Real Mechanical Rates Have Declined with Inflation Increases Due to #FrozenMechanicals

If you follow economics, you probably have heard the expressions “real wages” or “nominal wages” or “real” versus “nominal” wages. This isn’t a Cartesian metaphysical discussion–it’s about the effect of inflation on what they tell you you’re getting paid. Nowhere is this truer than with the statutory mechanical royalty rate. The rate will inevitably decline over time due to the rot and decay of inflation. Inflation is like having a cavity in your tooth that you don’t fix. It doesn’t go away. It may not hurt yet but it’s going to.

The effects of inflation are hardly a secret. Because of the effect of inflation on interest rates set by the Federal Reserve (who is charged with keeping inflation under control), vast numbers of people around the world keep watch on U.S. inflation rates as well as inflation rates in other countries.

US Inflation Rate Over Past 5 Years

For example, an hourly worker might be paid $12 an hour by her employer. That’s her “nominal wage” or “money wage.” But the issue is not what the worker is told they are getting paid, it’s what the worker can buy with her wages. What her nominal wage buys her is her “real wage” or her nominal wage adjusted by inflation during the same time period. Real wages are always less than nominal wages. This is why workers commonly get annual cost of living adjustments to nominal wages that increase their nominal wages based on inflation in addition to nominal performance-based increases. The same is true of entitlement payments like Social Security which just announced its biggest inflation adjustment in many years.

This is particularly important when understanding nominal and real statutory mechanical rates set by the government’s Copyright Royalty Board every five years. With a nominal wage (as opposed to a government rate freeze like a price control), there are a number of different countermeasures you can take in response to a wage freeze and take quickly. You can always try to negotiate a higher hourly or annual wage if you are falling short of inflation. You can also try to quit and find another job that pays more money. Perhaps even get an annual raise built into your salary.

However, with the statutory mechanical royalty, there is no escape. Songwriters are at the mercy of both the government (in the form of the Copyright Royalty Board) and the people who are supposed to be negotiating for them who seem to have decided that millions of songwriters don’t need a cost of living adjustment. Without “indexing” the statutory mechanical to inflation (meaning a CRB ruling requiring automatic cost of living increases based on increases of inflation), songwriters’ buying power actually decreases over time. That’s the difference between the nominal mechanical royalty and the real rate, i.e., the inflation adjusted rate.

Nowhere is this more apparent than with the “frozen mechanical” that you’ve probably heard a lot about if you’re a regular reader. It’s called “frozen” because the rate for physical and vinyl was set by the CRB in 2006 and has not been raised since–apparently at the request or acquiescence of those negotiating in the songwriters’ interest. Think about that–remember what happened in 2008 (just a couple years after the rate was frozen)? The Great Recession aka The Big Short.

It may not be obvious to you but most of the laws in the US are not passed in Congress and they are not signed by the President. The overwhelming majority of these laws are created by administrative agencies, often located in the Executive Branch, but not always. When it comes to songwriters there is a federal agency that has almost total control over certain aspects of your life.

That agency is the Copyright Royalty Board which has three “judges” that are appointed by the Librarian of Congress (therefore are in the Legislative Branch of government along with Congress). While these members of the Copyright Royalty Board are styled “judges” they are not “all purpose” judges appointed by the President and confirmed by the Senate (under Article III of the Constitution for those reading along at home). (This CRB appointment issue is a matter of some debate but we will talk about the appointment issue some other time (attention Justice Kavanaugh).)

Whether you know it or not or like it or not you have delegated your personal agency to the CRB and you have also delegated your agency to the people who can afford to appear before the CRB. This is the classic case of the merger of the little intellectual elite in a far-distant capitol who think they can plan your life better than you can. If you have no idea about the CRB, there’s an easy answer–you’re very unlikely to ever wander into a CRB hearing because the hearings take place in the Library of Congress which is not someplace that songwriters typically are found. Even so, you have delegated your authority whether you know it or not and whether you like it or not to certain representatives of the music publishing community who act on your behalf and probably without your direct authorization. There’s plenty of blame to go around. To paraphrase Lord Byron, if you want a friend in Washington get a dog. Preferably a big one with teeth.

