With music streaming rising fast as the number one way for music fans to hear music, every songwriter wants to know—What’s the latest news in the battle for songwriters & music publishers to be paid higher royalty rates?
As we have done in two previous articles (December 2014 and May 2015), we are pleased to interview David Israelite, President & CEO of the National Music Publishers Association (NMPA). Israelite is one of the top music execs leading the way in the battle for music publishers & songwriters to be paid fairly from all revenue sources.
In fact, Israelite has stepped up to the forefront, recently negotiating an estimated $30 million agreement with Spotify over unpaid royalties. He brokered a settlement between Spotify and NMPA’s constituents, over unmatched royalties (songs that haven’t received payment yet because Spotify didn’t identify their publishers).
In this new interview, Israelite discusses the latest developments with mechanical licensing and performance licensing. He explains how the music publishing industry is still awaiting a crucial decision by the Department of Justice on the status of consent decrees, which have restricted ASCAP and BMI from negotiating higher, free-market rates with streaming companies such as Spotify, Apple Music, Pandora, Google, Amazon and Tidal.
Israelite also discusses the improved situation between music publishers and Pandora. In December, Pandora negotiated deals with major publishing companies which has led to a doubling of the meager rate Pandora had been paying. Israelite also explains the status of the Songwriter Equity Act, and when there might be progress on this proposed legislation. In addition, he talks about the new Copyright Royalty Board proceedings, which will set rates and terms of mechanical licenses.
Before we start this interview, here is some information on the NMPA and Israelite. Founded in 1917, the NMPA is the trade association representing all music publishers and their songwriting partners. The NMPA’s mandate is to protect and advance the interests of music publishers and songwriters in matters relating to the domestic and global protection of music copyrights. The goal of the NMPA is to protect its members’ property rights on the legislative, litigation and regulatory fronts. Most of the major and independent music publishing companies are members of the NMPA, including top execs from Sony/ATV Music, Universal Music Publishing Group, Warner/Chappell Music, Kobalt Music Group, BMG Rights Management, peermusic, SONGS Music and Disney Music Group.
Israelite has been the head of the NMPA since 2005. He is an attorney who served as Deputy Chief of Staff and Counselor to the Attorney General of the United States. In March of 2004, the Attorney General appointed Israelite Chairman of the Department’s Task Force on Intellectual Property.
Here is our new Q&A interview with David Israelite:
DK: What are the latest developments for songwriters & publishers in their quest to be paid higher royalties?
Israelite: Well, there are a lot of fronts to that war. One thing that is going on right now is that we’ve begun the Copyright Royalty Board proceeding to set the rates and terms of mechanical licenses under Section 115 (of the Copyright Act). That’s a two-year process that started a few months ago. It will last through next year, and at the end of that process we’ll get new rates for the five-year period that begins in 2018. That covers the rate for things like physical product—like CDs and vinyl records, and for permanent downloads like Apple iTunes. But most importantly, it covers the interactive streaming rates, which we expect in this five-year period, from 2018 on, is really going to be the dominant source of revenue for songwriters and music publishers. So we’re very focused on the streaming models.
We’re in the stage of the trial right now, where we’re negotiating with the other parties to see whether there’s a settlement that can be achieved. But if not, in the very near future we’ll start the trial process that involves hiring expert witnesses, building a direct case, and ultimately culminates in a trial next year, with the three judges that make up the Copyright Royalty Board, making a decision by the end of next year and setting rates and terms for that five-year period. So that’s one big effort that we’re now just getting started with. It’s the third one we’ve done—two times ago we partially settled and we partially went to trial. Last time, we were able to settle completely, but this time a lot of new issues are present that are going to make it difficult to settle. The most important issue being the rate of how much songwriters get paid from these models. These are no longer experimental businesses. These are mature businesses that are generating a lot of money for themselves, and it’s time that songwriters got a bigger share of that value that they create.
DK: Is there any update regarding the Department of Justice’s ruling on the consent decrees? It seems to be taking a long time.
Israelite: You are exactly right—it has been a long time. We are still in this ongoing process, waiting to hear from the Department of Justice. This process started in November 2014. We are attempting to amend the consent decrees that govern ASCAP and BMI. I think we’re close to the end, but there’s no guarantee of when this process will end. I am concerned that the Department of Justice is not willing to do the things that we most care about, which include giving songwriters & publishers the right to be part in and part out of ASCAP and BMI. The reason that’s so important is because, where ASCAP and BMI are able to achieve rates that we think are fair, everyone’s happy keeping with the system. But where we think the rates have fallen short of what the market value is, mostly from the digital music companies, we want the ability to leave the consent decrees, go into a free market and negotiate the value of our songs. And that’s something the Justice Department, at least so far, has not been cooperative with.
