Time to Modernize the Entire Mechanical Licensing System (Guest Column)

I understand the songwriter’s frustration with the so-called “frozen mechanicals” settlement reached by the NMPA, NSAI and the major labels last year, which the Copyright Royalty Board rejected earlier this year, and I believe we need to find a way to ensure that songwriters are better compensated from all formats. I believe this even though my members – independent record companies – are the people who will bear the brunt of an increase in mechanical royalties paid on CDs, vinyl and downloads.

The business has changed and songwriters – who are a vital part of the music ecosystem – need to be supported.

The new settlement with regard to the physical formats and download formats unfortunately misses out. Eager to quickly resolve that part of the mechanics so the big companies could focus on streaming and other issues, the new settlement locks into the existing “penny rate” structure and relies on the consumer price index to adjust rates for the duration of the term. This is a mistake and a missed opportunity to come up with a new, better solution. Accordingly, A2IM filed comments at the end of June asking the Copyright Royalty Board to reject the new settlement and invite the parties to enter into a true, pan-industry negotiation.

As we explained in our comments, we believe in these negotiations that all stakeholders should examine the following three key ideas:

First, it’s time to completely reject the “penny rate” model of mechanical royalties in favor of a percentage of revenue. The penny rate structure has been “frozen” since 1909, and rates have simply been increased periodically, through processes seemingly disconnected from the marketplace. Tying future increases to inflation puts the penny rate on the path to becoming even more detached from reality: the price of CDs has fallen over time, while downloads have been the same price since 2006; meanwhile, the price of vinyl has risen faster than the consumer price index, although much of this is related to product improvements. There may even be future physical or digital formats that demand a higher price in the market. The bottom line is that the pricing structure of the new settlement puts some formats at risk — as the cost of the mechanical royalties could rise at a time when consumer demand for the format falls — while potentially underpaying songwriters for other formats. Additionally, the burden of the current rate structure, combined with the sudden increase now and CPI adjustments in the future, falls disproportionately on independent labels and puts some genres at greater risk than others, including jazz, blues, and rock—genres that depend heavily on in traditional formats. This is an unfair and unsustainable situation.

Second, it is time for the industry to move to a system where all mechanical royalties are managed centrally. It would bring the US marketplace in line with the rest of the world and would also dramatically reduce the cost of managing mechanical royalties for everyone’s benefit. The Music Modernization Act went halfway and created a system where streaming mechanisms are handled centrally (by the MLC); meanwhile, physical formats and downloads are still managed under the old haphazard and inefficient system that has been in place for decades. While a CRB settlement cannot change the MMA, renewed settlement discussions will provide a critical opportunity for all stakeholders to discuss changes they can propose to Congress.

Third, and similarly, A2IM believes that the CRB process generally needs to be reformed, with a particular focus on encouraging – and adopting – early settlements of CRB cases and ensuring that such settlements reflect a truly broad consensus. In this proceeding, the parties reached an early settlement, but that settlement was neither immediately adopted nor reflected broad industry consensus. Instead, after the CRB rejected the parties’ first settlement (almost a year after it was first proposed), the parties, eager to get this part of the case behind them, quickly reached an agreement they believed the CRB would accept. But they moved too quickly, and their new settlement suffers from the same problem as the first: It doesn’t reflect broad industry consensus—including input from the independent label community. The CRB process works best when parties reach early settlements that reflect a genuine consensus, and any CRB reform should ensure that all stakeholders should have the opportunity to weigh in on proposed settlements earlier in the process.

Now is the perfect time to have a discussion among all stakeholders on a new and rational approach to mechanical royalties and to pursue important CRB reforms. We look forward to engaging with our other stakeholders and improving the system for everyone.

Dr. Richard James Burgess MBE is President and CEO of the American Association of Independent Music (A2IM).

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