[Editor Charlie sez: This continues from Part 1]
We saw in Part 1 that a sound recording is comprised of two separate and distinct copyrights: The copyright in the song (“©”) and the copyright in the recording of the song (“℗”). We also saw that the two fundamental divisions of each of these separate copyrights are (1) who owns (or controls) the copyright, and (2) who gets paid, or who has a “financial interest” in the copyright (sometimes the same person). We will be focusing mostly on the song copyright in this Part 2, continuing to address primarily the basis for public performance royalties and the mechanical royalties that currently form the basis for the “streaming mechanical” payable for on-demand streaming services in addition to the public performance royalty. We will return to the public performance royalty for sound recordings in Part 3.
Payment Streams–Pre Digital
Because we are starting from the beginning, let’s look at how the income streams from songs and sound recordings were divided pre-digital, that is, before 1995 or so (for reasons that will become apparent in Part 3). We will add one important fact that we’ll come back to later–before 1972, there was no US federal copyright recognized for sound recordings. That sounds incredible now, but yet it was true. You say, quite logically, how in the world did it take so long after the introduction of the cylindrical disc in 1888 to get around to granting federal copyright protection in sound recordings in 1972? Don’t ask.
It’s not that there’s no copyright protection for sound recordings in the US before 1972–there is state law protection in something often referred to as “state law copyright” or “common law copyright.” But just remember that huge chunks of musical history occurred on recordings prior to 1972–lots of the jazz heritage, Motown, Stax, Elvis Presley, and seminal rock bands like Jimi Hendrix and The Beatles. And, as SiriusXM recently discovered, The Turtles.
In the pre-1995 world, assume that all records were physical and most physical records were sold by record companies, small and large. Large record companies sold almost all of their front-line records through their wholly owned distribution affiliates and what they did not sell themselves they licensed. So–roughly speaking–the most common song-based licenses pre-1995 were either from a music publisher to a record company or a music publisher to a broadcaster (almost always through a PRO). Importantly, but less frequently in sheer numbers, sync licenses from a music publisher to a producer for use of song or score in motion pictures or television.
For reasons that seem antiquated now, the government was heavily involved in licensing and price setting for both mechanical and public performance licenses for songs. (And as we will see in Part 3, for certain public performances of sound recordings.)
Enter the Government: Mechanical Royalty Licenses and Rates
The 1909 Copyright Act established a compulsory “mechanical” license for songs for the first time. The compulsory license we have today (under Section 115 of the 1976 revision of the US Copyright Act) is the descendant of the 1909 version. The current Section 115 has had a few nips and tucks, to be sure, but it is not that different than the 1909 version.
To qualify, the song had to have been commercially released previously (essentially), and forever after that “first use” or initial commercial release no songwriter could stop a “cover” recording. (Just the recording–not a video version which requires a synchronization license. We’ll come back to this, too.)
Since the government was dictating a compulsory license, it also had to set a compulsory license rate, or a “mechanical” royalty. The rate that the government established in 1909 was 2¢ per copy.
And that rate stayed in effect until 1977. That’s right. 68 years. Thanks to the efforts of songwriter Hoyt Axton and many other songwriters who lobbied Congress during the last major revision of the Copyright Act in 1976, after 1977 the rate was indexed and the minimum rate is currently is 9.1¢. If it weren’t for these activist songwriters, it’s likely the rate would still be 2¢.
So now do you understand why the rate setting process is such a big deal to songwriters and artists? While expressed as a “minimum” mechanical royalty rate in the Copyright Act, that minimum immediately became a maximum, mostly because the songwriter cannot say “no” to a compulsory license. Songwriters had their ability to negotiate rates taken away from them by the government. Songwriters don’t want to be the only workers in the economy not to get a raise for 68 years ever again.
What is interesting about this for our purposes is that the people who held the rates down and had the lobbying clout to do so were not the retailers. That began changing in 1995 and after 2002 or so has nearly inverted. Now we have some massive public companies using the compulsory license for their digital music retailer affiliates–in the tens of millions. These companies often have a tiny music affiliate while the bulk of their business is elsewhere, from selling iPhones to keywords like “lady gaga torrents”. They understand search or hardware, but don’t understand our business and are essentially aligned against us–online retailers, webcasters, Google and its vast lobbying network, and the Consumer Electronics Association. Even NARM has nearly half its board from digital retailers.
