The amount paid to songwriters and publishing companies for the making of “phonorecords” will be going up after a Copyright Royalty Board decision just released to the parties to the case. A summary of the findings have been published on the CRB website, here. The new rules are available here. A full decision explaining the CRB reasoning will follow at some later date.

These royalties are not ones paid by broadcasters or non-interactive webcasters or internet radio stations. Instead, these are the royalties paid under Section 115 of the Copyright Act for the making of copies of musical compositions when making a sound recording (this would include the amount paid by a record label or performing artist to the composer of a song or the composer’s publishing company for the use of the composition in a CD or for a digital download) and, more importantly in today’s world, in connection with on-demand or interactive music services. While one might wonder if an on-demand stream really makes a reproduction of a composition when it is sent to a customer to enjoy, by tradition that has grown up over the last decade, these royalties are paid by these services (though, in one case, Spotify questioned whether they were legally required).

The Section 115 proceeding before the Copyright Royalty Board to set royalties began two years ago. Certain parties entered into a settlement on the royalty for making reproductions of the compositions in connection with the making of sound recordings including CDs, LPs, digital downloads and ringtones (see the Federal Register Notice of that settlement here). But the interactive services (including Spotify, Amazon, Apple and Pandora) all continued to litigate over the royalty for interactive streaming services, apparently leading to the new decision which over five years would raise songwriter royalties as much as 45%. The new royalties, set out below, are set both as a percentage of revenue and as a percentage of “content costs,” which means the total cost paid by the service for both the rights to the sound recording and the musical composition. The new royalties are proposed to be:

  • In 2018, 11.4 percent of revenue or 22.0 percent of total content cost
  • In 2019, 12.3 percent of revenue or 23.1 percent of total content cost
  • In 2020, 13.3 percent of revenue or 24.1 percent of total content cost
  • In 2021, 14.2 percent of revenue or 25.2 percent of total content cost
  • In 2022, 15.1 percent of revenue or 26.2 percent of total content cost

This decision obviously raises questions, as digital music services have reported financial losses on a regular basis. Many press reports have indicated that sound recording royalties already result in services paying more than one-half (and in some reports as much as 70%) of the revenue of the service. Adding a royalty for the musical composition that can be as much as one-quarter of the sound recording fee leaves little money for the service to pay all of its other operating costs. Will sound recording royalties decrease to accommodate the higher composition royalties? That certainly has never been the case in the past, but we will have to see how these royalties affect that dynamic.

It is also interesting that this decision was released just as Congress seems to be getting some traction on a bill, the Music Modernization Act, which would reform the way that these royalties are paid – setting up a collective which would function somewhat like SoundExchange does for collecting sound recording performance royalties from non-interactive digital music services, and changing some of the criteria for determining the rates to be paid by the services. This legislation seems to have the support of the major representatives of songwriters and publishers, as well as the digital services. On Friday, the NAB lifted its objections to the proposed House and Senate Bills. Will this decision upend that agreement? We will write more about that proposed legislation soon, and will provide more information about the Section 115 decision when it is released.