A modicum of panic in songwriter circles emerged this week thanks to the news, via a Billboard report, that the likes of Amazon Music and Spotify had won a “procedural victory” in their appeal against a mandated streaming pay rise for songwriters in the United States.
That pay rise was originally set two years ago, when the US Copyright Royalty Board (CRB) ruled that streaming royalty payouts for publishers and writers would rise by 44%-plus in the States between 2018 and 2022.
Billboard reported Saturday (August 8) that, in a setback for songwriters, the US Appeals Court had “thrown out the rate structure cobbled together by a majority of the board’s three judges”.
At the time of that report, the decision from the Appeals Court was sealed – meaning that we couldn’t get access to its finer details.
It’s just been unsealed, and MBW is here to explain why the situation is a more nuanced one than songwriters may have first feared.
The US Court of Appeals decision, which you can read through here, ticks off the Copyright Royalty Board’s three judges for failing “to give adequate notice or to sufficiently explain critical aspects of its decision making”.
Specifically, it says the CRB “failed to provide adequate notice of the rate structure it adopted, failed to explain its rejection of a past settlement agreement as a benchmark for rates going forward, and never identified the source of its asserted authority to substantively redefine a material term”.
The long and short of that criticism? The decision is being kicked back to the CRB, which is being told to review specific elements of the process by which it reached key elements of its decision.
To understand the Appeal Court’s view, you first have to understand how, exactly, songwriter pay was increased by the CRB in its ‘Phonorecords III’ decision in the first place.
Before ‘Phonorecords III’, the likes of Spotify, Amazon Music and YouTube Music (who are all appealing the CRB decision) previously had to pay songwriters/publishers a headline royalty rate of 10.5% of their annual US streaming revenues. This “all in” number covered both mechanical and performance royalties.
In 2018, the Copyright Royalty Board (CRB) ruled that, for the five years from 2018-2022, this “all in” rate would rise by around 1% annually, up to 15.1%.
However, complicating matters a bit, the CRB also ruled that each streaming services would either have to pay songwriters this headline rate, or, if it resulted in a higher figure, up to 26.2% of their “Total Content Costs” across records and publishing (see ‘TCC’ above).
This ‘Total Content Costs’ figure, ruled the CRB, will be uncapped from 2018 onwards, meaning the 26.2% can be of an unlimited figure. Crucially, it means that whatever the services pay record labels is tracked/tied to the amount they pay publishers.
This is one main reason for the current commotion.
According to the Court of Appeals, the likes of Spotify and Amazon have argued that “the [CRB’s] decision both to uncap the Total Content Cost prong and to increase the percentages used to calculate the revenue prong and total content cost prongs were arbitrary and capricious”.
The Court of Appeals has now shown sympathy with this argument. Its new ruling states: “The Streaming Services are correct that the [CRB] failed to provide adequate notice of the drastically modified rate structure it ultimately adopted.”
In addition, the Court criticizes the CRB for not providing “a reasoned explanation” for refusing to use prior CRB rate-setting decisions as “a benchmark when setting the total content cost and revenue rates”.
“The Streaming Services are correct that the [CRB] failed to provide adequate notice of the drastically modified rate structure it ultimately adopted.”
Court of Appeals ruling
And, in a further criticism of the CRB, the Court of Appeals ruled that the CRB ” failed to identify any legal authority” for changing the definition of “Service Revenue” – a term which ultimately describes the amount of revenue from music-plus-non-music consumer bundles to which the music industry can lay claim.
(You might remember this from Spotify’s oddly-breezy open letter on its appeal: “A key area of focus in our appeal will be the fact that the CRB’s decision makes it very difficult for music services to offer ‘bundles’ of music and non-music offerings. This will hurt consumers who will lose access to them.”)
As a result, the Court of Appeals is essentially telling the CRB: do these bits again, take on board our views, and show everyone your working.
In a statement given to media, the National Music Publishers’ Association CEO & President, David Israelite, played down the impact such changes might have on the increased amount of streaming royalty cash (i.e. that magic 44% number) coming the way of songwriters.
Calling the Court of Appeals’ ruling “a limited remand”, Israelite said: “Last March, Spotify and Amazon appealed songwriters’ 44%-plus mechanical royalty rate increase by the CRB in a shameless bid to undercut the very creators they rely on.
“Last week, the D.C. Circuit Court of Appeals made its determination which supported the rate increase granted by the CRB to music publishers and songwriters, agreeing that writers have been underpaid and that the rate increase start date is January 1, 2018.
“To be clear, the decision did not reject the top line rate increase for songwriters; rather, the D.C. Circuit Court of Appeals asked the CRB for further explanation as to why it had rejected one particular supposed benchmark. It also asked the CRB to explain its authority for modifying ‘service revenue’ in regards to music bundles. We believe these things are easily done by the CRB.
“We are heartened that the Court understands and supports the fact that songwriters are grossly underpaid by streaming services. It is shameful that Spotify and Amazon have now spent millions of dollars – money which could’ve been paid to songwriters – on attempting to deny them a raise based on technicalities.”
David Israelite, NMPA
Israelite added: “The D.C. Circuit Court of Appeals also found that incorporating an ‘uncapped Total Content Cost (TCC),’ which allows the Court to take into account free market rates negotiated by record labels, was adopted without enough evidence regarding its impact. This has nothing to do with the 44+ percent rate increase.
“We are heartened that the Court understands and supports the fact that songwriters are grossly underpaid by streaming services. It is shameful that Spotify and Amazon have now spent millions of dollars – money which could’ve been paid to songwriters – on attempting to deny them a raise based on technicalities.
“We will continue to fight back against Spotify and Amazon’s brazen attempts to cut songwriter’s royalties and look forward to quickly resolving the procedural issues raised by the D.C. Circuit Court of Appeals in order to uphold our hard fought rate increase.”Music Business Worldwide