A new ruling from the US Government requires that streaming music services raise their royalty rates for songwriters and music publishers. Here are the details.
The United States Copyright Board (CRB) held hearings from March to June of 2017 to determine if it should raise, lower or do nothing to the royalty rates in regards to mechanical royalties. On Saturday, January 28th, it issued its long awaited decision, and the news was good.
The Current Rates for Streaming Mechanicals.
Currently, under US law, a streaming music service is required to set aside about 10.5% of its monthly Gross revenue to pay for the use of a “composition” (the lyric and melody of the song). Then, it divides the 10.5% of it Gross revenue by the number of streams to come up with how much is earned for each rate.
For example, $10 in gross revenue divided by 20 streams equals $0.50 for each stream (and so on).
Then, that per stream royalty is split roughly in-half between two rights: the right of Public Performance (paid to the Performing Rights Organizatiosn (i.e. ASCAP, BMI) who are then supposed to pay it to its members) and “Mechanical Royalties” (either paid to a publishing administrator or paid to a Reproduction Rights Collection agency like my company, Audiam, who then pays its members).
As an example, if one stream generates $0.50, about $0.25 is for the right of public performance and $0.25 is for “mechanical royalties’.
The actual per stream rates are much much lower than $0.50 per stream.
So low, its hard to call the rates money. For example, one stream on Spotify’s Ad Supported free service generates $0.00017 per stream for “Mechanical Royalties”. That’s about 1/100 of a penny. This means that for every 100,000 streams of one song played, Spotify pays just $17 in royalties.
You can view all the monthly per stream rates and use a rate calculator specific to Spotify here.
The Copyright Royalty Board’s Ruling
Some of the highlights of the Copyright Board’s ruling are as follows:
1) For the next five years (from 2018 – 2022) the per-stream royalty rate for mechanical royalties will increase incrementally from the current 10.5% of Gross revenue to 15.1% of Gross revenue.
For example, in the current model, if a music service made $100 in Gross Revenue, then 10.5% of $100 is the pot of money being paid for all the compositions, an amount of $10.50. If there are 100 streams in that one month, the service divides $10.50 by 100 streams to get a per stream rate of $0.105 per stream
Under the new model, by 2022, the 10.5% will increase to 15.1%. Doing the same calculation means each stream is now worth $0.151 per stream, an increase of about 40%.
2) If the music services pay the royalties late, they will be charged a late fee.
3) If a record label negotiates a higher rate with Spotify for the recording (as there is no government regulation or rate for recordings), then the royalty rate for the composition can also increase, but with a limit.
For example, if a record label gets 70% of Gross Revenue, then the amount being paid for the composition could theoretically increase to above 15.1%.
My company was involved in the rate increase. Here’s some data and other facts that we supplied to help inform this decision.
With this detailed data, the CRB was able to reach a measured decision and raise royalty rates for music rights holders.
One of the biggest takeaways from our data was this: as the top gross revenue for music services has increased, the per stream rate paid to publishers has decreased. Today’s ruling helps to offset this shift.
In addition, even at their peak, the per stream rates were incredibly low compared to the financial value songwriters and artists brought to the music services. As one example: 200,000 people using a music service to stream a song 1,000,000 times generates $160 in royalties for the songwriter but has a value of millions of dollars for the music service.
Accordingly, it’s exciting to see the true value of music realized as it is used to drive record setting value, customers and revenue for technology companies. Today’s ruling helps share the full financial value of music back with the creators whose music was used to acquire customers, increase market share and stock prices.
In addition, the CRB mandated 15.1% rate, phasing in over the next five years, is one of the highest rates in the world and is now a rate that must be met under the law.
The CRB ruling legitimizes and secures higher rates while also allowing for the possible removal of a contested provision in the controversial Music Modernization Act. The provision, called “Willing Buyer Willing Seller,” required the government to remove mandated rates and allow the publishers and music services to negotiate their own rates. The hope — but not guarantee — is for publishers to be able to increase the rates. This CRB ruling allows all music publishers and songwriters to experience a guaranteed higher rate while also potentially making it easier to pass the bill as the need for an increased rate is no longer an issue.
Jeff Price is the founder and CEO of Audiam, a digital reproduction rights management company.