When listening to a song on a streaming website such as Spotify or Apple Music most of us don’t give a second thought to what that means to the artist. The recent changes in streaming capabilities have fundamentally changed the way that the music industry works. Gone are the days when you walk to the store and pick up a record, or an album.  Even purchasing a song online is no longer necessary. Instead, all you need to do to listen to endless streams of music is to purchase a subscription to one of a plethora of sites online. You can even listen to music for free by listening to a few advertisements. The advent of these services has changed the way that artists, and their record companies, get paid.

There are two types of streaming services. In noninteractive services, the listener is passive and unable to choose their music. Interactive services allow the listener to select her own music. For the non-interactive streaming companies, Congress allows them to have a copyright to this music so long as they pay a standard royalty rate to the copyright holders. Every five years, the Copyright Royalty Board (CRB), which oversees the copyright board’s licenses, sets that standard rate.

When deciding on what the rate will be for the next term the board first waits for parties to negotiate a rate. If they are unable to do so, the CRB holds an adversarial proceeding to decide on the rates, and endeavors to “establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and seller.”

In a recent decision, SoundExchange, Inc. v. Copyright Royalty Board and Librarian of Congress, the U.S. Courts of Appeals for the D.C. Circuit upheld the recent royalty rate that was established by the CRB for noninteractive services.  In order to determine the appropriate rate, the Board allowed each side to submit a “benchmark” rate. In the initial hearing in front of the Board, streaming providers Pandora and iHeart Radio submitted proposals for a possible royalty rate. SoundExchange, a digital rights organization, similarly proposed a rate which would have been more favorable to the rights to the owners of the music rights. Ultimately the CRB chose to adopt the proposed rates put forth by Pandora and iHeart.

Perhaps the greatest takeaway from the decision is the affirmation of the willing buyer/ willing seller system for deciding rates. The Board uses this test to assess the proposed benchmarks as if they were negotiated in the marketplace. This allows the Board to establish a “zone of reasonableness” within which the Board establishes a license rate. This test comes from a statutory interpretation which mandates the Board set “a rate that reflects a market that is effectively competitive.” The D.C. Circuit upheld the Board’s reading of the statute and affirmed the willing buyer/ willing seller test for the establishment of royalty rates.

Recently, Judge David Strickler* of the Copyright Royalty Board spoke regarding this case at Vanderbilt Law School. According to Judge Strickler of the CRB, simply having the DC Circuit hear a case regarding the royalty rate allows greater predictability, thus promoting settlements within the music industry. Additionally, Judge Strickler indicated that this formula for deciding the rate for non-interactive streaming services may be applied to other formats of listening, such as interactive services like Apple Music or Spotify. As the way that we listen to music changes, streaming services comprise an ever-increasing portion of manner of consumption. The interaction between the owners of music rights and these streaming providers will continue to negotiate and fight for the best deals. Congress is currently set to pass the Music Modernization Act which endeavors to change the way that we license digital music, so we may be hearing more about the decisions of the Copyright Royalty Board in the future .

 

Carter Gantt

 

*All of Judge Strickler’s positions are his own and do not reflect the position of the Copyright Royalty Board, the Library of Congress, or the United States Government.

 

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