Oliver Mills, Intertrust

Clearly it is easier to distribute media over the internet than to manufacture physical items and then deliver them to warehouses and shops and expect people to make a journey to the shop to pick up the media. The difficult part is control of any usage of that media when it is released into an unmanaged environment. The internet creates a utility like the electricity or phone network.

In the face of recent advances in media duplication and distribution technologies, people in the recorded music business have behaved in the same way as P&O Shipping did when the aeroplane was invented and Kodak did when digital storage of film took the market. Another example is Singer sewing machines. They all clung to their established business models and refused to completely re-invent themselves at moments of technologically enabled change. It requires a really radical business manager to survive such disruption, although some companies seem to have managed it. Xerox is one example. It always seemed to me that most of the very senior people in the recorded music business had an extremely limited understanding of the capabilities of digital technology. When they did partly understand the digital paradigm they abused it somewhat and tried to model their old business ideas to fit their understanding, just as makers of early motorcars made them look like horse carriages.

Peer-to-peer downloading is not the problem; indeed peer-to-peer techonology provides great efficiencies.  The business model is the problem, and trying to make 5% of the market pay for the 95% that have not fully bought into an outmoded business model exacerbates it.

A government mandated collective licensing regime could be a way to compensate copyright owners for uncompensated downloads over the internet, but in general, I am not crazy about government mandated regimes in relation to entertainment other than for issues such as light censorship of obviously socially harmful material (How to build a WMD for one example!).  The next question is which government would mandate it and how could it be effectively policed. In Europe there have been suggestions of a ‘three strikes and you are out’ system to cut people off the internet if they are noticed illegally downloading copyrighted material. The ISP would be forced to monitor and then cut off their customers. ISPs are not happy with this and consumers like it even less. There are grey areas where a consumer can go to a reputable looking website (which may be based in a copyright-challenged country) illegally selling mp3 songs for 30 cents each and assume that they had got a legal bargain. Copyright holders and consumers need to work out an equitable exchange of value between themselves.

One option is a system in which users voluntarily “opt in” to pay a fee in exchange for copyright holders’ agreement not to sue them for uncompensated downloading of content, but it sounds a bit like a protection racket.It may be marginally better than a government mandated system, but would all copyright holders buy into something like this? Who would guarantee safe passage? If a person downloads one song a month and another downloads fifty songs a month should they both opt to pay the same fee?

I think creators and rights holders could be compensated simply: devices have the intelligence to translate bits arriving over the internet to something that humans can understand and enjoy so the device could easily keep a note of the content consumed and charge appropriately. Charges will have to be accepted as a fair exchange of value by consumers, perhaps 1c or less each time a song is listened to or an important in-depth news item is read and a couple of dollars every time a major film is watched. The cost should be incorporated into a data plan or the cost of the device so that as far as possible the consumer can enjoy rich multimedia at a fair price on the device of their choice. By spreading the cost over all devices, the cost of entertainment, which breathes the life into those devices, can be minimised on a per device basis. If 75% of all consumers spent a few cents a day the market would be much healthier than trying to make 5-10% of consumers pay a few dollars.

There is a lot of complexity, a lot of silos, a lot of NIH, a lot of disbelief, some technology IP, much investment in models that may or may not happen but which block new ideas, and an enormous amount of disruption to be overcome. It will not be easy but digital music must embrace the abundance of the new world and not try to maintain scarcity to enable monetisation. Scarcity can be used for live concerts and associated physical items such as T-Shirts, personalised events, etc.

People in the recorded music industry should continue to strive to develop long-term artists who write and make wonderful and creative music. It is technologically easy and cheap for anyone to make a new song. It is hard to make a top ten hit.

If the people involved are creative and have good business advisers then the recorded music business, the live music business, and the music licensing business can be wonderful. Businesses often consolidate and then parts of that business specialise and re-split. Any global recession may be a boon to fresh creativity.

Boogie on, music will never die, humans need it too much. Social sharing of music and playlists will be key. Look to service enabled consumer devices to be the tills and the communication systems.

Tim Westergren, Pandora

Here’s how I think of this idea. My guess is that ISPs will be very reluctant to raise their prices unless they are getting a very substantial portion of the increased revenue – that will bump into the revenue requirement that labels need to have for any all-you-can-eat service, which is inherently substitutional.  If there is no meeting of the minds on the rev split, I would assume it would have to be an elective add-on.  In that case, it becomes another subscription service.  The history of the subscription business in music is not a healthy one.

I also don’t believe the record business can sue its way out of this situation.  I believe that the answer for labels lie in supporting business models that enable ad-supported, free to consumer offerings to thrive.

Walter McDonough, Author

100 YEARS OF COMPULSORY LICENSING: A COMMON SENSE SOLUTION TO THE PEER-TO-PEER FILE SHARING DILEMMA?

INTRODUCTION
The history of copyright law can be seen as a series of legislative reactions to disruptive technologies that threaten the status quo. According to Harvard Business School professor Clayton M. Christensen, a disruptive technology is one that unexpectedly dislodges one that is already established. The printing press, radio, television and the Internet are all examples. Each has also challenged copyright owners’ ability to protect their exclusive rights. In much the same way that at the beginning of the last century improved and integrated rail service networks made it easier for English “pirates” to physically distribute unauthorized copies of printed music throughout the United Kingdom, today, at the beginning of this century, the Internet and networked computing makes it possible to instantaneously disseminate perfect copies of copyrighted content throughout the world.

