Category: CRB Reform

Phonorecords V and the “39 Steps” Problem: Time for the CRB to Fix Streaming Mechanicals

As we head back into the next Phonorecords proceeding, there is an issue hiding in plain sight inside the existing and ancient streaming mechanical royalty rate structure that we fondly call “the 39 steps” in honor of John Buchan, Alfred Hitchcock and Richard Hannay. Despite the blood lust for complexity from the ancien régime that clings to its one sided royalty pool, there is one part of this unfair business practice that the Copyright Royalty Board (CRB) can and should address this time around.

Start with the basics. The part 385 streaming mechanical formula—the so-called “39 steps”—is built on a simple premise: we are calculating royalties for the use of musical works protected by the Copyright Act. The inputs and deductions in that formula are not abstract accounting categories. They are supposed to reflect real payments for real statutory rights.

That premise is now under pressure.

The rise of generative AI has introduced a new category of output that does not fit neatly within the Copyright Act. The U.S. Copyright Office has made clear that works generated entirely by AI are not copyrightable, and that protection exists only to the extent of meaningful human authorship in a proportion yet to be determined. Courts have moved in the same direction, and the Supreme Court’s denial of cert in Thaler v. Perlmutter leaves that framework intact.

Yet the part 385 formula has no explicit mechanism to deal with this category of material. That creates a risk on two fronts.

We have to consider the royalty pool itself. Section 115 applies when the exclusive rights of a copyright owner in a musical work are implicated. If a so-called “AI track” is not a protected musical work, then there is a serious question whether it belongs in the section 115 system at all. Treating non-copyrightable output as if it were a statutory musical work risks diluting the pool for actual rightsholders.

And then, of course, we have the Step 2 deduction for performance royalties. The regulation allows services to subtract payments for the public performance of musical works before calculating the payable pool. But what happens if a service characterizes payments to a platform like AIMPRO as “performance royalties”? If those payments are not, in fact, for the public performance of a protected musical work, they should not reduce the pool. Otherwise, the formula becomes a vector for leakage.

Moreover, if the U.S. Copyright Office ultimately articulates a workable “human authorship” framework for AI-assisted works during the Phonorecords V rate period, the downstream impact on the section 115 system could be profound: for the first time, the part 385 “39 steps” calculation may have to accommodate fractional copyrightability within a single work. Instead of treating a musical work as a binary input (in or out), services and the MLC could be forced to parse which portions of a track are attributable to human authorship and therefore eligible for royalties, and which are not. That would introduce a new layer of allocation on top of an already complex formula—effectively embedding micro-level authorship determinations into macro-level royalty calculations—and raising the administrative, evidentiary, and dispute-resolution burdens across the entire system.

The key point is that the CRB does not need to resolve all questions of AI copyrightability to act here for purposes of the 39 Steps. It can simply clarify what is already in the statute and the regulation: The part 385 formula applies only to payments that correspond to rights in nondramatic musical works, and deductions are limited to payments that genuinely compensate the public performance of such works. That is not a policy innovation. It is a classification rule.

If there is doubt about whether a category of material such as purely generative AI output qualifies as a “musical work” for these purposes, that is a question the CRB can refer to the Register of Copyrights in a pinch. But the CRB should not leave the door open for the mechanical royalty pool to be diluted by payments for things that fall outside the Copyright Act altogether.

This may also be the moment to ask a more fundamental question: whether the industry should abandon the “39 steps” construct altogether. Whatever its historical justification—particularly in Phonorecords I, where publishers were trying to shield early services like MusicNet from crushing retroactive exposure—the current formula has outlived its usefulness. Today, it functions less as a fair pricing mechanism and more as a constraint, allowing services to use their complementary oligopoly power to effectively cap mechanical royalties by anchoring them to total content costs. The result is a structurally odd feedback loop in which sound recording deals influence the value of adjacent musical works. A cleaner alternative would be a flat, escalating penny-rate framework, akin to what the Judges adopted for both Subpart B mechanical royalties (physical and downloads) as well as section 114 royalties—simpler, more transparent, and far less susceptible to strategic manipulation.

We have been here before. The history of section 115 is, in many ways, the history of closing gaps between statutory language and market behavior.

Phonorecords V presents another such moment.

The CRB should take it.

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.