What They'll Never Tell You About the Music Business

by Peter M Thall

  There are innumerable issues inspired by the fast-paced technological changes occurring in the digital world: 1s and 0s have never been so complicated. Here are a few of those that must be considered in attempting to wedge new ideas into traditional structures:

  • Are digital phonorecord deliveries (DPDs) to be treated the same as direct mail, with its attendant lower royalty rate? Are Internet transfers to be dealt with differently if they constitute digital downloads or simple Internet e-commerce sales via Amazon or www.​CDUniverse.​com? Is one in the nature of direct mail and the other not? Even if the prices are the same as retail prices in record stores, should there be an increase in the royalty rate since there is no packaging as such?

  • A digital download is different from a hard copy because transfer via the Internet does not involve the manufacturing and distribution process, as the sale of a hard copy does. Does a record company satisfy its release commitment obligation by offering DPDs?

  • Where royalties are reduced until such time as a change of policy occurs at the record label, is the royalty rate change to be retroactive? Is the new rate to apply to United States sales only or worldwide?

  • Are coupling restrictions a thing of the past? If iTunes offers three DPDs for the price of two, does this constitute coupling?

  • If two tracks of an artist’s album are offered via digital download, what happens to the A-side protection of the producer when the A track may well be coupled with a track that he or she has not produced? The record company that has promised the protection will not be able to control coupling.

  • Is every digital download a DPD?

  HOW THE INTERNET HAS PROVIDED CONTEXT FOR SONGWRITERS’ AND PUBLISHERS’ SEARCH FOR EQUITABLE TREATMENT

  David Israelite, the chairman of the National Music Publishers Association (NMPA), the songwriters’ and music publishers’ trade organization, has pointed out, in the clearest terms, those aspects of copyright law and how it is administered by the government, which place songwriters and publishers in a distinct disadvantage vis-à-vis record companies—their alleged partners in aggregating sound to be carried to the public. He points out two incredible facts: the first is that a 1909 law, passed during William Howard Taft’s presidency, continues to force onto songwriters and publishers a “statutory compulsory rate” that they have no choice but to accept. This is the mechanical rate that we have discussed many times earlier in this book. The rate was originally set at $0.02 for each recording of a song; it eventually (seven decades later) was raised to $0.0275 and ultimately to today’s level of $0.091. Recordings of songs in excess of five minutes command $0.0175 per minute or fraction thereof. But, given the value of the dollar in 1909, this increase has not kept up with inflation. Furthermore, and this is David’s principal point, songwriters and publishers have no opportunity to negotiate in a free market, as willing sellers, rates that willing buyers are able, and would be willing, to pay. The net effect is that record companies and download and streaming services are essentially subsidized by the songwriters/publishers.

  The second fact that David reminds us of is that the consent decrees that allow ASCAP and BMI to exist as monopolies (necessary monopolies, of course—what radio station wants to negotiate with a million song owners) were established during Franklin D. Roosevelt’s presidency. The US Justice Department constructed the situation whereby rates that ASCAP and BMI are allowed to charge those who perform music (principally analog radio stations) are not set in an open market, but by one of two federal judges (one for each PRO) who themselves have no required knowledge of music, the music industry, its past, or its future. The PROs are restrained from the ability to negotiate freely with users of their music. They feel that the process established to set the rates is artificial and arbitrary, yet they can do nothing about it.

  The result of these two vestigial means of controlling songwriters and publishers is the following:

  1. Outside of the United States and Canada, mechanical rights royalties are paid based on a percentage of the publisher price to dealers of sound recordings embodying the songs. In the United States (and Canada), mechanical rights royalties are force-fed to songwriters/publishers by the fixed statutory rate, the concept of which was established more than a hundred years ago. Thus, for a $0.99 download on iTunes, about $0.22 is retained by Apple. Of the $0.77 remaining, $0.091 is paid to the music publisher/songwriter. Of the $0.676 remaining, all of it goes to the record company to share with the recording artist and producer (on terms mostly favoring the record company). Thus, the music publisher and songwriter share $0.091. The record company and artist share $0.676. That is, 88% of the price of a download that is paid by iTunes after it takes its share, goes to the record company/artist…12% goes to the publisher/songwrwiter. That is, the record company/artist receives seven times what the publisher/songwriter receives.

  2. With respect to the performing rights organizations’ share of streaming revenues, the federal judges have determined that they are entitled to 1.85% of the streaming services’ revenue. The PROs feel that the rate is ridiculously low given what the record companies likely receive. No one knows for sure what the record companies receive because their deals with Spotify and other streaming services are secret—but we do know that (a) their share is dramatically higher than 1.85%, (b) the record companies receive millions of dollars in advances which they do not necessarily earn back and therefore can keep for themselves, (c) some record companies charge a management/administration fee over and above the rate which establishes their base share of revenues, and (d) some powerful music publishers have sought and received equity shares in the streaming services which they need not share with their artists.

