What is a Mechanical License?

According to the Harry Fox Agency, a mechanical royalty collecting agency, a mechanical license grants to the user the rights to reproduce and distribute copyrighted musical compositions on CDs, records, tapes, ringtones, permanent digital downloads (DPDs), interactive streams, and other digital configurations supporting various business models. In exchange for the permission to do so, licensees pay a statutory rate to the copyright owner(s) per reproduction.

Background

At the beginning of the 19th century, player pianos that performed songs transcribed on a roll of paper were growing in popularity. This created the first major copyright law dispute in regard to sheet music reproduction. In 1908, the case in question, White-Smith Music Publishing Co. v. Apollo Co. (209 U.S. 1), reached the Supreme Court.

The Supreme Court ruled in favor of Apollo Co., stating that the manufacturers of player pianos and piano rolls were not required to pay royalties to composers when using their sheet music. Songwriters quickly took action against the ruling by lobbying Congress. The activist efforts of American songwriters quickly caused government regulations to be put in place with the Copyright Act of 1909. This act wrote mechanical licenses into law, which was a triumph for composers and songwriters, as they finally had the chance to be paid for their creative contributions. American copyright law has maintained the mechanical licensing system by adjusting it as technological advances make the reproductions of copyrighted works more complex.

What is a Compulsory Mechanical License

Section 115 of the Copyright Act allows a composition to be considered properly and legally licensed by a music user by way of sending the owner of the composition, most often the music publisher, a Notice of Intention (NOI) to obtain a compulsory license for the mechanical rights. Aside from a few exceptions, anyone who files the proper notice of intention is free to reproduce the composition they are obtaining a license for and the copyright holder is required to license the use of the song under the compulsory license. Section 115 aims to promote creativity and freedom of music while simultaneously protecting songwriters and composers. The exceptions to this compulsory license are as follows:

Right of First Use: The compulsory license does not apply to compositions that have not yet been recorded. Until a song has been recorded under authorization of the copyright owner, AND that first recording has been distributed to the public, the publisher can charge anything it wants for use of the copyright and is not bound by the compulsory license rate.
Dramatic Musical Works: The song cannot be intended for the opera or for use in musical theatre.
Non-Phonorecord: The composition must be an audio-only recording in order to apply to a compulsory license. In 1995, the Copyright Act was revised to make it clear that compulsory mechanical licenses apply to DPDs too, or digital phonorecord delivery (like a song download from iTunes).
Major Changes: When one obtains a compulsory license, they are allowed to arrange the song “to conform it to the style or manner of interpretation of the performance (Copyright Act 115(a)(2)). However, one cannot change the basic melody or fundamental character of the work, so no new lyrics or melody. These types of changes require direct permission from the publishers/writers.

This notice also serves as a legal means for a music streaming service to obtain a compulsory license for the distribution of the song on its platform, as opposed to entering into a direct deal with the music publishers of the compositions. If the proper guidelines are followed by the user, a music publisher cannot refuse usage.

Though NOIs historically authorized all compulsory licenses, they no longer apply to digital delivery of musical works (i.e. permanent download, limited downloads, or interactive streams). Under the 2018 Music Modernization Act, NOIs only authorize non-digital phonorecord delivery (i.e. compact disk, cassette, or vinyl). As of January 1, 2020, the Copyright Office no longer accepts NOIs to obtain a compulsory license for making a digital phonorecord delivery of a musical work. Rather, users may obtain compulsory authorization through the purchase of a blanket license covering all musical works available for compulsory licensing. Such a license is made available through the Mechanical Licensing Collective (MLC).

Rights NOT Covered by Mechanical Licenses

As defined previously, mechanical licenses only grant certain permissions for licensees. Different licenses must be obtained if a licensee is seeking other rights, and they will have to file and negotiate for these separate licenses. The following are brief descriptions of various rights that are not covered by mechanical licenses.

Master-Use Licenses are required to utilize a copyrighted sound recording. A master-use license can be obtained from the owner of the master recording, usually a record label. It is not administered by the Harry Fox Agency (HFA) or the Mechanical Licensing Collective (MLC).
Synchronization Licenses are required for individuals seeking the rights to include the song in a video (including YouTube videos), film, or TV. To obtain a synchronization license, interested parties need to contact the music publisher or songwriter directly.
Public Performance Licenses are required in order to publicly perform a copyrighted song. These licenses are commonly granted by copyright holders through Performing Rights Organizations (PROs) such as ASCAP, BMI, or SESAC.

