Tag: Phonorecords V

2026 Mechanical Rate 13.1¢

The Copyright Royalty Judges have announced that the new COLA-adjusted minimum statutory rate for 2026 is 13.1¢ for physical and downloads, up from 12.7¢, effective 1/1/26. This is the last year of the Phonorecords IV rate period, so that’s an increase from the 9.1¢ frozen mechanical rate that had been in effect for 15 years.

The adjusted rate stands in stark contrast to the streaming mechanical which not only has been frozen for the entire 5 year rate period, but has actually declined substantially due to Spotify’s bundling silliness. That smooth move has set up what will no doubt be a donnybrook in Phonorecords V, i.e., the next rate proceeding which is due to start any minute now (actually more like January, which is close enough).

It must be said that the reason there’s a rate increase for physical/downloads is due to the efforts of independents who filed two rounds of comments in Phonorecords IV and also the willingness of the labels to be flexible and reasonable. I suspect that has a lot to do with the fact that at the end of the day, we are all in the same business and it’s to everyone’s advantage that songwriters thrive. Obviously, the same cannot be said of the streaming platforms like Spotify that are busy seeding AI tracks with both hands. I really don’t know what business those people think they are in, but it’s not the music business.

2025-21695Download

Can Streaming Price Segmentation Avoid the Malthusian Trap?

When you see artists and songwriters getting starved out of the music business while at the same time fighting over scraps from streaming, that’s unusual. When you see more and more labels caring almost as much about acquiring ever more catalogs rather than helping artists in developing long-term careers, that’s unusual. Why is this becoming the norm? Could it be we are in a “Malthusian trap”?

Remember “nice price” CDs? The budget bin? Top line, mid price, budget price points? That’s called “price differentiation” or “price segmentation.” It’s common in pretty much any consumer good. The idea is that people will pay more for stuff they really want and less money for the nice to haves–the 10 second MBA, buy low sell high. Pretty much any consumer good except–of course–streaming music. One big difference between streaming and physical records is that with streaming, the retailer controls both the wholesale price and the retail price. Want to bet that Wal Mart would just love that model? That should explain why so many artists and especially songwriters are gasping for air. And it should explain why so many are suffering from the streaming pandemic.

Price segmentation in streaming music could be an effective way to avoid the economic concept of the “Malthusian trap.” Simply put, the Malthusian trap occurs when demand for resources outpaces the supply of available resources. This is most likely to happen when buyers with cash exploit sellers who want that cash by using price fixing and market allocation. Like the big pool method of manipulating wholesale prices.

Adopting a more sophisticated approach required by segmentation could allow the music business to move away from the “big pool” program of price controls that has been adopted by every streaming service for both songs and sound recordings.  Notice that blowing up the big pool has nothing to do with a compulsory license.

Remember that the “big pool” method allocates a “pie” which is roughly 50ish% of a defined revenue pool calculated each month for the sound recording and about 14ish% of a slightly different revenue pool for the song. Those two “pies” are then divided up based on market share or said another way, popularity. I say “defined revenue” because it is a negotiated number, not all revenue. Want to bet that defined revenue is less than actual revenue? Sure as there’s gambling at Rick’s. So there’s nothing inherent in the pie, and if you wanted to bet that share price and market valuation is not included in that defined revenue, you’d be a winner.

That “big pool” formula is calculated every month (call that Time X or “Tx”) which is essentially:

(Defined Revenue x [Your Total Streams ÷ All Streams]) = Your Revenue @Tx

and then

Your Revenue ÷ Your Streams = Wholesale Price Per Stream

There are a few bells and whistles to this calculation, but it’s easy to see why this method of price fixing is attractive to the streaming services–it’s just that it’s killing the artists and songwriters stuck in the Malthusian trap. It’s also easy to see that unless Your Total Streams are increasing at a greater rate of increase than the increase in All Streams at T1, T2, T3 and so on, or if the Defined Revenue is not increasing at a greater rate than All Streams, then whoever gets the cash called “Your Revenue” is getting screwed blued and tattooed. Why?

Because they cannot control the wholesale price. That sets into motion the big pool downward spiral and that’ downward spiral can also be called the Malthusian Trap in honor of the 18th Century economist Thomas Malthus who you’ve probably have never heard of.