Here’s an example. According to government data, 9.1¢ in 2006 is worth approximately 13¢ today, or approximately a 33% inflation rate. That means that the frozen 9.1¢ rate in 2006 has the buying power of approximately 6¢ in 2021. In other words, the real mechanical rate has actually declined although the nominal rate has stayed the same. Why? Because like King Canute commanding the ocean, the nominal rate was not increased to at least stay even with inflation and inflation rotted it from the inside out.

So you can see that when you’re considering the mechanical rate that is set every five years by Copyright Royalty Board, the rate that matters is the real rate. However, the CRB only set a nominal rate for songwriters in 2006 even though they could have increased that nominal rate based on increases in the consumer price index. They could also have increased the rate in Phonorecords II or Phonorecords III but did not.

And now 15 years later, the frozen mechanicals crisis has been engaged by a revolt of the songwriters in Phonorecords IV, currently before the CRB. The struggle is all about real vs. nominal mechanical rates.

Evidence Mounts for Inflation Indexing for Songwriters

No one needs to be told that inflation is on the rise. We all see the evidence everywhere we go: gasoline prices, groceries, rent, health care, you name it. Inflation may not have increased prices to the point that large numbers of consumers are substituting away from particular goods because they can’t afford to buy, but it’s getting there.

This is important for songwriters who are paid on a statutory rate set by the government’s Copyright Royalty Board that tries to approximate what a willing songwriter would charge a willing music user in five year tranches. It is this five year bet that causes heartburn–one solution that the CRB recently applied to webcasting is to index their government royalty to inflation so that the royalty actually retains its value and increases as inflation increases, called “indexing”.

For whatever reason, the rates for physical configurations and downloads has not contain inflation indexing since it was put in place in 2006 and still does not in the current proposed settlement. Songwriters across the board are resisting this and demanding indexing as part of the “frozen mechanicals” debate as part of the current Copyright Royalty Board rate setting proceeding (styled as “Phonorecords IV“).

Unfortunately for all of us, a statistic released today suggests that inflation continues apace. The Personal Consumption Expenditures Price Index prepared by the U.S. Bureau of Economic Analysis continued its upward trend indicating that consumers are spending more which suggests inflation is the reason not an increase in wealth. As Trading Economics summarizes:

Personal spending in the US increased 0.6% mom in September, following an upwardly revised 1% rise in August and above market forecasts of 0.5%. Spending on health care, food services and accommodations, foods and beverages, pharmaceutical products and gasoline offset lower sales of motor vehicles. Personal income on the other hand fell 1%, the first decline in 4 months and much more than expectations of a 0.2% drop.

Even if you don’t go as far as Twitter CEO Jack Dorsey’s assessment that “hyperinflation” is coming soon, it’s pretty easy to see that if the Copyright Royalty Judges fail to add indexing to the mechanical rate (frozen or not) as they had so many times in the past, songwriters will find their government royalty eaten away by inflation. (“Hyperinflation” is a rise in prices of 50% a month.)

It’s also becoming clear that inflationary pressures will continue well into 2022 and 2023–the rate set in Phonorecords IV is theoretically to begin in 2022.

Indexing is crucial.

Decline in GDP Projection Increases the Importance of Inflation Adjustments in Government Song Pricing #IRespectMusic

God gave Noah the rainbow sign, no more water, the fire next time.

James Baldwin, The Fire Next Time

Remember the stagflation three point play? Supply contracts, prices go up due to those supply side shocks and real gross domestic product contracts. Stagflation also results in higher unemployment. Stagflation can take a long time to shake out of an economy once it sets in.

