New Streaming Mechancial Rates and Hypotheticals: Chris Castle at @thecacopyright

12 Sep

The following is from Chris’s presentation at the California Copyright Conference “Legal Eagles” Panel on 9/11/12 in Los Angeles.  Chris covered the new streaming mechanical rates that are expected to soon be in effect.  See complete proposed regulations in the Federal Register.

Service Type

Definitions

2012 Rate

Promotional Clips Increased from 30 to 90 seconds
PRO Payments Actual or estimated All rates include PRO payments
Total Content Cost Applicable   consideration means anything of value given for the identified   rights to undertake the licensed activity, including, without limitation,   ownership equity, monetary advances, barter or any other monetary and/or   nonmonetary consideration, whether such consideration is conveyed via a   single agreement, multiple agreements and/or agreements that do not   themselves authorize the licensed activity but nevertheless provide consideration   for the identified rights to undertake the licensed activity, and including   any such value given to an affiliate of a record company for such rights to   undertake the licensed activity.Greater   of formula:“the total amount expensed by the service provider   or any of its affiliates in accordance with GAAP for such rights for the   accounting period, whichamount   shall equal the  applicable consideration   for such rights at the time such applicable consideration is properly recognized as an expense under GAAP”
Proration Licensees paid their prorata share of greater of formula for activity   during the accounting period
Mixed Service Bundles (385.21) The combination of locker services, limited interactive   services, downloads and ring tones with other non-musical products such as a   mobile phone, a consumer-electronics device, or Internet access Greater of 11.35% of revenue or 21% of   total content cost
Music Bundles (385.21) A package of music products such as CDs, ring tones and   permanent digital downloads (20 or fewer dpds) Greater of 11.35% of revenue or 21% of   total content cost
Limited Offerings (non-interactive services) (385.21) Subscription-based and offer access to certain genres of   music or specialized playlists at reduced prices, including monthly playlists   of a limited set of recordings Greater of 10.5% of revenue or 21% of total   content cost or 18 cents per subscriber
Paid Locker Services (385.21) Subscription-based cloud music storage for streaming and   download, such as those offered by Apple, Amazon, Google Greater of 12% of revenue or 20.65% of   total content cost or 17 cents per subscriber
Purchased Content Locker Services (Free Lockers) (385.21) Free cloud storage for digital music previously bought by   the user as a permanent digital download, ringtone, or CD Greater of 12% of revenue or 22% of the   total content cost
Physical  Phonorecords (2009   rate unchanged in 2012) 17 USC 101 Larger   of 9.1 cents or 1.75 cents per minute of playing time or fraction thereof
Permanent Downloads(2009 rate unchanged in 2012) “Digital phonorecord   delivery” 17 USC 115(d)/385.2 Larger   of 9.1 cents or 1.75 cents per minute of playing time or fraction thereof
Limited Downloads(2009 rate unchanged in 2012) 37 CFR 385.11 10.5% of   revenue, less PRO payments (rate formulas at 37 C.F.R.§385.10 through §385.17)
Interactive Streaming(2009 rate unchanged in 2012) 37 CFR 385.11 10.5%   of revenue, less PRO payments (rate formulas at 37 C.F.R.§385.10 through   §385.17)
Ringtones (2009 rate unchanged in 2012) 24¢
Late Fees 1.5   percent per month, or the highest lawful rate, whichever is lower. See 37   C.F.R. § 385.4

This is Chris’s Total Content Cost hypotheticals:

385.11 Applicable consideration means anything of value given for the identified rights to undertake the licensed activity, including, without limitation, ownership equity, monetary advances, barter or any other monetary and/or nonmonetary consideration, whether such consideration is conveyed via a single agreement, multiple agreements and/or agreements that do not themselves authorize the licensed activity but nevertheless provide consideration for the identified rights to undertake the licensed activity, and including any such value given to an affiliate of a record company for such rights to undertake the licensed activity.

TCC is a percentage of “the total amount expensed by the service provider or any of its affiliates in accordance with GAAP for such rights for the accounting period, which amount shall equal the applicable consideration for such rights at the time such applicable consideration is properly recognized as an expense under GAAP.

Gratify, a digital retailer, wants to license the catalog of Galaxy Domination Music Group.  After some back and forth, Gratify and Galaxy reach this deal:

$2 million advance, 2% of Gratify’s common stock on an as if converted basis, and a 10% discount on royalties.

The shares are issued as private stock held by Galaxy, with a valuation set by Gratify’s board at 10 cents per share.

Question 1:  The company records the contract with Galaxy as the consideration for the shares.  Would the shares be recognized as an expense under GAAP?

Question 2:  The company records the future discount in the contract as consideration for the shares.  What would the amount of the discount be?  Would the shares be recognized as an expense under GAAP?

Things go well for Gratify and the company goes public and its underwriters price the stock at $20.

Question 1:  If Galaxy liquidates its entire position as a selling stockholder in the IPO, would the proceeds from the sale be recognized as an expense to Galaxy under GAAP?

Question 2: If Galaxy holds its position for several months and then liquidates its position through a sale of registered stock in the public market for a profit, would the proceeds from the sale be recognized as an expense to Galaxy under GAAP?  Is there a different answer if Galaxy sells its shares for less than $20?  Is there a different answer if Galaxy sells its shares for less than 10 cents (the issue price)?

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One Response to “New Streaming Mechancial Rates and Hypotheticals: Chris Castle at @thecacopyright”

  1. Chris Castle September 16, 2012 at 5:18 pm #

    Reblogged this on MUSIC • TECHNOLOGY • POLICY.

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