David Israelite has had a busy summer. As the President and CEO of the Washington, DC-based National Music Publishers’ Association (NMPA), he looks after the music publishing community and has had a lot on his plate in recent months, from the soon-to-be-launched Mechanical Licensing Collective, which should revolutionise the way mechanical royalties are licensed and paid in the US, to the review of the ASCAP and BMI consent decrees by the Department of Justice, the CRB rates determination, and the on-going battles to get platforms such as Triller and Twitch licensed for the use of music.
A consummate Washingtonian, Israelite joined the NMPA in February 2005 after working at the Department of Justice, where he was appointed Chairman of the Department’s Task Force on Intellectual Property. He also previously worked in the US Senate where he was chief of staff for Missouri Senator Kit Bond.
This dual experience was at hand when Israelite was among the group of people involved in getting the crucial legislation known as the Music Modernisation Act passed in 2018. Israelite first had to convince his membership that it would be preferable to switch to a blanket system for the license of mechanicals rights, and then make sure that all parties, in particular streaming services, kept the momentum going and agreed with each other, while fighting in court with some of them.
His tenure at the NMPA has been marked by almost a decade of growth for the sector, due to the overall increase in music usage, the strength of US repertoire in the US and around the world, and the dynamism of its membership, which comprises the three majors – Universal Music Publishing, Sony/ATV and Warner Chappell Music – as well as a wide range of companies – from relative newcomers such as Reservoir, Downtown and Concord to established names such as peermusic and Carlin. In 2017, Israelite extended his NMPA contract to 2022.
The US music publishing industry celebrated its best year ever in 2019, with overall revenue of $3.7 billion, up 11.55% over 2018. It was the fifth consecutive year of “significant” growth for the industry. In 2019, performance rights continued to be the most dominant revenue stream for publishers, accounting for 52.30% of the total, followed by sync (22.69%), mechanical (18.53%) and miscellaneous (6.48%).
Every year, during the organization’s AGM, usually in June in New York, Israelite delivers a much awaited State of the Union address, in which he scrolls through the key issues of the moment and reveals the annual revenue figures for the sector. This year, like for the rest of the industry, was slightly different, in that the NMPA’s event was virtual. It did not matter for Israelite who was as combative as ever, snapping at Spotify and Google for appealing the rate determination from the Copyright Royalty Board, which initially gave the publishing sector a rate rise of 44% over four years.
Synchblog did a virtual catch-up with Israelite to talk about all these issues, starting with the impact of the Covid-19 pandemic.
Let’s start with the State of the Union. What information do you get from your members about navigating COVID?
We’re very concerned about the financial impact of COVID. We only track revenue on a calendar year basis at NMPA, so we won’t get any of the 2020 data until early 2021. But obviously we are collecting anecdotal evidence and there are some clear signs that there is going to be a hit. The question is how big it will be. One of the interesting things is that in the music publishing industry, there is quite a delayed schedule so that money that flows to songwriters and music publishers is often for activity that was a few quarters before. So for example, PRO distributions this September are generally for the fourth quarter of 2019, and that’s before there was an economic impact. A lot of the pain is going to be spread out and felt in the future because of the nature of how publishing pays out.
Areas that we are particularly concerned about include models that rely on advertising revenue, such as radio and free-to-the-consumer models. We are concerned about general licensing. Bars, restaurants, hotels and businesses of that nature. We are hopeful that subscription revenue is going to be strong as more people feel the need to have a music subscription service. Because the dominant model is subscription-based and not purchase-based, there are actually some benefits as long as people keep their subscriptions. We think there will be strong revenue from that.
Another big area of concern is the shut-down of production of movies, television shows and commercials with all the synchronization money. So we just don’t know. I’m not in a position to give any kind of percentages of how much of a downturn we think there is going to be from 2019 to 2020. We won’t know that for some time. But one of the good things about music publishing is that we are a diversified industry with lots of different income streams.
“One of the good things about music publishing is that we are a diversified industry with lots of different income streams.”
BMI released its figures for the year ending June 30th which were positive overall despite a $60 million hit from COVID. Are these the kind of figures that you are considering at the moment?