Stagflation’s three point play

We can learn from the economic history of stagflation, particularly in Japan and the U.S. Japan had a stagflationary period started by the economic shock of the collapse of Japan’s real estate market (not unlike what is happening in China with Evergrand and Sinic) and the follow on effect of a 60% decline in Japan’s stock market. The U.S. had a stagflationary period in the 1970s brought on by a dependence on foreign oil and predatory pricing largely by OPEC. That led to skyrocketing oil prices and gas lines. Both countries experienced a “Lost Decade” due to stagflation.

The Federal Reserve Bank of Atlanta announced this week that it projects real GDP grown in the third quarter of 2021 to fall to 0.5% with some caveats:

https://www.atlantafed.org/-/media/Documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf

The Federal Reserve Bank of St. Louis gives a longer term chart of GDPNow:

https://fred.stlouisfed.org/series/GDPNOW/

The point of these graphs is to emphasize that the US economy appears to be heading to a contraction and inflation brought on by a combination of supply side shocks (cost-push inflation) and demand caused in part by government actions (demand-pull inflation) combined with sharp increases in gasoline prices among other commodities. Gasoline prices ratchet through many products in the economy and have been sharply higher over the last 12 months as the U.S. became more dependent on OPEC production.

https://tradingeconomics.com/commodity/gasoline

All the indications are that the U.S. may be headed into a prolonged period of stagflation which is inflation combined with a stagnating economy. It seems less and less likely that inflation is “transitory” and more likely that it will last well into 2023 and possibly 2024.

How does this affect songwriters? Remember that the mechanical rates set in the current Copyright Royalty Board rate proceeding will fix prices until 2027, so it appears that there will be considerable overlap between the inflation cycle and the royalty rates–all the more reason to seek the same inflation indexing for songs as the CRB recently granted for sound recordings.

Why Songwriters Should Care About Inflation Protection for Mechanical Licenses

In a word: Stagflation. Maybe. In more words, classic stagflation occurs when supply side shocks lead to the costs of goods increasing while the real economy declines. We certainly have had and continue to have supply side shocks and it’s hard to tell what the real economy is doing because of distortion. Due to the COVID pandemic, the global economy has been hit with a cascading series of supply side shocks. For example, one shock is due to supply chain disruptions which look something like this:

If you’ve ever been on one of the very large cargo ships, you will know that is a big mofo. (When a sailor looks at all those elephants churning up the water, you can’t rule out a collision which could have really big problems depending on where and how bad that collision is.)

There currently are something like 500,000 shipping containers sitting on ships off of the Port of Los Angeles that can’t unload. That means someone has ordered the goods in the containers, perhaps paid in advance all or part of the cost of those good, but can’t get the goods to sell. And that’s just Los Angeles. That’s also called a supply side shock.

A supply side shock may cause an increase in the prices of the goods that are available to sell which causes a shift in the aggregate prices in the economy as a whole.

Another supply side shock may occur when inflation causes the price of goods to increase over the level that a firm can eat to avoid passing on the cost to their customers. This causes earnings to decline and eventually share prices to decline. If the market does not re-establish equilibrium fairly quickly, right after earnings decline, the price may get passed on to the consumer which may cause demand to drop which will ultimately cause earnings to decline. This is cost-push inflation which is a bit different from what you normally hear about too many dollars chasing too few goods or demand-pull inflation.

So to recap: cost-push inflation is a decrease in the aggregate supply of goods and services caused by an increase in the cost of production, and demand-pull inflation is an increase in aggregate demand from one or more or all of households, business, governments, and foreign customers. 

Inflationary pressure is compounded by an increase in the money supply, especially a sharp increase in the money supply.

All this should be sounding familiar if you follow the news.