  One further note about how the consent decrees hamstring the PROs: if a radio station or a streaming service wishes to use the millions of compositions controlled by the PROs, they do not have to obtain a license to do so; all they need to do is to request a license, reject the rate that is sought to be charged, and freely use the music for years while they fight the PROS on the amount of the cost; in essence, the publishers and songwriters are subsidizing the radio stations and digital service providers. And when all settles down, and a retroactive rate is established, even if the streaming services still exist or are still solvent, it is the publishers and songwriters who receive a miniscule percentage of what the licensees pay to the record companies due to other restrictive aspects of the consent decrees. A double whammy.

  In 2010 and 2011, the major music publishers sought to withdraw their digital rights from ASCAP and BMI so that they could license them directly. Soon, however, the PROs rate court judges blocked them from doing so, But in the interim, these companies they negotiated directly with the streaming services. What did they achieve in an open market? They obtained rates substantially higher than what the judges determined the PROs were entitled to charge for these rights. While they did not entirely close the gap between what the sound-recording owners were being paid, which was about eight times what the rate courts allowed ASCAP and BMI to charge, they improved the rate substantially. The free market was doing its thing, but both rate courts summarily denied the publishers the results of their negotiations by prohibiting them from withdrawing only their digital rights from the PROs. They said that once their long-term licenses issued via the PROs had expired, they were free to leave entirely. But that would have produced havoc among the hundreds of thousands of companies—radio, TV, live venues, etc.—that depend on licensing their music directly from the PROs. They would have had to negotiate separately with the music publishers, and the music publishers would have had to negotiate separately with the hundreds of thousands of users of their music. Furthermore, Pandora, the Internet radio station, which complained that it was being asked to pay a greater percentage of its revenues than terrestrial radio stations, purchased a small station in South Dakota, KXMZ, thereby justifying a lower terrestrial radio rate for its Internet radio station. David Israelite called out Pandora. “Make
no mistake,” he said, “Pandora has now proven that it is the enemy of creative people everywhere.” The company has since agreed to not take advantage of the loophole it had qualified for, and in fact voluntarily doubled its rates payable to publishers. A start!

  It is also worth noting that the one place where neither the government imposed a mechanical statutory rate nor the federal courts interceded to block the PROs to negotiate a free-market rate, the ratio between record companies’ share of licensing revenue and publishing companies’ share of licensing revenue was 1 to 1. That is, in the area of synchronization licensing, it has become customary, in the marketplace, that the licensee—the user of a sound recording and the musical composition embodied in it—splits the synchronization fee equally betrween the sound recording owner and the music publisher.

  The NMPA and other entities are diligently seeking to protect the rights of songwriters and publishers from being marginalized financially by laws established between eighty and more than one hundred years ago. The Justice Department has announced that it is examining the rules that govern the performing rights organizations with a view toward relaxing some of the restrictions that have caused their members/affiliates to object at being treated so differently from record companies and their artists for reasons solely due to the fact that one set of rights owners are hamstrung by ancient laws and the other set is not subject to anything close to such regulations. Susan Butler, the publisher of Music Confidential, notes that the music business is one of the most regulated industries in the country; in my opinion, there is no class of people for whom the regulations are designed to protect—given that one wonders if the industry and its consumers cannot fare perfectly well without them.

  THE INTERNET IS GLOBAL: SO WHAT? I’LL TELL YOU WHAT

  One of the problems in clearing music rights, of course, is that the Internet is global, and it is very difficult to effectively limit the exploitation of music to individual territories. For example, ASCAP’s rate structure, while one that does not require time-consuming negotiations, is limited to the territory of the United States. So anyone who wants to webcast or use a song as part of a conventional website beyond US borders is going to be back into the negotiation mode, like it or not.

  The music publishing and record industries have always been designed along territorial constructs. Rights licensing has necessarily found its solutions in territorial determination. Subpublishers and record company affiliates are institutionalized throughout the world, and the processes of international licensing have, traditionally, followed a certain model, a model that is not global.

  The Internet Right Model

  In view of the difficulties being experienced by companies that wish to clear music rights for their websites and for other exploitations, and that are at the same time expected to comply with a myriad of laws, several concerned industry lawyers and executives have recommended that there be established an Internet right—essentially combining (or neutralizing) the various rights that are being exercised when a piece of music is dancing around in cyberspace.

  This right would combine the transmission, distribution, and performance rights; it would supersede the synchronization right, the mechanical reproduction right, and the performance right solely for Internet use. There is naturally a lot of resistance to this idea because, among other things, the various entities that might own the separate rights would have to determine who owns, controls, and administers the combined right. In addition, the wording of the original rights grants by the writers to the publishers is not likely to have addressed the issue of the Internet right. There are two possibilities with regard to an Internet right. One is that courts would have to “discover” it among the “bundle” of rights within copyright. If such a new right were “discovered,” publishers and record companies would require new assignments from writers, artists, or their heirs—a virtual nightmare. The other is that the Internet right would have to be established solely by legislative means; that is, it would be a statutory right. This most likely would take the form of a compulsory license—something that is disliked intensely by virtually all copyright owners, who feel they are in a better position to put a value on a specific use and charge appropriately for it in each specific circumstance, rather than be told that all uses and all content are essentially equal and should either be licensed for the same fee or licensed according to a limited selection of predetermined fees.