A. The Peer-to-Peer File Sharing Problem
One of the most controversial modes of Internet distribution, and the most contemporary example of a disruptive technology, is peer-to-peer file sharing (P2P) and its component software. P2P file sharing is “a popular Internet application with millions of users sharing millions of files daily” (these distributions are also known as “torrents”). The public is most familiar with P2P software through its most popular versions: KaZaA, BitTorrent, Morpheus and Grokster. The copyright infringement conviction of the proprietors of the Swedish P2P website Pirate Bay grabbed headlines throughout the world this year.

Why is P2P file sharing seen as a crisis? Although P2P can be used for many constructive purposes, users may also engage in the unauthorized copying and distribution of music, video, games and software. This conduct threatens existing business models and the monetization of copyright because neither creators nor the companies that manufacture, market and distribute their content receive compensation. The scale of this phenomenon is almost difficult to understand.

McAfee’s 2009 Third Quarter Threats Report revealed that a number of new file sharing sites (featuring unauthorized copyrighted material) grew by 300% in the three months after the court-ordered closing of the Pirate Bay web site in the late summer of 2009. Creative industries in the United Kingdom (UK) have claimed that more than 50% of Internet traffic in their country consists of unauthorized uses. These same businesses have asked the British government to deny Internet access to users who persistently download copyrighted content without authorization. Record labels in the UK believe that they are suffering losses of ₤200 million each year because CD sales have never recovered from the introduction of file sharing. The television and film industries are also concerned that increasing broadband speeds can do similar damage to their businesses. The International Federation of the Phonographic Industry (IFPI) opines that 95% of all downloads are unauthorized. It is believed that almost seven million people in the UK download without authorization. One study calculated that worldwide, as of June 2008, there were 202,144,202 PCs with installed P2P applications.

There are two schools of thought about this phenomenon. One group has seen this development as beneficial and a logical development in the free and unfettered distribution of information. This faction also maintains that P2P serves a valuable social purpose in providing consumers with almost unlimited choice and search capabilities. David Touve, a PhD candidate at Vanderbilt University, may have put this best when he stated “P2P networks are such powerful venues for music demand for reasons beyond the economic argument that we can get stuff for free – these networks offer an ideal landscape for sharing the stuff of which culture is comprised.” Ivor Tossell of Toronto’s Globe and Mail put a hip but cynical spin on this perspective when he wrote “[t]he upshot is that Internet dwellers of 2009 live in an atmosphere in which downloading copyrighted movies and music isn’t just a convenient way of getting your hands on something you want . . . [i]t has become a low-grade gesture of rebellion and as such, like love beads in 1967 or safety pins through your T-shirt in 1977, the fashion of the day.” With some irony, some observers have cited polling data that seems to indicate that those who download music without authorization spend the most money on recorded music.
The opposing side sees such technologies as a potential threat to the existence of creative industries. Industry trade associations, such as the Recording Industry of
America (RIAA), have sought stiff sanctions against unauthorized uses of their copyrights. These efforts have included the record industry’s litigation strategy against unauthorized downloaders in the United States and France’s enactment of the draconian “three strikes and you’re out” policy. In fact, the RIAA has accused 18,000 individuals of unauthorized downloading. Although most of these cases settled, two defendants, namely, a single mother and a student lost in court and were ordered to pay damages of $1,920,000 and $675,000 respectively.

B. Potential Licensing Solutions
Is there another way to look at this issue and can United States copyright law adapt to this new disruptive technology and balance the interests of consumers and copyright owners? The Electronic Frontier Foundation (EFF), the Songwriters Association of Canada (SAC) and the Future of Music Coalition (FMC) have each offered proposals to solve this dilemma. At a recent press conference in Ottawa, Billy Bragg, Safwan Javad of Wide Mouth Mason, Minister of Parliament and the NDP’s Heritage critic Charlie Angus and the Songwriters Association of Canada discussed proposal for greater artist participation in the digital distribution debate. Don Quarles, the President of the SAC proposed “[a] license fee of a few dollars a month paid by those who wish to file share [that] would create a new business model, one that creates good value for the consumer and ease of access to the music, while ensuring the music creators and rights holders are farily compensated for the use and enjoyment of their work.” While the EFF and SAC have proposed voluntary systems, is there a place for compulsory licensing in this debate?

Conceptually, such a proposal would allow Internet Service Providers (ISPs) and/or their subscribers to be compulsory licensees that could then allow them to engage in P2P file sharing without the threat of litigation. In exchange, customers would pay a monthly surcharge on their broadband bill, in much the same way that cable customers pay extra now for HBO or Showtime on their monthly cable bill. Such monies would be paid to a central collection society, e.g., Sound Exchange (the organization that currently collects and distributes compulsory monies under sections 112 and 114) and then paid to copyright owners and other stakeholders.
A February 2008 British Music Rights Association survey found that 80% of current illegal downloaders would be willing to pay for legal file sharing. A November 2009 conducted by the German Institute for Strategy Development indicated that 50% of that country’s most active Internet uses would also pay a flat fee to legally download content by utilizing P2P file sharing. Politically, there may be a large constituent group of Internet users who would support such a proposal. In order to place this concept into a more meaningful context, however, it is important to review the last one hundred years of copyright history.

THE HISTORY OF COMPULSORY LICENSING: 100 Years Ago: Crisis Creates A New Idea (1909)

Imagine a world where new technological devices have disrupted the status quo. The public has overwhelmingly embraced these inventions and they have become the popular consumer products of their time. These technologies are so disruptive that the music industry legitimately believes that its actual existence is in question. To further complicate the situation, there are no rules in place that would guarantee compensation to copyright owners for the use of their music. Are we talking about the Internet and the 21st Century? No, this is a description of the early 20th Century and the emergence of the player piano and the record player.