The Stagflation Three Point Play

Historical examples of stagflation events in the US are particularly related to energy cost shocks and OPEC’s use of oil embargos to influence US foreign policy and support for Israel. We’ll come back to this, but remember that the crippling stagflation of the 1970s was largely due to one input–energy. The gas lines of the 1970s and heating oil price increases were particularly profound and the resulting stagflation influenced the increase in interest rates to a prime rate of 21.5% in December of 1980 after President Jimmy Carter lost reelection. It may be hard to comprehend a prime rate of 21.5% in this low interest rate environment, but don’t feel bad–it wasn’t so easy to understand then, either. The shys were jealous.

Could it happen again? At this point, I think it’s hard for anyone to rule it out entirely, so the probability is a positive integer. What did songwriters do during the stagflation era of the 1970s? Unlike most of the rest of the peacetime economy, songwriters had mechanical royalties set by the government at a fixed price. Starting in 1909, the federal government set songwriter royalties at 2¢ per unit and never changed the price until 1978. Needless to say, the stagflation of the 1970s destroyed the government’s fixed songwriter royalties. By 1978 it’s not an overstatement to say that songwriters earned a negative royalty rate if you adjusted for inflation. This was all due to the government’s wage controls on songwriters. (You can argue that this is the primary reason songwriters get paid so little today.)

Why did this happen? Government mandated wage and price controls were common in wartime–during World War II, military expenditures exceeded 40% of gross domestic product (GDP) so the government had an interest in controlling labor and materials costs. They accomplished this through the War Labor Board and the Office of Price Administration. If that sounds positively Soviet, it was. Unlike songwriter royalties, the government mandate was temporary.

By the time the 1976 revision to the Copyright Act rolled around, songwriters lobbied effectively for their statutory mechanical rate to be increased. However, given the rampant inflation of the time, they needed protection because even with prices reset after five year periods, inflation could easily eat away any gains. That’s one reason why after the 1976 revision, mechanical rates gradually increased and eventually were increased based on the Consumer Price Index (called “indexing”) for many years.

If you followed the recent commentary opposing an extended freeze of the mechanical royalty rate for physical and downloads, the inflation issue is front and center once again. And if you observe the current state of the economy and the likely future, you’ll understand why indexing may be crucial to preserving the value of whatever mechanical royalty is set by the Copyright Royalty Board, the songwriter’s version of the WWII era Office of Price Administration. And who would bet against inflation?

Of course, the CRB heard absolutely no evidence on the inflation issue from the NMPA, NSAI and the major labels that essentially put their finger in the air and decided to freeze rates. That’s not the end of the story, though. The relevant information on inflation is readily available in the public domain and the CRB can take notice of it if they want.

Remember, the 1970s stagflation was a highly unusual economic condition caused by a supply side shock of one input–energy. Here’s a few examples of current supply side shocks from multiple inputs. I think it should give everyone pause before they rule out a need to index the statutory rates for songwriters.

Personal Consumption Expenditure Index (US Govt. Bureau of Economic Analysis)

The “PCE” and “Core PCE” are indexes that economists monitor (such as the economists at the Federal Reserve) to track inflation trends. So let’s see what these metrics tell us about the inflationary trends that would be an argument to support indexing mechanical royalties.

“Core PCE” is another look at consumer prices that excludes the cost of food and energy which doesn’t make much sense to you and me, but is another way to look at underlying inflation trends for economists. This is important because it can influence decisions about interest rates at the Federal Reserve.

For perspective, here’s a five-year look at PCE and at PCE excluding food and energy:

The data tell us that the five year inflationary trend is up and to the right with an increasing slope. It is the sharpness of that increasing slope that gives pause–the inflationary trend has been up since 1959 per the following chart, but the steepness over the last 12 months is unusual.

Overall US Inflation Rate

The PCE and Core PCE is confirmed by the overall U.S. inflation rate as measured by the U.S. Bureau of Labor Statistics:

You see the trend here. Inflation has sharply increased. Consider the last twelve months–inflation has tripled.

Do we think it will continue to increase or will it decline? Let’s consider the inputs that can cause that supply side shock we talked about above.

