Price is Truth: Practical Knowledge for Independent Label Compliance with the New Mechanical Rates

Price is truth.  Or something like that.  The price of a song came up on a panel I was pleased to speak on at the A2IM Indie Week conference that was intended to cover what effect the potential new mechanical royalties for physical and downloads would have on indie labels.

Sadly, the panel didn’t have time to drill down on the practical effect that this price increase would have on record companies, particularly record companies that started operations or designed their royalty systems since 2006.  I’ll talk about that announced topic in this post as it’s the one that most labels would probably like some answers on rather than a discussion of process inside the Imperial City of Washington, DC. 

First remember that one big reason for regular mechanical rate increases across the board is historical—the first big rate freeze lasted from 1909 to 1978 and the statutory rate compelled by the government’s license was frozen at 2¢, kind of the longest running wage and price control in history.  The rates gradually started increasing in 1978 until reaching the high of 9.1¢ in 2006.  Merely adjusting that 2¢ rate for inflation from 1909 to 2006 would be a 40¢ rate, so arguably songwriters are paid at a -31¢ rate just for perspective.  The heart of the songwriters’ problem is that the people in charge allowed them to twist in the wind from 1909 to 1978 and then again from 2006 to the present day on physical. 

Not to mention that the publishers seem to overlook the simple arithmetic:  If you freeze the rates for 15 years, don’t be surprised if category income is suppressed or even declines.  Plus suppressed rates understate catalog earnings and potentially the sales prices of catalogs are less than what they should be.  Price is truth.

What Labels Need to Do to Get Ready for the Return to Regular Mechanical Rate Increases 

Sellers are focused on the sales side of the transaction.  As anyone can tell you, vinyl sales are up, especially at indie labels who sell a lot of vinyl.  That’s why my panel was at A2IM in a room of vinyl sellers doing a fantastic job of preserving culture.  So how will the new mechanical rates affect these labels?

The new rates for physical and permanent downloads start on January 1, 2023.  That suggests that labels need to plan on reviewing their P&Ls and changing their accounting systems for units made and distributed after that date. 

You need to consult with your lawyers and accountants but here are some general ideas about what to be thinking—and if your label wasn’t operating before 2006, you may have never experienced a mechanical rate increase before because the suppression of rates was so effective.  Rate changes occurred every two years between 1/1/1978 and 2006, but this old thing may seem like a new thing if you haven’t been operating that long.

  •  Do you have the mechanical obligation:  Consult your contracts to determine if you pay mechanicals or if you pass that obligation off to someone else (such as the artist).  Revenue share deals (say a 50/50 split of net) between a label or licensee and an artist often push the entire mechanical obligation (or “load”) off on the artist or the licensor.  (Or the label may pay but deduct from the artist.). If this is your standard arrangement, it’s possible that the new rates will have no financial effect on you at all.
  • Controlled Composition Impact:  Physical albums are most likely to be covered by the “controlled compositions clause” both retrospectively and prospectively.  Review your contracts to determine if you license mechanicals directly from your artists under a controlled compositions clause, or as it’s sometimes called a “maximum aggregate mechanical royalty” provision.  Remember—the whole point of the controlled comp clause was to prevent songwriters from getting the benefit of any increase in the mechanical rate (which includes artist/songwriters).  Producer deals also may have a controlled compositions clause. (Also remember that physical is not handled by the MLC, thankfully for songwriters.)

    These controlled composition clauses freeze historical mechanical rates at the statutory rate on delivery (or sometimes release).  At a minimum, these clauses apply to all songs written or co-written by your artist, but often apply to all songs, including “outside” songs, meaning song payments are subject to the cap even if written by someone not subject to controlled compositions.  (You may have negotiated “protection” for one or two outside songs (or fractions).) The scope of these clauses may vary by contract.

    But the real meat of the controlled comp clause is the three-quarter rate and cap.  This means that for purposes of all the songs on an album, the maximum that the label pays is 10 x [.75 x Fixed Minimum Statutory Rate] on all royalty-bearing sales, where the “Fixed Minimum Statutory Rate” is the rate in effect on delivery of a recording commitment album.

    What this means as a practical matter is that the chances are very, very high that the mechanical rate on all the records you have released before 1/1/23 will not change at all.  There is also a good chance that the records delivered to you after 1/1/2006 but before 1/1/23 will have their rate fixed at 9.1¢. If you were operating before 2006, the rate fixing dates for older releases could be lower and maybe much lower and likely will not be affected by the new rates.

    The new controlled comp rate for albums with a 10 song cap and ¾ rate will be 10 x .12 x .75, or $0.90 per disc.  Check your contracts and consult with you legal and finance teams, but chances are good that this new rate will only apply to new releases not subject to a rate fixing date prior to 1/1/23.

    Compared to the current controlled rate of 10 x .75 x .091, or $0.6825, that is a per-unit increase of $0.2175 for royalty bearing sales occurring after the contractual rate-fixing date (because rate fixing dates once set last forever, which is a long time).
  • Mechanical Royalty System Review:  You need to determine sooner than later how difficult it will be to pay different penny rates for different releases and within one release.  For example, if Artist A has 2 albums released prior to 1/1/23 and releases a 3rd album after 1/1/23, the first 2 albums will be subject to the old frozen rate and the third will take the new, unsupressed rate.  “Difficult” does not just mean affordability, it also means a systems review.  For example, if you have hard wired a 9.1¢ rate into your mechanical royalty accounting, you will need to have your system recognize a different rate for different releases.
  • Outside Songs:  If you have a lot of cover recordings of songs by outside writers or compilation albums where you agreed to pay a full floating rate, you will have a greater P&L impact.  But you also have some time to negotiate lower rates if possible.

A Question of Process:  A Longer Table

First, what did the panel actually address?  The panel did have an important discussion about the basis for the mechanical rate in the US which wasn’t exactly the announced topic but which was nonetheless the basis to air some ideas that really must be addressed.

The process at the Copyright Royalty Board and in particular the rejected “voluntary settlement” that created the crisis in the first place needs to be addressed.  Closed door meetings help no one and will eventually come back to bite as the frozen mechanicals crisis demonstrated in spades.

A2IM is exactly the place for this discussion.  That is why I began having conversations with Richard Burgess, the head of A2IM, back in January about the potential new rates, soon joined by independent publisher Abby North.  We decided to start these discussions because it was quite apparent at that time that there would be some kind of increase in the then-frozen physical mechanical rates of 9.1¢ and we did not want it to come as a surprise to A2IM members.

The reason for our outreach to Richard is simple:  A2IM members release a disproportionately large number of titles in the vinyl configuration.  The aggregate annual revenue figures from mechanicals continually downplayed by the publishers soft-pedals this vital fact.  

Closed door meetings help no one, and I appreciate that Mitch Glazier of RIAA wants more people in the room for the voluntary negotiations as stated in Billboard:  

Glazier, however, says that he has no control who participates in the CRB proceedings — it has its own process that makes those decisions — he does have a say who participates in the negotiations for a new rate settlement and wants to include other independent songwriting groups, publishers and labels

David Lowery and I intend to advance that ball by hosting roundtables on the CRB process as part of the next Artist Rights Symposium this fall at the University of Georgia in Athens.  We also want a longer table with more people at it to set the price, because price is truth.