In 1909, the United States passed its first major omnibus revision of copyright law. Known as the Copyright Act of 1909, the bill replaced the original Act of 1790. The 1909 act introduced the concept of “compulsory” licensing. The reasons for the adoption of this provision and the genesis of compulsory licensing are fascinating for our purposes.

The most controversial aspect of this era of copyright reform was the provisions regarding the control of so-called “mechanical music.” Also known as the “canned music” debate, this issue consumed Congressional committees for a good part of the decade. The player piano was the disruptive technology of its time. This machine was a self playing keyboard instrument that was programmed by perforated or “mechanical” rolls. These rolls were the instructions that controlled what keys were struck so the piano could play the most popular songs of the day without human intervention or assistance. This became a major form of home entertainment throughout the western world. The other invention that disrupted the established order was the phonograph player.

To set the stage for this historic debate, one first has to understand the level of popularity of these two devices. Second, at the turn of the century the manufacturers of these devices were not paying royalties of any kind to the copyright owners of the music that they were consuming. The great composer John Phillip Sousa wrote an impassioned essay for Appleton’s Magazine underscoring this problem. When the hearings began, there was no consensus as to whether or not the music reproduced even fell within the parameters of then existing copyright law. There was also a fear that these machines could lower the demand for live music.

Congress understood the threat of these new disruptive technologies and, consequently, sought to update the present copyright law. When Congress began the process of copyright reform in 1905, it featured conferences before the Library of Congress and emotional hearings before Congress. Eventually, these developments produced the compulsory license. On one side were the music publishers, composers and their allies and on the other side were the player piano manufacturers and phonograph manufacturers. Some commentators have opined that the controversial and incendiary rhetoric on both sides of the debate set a tone for music industry politics that continues to this very day.

During the hearings, copyright advocated argued for the following language “the copyright secured by this Act shall include the sole and exclusive right to make, sell, distribute, or let for hire any device, contrivance, or appliance especially adapted in any manner whatsoever to reproduce to the ear the whole or any material part of any work published and copyrighted after this Act shall have gone into effect, or by means of any such device or appliance publicly to reproduce to the ear the whole or any material part of such work.” The manufacturers did not want to be subject to copyright law. Over the course of the debate, they eventually realized that they would have to pay in order to have certainty over the licensing process.
What complicated the matter was President Roosevelt learned in 1907 that a group of publishers had created a “giant music monopoly” for the purposes of supplying one player piano manufacturer with an exclusive right to reproduce new popular songs. In fact, during the hearings, the committee heard evidence that the Aeolian Company had pre-existing to do this very thing. This agreement had been entered into in 1902 and was contracted to last for thirty-five hence.

To further muddy the waters, contemporaneous to the Congressional hearings, the Supreme Court ruled in 1908 in White-Smith Music Publishing v. Apollo Company, that the “mechanical” rolls of player pianos were not “copies” under copyright law because they were not formatted in a way that could be read literally as a piece of music. The Court noted that because Congress was familiar with this issue, the Congress could have legislated a solution if they had deemed this issue to be important. Was it a copy if the underlying creative work could not be perceived as original work of authorship? In the words of Justice Holmes “the result is to give to copyright less scope than its rational significance and the ground on which it is granted seems to me to demand. . . . [o]n principle, anything that mechanically reproduces that collocation of sounds ought to be held a copy, or if the statute is too narrow, ought to be made so by a further act, except so far as some extraneous consideration of policy may oppose.” Furthermore, Justice Day wrote the underlying issues “properly address themselves to the legislative and not to the judicial branch of the Government” and that “as the act of Congress now stands, we believe it does not include these records as copies or publications of the copyright music involved in these cases.”

That was the issue that Congress faced when it conceptualized the 1909 Act, it not only wanted to redefine what constituted a copy but it also wanted to avoid the potential for monopolistic control of music (musical work copyright owners could have used their exclusive rights to license in a non-competitive manner). The result was section 1(e) of the 1909 Act. Under Section 1(e), musical work copyright owners had the exclusive right to authorize “mechanical” reproduction of their works subject to some limitations. After the copyright owner approved the first use, any person could make a “similar use” provided that there was a payment made to the copyright owner of two cents for “each part manufactured.” Thus, the statutory or compulsory license was born 100 years ago.

Today, a statutory or compulsory license allows a user to use copyrighted materials without the approval of the owner. In exchange, the statutory licensee adheres to reporting and payment requirements. If the user complies with these rules, he or she is not an infringer and not subject to litigation.

What are some of the current compulsory or statutory licenses? There are licenses for: secondary transmissions by cable systems; making ephemeral recordings; the public performance of sound recordings by means of a digital audio transmission; the use of musical works in making and distributing phonorecords; the use of certain works in connection with non¬commercial broadcasting; secondary transmissions of superstations and network stations for private home viewing; secondary transmissions by satellite carriers within local market ; and the distribution of digital audio recording devices and media. This group of copyright provisions, in some instances, reflects the Congress’ intent to adapt the law to meet the challenges of new and potentially disruptive technologies.

