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 This is no longer applicable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.”
