How Unfrozen Mechanics Affect Controlled Comps [Chris Castle]

Due to the pricing date being frozen by contract (the mini ice age), the artist/songwriter will pay a upper mechanics to the outside writer of a frozen the royalty pool.

A guest post by chris castle of Music Tech Solutions.

Nice article by Ed Christman in Billboard explaining the continuing crisis of frozen mechanics. Ed offers a rough quantification of the revenue impact on songwriters and music publishers in light of controlled compositions clauses in recording contracts that apply (a) to songs written and recorded by artists , or (b) songs by “outside writers” if and only if the artist can get the outside writer to agree to the terms and pricing of controlled compositions.

For those reading at home, one theory (apart from leverage) that is used in this context is that the artist/writer may agree on behalf of all co-authors 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 copyright of the song and can grant non-exclusive licenses in the whole subject to accountability provided that the license is not an economic waste or a personal transaction. Let’s leave all of that where it is for now, but that story has never really been properly challenged, especially the economic waste part given the question of when the rates will be fixed and even the crisis of the frozen mechanics itself. We will come back to it another time.

The rate fixing date is a key element of the discussion to understand the impact of the thaw mechanisms. So what is this rate-setting provision?

Remember that the controlled compositions clause starts by reducing the minimum legal mechanical rate in the United States (and theoretically in Canada subject to MLA) in effect at any given time. This moment is either the beginning of the recording (booo!), or the delivery, the release or the sale of a unit embodying the song in question. Recall that labels only pay mechanical royalties on physicals and downloads (the rates at issue in the frozen mechanics crisis) – streaming services pay for interactive streaming mechanics (and there’s no mechanics 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 all the prices be the same? And you’d be right if you were asking about a record recorded and released in or after 2006, or a record recorded and released between 1909 and 1978, like, say, some Bob Dylan, The Beatles, Otis Redding, or Miles Davis tracks.

But… it wasn’t always like this. 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 United States copyright in effect in 1978. The rate then began to increase gradually over the years. until it reached 9.1¢ in 2006, a gradual increase that was meant to make up for Congress not raising the rate for 70 years, aka “the Ice Age.” Congress really screwed up the lives of songwriters by freezing the rate at 2¢ during the ice age and songwriters and their heirs have been paying it since, until the period 2006-2022, aka “the second period glacial” or the Return of the Neanderthals.

In an effort to help songwriters out of the ice age, Congress also authorized the indexing of the minimum rate to inflation from 1988 to 1995. Indexing is again in the spirit of Copyright Royalty Board right now – bearing in mind that a rate increase due to inflation has nothing to do with the intrinsic value of the song’s copyright, so there is no confusion. Indexation simply applies any increase in the consumer price index to the legal rate and preserves purchasing power. In a way, it’s the opposite of a value deal. Indexing assumes that the question of value has already been decided (in this case in 2006) and simply preserves purchasing 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, ie the inflation-adjusted rate, is not 9.1¢, it is approximately 6¢.

Remember that the CRB’s proposed 12¢ rate increase is not about value, it’s about purchasing power, as it’s only geared towards inflation.

So let’s get back to the mastered compositions. It’s no coincidence that, alongside the gradual implementation of the 1978 increases, labels established controlled composition clauses that set songwriters back. They probably couldn’t have gotten away with freezing per contract at 2¢, so they let the rate float, but much slower and with multiple 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 legal rate. But the third cap is the rate fixing date and that’s the one we want to focus on in the context of unfrozen mechanics.

In simple form, it looks like this contract language:

If United States copyright law provides a mandatory minimum rate: the rate equal to seventy-five percent (75%) of the minimum mandatory license rate applicable to the use of musical compositions on audio recordings under US copyright law (hereinafter referred to as “US Minimum Statutory Rate”) at the time of commencement of recording of the relevant Master but in no event later than the latest delivery date in time of this Master (the applicable date is hereinafter referred to as the “Copyright Fixing Date”). (The United States minimum statutory rate is $0.091 per composition as of January 1, 2006);

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

Also remember that rate increases are prospective, which means that the rate for controlled compositions on recordings delivered in the future will, of course, get the higher rate, even if past rates do not change, from least not yet. Also keep in mind that permanent downloads are often excluded from the vetted artwork processing and are paid for at full price, presumably as of the date the price is set in the artist’s agreement. Sometimes download prices “float” or increase based on increases in the legal price, but this is part of individual negotiations.

If there’s an outside songwriter who doesn’t accept the artist’s controlled songwriting rate (and there are many), 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 are a few twists to this involving rates on different “manufactured and distributed” units, but for our purposes there is one clear thing to understand:

Due to the pricing date being frozen by contract (the mini ice age), the artist/songwriter will pay a upper mechanics to the outside writer of a frozen the royalty pool.

That’s why you should always, always ask for “protection” for at least one outside song in your contract, then review each album to determine if that needs to be increased. This is especially true for records made in places like Nashville where the record company will ask you to work with “A” list songwriters (assuming none of them will take the 3/ 4) and will then try to deduct the difference between the unchecked rate and the checked rate from you (and if it gets large enough, cross it to your record royalties). (A-list writers not only won’t take the 3/4 rate, they’re pissed because they can’t charge you a double stat like they do for sessions.)

Example: You have a ceiling rate of 10 x 3/4 on mechanical parts, the “ceiling rate”. That’s the 68.25¢ album rate you hear about (10 x 0.75 x 9.1¢). Let’s say you have 10 songs on your album and you’ve written them all. You get the full 68.25¢. If you have two outside songs whose writers receive 9.1¢ under current rates, you deduct 18.2¢ from the cap rate, leaving 50.05¢ as the “controlled pool” or the total mechanical royalty payable to the artist/songwriter (actually all vetted). writers, but leave that wrinkle aside).

So you see that it is no longer a rate of 75%, but rather a rate of 55%.

Now suppose the new rate is 12¢. Same math, two outside songs now get 24¢, but cap rate remains the same due to rate fixing date. During the Mini Ice Age, i.e. while this cap rate is set at 9.1¢ x 10 x 0.75, the controlled pool is now expressed as 68.25¢ – 24¢ = 44, 25¢, or about 48% (44.25 ÷ 91). the artists the editor isn’t going to be mad about it; the outside writer publishers will be delighted.

This will start to hold true on the next LP that takes a rate fix date after the 12¢ rates take effect. In this situation, you would increase both sides of the equation, so the cap rate would increase to 90¢ (10 x 0.12 x 0.75). Outside writers still receive 12¢ each for two songs (or 24¢) which is deducted from the cap rate to get a controlled pool of 66¢. The true controlled clearing rate then returned to around 55%.

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

I think that leads to the conclusion that increasing the guideline is a huge step forward and we should all be grateful to the judges. Pricing dates for catalog titles (really the whole concept of pricing dates) must also be considered and any further effort to change the controlled comps clause to effectively reverse the pricing increase judges will undoubtedly lead to further conflict.

Someday Congress will act again to reduce the effects of the controlled compositions clause and more importantly the rate setting date, but in the meantime the judges may well consider the matter to the extent they can before they see the return Neanderthals.

About Madeline J. Carter

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