The Easiest Way to Fix the Streaming Mechanical is to Get Rid of It

Get Rid of the Mechanical License?

photo: Kennedy Fotos

More than 500 songwriters and publishers are seeking punitive damages for Spotify’s failure to pay mechanical royalties.  How did we get here?

Interactive ‘streaming mechanicals’ were invented by stakeholders in 2008 to address the concern that streaming would cannibalize record sales which would, in turn, vanquish mechanical royalties.  So they imposed a replacement that mollified the participants.  But, the cure turned out to be toxic.  It could not be implemented for all songs and it raised the specter of the current lawsuits that bedevil Spotify.

Kohn On Licensing, one of the legal bibles of copyright law, tells the history.  Here’s a summary:

“The story begins circa 2001-2002.  Streaming services emerge.  Music publishers fear that on-demand streaming would replace the sale of copies – physical records and downloads – eviscerating the revenue from mechanical licenses.  In addition, there was no assurance that the revenue would be replaced by an increase in performance fees.  There was also the fear that then-prevalent ‘limited downloads’ — saving an on-demand stream to a computer or phone — would make the performance ‘private’ and thus not even subject to a performance license and payment.

“During the next few years, the Digital Media Association (DiMA) (on behalf of digital services) declared war on the notion that a pure on-demand stream requires a mechanical license.  Lawmakers and regulators started to consider the issue.

“Things crystalized circa 2008.

“After Congress failed to make legislative headway to reform Section 115 of the Copyright Act (the provisions for compulsory mechanical licenses), the Copyright Office hosted discussions among stakeholders to solicit views. The Copyright Royalty Board (CRB), which is empowered to set mechanical rates, also held hearings.  Notably, the CRB is not authorized to interpret the Copyright Act – i.e., to declare, for instance, the extent to which, if at all, on-demand streams require a mechanical license under the law.

“Before the CRB hearings were completed, the major stakeholders – RIAA (on behalf of record labels), DiMA (on behalf of the digital services), and NMPA (on behalf of the publishers) — reached a settlement regarding rates for interactive streaming: Interactive streaming service providers would pay a mechanical royalty of 10.5% of revenue, minus any amounts owed for performance royalties.

“That agreement remains the foundation for the rate scheme still used today, with quirks for setting minimum revenue pools.”

(See: Kohn on Music Licensing, page 755+)

However, in agreeing to the solution, logistics be damned.

If mechanical licenses are required, who will issue them?  The streaming services had two routes to acquire the licenses: direct from cooperating publishers who could issue “consensual” licenses with negotiated terms; or, with respect to every other publisher, employ the “compulsory licensing” provisions of Section 115 of the Copyright Act which prescribe complicated hoops that almost no licensee can jump through.

A Crash Course on Mechanical Publishing Royalties — Part 1: The Basics

The big dogs who made the deal that the CRB approved knew that the compulsory licensing provisions were almost impossible to comply with. They also knew that the NMPA did not represent all publishers.

There was no meaningful centralized database for mechanical rights.  It was totally knowable at the time that thousands of songs would never be paid by the streaming services.  But, who cares – the majors were covered because they were represented by the NMPA and its Harry Fox Agency.

Even today, nine years after that settlement, there are at least 3 separate major endeavors underway to create the ultimate, centralized database.  But, there is no cooperative effort among all stakeholders and there is no completion date in view.

It’s important to remember that the streaming services must also acquire performance licenses.  While there is no obligatory database for mechanical rights, all songwriters and publishers must sign up with a ‘performing rights organization’ — ASCAP, BMI, SESAC, or the other smaller alternatives.  Those PROs have well functioning, comprehensive databases.  Thus, it’s easy for the steaming services to obtain these rights and make the required performance royalty payments.

It’s time to unring the bell – fix the real problem.

The revenue distribution from streaming services to musical compositions is unconscionably inadequate.  Musical compositions deserve more of the pot of streaming revenue.

Currently, they get only one-quarter of the share paid for recordings.  The groundswell of independent (non-major) publisher and writer lawsuits against Spotify, including punitive damages, is the legal conflagration that erupted because these creators are foreclosed from any way to rebalance the revenue share.

