Category: Copyright Royalty Board

On the Internet, “Partners” Don’t Hear You Scream: Daniel Ek Makes a “Bundle” From the Value He Won’t Share

Here’s a quote for the ages:

MICHAEL BURRY

One of the hallmarks of mania is the rapid rise and complexity
of the rates of fraud. And did you know they’re going up?

The Big Short, screenplay by Charles Randolph and Adam McKay, based on the book by Michael Lewis

I have often said that if screwups were Easter eggs, Daniel Ek would be the Easter bunny, hop hop hopping from one to the next. I realize that is not consistent with his press agent’s pagan iconography, but it sure seems true to many.

The Bunny’s Bundle

This week was no different. Mr. Ek evidently has a “10b5-1 agreement” in place with Spotify, a common technique for insiders, especially founders, who hold at least 10% of the company’s shares to cash out and get the real money through selling their stock. The agreement establishes predetermined trading instructions for company stock (usually a sale and not a buy so not trading the shares) consistent with SEC rules under Section 10b5 of the Securities and Exchange Act of 1934 covering when the insider can sell. Why does this exist? The rule was established in 2000 to protect Silicon Valley insiders from insider trading lawsuits. Yep, you caught it–it’s yet another safe harbor for the special people.

As MusicBusinessWorldWide reported (thank you, Tim), Mr. Ek sold $118.8 million in shares of Spotify at roughly the same time that Spotify was planning to change the way the company paid songwriters on streaming mechanicals by claiming that its recent audiobook offering made it a “bundle” for purposes of the statutory mechanical rate. That would be the same rate that was heavily negotiated in 2021-22 at great expense to all concerned, not to mention torturing the Copyright Royalty Judges. The rates are in effect for five years, but the next negotiation for new rates is coming soon (called Phonorecords V or PR V for short). We’ll get to the royalty bundle but let’s talk about the cash bundle first.

As Tim notes in MBW, Mr. Ek has had a few recent sales under his 10b5-1 agreement: “Across these four transactions (today’s included), Ek has cashed out approximately $340.5 million in Spotify shares since last summer.” Rough justice, but I would place a small wager that Ek has cashed out in personal wealth all or close to all of the money that Spotify has paid to songwriters (through their publishers) for the same period. In this sense, he is no different that the usual disproportionately compensated CEOs at say Google or Raytheon.

Don’t get me wrong, I don’t begrudge Mr. Ek the opportunity to be a billionaire. I don’t at all. But I do begrudge him the opportunity to do it when the government is his “partner” as it is with statutory mechanical royalties, he benefits from various other safe harbors, has had his lobbyists rewrite Section 115 to avoid litigation in a potentially unconstitutional reach back safe harbor, and he hired the lawyer at the Copyright Office who largely wrote the rules that he’s currently bending. Yes, I do begrudge him that stuff.

And here’s the other thing. When Daniel Ek pulls down $340.5 million as a routine matter, I really don’t want to hear any poor mouthing about how Spotify cannot make a profit because of the royalty payments it makes to artists and songwriters. (Or these days, doesn’t make to some artists.) This is, again, why revenue share calculations are just the wrong way to look at the value conferred by featured and nonfeatured artists and songwriters on the Spotify juggernaut. That’s also the point we made in some detail in the paper I co-wrote with Professor Claudio Feijoo for WIPO that came up in Spain, Hungary, France, Uruguay and other countries.

The Malthusian Algebra Strikes Again

It’s not solely Mr. Ek who is the problem child here, it’s partly the fault of industry negotiators who bought into the idea that what was important was getting a share of revenue based on a model that was almost guaranteed to cause royalties to decline over time. This would be getting a share of revenue from someone who purposely suppressed (and effectively subsidized) their subscription pricing for years and years and years. (See Robert Spencer’s Get Big Fast.). If I were a betting man, I would bet that the reason they subsidized the subscription price was to boost the share price by telling a growth story to Wall Street bankers (looking at you, Goldman Sachs) and retail traders because the subsidized subscription price increased subscribers.

Just a guess.

Now about this bundled subscription issue. One of the fundamental points that I think gets missed in the statutory mechanical licensing scheme is the scheme itself. The fact that songwriters have a compulsory license forced on them for one of their primary sources of income is a HUGE concession that songwriters have been asked to agree to since 1909. That’s right–for over 100 years. A decision that seemed reasonable 100 years ago really doesn’t seem reasonable at all today in a networked world. So start there as opposed to streaming platforms are doing us a favor by paying us at all, Daniel Ek saved the music business, and all the other iconography.

Has anyone seen them in the same room at the same time?

The problem that I have with the Spotify move to bundled subscriptions is that it can happen in the middle of a rate period and at least on the surface has the look of a colorable argument to reduce royalty payments. I think if you asked songwriters what they thought the rule was, to the extent they had focused on it at all after being bombarded with self-congratulatory hoorah, they probably thought that the deal wasn’t change rates without renegotiating or at least coming back and asking.

And they wouldn’t be wrong about that, because it is reasonable to ask that any changes get run by your, you know, “partner.” Maybe that’s where it all goes wrong. Because let me suggest and suggest strongly that it is a big mistake to think of these people as your “partner” if by “partner” you mean someone who treats you ethically and politely, reasonably and in good faith like a true fiduciary.

They are not your partner. Stop using that word.

A Compulsory License is a Rent Seeker’s Presidential Suite

But let’s also point out that what is happening with the bundle pricing is a prime example of the brittleness of the compulsory licensing system which is itself like a motel in the desolate and frozen Cyber Pass with a light blinking “Vacancy: Rent Seekers Wanted” surrounded by the bones of empires lost. Unlike the physical mechanical rate which is a fixed penny rate per transaction, the streaming mechanical is a cross between a Rube Goldberg machine and a self-licking ice cream cone.

The Spotify debacle is just the kind of IED that was bound to explode eventually when you have this level of complexity camouflaging traps for the unwary written into law. And the “written into law” part is what makes the compulsory license process so insidious. When the roadside bomb goes off, it doesn’t just hit the uparmored people before the Copyright Royalty Board–it creams everyone.

Helienne Lindvall, David Lowery and Blake Morgan tried to make this point to the Copyright Royalty Judges in Phonorecords IV. They were not confused by the royalty calculations–they understood them all too well. They were worried about fraud hiding in the calculations the same way Michael Burry was worried about fraud in The Big Short. Except there’s no default swaps for songwriters.

Here’s how the Judges responded, you decide if it’s condescending or if the songwriters were prescient knowing what we know now:

While some songwriters or copyright owners may be confused by the royalties or statements of account, the price discriminatory structure and the associated levels of rates in settlement do not appear gratuitous, but rather designed, after negotiations, to establish a structure that may expand the revenues and royalties to the benefit of copyright owners and music services alike, while also protecting copyright owners from potential revenue diminution. This approach and the resulting rate setting formula is not unreasonable. Indeed, when the market itself is complex, it is unsurprising that the regulatory provisions would resemble the complex terms in a commercial agreement negotiated in such a setting.