Does statutory licensing produce tangible results? The most recent data concerning the Copyright Office’s collection of statutory licensing monies comes from its 2007 Annual Report. It covers the fiscal year ending September 30, 2007. Among the almost $280 million in distributions were: $3,002,596.73 of the 2002, 2003, and 2004 Musical Works Fund; $1,538,780.83 of the 2005 Copyright Owners of Sound Recordings and Featured Artists Subfunds; $938,605.32 of the 1993 to 2001 final supplemental distribution to Non-Featured Musicians Subfund, Non-Featured Vocalists Subfund, Featured Artist Subfund, Sound Recording Copyright Owners Subfund, Music Publishers Subfund and Writers Subfund; $1,658,959.68 to Major League Central Fund, for the 1993 to 1997 Cable and 1994 to 1995 Satellite Funds; $194,220,505.37, comprising the final cable royalty distributions from the 1999 through 2002 cable royalty pool to the Music Claimants, Joint Sports, Commercial Television Claimants, Public Television Claimants, and Canadian Claimants; $76,484,928.33 to Joint Sports and Program Suppliers of the 1998 and 1999 cable royalties; and $2,086,531.64 of the 2006 Sound Recording Copyright Owners and Featured Artists Subfunds. In addition, Sound Exchange and the Alliance of Artists and Recording Companies (AARC) collect monies for the statutory licenses for ephemeral recordings and the public performance of sound recordings by means of a digital audio transmission (sections 112 & 114) and the statutory obligation for distribution of digital audio recording devices and media (chapter 10) respectively. Looking at the universe of collections and distributions, large sums of money have been distributed to copyright owners and stakeholders.

WHAT WOULD A PROPOSED P2P COMPULSORY LICENSE LOOK LIKE?

Copyright owners enjoy the exclusive right to make copies and distribute their works. The very nature of P2P file sharing facilitates unauthorized distributions or torrents that result in perfect and unauthorized digital copies. Any system of statutory licensing would have to address this.

The architecture of the Internet would necessitate that the ISP or the customers would be the licensee. In that way, ISPs could do the following things: serve as an immunized and licensed bridge to P2P networks; collect data regarding the distribution of particular torrents; and, finally, serve as the agent in the collection of customer levies. Because ISPs would be the statutory licensee, they would have the traditional obligations of reporting and payment. ISPs could then extend their rights under the statutory license to their customers. All customer obligations and responsibilities would be outlined in the traditional customer agreements and terms of use.
Because we are dealing with all forms of copyrighted material, it would necessary to add a new chapter to title 17 in much the same way that the Audio Home Recording Act of 1992 added chapter 10, “Digital Audio Recording Devices and Media.” It could be entitled “Statutory Licensing for P-2-P File Sharing.” This chapter would allow customers of ISPs, which had conformed to statutory provisions, to distribute and copy copyrighted materials through the use of P2P software.

There would, however, need to be a few exclusions. First, only customers who actually used P2P file sharing software would have to pay levies. Consumers who use their computers solely to retrieve e-mail or check the latest news or sports scores would not be required to subscribe. Second, copyright owners could exclude certain works for defined periods of time. For example, the motion picture industry could exclude films during the first year of their release. The recording, television and publishing industries could also follow this practice. At the end of this period, however, consumers would be free to distribute and copy such works.

The CRB would set the rate for the monthly fee that ISP customers would pay. ISPs could then pay these monies to Sound Exchange (or another designated collection entity). This entity could then monitor torrents and then make calculations based upon what was actually distributed and downloaded. As a recent survey has found, there is a correlation between the popularity of individual P2P torrents in the digital world and the popularity of the most popular artists and works in the physical world. In other words, if Eminem is selling the most CDs in the physical world, it is highly likely that he would be the most downloaded recording artist on P2P.

Finally, the last component of this proposed statutory license is probably the most difficult. Who should be the recipient of the royalties? Should copyright owners (in many cases multi-national media corporations) receive all of the proceeds or should there be some form of payment to the original creators (who most likely transferred their interests under work-for-hire agreements)? Ultimately, this could be answered contractually or through collective bargaining, but in the embryonic stages of this license, this almost metaphysical question would have to be answered in some fashion. Creators should be allotted some share of these monies in addition to whatever payments would be due to the creative industry unions under their existing agreements.

CONCLUSION

The challenges that face the music industry have historical antecedents. When the political will existed, Congress was able to craft a workable solution that has now been in place for a century. Applying these lessons to the Internet may replace and even surpass lost revenues.

Sandy Pearlman, the noted producer, songwriter and Distinguished Professor at the Schulich School of Music at McGill University in Montreal, once asked “what is the real value of a download?” His answer was “anything greater than zero.” That is the premise of this proposal. P2P file sharing is an unmonetized use of copyright materials that brings no remuneration to copyright owners or to the creative community.

Until there are concrete efforts to harness the enormity of this distribution method, copyright owners will see declining revenues as media migrates from the physical to digital world. Any fair-minded observer also cannot discount the robust search capabilities of P2P and the potential benefits that it offers to maximize consumer choice. In conclusion, an income positive policy of monetizing millions of torrents seems a better option that an income negative policy of litigation and “three strikes and you’re out.”

Steve Gordon, Attorney/Author

How Compulsory License for Internet Might STILL Help Music Industry Woes
Copyright 2009 Steve Gordon

In 2003 I published an article titled “How Compulsory License for Internet Might Help Music Industry Woes” in Entertainment Law & Finance, a newsletter published by the NY Law Journal. Billboard Magazine re-published the article as an op-ed but gave it a new title: “Licensing Could Solve Internet Piracy.” The first title was a much more accurate description of my argument, and I still believe that a compulsory license is the best solution for saving the major record companies, and is in the best interests of the artists, as well as music fans. In fact the circumstances for supporting a compulsory license are even more compelling now than in 2003.

