Should old acquaintance be forgot,
and never brought to mind?

Auld Lang Syne, by Robert Burns

If you’ve gotten accustomed to regular mechanical royalty checks every month or quarter paid directly to you (or your publisher) by streaming services or for downloads like iTunes, fasten your seatbelt. You may have some surprises coming in this time of the pandemic when money’s too tight to mention as Simply Red might say. The way it looks at the moment, if you don’t pay to “Play Your Part” with the mechanical licensing collective (or more precisely with The MLC, Inc.) those payments may disappear and you may be forgotten. We will be drilling down on this issue in coming weeks and months, but Apple Music has played their part in bringing the new new thing into sharp focus.

The Bonnie LADdie

As The MLC, Inc. tells us:

Starting in January 2021, The MLC will administer blanket mechanical licenses for eligible streaming and download services (digital service providers or DSPs) in the United States. 

Anyone who is entitled to receive digital audio mechanical royalties in the United States will need to become a “Member” of The MLC. This will include music publishers, administrators, ex-U.S. collective management organizations, and self-administered songwriters, composers, and lyricists. Becoming a “Member” of The MLC is how you Connect to Collect your digital audio mechanical royalties from The MLC. By law, The MLC’s services will be free for all of its Members. 

This is a nice way of saying that if you don’t become a member of The MLC, Inc., you will no longer receive your mechanical royalties from streaming or downloads–unless, of course, you have made other arrangements with the digital music services like a catalog wide voluntary license that a service has not (yet) terminated. More on this below.

Read that again–if you don’t become a “member” of The MLC, Inc., you will no longer be paid directly unless you’re big enough to have a direct deal with the music services. (By the way, the statute does not require that you sign up with any particular mechanical licensing collective, so it’s probably more proper to say that you have to sign up with a mechanical licensing collective, currently The MLC, Inc. If the Concrete Club…sorry…The MLC, Inc. is not redesigned in 2024, there will be a new mechanical licensing collective designated by the Copyright Office, at least in theory. No one expects that will happen, because as we know, everything is awesome.)

MTP readers will recall that January 1, 2021 is defined in Title I of the Music Modernization Act as the “license availability date” or the “LAD” (17 U.S.C. Sec. 115(e)(15). The LAD is the first day that the lobbyists’ shiny new blanket compulsory license and authoritative musical works database goes into full effect. The LAD is also the day that your mechanical license royalty is no long paid to you directly unless you have what’s called a “voluntary license” (17 USC Sec. 115(e)(36)) and maybe even if you do, as we will see. That’s right–another middleman in the friction free Internet. As they might say on Game of Thrones, from this day until your last day your mechanical royalties are now paid by the Congress’s “mechanical licensing collective” better known as the MLC and even better known as The MLC, Inc. And trust me, your watch is just beginning.

[Quick sidebar: Remember, mechanical royalties are paid to you for the “mechanical reproduction” of copies of recordings of your songs, including your own recordings. Descended from the piano roll for player pianos in the 1909 version of the Copyright Act, interactive streaming services pay mechanical royalties for the reproduction (and distribution) of songs. Before the LAD, those sums for mechanical royalties were payable directly to song copyright owners and the performance royalties for the public performance of those songs to the PROs like ASCAP, BMI, GMR and SESAC.]

After the LAD, those sums for mechanical royalties will be paid to The MLC, Inc. and The MLC, Inc. are in turn required to pay copyright owners (including self-administered songwriters) for billions if not trillions of plays. (The only entities I am aware of who routinely handle this level of transaction data are CMOs like CMRRA or MCPS both of which currently process mechanical royalty payments from the same services that will be reporting to The MLC, Inc.) The MLC, Inc. has selected the Harry Fox Agency to be its data vendor for the authoritative musical works database required by Congress upon which Congress intended for the world to rely. You may have run across HFA before as the licensing agent for Spotify among others if you follow the two class actions and numerous copyright infringement lawsuits filed against Spotify for failing to obtain mechanical licenses and pay royalties. That would include the recent case brought against Spotify by Eight Mile Style and Martin Affiliated regarding some of the Eminem catalog that names HFA as a defendant.

The MLC, Inc. was selected by the Copyright Office to operate the blanket mechanical license and to create the authoritative musical works database on which the world can rely for accurate song ownership information, the two fundamental tasks required by Congress of the mechanical licensing collective. The MLC, Inc. was selected on July 8, 2019, and will have its work reviewed by the Copyright Office every five years, so will be up for redesignation July 8, 2024. Since the lobbyists drafted Title I so that they would be selected, it should not be surprising that they were. However, starting with the LAD we are about to find out whether the lobbyists’ plan can actually survive contact with reality.