PR IV Final Rule at 80452 https://app.crb.gov/document/download/27410

It must be said that there never has been a “commercial agreement negotiated in such a setting” that wasn’t constrained by the compulsory license so I’m not sure what that reference even means. But if what the Judges mean is that the compulsory license approximates what would happen in a free market where the songwriters ran free and good men didn’t die like dogs, the compulsory license is nothing like a free market deal. If they are going to allow services to change their business model in midstream but essentially keep their music offering the same while offloading the cost of their audiobook royalties onto songwriters (and probably labels, too, although maybe not) through a discount in the statutory rate, then there should be some downside protection or another bite at the apple.

Unfortunately, there are neither, which almost guarantees another acrimonious, scorched earth lawyer fest in PR V coming soon to a charnel house near you.

Eject, Eject!

This is really disappointing because it was so avoidable if for no other reason. It’s a great time for someone…ahem…to step forward and head off the foreseeable collision on the billable time highway. I actually think the Judges know that the rate calculation is a farce but are dealing with people who have made too much money negotiating it to ever give it up willingly. If they are looking for a way off the theme park ride run by the evil clown, grab my hand on the next pass and I’ll try to pull you out of the centrifugal force. It won’t be easy.

This inevitable dust up means other work will suffer at the CRB. It must be said in fairness that the Judges seem to find it hard enough to get to the work they’ve committed to according to a recent SoundExchange filing in a different case (SDARS III remand from 2020) brought to my attention by Mr. George Johnson.

That’s not uncharitable–I’m merely noting that when dozens of lawyers in Phonorecords proceedings engage in what many of us feel are absurd discovery excesses, you are–frankly–distracting the Judges from doing their job by making them focus on, well, bollocks. We’ll come back to this issue in future, but I think all members of the CRB bar–the dozens and hundreds of those putting children through college at the CRB bar–need to take a breath and realize that judicial resources at the CRB are a zero sum game. This behavior isn’t fair to the Judges and it’s definitely not fair to the real parties in interest–the songwriters.

Tell the Horse to Open Wider

The answer isn’t to get the judges more money, bigger courtroom, craft services and massages, like a financial printer. Some of that would be nice but it doesn’t solve what I think is the real problem. I’d say that the answer is that the participants remember that the main this is that the main thing has to be the main thing. Ultimately, it’s not about us in the phonorecords proceedings, it’s about the songwriters. How are they served?

A compulsory license in stagflationary times is an incredibly valuable gift, and when you not only look the gift horse in the mouth but ask that it open wide so you can check the molars, don’t be surprised if one day it kicks you.

Chronology: The week in review, Spotify layoffs, mechanical rate increase, FTC on copyright issues in AI

What Spotify needs is a good pandemic.  

Harsh?  Not really, at least not from a share price point of view. Spotify’s all time highest share price was during the COVID pandemic.

Spotify CEO Daniel Ek and the press tells us that Spotify is cutting 1,500 jobs which works out to about 17% of Spotify employees. Which works out to a pre-layoff workforce of 8,823.  So let’s start there—that workforce number seems very high and is completely out of line with some recent data from Statista which is usually reliable.

If Statista is correct, Spotify employed 5,584 as of last year. Yet somehow Spotify’s 2023 workforce grew to 9200 according to the Guardian, fully 2/3 over that 2022 level without a commensurate and offsetting growth in revenue. That’s a governance question in and of itself.

Why the layoffs? The Guardian reports that Spotify CEO Daniel Ek is concerned about costs. He says “Despite our efforts to reduce costs this past year, our cost structure for where we need to be is too big.” Maybe I missed it, but the only time I can recall Daniel Ek being vocally concerned about Spotify’s operating costs was when it came to paying royalties. Then it was full-blown poor mouthing while signing leases for very expensive office space in 4 World Trade Center as well as other pricy real estate, executive compensation and podcasters like Harry & Meghan.

Mr. Ek announced his new, new thing:

Over the last two years, we’ve put significant emphasis on building Spotify into a truly great and sustainable business – one designed to achieve our goal of being the world’s leading audio company and one that will consistently drive profitability and growth into the future. While we’ve made worthy strides, as I’ve shared many times, we still have work to do. Economic growth has slowed dramatically and capital has become more expensive. Spotify is not an exception to these realities.

Which “economic growth” is that?

But, he is definitely right about capital costs.

Still, Spotify’s job cuts are not necessarily that surprising considering the macro economy, most specifically rents and interest rates. As recently as 2018, Spotify was the second largest tenant at 4 WTC. Considering the sheer size of Spotify’s New York office space, it’s not surprising that Spotify is now subletting five floors of 4 WTC earlier this year. That’s right, the company had a spare five floors. Can that excess just be more people working at home given Mr. Ek’s decision to expand Spotify’s workforce? But why does Spotify need to be a major tenant in World Trade Center in the first place? Renting the big New York office space is the corporate equivalent of playing house. That’s an expensive game of pretend.

Remember that Spotify is one of the many companies that rose to dominance during the era of easy money in response to the financial crisis that was the hallmark of quantitative easing and the Federal Reserve’s Zero Interest Rate Policy beginning around 2008. Spotify’s bankers were able to fuel Daniel Ek’s desire to IPO and cash out in the public markets by enabling Spotify to run at a loss because money was cheap and the stock market had a higher tolerance for risky investments. When you get a negative interest rate for saving money, Spotify stock doesn’t seem like a totally insane investment by comparison. This may have contributed to two stock buy-back programs of $1 billion each, Spotify’s deal with Barcelona FC and other notorious excesses.

As a great man said, don’t confuse leverage for genius. It was only a matter of time until the harsh new world of quantitative tightening and sharply higher inflation came back to bite. For many years, Spotify told Wall Street a growth story which deflected attention away from the company’s loss making operations. A growth story pumps up the stock price until the chickens start coming home to roost. (Growth is also the reason to put off exercising pricing power over subscriptions.) Investors bought into the growth story in the absence of alternatives, not just for Spotify but for the market in general (compare Russell Growth and Value indexes from 2008-2023). Cutting costs and seeking profit is an example of what public company CEOs might do in anticipation of a rotational shift from growth to value investing that could hit their shares.

Never forget that due to Daniel Ek’s super-voting stock (itself an ESG fail), he is in control of Spotify. So there’s nowhere to hide when the iconography turns to blame. It’s not that easy or cheap to fire him, but if the board really wanted to give him the heave, they could do it.

I expect that Ek’s newly found parsimony will be even more front and center in renegotiations of Spotify’s royalty deals since he’s always blamed the labels for why Spotify can’t turn a profit. Not that WTC lease, surely. This would be a lot more tolerable from someone you thought was actually making an effort to cut all costs not just your revenue. Maybe that will happen, but even if Spotify became a lean mean machine, it will take years to recover from the 1999 levels of stupid that preceded it.

Hellooo Apple. One big thinker in music business issues calls it “Spotify drunk” which describes the tendency of record company marketers to focus entirely on Spotify and essentially ignore Apple Music as a distribution partner. If you’re in that group drinking the Spotify Kool Aid, you may want to give Apple another look. One thing that is almost certain is that that Apple will still be around in five years.

Just sayin.

