Monday, May 5, 2008

Composition Complications

One of the central themes of my research (and this weblog) is the need to find the balance between creating incentives which attract and reward creators of the highest quality, and providing reasonable access to works for the public, in order to achieve the optimum level of social and political participation. A recent court ruling with respect to music streamed over the internet and a pending determination by the Copyright Royalty Board regarding mechanical royalties for recordings, are important contemporary issues which will influence the quality of music into the future.

Professor Terry (William) Fisher, developed an excellent diagram illustrating the revenue stream in the music industry in 2004 -see: Promises To Keep (2004) <> at 5 May 2008, Chapter 6 page 10. The transition of the licensing and royalty system to the digital environment has not been easy. When record companies license digital media stores to sell downloads they negotiate a whole sale rate and pass on mechanical royalties through the Harry Fox agency to music publishers. Litigation last year clarified that permanent downloads do not attract a performance royalty. A webcaster on the other hand must pay a blanket license to ASCAP/BMI/SESAC as well as a performance license to the record company via SoundExchange. At present streaming music services are required to pay a blanket license but industry wide negotiations for the mechanical rate have not yet been conducted.

While the need for streaming music services to pay a blanket license has not been in question, in some instances there have been difficulties in negotiating and determining the rate at which this is to be paid. Last week the U.S. District Court for the Southern District of New York ruled that Yahoo!, AOL and Real Networks were required to pay a blanket license to ASCAP. The rate set by the court was 2.5% of advertising revenue after costs backdated to 2002 and payable until 2009. ASCAP represents 320,000 members who stand to gain in the vicinity of $100 million from this decision. Interestingly, the rate set by the court is higher than that for terrestrial radio stations who, with more advertisements and non music content, are only required to pay 2% of advertising revenue. In addition to holding that online services stream more songs in an hour than traditional forms of radio, the court also noted tactics used by these services to reduce the amount of money payable to songwriters, including the strategic placement of ads on separate pages from the streaming software. This decision may be appealed in the coming months.

Earlier this year hearings began before the Copyright Royalty Board regarding the royalty liability for streaming music services. As explained in the introductory statements presented to the Copyright Royalty Board by the National Music Publishers’ Association (NMPA), the existing industry wide agreement for mechanical royalties which is currently open to negotiation, only extends to per track sales of digital music:

As part of the 1997 Agreement, the parties agreed, on a non-precedential basis, to propose rates for so called permanent downloads but did not address the rates for other digital uses, such as “limited downloads” and “interactive streams”. At the time, the market for the digital distribution of music was in its infancy and the Copyright Owners had no empirical or economic evidence that would have enabled them to value accurately the future of digital distribution of music.

The National Music Publishers’ Association has presented its case for the greater of: 12.5% of total revenue from streaming services or 27½% of the total content costs for compositions and musical recordings or a formula based on a rate per use or per minute of playing time.

The hearings before the Copyright Royalty Board also address the present mechanical royalty rate for sound recordings sold as permanent and limited downloads by digital media stores, in physical form and ringtones. The National Music Publishers’ Association has argued that the rate of 9 cents per track (13% of the wholesale price) from the sale of permanent downloads and physical formats is insufficient given the reduction in income to composers with the decline in CD sales, suggesting that 12.5 cents per digital track or a formula based on per minute of playing time, would better reflect the contribution made by songwriters and create the incentives needed to attract quality composers. Both the Recording Industry Association of America and the Digital Music Association, in contrast, are expected to suggest that this rate is too high with RIAA arguing that 5 to 6 cents per track (8% of the wholesale price) would provide sufficient income to composers, and DiMA suggesting the rate should be lower again.

The rebuttal phase of the trial is due to start tomorrow with a final determination from the Copyright Royalty Board regarding both of these issues due in early October 2008.

It is important to distinguish the nature and role of songwriters and publishers from recording artists and record labels. While many recording artists may also be songwriters this is not always the case - over a period of time the association has become more nebulous and some would suggest that the increased ability to select recording artists based on marketability rather than skill has been a significant factor in the deterioration of the content of mainstream music. Publishers, whilst agents for composers as record labels are for recordings artists, more generally provide a greater share of royalties to the creator and do not have the same degree of influence over the content of creations. Unlike record labels, publishers also have a lot to gain from a transition to a collective licensing model for file sharing. To date publishers have taken a less active role in litigating against file sharing operators and users, however for now they continue to lobby for stronger copyright laws and greater resources for enforcement.

