The billion dollar ringtones war
By Steve Gordon
This may increase the variety of
songs used as ringtones because publishers who previously denied permission,
including songs by the Beatles, Hendrix and Aerosmith, can no longer withhold
consent. However, Peters' Opinion left the answer to a very important question
unresolved - the royalty split.
Peters concluded her opinion by writing: "[I]t is appropriate for the Copyright
Royalty Judges to determine royalties to be payable for the making and
distribution of ringtones under the compulsory license." Does this mean that the
current statutory rate of 9.1¢ applies, or not?
According to Steve Masur, a copyright lawyer with a significant ringtone
practice, the ringtone companies have a choice.
They can continue under their current contracts; or they can perhaps terminate
or repudiate these and seek to enforce the compulsory rate; or they can
negotiate a new rate, taking into account the ruling; or they can follow the
statute for a 115 license and pay the 9.1 cent rate until it changes.
"Our reading of the decision is that the current compulsory rate (9.1¢) is the
rate for ringtones until the tribunal creates a new one," says Masur.
However, a lawyer at the Copyright Office said that it is not exactly clear
whether the 9.1 cent rate applies to ringtones, but since the Opinion would not
supersede contracts currently in effect, and since the Copyright Royalty Board
is currently holding proceeding on the new compulsory rate, the issue could be
However, the CRB may not make a determination for more than a year so the
question is important - a lot of money can change hands in that period, as we've
Currently, master ringtones alone sell more than 6.5m downloads per week on
average in the United States, according to Nielsen Mobile. And publishers often
negotiated a rate of 10 per cent of retail or more. Since most ringtones exceed
$2 retail price, the publishers usually receive twice the statutory rate.
Switching from market rate to statutory rate of 9.1¢ could represent a drop of
more than $700,000 per week or approximately $3m in publishing revenue.
Marybeth Peters' intent seems to have been to leave the appropriate rate to be
determined by the CRB. One month after her Opinion, the trade groups for both
the record companies and the music publishers both submitted written arguments
to the CRB for what the compulsory license rates for ringtones should be. During
the year to come, executives from some of the most powerful companies from the
labels publishers and ringtone providers will testify at the proceeding. All of
them are sure to argue that it's imperative that the CRB accept the rates that
The publishers are proposing the following terms: a rate equal to the greatest
of (i) 15 per cent of revenue; (ii) one-third of the total content costs paid
for mechanical rights to music compositions and right to sound recordings; or
(iii) 15¢ per ringtone subject to periodic adjustments for inflation. This would
mean that for a ringtone retailing at $2.99 with the record company's share at
40 per cent inclusive of the song, the payment to the publisher would be the
greatest of (i) 15 per cent of $2.99, or 44.85¢; (ii) one third of 40 per cent
of $2.99, or 39.86¢; or (iii) 15¢. Therefore the payment would be 44.85¢. The
current standard price is 10 per cent of retail or approximately 30¢. Thus, the
publishers are saying, first of all, we don’t think the compulsory license
applies, but in case it does, we want even more than we are getting under freely
The RIAA, on the other hand, is asking that the rate be 7.8 per cent of
wholesale. Assuming the wholesale rate for a $2.99 ringtone is approximately
$1.25, the publisher would only get 9.75¢, which is only a slight increase over
the current rate of 9.1¢.