Residential Rent Prices

According to Zillow, “[t]ypical U.S. rents grew 9.2% year-over-year in July, according to the Zillow Observed Rent Index (ZORI) — the fastest recorded by Zillow records in data that reaches back through 2015 — to $1,843/month. Projecting forward historical ZORI values from February 2020 — the last full month before the COVID-19 pandemic hit the U.S. in earnest — we estimate that the U.S. ZORI in July was 2.9% ($52) higher than where it would have been if the last roughly 18 months had been more ‘normal.’ “

And CBS news confirms the data:

After dipping last spring, rents around the U.S. have not only recovered but are now blasting past their pre-pandemic levels. In 44 of the nation’s 50 largest metro areas, rents have surpassed where they were before the health crisis, according to data from Realtor.com. Nationwide, the median rent reached a record high of $1,575 in June, an increase of 8% from a year ago.

Cotton

Cotton is a commodity that finds its way into many goods. The Wall Street Journal reports that cotton prices have surged to their highest level in a decade, but that Levis won’t be passing on the cost increase to consumers–yet. Remember cost-push inflation?

Levi’s commentary on the cotton-pricing issue should soften some of those fears—at least in the near term. On its earnings call Wednesday evening, the apparel company said that much of its own cotton prices have already been negotiated for the first half of 2022 and that it expects its cost of goods sold to increase 1% in the first half of 2022 compared with 2021 levels. For the second half of 2022, the company said it might be able to negotiate prices that will lead to a mid-single-digit percentage increase in costs compared with 2021 levels. Cotton accounts for about a fifth of the cost of producing Levi’s jeans.

Food Inflation

If you’re going to just look at the core PCE without food and energy, you can’t just ignore those two key inputs if you want to know what is going on at the micro level. We’ll look at both food inflation as well as inflationary effects on a few key energy components, especially for touring bands. Consider this chart of food inflation in the US over the last twelve months which itself is slightly higher than the core PCE.

Propane

Propane–also known as heat–is a lot more relevant to consumers particularly as we head into winter. Propane generators are of particular interest to anyone who suffered a power outage during a polar vortex–ahem–and as you can see, propane prices are already through the roof.

Same story for natural gas and heating oil.

Gasoline

If you’re planning a ground tour, keep an eye on the price of gasoline, also up and to the right.

10 Year US Treasury Bonds

You may not be aware of it, but practically everything in your financial life is affected by the 10 Year US Treasury bond. The “10 Year” is used as a reference point for a multitude of financial instruments and interest rates around the world. This includes mortgage rates and credit card rates. As you can see, over the past 12 months, the yield on the 10 Year treasury note has increased or nearly doubled. And remember that the bond market is orders of magnitude larger than the stock market. The bond market is also run by sophisticated traders–I’ve never heard of day traders in the bond market.

You want to keep a good eye on the 10 year because the Federal Reserve plans to “taper” which is one of those fancy names like “quantitative easing” that sounds like a caramel macchiato but is actually not. What that means in a nutshell is that the Federal Reserve plans on buying fewer treasury bonds than they have done–sopping up however much debt that Congress wants to take on. (Some people say this is a lot like printing money–remember that increasing the money supply is one of the causes of inflation, particularly sharp increases in the money supply.)

A cynic–certainly not me–might say that the Federal Reserve keeps the interest rates low because if the U.S. government ever had to pay anything like a market interest rate, the country would go under. But this cannot go on forever, hence “tapering”.

People may disagree with this “printing money” analogy, but the money supply has substantially increased in the last 12 months and it came from somewhere.

Conclusion

If you stayed with me this far, thank you. I hope I’ve persuaded you that it in the current environment it is highly dubious that songwriters should ever agree to a fixed mechanical rate for any configuration that is not indexed to inflation. Even if you don’t think that stagflation is around the corner, we are certainly seeing considerable inflation in a number of inputs–the supply side shock that is the hallmark of a period of stagflation may not come solely from energy this time. Just because energy was the culprit before doesn’t mean that the economy will not succumb to stagflation by a thousand cuts in the future.

