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How much compensation should an artist get when his music is used? And in deciding this question, what consideration should be given to the interests of the distributor? If you ask the RIAA or SoundExchange the answer would be that the artist deserves the highest compensation if the RIAA members don’t have to pay it. If they do, whoever decides the amount of compensation should always be mindful of the RIAA companies’ bottom line.
This is the argument the RIAA is making before the Copyright Royalty Board, which is in the process of setting royalty rates that record companies and digital media companies should pay song writers and music publishers each time they sell music. By way of background, copyright law provides that anyone can cover a song and sell it on CDs or through the Internet once the composer has recorded and sold his music. A person who wants to do this must pay a set royalty, known as the “mechanical royalty” to the composer. The Copyright Royalty Board sets the mechanical royalty rate for this compulsory license.
The RIAA claims, that “record companies are suffering a contraction of business”. It also claims that the current royalty rate set at 9.1 cents per song is too high (Never mind that many record companies pay only 75% of this rate to those composers who cover their own songs and sign on with the company for distribution). The RIAA argues that the Copyright Royalty Board should completely change the present rate structure from one based on a set amount per song sold to one based on a percentage of revenue of the record company. It proposes that the rate should be set at 7.8% of the revenue of the sale.
The RIAA (oops, its spin off SoundExchange) fought hard against a similar rate structure for webcasters. We all remember the rate setting proceedings concluded in May last year that set rates that webcasters had to pay record companies each time they streamed music. The Copyright Royalty Board adopted rates proposed by SoundExchange even though this rate would exceed the actual revenues of many webcasters and drive them out of business. And the RIAA’s current argument for change in the rate structure is nowhere near as compelling as the webcaster’s arguments were. The webcasters had argued that they were a nascent industry that could be crippled by high royalty rates. Although, SoundExchange has reached settlements with large webcasters and some small webcasters, the fate of many other small webcasters is not clear.
Is the record companies “contraction in business” reason enough to potentially lower the amount songwriters get paid? Is it fair that RIAA/SoundExchange switch to a percentage of revenue model for music sales while holding back the small webcasters from taking advantage of the same for streaming? What do you think?
Since posting this blog, I have been informed that I was wrong in saying that SoundExchange never proposed a percentage of revenue based rate structure for webcasters. So, let me set the record straight. It turns out that SoundExchange did propose a percentage of revenue based rate as an alternative to a flat fee--also known as a per performance rate. The proposal is explained on page 17 of the CRB decision(final determination of rates and terms). The thing is, this rate (a full 30% of gross revenue) would apply only if the flat fee (per performance rate) turned out to be less than this 30% of revenue. To be clear, what SoundExchange actually proposed was an “either-or” choice--whichever fee was higher, that’s what had to be paid.
With estimates that the per performance rate adopted by the Copyright Royalty Board could be so high as to exceed the revenue of many small webcasters and come close to 40-70% of revenues of large webcasters, there was very little likelihood that the percentage of revenue rate proposed by SoundExchange would apply.
I may have been mistaken in my earlier blog post, but after even further careful review, I’m confident that the rate structure proposed by SoundExchange was unrealistic. It appears that it was proposed so that if the flat rate were “too low,” the already high percentage of revenue rate would kick in. As Art might say, “it was an offer that the webcasters could refuse.” Unfortunately, the adoption of this rate structure, with or without the percentage of revenue option, resulted in unfairly high royalties.