Music Modernization Act Proposes Single Solution to Mechanical Licensing Problem

The music industry’s licensing problems just got another proposed governmental solution, with last week’s introduction in Congress of the Music Modernization Act (MMA). The MMA is a bipartisan bill that would provide a blanket mechanical license and set up a collecting society to manage payments to composers and publishers. It aims to solve a particular set of large and growing problems around mechanical licensing for streaming services like Spotify and Apple Music, both of which have been sued over allegedly unpaid mechanical royalties.

The problem the MMA aims to solve has to do with the current state of mechanical licenses and streaming music services. Whenever a user plays a track on a streaming service, the service has to determine which composition underlies the sound recording and pay mechanical (reproduction) royalties to songwriters and music publishers for that composition. Because record labels typically don’t supply information about underlying compositions, music services typically engage outside agencies — such as the Harry Fox Agency (HFA) and Music Reports Inc. (MRI) — to match recordings to compositions and manage royalty payments.

The recording-composition matching process is ultimately the streaming music services’ responsibility, and it’s prone to errors arising from bad or incomplete data. As I’ve discussed before, now that streaming services dominate the industry, this problem has grown to become the industry’s Achilles’ Heel. Although various new technologies are being built to help solve it — some of which we’ll discuss at our upcoming Copyright and Technology conference on January 16th — this is ultimately a “garbage in, garbage out” data problem.

It also doesn’t help that there is no blanket license for mechanicals. There is a compulsory a/k/a statutory license, meaning that music services don’t have to negotiate with songwriters or music publishers to get rights to reproduce their compositions, and they pay royalties that are fixed by a government-run process. But each music service must take a step to get that compulsory license for each of the tens of millions of tracks it wants to offer.  Specifically, it must find out who the composition rights holders are and send them a form called a Notice of Intention (NOI); or if it can’t determine who they are, it must file the NOI with the U.S. Copyright Office. Music services must also account for mechanical royalties from each of billions of transactions every year and pay rights holders the statutory royalties.

The result is massive administrative headaches and potential legal liability for the music services. In contrast, music services get blanket licenses for performance rights — the other type of right on compositions they must license — from performance rights organizations (PROs) like ASCAP, BMI, and SESAC, which figure out who gets paid and disburse royalties accordingly.

The MMA purports to solve this problem by way of a grand bargain between music services on the one hand and music publishers and composers on the other. The bargain is this: music services get to have the problem taken off their hands; songwriters and publishers get what they expect to be higher royalties.

In its current form, the MMA provides a blanket license for mechanicals, meaning that streaming services would no longer have to identify rights holders or send NOIs. It also calls for a mechanical licensing collective to be established, which will receive payments from music services according to transaction volumes, match recordings to compositions, and disburse royalties to songwriters and music publishers.

The bill also requires the licensing collective to maintain a freely accessible publicly accessible online database of musical works with information about the recordings in which they are embodied, their owners with ownership shares, and standard identifiers (ISWCs) where available. The music services will be able to read information from this database in bulk using widely available technology (perhaps XML-based data structures in DDEX format).

The licensing collective will be an independent not-for-profit organization selected by the U.S. Copyright Office. It will be funded by administrative fees paid by the music services. The organization running the mechanical licensing collective and the rate structures will be subject to review every five years. A governing board, composed mainly of representatives from the songwriting and music publishing communities, will oversee the process; the MMA also calls for an advisory committee with membership divided equally between copyright owner and music service provider constituencies as well as a best practices working group with members from throughout the music industry.

This all sounds like a great deal for music services; the administrative fees that they will have to pay will likely be comparable to what they currently pay agencies like HFA and MRI. But songwriters and publishers get various sweeteners, such as adoption of different economic standards for setting the statutory mechanical royalties (“willing buyer/willing seller”) that they expect to result in higher royalty rates that the music services will pay.

