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The Music Industry Overhaul: What you Need to Know

Music Industry

There is no doubt that the music industry is in need of repair, particularly regarding licensing. Talk to any member of the music industry, whether they are consumers, artists, publishers, or even studio musicians, and each will have a story to tell about how the music industry is not giving them what they want in the way that they want it. It has gotten so bad that many extremely talented songwriters, musicians, and developing artists question whether a career in music is realistic. Given the outdated laws under which the industry operates, it’s no wonder. The current music-licensing scheme took shape almost 70 years ago and has not been significantly updated since the 1980’s. For those of you too young to remember; in the 1980’s, people still listened to vinyl records, as the music CD didn’t arrive in the U.S. market until 1984. (The first music CD was Bruce Springsteen’s Born in the USA). There were no iPods, iPhone or mp3s and the Sony Walkman played cassettes. Needless to say, given the technological advances that have so significantly changed to the way people listen to music today, it is fairly obvious that laws developed almost 30 years ago need to be updated. Yet, change doesn’t come easily especially when it affects so many different groups, each having a significant financial stake in the outcome.

After years of talk, the Copyright Office has taken the initiative and commissioned a study to explore overhauling the music industry’s system. This week, the Copyright Office issued its results in a report entitled, Copyright and the Music Marketplace, which details the main issues involved and proposed solutions or revisions. The authors seem to understand that getting anything through Congress is difficult, so the report focuses on major issues that could have bipartisan support, that don’t upset too many industry players, and is palatable to enough people that the changes have a chance of being implemented. On the downside, the two hundred-page report is dense and boring, which means that the general public, (or probably most of Congress) aren’t likely to read it. It’s as if the authors chose to punish the reader for making them write it in the first place; paying the tedium forward. Thankfully, I am here to explain the report in a more succinct, friendly and entertaining way, and a lot shorter. First we’ll look at the groups involved, who stands to gain and lose, what these groups want changed, and finally what ideas the Copyright Office has to fix it.

Key Players in the Music Industry

Let’s start by looking at the many players that have a stake in a music industry overhaul.

Composers

Songwriters fall into one or two groups; those that write the music and lyrics and sometimes they also are the performers. This is an important distinction since, unlike visual arts where a work only has a single copyright; any song you hear on the radio will have two copyrights, one for musical work (the composition) and one for the sound recording (the performance.) The two copyrights are not treated equally under the music industry licensing scheme. A sound recording tends to generate higher royalties than the musical work, but as you’ll see, there are times when musical works are the only royalty allowed. However, playing a recording will require permission from both copyright holders whereas performing a song only requires permission from the composer.

 Publishers

Publishers will usually set up publishing agreements with the songwriters, advancing them money from future royalties so they can continue to write. The publisher will promote the compositions and handle the licensing in return for a portion of the copyright. The publisher is compensated through its share of the royalty payments. Recording artists, such as singers or band members, will also have contracts with record labels, but they will likely be very different terms that the composer. The producer will also often be included in the contracts and receive royalty payments. On the other hand, studio musicians, backup singers or other hired talent on recordings are typically paid by the record company rather than through royalties. The SoundExchange is the organization that collects and pays royalties to the artists (as well as to record companies) but not for online streamed content.

Performing Rights Organizations (PRO’s)

PROs are among the most important stakeholders and are responsible for licensing public performance rights. The two largest are the American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music, Inc. (“BMI”), which together represent about 90% of the songs available for licensing in the United States. Both of these organizations have government-mandated rules, (Consent Decrees) which play a major role in debates about the overhaul and will be discussed in detail later. Nashville‐based SESAC, Inc. and Global Music Rights (“GMR”), handle performance rights licensing for a select group of songwriters but do not have Consent Decrees.

Record Companies

Record Companies have traditionally been the backbone of the industry, discovering and signing the artists to multi-album contracts. A record label usually finances the music production, promotes the artist, and arranges distribution, although their role is changing with the ease of self-publishing and promotion through outlets like SoundCloud. Radiohead is a good example, having successfully promoted their last album, King of Limbs outside of the traditional record label channels. Except in the case of non-interactive streaming, record labels typically handle the licensing for the sound recordings they own.

Music Providers

Music Providers include broadcasters and distributors, such as radio and TV stations, digital music companies and record stores, both physical and online stores. Sites like Pandora and Spotify have begun to redefine music distribution, which has had a major effect on royalties, as will be discussed.

Consumers

Finally, we have the music fans. This is the group that has the least amount of negotiating power but is the one that is affected the most by a legal regime. The inflexibility that the licensing system has on how the industry operates, forces the industry to use old and outdated delivery methods. Conversely, users take it upon themselves to move music into the modern technological space, which creates a mass market of pirates and infringers.

