Last week the U.S. House of Representatives voted unanimously to adopt the Senate’s modified version of the Music Modernization Act (MMA). It’s expected to become law with the President’s signature imminently. The bill’s trip from the House to the Senate had several twists and turns, with parties such as Blackstone Group (controlling owners of the Harry Fox Agency or HFA) and Sirius XM satellite radio raising various objections, which led to various tweaks. The House voted to pass the Senate version as is rather than negotiate a compromise with its own prior version.
The issue we’ve been focusing on here is whether the MMA will foster solutions to fundamental problems with music mechanical licensing for streaming music services or merely sweep them under the rug. This issue is increasingly important given that interactive streaming — according to the RIAA’s just-published numbers for the first half of this year — now accounts for almost 60% of total music industry revenue and is still growing fast. The Senate’s version of the bill does have a few changes in the relevant provisions from the House bill, but the net effect is not much improvement, if any.
The main feature of the MMA is its establishment of a blanket mechanical (reproduction and distribution) license for musical compositions for digital music services such as Spotify, Apple Music, and Google Play. Currently, these services use mechanical licenses granted by law, but the licenses are on individual tracks. This means that the services have to find the copyright owners for each track in their catalogs, file paperwork with them, and pay royalties to them. This is a massively onerous task — involving tens of thousands of tracks per day added to music services’ catalogs — that also incurs risk of being sued if it isn’t done properly.
The MMA does away with the paperwork and the legal risk for interactive music services. In addition to the blanket license, it establishes a single mechanical licensing collective (MLC) to receive payments, identify rights holders, and distribute royalties to them. The MLC is also required to build and maintain a database of musical composition rights owner information, and make it accessible to the public.
The drama that took place during the bill’s trip through Congress barely touched on this core aspect of the legislation, so no one has said much about changes to the MLC’s structure in the version that’s likely to become law soon.
Previously I’ve noted that while the MLC is a great idea, it comes with the danger of foreclosing opportunities to fix systemic problems with musical composition data that result in songwriters and music publishers not getting paid appropriately by interactive streaming music services — problems that have led to lawsuits against some of the music services. Ideally, the MLC would be a vehicle for improvements in the accuracy and completeness of data about music compositions and their rights holders, including the crucial issue of which compositions underlie the tens of millions of recorded music tracks in streaming services’ catalogs. Less than ideally, the MLC would be a “black box” that offloads the onerous task of mechanical royalty payments from streaming services and only has incentive to do the job well enough that no one complains too much.
To be sure, the MLC specified in the Senate’s version of the MMA sits between these extremes, but it falls short of the ideal.
The House version of the bill called for the MLC to be an independent non-profit entity selected by the U.S. Copyright Office. The Copyright Office can select a new entity to run the MLC every five years, but otherwise the House bill subjected the MLC to limited oversight and provided few mechanisms to ensure its accuracy or efficiency. Stakeholders raised concerns about this, and I had suggested a few fixes to the bill to make sure that the MLC has incentive to improve. The Senate did make some changes in this area of the bill, but sadly, they aren’t enough.
The House version of the bill called for a Best Practices Working Group, consisting of representatives from all stakeholders, to advise the MLC. It also called for an Operations Advisory Committee, which consists of equal numbers of people from digital music services and music copyright holders, i.e., set up as a purely adversarial body with no independent expertise. My suggestion was to add one or more independent, unaffiliated experts to this group. The Senate version of the bill does away with the Best Practices Working Group entirely and leaves the Operations Advisory Committee as is.
The Senate bill does add a requirement that the MLC conduct an audit of its operations every five years and that the auditors provide a report to the MLC’s board of directors, whose voting membership includes music publishers and songwriters. But that’s it. The bill doesn’t specify that the auditor be independent or free of conflicts of interest, and it doesn’t ensure substantiality of the audit by providing funding from another source. In other words, the MLC will be motivated to spend as little money as possible for an audit that’s as toothless as possible.
My other criticism of the House version of the MMA related to the fact that there is currently a modestly competitive market for service providers, such as HFA and Music Reports Inc. (MRI), who process mechanical royalties for interactive music services. This isn’t just a matter of generating paperwork and disbursing royalties; it requires dealing with all that missing, inaccurate, or contested data. It’s a nontrivial task that involves huge and growing amounts of detail. These services have developed many years of expertise in doing this, and they are motivated to improve accuracy and efficiency through a combination of competition and the legal risk that their customers (music services) incur if they don’t do the job well. The MMA would replace this with a non-profit monopoly that isn’t motivated to improve and would potentially deny the MLC access to all that accumulated expertise.
Yet the House version of the MMA contains a loophole in the above: that the MLC can hire subcontractors to perform some of its functions. The bill imposes no constraints on the subcontractors.
The Senate version of the MMA leaves all this structure in place, including the loophole. I have heard two theories about which entity is likely to get the job as the MLC. One theory is that it will go to SoundExchange. SoundExchange is an independent non-profit that processes royalties from digital radio services like Sirius XM, iHeartRadio, and Radio.com. It has a good reputation in the industry, it’s a veteran of the Copyright Office five-year approval cycle, and it has made a move into musical composition royalty processing through its acquisition of CMRRA, the Canadian mechanical licensing agency.
The other theory is that the MLC will be a small shell organization that will subcontract the bulk of the work — the recording-composition matching, the database management, the royalty payouts — to one or more of the established commercial services. Once the bill becomes law, the Copyright Office has 9 months to get proposals from prospective MLC operators and figure this out.
One welcome change in the Senate bill is that the MLC’s database of musical composition rights information will be more accessible than in the House version. The House version required the database to be accessible to the public through a website but limited bulk machine-readable access (access through database queries or APIs) to digital music services and vendors acting on their behalf. Anyone who has tried to access sound recording information through public websites like SoundExchange’s (or ASCAP’s, or BMI’s, etc.) knows how painful it is to get bulk data that way. The Senate version of the MMA requires the MLC to make bulk, machine-readable access available to anyone for a small fee to recover costs. That’s an improvement in convenience as well as transparency.
It’s also worth mentioning that the MMA gives copyright owners rights to audit the MLC and gives the MLC rights to audit music service providers. It also imposes a duty on copyright owners to make “commercially reasonable” efforts to get and provide information about musical composition rights holders. But otherwise, the bill does not institutionalize a process for improving the music industry’s “data problem” with respect to musical compositions. Although the MMA will remove inefficiencies and redundancies in mechanical licensing, and generally make life easier for interactive music services, this is a lost opportunity.