I once had a cat that would run to the closet when unknown visitors arrived. I said he was guarding the closet because they could be coming that way. If you’re going to be forced to take the government cheese, maybe songwriters should build in an indexed escalator like the CRB did in the webcasting rates to at least allow you to keep your head above the inflation or stagflation waters.

How to Register to Comment at the Copyright Royalty Board on the Frozen Mechanicals Rate Hearing

If you’ve been following the heated controversy around the frozen mechanicals crisis, you’ll know that the Copyright Royalty Board has received a proposal from the NMPA, NSAI and the major labels to freeze the statutory rate for songwriter mechanical royalties on physical (like CDs and vinyl) and permanent downloads (like iTunes) for another five years. That proposal mentions a settlement to establish the frozen rates (which extends the rates that were first frozen in 2006 for another 5 years) and a memorandum of understanding between the NMPA and the major labels for something, we’re not quite sure what.

There’s quite a bit of material about the problem that was posted on the Trichordist, so you can check there to read up on the background. You can also subscribe to the Artist Rights Watch podcast and listen to our first episode about frozen mechanicals. This post today assumes you already know the background and are ready to file your comment.

Filing comments with the CRB is not quite as simple as filing comments with the Copyright Office and it takes a bit of time–comments close on July 26, so do not leave setting up your account until July 26, or even July 25. I would do it today. You can set up your account before you file your comments so that the account part is all ready to go.

Here are some steps you will probably go through to set up your account:

  1. Go to app.crb.gov. Look for “Register for an account” (the one in small print at the bottom of the list)


2. “Register for an account” will take you to a sign up page. Scroll down to “User Information”. You only need to complete the required fields with a red star (so ignore the bar number, etc.)

There is a pull down menu under “Register as” with a few different roles listed. The one you want is “Commenter”

Then complete the form completing only the required fields.

3. The CRB will then authenticate your account and send you and email confirmation. That part goes pretty quickly. However, once your account is authenticated, make sure you log on. You should be taken to a dashboard, but the question is whether your dashboard looks like this:

Note that the dashboard does not have a button to “File a comment”. If this is what you see when you log into your account, you are not done. Contact the CRB support people ecrbsupport@egov.com and tell them that your account has not been activated to comment.

4. Your account should look like this:

The comment you want to file is for Phonorecords IV. You can ignore the other dockets. It took me several trips to the support desk to get the correct filing tabs on my account, hopefully you won’t have that problem. But–just in case, don’t be running around crazy on July 26 trying to file the comment you slaved over because you left the account to the last minute.

What Would @TaylorSwift13 and Eddie @cue Do? One solution to the frozen mechanical problem

Who can forget how Taylor Swift stood up for songwriters, producers and artists against Apple’s bizarre decision to impose a royalty-free three month trial period on the launch of Apple Music. (Of course, songwriters, producers and artists weren’t the only ones involved, but that’s a story for another day.)

What is equally memorable is how fast Apple changed course and all the goodwill that came to Apple as a result. Faster than you can say “Arsenal”, Eddie Cue announced that Apple would scale it back. Lemonade out of lemons. Of course, the issue should have been obvious, but sometimes smart people miss the point like everyone does sometimes. (Rolling Stone has a good short post on the backstory.)

The point of the story is that when you make a mistake, it’s better to fix it quickly than let it fester. So it is with the “frozen mechanical” problem that has become all the rage in recent days. The good news is the problem can be solved with the payment of money. It won’t be easy, but as a great man once said, this is the business we’ve chosen.

The Copyright Royalty Board decides on the statutory rate that’s paid under compulsory content licenses in the United States. For mechanical royalties, the CRB makes that decision every five years which means that if there isn’t a CRB hearing going on at any given moment, wait a little while and there will be one. (Needless to say, the volume of CRB hearings varies directly with full employment for lawyers and lobbyists in Washington, DC.) The “frozen mechanical” issue dates back to 2006 (or 2009 depending on how you count it) when the CRB allowed the end of rising mechanical royalty rates on physical and permanent downloads (and a couple others). However, the sour memories of frozen mechanicals dates to 1909–also a story for another day.