Spotify has a pot of revenue.  The record companies take first position and negotiate the lion’s share of the pot for itself.  The song representatives squeeze out whatever they can from what is left.  To Spotify, the latter amount is just an aggregate sum of money that it doesn’t have to pay to the labels.

Spotify doesn’t care what technical name is attached to the specific rights that trigger the payments.  Whether it’s called performance or mechanical royalties is irrelevant to them.  Songwriters should not care either.

Songwriter representatives should seek the biggest possible share of the pot, and demand it in the most direct way.  In other words, all song revenue should be treated as performance royalties.

The ‘streaming mechanical’ is a fiction, never declared by any court in interpreting the Copyright Act.

At best, it was a quick fix by well-meaning commercial stakeholders to enable an embryonic technology to launch while guaranteeing that some songs would receive some part of the revenue pool.

But, mechanical licenses are the least effective and most expensive pipeline through which to push online earnings to songwriters.  The PROs are the most effective and least expensive.  No one has complained that the streaming services have not made payments to the PROs.  And, by the way, 50% of each dollar is sent directly to the individual writer by the PRO (even if he or she has a publishing deal) – an enormous source of comfort and benefit to writers.

In contrast, 100% of mechanical royalties, if ever paid, are sent to the publishers.  Those publishers then distribute, eventually, some portion to writers.

Of course, that is the single reason why publishers remain wedded to the notion that streaming revenue should be differentiated.  Even while knowing that a large chunk is forever lost in the dark hole of “compulsory licenses.”

The lawsuits by the independent publishers and writers should be settled; Spotify must pay all money owed for unpaid mechanicals. In addition, within that settlement, all publishers should agree that sums previously computed as ‘mechanicals’ will still be payable in the future but shall forevermore be deemed to be ‘performance’ income and paid to the PROs.  That would be a real victory for songwriters.

 


Jody Dunitz is a longtime industry executive and investor, with extensive business and legal background in the entertainment industry. On the publishing side, Jody carried stripes as Executive Vice President of Sony/ATV Music Publishing. Since 2004, Jody has been a member of Tech Coast Angels, the largest angel investor network in the United States providing funding and guidance to the most early-stage, high growth companies in Southern California.

14 Responses

  1. Dont Believe The Shills...

    This article is a bunch of rubbish. The simple truth is streaming services could have put a gate on master recordings requiring the labels to provide publishing info on every single song delivered to streaming services at source. Just the way it’s been done for 60+ years at physical retail. By law, every record label must have this info… disinformation shills ignore that the intent of streaming services was to NEVER PAY SONGWRITERS and now we have proof… see here:
    https://thetrichordist.com/2017/09/05/how-spotify-and-others-could-have-avoided-songwriter-lawsuits-ask-the-labels/

    • Dean Hajas

      This is partially right in thinking.
      With a centralized data base, the PRO’s are redundant and unnecessary. Metadata is easily recognized, and can generate its own payment per play directly to Pay pal account. Right now, pRO’s are just trying to stay in the game..
      Many schemes have been tried, but Performance base Royalties are easily established by recognizing the Broadcast and Transmission factor. When you are in your car, listening to s radio, there’s one person or more listening, the same as if you are in your home, one or many can listen to the same Broadcast.

      • old dude

        Dear Dean – You do understand the issue is not just who collects, but what the rate is, right? If streaming mechanicals are converted to the type of payments Pandora pays, there is no future for songwriters. Period. The PRO monies are a small fraction of the rates the CRB settled with ALL STAKEHOLDERS. So this is a very intellectually dishonest argument in an attempt to swindle songwriters out of their fair share of streaming revenues. Spotify replaces RETAIL NOT RADIO… and the mechanicals for on demand streaming should recognize that.

  2. Hit Spins

    Actually, I get what this article is saying and I tend to think, even as a songwriter and publisher, that maybe it’s ok for companies like Spotify, Apple Music, YouTube etc.. to just pay the performance royalties that the performance collection societies collect on behalf of songwriters and music publishers.

