Canadian Collectives Demand iTunes Tariff

[David Farber <dave () farber net>]

------ Forwarded Message
From: Michael Geist <mgeist () pobox com>
Date: Mon, 18 Apr 2005 06:47:26 -0400
To: <dave () farber net>
Subject: Canadian Collectives Demand iTunes Tariff

Dave,

Of possible interest to IP -- my regular Law Bytes column (posted below)
reports that SOCAN, a leading Canadian copyright collective, recently filed
an application 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 music download services and 15 percent for webcasters.
When combined with other tariff proposals, Canada's collectives are seeking
at least 40 percent of gross revenues 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 hear an appeal of last spring's decision that denied a request for
identifying information on 29 alleged file sharers due to insufficient
evidence, privacy concerns, 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 hurting 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 otherwise 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 industry'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 decision 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 Collective 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 collection 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 songs 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 activities 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 sites.  SOCAN had previously focused Tariff 22 on Internet service
providers.  That led to a lengthy legal battle that culminated last year
with the Supreme Court 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 astonishing 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 download 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 sites that feature content similar to conventional radio stations as
well as from established radio stations that webcast their signal.
Moreover, gaming sites that 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
Reproduction 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 remains possible that other groups, including collectives representing
music performers and producers, may come forward to demand their share of
compensation by further 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 fierce 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 each 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 established 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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