Canadian Collectives Demand iTunes Tariff

["Dave Farber" <dave () farber net>]

------- Original message -------
From: Michael Geist  <mgeist () pobox com>
Sent: 18/4/'05,  6:47

Dave,


Of possible interest to IP -- my regular Law Bytes column (posted below) reports that SOCAN, a leading Canadian 
copyright collective, recently filed an applicat
ion that targets all websites that communicate music to the public.  The tariff proposal calls for payment of an 
astonishing 25 percent of gross revenue for mus
ic download services and 15 percent for webcasters.  When combined with other tariff proposals, Canada's collectives 
are seeking at least 40 percent of gross re
venues from music download services, representing a far greater threat to the business model than peer-to-peer file 
sharing.


Freely available, hyperlinked version of the column at
http://www.michaelgeist.ca/resc/html_bkup/april182005.html
Toronto Star version at
<http://geistitunestariff.notlong.com>


MG


Michael Geist
April 18, 2005

THE REAL THREAT TO THE MUSIC DOWNLOAD MARKET

The Canadian Recording Industry Association's (CRIA) legal campaign against music file sharing heads back to court 
later this week.  A three judge panel will he
ar an appeal of last spring's decision that denied a request for identifying information on 29 alleged file sharers due 
to insufficient evidence, privacy concer
ns, and doubts about proof of infringement under Canadian copyright law.  CRIA is likely to use the hearing to again 
argue that peer-to-peer file sharing is hur
ting Canadian artists and the industry, which at long last is seeking to develop fee-based alternatives such as Apple 
iTunes, Napster, and Puretracks.

Despite all the rhetoric, there remains much doubt about whether peer-to-peer is really responsible for declining 
sales.  The industry's own numbers suggest oth
erwise since the popularity of DVDs, changes in the retail distribution of music, and reduced retail pricing on CDs 
have all played significant roles in the ind
ustry's self-proclaimed woes (which themselves are not so woeful with sales increasing by more than 10 percent in the 
six months following the federal court dec
ision last year).

Moreover, there is little doubt that Canadian artists' royalty losses have been offset by the private copying levy 
system.  The Canadian Private Copying Collect
ive has collected approximately $120 million over the past five years with much of that revenue earmarked for Canadian 
artists.

While CRIA has argued that the private copying levy was not intended to cover music downloading those claims ring 
hollow in light of recent statements and colle
ction practices.  Last month, the industry acknowledged to the U.S. Supreme Court that users have the right to copy 
their CDs in order to listen to the same son
gs on devices such as the Apple iPod.  Given that $30 million was collected from Canadians last year, it must surely 
have been paid for something other than act
ivities already permitted under the law.

In fact, the real threat to fee-based alternatives in Canada does not come from the peer-to-peer systems.  Rather, 
Canada's copyright collectives are poised to 
kill the nascent industry by demanding the creation of a new iTunes tariff that would require music download services 
to surrender at least 40 percent of their 
revenues to the collectives.

The Society of Music Composers, Authors, and Publishers (SOCAN) recently filed a revised Tariff 22 proposal that 
directly targets music download and streaming s
ites.  SOCAN had previously focused Tariff 22 on Internet service providers.  That led to a lengthy legal battle that 
culminated last year with the Supreme Cour
t of Canada's ruling that ISPs should be treated like common carriers who rarely face liability for the transmission of 
data on their networks.

In search of a new deep pocket, SOCAN has reformulated Tariff 22 by targeting websites that communicate music to the 
public.  The largest tariff - an astonishin
g 25 percent of gross revenue - is reserved for sites or services that permit users to select, listen to, or reproduce 
music for later listening (ie. music down
load services). By comparison, the top SOCAN tariff for commercial radio stations in Canada is currently 3.2 percent of 
gross revenue.

SOCAN's proposal does not stop with music download services. The new Tariff 22 also calls for a tariff of 15 percent of 
gross revenues from both audio webcast s
ites that feature content similar to conventional radio stations as well as from established radio stations that 
webcast their signal.  Moreover, gaming sites t
hat communicate musical works as part of their games face a potential tariff of ten percent of gross revenues.  In 
fact, to ensure that no one escapes Tariff 22
, SOCAN envisions a tariff of ten percent of gross revenues for all other sites that communicate music.

If this SOCAN proposal were not damaging enough, it does not stand alone.  SODRAC, a Quebec-based collective, has 
teamed up with the Canadian Musical Reproducti
on Rights Agency (CMRRA) to propose a pair of new tariffs to cover the reproduction rights associated with online 
music.  The SODRAC/CMRRA proposals demand the 
greater of either 15 percent of gross revenues or ten cents per permanent download.  Webcasters would also be hit with 
a minimum tariff of five percent of gross
 revenues.

Incredibly, the 40 percent of gross revenues envisioned by these tariffs may not cover all the rights associated with 
commercial music download services.  It re
mains possible that other groups, including collectives representing music performers and producers, may come forward 
to demand their share of compensation by f
urther cutting into online music services' revenues.

Although the tariff proposals are not final - the Copyright Board of Canada will set the ultimate tariff after 
conducting hearings that are certain to attract f
ierce opposition - the starting point for discussion is discouraging since this short-sighted cash grab fails to 
recognize that a smaller share of a larger pie 
may often be better than a large share of a small pie.

In the U.S., large collectives such as ASCAP and BMI have struck more reasonable deals for webcasting royalties.  BMI 
expects to collect US$400 in 2005 from eac
h local radio station that webcasts its signal, while ASCAP has built the webcasting right into its existing 
over-the-air royalty structure.

The Canadian Independent Record Production Association (CIRPA) has pegged the value of the Canadian market for music 
downloads at $100 million.  While the estab
lished players have negotiated agreements with the record labels, the future growth of the industry depends upon the 
development of an economically viable model
.  The true threat to that future does not come from peer-to-peer downloads that is already subject to compensation 
through the private copying levy but rather 
from collectives that seem determined to receive a very large share of a very tiny market.



-- **********************************************************************
Professor Michael A. Geist
Canada Research Chair in Internet and E-commerce Law
University of Ottawa Law School, Common Law Section
57 Louis Pasteur St., Ottawa, Ontario, K1N 6N5
Tel: 613-562-5800, x3319     Fax: 613-562-5124
mgeist () pobox com              http://www.michaelgeist.ca


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