Weary Winter is Coming Fast

Apple Music is not waiting around for either streaming mechanicals or downloads from iTunes Music Store (which had previously been paid to labels or distributors of sound recordings by contract under what’s called a “pass through license”). You may have received this notice from Apple in the last few weeks:

The entire notice should be read carefully, but let’s focus for now on the second paragraph:

Apple has typically not paid minimum guarantees for streaming mechanicals but has paid a somewhat higher royalty rate under voluntary licenses for streaming that included collateral uses like lyrics.  Other services may pay minimum guarantees which makes termination more complicated from an accounting point of view.  But notice what happens here–first step, Apple moves its statutory licensing to the MLC and will pay the statutory rate.  (It’s unclear whether this is streaming only, download only, or both.  My hunch is both, but it’s unclear at this point from the papers.)  

Let’s set aside the usual self-congratulatory MMA hoorah and realize that it’s likely that at least pending the appeal of the CRB ruling in Phonorecords III (which Apple is not appealing), Apple will likely be paying less under the MLC’s administration of the blanket license than it is currently under its voluntary agreements.  You’d have to check your statements and your deals, but it’s possible.  If Apple is picking up the lyric licenses, etc., under the typical share of a capped pool structure, Apple has limited its downside.  Those licenses appear to be getting handled by BOTH MRI and HFA, which is weird in and of itself.

It remains to be seen whether songwriters will now get less from Apple, at least pending the rate court appeal remand (and any subsequent appeals of the remanded CRB ruling), but one cannot exclude the possibility. It’s also unclear whether transferring all its licensing to The MLC, Inc. results in additional transaction costs for Apple (and other DLC members) since they are essentially running the same siloed royalty operation to render transaction logs but paying the cost of the MLC for processing, statements and last mile payments.

Apple is doing something else that I’ve been concerned about since the MLC idea first surfaced back in the not-so-secret meetings with Rep. Judy Chu and others. Once the services have a way to dump the royalty accounting and payment processing on a middleman while getting all the rights they need through the blanket and some small side deals, what is to stop the services from refusing to pay minimum guarantees altogether? I’m just a country lawyer and am not as smart as these city fellers, but it sure seems to me like Apple is demonstrating how to get that done.

This also raises the immediate possibility that The MLC will administer voluntary licenses for Apple. The mechanical licensing collective (currently The MLC, Inc.) is authorized by statute to administer voluntary licenses under certain circumstances. Title I provides:

[T]he mechanical licensing collective may also administer, including by collecting and distributing royalties, voluntary licenses issued by, or individual download licenses obtained from, copyright owners only for reproduction or distribution rights in musical works for covered activities, for which the mechanical licensing collective shall charge reasonable fees for such services….Notwithstanding any provision of the antitrust laws, copyright owners and persons entitled to obtain a compulsory license under this section may designate the mechanical licensing collective to administer voluntary licenses for the reproduction or distribution of musical works in covered activities on behalf of such copyright owners and persons…

Title I clearly states that in order for the MLC to administer voluntary licenses for services, the copyright owner must also consent and also designate the MLC as the administrator of that voluntary license. Presumably Apple or the MLC have obtained the consent of each copyright owner to Apple’s transfer to the MLC of any voluntary license administration (such as a modified compulsory license). Given that the MLC is permitted to charge a fee for those services, the statutory drafting is again unclear–who pays that cost or can the other licensees that underwrite the cost of the MLC offset the administrative assessment by the amount of voluntary license fees received by the MLC for exploiting the asset that the DLC paid to create? Who knows.

Title I goes on to say (17 U.S.C. Sec. 115(d)(11)(C)(ii)) that “[e]ach copyright owner shall establish the royalty rates and material terms of any such voluntary license individually and not in agreement, combination, or concert with any other copyright owner.” A relatively small point, but it would be worth thinking through whether this provision has an effect on MFN clauses (also called “pricing parity provisions” for those reading along at home) or “capped pool” royalty rates.

But I’m sure that the Copyright Office will be keeping a close eye on how all this works out for songwriters, who are largely without recourse in the entire episode and rely on the Copyright Office to protect them. The Copyright Office designated The MLC, Inc. and will be responsible for deciding whether The MLC, Inc. has performed well enough to get re-upped after the review in 2024–for she who passes sentence should swing the sword.