Again it’s hard to tell because of the way that the PROs collect their money, and ASCAP and BMI have different accounting methods in terms of from what quarter activity the distribution is from. And there’s not a ton of transparency in what the PROs report publicly. Obviously, we’re only looking at the BMI report now. ASCAP has a fiscal year that’s a calendar year and SESAC and GMR don’t publish any reports at all. So I think it’s a little bit dangerous to read too much into the BMI report because its accounting methods may be different from its competitors, which means the hit that BMI is experiencing may have a very different kind of life cycle than what an ASCAP may experience.
Where do you see growth areas for music publishing in the years to come?
I am actually optimistic about publishing. Obviously we are experiencing the recession from COVID, but overall I think the future is very bright for publishing and songwriting. In the mechanical space, I think we are going to see continued growth in subscription revenue, and it’s going to have a multiplier effect. Number one, you’re going to have more people buying subscriptions. Number two, the services are going to be paying higher rates thanks to the victory at our last CRB rate review, and we are optimistic that the next CRB review is also going to produce some increases.
“On the synchronization side, I think that we are going to see continued growth in social media applications.”
On the synchronization side, I think that we are going to see continued growth in social media applications. Take for example our landmark deal with TikTok. And then you’ve got a lot of other very large players like Triller, Twitch and Twitter that have massive amounts of music on them but are not yet paying properly. So I think that through a combination of licensing deals and enforcement actions, which means suing people that are stealing music, you’re going to see a big growth in that area. Those two things combined, I think, could lead to some good growth numbers once we get out of this recession period.
You mentioned the TikTok agreement, can you elaborate a little bit more?
Sure, it was two things. Number one, it was a settlement looking backwards and there was a very generous settlement pool that was offered to publishers for music that was not licensed. Then, it was also a looking forward two-year licensing deal. Which again had a generous compensation pool for publishers in exchange for a license going forward for that period. Once that is established, we expect it will be a continuing string as long as the company is in existence. So it was two parts, both of which had significant revenue pools for publishers.
Are you worried about the future of TikTok?
The TikTok situation is obviously caught up in what is going on in the United States. It’s a worldwide company. I think it’s going to have a future and we’ll have to wait and see what happens in the US. I think there are going to be a lot of competitors that attempt to compete in the same space and so, depending on what happens, that activity is going to be picked up by someone. Again, that means more uses of music which should lead to more revenue for songwriters.
You mentioned a few other names. Let’s start with Twitch. Can you confirm to Jeff Bezos that Twitch is not licensed?
[Laughter] Yes, I can confirm to him that Twitch is not properly licensed across all of its platforms and I can tell you that it is at the very top of our list that we are looking at in terms of how best to proceed with regards to its lack of licensing.
“I can confirm to him [Jeff Bezos] that Twitch is not properly licensed across all of its platforms and I can tell you that it is at the very top of our list.”
And what about Triller?
Triller is a competitor of TikTok that is mostly unlicensed and I think that, similar to TikTok, Triller is going to have to figure out a way to settle for the past and license for the future, otherwise we’re going to find ourselves in conflict.
Isn’t it interesting that 20 years after Napster, the music industry is still facing the same situation?
It is. It’s incredible that more tech companies haven’t learned the lesson that it’s easier to ask for permission than forgiveness.
Is it a problem of mindset or education, or is it simply that they don’t care?
It’s hard to say that there is one cause. I think there is an arrogance among some startup tech companies that somehow they first should prioritize making a business model work and then only later worry about securing the proper rights for music. You see it repeated again and again and again, and in every instance it would have been easier and cheaper to do it right from the beginning. It’s just perplexing why the lesson has not been learned by other technology companies… I guess I would chalk it up to arrogance more than ignorance because in some circumstances these companies will acquire some licenses, but then their behaviour goes well beyond the scope of where they’ve gotten permission. It’s inexplicable.
Another example where you had to intervene was with Peloton and eventually you prevailed. Can you give more details about that settlement?
