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A Full, Fair And Feasible Solution To The Dilemma of Online Music Licensing
By Bennett Lincoff BennettLincoff@aol.com © Bennett Lincoff 2002.
1 Mr. Lincoff is an attorney, consultant and writer, working in New York City. He is the former
Director of Legal Affairs for New Media at ASCAP, where he developed the organization's Internet
license agreement that authorizes Internet performances of the copyrighted music in ASCAP's repertory
2 He also directed the collection and analysis of data that allowed ASCAP to make the first-ever
distribution of Internet royalties to music publishers and songwriters for online use of their creative
works. Mr. Lincoff represented ASCAP before the Copyright Arbitration Royalty Panel in rule making,
rate setting and royalty distribution proceedings under numerous compulsory and statutory license
regimes. He also co-chaired the delegation of the American Bar Association to the WIPO deliberations
that led to the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty; and he
represented ASCAP as a member of the coalition of rights holders in the negotiations that led to passage
of the Digital Millennium Copyright Act. Mr. Lincoff can be reached at bennettlincoff@aol.com
I. Introduction
3 Practically no one is satisfied with the rules governing online use of copyrighted
musical works and sound recordings. Rights holders believe that the rules are
inadequate to protect their ability to sell recorded music. Information technology
firms and consumer electronics makers are concerned that they will not be
permitted to develop new media or new markets. Webcasters are being driven out
of business by statutory license fees that exceed their gross revenues. Those who
survive must operate with unprecedented program content restrictions. And
consumers are alarmed that the rules will expose them to liability for enjoying
music when, where and how they want.
4 Despite the growing conflict between the music industry and each of these other
groups, their interests are not necessarily incompatible. It is possible
simultaneously to protect the integrity of copyrights, promote technological
innovation, facilitate the growth of digital audio services, and meet consumer
demand
5 The problem is, however, that because of the Internet it will not be possible to
prevent the widespread unauthorized distribution of recorded music in digital form
6 This, in turn, jeopardizes the music industry's $40-plus billion dollars in annual
worldwide revenue from the sale of recordings
7 The industry has responded with legislative proposals, technological access
restrictions and anti-copying measures, and infringement litigation. Nonetheless,
digital music piracy is on the increase and CD sales are in decline. It appears that
the only effect -- if not the intent -- of the industry’s strategy has been to thwart
development of a lawful market for the online use of music
8 Simply put, the music industry soon may no longer be able to sustain its traditional
sales-based revenue model. Neither law, nor technology, nor moral suasion will
suffice
9 An alternative to the sales-based revenue model is needed for online uses of music;
an approach to rights management that will not depend on access restrictions or
anti-copying technology for its success; one that is structured specifically to
accommodate the changed circumstances imposed on the music industry by the
emerging global digital network
10 I suggest this:
- 11 Congress should create an online transmission right for musical works and
sound recordings. This new right would replace the now-existing
reproduction, performance and distribution rights in these works for online
purposes only
- 12 Licenses under the online transmission right would authorize all acts
cognizable under the Copyright Law that may be involved in transmitting
music to end users. Licenses would be granted without regard to the
conduct of end users: It would no longer matter whether consumers only
listened to online transmissions or also downloaded them
- 13 The online transmission right should be subject to a statutory license and
administered by a single rights collective on behalf of all rights holders of
musical works and sound recordings
- 14 Rights holders and service operators must cooperate in the development and
deployment of a uniform rights management system for monitoring which
works were transmitted and by whom. To this end, rights holders would
identify the works in which they claim protection. They would also provide
a technological means for marking individual works and tracking them when
transmitted online. For their part, service operators wishing to qualify for
the statutory license must ensure that they only transmit properly marked
works and that they keep track of the works they transmit
- 15 The statutory license fee for each service would be based on its revenue or
its operating expenses, whichever is greater. Adjustments could be made to
the fee to reflect differences among services in the prominence of their use
of music as well as in the relative proportion of copyrighted and public
domain works they transmit. Within this framework, the statutory license
fee rate could be set by voluntary negotiations between the rights collective
and service operator representatives. Failing voluntary agreement, the rate
would be established by government-supervised arbitration following an
evidentiary hearing
- 16 In addition, a flat monthly license fee would be charged for members of
peer-to-peer file sharing networks and similar online communities wishing
to avail themselves of the statutory license
- 17 Royalty distribution would be based on a full census of licensed
transmissions. In this way, royalty payments would correspond precisely
with online transmissions and they would be made only to those rights
holders whose works were actually transmitted by licensed services.
