Delinquent Royalty Payments: A Conflict with Royalty Distributions in Music

With the proliferation of streaming services such as Apple Music and Spotify, the way consumers listen to their favorite songs has changed. Royalty rates, the specific amounts to be paid to artists during a particular time period, have recently become a source a conflict between artists and streaming services. Specifically, when the most recent royalty rate was determined, streaming services appealed the decision, and ultimately, artists will have to wait months to reap the benefits they are rightfully owed. This article examines how royalty rates are set and also examines that conflict between artists and streaming services with the rate-setting process.

On August 10, 2023, the Copyright Royalty Board (CRB) finalized royalty rates owed to artists for the years 2018 through 2022, as prescribed by statute.¹[1]Determination of Royalty Rates and Terms for Making and Distributing Phonorecords (Phonorecords III), 88 Fed. Reg. 54406, 55406-54486 (Aug. 10, 2023) (Codified at 37 C.F.R. §385). The CRB is a three-judge panel acting under the Copyright Royalty and Distribution Reform Act that sets and periodically adjusts the rates.²[2]What Is the Copyright Royalty Board?, Winston & Strawn LLP, https://www.winston.com/en/legal-glossary/copyright-royalty-board. Despite the fact that the CRB finalized the rates, hundreds of millions of dollars still have not been distributed to artists.³[3]Refresher on Phonorecords (Rate) Periods, The MLC, https://www.themlc.com/historical-unmatched-royalties. David Israelite, President and Chief Executive Officer of the National Music Publishers Association, expressed the sentiment shared by artists: “The length of time we have waited for this decision proves the [CRB] system is woefully flawed.”⁴[4]Ashley King, Copyright Royalty Board Finally Confirms Songwriter Mechanical Royalty Rates for 2018-2022, Digital Music News (May 24, 2023), https://www.digitalmusicnews.com/2023/05/24/copyright-royalty-board-finally-confirms-songwriter-mechanical-royalty-rates-for-2018-2022. In a time where interactive music streaming services (e.g., Spotify, Apple, Amazon, and Google) instantly realize millions of dollars in revenue upon streams, why are artists’ royalties not distributed expeditiously too?

Artists’ Right to Royalties and Recent Rate Setting

Under Section 106 of the Copyright Act, copyright holders of musical compositions have the exclusive right to make and distribute phonorecords of their work (i.e., copies in which the song is embodied, including interactive streaming and downloads).⁵[5]17 U.S.C. § 106.  Accordingly, every time a copyright holder’s work is reproduced in a digital format, including through streaming, they are owed a mechanical royalty,⁶[6]17 U.S.C. § 115. . which bear that name because of section 115 of the Copyright Act, which requires licensees to obtain a “mechanical” license on a song-by-song basis. The CRB establishes all mechanical royalty rates every five years through a panel of three judges appointed by the Librarian of Congress.⁷[7]17 U.S.C. § 115(a). In 2018, the enactment of the Music Modernization Act (MMA) created a streamlined process by revising section 115, enabling the distribution of “blanket” licenses and the collection and payment of such royalties in an effort to enable licensees to offer as much music as possible and to reduce transaction costs.⁸[8]Where We Began, The MLC, https://www.themlc.com/historical-unmatched-royalties. The Mechanical Licensing Collective (MLC), a nonprofit organization, is designated by the statute to undertake these processes.⁹[9]What is the mechanical licensing collective? https://www.copyright.gov/music-modernization/faq.html. Since 2021, the MLC has been responsible for administering such blanket mechanical licenses to digital service providers—including those that stream music—and for collecting royalties to pay copyright holders, the artists, after deciding the appropriate rate.¹⁰[10]Id.

The most recent CRB rate proceeding shows how complex the rate-setting process is and how it can lead to the prolonged distribution of royalties. The ruling of that proceeding appeared to be a significant victory for songwriters and artists when the CRB determined the royalty rate for 2018-2022 should be increased from 11.4 percent to 15.1 percent.¹¹[11]Songwriters of North America, Black Music Action Coalition, Music Artists Coalition, Songwriters Have Been Waiting Five Years for a Whopping $700-800 Million in Royalties: Here’s What You Can Do to Help, Variety(Mar. 31, 2023), https://variety.com/2023/music/news/songwriters373-million-in-royalties-petition-1235569464/. However, that victory was diluted when four streaming services appealed the decision, causing a five-year delay in distribution.¹²[12]Id. The importance of the increased rate can be illustrated by the testimony of songwriters lobbying for the increase. Steve Bogard, a successful songwriter, testified in that proceeding: “Over the past few years, my income has not reflected my success because the interactive streaming services are paying a fraction of what I earn from physical sales and permanent downloads.”¹³[13]Phonorecords III, et. al., supra note 1 at 1957. In 2022 alone, the U.S. music industry reached record revenue of $15.9 billion, with 84 percent of that figure made up of streaming revenues.¹⁴[14]Jem Aswad, U.S. Recorded Music Revenue Score All-Time High of $15.9 Billion in 2022, Per RIAA Report Variety (Mar. 9, 2023), https://variety.com/2023/music/news/riaa-2022-report-revenue-all-time-high-15-billion-1235547400/. The increased rate ultimately enables artists to claim their rightful portion of that revenue. Nevertheless, to make things worse, artists were still not swiftly paid when the CRB upheld that increased preliminary rate.¹⁵[15]Id. This is largely attributable to the convoluted royalty payment process set by the MLC.