In addition, mechanical licenses do not permit the reprinting of lyrics, manufacturing of sheet music, or the use of copyrighted work as background music, on digital jukeboxes, as ringtones, karaoke, or in a theatrical production. Separate agreements must be made with the copyright owner for these permissions.

Mechanical Royalty Rates

The United States Copyright Office sets a statutory mechanical royalty rate that requires a certain payment for each reproduction of a copyrighted work. For physical sales and downloads, this rate is set at a flat-fee of 9.1 cents for songs that are under five minutes. For pieces over five minutes in playtime, the rate is 1.75 cents per minute. The rate for ringtones is 24 cents per ringtone.

Unlike royalty rates for physical sales, digital downloads, and ringtones, the royalties set for interactive on-demand streaming are fairly complex. Mechanical royalty rates for interactive streaming are based on a number of factors and formulas. The applicable service’s revenue, money paid to the sound recording owners, the number of subscribers, and performance royalties are just some of the factors taken into consideration when determining streaming rates. Therefore, unlike the mechanical royalties paid for physical sales and digital downloads, there is not a set rate.As of now, for interactive digital streams (e.g. Spotify and Apple Music) the CRB (the Copyright Royalty Board) first sets the “All- In Royalty Pool” as such:

All-In Royalty Rate, applied to the service's total revenue (currently, 11.8% of the service's revenue, with a plan in place to increase the rate to 15.1% by 2022)
Minimum All-In Royalty Rate, calculated as a percentage of what service's pay the record labels (currently, 21-22% of the payment to labels — with a planned increase to 26% by 2022)
Subscriber-based Floor of 50 cents per subscriber

The streaming service is required to apply all three formulas and utilize the formula that elicits the greatest value. The resulting value is the amount the streaming service owes to songwriters (performance and mechanical royalties). After the deduction of the performance royalties that are paid to PROs the results are mechanical royalties owed to songwriters.

The Music Modernization Act and the MLC

On October 11, 2018, the Music Modernization Act (MMA) was unanimously passed by Congress and enacted into law. According to Copyright.gov, “The Music Modernization Act updates the music licensing landscape to better facilitate legal licensing of music by digital services. It also provides certain protections (and exceptions to those protections) to pre-1972 sound recordings, and addresses the distribution of producer royalties.” Prior to the passing of the MMA all government laws and regulations surrounding mechanical licensing were written in Section 115 of the Copyright Act. This section’s contents are over a century old, predating digital listening services by a long shot. The Music Modernization Act has three main sections:

Title I – The Musical Works Modernization Act, which creates a blanket license for interactive streaming services, and establishes a mechanical licensing collective (MLC) as well as a digital licensee coordinator (DLC), making it easier for services to obtain licenses and for creators to collect royalties.
Title II – The Classics Protection and Access Act, which created federal rights for owners of sound recordings made before February 15, 1972.
Title III – The Allocation for Music Producers Act (AMP Act), which creates a path to collect certain royalties for music producers, mixers, and sound engineers.

Title III allows music producers, mixers, and sound engineers to receive royalties collected for uses of sound recordings by codifying a process for the designated collective (Sound Exchange) to distribute those royalties under a “letter of direction.”

How to Obtain A Mechanical License for A Non-Digital Phonorecord Delivery

Individuals who are seeking a mechanical license will often use collection agencies. Typically, in the US, people who are trying to acquire mechanical licensing for all modes of delivery will go through one of the three mechanical licensing agencies: the Harry Fox Agency (HFA), Music Reports Inc (MRI), or the newly developed Mechanical Licensing Collective (MLC ). The process of obtaining a license, as detailed below, is typically conducted by HFA, MRI, MLC, or a similar agency on behalf of an individual, digital service provider, or record label.. HFA offers an automated license request and payment system called Songfile.
The first step in obtaining mechanical rights is determining who is responsible for licensing the work. This will either be the copyright owner of the composition or someone authorized to handle licensing on their behalf. One way to locate copyright owners is through the Copyright Office’s public records database, which interested parties can search themselves or file requests for the staff to do so for them. Once the copyright owner has been identified (or deemed unidentifiable), the licensee must send them a Notice of Intention to Obtain a Compulsory License (NOI). According to the Copyright Office, “an NOI must be served before or within thirty days after making, and before distributing, any phonorecords of the work.” *

