7. Music Royalty Rates for Streaming Services
Total Royalty Burden: 55-75% of Gross Revenue
Some higher
Almost 20 year history of streaming – No streaming
service has EVER been profitable on an annual basis
What possible reason other than royalty burden?
7
11. Recent Developments in DMS Royalties:
Webcasting IV CRB Proceeding
New Panel of CRJs
Willingness to re-examine first principles
First rate decrease ever (though still very high)
Stayed with per-performance structure
Rejected automatic annual increases
Variations among sellers – segmented market / rates?
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12. Recent Developments in DMS Royalties:
Webcasting IV CRB Proceeding
Relevance to Future
Other rate proceedings
Phonorecords III
SDARS / PSS III
Who will use webcasting license?
What is future of market if rates stay high?
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13. Recent Developments in DMS Royalties :
DOJ Consent Decree Review
Publishers’ Answer to Rate Disparity is to
Increase Musical Composition Performance Rates
Lack of Success Due to Rate Court Oversight
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14. Recent Developments in DMS Royalties :
DOJ Consent Decree Review
Strategy – Selective Withdrawal
Direct licensing – absolute pricing power
DMS still needs license from PROs
Hoped to use direct licenses as benchmarks in rate
court
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15. Recent Developments in DMS Royalties :
DOJ Consent Decree Review
Legal Challenge – Pandora Rate Court Cases
ASCAP – selective withdrawal violates consent decree, therefore
ineffective – works still in ASCAP repertory
BMI – selective withdrawal violates consent decree, therefore
construe withdrawal as total – works out of BMI repertory for ALL
licensees
After short period of chaos, withdrawing publishers returned
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16. Recent Developments in DMS Royalties :
DOJ Consent Decree Review
Loss in court led to DOJ consent decree review
DOJ agreed to consider, initiated two-year investigation
Wish-list of changes requested by publishers
DOJ initially seemed willing to allow partial withdrawal but slowly
changed position
During review, issue of fractional licensing arose
Why does fractional licensing matter, and why an issue now?
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17. Recent Developments in DMS Royalties :
DOJ Consent Decree Review
DOJ Closing Statement – August 4, 2016
Rejected all changes requested by publishers
Changes were not in public interest
But, clarified fractional licensing issue raised by licensees
BMI challenged fractional licensing interpretation in rate
court, BMI court rejected DOJ interpretation
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18. Recent Developments in DMS Royalties :
DOJ Consent Decree Review
Where do we go now?
Partial withdrawal appears dead
Fractional licensing
Appeal
What happens if publishers win? Lose?
SESAC antitrust cases
GMR antitrust cases
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19. Recent Developments in DMS Royalties:
Pre-’72 Sound Recordings
Pre-’72 Recordings = No Federal Copyright
Consequently not covered by statutory license
Is there any state law performance right?
If so, terrestrial radio has been massively infringing
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20. Recent Developments in DMS Royalties :
Pre-’72 Sound Recordings
Pre-’72 Recordings = No Federal Copyright
Flo & Eddie Litigation
RIAA Litigation
Tennessee legislation
Problem proving which recordings are really pre-’72
How to license?
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21. Apocalypse Now?
DMS Market – Going on 20 Years of Chaos
If Market Is Ultimately Destroyed Who Benefits?
Unlike DMS, record companies and publishers have remained profitable
Record Companies Need To Reset Expectations – Streaming revenue is now
more than offsetting decreases in sales revenue
Unreasonable to expect return to pre-digital revenues, which were anomalous
and unsustainable
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Editor's Notes
Return
Background – from beginning of legal career worked in digital music space - mp3.com, yahoo launchcast, CRB, rate court
Disclaimer
Ask questions as we go
Brief overview of mess that is copyright licensing for DMS
Why apocalypse – almost 20 years no profitable streaming company – contrast music companies
Then certain key developments relating to DMS licensing – CRB, PROs Consent Decrees, Pre-72 sound recordings- I identified as important to watch in 2014
Two copyrights – Mcomp and SR
History of SR copyright
First hundred years of recording industry – no federal copyright at all
State “common law” copyright – essentially anti-piracy statutes no performance right, radio, bars, restaurants, etc., paid only publishers
1971 – Sound Recording Amendment, SR created on or after Feb 15, 1972 – still no performance right
1995 – Digital Performance Rights in SR Act – added limited performance right – digital and statutory license for non-interactive subscription DMS
1998 – DMCA - expanded 114 license to non-subscription DMS
Rights needed and types of license available depends upon functionality of service
On-demand
Circle P – phonogram
GMR?