Complicated Royalty Calculations and the Multi-Step Payment Process

The process of calculating royalties is complex. For streaming services, the first step is determining the Total Content Cost (TCC) of licensing recordings that contain a musical composition.¹⁶[16]Songwriters’ New Streaming Royalties Approved Before the New Year / Billboard, National Music Publishers Association, https://www.nmpa.org/https-www-billboard-com-pro-songwriters-new-streaming-royalties-approved-new-year. More specifically, the TCC is the total cost of payments that streaming services make to record companies or similar entities that own or control master recordings for licensing.¹⁷[17]Jordan Bromley, A Letter to Songwriters On the Copyright Royalty Board, Hypebot, https://www.hypebot.com/hypebot/2018/03/a-letter-to-songwriters-the-crb. Second, that number is measured against the total revenue of the service.¹⁸[18]Songwriters’ New Streaming Royalties Approved, et. al., supra note 16. After that number is established, a royalty pool is created.¹⁹[19]Id. Next, the performance royalties are subtracted out, leaving only mechanical royalties.²⁰[20]Id. That deduction happens because performance royalties are negotiated separately by performing rights organizations such as the American Society of Composers, Authors and Publishers (ASCAP).²¹[21]Music Royalties Under Copyright Law, Justia, https://www.justia.com/entertainment-law/music-royalties. Finally, a per-subscriber “penny rate royalty,” the fixed rate per song unit (e.g., $0.60 per unit), is multiplied by the number of subscribers for a particular service.²²[22]Songwriters’ New Streaming Royalties Approved, et. al., supra note 16. The greater of these two totals (the TCC percentage or subscriber royalty rate) becomes the final mechanical royalty pool that is ultimately paid to artists.²³[23]Id.

According to the MLC, once the CRB publishes the final royalty rate determination in the Federal Register, streaming services have six months to report and pay the additional payments to artists.²⁴[24]What about Royalties for Phono 3 Uses?, The MLC, https://www.themlc.com/historical-unmatched-royalties. . That means that the date for distribution for the 2018-2022 period is February 2024.²⁵[25]Id. To illustrate the point of contention here, this is the timeline of most recent proceeding: First, the CRB initially set a royalty rate for the statutory period (2018-2022) in 2018.²⁶[26]Id. Next, in March 2019, streaming services appealed the decision.²⁷[27]Id. Finally, in August 2023, the CRB upheld their initial determination and published the final royalty rate in the Federal Register.²⁸[28]Id. Subsequently, in February of 2024, an entire year after the payment period has ended, artists will be paid.²⁹[29]Id.

The Distribution System’s Various Impacts

For artists, waiting an extra year to be paid has tremendous consequences, as royalties are their main source of income to cover living expenses, thus allowing them to dedicate as much of their time as possible to songwriting.³⁰[30]Phonorecords III, et. al., at p. 1957, supra note 1. Moreover, the delay also has consequences for music publishers. Specifically, the lack of payment in royalties has diminished some music publishers’ willingness to make or continue publishing agreements with songwriters.³¹[31]Id. These ongoing frustrations are perpetuated when streaming services prolong distribution by appealing the rates set by the CRB. However, for streaming services, the revenue earned by allowing consumers to access these artists’ works is utilized to do things such as sign new artists and acquire catalogs.³²[32]Id.

Ultimately, streaming services boost revenue by delivering artists’ works to ever growing numbers of subscribers, at the expense of artists who must wait months before they see a portion of those revenues. The bottom line is that while the system for collecting and distributing royalties to rightful owners has undoubtedly improved, as shown by CRB upholding the rate increase, there are still opportunities to make it even more efficient. The six-month delay of royalty payments between rate determination and distribution is one example of the shortfalls of the system under the MMA.

Conclusion

The MMA has made it easier and more efficient for streaming services to obtain mechanical licenses to distribute and play copyrighted works. Nonetheless, artists are sadly still waiting for their deserved royalties. Moreover, the rate setting proceedings illustrate that streaming services will likely appeal any CRB decision that increases the rate, causing further delay on royalty payments. If the timelines and/or structure of the royalty setting process, as well as distribution, do not change, this cycle will likely continue, creating unjust hindrances on musical creators and the industry as a whole.

Written by: Kyle Hogan
Kyle is a 2024 J.D. Candidate at Brooklyn Law School