Another method of locating copyright owners is through the MLC’s Public Work Search. The Public Work Search allows anyone to search The MLC’s song ownership database free of charge. It is recommended that artists, songwriters, and lyricists register their works with the MLC.

Rember, after the enactment of the MMA in October of 2018, NOIs only apply to non-digital phonorecord delivery (i.e. compact disk, cassette, or vinyl) non-interactive transmissions, and the transmission of works accompanying a motion picture or other audiovisual work, while mechanical licenses for digital deliveries require a blanket license from the newly formed MLC. It is important to note that a Notice of Intent for non-digital phonorecord deliveries is used as a last resort in the industry. Because of the compulsory mechanical licensing doctrine in copyright law, rights owners are required to let someone else record their composition and distribute those reproductions if they wish to do so. Because rights owners can’t really refuse a compulsory licensing request, it is easier to go through HFA or the rights holders directly than through the Copyright Office. NOIs are used when there is a lack of information available or when the rights owners make it difficult to complete the licensing deal. If the copyright owner’s name and contact information are registered within the Copyright Office’s public records, the licensee (or the organization working on behalf of the licensee) is required to send the NOI to the owner or an agent, as authorized by the owner. In the case that there are multiple copyright owners registered with the work, a singular NOI sent to any of the owners or their agents is permissible. If the work has no copyright owner registered with the Copyright Office, the NOI must be sent to the Copyright Office directly. By doing so, the licensee protects themselves from infringement, and royalties from the use of the work will be held and paid to the appropriate party if they are identified in the future. The Copyright Office also recommends that licensees of compositions with unknown copyright owners should occasionally search the copyright database to see if the owner has been identified so that they are prepared to begin making payments.

The Copyright Office allows individuals to file notices online or by physical mail. There is a $75 fee for an NOI for the first title. After that, paper filing has an additional fee of $20 for each group of 10 titles and online filing has an additional fee of $10 for each group of 100 titles. To file an NOI online, interested parties can visit the Copyright Office’s page on the process. To file an NOI by mail, the document (with a check or using a deposit account to cover the fee) can be sent to the following address:

The Copyright Office does not provide any standard NOI forms or documents. However, the law outlines the required contents of an NOI in 37 CFR § 201.18. They are as follows:

The header must “clearly and prominently” designate the document as an NOI with the title: “Notice of Intention to Obtain a Compulsory License for Making and Distributing Phonorecords”
There must be a “clear statement” including:
- The full legal name of the licensee.
- All other relevant names used by the licensee.
- The licensee’s contact information: phone number, full street address and email address. (A P.O. Box is not sufficient unless it is the only option in the location.)
- If the licensee is a business organization: the name and title of the CEO or equivalent head of management for the entity.
- The fiscal year of the license request
For each composition being licensed, the following information must be listed (if available):
- Title
- Author(s)
- Copyright owner(s)
- All forms of phonorecord and listening platforms that the license will be used to make (ex: CD, vinyl, DPD, streaming, combination of several, etc.)
- Expected release date of phonorecords already made or to be made using the license
- Name of the artist(s) recording the copyrighted work
- Catalog number(s), record label name(s) expected to be affiliated with the licensed work
- Date of manufacturing of phonorecords (if any) made with the license
- Length of your performance in minutes and seconds*
NOIs must be signed by a member of the filing party or their authorized agent.

*Timing is important because different royalty rates are applied to different lengths: the Mechanical rate is set at a flat fee of 9.1 cents for songs that are under five minutes. For pieces over five minutes in playtime, the rate is 1.75 cents per minute. The rate for ringtones is 24 cents per ringtone.

As long as the NOI contains the required contents and is filed within the appropriate timeframe, the licensee is lawfully given mechanical rights after filing the NOI. The licensee must also maintain royalty payments as a part of the agreement.