The beginning of my article noted:

Sales of recorded music in the United States and throughout the world have declined for three consecutive years. Three of the five major record companies are now reportedly for sale.

Since 2003, Time-Warner sold off Warner Music, EMI was sold to a group of private investors, Sony Music and BMG merged and then BMG bailed out of the recording business. Income from recorded music has plunged from a peak of approximately 14.5 billion in the U.S. in 1991 to 8 billion today – a precipitous decline of almost 50% in income even without accounting for inflation. Along the way the major labels discarded thousands of employees and dropped scores of artists. Obviously, the record business is in even in worse shape now than six years ago.

The article continued:

The International Federation of the Phonographic Industry blames the situation on CD burning and unauthorized Internet file sharing.

The IFPI was right, the Internet has hurt the record business. But the Internet, by itself, was not the reason for the decline of the record business. One of the primary causes for the industry’s woes can be traced back to the Digital Millennium Copyright Act of 1998 (DMCA). In negotiations surrounding the passage of the Act, the political influence of the recording industry was dwarfed by the money and political influence of the ISPs. Consequently, the labels were forced to concede a “safe harbor” designed to shelter the ISP’s from any liability for carrying P2P sites on their networks. At the same time, the labels failed to make computer manufacturers apply digital rights management restrictions to their hardware. The major labels’ plan to make the manufacturers of digital devices embed code in their gadgets that would prevent people from downloading unauthorized music, The Secure Digital Music Initiative or “SDMI,” was a complete failure because the electronics business, including the parent company for Sony Music, knew that people would buy more PCs, CD burners, and MP3 players if consumers could play and share free music. In fact “free music” is not free at all. In order to download, copy, transport and share “free music” from bit torrent sites, private networks or Russian websites, you need to BUY computers, MP3 players and PAY for subscriptions to high speed Internet providers. The record companies understood this, but were powerless to stop it because the more powerful electronics and ISP industries refused to cooperate and had the economic and political muscle to stonewall even the major labels. As a result the labels attacked the only targets left, the music fans who used this new technology to listen to and collect recorded music. This strategy did not solve the labels’ problems because it did not significantly impede music sharing on the Web. The technology was just too powerful and the electronics and ISP industries made it too easy to share music. The labels themselves recognized this when they announced they would stop their lawsuits against music fans last year.

The Commentary continued with my proposal:

The solution to the music industry’s woes is a federal law providing for a
statutory license that would legalize the sharing of music online while
compensating copyright owners for lost sales. A federal law implementing a
statutory license could legalize the transmission of all recorded music for
purposes of sharing music over the Internet and downloading permanent, portable
copies. Fees would be paid by those directly profiting from file sharing, that is,
the makers of CD burners, including computer manufacturers, and the Internet
service providers (ISPs) whose subscribers already pay in part for access to such
services as Kazaa. As CD sales continued to decline due an ever increasing
number of households acquiring computers and high speed Internet connections,
the amount payable to the fund could be adjusted upwards.

Steve Jobs and Apple have made huge fortunes from selling iPods and iPhones. It has been estimated that less than 10% of music on these devices come from authorized services. Instead, consumers use these devices to copy their own music collections or store music from unauthorized services or pirate sites. Sales of other MP3 players, CD burners, and computers continue unabated. High-speed Internet subscriptions are at an all time high. These segments of the economy, as opposed to the content providers, are doing very well. What is really happening is a redistribution of consumers’ dollars away from the content provides (the labels and artists) to those who facilitate “free” music,” the electronics industry and ISP’s.

The commentary continues with a description of how a statutory license would work.

The contribution of each ISP and computer manufacturer would be determined by
a body designated by the U.S. Copyright Office. The payments would be
delivered to a central administrator on behalf of the labels and the artists. This
fund would be allocated based on downloads of each master as tabulated by
digital rights management technology similar to what the performing rights
societies already use to count the performances of songs on broadcast radio and
TV. The fund administrator would then pay each label and artist on a 50/50 basis,
just as ASCAP and BMI pay songwriters and music publishers. There would also
be a separate fund for music publishing. In fact, the rate for downloading songs is
already subject to a compulsory license of eight [now 9.1] cents per song
under the Copyright Act.

I believe that the principal reason the RIAA and the major record companies have not pushed for this plan, which would force the electronics industry and ISP’s to share the financial rewards of “free music,” is that the labels would be forced to actually share monies for recorded music with the artists. The traditional model is otherwise. Under the standard recording agreement, still in use today, the artists receive only 10% to 15% of the retail price for records sold. After contractual reductions such as packaging (25%), “net sales” (10%) and producer royalties (3% to 5%/), which are all deducted from the artist’s recording royalty, the artist usually winds up with less than 5%. Moreover, they usually don’t even get that because the labels “recoup” advances, recording costs and marketing expenses from recording royalties. As a result, very few artists ever receive a dime of recording royalties. The notion of sharing 50% of income from record sales with the artists is revolutionary, and hard for the labels to accept. But they have to understand that the electronics business and ISP’s are making so much money that if calibrated correctly, there would be more than enough money to go around.