Sure. Peloton is a great example of when a company decides to own the mistakes that it’s made and commit itself to being a good business partner. We were able to reach an agreement about how to address the past and with that we were very excited to then partner looking forward because the in-home fitness industry is an enormous source of potential new revenue, especially during COVID. While in public gyms you maybe are limited to just the public performance revenue, which is quite small, once you start producing programming that has music synchronized to it, there’s tremendous value for songwriters and publishers.
“The in-home fitness industry is an enormous source of potential new revenue, especially during COVID.”
We were very happy with Peloton’s decision to make things right and that’s why we were willing to give them that coveted slot at our annual meeting. I’m also a personal fan of the company. I own a bike and use it and I just thought it was a good message for other companies that have not done things properly that there is a way to make things right and there is a benefit to that. We wanted that message to get out.
Let’s talk about the CRB rate appeal from Spotify, Amazon, and a couple of other platforms, excluding Apple. The appeals courts seems to have gone against your wishes and sent everybody back to the CRB for more discussions. In your comments after the court decision you seemed optimistic. Do you still feel the same now?
I think a lot of people misunderstood what the appellate court did and jumped to conclusions about it. It gets very legal and very technical but at a high level, what the appellate court did was remand back to the CRB a couple of issues which the CRB is now going to have to address. It doesn’t mean that anything has been changed about the ultimate decision. What it means is that the CRB has to address the concerns that were raised by the appellate court on two particular issues. One of which is the second prong of the three prong test about what we call the uncapped TCC. Which means basically under the rate structure, the services owe the songwriters and publishers a greater of three different formulas. The second formula was looking at a percentage of what the digital services paid the record labels and was that percentage number bigger than the other two prongs of the test or not? The appellate court had an issue with how the CRB came to the uncapped part of that second prong, so that’s been sent back.
The second issue had to do with the definition of bundling, which is when you marry a music service with a non-music product, and how you charge for the music product. Again, it doesn’t mean that either of the decisions are going to go away. Ultimately, it means that the CRB has to do some work and address those concerns. The most important issue from the previous CRB decision was the 44% rate increase which was the first prong of the three part test and as long as that prong stays intact, these other issues will be much less important.
Again, we’re not going to know the final rate determination until we are through the remand process. What’s most frustrating about it is that we are sitting here almost three years through the five year period and we’re still arguing about what the rate should have been starting almost three years ago. The system is completely broken. The digital services have no shame in dragging this out, costing both sides money with legal fees and basically trying to squeeze every penny they can out of songwriters instead of accepting the court’s decisions and giving songwriters a pay increase for the first time in a couple of generations. The uncertainty of that is frustrating.
“The system is completely broken. The digital services have no shame in dragging this out, costing both sides money with legal fees and basically trying to squeeze every penny they can out of songwriters.”
So when is that determination going to be made?
There’s a rehearing petition deadline of September 21st, then the mandate from the decision takes effect on September 28th. And then the parties have to submit a remand plan to the CRB by October 12th. Then, there will probably be a briefing, there may be arguments, we don’t know when we will have a final decision. But it will obviously drag out through the end of this year and what’s really comical is that we start the next CRB process on January 5th of next year, so we will be still litigating the last CRB while we start the next.
No wonder that you say the system is broken.
Right. This is why songwriters and music publishers feel so strongly about getting selective withdrawals from ASCAP and BMI because the interactive streaming services are using both the mechanical and the performance rights of publishers. Right now, it’s a combination of a compulsory license for the mechanical and a consent decree compulsory license for the performance, which means there’s no free market element to the relationship at all. If publishers had the ability to withdraw their digital rights from ASCAP and BMI then Spotify and Amazon would have to negotiate with publishers in a free market for the performance rights that they need to operate their interactive streaming services. Which means that the impact of the mechanical compulsory process would become much less important and that these crazy litigations and court decisions and appeals would all become subsumed by the free market of performance rights. That’s why we’re fighting so hard to get that.
The irony is that you are sitting side by side with the Spotifys of this world in the MLC. There’s something that doesn’t seem consistent in their relationship with the songwriting and publishing community.