There are other issues in play at the Department of Justice—things that include…do ASCAP and BMI have to give 100% licenses? Can we go we go to arbitration instead of a federal trial? Can BMI and ASCAP license mechanical rights as well as performance rights? Those are all issues that are in play. But we’re not exactly sure how it’s going to end up. But it’s an ongoing process—it’s been too long…it’s very frustrating. And I think the entire process speaks to the reason why you want to be a free market business and not have the government involved in running your business.
DK: Regarding the Copyright Royalty Board proceedings, if the terms are satisfactory to you as Head of the NMPA, would that negate the need to have the DOJ step up with the consent decrees?
Israelite: Theoretically, it would to some extent. Remember, some of the business models, like interactive streaming, are both mechanical and performance. So if the mechanical rate is healthy enough, then yes, you’re less concerned about the performance rate for the exact same business model. But lots of the business models are only performance. For example, Pandora, which is a noninteractive model like radio, doesn’t have a mechanical rate. It’s only performance, which is why 100% of the rate is determined by these consent decrees. Or you talk about things like AM/FM radio, or general licensing—those are all consent decree only rates. So it would help to get a healthy mechanical rate, but it wouldn’t solve the whole problem.
The other thing, is that I don’t think anyone believes that in the mechanical proceeding, the rate’s going to get high enough, that it would be the same as if you were in a free market, because you still again are in a compulsory licensing situation where you can’t say no, and whenever the government sets your price and you have no ability to say no, the value of what you’re negotiating is just inherently going to go down.
DK: Is there any news regarding the Songwriter Equity Act?
Israelite: The Songwriter Equity Act continues to be a bill that’s in front of this current Congress. No one believes it’s going to pass before the end of this year, which is at the end of the two-year Congress. This means that we’ll go into the next Congress almost with a blank slate, and everyone is waiting for the Chairman of the House Judiciary Committee, Bob Goodlatte, to make a decision about what he wants to do. He just sent out a communication yesterday, that indicated this fall he’s going to ask all of the parties to get together, to start hammering out what might happen in the next Congress beginning in January (2017). He has a term limit of six years to be Chairman of the House Judiciary Committee—at the end of this year, it will be the end of year four. So if he wants to legislate in this area, he’s going to have to tackle that aggressively in his last two years, starting next year.
If Congressman Goodlatte wants to move a big comprehensive bill, then it’s possible the Songwriter Equity Act could be a small part of it. If he decides that he only wants to pick smaller bills and move them individually, then it’s possible the Songwriter Equity Act could be one of those bills. So our focus right now is getting as much support as we can for our one bill, understanding that it’s kind of at the whim of whether the congressman wants to do a large, comprehensive legislative package, or wants to move smaller, individual bills. But nothing will happen before the end of this year.
DK: I read a few months ago that the major publishers agreed to a deal with Pandora. Was this a temporary fix, or was it something quite satisfactory, where publishers are now happier working with Pandora?
Israelite: I’m so glad you asked about that, because I think it’s a small success story. Pandora, as we were discussing, only needs a performance license, and they had gone through the consent decree process, and litigated against ASCAP and BMI to get rates, and the rates were terrible. The ASCAP rate was 1.85% of their revenue paid to ASCAP, and the BMI rate was 2.5% of their revenue paid to BMI. If you add them together, you’re talking about just an embarrasingly low rate to pay for the songs, when Pandora basically does nothing else but deliver our songs to their customers.
What happened, was a very interesting story. The publishers found other ways to get leverage over Pandora. Mostly, Pandora wants to go to other countries to become an international service. Right now, they’re only in a couple of countries. And unlike in the United States, in the other countries they actually need the permission of the publishers. So what I believe happened, is that because Pandora was now forced to try to negotiate with publishers, where the publishers could say no, they were forced to address the low rates in the United States. What seems to have happened, is overnight, the rates more than doubled. So Pandora litigated these rates and they won their trials, but because they now need something, they were willing to pay more than twice as much in the United States for these exact same rights they’d been getting for so cheap. They didn’t just offer this to the major publishers—they made the same offer to everyone. So every songwriter and music publisher today is getting a more than doubling of the rate because there was a leverage point against Pandora. What it just proves, is that how much they were underpaying to begin with. I still don’t think that the rate represents a market rate. I still don’t think it’s what would happen if we were sitting across the table and we were negotiating the true value. But I do think that it’s a step forward, and I think it speaks to the philosophy that you’ve got to get these rates out of the consent decrees, because they’ve been so terrible.
