IP: Comments on the state of copyright and music licensing

[Dave Farber <dave () farber net>]

------ Forwarded Message
From: david.pakman () bmgdirect com
Date: Mon, 18 Mar 2002 10:38:29 -0500
To: farber () cis upenn edu
Subject: Comments on the state of copyright and music licensing

Dave,

Here is an article I authored for the October 2001 issue of "Copyright
World" magazine. These issues are hot, especially with the DoJ investigation
of the record labels and the House Judiciary Committee's request for
comments regarding online music licensing.

Please note that these comments are my own, and may or may not be reflective
of the position of my current employer.

Regards,

David

..................................................
David Pakman
SVP Corporate Development & Public Policy
Bertelsmann BeMusic
david.pakman () bmgdirect com <mailto:david.pakman () bmgdirect com>

----------------------------------------------------
Copyright and the Consumer:
How to Balance Protection for the Creator and Fair Use for the Consumer
By David Pakman 

Well before the advent of Napster, consumers showed a strong interest in
obtaining music through the internet. Early online music pioneers such as
N2K and Launch delivered compelling online music experiences as early as
1996, including CD retailing, genre-based music communities, and even
protected digital downloads for sale.  In 1996, you could visit a Miles
Davis or Rolling Stones website and follow a link to an online music store
to buy their CDs. You could even buy a digital download of an emerging
artist from small independent record labels.  But if you were looking for
the same music you heard on the radio or the classic artists from your
college days, there were no downloads available.

The main ingredient missing for greater success was not innovative ideas: it
was the commercial availability of lots of music over these services. With
Napster, consumers got a taste of the widespread availability of deep access
to the catalog of popular (and unpopular) music. They appeared in droves.
Was it because the music was free? Not entirely. It was because the music
was finally available, albeit, not legally.

Given the overwhelmingly strong demand from more than 50 million consumers
for access to music online, why haven't enterprising companies (both small
and large) been able to satisfy this consumer appetite and build successful
businesses, compensating copyright holders? In an era where commercial
recording artists and songwriters are seeking new exposure for their work
(and hence new revenue streams) and are laboring to become less dependent on
their record labels and publishers for their livelihood, why aren't their
catalogs licensed to hundreds (or even more than 2) outlets online? The
answer lies in copyright law and its government-granted right of exclusive
control.

While owners of copyright, under law, have been granted a limited monopoly
to control distribution and reproduction of the works they own, this limited
monopoly was in fact granted in the Constitution and later by Congress with
the intention of furthering the availability of creative works for the
public good. James Madison in the Federalist Papers helps us understand the
motivation for this: "The utility of this power will scarcely be questioned.
The copyright of authors has been solemnly adjudged, in Great Britain, to be
a right of common law. The right to useful inventions seems with equal
reason to belong to the inventors. The public good fully coincides in both
cases with the claims of individuals."

Furthermore, in landmark Supreme Court decisions, the High Court reminds us
that copyright is a balance between the limited rights granted the author
and the freedoms of the consumer: "We have often recognized the monopoly
privileges that Congress has authorized, while 'intended to motivate the
creative activity of authors and inventors by the provision of a special
reward,' are limited in nature and must ultimately serve the public good."
At this particular time, this limited monopoly granted by the People of the
United States, is not working to serve the People. This monopoly has allowed
the creation of a roadblock in the march to provide consumers with
widespread access to music online.


In the past 5 years, literally hundreds of companies have attempted to build
successful businesses in the name of providing consumers with online access
to music or music-related features.  Some of these companies even went
public in the heyday of the IPO market and enjoyed brief high valuations.
Yet, arguably, there have been no commercial successes. The fate of the
marquee names of Napster and MP3.com are well-known, and the lesser-known
companies have either closed-up shop, been acquired for less than their
former worth, or are hanging on, trying to eek out a win. Are these failures
the results of bad business plans or poor execution? In almost all cases,
these companies had been attempting to license portions or entire catalogs
of sound recordings and compositions from their owners, without success.
Let's examine why.

There are 5 major record distribution companies worldwide. These 5 majors
control scores of affiliated record companies which own or are the exclusive
licensor of more than 80% of the market share of sound recordings
commercially available. As the owners of copyright in their sound
recordings, they enjoy a monopoly on the reproduction, duplication, and
transmission (among other rights) of the works. The recording artists and
composers who license or sell their works to the labels depend on both the
success of the number of units sold as well as the widespread licensed
performance (among other uses) of their works to generate payment back to
the creator.