Mechanicals on Physical and Downloads Get COLA Increase; Nothing for Streaming

Recall that the “Phonorecords IV” minimum mechanical royalties paid by record companies on physical and downloads increased from 9.1¢ to 12¢ with an annual cost of living adjustment each year of the PR IV rate period. The first increase was calculated by the Copyright Royalty Judges and was announced this week. That increase was from 12¢ to 12.40¢ and is automatic effective January 1, 2024.

Note that there is no COLA increase for streaming for reasons I personally do not understand. There really is no justification for not applying a COLA to a government mandated rate that blocks renegotiation to cover inflation expectations. After all, it works for Edmund Phelps.

The Federal Trade Commission on Copyright and AI

The FTC’s comment in the Copyright Office AI inquiry shows an interesting insight to the Commission’s thinking on some of the same copyright issues that bother us about AI, especially AI training. Despite Elon Musk’s refreshing candor of the obvious truth about AI training on copyrights, the usual suspects in the Copyleft (Pam Samuelson, Sy Damle, etc.) seem to have a hard time acknowledging the unfair competition aspects of AI and AI training (at p. 5):

Conduct that may violate the copyright laws––such as training an AI tool on protected expression without the creator’s consent or selling output generated from such an AI tool, including by mimicking the creator’s writing style, vocal or instrumental performance, or likeness—may also constitute an unfair method of competition or an unfair or deceptive practice, especially when the copyright violation deceives consumers, exploits a creator’s reputation or diminishes the value of her existing or future works, reveals private information, or otherwise causes substantial injury to consumers. In addition, conduct that may be consistent with the copyright laws nevertheless may violate Section 5.

We’ve seen unfair competition claims pleaded in the AI cases–maybe we should be thinking about trying to engage the FTC in prosecutions.

Will Songwriters Wish they had Gotten Inflation Protection on Streaming Mechanicals?

When the dust settled after the last mechanical royalty rate setting we saw the Copyright Royalty Board approving two different settlements for mechanical royalties. The royalty rate for physical mechanicals and permanent downloads get a significant rate increase and the royalty rate for streaming mechanicals got a theoretical rate increase. However, only physical mechanicals and downloads got both a rate increase and a cost of living adjustment (or “inflation protection”). Streaming mechanicals did not get inflation protection–could have but did not.

This means that the same writers on the same song in the same recording will get inflation protection when that song is sold in physical formats (such as the surging vinyl configuration) or downloads, but will not when that song is sold in streaming formats. What is the logic to this? One difference is that record companies are paying on the physical and download side and the lived experience of record companies necessarily puts them closer to songwriters than the services. And the lived experience of streaming companies is…well, breakfast at Buck’s, Hefner level private jets, warmed bidets and beach volleyball courts at home with imported sand. (Although Sergey Brin has a real beach in his Malibu home. Surf’s up in geekville. Maybe he’ll send DiMA to represent him at the Malibu city council meetings if Malibew-du-bumbum is ready for Silicon Valley style lobbying to decide who can surf Sergey’s beach and the color scheme of their boards. Kind of like the Palo Alto Architectural Review Board with a tan.)

The Big Google

We heard that inflation was transitory, which may prove true–or not. Transitory or not, that’s not an argument against treating songwriters equally on two versions of the same mechanical license; rather, it’s a reason why it should be easy to afford if you cared about sustaining songwriters at least as much as investing in ChatGPT to replace them.

However, in one of the great oopsies of the 21st Century, it doesn’t look much like inflation is all that transitory. Based on some of the posts I wrote starting in 2020, I think we can see that inflation is way worse on the items that count for songwriters like “food at home,” rent, utilities and gasoline. Very often the number of Americans working a job is used to counter the lived experience of the high number of people who believe the economy is tanking. But what about that jobs report? More jobs equals good times, yes? There’s something weird about the math of the jobs report which should make you wonder about whether that’s such a great argument.

If I still have your attention after the “math” word, there are two standard surveys of the economy used to measure jobs that measure different components of the jobs created in a given measurement period. These data are the “Establishment Payroll Survey” which measures the total number of jobs in the U.S. economy. That’s the number most people refer to with the “jobs report” you hear so much about. (More formally titled the “Current Establishment Statistics (Establishment Survey).”)

There’s another number called the “Household Survey” that measures the total number of jobs per household (more formally titled the Current Population Survey).

Note that the Establishment survey measures all jobs; the Household survey measures jobs per household. If you had two or three jobs, the Household survey would count you as “employed”; the Establishment survey would count the number of jobs you had. Now note that there is currently 2.7 million job difference between the two. Why?

I’m not really sure, but it would appear that there are more jobs than households. That difference may occur from time to time, but it’s quite a big difference at the moment and seems to be a trend that’s confirmed by another statistic: the surge in part-time jobs as shown in this chart:

So what’s missing is how many jobs that are counted in the Establishment survey are held by any one or two household members in the Household survey. If you were to draw the conclusion that every job in the Establishment survey is a full time job held by the primary source of support in a household and that when the Establishment number is rising things are looking up, that may be a leap unsupported by evidence. That may be one of the things you’d want to know if you were trying to predict how well the government’s songwriter royalties would hold their value over the five year rate period.

The sharp increase since June in the number of part time workers may suggest that more people are working multiple jobs and not that more people are working. In fact, the total number of full time workers seems to have declined by a bit over the same period.

That’s not to say that inflation protection is not a serious requirement of everyone who relies on the government for their livelihood. While the inflation rate has declined a bit recently, possibly due to the Federal Reserve abandoning its zero interest rate policy, it is still significant. In my view, nothing in the employment report suggests otherwise and continues to highlight the importance of songwriters being accorded the same inflation protection on streaming as they are on physical and downloads.

Just because the physical rate is paid by the record companies and the streaming rate is paid by the richest corporations in history does not excuse the distinction. Each should be protected equally.

The Enemy Gets a Vote: How will Big Tech respond to “CRB Reform”?

You may recently have heard the term “CRB reform” tossed around by various music industry entities. The term usually means changes to the law or regulations governing the Copyright Royalty Board in the interests of the lobbyists or the big music publishers. And yes, so far it has just been the publishers raising “CRB reform” aside from the odd comment of A2IM filed with the CRB that would, if adopted, create a massive change to the Copyright Act and make controlled composition clauses even more pernicious. (As I explained in my reply comment, I don’t think the CRB has the authority to make the change A2IM asked nor do I think they have the inclination for self-surgery judging by their opinion concluding the “Subpart B” proceeding in Phonorecords IV.)

What you don’t hear, what you never hear, is how the music users will respond, particularly the Big Tech companies that participate in the Phonorecords proceedings for streaming mechanicals. You don’t even hear speculation about that little issue, which ignores the very important fact that the enemy gets a vote. (If you don’t think Amazon, Apple, Google, Pandora and Spotify are the enemy, then ask yourself why they brought 26 lawyers to the Phonorecords IV streaming mechanical proceeding and conducted a scorched earth discovery campaign in that proceeding. Not to mention dragging out Phonorecords III as long as they possibly could without remorse. And then there’s UGC 2.0 called AI and ChatGPT designed to take the human out of transhumanism. That’s not how friends treat each other.)