DK: Earlier in this interview, you mentioned that Pandora was paying BMI a slightly higher rate than they were paying ASCAP. Is there still a discrepancy with this new Pandora agreement, or is Pandora paying them both equally now?
Israelite: I believe that the new voluntary deals are similar, which means that everyone is getting the same thing. But ASCAP and BMI would have to disclose their exact terms, which I don’t believe they’ve done. But my understanding is that everyone got the same thing, so there shouldn’t be a discrepancy anymore between the two rates.
DK: I read recently that you and the NMPA worked out a new agreement with Spotify. What are the specifics of this deal?
Israelite: Yes, we have a settlement with Spotify that we recently announced. The settlement is currently in a stage where music publishers have an opportunity to opt-in to the settlement if they want to. I’m very pleased about that. The basic terms of the settlement are this: Spotify has a problem that basically every other company has that does interactive streaming. That problem is, they need to get two, different licenses from the publishers. They need to get a mechanical license and they need to get a performance license.
On the performance side, it’s a relatively easy process—you go to ASCAP, BMI, SESAC and GMR (Global Music Rights)—the four performance rights organizations—and you negotiate a blanket license, and then you pay them a lump sum along with your reporting data. And then all the money goes out the door for what you owe in performance and it’s no longer your problem if you’re a Spotify. But on the mechanical side, there’s nowhere for them to go to get a blanket license for mechanicals, even though it’s a compulsory license under Section 115 (of the Copyright Act).
Now the way that it’s always worked, is that record labels would get mechanical licenses from publishers, and they would put out records. There was a system that just worked over the years as we moved fron vinyl to 8-track to cassette to CD. Record companies would get the mechanical licenses, pay the publishers, and that’s how mechanicals worked. When downloads came about, Apple said, “Well, we don’t want to take a direct license from the publisher—we don’t know who owns all these songs. So we’re going to make the record labels basically pass through the mechanical rights,” which is what they’ve been doing. So Apple pays the label for both the label and publishing royalties, and then the label pays the publisher.
However, when we got to interactive streaming companies, the labels did not pass through the mechanicals. This means that if you’re Spotify or an Apple or Google or Amazon or Rhapsody, you have to take a direct license from the publishers for mechanicals, and you need a lot of them because you want to have a library that has maybe 40 million songs in it, so that you can argue to your potential customers that you can get everything in our library. Well, there’s nowhere to get that. And so, what do you do?
Well, you do the things that are logical. You go to the Harry Fox Agency and you take all the licenses they can give you. You go to the major publishers. You even hire vendors to help you try to match this. But at the end of the day, you are left with an impossible task, which is, you don’t know who owns every fraction of every song in your 40 million song database. And therefore, what really happens, is you become an infringer. You are using music that you have not licensed properly yet.
Now, the record labels have always been infringers. They will put out an album that has not been licensed properly. But the business practice has always been, to just allow that and work it out down the road. So there’s a culture that developed in the music industry, that you’re supposed to clear the licensing before you put out the record, but no one does it.
With Spotify, they were starting to build up money that they knew that they owed publishers and songwriters for mechanical reproductions, but they didn’t know who owned the songs. Our settlement was an effort to address this problem in a way that’s fair to everybody. So the settlement makes Spotify pay $5 million on top of what they owe us (about $25 million). We’re calling it a bonus pool, and it’s basically extra money because of the fact that they weren’t able to do this properly. And then what Spotify is going to do, is they’re going to publish (a list of) the songs that they couldn’t match. And everyone who opts-in to the settlement is going to have an opportunity to go through those songs and claim anything that’s theirs. If they claim it, they’ll get paid in a normal course. There will be a process in case there are any conflicts in the claiming process. Then at the end of the claiming process, they’re going to liquidate whatever they can’t match, and that money will go back to the songwriters & publishers using a distibution formula of market share.
So there are three different payments—there’s the upfront $5 million, there is the royalty that they actually owe that will first have an opportunity to be claimed but then will be liquidated. And the most important thing about all of this, is that at the end of the process, they have agreed to a series of best practices where we have to work together to fix this problem, because it’s just going to repeat itself. There’s no way to know who owns these songs.
Now after we were months down the road with our settlement, there were two, class action lawsuits that were filed against Spotify for this exact same problem. The one that’s gotten the most attention was the one filed first, by songwriter (& artist) David Lowery. So now, if you’re a publisher or songwriter that controls your publishing, you have a choice. You can either opt-in to my settlement, or you can wait and see whether these litigations get certification to represent a class, and if so, you can be represented by a class action that’s suing Spotify.
