Phonorecords V and the “39 Steps” Problem: Time for the CRB to Fix Streaming Mechanicals

Key Takeaways

• AI‑generated tracks lack copyright protection under current law
• Part 385 formula may dilute mechanical royalty pool with non‑copyrightable content
• CRB can clarify deductions apply only to protected musical works
• Abandoning “39 steps” could enable a flat, escalating penny‑rate system
• Misclassification risks leakage and increased administrative burden for services

Pulse Analysis

The streaming‑mechanical royalty framework, codified in Part 385 of the Copyright Act, has long relied on a multi‑step calculation known as the “39 steps.” Originating in the early 2000s to protect publishers from retroactive liabilities, the formula ties mechanical royalties to the total cost of content on a service. While it once balanced the interests of record labels and digital platforms, the model now operates on assumptions that no longer reflect today’s music creation landscape, especially as AI‑generated tracks flood streaming catalogs.

Generative AI introduces a category of audio that falls outside traditional copyright protection. Courts and the U.S. Copyright Office have signaled that works lacking meaningful human authorship are not eligible for statutory rights, meaning they should not be counted in the Section 115 royalty pool. Yet the current “39 steps” formula treats every streamed track as a protected musical work, allowing services to deduct performance payments that may not correspond to any enforceable right. This misalignment threatens to dilute the pool for genuine rightsholders and creates a loophole for revenue leakage, while also imposing costly micro‑level authorship analyses on streaming platforms.

Given these pressures, many industry observers advocate abandoning the legacy formula in favor of a flat, escalating penny‑rate system—similar to the rates applied to physical and download mechanical royalties. Such a model would simplify calculations, enhance transparency, and reduce the strategic leverage that oligopolistic services wield over royalty pricing. By issuing a clear classification rule that limits deductions to payments for protected works, the CRB can safeguard the royalty pool today while laying groundwork for a more modern, equitable framework. This decisive step would reaffirm the board’s role in aligning statutory mechanisms with evolving market realities.