Following two lengthy years and a slew of cash from digital streaming services and the NMPA, the Copyright Royalties Board has finally reached its decision to increase payout to songwriters and publishers by (on paper at least) 43.8%. Here we look at what this actually means for your bottom line.
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Guest post by Jordan Bromley, partner at Manatt, Phelps & Phillips
After a 2 year battle, and tens of millions of dollars spent by the NMPA and the digital streaming services regarding setting new streaming mechanical rates, the Copyright Royalty Board, or “CRB”, recently posted its decision on streaming payouts to songwriters and publishers. Though the headline news is a 43.8% bump in royalties, I’m sure you’re wondering what that really means to your bottom line. Here are a few early takeaways:
- YES, This Is Good News: No matter how you cut it, a raise in payments to songwriters is a good thing. In addition to the total revenue percentage raise, the CRB raised the percentage on total content costs, or TCC. More notably, the CRB removed the prior “cap” put on this revenue. In short, the TCC is how much the streaming services pay the label. So, if a label gets a better deal, songwriters get a (larger) percentage of that uplift — those numbers are listed further below. For those writers who are selling a catalogue, the eventual 43.8% bump (more on why I’m saying “eventual” later) is great for adjusting the calculation of future Net Publisher’s Share. It also means more money to publishers and better outlooks for their own NPS, which should loosen acquisition budgets both for catalogues and for contemporary writers (i.e. higher advances). This could have gone a completely different way for songwriters (i.e. flat or reduced rates), so the results are very positive.
- Headline Rate vs. Effective Rate: Various rules related to the calculation of streaming payments to songwriters and publishers (i.e., per subscriber floors and the TCC mentioned above) have in some instances resulted in an all-in (combining both mechanical and performance sources of royalties) “effective rates” on certain DSPs that are higher than the “headline rate” of 10.5% in the current regulations. The effective rate is as described – it’s the actual rate paid out to the songwriter and publishing community based on various tiers of calculations used to protect publishers from a bottomless floor of income due to fear of services undervaluing their subscriptions on the mechanical side and aggregated with what publishers and songwriters receive on the performance side. It remains to be seen how these effective rates will play out under the new regulations, which include discounting of the mechanical minimum per subscriber floors for student and family plans; however, the increase and uncapping of TCC percentages could carry the effective rate over the published headline rate in any accounting period. Note that there is no mechanical minimum floor on ad-supported models and that will continue in place under the new regulations.
- The MMA and the CRB: The Music Modernization Act, or “MMA”, creates a formalized body run by publishers to administer digital licensing, changes how songs are made available, and limits liability. It’s supported by all sides of the equation (songwriters, publishers, DSP’s), and will modernize the music licensing process: killing bulk NOI’s, putting unclaimed royalties in the hands of the content community (instead of DSP’s), creating a comprehensive licensing database that puts all pertinent information in one place that is accessible to everyone involved – and providing streaming services with confidence that they can license all their music without fear of billion-dollar lawsuits.
What it also does, and what directly affects streaming mechanical rates, is it changes the evidence standards by which publishers and performance rights organizations can argue for better rates. It will be interesting to see where these shake out in the coming years.
- The Chart: Here are the headline rates for the next five years:
|
Royalty Year |
Percent of Revenue |
Percent of TCC |
|
2018 |
11.4% |
22% |
|
2019 |
12.3% |
23.1% |
|
2020 |
13.3% |
24.1% |
|
2021 |
14.2% |
25.2% |
|
2022 |
15.1% |
26.2% |
- An Eventual Per Stream Rate?: If one followed the CRB proceedings closely, they may have seen that the NMPA proposed a per stream rate, rather than a percentage of revenue. Apple Music agreed to a per stream rate, although substantially lower than what NMPA was advocating. There was a political angle to this, as Apple has no ad tier subscription model. And as a hardware manufacturer boasting a 900B market cap (along with its astronomical amounts of cash on hand), it can afford to pay a little more (and possibly knock out competitor or two in the process). The per stream rate issue raises a point that is important to the content community — especially those dabbling in futurism.
Here’s a theory worth considering: While the streaming economy is booming, it will eventually normalize. If streaming services take the place of other models of music consumption (e.g., terrestrial radio), and if subscriber counts settle, there could be a subsequent spike in stream counts (as all music consumption would occur on streaming services), without the requisite boom in income (since every potential subscriber has already subscribed). This could drive the per-stream rate lower, eventually concentrating streaming income around mega-successful acts who have the benefit of mass marketing and broad-based appeal. The long, fat tail will get skinny, and the economy will once again focus its wealth on the major players.
On the other hand, there is a surge in consumption of “mood” music. Playlists centered on study, sleep, and other focus areas attract stream counts in the millions for some compositions that, arguably, are a step above white noise. With a set pool of income paying each song at the same rate, it begs the question whether these songs all songs in the pool should be treated equally.
Not to mention: the per-stream model of compensation as reflected in the CRB’s ruling for internet streaming radio (non-interactive streaming) helps direct streaming services away from models that undersell their consumption models, and further helps to stabilize an economy for songwriters and their publishers. Perhaps the next CRB decision for 2023 royalties will take this into account. That said, to the extent record labels negotiate per stream rates in free market deals with DSPs, publishers and songwriters will indirectly be able to realize the benefit of those rates by the uncapping of the TCC prong.
IN SUM: This CRB result is a major achievement for publishers and songwriters. The recent accomplishments in Washington are equally groundbreaking and very favorable for the future of our business. It is, however, important to understand the nuts and bolts behind these results — not only as a way to plot future earnings, but also as a way to measure expectations on what to expect from your royalty statements.