Spotify’s just the first—all of these companies have the same problem. None of them can clear the publishing on their mechanical side for their entire library. So we will probably follow up with more settlements in the near future. But our Spotify one is done and public, and now publishers have to make a choice. Do they want to continue suing under a class action theory, or do they want to try to settle? That’s really the choice before the industry right now. My view is, that while I agree that what Spotify and others have done is wrong—I agree that it violates the law—I also understand that they couldn’t have done it any other way. Unless your only other answer is to say, “Well you shouldn’t put music in your library if you don’t know who owns 100% of it.” That’s a legitimate point of view. But if you do that, what you’re really doing is you’re gutting the chance that interactive streaming services become successful, because most of the new music that gets released, you don’t know yet who owns it. So when an artist releases a new album, and the customer is willing to pay $9.95 a month to a Spotify, and they go to get that new music and it’s not available because the publishing hasn’t been cleared yet. That’s a recipe to kill these companies. And I and a lot of other people believe that if consumers have made their choice, that they don’t want to own copies anymore—they want to have access models like these interactive streaming models—we better figure out how to make it work so that songwriters & publishers make a living from it, not just try to kill it in the crib. I’m worried that the lawsuit strategy is very short-sighted, and it’s also asking them to do something that quite honestly, is impossible in this country.
Now in every other country in the world, there’s a society where you can go to one place and get all the licenses that you need for mechanicals. But not in the United States. So as long as that’s the system, I’d rather have them pay an appropriate penalty and then work as business partners to fix this, rather than try to sue this out of existence.
DK: Have some of the major publishers decided to opt-in on the settlement with Spotify?
Israelite: I expect that all the major publishers will opt-in to my settlement. The opt-in period is still open, but I have a strong belief that all the major publishers will opt-in to my settlement.
DK: You’ve reached this settlement with Spotify. Will you also be negotiating a deal with Apple Music and the other streaming companies?
Israelite: We’re talking to all of the companies that are in this space, including Rhapsody, Google, Tidal and Apple. Now, Apple has a little less of a problem. The reason why, is because Apple took all direct licenses, instead of using the compulsory process under Section 115. They have the same problem, though.
DK: I read a recent report, that streaming for record labels now accounts for slightly over 50% of all their revenues. Are labels relatively happy with the royalty rate the streaming companies are paying them? And there’s the question of balance—what should labels be paid compared to what publishers & songwriters are paid? The royalty percentage seems to be tilted more favorably towards labels.
Israelite: You’re exactly right. You’ve got to distinguish between the type of business model—it’s part of what’s so screwed up, quite honestly, about the system. If it’s a noninteractive service like a Pandora, then a record label has a compulsory license, and they have to go to the same three judges that we do for our mechanicals. But we also have to go to consent decrees. So they’re much better off than we are, going to a CRB (Copyright Royalty Board) than we are going to a consent decree process. The result is right now, with the new deal publishers have struck with Pandora, the money is split about 5 to 1, labels to publishers. But in every other country in the world, radio models split the money about 50/50. So we feel like we’re being significantly underpaid by the radio model of Pandora and others like it, such as XMSR (Sirius Radio), iHeart Radio…any of the digital radio models.
If the service is interactive like a Spotify or Apple Music, the record labels are then in a free market, where we want to be but we’re not. So the record label gets to negotiate their deal, and if they don’t like the deal, they get to say no. The typical deal the record labels have, is they receive about 60% of the revenue—we’re getting about 10% of the revenue. So it’s about a 6 to 1 split. And what’s even worse about that, is because the record labels are in a free market, they can negotiate things like equity in the company. It’s been reported that the record labels own as much as 15% of Spotify. Well, the publishers & songwriters don’t own any part of Spotify, because we’re not in a free market to negotiate that. And so even though it’s a 6 to 1 split, it’s even worse than that because the 6 (the labels) also gets equity and the 1 (publishers & songwriters) do not.
I think labels would tell you, that depending on the model, that they’d like to to be paid more. But I think their situation is much better than the songwriters & music publishers’ situation.
DK: As a music publisher, I know there are different ways that royalties get split up. There’s the licensing for sync, which gets split 50% for the master and 50% for the publishing. But traditionally, for mechanical royalties paid by labels to publishers, the ratio is about 6 to 1. I don’t know how things ended up this way, with publishers getting 50% for sync licensing, but only 1/6 for record royalties.
