September 27, 2008 – If you like complicated puzzles, then the online music royalty situation is right up your alley. A major royalty deal for streaming and limited downloads of music was announced this past week. Online music services, music publishers, and the recording industry all took part to come up with this deal.

The deal concluded with the agreement for a mechanical royalty rate of 10.5% of revenue for online digital music providers that offer interactive streaming music.

That’s nice. What does it mean?
Well, streaming sites are basically broken down into two types of streams:
1. Interactive Streams
2. Non-Interactive Streams

The difference between these two is as follows. Interactive streams, as the name suggests, are streams that are on demand. The user picks a song that they want to hear. the corresponding royalty rate is what was agreed upon for this deal, which will be 10.5% of revenue. This is in sharp contrast to a per-stream rate. Examples are iMeem and Rhapsody.
Non-interactive streams are those where the user does not have total control over what is played. An example of a non-interactive streaming site is Pandora, which generates playlists based upon a users musical preferences. But the user can not choose the specific song.

Another side of this whole story is that the interactive streams are just one part of the royalty cocktail. Ben Cockerham, Chief Operating Officer of licensing firm RightsFlow, breaks down the 4 types of royalties as follows:
1. performance of the sound recording
2. reproduction and distribution of the sound recording
3. performance of underlying musical composition
4. reproduction & distribution of the underlying musical composition

The only type affected by this most recent ruling is #4, the reproduction & distribution of underlying musical composition. Therefore, streaming site owners must also negotiate rates for the other three.

As decisions are made in this arena, I will continue to keep an eye on these rates.

Stay tuned, Erik