The History of ASCAP and BMI

ASCAP and BMI are at the center of music licensing. Both organizations are clearinghouses for sound recordings, providing one-stop-shops for sound recording licenses. ASCAP was founded in 1915 by the musical giants of the day: Irving Berlin, James Weldon Johnson, Jerome Kern, and John Philip Sousa. At a time, when most composers were generating income primarily from the sale of sheet music, ASCAP was formed to “assure that music creators are fairly compensated for the public performance of their works, and that their rights are properly protected.”[1] ASCAP devised the “blanket license” system in which businesses such as restaurants, retail stores and radio stations could play any song by an ASCAP signed artist for a fixed annual fee.

In 1939, radio broadcasters decided that ASCAP’s prices were too high and its limitations on membership too restrictive. As a result, they formed BMI, which provided radio broadcasters and other music users with an alternative source for music performance rights licenses, and offered composers open enrollment. Then, in 1941, the Department of Justice sued ASCAP for violations of the Sherman Antitrust Act. Antitrust laws are designed to ensure that 1) competitors behave as competitors, not secret allies, and 2) prices are as low as reasonably possible, as the result of competition. As a result of the lawsuit, ASCAP entered into a voluntary Consent Decree, which is basically a settlement arrangement. BMI entered into a similar Consent Decree in 1966 over its own Antitrust violations.

The Consent Decrees limited the way the two organizations could operate:

  • ASCAP and BMI can only administer performance rights, not any other, often related, rights.
  • The licenses must be non-exclusive licenses, meaning that publishers retain the ability to directly license music to the public or other organizations.
  • Both ASCAP and BMI are required to grant a license to any party that requests one. This license is then valid while the two parties attempt to negotiate a rate.
  • If the two sides are unable to reach an agreement on a rate, a special Rate Court settles the dispute.

The details of the consent decrees have been updated and amended over the years but basically remain the same as above.

Music Industry Issues

Now that we know all the players, a bit about the licensing system, and limitations on the PROs, we can now turn to the issues that have been plaguing the music industry. In general, the industry process is fragmented with different rules for different groups under varying situations. Even the courts that set the rules are fragmented. So while the following issues may seem disparate, underlying them all is the issue the lack of uniformity in the process and the inherent unfairness that comes with the fragmentation. Let’s take a look.

Consent Decree Adjustments

 As you can imagine, being hampered for almost 70 years by the limitations dictated in the Consent Decrees could be a bit tiring. And I am sure that anyone can guess that a major complaint by two of the largest industry players, ASCAP and BMI, revolves around the onerous rules dictated in those Decrees. Both companies assert that without its Consent Decree, they would be free to better serve artists and songwriters. Having the ability to freely negotiate licensing fees as well as offer packaged bundles would only be positive for the industry. Of course, that same freedom is what led to the Consent Decree in the first place, so the industry is understandably wary of releasing these companies from bondage. Ask ASCAP and BMI and they would say they could be trusted. Yet, as a counterpoint to that idea, recently television and radio licensees sued on of the other PROs, SESAC (which does not have a consent decree), for anticompetitive licensing practices. SESAC settled the case by reimbursing plaintiffs for almost $60 million in licensing fees.

ASCAP and BMI also claim that the Consent Decrees as written, restrict their ability to get fair market value for their work. They note that Pandora paid some 49% of its revenue, about $313 million, to record labels but only 4%, or about $26 million, to publishers (including 1.85% to ASCAP). Such as disparity is a major concern and a topic of frequent discussion.

Interim Rates

As well, another claim that has garnered some attention is the lack of an interim rate for compulsory licensing. Under the Consent Decrees, ASCAP and BMI must offer licenses to anyone. However, there is no requirement for an up front payment, so the compulsory licenses must be granted even while the PROs and the artist or record labels are still negotiating on price. With no requirements as to when a license agreement must be reached, the urgency for the licensee to resolve the license fee has no urgency, resulting in long drawn out negotiations.

Rate Setting

A recurring complaint from publishers and songwriters is that significantly higher rates are paid for sound recordings than for musical works. Remember that there are two copyrights in a piece of music: the sound recording and the musical work (think notes on paper or lyrics). Record labels typically own sound recordings while the composition is usually owned by publishers and composers.