The fact that you don’t hear anything about how Big Tech views “CRB Reform” suggests one of two things is happening. Either there is no deal in place with the services or worse yet there is a deal but it just hasn’t been surfaced yet. That would be in keeping with the disastrous 2006 S1RA legislation (“Section 115 Reform Act“) the first version of the Harry Fox Preservation Act that failed, but eventually became Title I of the Music Modernization Act.

The way that one worked was Big Tech woke up and said, oh, you want to amend the Copyright Act? We have some things we want, too. (Big Tech in those days mostly Google led by their many proxy NGO front groups including the person of Gigi Sohn who is now unbelievably an FCC commissioner). So not only could Big Tech bring their considerable lobbying muscle to bear on any statutory “reform” (which usually means a further consolidation of power in the ruling class by closing loopholes favorable to the people), but they might make it actually worse.

For example, it would not be difficult for Big Tech to leverage their superior numbers and legal geographical advantage by expanding the discovery and appeal rights in CRB proceedings. That will essentially be the death knell of songwriters ever being able to defend themselves. Both the publishers and Big Tech would probably like to make certain that there is never again a George Johnson figure appearing in the proceedings much less 50 George Johnson’s (apologies for the casual objectification, but you get the idea). The lobbyists and lawyers on both sides share that special Washington moral hazard of wanting everything involving the government to be as complicated and lengthy as possible. Boy have they done that with the impenetrable streaming mechanicals calculations and expensive negotiations to keep it complicated so only the big guys can afford the accounting systems to use the government’s license.

How would anyone keep Big Tech from slurping at that trough if you opened up the CRB statutes and regulations? You can’t stop them–except one way.

If our side in the proceedings found voluntary changes everyone could agree to that would not require amending the statutes, then for better or worse we would be able to operate on the status quo. For example, the publishers could agree that there would be an independent songwriter advocate who would be included in the negotiations. They could agree any one of a number of things that would result in better treatment of songwriters. As long as we are stuck with the compulsory license, we could at least make it more representative.

But what no one wants is to have Big Tech leverage disagreements inside our house over the length of our table to come up with even more limitations and exceptions to copyright. To my knowledge, there is no agreement from the other side to stay out of this issue. If there is such a deal, I’d really like to know what was given up to get it. If there isn’t, I’d love to hear the plan from the smart people.

I’m all ears.

Applying a Cost of Living Adjustment to Streaming Mechanicals

You are no doubt aware that the Copyright Royalty Judges handed down a final rule adopting the settlement covering streaming mechanicals reached by the major publishers and the richest and most dominant corporations in the history of Planet Earth: Apple, Amazon, Google, Pandora and Spotify. There are many who are dissatisfied with the negotiated rate, no doubt. There are many who are disappointed that the Judges perpetuated the mind-numbing complexity of the royalty calculation methodology (which probably costs more to account on a per-stream basis than the payable royalty).

That’s all true, but is a byproduct of the discriminatory practices frozen in time at the CRB, a libertarian hell-scape preserved in amber. As if taking a trip to Jurassic World (or at least 2009) wasn’t bad enough, the Judges refused even to place a toe onto the arc of the moral universe as they just did in the Subpart B rate setting in the same proceeding (i.e., the Phonorecords IV rates that abandoned the frozen mechanical and adopted an annual cost of living adjustment for physical and permanent download configurations).

I discuss this in more detail in a post on MusicTechPolicy in which I question whether a hidebound adoption of rates that fail to apply a COLA equally and treat likes alike in the same proceeding is lawful, much less good policy. While the Judges focus on giving the negotiating parties, aka the rich people, what they want and ignore the notorious unfairness of the Copyright Royalty Board whose rulings apply to all songwriters in the world who ever lived or may ever live regardless of representation, I argue that applying the same COLA calculation to streaming as to Subpart B configurations solves the problem. This post will lay out a simple method of implementing a COLA for streaming.

The policy goal would be to apply the COLA formula to streaming. Because the streaming formula is so unduly complex, it’s easy to understand the resistance to adding still another step. Remember that the greater than/lesser of monthly calculation is a series of steps that gets to a per-play rate of sorts. All of the greater of/lesser than calculations have been fought and salivated over by dozens of lawyers (literally) so changing any one of them is probably not productive and in my mind is not necessary to give effect to the COLA. Remember that in the history of the government’s mechanical rate, the COLA was applied to a rate as an uplift, not as a way to calculate a rate. The point of a COLA is always to preserve the value of the government’s rate and recognizes that the songwriter will not have a chance to revisit the rate for five year tranches and a lot can happen in five years.

The easiest way to apply a COLA to streaming is to derive the per-play rate given the current formula and then uplift it with a COLA. The Judges already have a COLA based on CPI-U . The Judges need only apply the COLA as a legal modification to the streaming mechanical and accept the base line rates in the negotiated settlement. Otherwise, the exact same songs with the exact same songwriters for the exact same recording in the exact same proceeding will have a COLA when exploited by record companies and none when exploited by the rich people. This result just seems arbitrary. The labels having shown the way to a fair result should be followed by the DSPs.

We raised this approach in a Phonorecords IV comment I filed for David Lowery, Helienne Lindvall and Blake Morgan:

Applying the COLA to Section 115 may actually have a simple solution. The Judges already have a COLA formula. That formula can simply be applied as a step (5) in 37 CFR §385.21(b). This way the negotiated settlement terms are not re- opened.

Adding a COLA uplift to the applicable royalty calculation is simple. First, determine the applicable payable royalty for the accounting period concerned under the negotiated rates. Then apply the COLA formula derived by the Judges as an uplift to the payable royalties as a last step in the royalty calculation. The COLA could be calculated either annually or monthly although monthly seems more appropriate and accurate.

The uplifted amount (after any uplifted overtime adjustment to plays) would then be reflected on the applicable Copyright Owner’s royalty statement as the payable royalty for that accounting period.

This seems like a simple solution that brings the streaming mechanical out of Jurassic World and into the Era of the Songwriter.

Thinking Outside the Pie: @legrandnetwork Study for GESAC Highlights Streaming Impact on Choking Diversity and Songwriter Royalties

Emmanuel Legrand prepared an excellent and important study for the European Grouping of Societies of Authors and Composers (GESAC) that identifies crucial effects of streaming on culture, creatives and especially songwriters. The study highlights the cultural effects of streaming on the European markets, but it would be easy to extend these harms globally as Emmanuel observes.

For example, consider the core pitch of streaming services that started long ago with the commercial Napster 2.0 pitch of “Own Nothing, Have Everything”. This call-to-serfdom slogan may sound good but having infinite shelf space with no cutouts or localized offering creates its own cultural imperative. And that’s even if you accept the premise the algorithmically programed enterprise playlists on streaming services should not be subject to the same cultural protections for performers and songwriters as broadcast radio–its main competitor.

[This] massive availability of content on [streaming] platforms is overshadowed by the fact that these services are under no positive obligations to ensure visibility and discoverability of more diverse repertoires, particularly European works….[plus]  the initial individual subscription fee of 9.99 (in Euros, US dollars, or British pound) set in 2006, has never increased, despite the exponential growth in the quality, amount of songs, and user-friendliness of music streaming services.

