How The CRB Has Done The Music Industry A Favor (Updated)

With the possible exception of Taylor Swift, Janet Yellen may now be the most powerful person in the music business. As chair of the Federal Reserve, Yellen controls the levers that control the rate of consumer inflation in the U.S., a number on which potentially millions of dollars in music royalty revenues will now turn in the wake of Wednesday’s ruling by the Copyright Royalty Board (CRB) setting the royalty rates that internet radio services like Pandora and iHeartMedia must pay to record labels and artists for the next five years.

Under the new rate card, internet radio services will pay 17 cents per 100 streams in 2016 ($0.0017 per stream), up nearly 20 percent from the 14 yellencents per 100 streams they pay today but well below the 25 cents per 100 that SoundExchange, which collects digital royalties for artists, had sought. After that, the rate will be indexed to the Consumer Price Index (CPI), the main gauge the government users to track inflation, for the next four years, which means the rate could go up or down with the price of bread.

It was an unexpected and deeply peculiar move that looked like nothing so much as an effort by the CRB, an arm of the Library of Congress, to get out of the rate-setting business, which itself would be mighty peculiar insofar as its role in setting royalty rates for webcasters is mandated by Congress and not really optional on CRB’s part.

It’s peculiar in that it’s hard to think of a number less relevant to setting a fair copyright royalty than CPI. If  a bad orange crop leads to higher orange juice prices at the grocery store Pandora pays more? Or if Yellen raises interest rates to tamp down inflation next year Pandora pays less?

It doesn’t make a lot of sense on its face (I foresee debates at future music industry conferences over whether royalty rates should reflect “core” inflation, which excludes volatile food and energy prices, and is currently at 1.9 percent, or total inflation, which includes them, and is currently running at 0.5 percent).

On the other hand, previous rate-settings, in which annual or periodic increases were fixed in advance by the CRB, without reference to anything that might happen in the streaming music business in the meantime, didn’t make a lot of sense, either, and generally left no one happy with the results. By pegging the rates to CPI, the CRB may have found an innovative way out of the current cul-de-sac.

While hardly on all-fours to the music streaming business, the CPI is at least an objective standard. One way to read the CRB’s move is as a gentle nudge to the industry to focus less on the precise fraction of a penny incurred from each play, which will now be out of anyone’s hands (apart from Janet Yellen’s) including those of the CRB itself, and more on where the interests of the various industry players align.

Another tell: The CRB eliminated to current two-part test, under which Pandora and its ilk paid the greater of $0.0014 per stream or 25 percent of gross revenue — an arrangement that created uncertainty for webcasters regarding their cost structure and produced a perverse disincentive for a webcaster to grow its business too rapidly for fear of trigger higher costs.

Finally, the CRB actually lowered the royalty rate for streams delivered on a subscription tier, from 25 cents per 100 streams to 22 cents per hundred. The effect, for a company like Pandora that has both an ad-supported tier and an ad-free subscription tier, is to narrow the gap in its cost structure between the two tiers, making the distinctions between which monetization bucket a user falls into less relevant to the webcaster’s overall business. Today, only about 5 percent of Pandora’s users are on the subscription tier, but they generate nearly 21 percent of royalty fees it pays.

Starting in 2017, Pandora will have a far-more predictable and projectable cost base from which it can begin to make rational investment decisions aimed at growing its business, which is the main reason investors sent its shares up 15 percent in the wake of the CRB’s announcement.

For artists and record labels, the rate at which Pandora users convert from the free, ad-supported tier to the paid subscription tier will be a less relevant metric, which the total number of users will be a more important one, which will put them more or less in the same boat as Pandora itself.

And for all parties, insofar as pegging royalty rates to the CPI could introduce a measure of volatility in their businesses, it creates an incentive to move away from reliance on the statutory license and CRB-set royalties for webcasting in favor of negotiating a market-based formula that benefits all sides and creates rational incentives.

Let’s hope the industry seizes the opportunity the CRB has given it.

Update: A regular reader reminds me that the Copyright Royalty Tribunal, predecessor to the CRB, often included an inflation adjustment in setting royalty rates in pre-streaming days, such as for mechanical royalties, so the CRB’s move is not so peculiar after all. It’s still a win for the industry though.