When a song is played on the radio, a royalty is generated for the publishers and songwriters, but not the composer. For web or satellite radio, royalties are paid to performers and labels for the sound recording as well as to the publishers and songwriters for the musical work, which is far better for the composer. Web or Satellite radio, such as Sirius XM, can play whatever music they want without seeking individual permission, by paying the set rate. Conversely, on-demand services like Spotify, do not have the benefit of a set rate; they must negotiate directly with the rights holders to get permission and determine a price; a costly and time-consuming process that has no guarantee of authorization. Music Industry

For those that can take advantage of them, rates are set every few years by the Copyright Royalty Board, (CRB) a three-judge pane. Each industry player presents arguments as to what the rate should be, with CRB making the final ruling. The problem with rate setting is that different groups have different “standards” through which the judges must view the arguments. “Standards” are legal term, which indicates the flexibility the CRB has in setting rates. The standards employed for digital radio are much more malleable than the ones for ASCAP and BMI (which cannot take into account sound recording performance rates). As well, the ASCAP BMI standard is perceived as producing below‐market rates. Many people consider this to be unfair and would rather see a fairer process, which they say would foster competition and perhaps lower prices for consumers.

The Pre 1972 Recording Problem

In the Copyright Act of 1976 “sound recordings fixed before February 15, 1972, any rights or remedies under the common law or statutes of any State shall not be annulled or limited by this title until February 15, 2067.”  So songs recorded before February 15, 1972 are governed exclusively by state law, not Federal law. Recordings created on or after February 15, 1972 are governed exclusively by federal law. In 1995, a federal law added digital radio services to the mix, requiring that they pay royalties for songs played on their services, but only those created after February 15, 1972. Earlier recordings were not mandated. Sirius XM and other digital radio stations took this to mean that sound recording licensing was free for the pre-1972 songs. For practical purposes, when Pandora plays The Rolling Stones first hit, “I Wanna Be Your Man” (1964), the company doesn’t have to pay the band a royalty for the sound recording (though it does have to pay Paul McCartney and the John Lennon Estate, because they are the composers.).

As a result, satellite and internet radio services rely heavily on pre‐1972 recordings in curating their playlists. However, recently, the 1960s musical group, The Turtles, who had the hit song “Happy Together,” sued Sirius XM Radio under California State law claiming copyright infringement and damages over unpaid royalties. The Turtles won prompting other lawsuits from music artists in various state courts. So older artists would like to see the pre-1972 songs brought under federal protection. Of course, SiriusXM radio would prefer the status quo.

The “All in” or “All out “Problem for ASCAP and BMI

In 2011, Sony Music and Universal Music Publishing Group (UPMG) decided to partially withdraw from ASCAP so they could independently negotiate licenses with Pandora, rather than using ASCAP.  Negotiations didn’t go well so the case ended up in front of Judge Denise Cote, who is the designated judge to handle issues that arise under the ASCAP Consent Decree. Judge Cote found antitrust issues in that “ASCAP, UMPG, and Sony did not act as if they were competitors with each other,” and used their power in the market to “extract supra-competitive prices” as well as breaching of confidentiality agreements. Most concerning was ASCAP’s refusal to tell Pandora which works were removed from licensing. Without knowing which songs they couldn’t use, they were forced to enter into a contract with Sony or risk infringement.

The two rate courts held that these publishers could not selectively withdraw specific rights from ASCAP or BMI to be negotiated independently. Instead, the publishers had to be “all in” or “all out.”

The Copyright Office Proposed Solutions

Now that we know the main issues that have been plaguing the music industry, let look at some of the proposed solutions as dictated in the report. Understand that these are proposed changes, and whether any are implemented or not is still a mystery.   There will be a lot of hoops to jump through before this becomes law. And we can’t forget the lobbyists. Once they get their hands in the mix, many of these ideas will change, some better, some worse, some gone and possibly even new ones. That remains to be seen. And the following list is far from all that is in the report. For that, here is the link Copyright and the Music Marketplace. Also, note that wherever I have quoted text, all come from within the report.

