Senators Slam Streaming Services’ Request to Defer Payment of Back Royalties, as CRB Ruling Looms (EXCLUSIVE)

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The negotiations over streaming-service royalties are one of the most complex, contentious and important battlegrounds in the contemporary music industry, pitting some of the world’s largest companies — Amazon, Apple, Google/ Alphabet, Pandora/ SiriusXM/ Liberty Media and upstart Spotify — against music publishers and labels.

It’s so contentious that even as the battle over rates for 2023-27 approaches later this year, the rates for 2018-22 still have not been determined: In 2018, the Copyright Royalty Board, which determines rates for publishers but not labels, ruled that streaming services must pay approximately 44% more in publishing royalties. In 2019, the four streaming services appealed that decision, arguing that they already pay out billions of dollars in royalties and such an increase would make their business models untenable. (Apple, the world’s second-largest streaming service, is sitting out this battle.) They requested that the increase come out of the labels’ share; the three major labels also own the three largest publishers, and needless to say are not interested in voluntarily taking millions of dollars from one business unit and moving it to another instead of collecting more — an unlikely premise that has been called a “heroic assumption” in hearings and documents. (While labels technically are not directly involved in CRB negotiations, some majors have involved executives working for both their publishing and label divisions.)

Caught in the middle of all this is the songwriter — the primary creator of the music that is at the center of this battle — who counterintuitively has ended up lowest on the totem pole in the streaming economy.

Untold millions of dollars in legal and lobbying fees later, a decision on 2018-22 — officially called Phonorecords III — is expected in the coming days, and according to documents obtained by Variety, it appears the streaming services do not expect to be successful.

The streaming services have appealed to the Copyright Office for more time to pay that potential increase — and been soundly criticized by five U.S. senators in a letter obtained by Variety, who stated “serious concern about any requests that would delay important and necessary royalty payments to copyright owners and [oppose] any granting by the Copyright Office of an extension.”

This most recent back-and-forth began with a six-page letter to the General Counsel and Associate Register of Copyrights dated June 1 on the letterhead of Latham and Watkins — a law firm working on behalf of the Digital Licensee Coordinator, which represents music-streaming services — in which a five-point argument is made for delaying retroactive payments that may be incurred by Phonorecords III to ensure “that royalties continue to flow to copyright owners with minimal disruption and that any changes to the rates for prior time periods be addressed efficiently and effectively.”

Its arguments include such matters as “the rate period straddl[ing] two very different statutory licensing regimes,” “the two types of adjustments that are necessary under the existing interim regulations, given the amount of time that has passed without final rates and terms,” “the limitation on liability in 17 U.S.C. § 115(d)(10)” and the like, concluding that “We have serious concerns about the ability to do all of this for every category of reporting— simultaneously—within the time provided in the regulations.”

Instead, it proposes “a temporary pause of prior-year retroactive adjustment timing (i.e., for 2021 annual reporting under the blanket license, and for both matched and unmatched pre-blanket-license-period reporting) while the Office conducts a rulemaking to collect input from the entire industry on the challenges involved in adjusting reporting for those prior periods,” along with proposed wording to that effect.

Not surprisingly, the National Music Publishers Association fired off an equally long letter objecting to the streaming services’ request, which was followed three days later in a letter to the Register of Copyrights dated June 16 from Senators Tom Tillis (R-NC), Mazie Hirono (D-HI), Marsha Blackburn (R-TN), Bill Hagerty (R-TN) and Sheldon Whitehouse (D-RI).

Describing the matter as “an issue of extreme importance to content creators,”  it states that the streaming services’ “extraordinary request comes after a four-year period during which the Phonorecords III determination was appealed as DLC member companies sought to decrease the royalties they paid to songwriters,” referencing the services’ request to revert to the lower rates established by Phonorecords II. “Throughout this time, DLC members were on notice that, should their efforts prove unsuccessful, they would be liable for back payments to songwriters.” In other words, they knew this day was coming.

It continues, “Digital music companies are some of the largest, most sophisticated global technology companies. Their concerns about operational challenges resulting from a potential Phonorecords III decision, a decision they appealed and have litigated for years, must be viewed in the context of the extensive resources they are able to gather to address those challenges. Their concerns must also be viewed in in comparison to songwriters, who as small businesses or individual creators are the most vulnerable parties in the music ecosystem…. Accordingly, we ask that you reject the DLCs request and ensure that, if back royalties are owed, they are timely paid to songwriters.”

The senators’ letter inaccurately portrays the situation as a David-and-Goliath struggle pitting songwriters against gigantic technology companies — the songwriters are actually largely represented by multi-billion-dollar music companies that own the publishing companies, which take around 25% of those royalties, according to the NMPA, significantly less than labels do for most artists — and it seems to presume that the music divisions of those gigantic technology companies do not require a workable business model.

Having said that, the streaming services have had nearly four years to prepare for a potential big retroactive payment, and to make such a request to the Copyright Office less than a month before it may come due certainly could be perceived to be short-sighted.

Reps for the streaming services, Latham Daniel and the NMPA did not immediately respond to Variety’s requests for comment.