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Copyright Contentment: Music Royalties Stay the Same

record-rights-issue-sm.jpgIt was the “showdown,” the looming crisis, digital music’s “Ok Corral.” If you believed the headlines and bought into the sensationalism, the fate of iTunes, the future of the world’s leading digital music store, hinged on the decision of the obscure three judge Copyright Royalty Board (CRB).   The reality was hardly so dramatic.

Thursday, the CRB was set to announce its decision on the mechanical royalty rate: the default per song license fees paid to music publishers for the sale of their music.  It was the first time since 1980 a government hearing addressed the rate, the review the result of last year’s expiration of a 1997 agreement.

Lobbying on one side of the aisle sat the National Publishers Association.  They were seeking a rate hike from the current 9.1 cents a song to 15 cents.  On the other side, the Digital Music Association, representing music sellers like Apple and Amazon,  lobbied for a price cut down to 4 cents per download.

The court, whose three judges are appointed by the Librarian of Congress had heard testimony and was set to break the stalemate.

Headlines centered on remarks made by Apple’s iTunes VP Eddy Cue last year.  In written testimony to the CRB, Cue had written “if the [iTunes store] was forced to absorb an increase in the royalty rate, the result would be to significantly increase the likelihood of the store operating at a financial loss….  Apple has repeatedly made it clear that it is in the business to make money, and most likely would not continue to operate [iTunes] if it were no longer possible to do so profitable.” (via Fortune).

Though Apple provided no current or updated statement, the testimonial threat became the foundation of stories on the impending “showdown.”

Realistically, no guns were drawn, no dire crisis narrowly avoided.  For the past decade, the mechanical rate has never jumped more than fractions of a cent per year (see chart here).  There was no basis to expect anything different would happen now.

Besides, negotiating stances and posturing aside, a dramatic change would not likely have served the best interests of any of the parties involved. 

Apple already pays about 70 cents out of every dollar in music sales at iTunes to record labels and artists.  With an estimated 85% share of global digital music sales, that translates to approximately $750m of the $1.26b in digital music sales tallied in 2007.  It’s also 8.6% of last year’s combined revenue for physical and digital sales (numbers via RIAA, mobile revenue which includes ringtones, and subscription service revenue are not included.  See here for complete numbers from RIAA). 

A change in the royalty rate would affect all digital music stores from Amazon to Apple to Best Buy.  If an extreme change were to pass, it would likely result in higher prices for consumers (a cost pass-through that could risk decreasing total music sales) or the potential shuttering of some stores.   

Those details weren’t lost in the thousands of pages of testimony likely assembled since the review began in January.  The CRB’s three judges, all lawyers with experience in arbitration and copyright, were well aware of the stakes.

Their final ruling represented the reality.  The royalties songwriters receive from CD sales and digital downloads will remain the same, the same for both media and the same as the current rate: 9.1cents per song.  The rate for ringtones will increase to 24 cents a song, above even the 15cents songwriters and publishers lobbied for.

All sides expressed satisfaction with the overall result.  Apple’s spokesman, Tom Neumayr said the company was “pleased with the CRB’s decision.”  The RIAA’s chief called the ruling “beneficial.”  The Publishers representatives were happy to have a “guaranteed value.”

For the next five years governed by the new ruling, the song will remain the same.

In other music copyright news, that may not be the case.  Earlier this week, Congress passed the Webcaster Settlement Act.  The law is effectively a stay of execution but not a solution.  It extends the term for ongoing negotiations over royalty rates paid by Internet broadcasters until February.

At issue are the fees the web broadcasters must pay for each song heard by each listener.  Currently, as set by the CRB in March 2007, the rates are structured at a fraction of a cent per song.  Web broadcasting services like Pandora argue this leads to excessive fees which can be greater in total than the entire sum of revenue their companies’ generate.  For many, it will make operating their businesses near impossible.   In Pandora’s case, a reported $18m of the company’s expected $25m 2008 revenue would go to royalty fees under the current fee structure.  Pandora, NPR and others seeking a new structure want rates to be set as a percentage of total revenue, similar to how royalties are assessed for satellite radio or subscription music services.  At the very least, they want a system that will favor webcasters big and small.

With the new settlement the debate with SoundExchange, the music industry organization responsible for collection and distribution, will rage on, at least until February 15th.

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