Artists working new recordings, especially in a language other than English, are forced to fight for “shelf space” and “mindshare”–that is, recognition–against every recording ever released. While this was always true theoretically; you never had that same fight the same way at Tower Records.

This is not theoretically true on streaming platforms–it is actually true because these tens of millions of historical recordings are the competition on streaming services. When you look at the global 100 charts for streaming services, almost all of the titles are in English and are largely Anglo-American releases. Yes, we know–Bad Bunny. But this year’s exception proves the rule.

And then Emmanuel notes that it is the back room algorithms–the terribly modern version of the $50 handshake–that support various payola schemes:

The use of algorithms, as well as bottleneck represented by the most popular playlists, exacerbates this. Furthermore, long-standing flaws in the operations of music streaming platforms, such as “streaming fraud”, “ghost/fake artists”, “payola schemes”, “royalty free content” and other coercive practices [not to mention YouTube withholding access to Content ID] worsen the impact on many professional creators….

This report suggests solutions to bring greater transparency in the use of algorithms and invites stakeholders to undertake a review of the economic models of streaming services and evaluate how they currently affect cultural diversity which should be promoted in its various forms — music genres, languages, origin of performers and songwriters, in particular through policy actions.

MTS readers will recall my extensive dives into the hyperefficient market share distribution of streaming royalties known as the “big pool” compared to my “ethical pool” proposal and the “user centric” alternative. As Emmanuel points out, the big pool royalty model belies a cultural imperative–if you are counting streams on a market share basis that results in the rich getting richer based on “stream share” that same stream share almost guarantees that Anglo American repertoire will dominate in every market the big streamers operate.

Emmanuel uses French-Canadian repertoire as an example (a subject I know a fair amount about since I performed and recorded with many vedettes before Quebecoise was cool).

A lot of research has been made in Canada with regards to discoverability, in particular in the context of French-Canadian music, which is subject to quotas for over the air broadcasters which however do not apply to music streaming services. The research shows that while the lists of new releases from Québec studied are present in a large proportion on streaming platforms, they are “not very visible and very little recommended.” 

It further shows that the situation is even worse when it is not about new releases, including hit music, when the presence of titles “drops radically.” It is not very difficult to imagine that if we were to swap Québec in the above sentence with the name of any country from the European Union [or any non-Anglo American country], and even with music from the European Union as a whole, we could find similar results.

In other words, there may be aggregators with repertoire in languages other than English that deliver tracks to streamers in their countries, but–absent localized airplay rules–a Spotify user might never know the tracks were there unless the user already knew about the recording, artist or songwriter. (Speaking of Canada, check the MAPL system.)

This is a prime example of why Professor Feijoo and I proposed streaming remuneration in our WIPO study to allow performers to capture the uncompensated capital markets value to the enterprise driven by these performers. Because of the market share royalty system, revenues and royalties do not compensate all performers, particularly regional or non-featured performers (i.e., session players and singers) who essentially get zero compensation for streaming.

Emmanuel also comments on the imbalance in song royalty payments and invites a re-look at how the streaming system biases against songwriters. I would encourage everyone to stop thinking of a pie to be shared or that Johnny has more apples–when the services refuse to raise prices in order to tell a growth story to Wall Street or The City, measuring royalties by a share of some mythical royalty pie is not ever going to get it done. It will just perpetuate a discriminatory system that fails to value the very people on whose backs it was built be they songwriters or session players.

We must think outside the pie.

Streaming CPI Adjustments: Willing Buyer, Willing Seller or Unwilling Subsidy

When I made the soft call for impending stagflation last October I had no idea that that it would hit the US economy with such force and speed.  The trends were, frankly, obvious and the signs unmistakable.  But it’s the speed with which stagflation struck that I didn’t expect.  We have seen each step of stagflation’s three point play undeniably demonstrated in real life and the result is inflation as far as the eye can see.

Stagflation’s Three Point Play

The return of 1970s style stagflation and the now-confirmed recession along with Federal Reserve “quantitative tightening” could mean policymakers recognize the need to end the easy money policy that has been in place since “quantitative easing” began around 2008. Arguably, the global economy has been in a post-Big Short bubble ever since, with the inevitable growth in the money supply that provided “too much money” that was chasing “too few goods.”

A recession and stagflation call is mitigated by the unemployment rate (which was about triple current rates during the 1970s), which itself is mitigated by the labor participation rate. A ten year view shows that the labor participation rate is still below pre-pandemnic levels even though the unemployment rate has been steady in the recent past. Yet even Y Combinator (that famously wanted to “Kill Hollywood” starting with the unions) warns of investment drying up for startups, but we’re not quite at the point of limited partners refusing to show up for capital calls at major VCs.

Inflation has, of course, been inevitable as has been the commensurate rot of inflation on the buying power of consumers. There is little doubt that inflation has been a long-term trend in the U.S. for quite some time and is likely to be with us for a good long while longer. For songwriters, if you’ve been following the rate increase confirmed in Phonorecords III, imagine what the rates would have been had the rates been indexed in this inflationary environment. We can understand how they missed indexing on Phonorecords III, but they cannot miss it on Phonorecords IV–or give it away as a bargaining chip.

Realize that one accepted method of extinguishing inflation is the “Taylor Rule” implemented by Federal Reserve Chairman Paul Volker in the 1970s for which Presidents Carter and Reagan took tremendous political heat–raise interest rates OVER the inflation rate. (Which is why there was a 21% prime rate–think on that.).

Source: Atlanta Federal Reserve

It was a different country then–America was a creditor nation. No longer true. Of course that’s not likely to happen today because of all the government borrowing during the easy money era. If the government had to pay a rate over the current 8.7% inflation rate, the government would collapse. It is likely that high inflation will be with us for a long time to come.

Being aware of the inflationary economic environment is a critical issue for songwriters in the US who are in the middle of a government rate setting proceeding before the Copyright Royalty Judges at the Copyright Royalty Board in Washington, DC.  Songwriters at least have the opportunity to include a cost of living adjustment in the government’s rate and have asked for it in the streaming proceeding.  Remember, there are two rate proceedings underway:  One for physical mechanicals and downloads and the other for streaming.  Songwriters, publishers and labels are in the physical and downloads proceeding.  Songwriters, publishers and Big Tech are in the streaming proceeding soon to go to trial.

Credit where credit is due, Universal, Sony and Warner labels have included an annual CPI adjustment (or “indexing”) for songwriters in their voluntary agreement to raise the previously frozen mechanical rate for physical and downloads.  The Copyright Royalty Judges also included indexing in the rate for webcasting of sound recordings that they recently decided (Web V). Many of the same Big Tech services were parties to Web V but are now arguing against CPI for songwriters in Phonorecords IV.  Different hearings, true, but a lot of overlap in the parties and their smug little straight faces.

In our stagflationary economy, an agreed-upon inflation adjustment is a fairness making term that doesn’t make songwriters eat all of the inflationary rot from cost increases for “food at home” and force them to predict those price changes five years in advance.  Indexing helps to fix that guess work in what is already a process of educated guessing in the non-existent willing buyer/willing seller folie à deux.

