A Kitchen Table Solution for a Kitchen Table Problem: The Importance of the Consumer Price Index on Unfrozen Statutory License Rates For Physical and Downloads

The Copyright Royalty Judges, their predecessor agencies and indeed the Congress have long used the Consumer Price Index as a way to preserve buying power for songwriters. They do this through a process called indexing which essentially increases an existing statutory rate by the cost of living during a relevant period of time. For example, the Copyright Royalty Judges now famously suggest in rejecting the extension of frozen rates in Phonorecords IV that a static rate is unrealistic. One reason: a static rate does not take into account the unknown cost of the consent to license permanently removed by the compulsory nature of the government’s mandatory mechanical license for songs. Permanently removing a vendor’s right to stay in or exit a market is a big deal in American jurisprudence, and it’s a role that the Judges clearly take quite seriously. (There are minor twists and turns to this due to “first use” but these are honored in the breach, hence the practically nonexistent cases turning on the exclusive nature of the first use right.)

The Judges typically turn to the Consumer Price Index as a way to solve this kitchen table problem (specifically the CPI-U, which is the urban dwellers version; country lawyers like me might take issue with that, but leave it to one side for now). Applying the CPI to the wage and price control of the statutory rate brings humanity into it and is the closest tool the Judges have to an economic impact study of frozen rates on songwriters and independent publishers. Here’s an example from the Bureau of Labor Statistics of what goes into the recent 8.5% increase in the CPI for March year over year:

As I’ve been reporting for the last year, we are heading into inflationary times reminiscent of the 1970s and early 80s. The trendline in CPI has been obvious for well over a year as I’ve reported many, many times as has the entire business press outside of the music business:

When you read news reports that say current inflation is the highest in 40 years, remember that those rates were after a decade of rising interest rates. We are just starting what could easily be a decade of rising interest rates after some 14 years of zero interest rate policies that artificially reduced or tamped down the market rates of interest while the government lathered on the debt and the Federal Reserve bought a variety of assets such as toxic mortgage backed bonds (see The Big Short). All this started in 2008 and is coming home to roost now.

This means indexing to the CPI for songwriters is more important than it has been in 40 years.

All of the bundle of costs in the CPI-U are exactly relevant to the cost of the input into recorded music–the songwriter has to stay alive long enough to keep producing songs (the same could be said of artists, which may be why the CRB routinely applies a CPI indexing to sound recordings for the webcasting royalty–sadly, this has never been a deal point in recording agreements but probably should be.)

When you look at the items that go into the CPI from the chart above, it’s easy to understand why a kitchen table issue requires a kitchen table solution.

If the cost of songs increases with inflation, the assumption is that prices will increase on some level; otherwise, songwriters are subsidizing the manufacturing chain. Like all other companies in an inflationary environment, labels will have to decide whether to pass the increased cost on to consumers or absorb the cost themselves, in whole or in part. That’s what people do when inflation runs uncontrolled through the economy.

Whatever the outcome, the CPI is a relevant tool for the Judges which is why they have used it a bunch, Congress is comfortable with them using it (because Congress does, too, in many other areas where the government controls payments (like Social Security), and it addresses the task and purpose of that statutory license which is to compensate songwriters.

Another way to look at this is that if the minimum rate increases from 9.1¢ to 12¢ (or 13¢ depending how you do the maths), the incremental cost to labels would be 2.9¢ per single song recording, such as a download. That’s $2,900 for every 100,000 download sales, or $290 for every 10,000 albums with 10 songs. If you apply the effects of the controlled compositions clause in recording artist agreements, this increase is at best prospective, but is likely to be muted further still due to the 3/4 rate and other caps. Indexing seems like a common sense move, but why do they call it common sense when it’s so uncommon?

The CPI is the right tool and if the Judges only apply a CPI index in the physical/download prices, they can avoid running up big legal fees and turning what should be a simple negotiation among friends into Bleak House, the Dickens book about the lawsuit where the only people who made money were the lawyers. (Another good reason to keep the rates constant across all physical configurations and downloads–Apple and Amazon need to increase wholesale prices on downloads so labels and songwriters don’t subside them.)

Kind of like it is now at the CRB.