    Isn’t this the way that radio works.. and radio is in many ways similar to streaming services in that they stream recorded music over AM and FM (and digital) airwaves…

    Am I right in thinking that writers/publishers are more likely to receive their royalties if it’s done via the performance collection societies.

  3. Paul Resnikoff

    Technically, neither license applies to streaming.

    There is no mechanical reproduction in streaming, outside of cached, temporary downloads. The rest is a huge stretch.

    But also, there is no performance happening. Unless we are talking about a ‘performance’ in your earbuds while you’re going for a jog.

    What should have happened is that a publishing license specific to digital streaming should have been created. But it wasn’t. The result is two sloppy licenses that don’t fit, and are vulnerable to legal challenges.

    • Anonymous

      Technically, your point is BS, Paul, because “a license specific to digital streaming” exists. Two of them, in fact: the “interactive” and “non-interactive” rates.

      The way people get hung up on the whole “this is a foo license and we’re no foo” bit is baffling beyond words. It DOESN’T MATTER what the license is called. It was known beforehand that it exists – with a rate set specifically for the kind of thing Spotify does (interactive streaming) – and that’s the only thing that matters.

  4. Ari Herstand

    Interesting proposition. The problem with performance royalties is that PROs don’t calculate their royalties per composition based on how that composition performed on each platform. They calculate the royalties based on every performance for every song in their catalog from every medium. Weighted against each other.

    So, a songwriter getting even 1M streams on Spotify may be paid $0 for performance royalties because those 1M streams are weighted against every other performance on TV, radio, Macy’s, TouchTunes, etc. Everywhere.

    Whereas now, at lease, 1M streams on a streaming service will earn the statutory rate set for mechanicals. Yes, that rate is absurdly small and disproportionate, but at least 1M streams WILL see revenue.

    I have over 400,000 views on YouTube from my original compositions. ASCAP states that YouTube pays for a performance license. Well, I get ASCAP checks for my TV and radio performances, but have yet to see a performance royalty from YouTube. Or Spotify for that matter. I have gotten mechanicals for my Spotify et al plays.

    So, it’s a nice theory, but the problem is as long as ASCAP and BMI continue to lock their royalties and calculations within a black box with zero transparency, songwriters won’t ever get what they deserve. Yes, it’s great that PROs pay 50% directly to the songwriter. But 50% of $0 is still $0.

    A better solution is to change the entire system and pay 50% for sound recordings (directly to labels / artists) and 50% for compositions (DIRECTLY to publishers and songwriters). Kill “mechanical” and kill “performance” when it comes to streaming. 50% of the money goes to the rights owners of the sound recording (label or artist) and 50% of the money goes to the rights owner of the composition (publisher or songwriter). Like how synch licenses typically work.

    The streaming services should require publishing info for every recording they receive so they don’t fall into the same mess they’re in now with having to hunt down copyright owners to pay them the mechanicals.

    The entire system is completely broken. Burn it to the ground and start over! The laws do not make sense for 2017.

    • Jody Dunitz

      It would be easy for the PROs to change their internal rules to treat streaming platforms discretely and compute performance distributions specifically from those streams.

      Since “streaming mechanicals” were created by a settlement of stakeholders, they can be modified (restated to become “performance income”) in the same way. The lawsuits are a perfect opportunity since the relevant stakeholders — the plaintiff publishers and Spotify — are already at the table. If one group of publishers so settles, maybe it will spur similar negotiations among other publisher groups.

      Any other fix requires an amendment of the Copyright Act.

      The proposal that Spotify pay 50% of its pot to labels and 50% to publishers (but, therefore, none directly to writers) requires that labels voluntarily abandon all the fruits of their prior negotiations – all the equity, all the guarantee fees, all the cash advances, and the large royalty share. Uh huh.

      • Reno Davenport

        Oh, PLEASE Jody! Put down that 6 ft. bong and face reality for once. Unless someone’s paying you to write this work of fiction then at least someone is putting food on the table.

        PRO’s take the money and put it into the BLACK BOX. Never to be seen again. Just look at what HAIRY HERSTAND just said! He admitted that ASCAP *never* pays a dime from streaming!

        And you want to support THAT?

