The Brief History of Mechanical Royalties and Music in the U.S.

The Brief History of Mechanical Royalties and Music in the U.S.

By Jeffrey E. Jacobson, Esq. & Justin M. Jacobson, Esq.

The existence and evolution of mechanical royalties and their impact on the U.S. music business is very important to understand. While today these royalties are not a chief source of income for most musicians and other entertainment companies; they still have an important place in today’s music business. This article takes a brief look at the history and transformation that this income stream has undertaken from its inception to its current state.

What is a Mechanical Royalty?

Every song has two copyrights—the underlying musical composition (that is the lyrics, the instrumental or “beat” track) and the master sound recording (the actual recorded song). The song composition is the part that is written, composed, and published by songwriters and composers. The sound recording is the actual recorded track that is performed and recorded by a vocalist, an artist, or several singers. If the same individual composes and performs a song, they generally own rights in both the musical composition and sound recording copyrights. This fact might permit them to register to protect their rights in one copyright application as opposed to submitting two separate ones for each copyright in the track. Songwriters and producers (or their respective publishing companies) earn royalties through the usage of their composition copyright. Recording artists (or their recording label) earn income on the licensing of their sound recording copyright. This money includes royalty fees paid for the use of the master sound recording as a “cover” of an existing song.

Mechanical royalties from the copyright in the musical composition are payments made by a third-party, such as the recording company, each time that a copyrighted musical composition is reproduced, whether physically, via digital streaming or as a file download. A mechanical license is needed whenever an artist or record company releases and reproduces a musical composition,. This means that a mechanical royalty must be paid to the music publisher for nearly every commercially available work. The music publishing company then pays the songwriters and composers of the composition their earned share.

In the past, this process solely focused on the “mechanical” reproduction of the composition by pressing the song onto blank vinyl or compact discs. This meant that whenever a record label wanted to print new physical copies of a track, it had to compensate the rightsholders for each copy of the composition pressed into an album. Initially, mechanical royalties only applied to the reproduction of a musical composition on vinyl albums, cassette tapes, and CDs. However, since music sales have shifted primarily to digital platforms, mechanical royalties are now applicable to many new music listening platforms, such as Apple Music, Tidal, Amazon Music, and Spotify.

The History of Mechanical Royalties in America

The potential need for mechanical licenses (and corresponding royalty payments) originates when the music industry first reproduced existing songs on piano rolls. Those are rolls of paper with holes punched into them representing musical note data that was “read” by the player piano. A player piano was a self-playing piano with an electro-mechanical mechanism that operated the instrument and “played” the programmed music on the piano rolls.

Before 1909, most player pianos used musical works without the payment of a royalty and without any license from the composition’s owner. That was because in 1908, the Supreme Court ruled in White-Smith Music Pub. Co. v. Apollo Co. that piano rolls were not considered sheet music (which would have required a royalty payment to the publishing rights holder); and, therefore, the player piano companies were not required to pay these royalties to songwriters for each player piano using a piano roll. This ruling outraged many songwriters and publishing companies and they urged Congress to take action to rectify the situation.

In response to the Supreme Court’s ruling, the legislature passed the 1909 Copyright Act, which statutorily required a license to be purchased by a company to mechanically reproduce a musical composition, including when a player piano used a piano roll. As a result of that new copyright law, music publishers started issuing mechanical licenses to piano roll manufacturing companies in exchange for the statutorily required mechanical royalty payment. The Act created the first mechanical statutory rate which was initially set at $0.02 (two cents) by Congress. The statutory mechanical rate remained unchanged at the two-cent rate from 1909 until 1978.

The 1909 Copyright Act was updated by the Copyright Act of 1976. That law made two major changes to royalty payments for all works created after it went into effect. First, the new statute stated that royalties were only payable for phonorecords made and distributed, rather than for any phonorecord that was manufactured. Second, the statutory royalty rate for a mechanical license was increased from $0.02 to $0.0275 or $0.005 per minute of playing time or fraction thereof (whichever was greater). This increase was the first since the compulsory licensing was created in 1909 and it was met with some stiff opposition from the recording industry.

The Copyright Act of 1976 also established the Copyright Royalty Tribunal. The Tribunal was an independent agency of the legislative branch consisting of five commissioners appointed by the President for seven-year terms. These individuals were tasked with setting the statutory rate paid for mechanical licenses (as well as several other copyright licenses). Congress later eliminated the Copyright Royalty Tribunal and replaced it with the Copyright Arbitration Royalty Panel. Presently, the three Copyright Royalty Judges on the panel are appointed by the Librarian of Congress and serve six-year terms with an opportunity for reappointment for subsequent six-year terms. This royalty panel was created by The Copyright Royalty and Distribution Reform Act (“CRDRA”) and they oversee the governance of statutory mechanical licenses as well as their rates. This means that these judges set and adjust the mechanical royalty rates and terms in addition to supervising the distribution of mechanical royalties. Additionally, the panel adjudicates controversies relating to any royalty distributions.

