So what do these copyright rates actually mean?

If you're in the music industry in Nashville, you likely have heard something about the appeals filed by Spotify, Amazon, and Pandora. And although you have heard plenty from strong activist organizations such as Nashville Songwriters Association International (NSAI) regarding recent rate determinations, it is perfectly normal to wonder exactly what has been determined and why appeals have been filed. 

A big part of the answer comes from a publication rarely read by most but full of information about a recent finalization of rate determinations by a vote of 2-1 from Copyright Royalty Judges. These judges are appointed by the Librarian of Congress, who must consult with the Register of Copyrights regarding such appointments. Decisions by the judges may be appealed (and, in this instance, are being appealed) to the U.S. Court of Appeals, District of Columbia Circuit.

These determined rates are for the payment of royalties for compulsory licenses. An owner of a copyright has the exclusive right to, among other things, reproduce his or her work in copies or in material objects known legally as phonorecords, to distribute copies or phonorecords to the public by sale or lease, and to perform the work publicly.

The rates and the reasons for implementing them were published in the Federal Register (the official journal of the United States government) dated February 5, 2019. Since that time, a lot has been written about the decision of the judges. Much of it is critical of the digital streaming companies.

The tables for the five years 2018 through 2022 contain two number lines - Percent of Revenue and Percent of TCC (total content cost). TCC is industry terminology used to measure royalties paid by interactive streaming services to publishers as a percentage of the services' payment to record companies for sound recording licenses (remember that a copyright for a sound recording is separate from a copyright for a composition). The rate structure is "greater of" TCC or Percent of Revenue minus the amount the services pay for the phonorecord performance right.

Songwriters have three primary sources of income, generally shared with their respective publishers: 

1. Mechanical royalties
2. Synchronization royalties
3. Performance royalties

Mechanical royalties play a critical role in enabling professional writers to write songs as a full-time occupation. 

Sound recording royalties (paid mostly to artists, labels, and musicians) include those from the sale of physical and digital albums and singles, sound recording synchronization, and digital performances. 

Interactive streaming services pay both mechanical royalties and a performance royalty. Non-interactive streaming services, satellite radio stations, and terrestrial radio stations pay only a performance royalty. Labels pay only mechanical royalties.

In an "All-In" rate scenario such as the one approved by the judges in February, the mechanical rate is calculated by subtracting from the base rate the amount paid by the interactive streaming services to performing rights organizations (PROs). The judges found that this deduction of performance royalties accounts appropriately for the complementary nature of performance and mechanical licenses.

The reasonable rate determined by the judges represents an approximate 44% increase and utilizes a percent of revenue rate structure over a per unit rate structure.

For interactive streaming, rate calculation is performed as follows:

1. Calculate All-In royalty for the service's offering using the table approved by the judges.
2. Subtract applicable performance royalties.
3. Determine the payable royalty pool - the amount payable for the reproduction and distribution of all musical works used by the service by virtue of its licensed activity for a particular offering during the accounting period.
4. Calculate the per-work royalty allocation - the amount payable for the reproduction and distribution of each musical work used by the service by virtue of licensed activity through a particular offering during the accounting period. The payable royalty pool from step 3 is divided by the total number of plays of all musical works through the offering during the accounting period to yield a per-play allocation. Then, the per-play allocation is multiplied by number of plays for a certain musical work.

"Offering" is defined as the following activity: Interactive streaming, limited downloads, limited offerings, mixed service bundles, bundled subscription offerings, and promotional and free-to-the-user offerings.

As much is being written about the recent rulings and the appeals going before the D.C. Circuit, I look forward to keeping you posted and to commenting on continuing developments.

There is a lot at stake for the music industry here and a lot being written and said by folks we know well. Hopefully, the debate can stay structured and civil. And hopefully this post helps you better understand what is occurring.