      • Ari Herstand

        Yes, I realize it’s a long shot that labels would give up their massive cut of the Spotify pie, but they have nothing without the compositions. Maybe first cut the deal with Merlin and get all the indie labels and indie publishers on board. Blast out in the press that that indie labels and indie pubs are receiving 50/50 splits. A new precedent will be set and A list songwriters will demand 50% of Spotify revenue. If they don’t get it, then they’ll head on over to the indies and work only with the labels who honor this agreement. If the labels don’t have their A list songwriters they don’t have the songs and they don’t have the hits. It all comes down to the songs in the end.

        And it’s noble to want to cut songwriters checks directly, but I highly doubt the PROs are going to upend their entire system to carve out streaming royalties and make that transparent like a Kobalt royalty portal with reports down to the penny/stream.

        Songwriters should work with admin pubs who track down their royalties and pay out transparently and fairly. If songwriters want to sign with majors, well, then they are beholden to their terms and lack of transparency. That’s their decision. I have no problem with streaming services paying publishers directly. Songwriters will learn to sign with publishing entities who are transparent.

    • Roland of Aragon

      Free Markets!

      Musicians need to think like real entrepreneurs. That’s the issue. If you signed the deal and everyone knew the ramifications, then you’re the dummy for not reading the fine print, but if they’re not honoring the deal, then I get it.

      Never invest into anything until you investigate everything! I’ve made these mistakes.

      The answer is:

      1. Create your own website.
      2. Sell your music on it.
      3. Sell your merch on it.
      4. Cough up those hard earned dollars to promote and market the hell out of your music, website and brand with paid ads.
      5. Use leverage (interviews, guest appearance, special performances) in big name platforms.
      6. Build Relationships with the right people (producers, MD’s, musicians, execs, VP’s).
      7. Do what Gene Simmons does.
      8. Don’t rely on streaming royalties as your main source of income. It’s just a small portion.
      9. Repeat steps 2-7.

      There’s obviously more to it. Centralization is not the answer, it’s gonna create more pain and lawsuits.

      Wisdom 101: “Know what you’re getting into.”

      Musicoverlord.com

  5. Anonymous

    I support any system that involves some incentive and effort to know who the songwriters and publishers are, licensing the rights from those songwriters or publishers, and paying those songwriters or publishers. If those things don’t happen, you shouldn’t be able to legally use the song. The PROs collectively don’t know that information for all the songs available on a streaming service. If all a service needs to license publishing rights is blanket PRO deals, the incentive is removed, and the black box only gets bigger. All you do is provide liability protection to services, where the goal should be to make sure songwriters get paid for every stream.

    If Spotify followed the rules, albums would be blocked from being made available on their service if the publishing rights aren’t licensed. If labels suddenly found that their albums couldn’t be made available, well that’s all the incentive you need right there. Labels don’t actually know who owns all the publishing rights for all their albums (whether they’re legally required to or not, as suggested in the Trichordist article), but I would think that if their albums couldn’t be made available, they would make some sort of effort find out that information, and ensure that the information is communicated to Spotify and HFA so they can license the rights. Then the album can be made available, and songwriters would be paid for every stream from day one. That’s how it should work.

  6. Esquire

    Divided rights are bad enough when divided between sound recordings and songs, but dividing them between songwriters in fictional piles (mechanical? performance?) is worse still, diluting songwriters earnings.

    Time to unify money for music. People listen to sound recordings. Let’s go back to sound recording owners arranging to pay for songs used, integrating the price into a price for music.

    Songwriters will benefit, sound recordings will benefit, and most importantly music and its audience will benefit from one price. Sound recording creators decide which songs to use, let them arrange payment for the songs they choose.

    • Anonymous

      It’s not a horrible idea, though it has a few flaws. The labels don’t want to take on this liability, and it would be a challenge to get them to agree with this (except with Apple of course). Most songwriters would end up with reduced royalties due to controlled composition clauses in the record agreements. Also, the labels don’t really know who all the publishers are on their albums, so a large chunk of royalties will go into the black box that songwriters will never see. Though, if all the labels hire 3rd party mechanical rights administrators to locate and pay the publishers on their behalf, that could reduce the black box significantly, and it may turn out all right.