  Currently, ease of distribution and access to music via the Internet are virtually impossible to achieve. For example, let us say you want to webcast a live event and to preserve the event for other forms of exploitation in the future. At a minimum, you will have to clear the following ten rights (for each song and for each master—that’s already twenty, and it’s just a beginning) before the webcast takes place:

  • webcast itself—both performance and mechanical rights

  • pay per view simultaneous with the webcast

  • pay per view after the webcast

  • television special derived from the webcast

  • edited television specials of indeterminate number for different countries (for example, Europe, North America, Asia, South America)

  • CD release of the soundtrack of the webcast

  • videocassette/videodisc/DVD of the webcast

  • videocassette/videodisc/DVD of the various television specials

  • in-store displays via looped minutes of the webcast—worldwide

  • actual television commercials using footage from the webcast

  The above list is not comprehensive, but includes the most important uses. Did I forget to repeat that most songs today are written by more than one person and that each person has his or her own publishing company? And that each of these publishing companies commonly shares responsibilities and income with another? And that even the master rights are often controlled by more than one party? So, the twenty clearances—ten per song, ten per master—can easily multiply to forty or more transactions per song. Ten songs? Four hundred transactions!

  WHAT IS TO BE DONE?

  The performing and mechanical rights societies of the world met in November 2000 in Santiago, Chile, under the auspices of the Confédération Internationale des Sociétés d’Auteurs et Compositeurs (CISAC), determined to find a partial solution to the music performance portion of the problem—to figure out how to offer world licenses via reciprocal agreements among themselves. While the temporary solution they agreed upon would still require users to enter into licenses for their territory, multiple negotiated licenses would have seen their last light, at least in the non–sound recording arena. Of course, many, if not most, eventual users wish to use the songs with the masters. Nevertheless, some progress toward establishing a global licensing structure had been made. This is how it was supposed to work.

  • The prospective licensee contacts the content provider (usually that is the music publisher).

  • The content provider is represented by a society in the country in which the content provider is located.

  • The society licenses the rights worldwide, but on a nonexclusive basis only and on a nondiscriminatory basis as well (to avoid territory shopping).

  • Prompt distribution of the license fee is arranged.

  • Any taxes that are payable are charged in the country of use (that is, the download), if that country in fact taxes the transaction.

  This procedure produces not only ease of licensing and a sort of one-stop buying, it also provides legal certainty for the licensee. That appeals not only to the licensee, but to the licensee’s attorneys as well, who are being asked, if only by implication, to “certify” that the licensee won’t be sued for copyright infringement.

  Following the CISAC World Congress in Santiago, a number of the world’s most important societies—including Broadcast Music, Inc. (BMI); Vereniging Het Bureau voor Muziek-Auteursrecht (BUMA, the Netherlands); Performing Rights Society (PRS, United Kingdom); Sociedad Général de Autores y Editores
(SGAE, Spain); Società Italiana degli Autori ed Editori (SIAE, Italy); and Gesellschaft für musikalische Aufführungs- und mechanische Vervielfältigungsrechte (GEMA, Germany)—established a “fast track” licensing procedure designed to optimize business cooperation and ease of licensing. At this conference, a majority of the world’s active international repertoire representatives entered into agreements that authorize each other to grant licenses for online music use on a worldwide basis. This was a remarkable achievement, although long overdue.

  The official statement issued by the parties signing these bilateral internet licensing agreements states:

  The parties recognise that one transmission of music over the Internet may result in performances in multiple countries. It is clear that online music users do not want to enter into license agreements with each performing right organisation in the various countries where their musical works may be performed online. We realise that the extensive use of copyrighted music is not limited to territorial boundaries in the online world. We hope that others will agree that this is a necessary step to assure the legal performance of music online, and that many other societies will enter into such agreements.

  The agreements cover webcasting, streaming, and online music on demand, as well as music included in video (TV, motion pictures, etc.) transmitted online. They provide for a mechanism to assure proper distribution of license fees to authors, composers, and music publishers on a worldwide basis. The agreements were effective as of the issuance of the document, but as you will see, they met an unfortunate, and early, demise.

  A year after the Santiago Agreement, this time in Barcelona, the principal mechanical rights society members of BIEM (Bureau International des Sociétés Gérant les Droits d’Enregistrement et de Reproduction Mécanique, a group of forty-five mechanical rights collection societies from forty-three countries, and CISAC’s sister organization, picked up the ball passed to them by the performing rights group CISAC. They, too, agreed to a mechanism by which their member societies would offer a license for multiple countries, and to deal internally with the matter of identifying where exactly the mechanical reproductions took place.