The article also pointed out that a statutory license could cut through a major obstacle in the labels’ capacity to compete in the digital music world. That obstacle has to do with contract restrictions. As I pointed out in the commentary:

Some artist’s contracts do not allow record companies to put the artists’ music
online. As a consultant for one of the major authorized online services, I had to
delete approximately 80% of hip-hop music because sampling agreements
typically do not permit sales via the Internet or as singles of tracks on which
samples are used. Third-party artists who record with other artists often include
the same restrictions. And many major artists who are justifiably afraid that they
will not be adequately compensated by the labels for use of their records online
threaten not to record another album or with some other form of retaliation, even
if they are contractually obliged to allow the labels to use their music in any
media. A statutory license could cut through these knots while guaranteeing fair
compensation to the artists.

These contractual problems continue to have strong negative impact on the record companies’ ability to compete with unauthorized P2P systems. Limewire, Russian websites and the thousands of Bit torrent powered private networks that allow people to share free music are not limited in the amount of music that they allow people to share. They provide access to millions of tracks unavailable on iTunes or other “legit” business models.

The Commentary concludes:

The proponents of a free market would argue that the market is the best device in
establishing a fair price for all private property, including music copyrights.
However, the technological advances created by the Internet have led to what
economists call a “market breakdown” in the recording business. Without a
compromise–such as a compulsory license–between the competing economic
interests (i.e., hardware versus content), everyone will lose.

The crux of my proposal is that a statute legalizing file sharing, in return for a levy on the technologies that make “free music” possible, would help everyone:

• the labels and the artists would be fairly compensated;
• the technology companies would still have the labels around to find, produce and promote music to attract more subscribers to high speed Internet services, and more customers for computers, CD burners, MP3 players and other digital devices; and
• the public would have access to more music without the threat of lawsuits,

Developments since 2003 have only made the argument for a compulsory license as a cure for the recording industry’s woes stronger.

Steve Gordon is an entertainment attorney and author of The Future of the Music Business, and hosts a radio show at MyRealBroadcast.com that focuses on the revolutionary changes happening in the music business. He recently won a Fulbright Scholarship and delivered a series of lectures on copyright law and the music business at Bocconi University in Milan, Italy.

Stanley Schneider,

If we’re looking for a new, universal, consumer-friendly methodology, paying for protection against lawsuit is not the way to go! A government-mandated fee applied to your ISP or mobile bill, and distributed to rights holders through a collection society has become a kind of holy grail in the face of rampant online piracy. Industry agreement would be preferable to government mandate, of course. And the rub is, as always, how much and who shares; how much for the labels, music publishers, unions, etc. It has to be adequate to ensure the continued production of music by the people who do it on a commercial basis- the record labels. Notwithstanding a lot of talk about self distribution on the internet, most music that sells (and for that matter, that gets pirated) is produced by the major and independent labels.

Simon Wheeler, Beggars Group

The internet solves more problems for the distribution of media than it creates, to look at these new technologies in any other way than an opportunity means that you will miss the benefits and be more wrapped up in the problems

By not trying to make more of the opportunities, the industry has ceded ground catastrophically to those who want to take advantage of the benefits that digital distribution can bring, without dealing with the rights, or value, that the industry has created. By not licensing the original Napster, the industry lost a massive chance to harness the efficiency of p2p and so pushed it out to be the decentralized world of today, it wouldn’t have been pain free, but it would have likely been less painful that the previous 10 years that we’ve experienced and we would probably would have had a significant revenue stream that would have grown sooner and faster than what we have experienced

P2P downloads are a part of our problems but not the sole cause, file hosting services are a significant issue now for the industry, and indies in particular as we don’t have the resources to address these services effectively, this hurts most in the key pre-release window.

The main cause of the declining revenues in my view is two fold, one is the format shift to digital, turning a £10 purchase into a £0.79 purchase but its coupled with a decline in A&R; where 1 or 2 radio tracks were enough to drive album (CD) sales, that no longer applies in the digital track world, until the talent side of the industry realises that low/no attachment artists are never going to be significant album artists this is going to continue.

People have no stopped buying albums, people have stopped buying albums that only contain 1 or 2 tracks that they want, equally, if you have no emotional attachment to the artist then just grabbing a track from p2p is the most efficient option for a lot of people.

Government intervention in business is usually never desirable for any of the parties involved, but it seems to have become a necessity to get the right people talking, I don’t believe that a fee, or tax, on anyone’s connection bill is going to answer our problems as It doesn’t create any value for anyone in the chain, including the consumer.

I firmly believe that creating value added services based on frictionless movement of music between users is the best solution for the music industry and for ISP’s
Only by bringing ISP’s or Telco’s into the value chain can we develop meaningful music based services that bring in enough revenue to reward the creators and provide a compelling alternative to the blind and dirty (but free) exchange of files that currently exists.

ISP’s and Telco’s are already commodities, even though they rarely will admit that, for them to develop stand out businesses that are not only competing on price they must be part of the content / distribution business. I’m not suggesting that they all start content businesses, as so far we have learnt that they do not generally have the understanding or skills to enable this, but there are now more and more companies who can enable their businesses to create value based on content and differentiate themselves in the marketplace

Its not true to state that the internet doesn’t recognise geographical boundaries, and most online markets that I have experienced have a real local flavour, and we should be acutely aware and celebrate the many and varied cultural differences and not try to put everything in box, although it would be much easier if we could do so, however, the totally fragmented licensing regime is not conducive to scaling a business, Europe is a great but sad example of this fact.

Getting a truly global licensing structure for the industry is probably a pipe dream, a one stop shop for the world is a fantasy, but there does need to be some form of collective to make it easier for users to make the business money.