Instead, the CRB has allowed a private agreement among the biggest players to become the law. This has happened at least one other time and it appears that it is about to happen again according to public documents filed with the CRB on March 2, 2021 (read it here). Contrast that private agreement to the bitter struggle against the streaming services over streaming mechanicals that is still in the appeal process. Different people paying, same songwriters getting paid.

If you haven’t heard about the tentative settlement by private agreement at the CRB, it admittedly was not well socialized.

The inescapable problem is that any fixed or “frozen” rate determined at one point in time but paid over relatively long periods of time is at the mercy of inflation in the economy that may rise in that intervening time period. The Congress and the industry recognized this harsh truth in the 1976 revision to the Copyright Act and eventually indexed mechanical rates, meaning that they floated upward with the Consumer Price Index. (CPI has its own problems, but it’s a bogey that lots of people use so it’s easier than reinventing the wheel with a bespoke factor.)

Given what has been happening in the economy, it was inevitable that inflation was about to come back strong in the U.S. and global economy. Sure enough, the Department of Labor announced yesterday:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.8 percent in April on a seasonally adjusted basis after rising 0.6 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 4.2 percent before seasonal adjustment. This is the largest 12-month increase since a 4.9-percent increase for the period ending September 2008.

Yes, the CPI ignored the Fed and increased like the pesky little devil it is. There’s no reason to think that this is going to stop any time soon. (If you were born after 1960 or so, you may not remember that inflation and stagflation resulted in the prime interest rate peaking at 21.5% in December of 1980. That drove mortgage rates to 13.41% in 1981 (often plus points). And then there were the credit cards. That’s where inflation can lead. Personally, my money is on stagflation in the form of high inflation and high unemployment due to what Secretary Yellen called the scarring effects of the pandemic which the music business is experiencing in spades.)

April 2021 DOL Inflation

It just wouldn’t be prudent to enter into a long term contract at a fixed rate that does not take into account inflation. Yet that is exactly what the tentative settlement wants to do with the mechanical rate for physical, downloads, and a couple other categories. Yet, we must acknowledge that it is very difficult to herd the cats to get them to agree to anything. But having gotten everyone to agree to freezing mechanicals and having gotten the CRB to agree to adopt that agreement in the past, it may be the case that the parties can get the CRB to let them increase mechanicals going forward.

In other words, take a lesson from Taylor Swift and Eddie Cue and do a quick course correction before the final settlement gets announced on May 18.

So what would that look like? Precedent suggests that the CRB (and its predecessors) have accepted two principal methods of increasing the rate, which is phased in over time: fixed penny-rate increases and CPI indexing. My suggestion would be to employ both methods in a greater of formula (so popular with streaming).

If phased in over 5 years like other rates, it seems that there could be an immediate step up to compensate songwriters for a rate was frozen starting at the time that physical was still a very significant percentage of sales back in 2006. That stepped up rate could then gradually increase with a greater of a fixed penny increase or CPI. I wouldn’t presume to tell anyone what that step up should be, but if you apply the CPI index, it should probably be about 4¢, bringing the minimum rate to 13¢ from 9.1¢. Given that big–albeit entirely justified–jump, increases over the out years might be more modest.

Now that we know that there’s a strong possibility that inflation will be in our lives for the foreseeable future, the good news is there’s still time to do something about it. The CRB has shown us that they are willing to accept radical changes in the mechanical royalty rate by adopting private settlements, so there seems to be no impediment. I’m not aware of a rule that says the CRB only adopts rules that freeze songwriters in place, so it should work to the songwriters betterment and not just to their detriment.

We should ask, what would Taylor and Eddie do?