Adjustments to Phonorecords III Royalties

Royalty Adjustments In Connection With The CRB’s Determination Of Final Rates For The Phonorecords III Rate Period

The rates for the mechanical royalties administered by The MLC are set by the Copyright Royalty Board (CRB) in administrative proceedings.  Due to legal appeals, the rates for the period covering 2018-2022 (known as the “Phonorecords III” or “Phono 3” period) were not finalized until August 2023. Because the final rates are different from the rates that were used on an interim basis, digital service providers (DSPs) must submit adjustments to royalties previously paid. Below is more information about how this process works. More background information about The MLC and mechanical royalty rates is available here. 

When was the Phonorecords III (Phono 3) rate period?

The Phono 3 rate period ran from January 1, 2018 through December 31, 2022.

What are the final rates and terms for the Phono 3 period?

On August 10, 2023, the Copyright Royalty Board (CRB) published the final determination of the mechanical royalty rates for interactive streaming activities for the Phono 3 rate period. The full text of the Phono 3 rates and terms is available here. 

What adjustments must Digital Service Providers (DSPs) report in connection with the CRB’s final rates for the Phono 3 rate period?

DSPs must report adjustments to calculate royalties due at the final CRB rates.

• For the Phono 3 blanket license period (2021-2022), these adjustments will reflect any changes from the blanket royalties that were paid to The MLC at the interim rates that were in effect pending the CRB final determination (More information on the interim rates is available here.)
  
  
• For the Phono 3 historical unmatched period (2018-2020), these adjustments will reflect any changes from the historical unmatched royalties transferred to The MLC by DSPs who chose to transfer their unmatched royalties to The MLC in 2021 (More information on the transfer of historical unmatched royalties is available here.)

When were these DSP adjustments due?

DSPs that engaged in interactive streaming activities during the Phono 3 period and reported related usage to The MLC were required to provide adjusted reporting to The MLC by February 9, 2024 (six months from the date when the CRB final determination was published).

Which adjustments has The MLC received?

Below are separate summaries of the adjustments received for the Phono 3 blanket license period (2021-2022) and the Phono 3 historical unmatched period (2018-2020).

Summary of DSP adjustments reported for the Phono 3 blanket license period (2021-2022)
The MLC has received 29 reports of adjustment from DSPs that reported streaming activity to The MLC that occurred during the post-license availability date periods of the Phono 3 rate period (January 1, 2021-December 31, 2022). The below chart provides a summary of the aggregate royalties originally reported to The MLC (the “Interim Reporting” column), the adjusted royalties recently reported (the “Current Reporting” column) and then the difference between the two (the “Amount of Adjustment” column). The chart also provides a breakdown of the adjustments to mechanical and performance royalties that have been reported to The MLC as of February 23, 2024. Since the final CRB rates are largely “all-in” (meaning that the total rate includes mechanical and performance royalties), the DSP adjustments to performance royalties change the amount of mechanical royalties that are delivered to The MLC. The following table shows both amounts for clarity, along with the total adjustment to musical work royalties:

The Amount of Adjustment in this chart for mechanical royalties are payable to rights owners either via The MLC or under the terms of direct licenses between DSPs and rights owners.

The Amount of Adjustment in this chart for Performance Royalties reflects what was reported by DSPs for distribution via performance rights organizations or under the terms of direct licenses between DSPs and rights owners. For more information concerning the Performance Royalties that DSPs report to The MLC, see our FAQ here.

Note on additional adjustments expected:  Several DSPs did not submit required reports of adjustment in advance of the February 9th deadline. The MLC expects the above adjustment figures to increase when these DSPs submit their outstanding reports. The MLC will update the above information when those reports are received, but based on the unadjusted reporting at the interim rates, The MLC estimates that adjustments to total musical work royalties could increase by an additional $10-15 million. Once the reporting is received for these additional adjustments, The MLC will be able to provide the breakdown between mechanical and performance royalties.

Summary of DSP adjustments received for the Phono 3 historical unmatched period (2018-2020)
The MLC has received reports of adjustment from 14 of the 21 DSPs that delivered a Cumulative Statement of Account to The MLC for unmatched usage from the portion of the Phono 3 rate period that occurred before the blanket license was effective (January 1, 2018 through December 31, 2020). At an aggregate level, the net effect of adjustments on the total amount of unmatched royalties that DSPs had transferred to The MLC is a reduction in the total amount transferred of approximately $28,817,456.* The following table shows a breakdown of specific adjustments reported by individual DSPs:

Note:  Most DSPs reported unmatched royalties to The MLC in 2021 using the royalty rates that had been in place under the original CRB Phono 3 determination. That determination was vacated on appeal, and then after remand proceedings, the CRB issued the final Phono 3 rates. While parts of the final rates are the same as the original rates, other parts are different. Due to those differences some DSPs reported adjustments that reduced the amount of historical unmatched royalties previously transferred to The MLC.

Will The MLC provide a breakdown of the adjustments reported by each DSP for the Phono 3 blanket license period (2021-2022)?

When The MLC distributes additional royalties from the adjustments for the Phono 3 blanket license period, royalty statements to members will include details on the specific adjustments reported by each individual DSP. However, The MLC understands that confidentiality provisions in applicable federal regulations prohibit The MLC from providing to the general public a breakdown of usage reporting under the blanket license by individual DSPs. Of note, the disclosure rules are different for historical unmatched royalties, where the law mandates that The MLC publicize each DSP’s transfer of unmatched royalties. Thus, The MLC can and does provide a breakdown of individual DSP adjustments for the Phono 3 historical unmatched period (2018-2020), but does not for the Phono 3 blanket period (2021-2022).

Where can I find more information concerning the Performance Royalties that DSPs report to The MLC?

Click here to read more.