The first step towards simplicity would be a global repertoire database where it would be possible to find out who owed the rights you wanted to license, or wanted to pay, there’s arguments for making this open, but as long as its not hidden away as private industry property and available for querying for a reasonable fee and with reasonable re-use terms then it could be an extra-ordinarily strong asset to help the industry progress.

While there are some good examples of collectives, unfortunately the history and present of collective licensing has not been transparent for many, in some cases there are personal vested interests, others are cultural vested interests and the usual commercial vested interests, its going to be very tough indeed for a body to handle the collective in a way that is transparent and doesn’t disadvantage one constituency over another. It is this trust and transparency which will be essential to any collective work along with the support of the differing anti-trust regimes that are in place around the world to work collectively to provide an offering that benefits business and the consumer.

Simon is Director of Digital at the Beggars Group and has been licensing digital services since 1997, licensed the original Napster and has since worked with almost every significant entity in digital media. He chairs AIM’s New Media Committee and has spoken at most music conferences around the world, but concentrates on keeping the Beggars Group of labels at the forefront of all new technologies to deliver its award winning roster of artists to the widest possible audience.

Rob Kasunsic, US Copyright Office

Rob Kasunsic – US Copyright Office – IAEL ISP Collective Licensing Opinion
On the merits, I’m not inclined to chime in. I’m not a fan of alternative compensation systems, including the outlined consumer levy. I spoke at the FMC summit several years ago on ACS and highlighted many of the practical problems, not the least of which is allocation and distribution to copyright owners and creators. In many cases, consumers are quite happy deciding what to purchase and when, and may not be inclined to subsidize those who are not happy with authorized sources of copyrighted works. There is also a significant amount of market competition for digital sources of copyrighted material. Without some sort of market failure, I don’t see the need for such a shift. Moreover, how would this affect authorized and unauthorized sources of works? Sounds to me like this is a solution in search of a problem that entails many unanswered questions and prospective problems in itself. Have you talked to Lon Sobel? I believe that he is one of the people who first came up with the idea of ISP intermediary collection. I discussed his article in my article on iTunes (the latter of which is available on the Stanford site and was published in Lon’s Entertainment Law Reporter). Here’s a link to the latter version: http://www.kasunic.com/Articles/Solving%20P2P%20Problem.pdf. I think this article explains part of my position. It could certainly be linked to or cited. Depending on the timing of this, if you would like a critique of ACS or a particular model, I would be happy to do that, but could not likely get to it until early in the year.

Rick Roccobono and Ian Penman

Rick {Riccobono [www.newmedialaw.biz/pages/rick-riccobono.php]} and I [www.newmedialaw.biz/pages/ian-penman.php] have been advising various governments on this issue.

As yet, however, our advice has not been fully followed (although we believe that it eventually will have to be).

In a nutshell: a licensed service will not work. Nor will suing the users and/or closing down their connections (although as copyright lawyers, our business will multiply logarithmically – as more and more people question whether such action was legitimate – and rights owners/ISPs are force to prove that the user’s action was in fact an infringement of copyright!

In our view, the evidence shows that the public will not adopt a music subscription service with the type of monthly charge being considered by Virgin (for instance). Also, the ISP’s cannot be counted on to police the network and/or administer music distribution even if they could maintain safe harbour status (something that any government would have to guarantee before begin discussions could even begin). Having said that, a government is critical in the process, as they must direct the ISPs to cooperate. To date, whilst some ISPs have paid “lip service” to toeing the line – in respect of copyright infringement – none have as yet actually adopted any policy that provides a direct financial benefit to copyright owners. Don’t forget that in the UK, studies have shown that up to 80% of total internet traffic at any one moment is comprised of people illegally downloading music! Yet do you suppose that the ISPs have offered to pay through any element of their income from this use? Of course not!

Our advice has been to tackle this by way of a levy per connection without regard to actual music usage (in effect a charge for broadband use). No engagement with the rights owners would be commenced unless and until a substantial pool of money had been set aside from a levy. At that point and again without regard to actual music consumption, the major rights owners would be invited to create a mechanism by which the money could be distributed, maybe via some combination of factors including the various market share numbers. The levy and its distribution would have no effect on already approved music services like iTunes and the rights owners could still address piracy in any way they see fit.

The advice we have provided addresses multiple topics including wholesale pricing models in a licensed service, the character of the levy and the viability of garnering the cooperation of the rights owners (publishers and labels at the same table from the start) to participate in the allocation of an incremental income stream that has no connection to the current approved and licensed business models.

However, none of this is happening right now. However if there is some level of support for this concept from one or more major music companies it may encourage the relevant governments to move forward with the initiative.

Frankly, at present, we cannot see any other solution having any chance of success.

Ray Beckerman, Ray Beckerman P.C. LLC

I think what people want is some form of compulsory mechanical blanket licensing so that people can do, without fear of violating copyright infringement law, what technology has already enabled them to do, both in terms of what they listen to or view, and in terms of what they create using bits and pieces of other creations.

Ray is a commercial litigator and internet law attorney with extensive experience in business law, copyright, trademark, entertainment, libel, slander, internet, computer software, business torts, and other areas, and has litigated hundreds of cases.

He began his legal career with Phillips, Nizer, Benjamin, Krim & Ballon, working his way through night law school, and upon graduation becoming an attorney in that firm.

