To stem future lawsuits over royalty rates relating to digital downloads, record labels, music publishers and digital music providers have reached a settlement for future mechanical royalty rates arising from digital music services.  The deal seeks to avoid  past battles waged over rates for music streaming services while introducing new ways for consumers to enjoy music, all while deterring online music piracy. The Copyright Royalty Board must reiew and approve these new  rates, which would be in effect  from 2013-2017.

The proposed settlement creates five new mechanical royalty rates for:

1) Digital locker services,  services and products such as iTunes and Amazon.com that allow users to store music and provide on-demand streaming. In this category, music publishers will get a mechanical rate of 12 percent of revenue or 20.65 percent of total content cost or 17 cents per subscriber, whichever is greater.  This rate will provide music publishers and artists with a lot of revenue based on the 17 cent per subscriber model.  Clearly, the music industry understands the expanding importance of paid cloud services.

2) Free cloud storage with a download purchase. Music publishers will get 12 percent of revenue or 22 percent of the total content cost, whichever is greater. On the free cloud service rate, music publishers will not get the option to collect based on subscribers  This is a victory for the cloud storage industry because the free services will always have a higher number of users than the paid services; this will allow for the free cloud services to stay in business.

3) Mobile cell phone service plans that include music services. Msic publishers will get 11.35 percent of revenue or 21 percent of total content cost, whichever is greater.  This new rate shows foresight of the parties to hammer out a deal covering a burgoening market segment.

4)  Limited interactive digital subscription services, such as Pandora in paid subscription,  that give users access to a limited amount of music based on a genre.  An example of this service is the paid subscription of Pandora. Music publishers will get 10.5 percent of revenue or 21 percent of total content cost or 18 cents per subscriber, whichever is greater. The music industry again appears to be pursuing aggresively a range of  businesses and their financial models, recognizing the likelihood that Pandora and its ilk will see increased revenue and prove successful.

5) Music bundles, which can include a CD album with a digital download. Music publishers will get 11.35 percent of revenue or 21 percent of total content cost. This rate also applies to bundling of digital downloads with other products.

The rate package has won praise from many in the music industry, including Cary Sherman, chairman of the Recording Industry Association of America. “This is a historic agreement,” Sherman said, “that reflects our mission to make it easier for digital music services to launch cutting-edge business models and streamline the licensing process.”  Sherman added “this is a major win for consumers, the music community, and entrepreneurs and investors in new music services.”

Lee Knife, executive director of the Digital Media Association, said  “music publishers and record companies alike are starting to see that the business of selling music is absolutely reliant on the online area.”

This accord could formalize what the public and markets had accepted and moved on from but that the music industry was slow to accept: digital and online services are the future of the music industry The new mechanical royalty rates for these new services will not only avert protracted litigation, it also will help foster new business models that could add sorely needed revenue streams. With sales of CDs declining while online piracy soars, on the incline, this could be a turning point for the business that bears careful watching.