “fair market value” analysis in which the court attempts to determine the price that a willing buyer and willing seller would agree to in an arm’s length transaction. The court also gives substantial weight to antitrust concerns in this regard. For the more astute readers, you may be wondering about SESAC. SESAC generally operates as if it is subject to the consent decrees, even though technically it was not a party to them. BMI and ASCAP frequently call attention to the fact that there is disparate treatment as to SESAC. The process of setting rates for the performance rights organizations in the rate courts can be lengthy and complicated, leaving music publishers and songwriters complaining that there should be a more efficient way to set the rates.
As for mechanical royalties for reproduction of musical compositions in sound recordings, the Copyright Royalty Board (“CRB”) establishes those rates. For this purpose, the CRB operates pursuant to the compulsory licensing guidelines in Section 115 of the Copyright Act, using the four‐factor, public policy‐oriented standard in section 801(b)(1). Not complicated at all right?
That brings us to Section 116(6) of the Copyright Act, which provides royalties to sound recording authors for digital transmissions of their works. The rates for the digital performance of sound recordings is proscribed in Section 114 using dramatically different standards, depending on the type of use. This the reason royalties received from Spotify look so much different than royalties received from Sirius or terrestrial performances. Older services such as Sirius XM, the only remaining satellite service, and Music Choice or Muzak, the only remaining subscription services, are governed by the same four‐factor standard as mechanical reproductions of musical works subject to compulsory licensing under section 115 as regards royalties. According to SiriusXM’s own website, the “U.S. Music Royalty Fee” for 2015 was 13.9% of the subscription fee charged for a particular service. That fee is placed into a fund that is used to pay royalties. Meanwhile, royalty rates for Internet radio services and newer noninteractive subscription services, and for all ephemeral recordings under Section 112 regardless of the type of service, are established under the so‐called “willing buyer/willing seller” standard, which many believe yields more market‐oriented rates than those established under section 801(b)(1).
So what about Spotify, you may ask? Spotify is, by far, the largest interactive streaming service available in the marketplace, and in many ways sets the tone for what a “willing buyer” is willing to pay. According to its response to the Copyright Office’s Notice of Inquiry, it pays out “70% of all money it receives to rightsholders.” But those songwriters who have received paltry royalty checks from Spotify revenue might question the accuracy of that statement, wondering why they don’t see more. That is because Spotify doesn’t pay on a “per song stream” model, as royalties get calculated when it comes to mechanical uses. Rather, they set aside the royalties and the total royalty pie is split among all rights holders based on the percentage of total Spotify streams their songs garner. But according to a New York Times article, the company does, in fact, calculate the per rate royalties, estimating that the average song generates between $0.006 and $0.0084 per stream in royalties. That is why, to songwriter in particular, this may seem like a pittance. That’s why Taylor Swift recently announced that her new album would not be available via Spotify. But Spotify’s counters these objections, producing data that it says illustrates that the numbers really do add up for big artists such as Swift. The company reports that the most-streamed album on the service each month typically generates more than $400,000 in royalties.
Finally, with regard to performance royalties, musical composition copyright owners enjoy performance royalties from terrestrial radio while the owners of sound recording copyrights do not. The radio industry has successfully convinced Congress on numerous occasions that it operates on a “quid pro quo” basis with the record industry so that there is no need for royalty payments. After all, without the marketing that radio provides by playing the records, there would be no hit records. This may seem like an antiquated loophole in the system, because it is. There is no reason why the owners of the sound recordings should not be compensated for performance over terrestrial radio, just as music publishers and songwriters are. This loophole needs to be closed to eliminate that obvious inequity.
So, as you can see, the rate setting standards under these various statutory licenses and consent decrees differ greatly, based on what rights are implicated and the use at issue. But even for arguably similar services, such as Spotify and SiriusXM, the structure produces inconsistent results and the royalties that are paid vary widely.
In addition to the disparity in setting royalty rates in the music industry, the report called attention to the fact that there is a general lack of transparency in regard to royalty streams and ownership. For the songwriter, the concern has always been that there is money being generated from the copyright that is not finding its way into royalty check. Now, with all of these disparate royalty streams being generated from new digital sources, particularly those involving direct deals between record companies and digital users, the songwriter legitimately feel as if those revenues are not being shared. For example, the labels ostensibly negotiated an 18% stake in Spotify, which is probably the real reason they love the service so much.
All of these concerns, among others, led the Copyright Office to articulate four guiding principles derived from their discussions with “stakeholder” during their research in regard to which it says it “appreciates and agrees.” The four principles are as follows:
- Music creators should be fairly compensated for their contributions;
- The licensing process should be more efficient;
- Market participants should have access to authoritative data to identify and license sound recording and musical works; and
- Usage and payment information should be transparent and accessible to rights owners.
However, the Office acknowledged that there was no consensus on how to achieve these goals, and in the end, developed some additional principles it believed should govern any future reform of Copyright Law:
- Government licensing processes should aspire to treat like uses of music alike;
- Government supervision should enable voluntary transactions while still supporting collective solutions;
- Rate setting and enforcement of antitrust laws should be separately managed and addressed; and
- A single, market‐oriented rate setting standard should apply to all music uses under statutory licensing.
If these principles are implemented, it would be dramatic changes in the way royalties are paid, collected and distributed. The Copyright Office was not kind to the compulsory licenses provisions under Section 115 of the Copyright Act, known to many as the “statutory royalty” provisions, proposing that we “sunset” these as they expire. The existing structures under Sections 112 and 114, on the other hand, it felt worked fairly well. There are various implications for organizations such as Harry Fox and others if these changes were to occur.
Overall, however, the report was fairly balanced, and songwriters should receive more favorable treatment from Congress if it follows these principles. It remains to be seen what Congress will do with the research developed by the Copyright Office in this report. That leads us to the next topic of discussion, and that is the Songwriter’s Equity Act, introduced in March.
Songwriter’s Equity Act
This Bill was originally introduced in February 2014, but died in committee. Now, it has been reintroduced by a bipartisan coalition to both houses of Congress and, with strong Republican support and control, there is much more optimism. The Bill, introduced by Congressman Doug Collins (R-Ga), seeks to amend Section 114 and 115 of the Copyright Act to implement some of the suggestions proposed by the Copyright Office’s report. Orrin Hatch (R-Utah), a senior senator and member of the critical Judiciary Committee, co-sponsored the legislation and has frequently been an advocate for songwriters. For one thing, it would allow the royalty courts to adapt the “fair market rate” standards when setting mechanical license rates under Section 115, and allow them to consider royalties paid to recording artist when setting rates for songwriters under Section 114. Most people believe that this would be a more profitable structure for songwriters and music publishers.
When testifying in front of Congress in regard to last year’s identical legislation, National Music Publishers Assn. president David Israelite said that