The Malthusian Trap and Faux Democratization of the Denominator

The “Malthusian Trap” occurs in streaming when wholesale prices determined by the “big pool” method of price caps is overtaken by the services’ open invitation for the supposed “democratization of the denominator.” That surge in tracks uploaded to music streaming services is sometimes estimated at 120,000 per day. (I doubt that it’s exactly that number but let’s go with it on the assumption that whatever the correct number is, it’s a lot compared to what a single artist or even a single label would put into commerce.). You are not uploading 120,000 tracks per day. I doubt that the biggest labels are uploading 120,000 tracks per day and they are definitely not uploading 43,800,000 tracks per year. Granted, those tracks are not all streaming, maybe 25% never get played at all.

But that still means that the only number in the big pool formula that is increasing essentially exponentially is the denominator. And when you consider that streaming revenues are growing less than 10% or so annually, the result of the big pool formula is steadily declining. High school algebra, right?

This faux “democratization” uses artists as human shields to put control of wholesale pricing squarely in the hands of streaming services due to wholesale price caps on both the sound recording and song payouts.

When the growth of a service’s sound recording offering outpaces available revenues, the “big pool” method effectively transfers control over wholesale prices from rights holders to services and causes diminishing returns for both labels and publishers. Regardless of the terms of any one artist’s record deal or the convoluted compulsory mechanical royalty for songwriters, these diminishing returns will hit artists, producers and songwriters because returns are diminished to the labels and publishers, particularly on a per-artist basis.  Particular deals may make the decline even more or less pronounced, but the race to the bottom is baked into the model. High school algebra.

By introducing a more dynamic and differentiated pricing segmentation model, rights holders could regain control over their own wholesale prices, streaming services might better align revenue payouts with actual usage and consumer preferences. We could all potentially avoid the scenario where a fixed revenue pool gets stretched too thin across an ever-expanding catalog.

It must also be said that because performance on Spotify is closely tied–so to speak–to other commerce such as talent buyers for live shows that constantly check how a new artist has performed on Spotify before giving them a show date, a relatively simple economic decision becomes complex. A demonetized artist may be economically indifferent to continuing to support Spotify by driving fans to the platform, but removing themselves from Spotify may hurt them in booking live shows. So the big pool needs to get blown up for yet another valid, if not actionable, reason.

Blowing Up the Compulsory?

On the songwriter side, there is a sense that what we really need to do is blow up the compulsory license particularly given the reaming songwriters are taking from Spotify’s exploitation of the “bundle” loophole that has foolishly been in the Copyright Royalty Board’s regulations for many, many years.  But even so, I suggest that the path dependence of 100-plus years of reliance by a wide variety of music users on the U.S. compulsory mechanical license is unlikely to get “blown up” and abandoned by lawmakers.  But what may get “blown up” is the hated “big pool” royalty payable under that compulsory.  It may turn out that it’s the big pool that is the culprit, not the compulsory license. (And by the way–be careful what you wish for with all this “blowing up” of the compulsory. You may really not want who comes next.)

Why are we still suffering under this ancient regime? Unfortunately, when the handful of people who forced through Title I of the Music Modernization Act got done with it in 2018, they made bad choices.  For example, they had a golden opportunity to do something simple like shorten the rate period from five years to a realistic duration that more closely matches the term of direct license agreements.  It’s simply bizarre to use a five year term during a contemporary era marked by relatively high inflation when rates during the 1988-2004 period were adjusted every two years. 

They also had a chance to choose between perpetuating the DMV-style model of licensing administration in favor of creating an Apple Store-style model and they went for “more DMV please” like carp on bait.  And here we are, more screwed than ever.  Gee thanks, thought leaders!

Understanding the Malthusian Trap in Streaming

In the current “big pool” model, royalties are divided among artists based on the proportion of streams their music receives relative to the total number of streams on the platform. Songwriters are paid in a similar version of the “big pool.”  This system leads to diminishing payouts as the catalog expands and the user base grows, since:

  1. The total revenue pool remains relatively static due to slowing streaming growth and frozen subscription prices, while the denominator (the total number of streams) grows larger;

2. The more content added to the platform, the less valuable each individual stream becomes (regardless of particular artist deals); and

3. Artists or songwriters with fewer streams get demonetized by Spotify or are paid but fall outside the mainstream struggle to receive meaningful payouts.

The “Malthusian trap,” in this context means there is an imbalanced relationship between increasing content and relatively static revenue pools. That imbalance results in declining payouts over time for artists and songwriters. This especially true for those creators whose total streams (the numerator in the ratio) are relatively constant or declining due to falling off in fan engagement for whatever reason (including bands that break up or artists who pass away).

In other words, the big pool’s fixed cap on aggregated streaming prices creates its own scarcity despite the infinite shelf space of a streaming service. (See Chris Anderson’s rather tarnished “long tail” theory that still reigns supreme at streaming services which demonstrates once again there is no free lunch.)