In 1987, the National Music Publishers Association (“NMPA”) and the Songwriters Guild of America (“SGA”) jointly filed a proposal with the Copyright Royalty Tribunal attempting to get the statutory mechanical royalty rate increased in correlation with U.S. inflation data without the need for legislative action. The Recording Industry Association of America (RIAA) responded and opposed any change in the licensing rates because they argued it would result in increased costs for recording labels distributing music. They opined that without their releases and marketing efforts, the music would neither be promoted nor generate any income. In fact, the RIAA argued “that for every tenth of a penny increase [in royalties], it [would] cost record companies $4.4 million a year.” In contrast, the NMPA stated that they believed the statutory rate fixed the writers’ and publishers’ incomes at a set amount, while the record companies set their rates on the open market. They also argued that mechanical royalties were one of a songwriters’ most important sources of income, as the organization claimed that it took six new songs to equal the income potential of one song in 1909. These songwriter and music publishing organizations ultimately hoped that the mechanical statutory rate would be periodically increased to account for inflation and other considerations. That did not happen as a result of this joint statement to the royalty arbitration panel.

Eventually on January 1, 1988, the statutory royalty rate finally increased to $0.0525 or one cent per minute of playing time or fraction thereof, whichever was greater. Two years later in 1990, the rate was raised to $0.057 or $0.011 per minute of playing time or fraction thereof, whichever was greater. Over the next few years, the rates rose little by little, finally breaking $0.625 or $0.012 per minute (whichever is higher) in 1992. Currently, the statutory rate is the higher of $0.091 or $0.0175 per minute, which has been the rate since 2006. In 2008, while the publishers and songwriters had still not been able to change the $0.091 rate since 2006 for physical recording and permanent downloads of digital recordings, they received a new mechanical rate for ringtones. Currently, a song that is used as a ringtone or ring back song counts as a reproduction and therefore generates a mechanical royalty owed to the rights holder. The current rate for ringtones is $0.24 per ringtone and is due by the company distributing the song, such as Verizon or T-Mobile.

Additionally, when a music streaming user selects a song on a streaming platform such as Spotify, both types of royalties are involved, the public performance and the mechanical right which both impose their own royalty payments. Since the listener does not own the track, the stream qualifies as a public performance of the work to them and requires a public performance license. Additionally, in order to access and play the song, the streaming service needs to reproduce the actual musical composition and this transaction requires a mechanical royalty payment for each user play. Therefore, most U.S. streaming services compensate the owners of both rights in a song whenever a user presses play on a song. In contrast, non-interactive streaming services, such as Pandora, do not have to pay any mechanical royalties, since they “broadcast” a composition, instead of reproducing it.

The mechanical royalty rates established for streaming services are unlike the statutory rate structure enacted for physical recordings, permanent digital downloads, and ringtones. Specifically, the mechanical royalty payments for CDs and downloads are based on a per unit calculation; while, streaming mechanical payment royalty rates are based on a percentage revenue formula that varies based on the licensee’s business model related to the offering of the musical recordings. This means that the amount due by the service or digital music platform to each publisher is usually a proportional percentage of the revenue earned by that entity. Additionally, there is a minimum payable rate according to the type of service provided by the streaming entity, including whether music subscription fees are charged by them, if the service is free to use or if it is ad-supported. The mechanical royalty rates payable for on-demand streaming is currently about 11.8% and is predicted to be increased to 15.1% by 2022.

In addition, in the United States traditionally, two well-known companies were solely responsible for collecting mechanical royalties and issuing the corresponding licenses to any third-party. The entities were the Harry Fox Agency and Music Reports (links). These licensing agencies collect the mechanical royalties from a party wishing to obtain a mechanical license. Each of these then remits the collected royalties to the music publishers or other relevant party who registered with them. In fact, Music Reports works with some of the largest digital content distribution platforms including Spotify, Amazon Music, iTunes, and Netflix. However, more recently, the Music Modernization Act was passed by Congress to modify and “modernize” the existing licensing system. This meant that the Act intended to create a universal automated licensing system that provides “blanket licenses” for any “streaming service.” The legislation also formed a new a “mechanical licensing collective” entity called the Mechanical Licensing Collective (MLC) which is responsible for issuing mechanical licenses to digital services. Publishers need to register with the MLC in order to receive their share of those royalties.

Conclusion
While the mechanical royalty rate currently still sits at the same rate since 2006, copyright law has made other breakthroughs, such as establishing mechanical royalty rates for streaming services and ringtones. Mechanical royalties have greatly evolved and expanded since they were implemented by Congress in 1909. As technology develops and as the music industry continues to change and keep up with the times, it will be interesting to see if the interested stakeholders are able to increase the payable mechanical royalty rates or if they will continue to stay as they currently are or if they will only grow very insignificantly over the years. Streaming royalties do not seem to fairly compensate the artists.

This article is not intended as legal advice, as an attorney specializing in the field should be consulted.

© 2021 The Jacobson Firm, P.C.