An inflation index is a particularly crucial tool when songwriters are prevented from stepping away from a deal because the government forced a deal upon them, like any statutory rate or in countries where there is a tariff or other compelled agreement.

Failing to use indexing makes the fairly controversial assumption that economically rational songwriters would charge a fixed price regardless of the fluctuations of the cost of energy, food and rent.  By using the government to impose a non-indexed rate, there is a government-mandated implied discount that accrues to the benefit of the services, aka the largest companies in commercial history who just can’t bring themselves to treat songwriters fairly.  

But want to bet these failures will have no impact on the services’ ESG scores on Wall Street?

Take Google for example, flatly rejecting indexing on the streaming side of the CRB proceedings:

“None of Google’s agreements with music publishers contain CPI adjustments for the [Per Subscriber Minimums] contained in those agreements. The Copyright Owners’ proposed CPI adjustment to PSMs is simply unsupported by marketplace evidence.” https://app.crb.gov/document/download/26528

Google is, as usual, full of it and is gaslighting the CRB with inapt arguments.  Google is in a rate proceeding where the government—not Google—sets the terms.  I know that line gets a little blurry for Googlers given how much strangulation Google sustains over government through its vast network of lobbyists, revolving door men and women, consultants and on and on and on.  

I also know that Google would love nothing more than to dictate the terms to the government because Google has not-unjustified delusions of grandeur in this regard due to their mind-blowing level of brazen influence peddling.  It’s not just Google, it’s all of the Big Tech oligarchs, the latter day Xerxes who seek to overwhelm creators through lawfare—songwriters are just low hanging fruit because of the ancient compulsory license—Section 115 of the Copyright Act—that is ready made for Big Tech’s copyright abuse.

But Google is not the government. It is the Congress and not Google that created Section 115 to interfere with private contracts and more importantly interfere with the right to privately contract.  That’s a big deal in the US.

So, the issue isn’t what Google may have done in contracts with a totality of vastly different terms in a completely unrelated setting.  It’s whether the government is paying just compensation for taking away rights under the Constitution of the United States.  More specifically the 5th Amendment “takings” clause.

And the government’s compensation to songwriters is not just. It never has been.

Remember that at the heart of this process, the Judges are required to set a price for songs that the Judges believe reflects what a willing buyer would pay a willing seller in a transaction that has been devoid of willing buyers and sellers for over 100 years.  

Google and other Big Tech DSPs in the CRB present the Judges with benchmarks based on prices that are not only distorted by years of abuse to begin with but are permanently disfigured.  Remember, the government set the mechanical rate at 2¢ from 1909 to 1978 and had raised it very slowly ever since while at the same time pretending that the distortion of the 2¢ rate did not exist.

This deep 2¢ hole that songwriters are digging out of may not be the only reason songwriters are so poorly compensated, but this “tuppence” era definitely is a contributing factor.  So whatever value-based rate increase that songwriters can claw out of the Big Tech services must be supported by a cost of living adjustment measured by the CPI just to tread water.  

Price is truth if prices are truthful. And undistorted.

Otherwise, it’s just frozen mechanicals by another name, and Big Tech is simply free riding on the government’s license due to their outsized lobbying influence and government capture. (Need we name names?)

The songwriter is simply subsidizing the biggest corporations in commercial history.

@RIAA Chief’s Proposal to Settle the Frozen Mechanicals Crisis by Expanding the Songwriters at the Table

The frozen mechanicals crisis points up one of the key problems in administering the statutory mechanical license in the US: Songwriters are a fragmented group. Merely chanting to courts that you represent all songwriters and publishers in the world when you know that is not reflective of reality is not a recipe for successful negotiations. It was only a matter of time until one of these deals imposed on the songwriter community turned sour. Frozen mechanicals turned out to be the black ice on the Nantucket sleigh ride.

Getting a result that is satisfactory to a broad group of songwriters and independent publishers is a challenge, no doubt. But the frozen mechanicals situation is actually not quite as bad as it could be.

First, we know what the dispute is about and the way the dispute could be solved. Those terms:

–Raise rates on the “Subpart B” configurations, meaning songs sold under the compulsory license in the permanent download, vinyl and compact disc configurations;

–Reach a private settlement and avoid the “battle of the experts” and further expensive litigation

–Include a broad group of activists from the US and other countries in the process.

–Create a settlement that is likely to pass review by the Copyright Royalty Judges (and ultimately Congress) and is at least less likely to get appealed by George Johnson and whoever else can manage to be granted standing.

–Unite the community against the streaming services.

The detailed and well-thought out sober comments by so many songwriters that seem to have been at least somewhat compelling and persuasive to the Judges tell the RIAA members who they must deal with and also give a good idea of what these group would find satisfactory. The RIAA members also have a unique opportunity to extract themselves from the “late fee waiver” deal that can be recast on more appropriate terms and include a much wider group with far fewer relations that give the appearance of conflicts.

Second, this is why it was encouraging to read this quote from Mitch Glazier, a long time community leader, deal maker, and head of the RIAA in an Ed Christman post from yesterday–a comment made outside the four corners of the RIAA’s controversial filing now characterized as “procedural”:

Glazier, however, says that he has no control who participates in the CRB proceedings — it has its own process that makes those decisions — he does have a say who participates in the negotiations for a new rate settlement and wants to include other independent songwriting groups, publishers and labels. He wants their point of view to inform negotiations, he says. But in order to have those discussion, it will take more time than the CRB currently would allow, thus the motion to delay responding to the judges on how adjudication should move forward.

I have to imagine that the major labels probably went into this Phonorecords IV proposed settlement first filed in early 2021 (so negotiated in late 2020, one would guess) feeling that surely their counterparties would have polled their membership and reached a bona fide consensus before making the deal. Particularly when the streaming companies were so obviously going to make the “good for the goose” argument in the streaming piece about frozen rates being applied equally to mechanicals regardless of who was paying.

This is particularly true when the services get to pay the old rates pending an appeal and are therefore incented to stretch out appeals as long as they can as a matter of drill if not sport. Another huge miss in the negotiation of Title I of the Music Modernization Act.

Songwriters know that if they are not at the table, they are on the menu as our dear late Governor Ann Richards used to say. It’s nice to see Mitch Glazier offering to include the wider group in settlement negotiations and we should all look forward to see how that goes. As Mr. Glazier said, his members are free to negotiate with anyone they want, and it’s obvious that the people who held themselves out has having all the experience and authority to speak for all songwriters in the world fell a bit short this time.

Let’s not make that mistake again. We are on the clock, and the golden hour for settlement is at hand.

The Effect of Unfrozen Mechanicals on Controlled Compositions

Nice post by Ed Christman in Billboard explaining the continuing crisis on frozen mechanicals. Ed comes up with a rough justice quantification of the impact on songwriter and music publisher revenues in light of controlled compositions clauses in recording contracts that apply to (a) songs written and recorded by artists, or (b) songs by “outside writers” if and only if the artist can get the outside writer to accept the controlled compositions terms and rates.

