RIAA and others establish standards for digital formats

The rise of digital platforms has kept showbiz scrambling — and lawyers working overtime — to sort out how content can be monetized and rightsholders compensated fairly. But with cloud-based music lockers such as Amazon and streaming services like Spotify on the rise, the music sector, at least, looks to be taking a signficant step toward clarity, with a proposed new deal on mechanical royalty rates and standards.

Hoping to open up a host of digital music formats to a wider range of works, the Recording Industry Assn. of America, the National Music Publishers’ Assn. and the Digital Media Assn. announced Wednesday that they’ve reached an agreement that creates five new categories to address digital formats.

Intent is to avoid litigation over Section 115 of the Copyright Act, which governs mechanical royalties, although the agreement has to be approved by the Copyright Royalty Board.

The crux of the issues the group aimed to resolve involve the increasingly complicated mixing of rights and rates that can arise with new digital platforms, such as cloud-based music lockers, streaming services or bundles involving cellphone or Internet service providers.

The new categories would allow both greater specificity and flexibility for mechanical royalty calculations, allowing for the fact that music platforms can change rapidly in the five year period between which Section 115 rates come up for negotiation. This would, in turn, theoretically encourage innovation and experimentation, as the new categories are designed to accomodate music platforms not yet in wide usage.

The new categories comprise mixed service bundles (which include a nonmusic service such as mobile phone or Internet services bundled with digital music), paid locker services (including subscription-based lockers such as Apple’s iTunes cloud), purchased content lockers (free locker storage provided along with a download or CD purchase), “limited offerings” (which would cover subscription services that offer specialized playlists or limited music genres, a category which effectively does not yet exist) and music bundles (two or more music products purchased in the same transaction, such as a CD with free download).

In proposing the new categories, the industry groups aimed to resolve gray-area issues and disputes for formats that have either “been developed since the last proceeding or are likely to be launched over the term” covered by the agreement.

Perhaps most importantly, each of the new categories propose both a revenue percentage rate, and a total cost of content rate, with the copyright holder getting paid whichever rate is higher. The objective here is to allow songwriters and publishers the flexibility to benefit even when labels or services change their own rates or platforms.

“Publishers can’t negotiate deal-by-deal,” said NMPA president-CEO David Israelite, adding that the new categories would allow digital music innovators “to be creative, while publishers are protected.” He also noted that writers and publishers would be better compensated, percentage-wise, under the new five categories than under any of the eight existing rates.

“This is a historic agreement that reflects our mission to make it easier for digital music services to launch cutting-edge business models and streamline the licensing process,” RIAA chairman-CEO Cary Sherman said in a statement. “This is a major win for consumers, the music community, entrepreneurs and investors in new music services.”

The agreement will essentially roll over all existing royalty rates and terms for CDs and standard digital downloads.

Pending approval by the CRB, the new terms would go into effect on Jan. 1, 2013, and expire in 2017.

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