  1. First, in order to have a robust and fair music marketplace, equivalent uses of sound recordings and compositions, including those on competing platforms should be the overarching goal. So the Office is recommending that all music rate setting activities, on both the sound recording and composition side, whether radio, TV or digital music, all take place before the same court; the CRB. By looking at uses that are fairly similar within in the digital environment, the rates will be fair for the different groups. As well, Government ratesetting should be conducted under a single standard, “There is no longer a threatened piano roll monopoly, and satellite radio is a mature business. ASCAP and BMI, satellite radio and subscription services (such as those provided through cable television) could all fall under the more flexible standard. That also gives the CRB the ability to think about broader concerns of the marketplace that are important to particular parties when as part of the rate setting process. “However that rate standard is formulated—i.e., whether it is articulated as “willing buyer/willing seller” or “fair market value”—it should be designed to achieve to the greatest extent possible the rates that would be negotiated in an unconstrained market.” This doesn’t mean that rates will necessarily be lower or the process any less difficult, but it will be fair.
  1. As one of the few remaining industrialized countries that does not recognize a terrestrial radio performance right, it is time for radio station to start paying royalties for performances. And that is exactly what the Office is suggesting. The Office has always been in favor of a full sound recording performance right, advocating for Congress to expand the existing right. So having terrestrial radio pay royalties is not surprising. But the Office seems to have listened to radios counter argument that their free play generates publicity and ultimately income for the artists. The report suggests that having terrestrial radio pay royalty fees doesn’t necessarily mean that the rates for sound recordings and the musical compositions necessarily should be equal.ASCAP
  1. As to Pre‐1972 recordings, they should be brought under the protection of federal copyright law. The Office agrees with the artists that having state courts litigate pre-1972 recording is inefficient and doesn’t “serve the interests of licensing parity by eliminating another market distortion.” In addition, this new scheme would allow artists to receive royalties through the federal mechanism for their pre‐1972 recording as well as “improve the certainty and consistency of copyright law, encourage more preservation and access activities, and provide the owners of pre‐1972 sound recordings with the benefits of any future amendments to the Copyright Act.”
  1. The Office agrees that music publishers’ should be able to withdraw certain music from ASCAP or BMI. “There is substantial evidence to support the view that government‐regulated licensing processes imposed on publishers and songwriters have resulted in depressed rates, at least in comparison to non-compulsory rates for the same uses on the sound recording side.” The Copyright Office is favoring the open market approach, which seems to be a common theme. The Office says that they “don’t see any reason why sound recording owners are permitted to negotiate interactive streaming rates directly while musical work owners are not. The Office is therefore sympathetic to the publishers’ position that they should be permitted to withdrawal certain rights from the PROs to permit market negotiations. The Office believes that partial withdrawal—in the form of a limited right to “opt out”—should be made available to those who want it.“ However, it seems that the Office wants this withdrawal to be limited to interactive streaming rights for new media services.

The “All in” or “All Out” idea doesn’t make sense in a digital world, where connecting with those who want to license music is far easier that it used to be, not to mention how easy it is it deliver. Cost associated with music delivery in may cases are far lower than they were allowing for lower prices with more profit. So it is easy to see why many copyright owners want to be able to withhold their works from low‐paying or otherwise objectionable digital services. Artists should be able to provide exclusives to certain services, much like Amazon Video and Netflix do with their programming. The Copyright Office did make one caveat though; while they believe that certain aspects of the processes can and should be relaxed they are still concerned about the potential for antitrust violations, which is a topic that needs to be looked at more thoroughly.

  1. The Office also discussed the issue of interim rates, albeit briefly. Under the consent decrees, anyone who applies for a license receives one but there is no requirement of immediate payment and since there is no established timeframe for the commencement of a rate court proceeding, an applicant is able to publicly perform a PRO’s catalog of works for an indefinite period without paying. The Copyright Office seems baffled by this concept and again are taking a market centric approach saying that they don’t “see why music is treated differently from the goods of other suppliers in the marketplace. A fair and rational system should require licensees to pay at least an interim rate from the inception of their service, subject to a true‐up when a final rate is negotiated with the PRO or established by the ratesetting authority .”

There is already a process within the ASCAP and BMI consent decrees that allow the rate court to set interim rates. But it could take up to four months of discovery and motion practice which can also be expensive, especially when the result is only for a temporary interim one. “The Office is of the view that to the extent a licensing entity is required to grant a license upon request, there should be a viable (not merely theoretical) mechanism—for example, a brief, single‐day hearing before the ratesetting authority (e.g., the CRB)—to set an interim royalty rate without undue burden or expense.”

 ______________

Despite the wide range of viewpoints expressed in the course of this study, the Office’s review of the issues has confirmed one overarching point: that our music licensing system is in need of repair. The question, then, is how to fix it, in light of the often conflicting objectives of longtime industry participants with vested interests in traditional business models and infrastructure; digital distributors that do not produce or own music and for which music represents merely a cost of doing business; consumers whose appetite for music through varied platforms and devices only continues to grow; and individual creators whose very livelihoods are at stake.

[1] http://www.history.com/this-day-in-history/ascap-is-founded

About the author

Steve Schlackman

As a photographer and Patent Attorney with a background in marketing, Steve has a unique perspective on art and law. Should you have any questions on Intellectual Property contact him at [email protected] His photography can be seen online at Fotofilosophy.com or on display at the Emmanuel Fremin Gallery in New York City.

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