How to Obtain A Mechanical License for A Digital Phonorecord Delivery

The MLC is now the sole distributor of Mechanical Licenses for all digital deliveries of phonorecords. Essentially, for a Digital Service Provider (interactive and non-interactive) to obtain the mechanical license to any song they must purchase a blanket license from the MLC. DSPs that wish to forgo the Blanket License must file a Notice of Non-blanket Activity with The MLC. To obtain a Blanket License a DSP must submit a Notice of License form to the MLC. Some DSPs may wish to maintain separately contracted licenses. The MMA permits DSPs to continue to license musical works rights directly should they so choose, as long as they provide The MLC with the required written notice and data regarding those direct licenses, so The MLC can determine which musical works on those services are covered by those voluntary licenses rather than the blanket license.

After receiving a blanket license, there are several responsibilities a DSP must fulfill to maintain their blanket license. A DSP must make assessment payments in full and on time according to US law. The due date and amount due will vary among DSPs. Also, DSPs must begin providing monthly usage reports to The MLC starting with January 2021 usage. Each monthly usage reporting file is due to The MLC no later than 45 days after the end of each calendar month.

Mechanical Royalties & Digital Streaming

According to the U.S. 2018 Mid-Year Report (July 2018) by information, data, and measurement company Nielsen Music, streaming is continuing to grow in popularity. The report states that in the past year, total album sales (and equivalent individual track sales) have decreased 20.2% in the past year. However, consumption through on-demand audio song streaming has grown 45.5% and on-demand video song streaming has increased 34.7%.

It is safe to assume that streaming isn’t going away anytime soon. The new form of consumption gives the user a much larger catalog of songs to select from, while maintaining the compact, quick, high-quality listening experience digital music provides. Streaming is also thought to be much more affordable for the consumer. However, each time a song begins streaming, the mechanical right (along with others) of the composition is being exploited.

Historically, mechanical royalties owed to music publishers have been tracked alongside the sales of the records, cassette tapes, CDs, and digital downloads that embodied the work being licensed. This method of cataloguing sales and royalties is proving faulty as technology adapts and changes the way that society consumes music. As on-demand music streaming services like Spotify and Apple Music continue to pull more users away from the traditional buying and selling of records, American copyright law is racing to catch up.

The issue with setting royalties for on-demand digital streaming stems from an ongoing argument within the industry regarding what permissions digital streaming should require. Some argue that on-demand streaming allows enough consumer selection, personalization, and input that it should be treated exactly like CDs and DPDs. This argument requires mechanical licenses only. Others argue that streaming services should be treated more like traditional radio stations, and should require public performance licenses. Due to the hybrid nature of streaming, it is difficult to determine how royalties should be allotted; however, it has been decided that interactive streaming exploits both performance and mechanical rights, whereas non-interactive music streaming only exploits performance rights.

Typically, digital streaming services enter into deals with record labels to distribute sound recordings on their platforms. Once that license is solidified for the master sound recordings, the streaming platforms are obligated to obtain applicable mechanical licenses for the use of underlying compositions owned by music publishers. Streaming services usually work with HFA and Music Reports, Inc. (MRI) to issue bulk notices of intent to music publishers that own the copyrights to which they are seeking mechanical rights. You can read more about this in the HFA guide and the MRI guide.

Generally, in the music industry, a digital delivery is considered both a reproduction and a communication. This means that both performance and mechanical rights are exploited. In America, copyright law specifies the differences between these rights. It states that a digital download (from the iTunes Store, for example) only exploits the mechanical right, while a personalized non-interactive radio service (like Pandora, iHeartRadio, etc.) only exploits the performance right. However, with on-demand (interactive) streaming, the industry acknowledges that both mechanical and performance rights are being exploited, and therefore requires licenses for both rights and the subsequent payment of royalties for each.

Sources

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[https://soundcharts.com/blog/how-the-music-publishing-works (https://soundcharts.com/blog/how-the-music-publishing-works)
https://themlc.com/dsp-resources-page

Composed by
Will Donohue, Mamie Davis, Luke Evans, Jacob Wunderlich, Rene Merideth, Jeff Cvetkovski, & Aaron Davis

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