I think that it’s complicated, but I think it’s probably no different than when you have countries that have tensions or conflicts between them and yet there are other areas where there still is interaction between them. We may be in a cold war environment with China, but we still do some trade with them that benefits both countries. I think that the MLC is kind of like the trade in that analogy where we’re definitely in conflict with Spotify and Amazon. They have declared war on songwriters, but at the same time we made a deal to build this MLC with their money and we’ll be professional about it, while at the same time we will defend ourselves against their attacks over what they pay songwriters.
What’s your assessment about what’s been done so far with the MLC? Is it on track?
Yes, I think that Kris Ahrend and his team are doing a fantastic job under difficult circumstances to stay on schedule. I think that people will quickly forget the benefits that were achieved from the MMA, so it’s worth reminding them that this entire infrastructure is being built and funded 100% by the digital companies, which means that songwriters will no longer pay a commission for their mechanical distributions. It’s the first place in the world where a society will collect money and distribute a hundred cents on every dollar, and that the database that is being built will be public. It will be the first public transparent database in the world and in the history of music rights and, again, 100% of that cost being funded by the digital services. So this is all going on with their money and at the same time that we’re fighting over rates, but the MLC is doing a great job and it’s going to be ready to open on January 1st per the law’s mandate.
Do you understand why some people were skeptical when HFA was chosen as the lead vendor when it comes to data? [HFA used to be owned by the NMPA before it was sold to SESAC in 2015, and had been criticised for the quality of its database.]
Oh sure, I think that when the MLC made its decision over choosing a vendor, it was in a difficult position in that I don’t think anybody felt that anyone did a good job with matching. When you’re trying to build a new system to do a better job and you have to work with vendors, your choices are to work with vendors who have experience and know what they’re doing, or to work with a vendor who’s never done it before. I think the consensus was that while HFA is certainly not perfect, using HFA’s structure as a starting point was going to be better than trying to create a system from the ground up with nothing.
“I think the consensus was that while HFA is certainly not perfect, using HFA’s structure as a starting point was going to be better than trying to create a system from the ground up.”
What’s different about the MLC from what HFA or MRI or anyone else has done, is that the database that will be the authoritative roadmap of how to pay people is public. It’s transparent. Which means that if you’re a songwriter or music publisher, you can go and look at whether all of your copyrights are accurately entered into the public transparent database; and if they’re not you can fix it. Unlike the old model where private vendors kept their databases confidential and proprietary and tried to make money off owning them, the MLC’s database is not proprietary or confidential and it’s a single source for all streaming services.
So if you fix the data in the one central location, it will be right for all streaming services whereas in the past, Apple and Spotify used one vendor, Pandora and Amazon used a different vendor, Google used a different vendor – that was part of the problem. No one is claiming that HFA starts the process with a 100% accurate database because it clearly doesn’t. But when you are building a new database you have to start somewhere and I think the MLC correctly judged that the best starting place was working with HFA, which by the way was the vendor that was chosen by the two largest streaming services in the market – Apple and Spotify. That was a big factor in the decision I think.
What do you think are the most important challenges ahead for the MLC?
I think the most important challenges are being ready to issue licenses on time, and having a database process that is transparent and easy to use and that is accommodating to the different ways that publishers do business. They don’t all use the same software, they all have different processes and I think that’s going to be the biggest challenge right out of the box.
Another issue is the ASCAP and BMI consent decrees, which are currently being reviewed by the DoJ. Do you think things are going to change?
On the consent decrees, the Department of Justice held a virtual workshop a little over a month ago. We were very pleased that we got to fully participate and make our case for selective withdrawals, and now we’re just waiting for the DoJ to decide how it wants to proceed. I suspect that we’ll have a decision before re-election and we’re optimistic about what might change in the decrees to give more freedoms to songwriters and publishers.
I wanted to close with diversity. Your board is very male and very white, is there anything you can do to change that?
Well, I would dispute that that is even the case. The three largest music publishers in the world whose CEOs sit on my board are one black male and two females. Those three individuals control a majority of the publishing market. I would just say that we are doing a very good job with diversity and I’m proud that you now see so many minorities and females take leading roles in publishing companies.