Paul Resnikoff, Digital Music News

If the goal of the music business was to successfully transition the traditional, CD-based business into digital formats, the report card looks awful. But business history generally predicts that entrenched companies are absolutely abysmal at handling disruptive change, as described in Clayton Christensen’s “The Innovator’s Dilemma.” In the slightly-broader sphere of media, we can see similar reactions from the newspaper industry (still paper-based and plodding into the internet for the most part), and Hollywood.

Skip the complicated analysis – file-swapping served to decouple the album, eviscerate scarcity, and prevent bad purchases by offering far more sampling. It ruined a great mark-up and packaged product for major label groups. The other variables related to moral responsibility and ethics among consumers turned against the industry. It turns out that most consumers have problems believing that artists are worthy of their money, or that labels are paying them in the first place. Part of that is rooted in reality – remember, Metallica was the one screaming about Napster, and labels are guilty of a lot of financial bad behavior. The finer points got lost. Layer in some file-sharing lawsuits against the little guy, and the cake was baked. File-sharing is now the equivalent of going 75mph in a 65mph zone in the mind of the consumer.

But there’s a much larger issue here. The economics of selling music once revolved around scarcity. There were only a fixed number of recordings created, and their availability was limited and obtainable only with payment. Sure, home-taping helped to work around that, but the prevailing relationship between the consumer and producer featured a controllable, fixed transaction in which money almost always changed hands. No more.

There are serious problems that a collective licensing regime introduces. At one point (earlier 2000s), ISPs seemed more receptive to this sort of thing, but there are some misguided assumptions currently among major label groups. The first is that adding a few dollars to an ISP bill is easy – but access providers are sensitive to this sort of thing, especially in the current economy. And, remember that consumers are totally conditioned to getting media for free – legal or not, moral or not – so ISPs will experience a lot of resistance to a paid replacement.

The other issue is that a collective licensing plan creates a fixed pool of money, and with it, a host of new problems. How is that money distributed? Can we trust that it will be administered fairly, without the need to constantly audit and reexamine terms? The legacy of the recording industry strongly suggests that this is a bad idea, and that artists will get ripped off. Additionally, huge problems currently exist with the distribution of royalties to actual copyright owners – even if the distributions are being conducted by ethical parties.

These are administrative and trust issues that require lots of oversight, and money to maintain (either from the copyright owners, or tax payers, or both). But why should all of this energy be expended to re-value the recording? A fixed pool would invariably tilt towards the more established acts, and could service to disincentivize newer artists – after all, no matter how great the song, it is subject to a maximum based on the existing pool of money.

There’s an assumption that the recording should be revalued, that it should retain its money-producing place in the food chain. Market and consumer dynamics suggest otherwise, and that is shifting controllable revenue-generators towards other assets and experiences, such as live gigs, publishing, and advertising relationships. Currently, the consumer values a song at about 2-cents, if that, averaged across most transactions, so the question is whether it makes sense to fight to aggressively to force a different valuation, and control payment against that valuation.

Based on current systems, a worldwide collective licensing system seems extraordinarily and unnecessarily difficult. Labels, publishers, ISPs, legislators, and technology providers are usually at loggerheads, often to the extreme detriment of the paid marketplace. The track record is poor, though certainly it is possible theoretically. But part of the reason why entrants like the Pirate Bay have done so well is that there are no cross-border rights disputes to negotiate, just technological questions to resolve. And the consumer appetite is enormous for unrestricted media access.

At this juncture, major labels need to seriously consider abandoning the CD entirely, and refocus their business towards smaller, nimbler goals. This means giving up billions overnight, though it also opens the possibility of survival and regrowth in the 2010s. Newspapers also need to give up print editions; it is a ‘cold-turkey’ transition that must happen if traditional media companies want to thrive in the future.

On the recording, the pressing question (no pun intended) is whether the fight to re-value and force purchasing is worth it. Or, if energies are better spend maximizing catalogs across different channels – b2b publishing deals, refining 360-deal structures, etc.

Spotify – and some competitors – provide very close to an ideal music service, though monetization remains the challenge. Total ubiquity is required – any song, any playlist, from the home, office, car, iPod, airplane, whatever. This is better than file-swapping, though monetization is the question. What is that price point? Probably lower than when the industry wants, and it remains unclear how willing consumers will be to pay.

Paul Resnikoff is the founder and publisher of Digital Music News (digitalmusicnews.com), a premier industry source for news, information, and analysis. Digital Music News has quickly grown from its humble roots as a small, executive news service to the most widely read information source in the field.

Prior to starting Digital Music News, Paul Resnikoff headed the digital music initiative at internet portal Lycos. In that role, Resnikoff managed relationships with several major labels, including the former BMG and Sony Music Entertainment. Resnikoff started out at Epic Records (Sony Music Entertainment) in New York, specifically in worldwide marketing.

Resnikoff’s interest in digital music comes from his passion for playing and writing music. He grew up playing French horn and bass guitar and dabbles in music composition.

In terms of listening, Resnikoff prefers Classical (Rachmaninoff, Mozart, Barber, Vivaldi, Mussorgsky), Rap (Styles P., Black Moon, Lost Boyz), Dancehall Reggae (Elephant Man, Buju Banton, Sean Paul), and Metal (Sepultura, Obituary). Other favorites include The Doors.

Aside from music, Paul also enjoys traveling (most recently Iceland, Germany, Sweden, Belize, Costa Rica, and Mexico) and is an avid tennis player. He is also known to eat large amounts of chocolate cake and root for the Washington Redskins, both unhealthy pursuits.

Paul Resnikoff earned his degree in Economics and Music from Stanford University.