Copyright Royalty Board Announces Compulsory Mechanical License Rate Hike for Interactive Streaming/Limited Download Services

On January 26, 2018, the United States Copyright Royalty Board (the “CRB”) released its initial determination regarding the royalty rates and terms of use that will apply over the next five years to the compulsory license of musical compositions in connection with the distribution of physical and digital phonorecords (sound recordings not accompanying an audio-visual work).  The highly anticipated ruling is the result of a CRB rate hearing that was initiated by the National Music Publishers’ Association and the Nashville Songwriters Association International and that took place between March and June of last year.  The new rules will become effective as of the date the CRB releases its final determination, which amongst other things, will include the CRB’s rate determinations for physical phonorecord deliveries and permanent downloads not yet addressed in the initial CRB announcement.  The final determination will result in a substantial increase to the mechanical royalty rate to be paid by interactive streaming/limited download services such as Spotify, Apple, Amazon, and Google.

Under the new rules, the mechanical royalty rates to be paid by interactive streaming/limited download services will be determined based on the greater of (i) a percentage of service revenue (all revenue generated from end users of the service in connection with the streaming/limited download of music, such as subscription fees, as well as all revenue generated from “in-stream” or “in-download” advertising and/or advertising on the same or immediately following web page or screen in which music is streamed/downloaded), or (ii) a percentage of total content costs (total amount of consideration paid to obtain the rights to make interactive streams/limited downloads of sound recordings through the service).

While this formula is similar to that used under the existing rules, the percentage of service revenue will immediately increase from 10.5% to 11.4% and will see a roughly 1% annual increase throughout the new rate term, up to a maximum of 15.1% in 2022.  Additionally, there will be a similar incremental rate increase to the percentage of total content costs, with an immediate increase from 21% to 22% and then a roughly 1% annual increase during each year of the new rate term, up to a maximum of 26.2%.  Another significant change is that unlike the existing rate calculation rules, the percentage of total content costs will no longer be subject to a cap (currently $0.80 per user per month), thus enabling publishers to obtain the benefit of a true percentage of what labels are able to negotiate in the free market in connection with the licensing of sound recordings (which are not subject to a statutorily mandated compulsory license rule).  As with the existing rules, royalty payments made in connection with the public performance of musical works via the service will be deducted and the total payable royalty pool will remain subject to a subscriber-based royalty floor of $0.50 per user per month.

In addition to the increased royalty rates, the new rules will now also impose a monthly late fee of up to 1.5% of the total amount of all owing and outstanding royalty payments received after their respective due dates.  This change is meant to encourage licensee services to pay royalties more quickly and to address certain common licensing practices that had resulted in delayed payments.

The CRB determination is seen as a major win for songwriters and music publishers and represents the largest royalty rate hike issued by the CRB to date.