“Malthusian” refers to the sometimes controversial ideas of Thomas Robert Malthus (1766–1834) the British economist, scholar, and demographer, best known for his theories on population growth and its relationship to resources, particularly food. His most influential work is “An Essay on the Principle of Population” (1798), where he argued that populations tend to grow exponentially, while food production grows at a much slower, linear rate.

This mismatch, according to Malthus, would eventually lead to overpopulation and resource scarcity, resulting in widespread poverty, famine, and social instability.  Malthus called this the “surplus population” or what the AI accelerationists call “useless eaters.” Surplus population leads to famine just like streaming leads to Discovery Mode and demonetization.  Mr. Malthus has a fairly gloomy view of the world, so no Spotify stock options for him.  He wouldn’t have his pompoms out as a streaming cheerleader our Thomas, but his ideas are very relevant to the streaming analysis.

Key Concepts of Malthusian Theory:  Also see Malthus critic Charles Dickens (“may I have some more”), England’s response to the Irish potato famine and Gangs of New York.

Exponential Population Growth: Malthus believed that if left unchecked, populations grow exponentially (doubling every 25 years), which would outpace the resources needed to sustain them.  Comparatively, the total number of tracks on Spotify has doubled approximately every four years. (This is like Sergei’s Corollary to Moore’s Law–royalties decline 50% with every two year increase in computing power.)

Limited Food Supply: Malthus argued that food production could only grow at an arithmetic (linear) rate because of the finite land, labor, and capital available to produce it. Over time, the availability of food per capita would diminish just like the per-stream rate on streaming platforms–that’s why Spotify continues to deny a per-stream rate even exists (ludicrous propaganda).  That is, populations tend to increase geometrically (2, 4, 8, 16 …), whereas food reserves grow arithmetically (2, 3, 4, 5 …). I’d say this is like a vast number of under performing recordings lead to competition for the artificially capped revenue under “big pool” and the relatively frozen subscription prices. This helps to explain Daniel Ek’s–very Malthusian–comment that artists need to work harder to keep up which was straight out of Oliver Twist.

The Malthusian Trap: The theory suggests that any improvements in living standards (through better agriculture, technology, or economic progress) would eventually lead to population growth, which would, in turn, bring the standard of living back down to subsistence levels. Essentially, population pressure would cause periodic famines, diseases, or wars–you know, demonetization–that would control population size and maintain balance with available resources. The trap helps to explain why we need to blow up the big pool model and its fixed wholesale prices.

Preventive and Positive Checks: Malthus identified two types of checks on population growth:

Preventive checks: These are voluntary actions people can take to limit population growth, such as delayed marriage and celibacy.  In the streaming analogy, this would occur if Spotify were to limit the number of royalty bearing tracks (like demonetizing under 1,000 streams).

Positive checks: These occur when the population exceeds the capacity for sustenance, leading to famine, disease, and mortality, which ultimately reduce the population.  In the streaming analogy, this occurs when artists or songwriters quit the music business or abandon streaming platforms.  Given the close ties between traction on Spotify and validation for talent buyers, for example, it is unlikely that a working artist could abandon the platform entirely no matter how much it costs them to stay on Spotify–although there are limits.

Can Price Segmentation Address the Malthusian Trap in Streaming?

Price segmentation allows streaming platforms to differentiate pricing based on different user segments, content types, or usage behaviors, which can provide several key benefits to avoid the Malthusian trap. We’ll see if the thought leaders have some other suggestions–that I cynically (I admit) think are most likely to be continuing to put bandaids on the status quo.

What Must Be Done in CRB 5?

We are rapidly approaching the next rate-setting proceeding before the three-judge panel at the Copyright Royalty Board for the royalty payable to copyright owners (and ultimately to songwriters) for exploitations of songs. These proceedings set rates for the next five year period and are numbered to tell them apart. The last proceeding, for example, was styled “Phonorecords IV” or sometimes “CRB 4” for those who struggle with long words. (Using the “CRB” acronym instead of “Phonorecords” is actually misleading because the CRB sets a number of rates.)

The proceedings will likely be divided in two: One proceeding for songs exploited in physical records like vinyl, CDs and permanent downloads and one proceeding for streaming mechanicals. These hearings are simultaneous and not sequential, so each hearing will be conducted side by side.

One reason for these simultaneous hearings is that the participants in each of the proceedings differ–the physical/download participants are songwriters and publishers on one side and the record companies on the other. The streaming participants are (often) the same songwriters and publishers on one side, but the streaming services are on the other.

