Mechanical collections from sound recordings are one of the key income sources for musicians. In the days when recorded music ruled, and LPs or CDs represented the main cash crop of the music industry, revenues from mechanicals were a reliable source of receipts for songwriters and their publishers. Songwriters, in particular, knew that, by law, mechanicals had to be paid dutifully by the record labels. Whereas artist royalties on recorded music sales were always subject to the record label breaking even with the artist—and the label’s ‘recoupment’ had to be considered before any payment to the songwriter—mechanicals guaranteed immediate income for the songwriter.
Moreover, mechanicals have always loomed large in the consideration of music creators, for they are one of the most important rights that the law recognizes for recorded music. From the mid 1980s to the new millennium, in many of the most developed countries, songwriters and publishers collected money from mechanicals roughly in the same proportion as that they collected money from performance rights on radio and TV broadcasting, sporting venues, clubs, and restaurants. This has changed since 2001, as recorded music sales have dropped, and the comparable figure is now is $1 of mechanicals for every $2 or even $3 of performance income.
In 2008, the Harry Fox Agency, the organization that administers the bulk of the mechanical royalty collections in the US, valued the market at $397 million. This is the figure that was distributed to music publishers, and roughly half of this was passed on to songwriters. Collections are based almost entirely on the application of the statutory rate of 9.1 cents per song under five-minute-duration (for lengthier songs, the rate is calculated at 1.75 cents a minute; this tends to discourage record labels from recording longer material, because for them the mechanical rate is a cost of production). Digital downloads at iTunes pay the same statutory rate on a 99-cent song. Other mechanical licenses today involve ringtones and interactive streams and limited downloads from subscriptions services. However, the combined revenue to Harry Fox from such activities is still very small.
A Checkered History Since 1976
A ‘new era’ of US mechanical collections was truly inaugurated with the Copyright Act of 1976, at a time when the recorded music business had reached a high point in sales. The rate was then set at 2.75 cents, and it has been periodically revised upwards to take marketplace conditions into account. However, there seems to be some confusion in the existing music business literature about how inflation factors in the determination of the rate, which is key to overall collections.
Without listing any particular author by name, an overall argument could be made to suggest that, depending on the year of the edition of a music business text, the rate is seen as determined by inflation only when it is declared so by the Copyright Arbitration Royalty Tribunal (CARP). The problem is that there have been many years since 1976 when the rate has been revised upwards with no reference to the rate of inflation. In that case, authors will often refer to the upward revision of the rate without reference to inflation.
The question here is whether or not the statutory mechanical rate has really kept up with inflation since 1976. If so, songwriters and their publishers could be said to have obtained fair terms against the record labels. A table, below, shows the data:
Inflation, in short, has not been accommodated properly. There has been a serious devaluation of the mechanical statutory rate against the Consumer Price Index since 1976. Moreover, the downward trend is steady throughout, suggesting that the periodic upward revisions of the mechanical rate –much publicized in the creative music community—are at best cosmetic.
The evidence suggests songwriters and their publishers are losing power in the US against the record labels. Perhaps it is the mitigating circumstances of the current recession that justify the sway labels have on CARP (and Congress) today. But in the golden mid 1980s and 1990s, proper artist representation could have addressed the decline in mechanicals at a time when the record business was financially strong.
Mechanical Rates and the Law
As will be seen, there is nothing in the legislation of 1976 that explicitly says that upward revisions of the statutory mechanical rate be based on the Consumer Price Index.
In particular, section 801 of the Copyright Act, the statute that establishes the functions of Copyright Royalty Judges, i.e. the officials who have the authority to set the mechanical royalty rate, lists four considerations to be taken into account when setting the rate. They are (sic):
(i) to maximize the availability of creative works to the public
(ii) to afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions
(iii) to reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication
(iv) to minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices
There is no mention here about keeping pace with the rate of inflation. In fact, among the canons of legal interpretation, it is usual to fall back on the phrase “expressio unius est exclusio alterius” –which has the implication that if something is not accounted for explicitly, it should not be considered. As there is nothing about the Consumer Price Index included in the statute, it can be inferred that inflation need not be an official consideration for the tribunal of judges.
Indeed, all of the objectives, but most particularly the fourth, seem to caution against raising the rates to keep in pace with the Consumer Price Index. A lower rate would maximize the availability of works to the public under the first objective. In addition, the investments made by record labels in recording and distributing sound recordings are almost always greater than those made by the composer in writing the song, leading the third objective to also weigh in favor of keeping the rate low. Finally, the fourth objective also plays against a periodic increase, as any rise would cause at least some disruption in the record industry. Overall, the four objectives may be considered somewhat of a sweetheart deal for the labels.
Under a provision of section 801, furthermore, when Copyright Royalty Judges set rates for compulsory music licensing in the secondary transmission of music by cable systems, only two factors may be considered and the first is “national monetary inflation or deflation.” Therefore, it is not as if monetary factors were entirely absent in the mind of Congress when the 1976 Copyright Act was drafted. The absence of inflation as a consideration in the setting of a mechanical rate is indeed conspicuous.
The mechanical rate has remained at 9.1 cents since 2006, and will remain so until 2012. Because it has not been adjusted upwards to reflect inflation, it suggests more loss of power by songwriters and their publishers. Conversely, record labels continue to save on the cost of production of intellectual property.
However, a number of points need to be made.
An album is now $9.99 at Apple iTunes, one of the main retail fronts of the business. Ignoring for a moment that most record label contracts now include controlled composition clauses that reduce payments of the mechanicals to a third of their value and pay mechanicals up to a maximum of ten songs per album, it is clear that the current mechanical rate is now a much greater percentage out of the selling price of an album than it was in the 1990s—when wholesale prices, without a discount, were around $12-$15.
Many artists, moreover, wish to promote sales of their music on a variety of non-recorded platforms, including live music and merchandise sales. Jazz artists, in particular, may be happy that mechanicals have not risen much because their livelihood is not as dependent on recordings (besides, it makes covering other standards and newer outside compositions more affordable). But they may not be alone. Higher mechanicals might mean more expensive records for the consumer—a factor that is not lost on many artists in other genres and on Apple, who has opposed the increase of the mechanical rate.
There is little evidence, moreover, that the Songwriters Guild and the National Music Publishers Association (for whom the Harry Fox Agency collects) are truly up in arms against the record labels for maintaining the 9.1 cents rate. The recorded music business is in retrenchment, so the struggle over mechanicals is not generating the excitement it might have engendered in better times.
Finally, mechanical concessions for new-recorded media may also be traded against the fixed and standard rate of 9.1 cents. Publishers and their songwriters were not able to change the 9.1 cents rate, but during the latest round of negotiations for a new schedule of mechanical levies, in force until December 31, 2012, they got a new mechanical rate approved for master ringtones. It was the first ever, and was set at 24 cents per download. The NMPA had done well. Although it fell short of the 30 cents it wanted, i.e. 15 % of a $1.99 download, it was well over the NMPA’s minimum position of 15 cents. Besides, a new compulsory license for recorded music had been written into law, potentially redressing the continuing inequity of a poor treatment of inflation in the long-standing distribution of mechanical collections.
By Peter Alhadeff and Caz McChrystal