Friday, December 18, 2015

Winners and losers of the CRB's Web IV rate decision

By Emmanuel Legrand

On Dec 16, 2015, the US Copyright Royalty Board (CRB) unveiled its decision regarding the rates applied to digital radio and non-interactive music platforms.

The process, known as Web IV rate-setting proceedings, concerns only sound recordings and its affiliated rights owners, recorded music companies and performers/musicians. It does not include rate-setting for royalties owed to songwriters and publishers. The period during which these rates applies is for four years starting January 1, 2016.

The rates decided for 2016 by the three-judge panel are:
  • $0.0017 per stream for ad-supported services ($0.0014 in 2015)
  • $0.0022 per stream for subscription services ($0.0025 in 2015)

For the years following 2016, the CRB said that rates for both subscription and non subscription services will be adjusted to reflect increases or decreases in price level, as measured by the Consumer Price Index.

What has not been renewed by the CRB is the scheme by which “pureplay” services like Pandora either paid the statutory rate or 25% of their revenues, whichever was the greatest. This is no longer applicable from January 1.

Non-interactive digital music platforms include internet radio giant Pandora, with its 80 million users, and satellite radio service Sirius/XM. Webcasters include all the radio stations that broadcast online their terrestrial output such as iHeartMedia, formerly known as Clear Channel.

The proceeds from the rates are collected from about 2,500 different media outlets by Washington, DC-based collecting society SoundExchange is tasked to collect and distribute the proceeds of the performance rights on sound recordings to performers and record labels.

Following the CRB's decision, we looks at the winners and losers.

Winners:

Pandora
The internet radio company said these were “rates that we can work with and grow from,” which reflects Pandora's management sigh of relief that the CRB did not set higher rates than it did. The rate of 17 cents per 100 streams for ad-supported services is slightly higher than the previous rate of 14 cents for 100 streams (a 20% increase), but the rate applicable for subscription service went down from 25 cents per 100 to 22 cents for 100. Pandora – which is still losing money despite revenues exceeding $920 million in 2014 and $828 million for the first nine months of 2015 – also said that the new rates would help provide “much-needed certainty for both Pandora and the music industry.” Pandora, as will the other services are also likely to benefit from the new approach from the CRB for the years 2017-20, during which rates will be subject to review based on the Consumer Price Index.

Sirius/XM
For the satellite radio platform, the CRB decision was good news as its service is subscriptions only, therefore, the slight drop in rate from 25 cents per 100 streams to 22 cents per 100 should have a significant impact on its bottom line. It still falls short of the 16 cents it was asking for, but it can still live with it.

iHeartMedia and other webcasters
The American radio giant will certainly see its bill to SoundExchange drop significantly as the rate its pays, as an ad-supported service, drops from 24 cents per 100 streams to 17 cents, a 30% decrease. “We believe that the rates the CRB announced will make it possible to spend more and drive more to build volume,” said the company in a statement. “We understand we have a responsibility to use this rate to increase volume, thereby increasing revenues paid to artists and music companies, creating a growth market and supporting services that consumers want and can afford.”

Rights holders
Even if the rates picked by the CRB judges are not as high as anticipated, more money is expected to flow in the direction of SoundExchange, which will benefit labels and performers/musicians. In addition, the ruling “will most likely not dampen the services desire to move toward more direct licensing,” according to former NMPA Legal Counsel Jay Rosenthal, now a partner at Washington, DC-based law firm Mitchell Silberberg & Knupp. “If anything, the ruling will probably drive more deals to the free market.” The ruling is also a victory for indie labels who argued against differential rates between the various set of rights owners, as advocated by Universal, Warner and Sony, who expected higher rates for holders of big catalogues.

Losers:

Pandora
Given that the CRB has increased the rate for ad-supported services, and that this segment is the one attracting the biggest percentage of Pandora's users, the bill footed by Pandora to rights holders is likely to grow, eroding even further the potential for profitability of the service. Its “blended” rate per stream of 17.6 cents represents a 15% increase from the previous rate, which would translate, at current subscribers' rate in roughly $60 million in additional payments to rights holders.

SoundExchange
The collecting society asked in its contributions to the rate setting process that the rates should be to increase to $.0025 and go up by $.0001 every year until 2020. The CBR did not follow this requirement, and SoundExchange will be certainly losing on potential revenues, which could come as a concern now that for the first time in ages, the society has reported lower than anticipated payments to rights holders for the third quarter of 2015, at $204 million, down 24% from the $267 million paid in the same period of 2014. The growth rate of Pandora and SiriusXM is slowing down with consumers turning to interactive services like Spotify or Apple Music, who do not pay royalties to SoundExchange but directly to rights holders. SoundExchange said in a statement that it will “review the decision closely and consider all of our options…” SoundExchange still has the option to appeal the ruling and ask the CRB to re-open the proceedings.

Songwriters and publishers
Although neither songwriters and publishers are not concerned by CRB's Web IV rate-setting, they have followed with great attention the proceedings, not least because they will soon get into their own round of rate setting. Given that Pandora seems to see publishing rates (roughly 4% of digital services' revenues) as variables worth pushing down, there is a lot to suspect that publishers and songwriters will be collateral damage in the process.

New non-interactive digital services
The new rates set by the CRB make it almost impossible for new entrants to join this sector without incurring from the outset massive costs related to content acquisition. That aspect was not lost on Pandora's management, noting that “it does make it harder for new players. It would be a challenge for a new company to start up and pay these rates from the start.”


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