The participants are incented to reach a voluntary settlement that they then present to the Copyright Royalty Judges for approval. The settlement negotiations are largely conducted in secret and no one on the songwriter side except a couple of participants knows anything about the terms of the settlement until it is presented to the Judges and the Judges make it public.

At this point, the Judges are required to entertain comments from the public as to whether the public supports the settlement (as required under a federal law applicable to all of the administrative state agencies from the Environmental Protection Agency to the Social Security Administration to the Copyright Royalty Board).

No matter how much some of the publishers would like to spin it, it is this public comment step where it all began to fall apart during the last proceeding styled “Phonorecords IV”, particularly over the “frozen mechanicals” issue. Signally, this disintegration of the initial physical/downloads “settlement” attracted a prairie fire of public comments that rejected the authority of the NMPA and NSAI to speak on behalf of all songwriters and publishers and also rejected the side deal that these groups had negotiated with the labels. The Judges listened, and the Judges rejected that settlement–I believe for the first time in the history of the rate setting proceedings.

The same was not true of the streaming mechanicals piece, however. I never did read a well-reasoned explanation for why participants lacked authority to speak on behalf of all songwriters, i.e., beyond their own members, in the frozen mechanicals proceeding, but that authority could not be questioned in the streaming proceeding. It should have been apparent to anyone paying attention that any consensus behind the time-encrusted “Big Pool” royalty calculation method for streaming mechanicals was rapidly crumbling apart. The Judges’ “39 Steps” royalty calculation is as mysterious as a Hitchcock movie and many did not trust it. And more importantly for our discussion today–still do not trust it at all.

As we approach Phonorecords V, there are some fundamental questions that all involved need to be asking themselves. The first is whether we want to go back to the same tired process of secret meetings with the big reveal resulting in public hostilities in the comments–against what is ostensibly our side. This before we even get to the negotiation with the other side.

The powers that be had the chance over the last few years to bring in some different viewpoints. Had they done so, they would have both diffused the inevitable collision, but could also have gotten the benefit of those viewpoints when there was still time to build alliances. There’s an idea–an integrative negotiation with a collaborative outcome.

Another fundamental question is whether we can reach a fairly quick deal with the labels on the physical/download side so that all concerned can turn their attention to bringing the streaming rates into some semblance of reality. Because the songwriters did such a persuasive job of raising the frozen mechanicals rates from 9.1¢ to 12¢ plus a COLA, that minimum statutory rate has now increased to 12.7¢. Given current inflation projections, it’s likely that the statutory rate will increase to about 13¢ and change by the end of 2026.

If a settlement could be reached quickly, it would not surprise me if someone came up with the idea of simply taking the then-extant minimum rate (for 2027) as the new base rate for the first year of Phonorecords V (2028) plus extending the annual COLA to protect songwriters in the out-years of PR V. Wherever the actual penny rates end up, if the songwriters and labels could reach an agreement quickly, it would save a bunch of effort and allow everyone to turn their attention to the streaming rates.

I wonder if it’s even possible to reach a negotiated settlement with the streaming services on the streaming mechanical. The entire concept of the “Big Pool” royalty rate is failing for streaming on both the sound recording and the song side of the deals. It was, frankly, a silly idea to begin with–and that takes us back to the beginning of streaming when deals were poorly negotiated with little to no accountability because physical still paid the bills. The general idea was that “superfans” would rule according to Thomas Hesse in Billboard who was around at the time: “If you get to superfans, who listen to music all the time, you get to all the money — not just from those people, but you get all the money from everybody.”  The reality is that you can replace “superfans” with “superstars” or more simply, “market share”, and you would have a much better understanding of the “Big Pool” concept. The Big Pool is actually just a hyper efficient marketshare distribution of a pool of money.

What Spotify has demonstrated with their short sighted move on bundling is simply all the reasons why they are disliked and untrustworthy. They said the quiet part out loud–we have no idea what we are doing in this business but we–and not songwriters or musicians–are getting stupid rich at it. It is unlikely that anyone is going to welcome more of the same in Phonorecords V.

What is becoming apparent to an increasing number of songwriters is that there is one metric that matters to Spotify’s CEO–stock market valuation. That is what has made him a billionaire. That is what has made plenty of people at Spotify into millionaires. That is also the one metric that songwriters and artists have never participated in. Our negotiators have had their eye on the wrong ball.

I say if we’re going to spend millions on the government’s rate proceedings anyway, let’s get something for it for a change, shall we?