The users of the compulsory license (or the “licensees”) are frequently those same retailers, so that’s a major change from the past when mechanical licensees were usually record companies. The current licensees are much more likely to be sellers of music than producers of music, and are much more likely to be retailers. This is relatively new in the 100 year existence of the compulsory license.
But for whatever reason, the government still thinks it is important to protect these licensees from the monopolistic lusting of songwriters. This is the same government that allows Google to drive around taking pictures of your house and snarfing down wifi data, tweaking their privacy policies to centralize the capture of user data for non-display uses, and buying up companies to increase their dominant position in online advertising. But those songwriters, boy we have to protect Google from them.
The Government Stays for Dinner: Government Control of Songwriters Through the ASCAP and BMI Consent Decrees
The government is still setting price controls on songwriters not only for mechanical reproduction, but also for the public performance right, too.
Remember that until the recent examples of direct digital licensing, the right to publicly perform songs was bundled with a collective licensing structure in the form of the American Society of Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc. (BMI) and the Society of European Stage Authors and Composers (SESAC).
The government thought it appropriate to protect America from the wanton monopolistic yearnings of songwriters to bargain collectively by asserting control over the two largest performance rights organizations in the US: ASCAP and BMI. (SESAC has never had a consent decree, which in and of itself raises a question about why ASCAP and BMI still have one.)
Around the middle of the last century, the government decided that they needed to treat songwriters as though they were as dangerous to the market as Standard Oil and forced an antitrust consent decree on them. The way those organizations work is that songwriters affiliate with one or the other (not both) and authorize their PRO affiliate to negotiate a blanket license on their behalf–which the PRO is required to grant. That means that if a licensee of music doesn’t like the royalty rate proposed by ASCAP or BMI, they continue using the music while choosing a very expensive process: litigation in a US federal district court sitting as a “rate court”. Strangely, the digital era has seen significant use of the rate courts that corresponds directly to the increased use of the compulsory license by wealthy public company digital retailers.
I wonder why. A cynic might say that any actual negotiation is simply the prologue to the third act that will be played out in rate court while the retailer uses the music. Again–the songwriter cannot say “no” very effectively. The lack of the ability to walk away from a negotiation seriously undermines the songwriter’s bargaining position.
Unlike the mechanical license, one of the conditions of the consent decree is that songwriters are allowed to opt out of the blanket license–but few ever did. (Some might say few ever did until digital retailers started abusing the rate court.)
Opting out is starting to happen more frequently in the digital era, and all of a sudden guess who doesn’t like it? The same digital services that like going to rate court and don’t want to have a fair arms length negotiation outside of a courtroom. Could it be that rate court litigation is just a cost of doing business for these public companies?
A Look at Royalty Streams for Songs and Sound Recordings
So who pays whom for what? Below I have another version of the chart from Part 1 of this series.
Note there’s a new category, the “record producer”–we’ll come back to them. This is the creative producer hired by the artist who helps the artist to realize the sound recording production. Record producers are usually paid a share of the artist’s royalty and an advance against that royalty. By the venture capitalists. No, actually, the VCs don’t pay producers either. No, the record producer is normally paid by the artist through the “old boss” record company.
Most artists have a producer, although some artists self produce. We’ll assume that all artists have a producer for our purposes.
I’ve also added a column to reference ex-US payments in a very general way (using Phonographic Performance Limited as an example). This column will become more relevant in Part 3.
This is how the payment chart looked in the pre-1995 (or “pre-digital”) era. (To be continued in Part 3)
Pre-digital income (Pre 1995)
Physical (CD, Vinyl)
US Radio/TV (OTA)
Ex US Radio/TV (OTA) For US Writer/Artist
MP/TV/Commercial
Songwriter
Yes, mechanical from publisher
Yes, PRO
Yes, PRO
Yes, sync license from publisher
Music Publisher of Song
Yes, mechanical
Yes, PRO
Yes, PRO
Yes, sync license
Recording Artist (“Featured”)
Yes, from record company
No
No (unless qualified see PPL)
Yes, master use from label
Session Musician/Vocalist
Yes, from union
No
No (unless qualified see PPL)
Yes from union
Record Producer
Yes from artist
No
No (unless qualified see PPL)
Yes from artist
Record Company
Yes from sales or license
No
No (unless qualified see PPL)
Yes, from master use
