Applying a Cost of Living Adjustment to Streaming Mechanicals

[This post first appeared on MusicTech.Solutions]

You are no doubt aware that the Copyright Royalty Judges handed down a final ruleadopting the settlement covering streaming mechanicals reached by the major publishers and the richest and most dominant corporations in the history of Planet Earth: Apple, Amazon, Google, Pandora and Spotify. There are many who are dissatisfied with the negotiated rate, no doubt. There are many who are disappointed that the Judges perpetuated the mind-numbing complexity of the royalty calculation methodology (which probably costs more to account on a per-stream basis than the payable royalty). 

That’s all true, but is a byproduct of the discriminatory practices frozen in time at the CRB, a libertarian hell-scape preserved in amber. As if taking a trip to Jurassic World (or at least 2009) wasn’t bad enough, the Judges refused even to place a toe onto the arc of the moral universe as they just did in the Subpart B rate setting in the same proceeding (i.e., the Phonorecords IV rates that abandoned the frozen mechanical and adopted an annual cost of living adjustment for physical and permanent download configurations). 

I discuss this in more detail in a post on MusicTechPolicy in which I question whether a hidebound adoption of rates that fail to apply a COLA equally and treat likes alike in the same proceeding is lawful, much less good policy. While the Judges focus on giving the negotiating parties, aka the rich people, what they want and ignore the notorious unfairness of the Copyright Royalty Board whose rulings apply to all songwriters in the world who ever lived or may ever live regardless of representation, I argue that applying the same COLA calculation to streaming as to Subpart B configurations solves the problem. This post will lay out a simple method of implementing a COLA for streaming.

The policy goal would be to apply the COLA formula to streaming. Because the streaming formula is so unduly complex, it’s easy to understand the resistance to adding still another step. Remember that the greater than/lesser of monthly calculation is a series of steps that gets to a per-play rate of sorts. All of the greater of/lesser than calculations have been fought and salivated over by dozens of lawyers (literally) so changing any one of them is probably not productive and in my mind is not necessary to give effect to the COLA. Remember that in the history of the government’s mechanical rate, the COLA was applied to a rate as an uplift, not as a way to calculate a rate. The point of a COLA is always to preserve the value of the government’s rate and recognizes that the songwriter will not have a chance to revisit the rate for five year tranches and a lot can happen in five years.

The easiest way to apply a COLA to streaming is to derive the per-play rate given the current formula and then uplift it with a COLA. The Judges already have a COLA based on CPI-U . The Judges need only apply the COLA as a legal modification to the streaming mechanical and accept the base line rates in the negotiated settlement. Otherwise, the exact same songs with the exact same songwriters for the exact same recording in the exact same proceeding will have a COLA when exploited by record companies and none when exploited by the rich people. This result just seems arbitrary. The labels having shown the way to a fair result should be followed by the DSPs.

We raised this approach in a Phonorecords IV comment I filed for David Lowery, Helienne Lindvall and Blake Morgan:

Applying the COLA to Section 115 may actually have a simple solution. The Judges already have a COLA formula. That formula can simply be applied as a step (5) in 37 CFR §385.21(b). This way the negotiated settlement terms are not re- opened.

Adding a COLA uplift to the applicable royalty calculation is simple. First, determine the applicable payable royalty for the accounting period concerned under the negotiated rates. Then apply the COLA formula derived by the Judges as an uplift to the payable royalties as a last step in the royalty calculation. The COLA could be calculated either annually or monthly although monthly seems more appropriate and accurate.

The uplifted amount (after any uplifted overtime adjustment to plays) would then be reflected on the applicable Copyright Owner’s royalty statement as the payable royalty for that accounting period.

This seems like a simple solution that brings the streaming mechanical out of Jurassic World and into the Era of the Songwriter.