Backers of the Music Modernization Act include most of the major organizations involved with musical composition licensing in the U.S.: the National Music Publishers Association, which represents major music publishers; two songwriters’ trade associations (Nashville Songwriters Association and Songwriters of North America); the PROs ASCAP and BMI, and — crucially– the Digital Media Association (DiMA), the digital music services’ lobbying group. The RIAA supports the bill as well, even though it doesn’t involve sound recordings directly. The smaller performing rights collecting society SESAC hasn’t expressed an opinion — for reasons that will become clear shortly.

The two major holdouts against the bill are the Songwriters Guild of America, which objects to insufficient songwriter representation on the governing board, and the National Association of Broadcasters, whose AM/FM radio station members don’t benefit from the deal because it doesn’t apply to so-called noninteractive music services such as the radio stations’ Internet streams. The powerful NAB’s lack of interest could jeopardize congressional support for the legislation, because its constituents are in all 50 states, as opposed to the three states in which the rest of the music industry is concentrated (New York, California, Tennessee); but otherwise, just about everyone who matters is on board, and the bill’s sponsorship cuts evenly across party lines.

Putting aside the considerations of money flows and royalty rates, the MMA is the most sensible solution to music licensing in the digital age to come along in a while. (It’s much more practical than the so-called Transparency in Music Licensing and Ownership Act that came along a few months ago.) The MMA focuses on a specific pain point rather than trying to boil the ocean. It proposes a win-win rather than win-lose solution among stakeholders. It simplifies existing processes by providing a single, centralized mechanical licensing administrator in place of requiring that every music service provide its own solution. Unlike the failed Global Repertory Database, the publicly accessible online database of music rights information is positioned as a means to an end rather than a “solution” in and of itself.

I have a test for the likelihood of success of a standards initiative that consists of six criteria; history has shown that a standard must meet at least four of the six to have a good chance of success. The Music Modernization Act could well meet at least that many.* The big question is this: if this legislation passes, the Copyright Office will solicit proposals from organizations to be named as the mechanical licensing collective; who is going to want to do this?

Right now, two companies serve this function for several major digital music services: HFA and MRI. (Apple Music, in a “belt and suspenders” approach, uses both of them.) Google acquired another company, RightsFlow, to act as its own mechanical licensing agency for YouTube and Google Play Music. Newer companies like Audiam and Loudr are in the same business; and various startups are offering partial solutions to the mechanical licensing problem based on blockchain technology.

In other words, many companies take on this crucial and monumental task as a for-profit business opportunity; there’s competition and innovation in the market. The MMA could put these companies out of business.

If the legislation passes, it’s possible that one of the existing players will apply to become the mechanical licensing collective, but they’d have to spin off from any parent company and become a nonprofit. HFA and Audiam are both owned by PROs (SESAC and SOCAN of Canada respectively — which probably explains why SESAC has been quiet about the MMA so far). Other players like Loudr are startups whose investors would likely not appreciate a shift to not-for-profit status.

This calls into question whether the entity that becomes the mechanical licensing collective under the MMA will be the best suited for the job.  The job includes compiling and organizing massive amounts of data from many disparate sources; it’s unthinkable for a new organization to do it adequately without significant time and monetary investment.

The solution to the mechanical licensing problem needs transparency and efficiency as well as accuracy; the question is whether the MMA will encourage these qualities or just cause the entire mess to be swept under the rug. Perhaps future versions of the MMA will acknowledge this reality and provide more incentives for one of the existing players to take on the role.

At our Copyright and Technology conference on January 16, we will have a panel on the recording-composition matching problem, featuring some of the key stakeholders and solution providers, not to mention several registered attendees who are also concerned with this problem and its solutions. The introduction of the Music Modernization Act will definitely add new dimensions to the discussion, so come join us!

*Specifically, the solution proposed in the MMA should meet the Motivation, Scope, and Wheel Non-Reinvention criteria. It may meet the Economics and Complexity criteria.

5 comments

  1. […] Music Modernization Act Proposes Single Solution to Mechanical Licensing Problem […]

  2. […] Music Modernization Act Proposes Single Solution to Mechanical Licensing Problem […]

  3. […] has recently proposed an act that is currently going through congress and the senate called the US Music Modernisation Act. Though the premise of this act is warmly welcomed by BASCA, the practice presents songwriters with […]

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