For those reading along at home, one theory (aside from sheer leverage) that gets used in this context is that the artist/writer can agree on behalf of all co-writers to accept the terms of the license granted by the artist to the label in the controlled compositions clause because they are co-owners of an undivided interest in the song copyright and can grant nonexclusive licenses in the whole subject to a duty to account provided the license is not economic waste or self-dealing. Let’s just leave all that where it lays for now, but that story has never really been properly challenged–particularly the economic waste part given the rate fixing date issue and even the frozen mechanicals crisis itself. We’ll come back to that bit some other time.

The rate fixing date is a key part of the discussion for understanding the impact of unfreezing mechanicals. So what is that rate fixing provision?

Remember, the controlled compositions clause starts with reducing the minimum statutory mechanical rate in the US (and in theory in Canada subject to MLA) in effect at a point in time. That point in time is either commencement of recording (booo!), delivery, release or sale of a unit embodying the song at issue. Remember that the labels only pay mechanical royalties on physical and downloads (the rates at issue in the frozen mechanicals crisis)–streaming services pay for the interactive streaming mechanicals (and there is no mechanical for webcasting, a whole other beef).

You say, wait–isn’t the mechanical rate 9.1¢? Why does it matter when the record was recorded, delivered, released or sold? Won’t the rates all be the same? And you’d be right if you were asking about a record recorded and released in 2006 or after, or a record recorded and released between 1909 and 1978, like, say some titles by Bob Dylan, The Beatles, Otis Redding or Miles Davis.

But–it wasn’t always this way. The mechanical royalty rate was set at 2¢ by Congress with the first statutory license, i.e., compulsory license, in 1909 and did not change until the 1976 revision of the US Copyright Act effective 1978. The rate then began to incrementally increase over the years until it reached 9.1¢ in 2006, a phased increase that was to compensate for Congress failing to increase the rate for 70 years, aka “the Ice Age”. The Congress really screwed up songwriters’ lives by freezing the rate at 2¢ during the Ice Age and songwriters and their heirs have been paying for it ever since, right up to the 2006-2022 period, aka “the Second Ice Age” or the Return of the Neanderthals.

In an effort to help songwriters shovel out from the Ice Age, The Congress also authorized indexing the minimum rate to inflation from 1988 to 1995. Indexing is again on the mind of the Copyright Royalty Board right now–bearing in mind that an increase in rates due to inflation has nothing to do with the intrinsic value of the song copyrights so there’s no confusion. Indexing simply applies any increase in the consumer price index to the statutory rate and preserves buying power. In a way, it is the opposite of a case about value. Indexing assumes that the value issue was already decided (in this case in 2006) and simply preserves buying power so that the “nominal” rate of 9.1¢ in 2006 can still buy the same amount of goods or services in 2022 (or 2023 in the case of the CRB rate period). Otherwise the “real” rate, i.e., the inflation adjusted rate, is not 9.1¢ it is about 6¢.

Remember–the proposed rate increase to 12¢ by the CRB is not about value, it’s about buying power because it’s solely focused on inflation.

So back to controlled compositions. It is no coincidence that at the same time as the 1978 increases were phased in, the labels established controlled compositions clauses that knocked songwriters back down. They would probably not have gotten away with freezing by contract at 2¢ so they let the rate float up but much more slowly and with several caps. The first cap is the maximum number of songs, usually 10 or 11. The next cap is the infamous 3/4 rate, where the label pays based on 75% of the minimum statutory rate. But the third cap is the rate fixing date and that’s the one we want to focus on in the unfrozen mechanicals context.

In simple form, it looks something like this contract language:

If the copyright law of the United States provides for a minimum compulsory rate: The rate equal to seventy-five percent (75%) of the minimum compulsory license rate applicable to the use of musical compositions on audio Records under the United States copyright law (hereinafter referred to as the “U.S. Minimum Statutory Rate”) at the time of the commencement of the recording of the Master concerned but in no event later than the last date for timely Delivery of such Master (the applicable date is hereinafter referred to as the “Copyright Fixing Date”). (The U.S. Minimum Statutory Rate is $.091 per Composition as of January 1, 2006); 

The way that the statutory rate increases come into the controlled compositions clause is because from 1978-2006 the statutory rates increased across albums delivered across album cycles. If you consider that the rates used to increase about every two years and that an album cycle can be two years, it’s likely that LP 1 would have a lower rate than LP2, LP 2 than LP3 and so on right up to 2006.

Also remember that the increases in rates are prospective, meaning that the controlled compositions rate on recordings delivered in the future will, of course, get the higher rate, even if the past rates don’t change which they don’t, at least not yet. Also consider that permanent downloads often are excluded from controlled comp treatment and are paid at full rate, probably on the rate fixing date in the artist’s agreement. Sometimes the download rates “float” or increase in line with increases in the statutory rate, but that’s part of individual negotiations.

If there is an outside songwriter who does not agree to accept the artist’s controlled composition rate (and there are plenty of these) what happens? Typically the label will account to the outside writer at their full minimum statutory rate but will deduct that payment from the maximum aggregate mechanical royalty payable to the artist (i.e., the 10 song cap). There’s some twists and turns to this involving rates on different units “made and distributed”, but for our purposes there is one clear thing to understand:

Because of the rate fixing date which is frozen by contract (the Mini Ice Age) the artist/songwriter will be paying a higher mechanical to the outside writer from a frozen royalty “pool”.

This is why you should always, always demand “protection” for at least one outside song in your contract and then review each album to determine if that needs to be increased. This is particularly true for records made in places like Nashville where the record company will demand you work with “A” list songwriters (assume none of whom will take 3/4 rate) and then try to deduct the difference between the uncontrolled rate and the controlled rate from you (and if it gets big enough, cross it to your record royalties). (Not only will A list writers not take the 3/4 rate, they’re pissed because they can’t charge you double stat like they do double scale for sessions.)

Example: You have a 10 x 3/4 rate cap on mechanicals, the “cap rate”. That’s the 68.25¢ album rate you hear about (10 x .75 x 9.1¢). Say you have 10 songs on your album and you wrote all of them. You get the entire 68.25¢. If you had two outside songs whose writers get 9.1¢ under current rates, you deduct 18.2¢ from the cap rate, and that leaves 50.05¢ as the “controlled pool” or the total mechanical royalty payable to the artist/songwriter (actually all controlled writers, but leave aside that wrinkle).

So you can see, that’s no longer a 75% rate, it’s actually more like a 55% rate.

Now let’s assume that the new rate is 12¢. Same calculation, two outside songs now get 24¢, but the cap rate stays the same because of the rate fixing date. During the Mini Ice Age, i.e., while that cap rate is fixed at 9.1¢ x 10 x .75, the controlled pool now is expressed as 68.25¢ – 24¢ = 44.25¢, or about 48% (44.25 ÷ 91). The artist’s publisher is not going to be wild about that; the outside writer’s publishers will be thrilled.

This will start to true up on the next LP that takes a rate fixing date after the 12¢ rates go into effect. In that situation you’d be increasing both sides of the equation, so the cap rate would increase to 90¢ (10 x .12 x .75). The outside writers still get 12¢ each for two songs (or 24¢) which is deducted from the cap rate to get a controlled pool of 66¢. The true controlled comp rate is then back to about 55%.

These effects will be less pronounced if you have protection for one or more songs (or fractions of songs) or you have a higher cap, say 11 or 12 instead of 10 (with corresponding increases on other configurations). But you see the trend line.

