Unexpected Raging 9.1% Inflation Allows CRJs an Unexpected Opportunity for Fairness in Frozen Mechanicals Solution

U.S. Inflation Rate BLS

The government announced another shocking 9.1% rise in the Consumer Price Index today that makes the frozen mechanical rate even more starkly unfair. Fortunately, a solution is on the horizon and the timing of yet another confirmation of the inflation crisis hands the Copyright Royalty Judges another opportunity for fairness that they are uniquely positioned to act on.

The current #FrozenMechanicals crisis has been submitted to the Copyright Royalty Judges for a final decision in the physical and download rate side of the current “Phonorecords IV” proceeding in Washington. For the first time in a long time we will likely see the government’s compulsory rates based on indexing the current rate to compensate for inflation. Given the dumpster fire economy we are all trying to survive in, that is a big deal.

We should see a final rule on these “Subpart B” rates for physical and downloads from the Judges in the coming weeks. (Remember, the unrelated streaming rates are being decided by the same judges in a different part of the same Phonorecords IV Copyright Royalty Board proceeding that features the usual insane posse of too many Big Tech lawyers chasing too few royalties and wanting to be sure that whatever the Judges decide, the value gets skimmed off the top to pay to the lobbyists and lawyers for the transaction cost of determining the rates paid by the biggest corporations in commercial history. But I digress.)

Thank You Everyone and Especially the Judges

Thanks to the Copyright Royalty Board commenters and sustained contributions from songwriters on social media and elsewhere (including our awesome readers) the Copyright Royalty Judges will be better informed about how the statutory royalty system actually works than they have ever have been at any time before. For example, when was the last time the the Judges on their own motion brought up the effects of the controlled composition rates on mechanical royalties? Keep looking, it must be in there somewhere.

We should all be grateful for each commenter who took the time out of their busy days to tell their side of the story to the Judges; each of them had a huge impact, and each of them inspired others to step forward next time. We should all be mindful of Ralph Waldo Emerson’s admonishment that “[t]here is no limit to what can be accomplished if it doesn’t matter who gets the credit.”

We must also, however, be thankful to the major labels who listened to the commenters and voluntarily decided to do the right thing by agreeing to index statutory royalties to inflation. This is a fair method–albeit something of a bandaid–for determining statutory mechanical royalties that allows songwriters and publishers to keep up with the rot of inflation and preserve the buying power of statutory rates. The fact that the major labels agreed to tie the statutory rate to inflation without litigating the issue is a major step forward for the community. It’s another major step along the fairness-making path the labels began with voluntarily passing through streaming royalties for many artists and in one notable case eliminating controlled compositions reductions altogether.

The major labels’ voluntary choice to do the right thing stands in stark contrast to the insane posse doing their wetwork in the streaming royalty hearings that the major labels are not directly involved in.

I hope we will see this forward looking treatment of songwriters replicated by streaming music services in the streaming mechanical rates later this year. There is absolutely no evidence that the Big Tech giants who use their 38 lawyers to dominate the streaming side of the Phonorecords IV proceeding have any intention of being fair to anyone who can’t make them cry uncle–which is no one, especially not the U.S. Government which is largely their owned property. These are people who are used to getting their way and intend to keep doing so. It’s certainly what they pay for.

Satan and Faust Press Gaggle

(Unfortunately, an inflation index was not included in the “new” Phonorecords III remand rates for the songwriter streaming royalty that were just announced with one dissent that is still under seal; unless it was in the dissent, the inflation debacle seems to have passed like ships in the night as far as the streaming services in PR III are concerned. There was, however, an inflation adjustment added in the streaming side of Phonorecords IV. We hope that Big Tech will be at least as sympathetic to songwriters as the major labels were. Yeah that’ll happen.)

The Judges Should Use the Inflation Rate with a 12¢ Floor

Remember that the purpose of public comments to a government agency is for the rule-takers to better inform the rule-makers about what it is like to live under their rules. This is why the comment I filed for Helienne Lindvall, David Lowery and Blake Morgan addressed the underlying policy of indexing rates rather than a specific static rate. The Judges seemed to have squarely rejected the appropriateness of a static rate when they rejected the first settlement these months ago; tying the rate to a constant rate over a five year period still requires the Judges to predict what the cost of “food at home” will be five years from now.

Instead, we took the Judges’ rejection of a static rate and the labels suggestion of a dynamic rate and applied the two across the board. As we have seen, the U.S. economy is coming apart faster than anyone would have predicted. A rate that seemed reasonable even a few months ago may not seem reasonable now. Remember, workers in the Weimar Republic got paid three times a day during the hyperinflation that led to WW II so they could get better prices on food and wood to burn in the morning and at lunch than they could when they got off work. We’re not there yet, but close.

It is no crime to have missed the inflation boat in Phonorecords III, but we gathered that the Judges did not want that mistake to be perpetuated in Phonorecords IV. Because the frozen mechanicals crisis is the first rate the Judges are deciding in Phonorecords IV (streaming will come afterwards), one can easily understand how the Judges may want to avoid the mistake of failing to index in historically disastrous economic times I began predicting last October in MTP (after all my friends were sick of hearing my whinging). The Judges may also be foreshadowing their ruling on streaming mechanicals yet to come (which Big Tech will fight to the bitter end as only they can). Time reveals all things.

Skyrocketing inflation rates militate for indexing across the board rather than a fixed rate in anything except a floor of the voluntary rate of 12¢. The Judges got to 12¢ by applying the increase in the CPI from when the current 9.1¢ rate was set and frozen in 2006 through the end of 2021. The labels adopted that rate and also agreed to index that rate to inflation in the “out years” of the Phonorecords IV five-year rate period (2023-2027).

Indexing With a Floor

Our argument was very simple. Having embraced indexing as the touchstone to guide government policy, we argued that it should be applied consistently. That consistency is applied in two major instances: Arriving at the indexed rate in 2023 (year 1) and determining which rate to index in the “out years,” i.e., 2024, 2025, 2026 and 2027.

The proposed indexed rate for 2023 is 12¢, derived by indexing the 9.1¢ rate to the end of 2021, not 2022. This method came from the Judges themselves in the Withdrawal Order issued in March of this year. Cynics like me anticipated the fast-moving dumpster fire in the U.S. economy back then, but even at my most Eeyore I did not anticipate the collapse we are watching unfold, even since the labels determined the 12¢ rate in April.

Therefore we argue that instead of the static rate–a policy approach the Judges rejected in the first place–the consistent approach would be to say that the 9.1¢ rate will be indexed to the annual CPI from January 1, 2006 through November of 2022. That calculation would be made in December of 2022 once the November rate is released by the government (which you need to complete the calculation).

We also introduce the concept of the 12¢ floor, meaning whatever the mathematical result of the calculation is for any year, it can be no less than 12¢. This is because the policy point of entire exercise is to remedy the injustice of a 15 year frozen rate to begin with. You don’t accomplish that policy goal by having the rate go backwards because of a glitch in the math.

Going forward, the rates are to be indexed, but which rate? Remember, the indexing calculation is to be done in December of each year based on the annualized inflation announced in November as is traditional. We think that the rate to be indexed should be based on the indexed rate set the prior year, but no less than 12¢ consistent with the restitution policy goal. Indexing to the prior year rate as opposed to the 2023 rate keeps the compulsory rate fresh as time passes and is consistent with the overall policy.

We will see what the Judges decide, but indexing will be a big help to songwriters no matter what.