How Does a Rising Mechanical Rate in the US Impact Labels & Publishers?

It is May 2022 and inflation rates are currently hitting 8.3% in the United States. It has made the cost of living a hot debate not only in newsrooms, politics and households but also the music industry. When Spotify launched its premium subscription in the United States in July 2011, its price was set at $9.99. In today’s money, that would warrant a price point of $12.71, but as it stands the price is … $9.99. The mechanical statutory rate in the United States, a rate deciding the royalty due to songwriters for every physical or permanent digital copy made of their compositions, was set to 9.1 cents in 2006. In today’s money, that would warrant a stat rate of 13.2 cents but in reality it stands at … 9.1 cents.

Earlier this month, we learned an important step has been made in giving songwriters active in the United States their first pay rise in 16 years. Publishing and songwriting collectives NMPA and NSAI and the three major record labels have reached a settlement for this mechanical stat rate in the United States to be increased to 12 cents. Additionally, the agreement states that the stat rate will be linked to the Consumer Price Index, and thus automatically increase each year with the rate of inflation.

The settlement is still to be approved by the Copyright Royalty Board before it can take effect in January 2023. The CRB has previously rejected a recent settlement which kept the stat rate at 9.1 cents, on the grounds of a static rate being unreasonable in the light of continuous inflation and erosion of the value of the dollar.

Hold on, what are mechanicals?

A mechanical royalty is a royalty that is due to a songwriter every time a copy is made of their composition. Each territory quite often has their own rules on what this mechanical royalty rate should be, and whom it should be paid by.

In the United Kingdom for example; a share of streaming revenue is paid by the streaming platforms to MCPS, the mechanical collection society. Download stores pay a unit rate to the MCPS for every permanent download made on their platform. And a unit rate is paid by the record labels to MCPS for every physical copy being manufactured or sold. The MCPS in turn passes this revenue on to the publishers and songwriters.

In the United States, the rules are somewhat unique in the sense that permanent download and physical mechanical royalties are paid directly on to publishers by the record labels. The unit rate that is reported with each copy is referred to as the stat rate.

What has been agreed in this settlement?

As is stated in the official settlement published by Music Business Worldwide; “For the year 2023, for every physical phonorecord and Permanent Download the Licensee makes and distributes or authorizes to be made and distributed, the royalty rate payable for each work embodied in the phonorecord or Permanent Download shall be either 12.0 cents or 2.31 cents per minute of playing time or fraction thereof, whichever amount is larger.” The rates are increased annually starting from the 1st of January, based on the US Consumer Price Index for All Urban Consumers, and the new rates will be confirmed by the Copyright Royalty Judges no less than 25 days before the start of the new year.

The increased rates cover both physical and permanent download copies. This comes from a current stat rate of 9.1 cents or 1.75 cents per minute, whichever is greater. The stat rate of ringtones remains at 24 cents.

It is worth noting that streaming royalties in the United States are not covered by this statutory rate, and instead are based on a percentage of the streaming platform’s annual revenue. Also this rate is currently under review by the CRB. When you know the major record labels are umbrellas with the major publishing companies, and you know streaming mechanical royalties come out of the pocket of the streaming platforms rather than the labels’, much of the incentive for the major record labels to acknowledge an increased stat rate was to set an example and clear the floor for the ongoing and far more impactful discussion on increasing the streaming mechanical rates.

Who is impacted by this decision?

The great winners in this story are of course the songwriters and their publishers as they, upon approval of the CRB, will see higher earnings per physical or download unit made or sold in the United States. As a footnote however, one should not overlook how minor a share the physical and download revenues are in a songwriter’s statement these days. It’s like giving your employee a pay rise, but only for the months that count 28 days. Many songwriters and publishers will additionally be looking out for an increase in the streaming rates in the United States.

The record labels on the other hand will now need to pay an increased mechanical rate for physical or permanent download copies being made and distributed in the United States. In the US, these mechanical royalties are paid on to the publishers and songwriters directly by the record companies. So the responsibility lies with them to make sure they report the correct mechanical rate to the publishers.

How can record labels report these mechanical stat rates?

Record labels can use specialised tools to report royalties to their artists or to publishers and songwriters. At Curve, we have built a modern royalty accounting platform from the ground up that deals with complex mechanical reporting scenarios. Labels simply input the conditions under which they wish to report a mechanical royalty and to whom, and Curve will report statements to these publishers and songwriters. Labels have the flexibility to customise their applied statutory rates on a date basis and are thus covered by the upcoming changes.

At Curve we are following these developments closely and will be quick to add solutions to any additional scenarios that may arise.