While the Mechanical Licensing Collective's announcement last month of the “final final” of the Phonorecords III Copyright Royalty Board's rate-fixing adjustment seemed to imply that songwriters and publishers are owed another roughly $400 million, sources say the number likely overestimates upcoming financial windfalls.
After more than two years of waiting that included an appeals process, a hold, a partial price retrial, and then time to recalculate and resubmit custom game reports, sources say that number can estimate correctly how much more money was earned and reported as due in the CRB determination covering 2018 to 2022 — but likely including payments already made.
Within the overall adjustment, about $250 million in net additional engineering royalties will be paid thanks to the adjustment, with almost all of that coming from 2021-2022. These royalties will be paid from May by the Mechanical Licensing Collective, the agency created by the Music Modernization Act to collect and disburse mechanical royalties from on-demand digital streaming services. This means that custom monies paid by MLC will likely start reaching songwriters from their publishers next quarter.
The remainder of the approximately $400 million adjustment comes from performance rights. But sources at US performance rights agencies say they are surprised by MLC's claim that another $138 million was discovered in the resubmitted game reports required by the final rate determination.
However, MLC may be the best to figure this out. Because the engineering rate formula requires digital service providers to report how much they paid in performance royalties each month — or estimate how much they will pay — MLC has information on how much they collectively reported in engineering and performance royalties for 2018-2022 before the rate setting is finalized. It also has information on the amount of performance rights incurred after the resubmission of reproduction reports with the adjustments due to this final determination. The final determination was made in August 2023, eight months after the end of the 2018-2022 period, with resubmissions due on 9 February 2024.
Instead, the PROs themselves only know what each individual was paid, and each digital service only knows what it has paid each individual PRO. None of these sides can see the entire performance revenue pool like MLC, unless they share information with competitors, which is unlikely but possible. As a result, sources at PROs and digital services say they are surprised and troubled by MLC's announcement that more performance rights were found because of the custom reports. Others say MLC's announcement has caused confusion among songwriters and PROs. A source at a PRO suggests MLC including performance rights in its report was a “marketing mishap”.
PRO sources insist that any performance royalties that came in have already been largely paid and they do not expect any new windfalls. And sources at the digital services say that, as far as they can tell, the streamers have already paid all the performance royalties they were owed and don't expect to make any further payments.
Meanwhile, sources at the PROs say the MLC announcement has caused considerable confusion, leading songwriters to question when they will receive additional performance payments and why they were not told about it earlier.
Even though the performance royalties have already been paid, many music industry executives are speculating as to what caused such a significant increase. The all-in engineering formula laid down by the CRB in Phonorecords III, by itself, does nothing to change performance rights, which are usually decided by private negotiations between PROs and streaming services.
It is possible that the digital services made mistakes when they reported the monthly performance allowances the first time. The MLC could also have erred either when it aggregated all interim royalties paid while the parties awaited the final determination or when it then adjusted performance royalties for the period.
Alternatively, some of the practitioners could have negotiated agreements linking their rates of return to the statutory mechanical rate. This would mean that when digital services returned to paying a lower engineering rate while the 2018-2022 rate was still being set, they also ended up paying lower performance royalty rates — which were later increased after the CRB rate was finalized. However, while some PRO sources admit they are trying to negotiate for at least 50% of the statutory rate as a floor, they also say they have no deal trigger specifically linked to the mechanical rate.
Another theory is that one or two of the PROs may have been operating on a temporary royalty rate with one or more streaming services while they worked through negotiations, which presumably weren't finalized until recently. If these royalty rates have now been decided, adjustments could be reflected in this overall reported figure. However, several sources say they know of no cases where this has happened.
It is not unusual for post-date streaming allowance adjustments, even without a new subsequent “final final” determination of rates, sources point out. As it stands, streaming services will sometimes need to make estimates regarding monthly performance reporting and mechanical royalty payments, and then adjust later, if necessary, once the period closes. At that time, the new payment would be made and the expenditure adjustment reported to the MLC — not two years later, sources say.
Performance and mechanical rights have a see-saw effect where an increase in one will result in a decrease in the other. This is because the formula for calculating the engineering factor includes a first step in the formula that initially acts as a cap on a set of publishing rights that combines the two. This has publishers worried. If the agencies have already made all of the performance payments and the PROs have paid all of the performance entitlements they received, then how can the agencies now claim that $138 million as an additional deduction on the resubmitted reports? By claiming additional performance payments, this would likely reduce potential mechanical royalty payments on the resubmitted report.
Beyond whether more money will come in, how those publishing royalties are paid — as a performance or mechanically — matters to publishers and songwriters.
For example, if those new $138 million in performance royalties were to be paid out, it would likely mean that only about $120 to $125 million of that would flow to songwriters and publishers due to PRO overhead.
If, instead, that $138 million was mechanical royalties, songwriters and publishers would get all of it because MLC doesn't get an overhead deduction since digital services fund the operation. But instead of being paid separately and shared directly between publishers and songwriters, these royalties are paid to the publishers, who then distribute the royalties to their writers, but usually after recovery. So the difference in where payment is made matters to songwriters and publishers.
Overall, this adjustment seems to weigh more favorably on the mechanical rights group. Previously, during the interim period, the $2.77 billion in total publishing rights payments from digital services was weighted 50.93% to mechanics and 49.07% to performances. However, after adjustments, including the removal of a small overpayment to mechanics for the years 2018-2019, the $3.16 billion in total publishing royalties paid by digital services to professionals and MLC amounts to 52.63% paid in mechanics and 47.37% in efficiency, or almost two percentage points for the former.
Ultimately, when the MLC investigates the resubmissions and compares them to previous monthly gaming reports, it will likely be able to discern whether the extra $138 million came from all services, or whether one or two specific services amassed the bulk of the the new reported performance rights. But if that doesn't solve the mystery, another process begins that could bring an answer. Last month, the MLC issued notice to around 50 digital services that it was carrying out audits on them. If all else fails, this should bring some clarity to the mystery.