Advent of the “full stack” service blurring licensing distinction between on-demand and non-interactive
Once record companies have service under thumb, can effectively deprive ability to use rate court
Difficult to be precise – per play vs percentage of revenue, public companies, press reports
Have seen some companies paying over 100% in some periods
Royalty burden is unsustainable
Hundreds of services, different sizes, scale, functionality, revenue models, etc.
Performance revenue to record companies now exceeding declines in sales revenue, yet streaming services still losing money
Interactive – 10.5% subject to minimum of 18 or 22 % of payment to record companies. – effective rate can sometimes be higher.
Programmed – can be higher, much higher, if forced into direct deals instead of regulated PROs
Radio – long history of paying low single digits – currently about 3.5% of revenue.
Even though ASCAP & BMI able to obtain slightly higher rates for digital services, not by much and certainly not by multiples, due to rate court
PRO rate courts product of antitrust consent decree
History of consent decrees, ASCAP, BMI
Collective licensing inherently anticompetitive
BMI v CBS – saved from per se antitrust violation only because, as moderated by consent decrees, has benefits for both copyright owners and licensees
Direct license – no competition – total market power
History of CARP – ad hoc
Change to CRB – three full time judges with 5 year terms, subject to renewal
Yahoo RIAA benchmark in Web I .07 cents
Equivalence of SR and MComp – recognized in various foreign jurisdictions – CRB rejection currently on appeal
Web II – Interactive webcasting direct licenses -- phased up to .19 cents
Web III – phased up to .25 cents – WSA commercial .24 cents, pureplay .13 cents (nonsub) .25 cents (sub, bundled)
.17 cents, down from .24 or .25 (but higher than pureplay of .13) still much higher than original .07 cents
Segmented market – fundamental principle of economics – uniform pricing is not typical in a competitive market
If Record cos getting 50+% and publishers want parity off of those inflated rates, math
By selectively withdrawing, keep benefits for bars, restaurants, radio, television, etc., but force webcasters to get direct licenses
Beginning of 2013, Sony/EMI then UMG – immediately obtained 25% rate increase from Pandora by direct license
Fractional licensing – joint owners default copyright law
BMI v CBS – whole reason collective licensing allowed - immediate, indemnified access to entire repertory
Businesses that use large volume of music – need this
Why now? Selective withdrawal, Problem of unaffiliated songwriters, GMR
DOJ if licensee relies, PROs can charge for increased admin
PROs chose not to appeal to ASCAP court, because felt they were likely to lose there.
BMI court seen as more publisher friendly based on recent Pandora decisions
Partial withdrawal dead in absence of legislation – would require broad antitrust exemption
If there were a state law performance right, radio would have been massively infringing for 100 years
Sirius – RIAA lawsuit, SX lawsuit, 3 Flo & Eddie class action suits (CA, NY, FL)
Tennessee – would create statutory copyright for pre-72 SRs, with only digital and satellite performance right (would not apply to terrestrial radio) – died
Litigation – RIAA sued last but settled first, took wind out of sails of Flo & Eddie case
Flo & Eddie class action kind of settled with SXM in CA, but cases still going through courts – CA – won district but on appeal. FL, lost district but on appeal. NY, won district but lost on appeal settled in NY
Creates uncertainty and mess.
Only sensible answer is federalization Record companies have been resisting for decades, but heard Steve Marks yesterday so maybe there is finally hope (now that they lost NY).
Current royalty rates unsustainable
Several current developments have potential to drive rates even higher
Destroying industry counterproductive for all - will not increase record sales or other revenues
Record sales - No question that on-demand streaming has some negative impact on record sales, but obviously not 100%
Streaming is not sole reason for decreased record company revenues. Commoditization of the music. Failure to timely adapt to consumer desires re: digital crated mindset where piracy was OK, music devalued. Product replacement cycle. Total unit sales, including album equivalent tracks, roughly same as it was in 70s.
