Copyright Royalty Board To Set Mechanical Royalty Rates For Digital Music Services

By Ed Christman

In a major settlement between the music industry trade associations for record labels, music publishers and digital music providers, the Copyright Royalty Board, is expected to maintain the mechanical rate structure set forth from prior proceedings concluded in 2008 while creating new rates and terms for five new digital music service categories.

The agreement, which must still be formally approved by the CRB, maintains a song rate of 9.1 cents for downloads, CDs and other physical formats, 24 cents for ringtones, and the same formulas, with limited changes, used to determine the mechanical rate for different kinds of subscription and free interactive-streaming services.

It also creates new rate formulas for five new digital business models:

– For the paid locker services like the one iTunes offers consumers, music publishers will get a mechanical rate of 12% of revenue or 20.65% of total content cost or 17 cents per subscriber, which ever is greater.

– For digital lockers that provide free cloud storage with a download purchase, music publishers will get 12% of revenue or 22% of the total cost of content, which ever is greater.

– For the third category, called a mixed bundle such as when your cell phone services subscription rate comes with a music service, music publishers get 11.35% of revenue or 21% of total content cost, whichever is greater.

– The fourth new category, called limited interactive service such as when a subscription service can offer limited amounts of music to, say, one genre or playlists that the user can access at a lower price, music publishers will get 10.5% of revenue or 21% of total cost or 18 cents per subscriber, whichever is greater.

– Finally, for the fifth category, called a music bundles such as when a CD album comes with a download, music publishers will get 11.35% of revenue or 21% of total content cost.

The use of a total content cost will allow music publishers to potentially partake in whatever upside occurs when music labels negotiate in a free market how much they charge to supply their music to digital music service providers, according to National Music Publishers Assn. president and CEO David Israelite.

“If they get a better deal, we get a better deal,” Israelite says. That means if a license expires and a label negotiates a better rate, the publishing royalty can increase too. Also, if a major comes up with a creative deal that includes an equity stake in a digital music service provider or a guaranteed allotment of advertising, those items are assigned a value and included when figuring total content cost, which allows music publishers to participate in such deals.

“Digital Media Assn. executive Lee Knife said, “Today’s agreement paves the way for our members to continue developing exciting new business models that satisfy consumers, create greater revenue opportunities for music creators and effectively fight piracy, the music industry’s greatest threat.”

Recording Industry Assn. of America chairman and CEO Cary Sherman said, “This is a historic agreement that reflects our mission to make it easier for digital music services to launch cutting-edge business models and streamline the licensing process. This is a major win for consumers, the music community, and entrepreneurs and investors in new music services.”

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