Israelite: The simplest answer, is that the sync is in a free market. Synchronization is the one and only place, where both the record label and the music publisher are in a free market. And when that happens…guess what happens to the values? They are worth 50/50 because if the publisher says no, you can’t use the song. I have a theory which I think is proven, although the record labels violently disagree with this theory. I believe that the values are only fairly decided when we’re both playing under the same rules. If we’re both in front of the same CRB and we’re both in a free market, you’re going to see much closer valuations. But unfortunately, for most of the industry they’re in a free market, and we’re under a consent decree or a compulsory license. The net result has been this inequity in the split.
DK: So is it conceivable in the future, that songwriters & publishers can get better than a 1 to 6 ratio?
Israelite: I’m sure of it. If the consent decrees were to go away, or if publishers were able to negotiate in a free market, there’s no way that the splits would be like this. I’m convinced of it, which is why I’ve been so focused on getting people to pay attention to how bad the consent decrees have been.
I think what’s happened—we’ve had a compulsory license since 1909, before recorded music even existed. And we’ve had a consent decree since 1941, before most of us were alive. I think what’s happened over time, is that the songwriting and music publishing industry has been conditioned…that somehow they deserve less—that these splits that we live with are just the way it is. I think it’s because no one goes back and questions the fundamental premise of how it got this way.
Now, the labels have complaints, too. Broadcast radio in this country doesn’t pay record labels and artists, and that’s wrong. And so labels will often argue, “Well sure, we’re getting most of the Pandora money, but you’re getting all of the AM/FM money.” And they’re right to say that’s not fair—they should be getting paid from broadcast radio. But it’s not our fault, and we support them getting paid by broadcast radio. And it’s certainly not a reason for them to take the lion’s share of the money from the new digital models.
They also argue that they have a different business model. They risk a lot more…that their margins are thinner, that they invest more in their artists than maybe the publishing industry does in the songwriters. But that’s changing very quickly. Labels are starting to act much more like publishers in terms of how they do business. So the old models of how it worked no longer apply anymore, in my opinion. Which is why, if you put us in a free market, the market will answer the question of what it’s worth…it always does.
DK: I have a general question that I think many songwriters & publishers would like to know. What is the current breakdown of how much income comes from mechanicals, performance and sync royalties?
Israelite: I collect data from the whole industry, as part of my dues process. So I’m in the middle of collecting the information for 2015 right now, and I will be able to unveil it at our annual (NMPA) meeting in June in New York. That will be when we unveil the 2015 data. But for 2014, which is now a little bit old, we know that for the industry, 52% of the revenue comes from performances. Mechanical and sync basically divide up the other 48%, roughly even. There’s also a few percent for lyric rights. That’s going to change over time—mechanicals will keep going down and then at some point, you’ll see performance and sync models become more important than they already are. That’s why the consent decree issues are more important than the compulsory licensing issues, because mechanicals are shrinking but performances are growing.
DK: In closing, there’s certainly a lot going on. You’re waiting for the Department of Justice ruling on the consent decrees, and then the Copyright Royalty Board proceedings might take up to two years. But in the next 6-12 months, what can songwriters and publishers look forward to, that would increase their income? What’s the good side that writers & publishers can look forward to in the coming year?
Israelite: I think that most important is what happens at the DOJ. Secondly, is the lawsuit settlements and figuring out how to make the interactive streaming models work in the new world. Those are the two things. And then longer term would be any legislative changes that might be coming, but it will probably be another couple years before we have an answer to that.
DK: Do you feel a little more optimistic now than a year ago, or is it still a dogfight?
Israelite: It’s still a dogfight. I’m optimistic, just because I think that so many people will want to use our songs and there’s tremendous value there. If you look at these (streaming companies) that went from nothing to having valuations in the billions of dollars, it’s because of the songs. So I’m optimistic about the overall industry, but I just think we have to unlock the value of what we’re providing. If this were any other industry, we would be getting the lion’s share of the money because we are the most important element in the business. But because the way the system works, [streaming companies] are able to get what we produce cheaply, and they’re making the money. Spotify is valued at $8 billion—it does nothing more than deliver our songs to someone else. It’s a delivery service. I appreciate their technology and I think they’re a valuable partner. But the most important thing about the whole equation are the songs. So why we would only get 10% and a label would get 60% and streaming companies would keep 30% is out of whack. And so we’ve got to wake everybody up about that value proposition, and do things that will eventually get us to the place of fair payment. It’s going to be small steps. because I don’t think you can overnight go from getting paid 10% to getting paid 30%. It’s going to take a grind to get there, but I’m optimistic.