In a paper titled The Engine of Free Expression: Copyright on the Internet the NMPA make valid arguments regarding the need to ensure that a professional sector of creators can support themselves from their art and the importance of effective licensing schemes. However, they also argue that licenses for recorded music should be optional and that where a license is refused by a record label works should not be used. This is a self defeating and unrealistic approach in the digital age. The NMPA would serve the interests of its members more effectively by acknowledging the impossibility of creating conditions of artificial scarcity and endorsing an approach that seeks to maximise the opportunities for licensing.

In questioning why it is that such an organisation would adopt this approach there are a number of influential factors to consider. The need to maintain an affiliation with the recording industry is one such factor with many of the members of the NMPA also being recording artists or dependent on recording artists to create revenue. The recording industry also have a much greater concentration of funds with which to lobby for laws which may not be achievable if songwriters and publishers were left to lobby on their own. This counterproductive approach is therefore more likely to be brought about by a desire to maintain powerful allies than the need to prevent the development of new technologies, particularly distribution networks, which if done pragmatically would allow for far greater diversity, quality and consumption of compositions and the continued remuneration of songwriters.

It will be interesting to follow the Copyright Royalty Boards hearings throughout the year and to reflect on the potential impact of the determination on the quality of composers and works produced into the future. At some stage one may also hope that organisations representing songwriters can acknowledge the need to adopt strategies more conducive to the digital environment.

Further Reading
The Register, Songwriters score victory over AOL, Yahoo! and Real Pay up (1 May 2008)<> at 2 May 2008

TechDirt, District Court Tells Yahoo, AOL To Pay Millions To Songwriters (1 May 2008) <> at 2 May 2008

CNet News, Court: Online services must pay up for song use (1 May 2008) <> at 2 May 2008

Digital Music News, Court Determines ASCAP Rates for Yahoo, AOL, RealNetworks (30 April 2008) <> at 2 May 2008

The Wall Street Journal, Court Sets Royalty Fees To Be Paid to ASCAP (30 April 2008) <> at 2 May 2008

Digital Music News, Harry Fox Still Writing Good Checks; $394 Million In '08 (18 March 2008) <> at 23 March 2008

Digital Music News, Mechanical Licensing Battle Royale Gets Started (6 February 2008) <> at 19 February 2008

ZeroPaid, RIAA Wants Songwriter Royalties Cut by 39% (6 February 2008) <> at 7 February 2008

TechDirt, Royalty Agreements Holding Up Necessary Change In The Music Industry (5 February 2008) <> at 7 February 2008

ArsTechnica, Artists' best interests? RIAA presses for lower royalties (5 February 2008) <> at 7 February 2008

Digital Music News, Latest Standoff Pits Publishers Against Subscription Services (8 January 2008) <> at 11 January 2008

William Fisher III, Promises To Keep (2004) <> at 5 May 2008

NMPA, The Engine of Free Expression: Copyright on the Internet (no date given)
<> at 5 May 2006

In the Matter of Mechanical and Digital Phonorecord Delivery Rate Adjustment Proceeding, Docket No. 2006-3 CRB-DPRA, The Written Direct Statement, Witness Statements & Exhibits of National Music Publishers’ Association, Inc., The Songwriters Guild of America, and the Nashville Songwriters Association International, Volume 1 (10 April 2007) <> at 5 May 2008

The Hollywood Reporter/Billboard, ASCAP blue after royalty ruling (26 April 2007) <> at 30 April 2007

Digital Music News, Judge Rules Against Download Performance Royalty (25 April 2007) <> at 27 April 2007

The Register, Court sez music downloads aren't performances (26 April 2007) <> at 27 April 2007

TechDirt, It Takes A Court To Explain That Downloads Aren't Public Performances? (26 April 2007) <> at 27 April 2007

Digital Music News, Online Music Stores Protest Additional Download Royalties (28 February 2007) <> at 4 March 2007

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