In discussing music royalties, the controversy that usually makes the news is the dispute between music services and copyright holders – with services arguing that the royalties are too high and rightsholders contending that they are underpaid. The introduction of the Songwriters Equity Act in Congress earlier this year seems to point toward a new area of dispute – one between the various rightsholders themselves.  This issue was one that was much discussed on a panel that I moderated last week at the RAIN Summit West (audio of that panel is available here).  What is this conflict?

The Songwriters Equity Act, while not explicit in identifying the controversy, does point to the dispute. As we have written many times before, in any piece of recorded music, there are two copyrights – thesound recording copyright (also known as the “master recording,” the recording of a particular song by a particular artist, rights usually held by the record label), and the right to the musical work(or “musical composition,” the words and music to a song, usually held by a publishing company).  The proposed legislation suggests that the amount of the royalties for the public performance of sound recordings can be taken into account in setting the royalties that are payable to songwriters for the public performance of the songs that they have written.  This would amend Section 114(i) of the Copyright Act, which currently prohibits the consideration of the sound recording royalty in determining the rates to be paid for the public performance of musical works.  The proposed legislation would also substitute the “willing buyer, willing seller” standard for the 801(b) standardin setting rates under Section 115 of the Copyright Act, the mechanical royalty (see our discussion of the difference between these standards, here).  While this does not sound like a big deal, it may have a significant impact.

As we have covered many times in this Blog, the royalties for the public performance of sound recordings by noninteractive services (like satellite or internet radio) are set by the Copyright Royalty Board, and distributed by a collective called SoundExchange.  The royalties for the public performance of the musical works for commercial entities are set by a rate court in the US District Court for the Southern District of NY. The rate courts decide the royalties payable to ASCAP and BMI artists, as both operate under antitrust consent decrees.  SESAC (which, with ASCAP and BMI are referred to as the Performing Rights Organizations or “PROs”) is not yet subject to an antitrust consent decree, so its rates are negotiated between the company and users, not yet subject to court review (though, as we wrote here, there are antitrust suits pending against SESAC seeking to bring it under rate court control). 

The motivating factor behind the Songwriters Equity Act is the recognition by the songwriters, the Performing Rights Organizations and publishing companies that the sound recording royalties are far in excess of those paid to the songwriters.  This recognition came out clearly in evidence cited by the judge in the recent decision setting the ASCAP royalties for Pandora, where there was a recounting of several communications between publishers and PRO representatives looking for ways to increase the amount of royalties going to songwriters and their representatives instead of to the sound recording performance rights holders.  Some estimates are that the sound recording royalty is 5 times that of that for musical works, though the exact ratio depends on the service, as different metrics for computing the royalties are often in use. 

The songwriters and their representatives feel that they are underpaid, and should receive more in the new digital music world.  Of course, one of the big questions from the audience at the RAIN Summit panel was where the money would come from to close the gap between the royalties they receive and the royalties that are paid to sound recording copyright holders.  It seems that there would be but two sources for these additional payments – either from the digital music services themselves, or from a reduction in the sound recording performance royalty.

With digital music services already paying royalties that so high that even the most successful of these services are not profitable, it is difficult to imagine how the revenue can come from these services.  That would lead to the other possible source – the reduction of the sound recording performance royalty – setting up a potential new area of dispute in the music ecology.

The proposed change in the standard used to set the Section 115 royalty is also one that is directed, in a significant way, at the sound recording royalty holders.  Section 115 sets a compulsory license for the record companies to use a musical composition that has already been released without the consent of the composer, as long as the statutory royalty is paid.  The rate of 9.1 cents per copy of a recorded song has not changed in a long time, and songwriters appear to believe that the change in the standard will help to establish a higher rate in the future.  It is interesting to note that the record companies have been against using 801(b) to set royalties for their public performance rights for Internet radio, yet they rely on that standard to set the compulsory license for the mechanical royalty. 

With sound recording performance royalties about to be readjusted for the 2016-2020 period, it is interesting to note that the music services have argued that the sound recording performance royalty should be closer to that paid to the composers of music, an argument that has in the past been rejected by the Copyright Royalty Board.  Now, the argument is coming from the songwriters that these two royalty rates should be adjusted so that the balance is closer for the two rights.  As we have written before, where everyone in the music world thinks that they should get more for the rights that they hold, the only thing that is certain is that there will be controversy.  Watch for this controversy to play out over the next few years, as Congress and the industries involved look at the potential rewrite of the Copyright Act.