There are more than 26,000 music publishers in the United States. These
publishers either own or exclusively administer the compositions in their
repertoire.  They are in the business of maximizing the returns from
exploitation of musical compositions, and share the proceeds with the
songwriters who give them their rights.  Publishers too enjoy a
government-granted monopoly on the reproduction, duplication, and
transmission (among other rights) of compositions.

In order to create an on-demand interactive music subscription service, like
Napster or the proverbial "jukebox in the sky," a business must obtain
several rights from the owners of the sound recording and the composition:

(1)    To stream a work from this "jukebox", an initial server copy must be
made. This implicates the reproduction right of the label (sound recording).
No statutory compulsory rate or license exists for this right; it must be
negotiated through voluntary agreements with the 5 major labels and hundreds
of independent labels. Before granting the right to duplicate the sound
recording this one time, the labels require a deep understanding of the
scope of the service before deciding if they will a)license the business and
if so, b)at what rate.
(2)    To perform the work publicly (streaming) in an interactive service,
a voluntary license must also be negotiated with the owner of the sound
recording. This goes hand in hand with the rights sought in number (1)
above.
(3)    The reproduction right of the publisher (composition) is also
implicated by the initial copy. No statutory rate or license exists. A
voluntary license must be negotiated either with all 26,000 publishers or
through The Harry Fox Agency, which acts as a go-between for a portion of
these publishers whom they represent.
(4)    When the stream is made, a performance right is implicated, for
which the publisher must be paid. Blanket deals can be negotiated with
ASCAP, BMI, and SESAC which in turn pay the publishers and composers.
(5)    Publishers and labels also claim that streaming implicates the
reproduction right, and therefore requires a reproduction license.
(6)    To add downloading to the service, additional rights are implicated.
Every time a download occurs, both the distribution right and reproduction
right are exercised. For that, permission first must be obtained from the
label (sound recording). This, again, is only provided under a voluntary
license, and...
(7)    The publisher must be paid a statutory "mechanical" royalty for
every download. No voluntary license is required here unless a reduced rate
is sought. In addition, the publishers are insisting that a download also
implicates a performance, however controversial or illogical that position
may sound. (In fact, the Copyright Office just disagreed with this position
in its latest "104 Study" and recommended that Congress amend Copyright Law
to clarify.)

Every time the word "voluntary" appears above, a license is only granted if
the controlling entity decides to enter into a license. Additionally, the
rate for such interactive licenses is arbitrary.

The U.S. Supreme Court has repeatedly held that the immediate effect of
Copyright Law may be to secure a fair return for an author's creative labor,
but the ultimate aim is to use this incentive to stimulate artistic
creativity for the general public good.  The Court has further held that the
Copyright Act must always be construed in light of this basic purpose.  At
this time, under the circumstances as described above, this limited monopoly
is not working for the general public good when it comes to music and the
internet.  This monopoly has been used to block consumers widespread access
to music on-line.  Congress has faced this situation before and has found
solutions.  

When certain owners of copyright, in the past, used their monopoly rights to
afford companies they owned preferential, exclusive, or otherwise advantaged
access to the works at the expense of competitors, Congress responded. In
the cable TV industry, Congress provided a "most-favored nations" provision
such that when works are licensed to affiliates owned or controlled by the
copyright owners themselves, the same rights and rates must be made
available to competitors of that affiliate. The same solution could be used
to provide access to musical works to many, if and when a label licenses it
the first time. In fact, Congress has already included this change in
section 114(h) of the Copyright Act, but it has a few exceptions: notably,
interactive services, like Napster, are excluded from this provision.

However, even if this sort of "most-favored nations" protection were
extended to cover interactive services, this solution would not provide
enough remedy to the existing road blocks.  Congress has also faced this
situation before. Congress must modify current copyright law to stipulate a
compulsory license for both the Sound Recording and Composition when used in
an interactive service. This would allow a rate court to determine a fair
market rate, would insure that all owners of copyright are compensated if
and when their music is used in an online service, and would allow hundreds
of new services to launch, providing consumers widespread access to music
online.  Consumers would be able to choose from music made by artists they
care about and the creators would be compensated. It would readjust the
balance between the ownership rights of the creator and the value our
democracy places on the dissemination of art.

The creators in our society must be fairly and justly compensated for their
work. Copyright was created to insure this motivation to create exists.
Copyright is not a monopoly meant to deprive consumers access to art and in
turn provide an unbalanced competitive advantage to the companies that
control these rights. It is time a new balance is achieved.


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