The Copyright Royalty Board Affirmed Royalty Rates from 2022 and Set Rates Through 2027
In the summer of 2023, after streaming services appealed the 2018 decision by the Copyright Royalty Board that decided phonorecord licensing rates, the Board affirmed its original decision that granted artists 15.1% of the streaming services’ overall revenue through 2022. The Board also set rates to increase to 15.35% through 2027.
Attribution
"Streaming Music - Music Service - Smartphone" by perspec_photo88 is licensed under CC BY-SA 2.0
When a composer pens a new score, that composer then owns the copyright to the resulting musical work. But if a filmmaker, restaurant, or advertiser wants to use the score they need permission, and they get that permission through a license. A copyright owner can license specific rights, like the right to distribute the copyrighted material or license the right to perform the copyrighted material.
Section 115 of the Copyright Act covers compulsory licenses of phonorecords. According to the Copyright Office, phonorecords include vinyl records, cassettes, and CDs, as well as digital phonorecords, like digital downloads and streaming. A compulsory license allows the licensee to use the copyrighted work without the explicit permission of the owner, but in exchange, the licensee must pay a royalty. These kinds of royalties are called mechanical royalties, which are different from performance royalties that are owed when a song is played on a radio station or in a restaurant or live venue.
Under the Copyright Act, Copyright Royalty Judges (CRJ) sitting on the Copyright Royalty Board (Board) set royalty rates for licenses to distribute physical records, digital downloads, and streaming. This kind of music licensing is covered under 17 U.S.C. § 115. The CRJs review the rates in proceedings every five years according to 17 U.S.C. § 803(b)(1)(A)(i)(V).
In February 2019, the Copyright Royalty Board issued a final determination to increase the rates for mechanical royalties covering January 1, 2018, through December 31, 2022, from 11.4 % to 15.1%. This period of royalty rates was called Phonorecords III. Before Phonorecords III, the rate was 10.5%. These rates are the percent of the streaming service’s revenue that must be paid by the streaming services that platform music to songwriters and publishers under the compulsory license regime of section 115.
Most of the major music streaming services, including Spotify and Pandora, appealed the decision to increase rates. The appellants argued that the increase in rates would harm their business models and that they already pay a significant percentage of revenue in royalties that are not covered under the statutory license regime of section 115. The streaming services and their progenitors had similar concerns about loss of revenue in the early 2000s after CD sales fell and illegal downloads increased, but those concerns have mostly been abated—though artists are still fighting to earn more than fractions of pennies on streams. In fact, the streaming industry, and the music industry more broadly, has seen growth for the last several years.
The DC Circuit identified three issues in the Board’s proceedings and vacated and remanded the Board’s Determination for further review. The DC Circuit held that the CRJs did not give adequate notice to participants of their overhaul of the royalty rate structure, failed to explain why they rejected a benchmark based on a prior settlement agreement, and failed to identify their legal authority to redefine the term “Bundled Revenue” in the Initial Determination. The Board worked with the parties to rectify these issues on remand and then, in what has been hailed as a victory for songwriters, the Board affirmed their initial decision.
While the songwriters and publishers celebrated the rate increases, the streaming services did secure two victories. First, the percentage of label revenue was capped, limiting the streaming services’ maximum financial burden. Second, the definition of bundling, which applies to family plans and other discount packages on these services, was reverted to an earlier definition that is more favorable to streaming services. The head of the National Music Publishers Association said that he and other representatives of songwriters and publishers would challenge both of these issues in the Phonorecords IV proceedings that cover January 1, 2023, through December 31, 2027.
The Board issued final rules for physical and digital downloads and separately for streaming in December 2022. The rates under Phonorecords IV increase steadily from 15.1% in 2023 up to 15.35% in 2027. Most songwriters, publishers, and their representatives recognize this increase as a success. However, some songwriters and publishers are frustrated because they sought higher rates, upwards of 20%, and the rates they will receive will only rise by 0.25% over five years, much less than the increases seen under Phonorecords III. The criticisms levied by songwriters and publishers indicate that there is still momentum in the industry to do more to ensure that artists are paid fairly for their work.