The Music Royalty Implications Of Apple’s iRadio

By David Touve of ROCKONOMIC.

Rumors now abound as far as the possible launch of an “iRadio” service from Apple (Forbes, Forbes again, the Verge, Cnet, ). Embedded within these rumors are discussions of the rates at which music licenses for such a service would be paid. Less discussed in these stories, however, is how any iRadio royalties might be distributed differently — to labels, performing artists, musicians, etc. — as compared to those royalties paid by other providers of Radio-like experiences online (e.g., Webcasters). A discussion of the difference in how these royalties might be paid is the purpose of this post.

To make a long story very short: iRadio royalties may not be distributed in such a way that 45% of the royalties are paid directly to the featured performing/recording artists, 5% to the nonfeatured musicians and vocalists, and 50% to the sound recording owner(s) — as these royalties are paid out from more traditional webcasters. Instead, 100% of these monies could be paid directly to sound recording owners, with the artist contracts and the recoup machine determining what portion of these royalties eventually make their way to artists and musicians.

To make that short story very long, read on…

First off, and to be completely clear, I said “might be distributed” in the paragraph above. I do not have any personal knowledge of the rates being negotiated, or the contractual terms which define these royalties. Rumors of these rates, however, are already surfacing. For example, the NY POST reported that Apple was hoping to pay 6 cents per 100 streams, or $0.0006 per stream, which is roughly 1/2 of the Pureplay Webcaster settlement rate ($0.0012and) less than 1/3 of the CRB-established Commercial Webcaster rate ($0.0022). I have no idea if this rumored rate is truly the rate at which an iRadio might be licensed.

Second off, the specific rate for the license is not really the focus of this article. Instead, I am talking about how the royalties would be distributed to the various stakeholders — labels, performing artists, musicians, etc. — regardless of the underlying license rate. Given these rates will (likely) be the result of direct negotiations, rather than the result of iRadio operating through a statutory license, the royalty game could play out quite differently from the way it plays out through traditional webcasters.

Royalties paid under the statutory license — the license under which most Webcasters, Satellite radio, and even Cable-delivered music services operate — are distributed in a particular way: 50% to the sound recording owners, 45% to the featured performing/recording artist(s), and 5% to the non-featured musicians/vocalists (which is split 2.5% for vocalists and 2.5% for musicians, paid via their relevant unions).

Importantly, embedded within US Copyright Law is a “side door” to the statutory path. This side door opens the moment a music service chooses to license its use of music from copyright owners directly, and most specifically when the use of music being licensed falls outside the narrowly defined terms in the Law (e.g., the “performance complement) that limit interactivity and playlist characteristics of music services that wish to take the statutory route. Most of the big names in on-demand services pass through this side door: Spotify, Rhapsody, Rdio, MOG (soon Daisy), Slacker, etc.

The relevant section within US Copyright Law is Section 114(g), which states:

(g) Proceeds from Licensing of Transmissions.—

(1) Except in the case of a transmission licensed under a statutory license in accordance with subsection (f) of this section—

(A) a featured recording artist who performs on a sound recording that has been licensed for a transmission shall be entitled to receive payments from the copyright owner of the sound recording in accordance with the terms of the artist’s contract; and

(B) a nonfeatured recording artist who performs on a sound recording that has been licensed for a transmission shall be entitled to receive payments from the copyright owner of the sound recording in accordance with the terms of the nonfeatured recording artist’s applicable contract or other applicable agreement.

This section, in simple English, simply means that in the case of licenses negotiated outside the statutory pathway the royalties owed to both featured and nonfeatured performing artists/musicians would be paid according to the artists’ contracts, rather than according to the 45/5/5 split as prescribed for the statutory license.

As a result, the royalties paid by an iRadio — if the service is indeed being direct licensed — may not make their way to artists and musicians until after all of the various terms of artist contracts — including deductions and recoups — are met. This non-statutory pathway is particularly likely if the interactivity of the iRadio service resides outside the limits of those terms appropriate to a statutory license.

And so, it didn’t take a rocket scientist to anticipate that direct licenses for an iRadio service could get negotiated at rates below the webcaster rates formally established through the Copyright Royalty Board (CRB) or published Settlement agreement. Why? Because it is possible for sound recording owners to be no worse off licensing webcaster-like services at rates below these statutory rates, after considering the probability of royalties passing through the deductions and recoup system (akin to a Pachinko game) on the way to artists and musicians.

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