What’s Happening With Mechanical Royalty Rates? (Updated)

  in Investing Updates / Analysis

Jan 07, 2021

If you’re an investor trying to put a value on a publishing catalog, you may be a little confused about the status of mechanical royalty rates. 

At first, it seems pretty straightforward. In early 2018, the Copyright Royalty Board (the court tasked with establishing mechanical royalty rates in the U.S.) raised the rates digital music services must pay in mechanical royalties substantially. That ruling stated services like Spotify or Amazon music had to increase their mechanical royalty payments by 44% over five years (2018 - 2022). 

Great news for songwriters and investors in mechanical royalties. But a month later, several digital music services appealed the ruling. As the appeal progressed, they continued to pay the increased rates. 

In August 2020, things got more complicated. The appeals court vacated part of that CRB decision and remanded other parts back to the CRB judges, according to Billboard magazine. That ruling wasn’t against the rates themselves, but rather the “procedural issues” related to how the CRB determined the rates in the first place. 

Regardless, the ruling opened the door to competing interpretations over exactly how much digital music services now need to pay for mechanical royalties. The Digital Media Association (or DiMA, the trade group representing digital music services) said the appeal court’s ruling means that the new rates no longer apply, and as such digital music services are free to revert to paying the previous rate structure rather than the higher rates.

DiMA further said it is up to each individual music service to decide whether they will pay the old rates or continue paying the new rates. Under the previous rate structure, digital music services were paying 10.5% of their revenue in mechanical royalties. The new rate structure increased that payment to 11.1% in January of 2018, and increased in annually over five years, to ultimately reach 15.1% in 2022. The 2020 rate stood at 13.3%. 

So far, no digital music services seem to have reverted to the pre-2018 rate structure. Given the contentious of this issue specifically and streaming royalties overall, any reduction in royalty payments by digital music services would likely generate immediate headlines. 

UPDATED 1/18/2021: Billboard reports that with the launch of the Mechanical Licensing Collective—a body created to collect and distribute mechanical royalties from digital music services—this may change. The MLC has asked the CRB to set an interim rate while it determined a compromise rate, but was declined, leaving a lack of clarity for what rate the MLC will collect for its first payment in April. 

Per Billboard: "Some streaming services have said that in light of the remand they would return to paying the 2013-17 rate of 10.5% of on-demand service revenue for all publishing royalties rather than the higher escalating-rate structure of 11.4% to 15.1%." 

And just to make things more interesting, the CRB is scheduled to begin considering the next rate period for 2023 - 2027 this week. According to published reports, the bad blood generated by this current appeal row should make this a contentious battle.