The music industry's transition to digital continues to be robust. In 2011, digital sales grew to more than 50% of the US music market by value, and for the first time over 100 million digital albums were sold in a year.
But we've all read about how licensing requirements can provide challenges both to established companies and start-ups desiring to offer consumers new music models. Labels and music publishers recognized this challenge early on and have been working to simplify the process. Back in 2001, when new on-demand subscription services like Rhapsody wanted to launch, labels and publishers reached an agreement that navigated thorny legal issues and allowed these services to obtain licenses for the reproduction of musical works (that is, the composition found in a recording). In industry parlance, these are called "mechanical" licenses, a moniker from the days of player pianos. (That tells you something about how little had changed between 1909 and 2001.) But our 2001 agreement helped to launch on-demand streaming subscription services, a business model that now boasts almost two million paying subscribers.
We built on that agreement in 2008 by reaching a settlement on rates for those services as well. That agreement created a percentage rate for a mechanical license for the first time ever in the United States. It also provided unprecedented certainty for these services because the rate netted out performance royalties paid to performing rights societies. This might sound like a no-brainer, but it was a big deal just a few years ago. That's because in the past services either needed a performance license or a reproduction license, and so they went for one or the other. On-demand streaming services needed both (I won't bore you with those legal details), and this agreement provided a way for those services to know the total amount owed. We presented this 2008 agreement to the Copyright Royalty Board (CRB), which oversees rates for mechanical licenses.
We get a chance to revisit and create industry-wide mechanical rates for new business models once every five years. This year, 2012, is that magic fifth year. We all know how much can change online or with habits for consuming music in five years. So when negotiations began last year, record labels' top priority was to set rates for as many new models as possible.
Today, after fifteen months of discussions with music publishers and digital music services, we submitted a new agreement to the CRB proposing rates for five new business models. The models include some you've heard of and some that may not be familiar. For example, one category is for paid locker services, subscription-based lockers like iTunes Match. Another category allows locker functionality without a subscription for music that is purchased.
We also created categories so that digital music services can offer music bundled together with other music or products in response to consumer demand. Want a service that bundles music with your broadband? How about bundling music with a device like a mobile phone? How do you feel about a download bundled with a pack of chewing gum? A music download bundled with a CD? Industry-wide mechanical rates for all these are now a reality.
Finally, there is a new category for subscription streaming services that offer more than radio but less than full catalog, on-demand. We agreed that many people may want a bite or two, but not the full meal. For example, on-demand streaming for certain genres or playlists. The new rate agreement permits these more limited offerings at lower price points.
We realize we can't predict every new idea for using music in the next five years (nor would the owners of the rights want to guess about things completely untested in the market), but we think we've covered a lot of ground. We are proud to have worked with our partners to reach this agreement, and hope that it paves the way forward for many great new and existing companies to offer music to consumers.
Steven M. Marks, Executive Vice President and General Counsel, RIAA