I think this leads to the conclusion that increasing the statutory rate is a huge step forward and we should all be grateful to the Judges. The rate fixing dates for catalog titles (really the entire rate fixing date concept) must also be considered and any new effort to tweak the controlled compositions clause to effectively nullify the Judges’ rate increase will no doubt cause further conflict.

One day Congress will again act to reduce the effects of the controlled compositions clause and especially the rate fixing date, but in the meantime the Judges may well visit the issue to the extent they are able before we see the Return of the Neanderthals.

Songwriter Inflation Adjustments Must be Mandatory

Both the consumer price index and the producer price index increased this month and the Federal Reserve is making noises like it intends to increase interest rates and reduce what is called the Fed’s “balance sheet”. Once again, the freeze on mechanical royalties for physical records like CDs and vinyl and failure to index to the consumer price index looks increasingly irresponsible if not downright antagonistic. If you agree that songwriters need to have a cost of living adjustment permanently built into all statutory rates, we have to also recognize that may be a heavy lift and needs to be supported by evidence. Here’s a few ideas.

Consumer Price Index

US Inflation Rate Jan 2020-Jan 2022
The Consumer Price Index tracked a 7.5% increase in inflation, and even excluding energy and food prices the CPI rose 6% (which applies to all those who don’t drive and don’t eat).

The next chart shows increases in the categories of goods that make up the CPI.

The January inflation rate is the highest since February 1982. If you don’t remember what was happening in February 1982, it was the end of the 1970s stagflation with supply side “exogenous” shocks to a number of sectors including energy. The other hallmark of the 1970s and early 1980s corresponding to the staglation is a black swan (we hope) increase in the prime rate of lending. The prime rate exceeded 20%.

One could say that the only reason that the prime rate is not much higher today is because the Federal Reserve adopted a zero interest rate policy (or “ZIRP”) in response to the 2008 financial crisis as did other central banks in other countries. The idea was that cheap money would encourage banks to make loans to borrowers as well as other banks and more debt would stimulate the economy. That’s why interest rates have been at or near zero for so long. (Not everyone thought this was a good idea, including me.) The truth is we don’t really know what interest rates would be absent the central banks’ distortion of the credit markets–perhaps for all the right reasons, but distortions nonetheless.

Increases in the 1970s prime rate caused all interest rates to increase, including credit card rates and mortgage rates. We are accustomed to seeing mortgage rates around 5% partly due to ZIRP, but mortgage rates were much higher in the 1970s. This caused a contraction in the number of people who could qualify for a mortgage and extremely high mortgage payments for those who could (not to mention “points” paid to compensate for the credit risk).

Remember the Federal Reserve’s mission is to use monetary policy to keep inflation under control and unemployment low. There are two policy “weapons” the Fed has to accomplish its mission: interest rates and the money supply. When the Fed adopts a ZIRP, what happens if those low rates don’t have the desired stimulus? That just leaves the money supply when zero interest rates lead to a “liquidity trap.”

With interest rates at their lower range (or “lower bound”) the Fed stimulated the money supply in a particular way called “quantitative easing” which involved increasing the money supply by creating money to buy treasury notes in a special way (not exactly printing money, but effectively similar) and also buying mortgage backed securities and other bonds in the open market. This was especially true in “busted offerings” when the government financed deficits with Treasury notes purchased by the Federal Reserve. And yes, that does sound rather hinky.

We’ll come back to that ZIRP policy and quantitative easing in another post, but let’s just say for now that the Federal Reserve provided more money to certain kinds of banks than they’d ever seen before in an effort to stimulate the economy without raising inflation. Yet they must have always known that an easy money policy was inflationary and due to ZIRP they had limited options–to kick the can down the road. Like a balloon payment in a mortgage, the devil would come for his due at some point. That time may be now.

Whenever inflation goes up, there is an assumption–fueled by those who wish to avoid blame–that inflation is just transitory and will recede if the central banks take anti-inflation steps, such as raising interest rates by targeting even higher interest rates on Federal Funds (currently 0.25%) on top of an already higher 10 Year Treasury Bond.

If the Fed raises rates by .25% five times this year as projected by banks like Goldman Sachs, that will essentially double the interest payment on government bonds which fuels both federal spending and the national debt. The problem with that is the higher interest rates proposed by the central bank also affect government borrowing to service the $30 odd trillion dollar national debt. Maybe you can withstand your credit card rate increasing by five percent, but the government cannot.

As you can see from the charts above, some of this inflation is increasing at an increasing rate. It is going to take time to recede. Energy markets are fluid, for example, but rents are not. The conventional wisdom is that mortgage rates and home prices vary inversely to each other. Mortgage rates can also have an effect on rental prices, too; the harder it is to qualify for a mortgage, the more people have to rent, so rental prices go up. Rental prices are also sticky, meaning that once they go up, they don’t decline very rapidly or at all. Ask yourself the last time a landlord cut your rent?

Speaking of the government’s credit card, it is important to look at the effect that inflation has on interest rates for another reason: many people have been dealing with the cost of inflation is by putting it on the credit card. Not everyone has a seven figure base salary.

Credit card interest rates are currently averaging around 14.5%, which means that if you don’t have a good credit score, you’ll probably pay closer to 20%. Bear in mind that the Federal Reserve has announced its intention to hike interest rates multiple times this year, so if that happens those in the riskier tier will be paying closer to 25% by December and people with “good” credit will be paying closer to 20%. Both of which are loan shark rates.

Bands are prone to maxing out credit cards in the best of economic times so are likely to be especially hard hit just with increased interest payments on existing balances. This multiplier effect is important because on top of everything else the cost of inflation for people who have been putting it on the credit card is going to be many times worse than it is for people who have been paying cash. This is not something that you really wanna mess with, so if there’s any possible way and I mean any possible way you can either stop making it worse or start paying down that credit card do it because this is going to get very weird.

Producer Price Index

The Producer Price Index rose 1.9% in January to 9.7%. Remember, the PPI is a leading indicator of future inflation because producer prices foreshadow increases in future goods as lower priced inventories decline and price increases are in part passed through to consumers (or are in part absorbed by firms to sustain demand).

Inflation Expectations

Should songwriters expect inflation rates will effect the statutory rates in the coming years? Remember that inflation expectations can have a direct effect on actual inflation because those expectations determine wages–if you think inflation will rise, you ask for higher wages. You see this on the interactive streaming mechanical rates (which recently were amended to include a cost of living adjustment), but for some reason not on the physical.

Determining inflation expectation requires survey data, and the benchmark surveys of consumer sentiment and inflation expectations are conducted by the University of Michigan. US inflation expectations for the next 12 months rose to 5% in February of 2022 from 4.9% in January. That is the highest level of 1-year Inflation expectations since July of 2008.

Conclusion

All this confirms again that inflation for the foreseeable future is not and will not be “transitory.” Statutory rates should be indexed to inflation for the foreseeable future. This should not even be a question (and was the rule in the latter half of the 1970s, and all of 80s and 90s). If the Copyright Royalty Board will not include a cost of living adjustment in all statutory rates, perhaps it should be imposed on them.