Disputes regarding royalty distribution could be settled either by voluntary
agreement or by arbitration
18 An online transmission right, collectively administered, and subject to a statutory
license, is the best model for the administration of online rights in music and sound
recordings. By these means, the ongoing public policy deadlock over the online
use and protection of music could be broken and an online marketplace for music
could flourish
19 A fuller explanation of the need for an online transmission right, as well as the
details of its implementation, follows
II. The Music Industry's Sales-Based Revenue Model Will Soon No Longer Be Sustainable
20 Internet transmissions are instantaneous and worldwide in scope. This changes the
dynamics of record piracy. Previously, large-scale piracy required an
organizational infrastructure, production facilities, distribution channels and lots of
money. It was cumbersome at best and vulnerable at every turn to the industry’s
anti-piracy campaigns. Also in the past, the copying and distribution of recordings
by individual consumers, while troubling, never imperiled the industry
21 Today, record piracy is cheap, quick and easy. Every Internet user, every member
of a peer-to-peer file sharing network and every service operator in the world is a
potential source for the unauthorized mass distribution of music. Many of these
may be beyond the ready reach of lawful process. Accordingly, rights holders are
preparing for future anti-piracy campaigns that will pit the industry directly against
consumers regarding conduct occurring in the privacy of people’s homes
22 The industry's exposure is greatest for "legacy" recordings. Nearly all recorded
music has already been distributed by the record labels in digital format through
the sale of CDs. Anyone can turn these works into digital audio files and distribute
them on the Internet in unprotected form. Whatever technological fixes the
industry may devise for newly made recordings cannot protect works already in the
public's hands
23 Even encryption may not protect new works from uncompensated distribution
24 Technological anti-copying measures beget countermeasures, and news of a
successful hack will be available immediately to anyone who cares to know it
25 Reliance on a succession of technological measures has proven unavailing. There
is no reason to believe that the result will be different next time, or ever
26 The industry takes comfort in the observation that most consumers walk past the
vendor selling CDs at the card table on the street to pay more in retail stores for
licensed products. It is believed that good and honest consumers will continue to
do the right thing in the online context; and that, in any event, they will continue to
demand the highest quality merchandise
27 It remains to be seen whether consumers will be able to hear the difference
between licensed and unlicensed digital audio files. The extent to which they will
care about small differences is itself a different matter. However, even the most
vigilant consumer may not be able to distinguish between services that are
authorized to offer downloads and those that are not. When criminal groups –
domestic and foreign – migrate to the Internet, the pirate services they launch
could have the same look and feel and same sophisticated functionality as those
operated by the largest entertainment companies
28 It is also possible that the music industry has misjudged its customers. The public
regards music differently than it does other content. Music is portable. Music is
ubiquitous. Music appears to be free. Everyone is a music consumer, whether
they buy CDs, go dancing or to concerts, or only listen to the radio and watch
television. People develop an ownership interest in the music they most like to
hear. “They’re playing our song,” is a heartfelt refrain. The psychological effect
on consumers of this sense of personal entitlement to other people’s property
should not be overlooked
29 Compounding these enforcement problems, the industry will not likely be able to
rely on a technological solution such as audio players that only operate with files
containing particular codes. Not all audio is music. Not all music is copyrighted
30 And not all rights holders want to limit online uses of their works. Moreover,
because ownership of rights in music and in recordings may change hands often, a
decision to limit online uses of particular works in response to today's market
circumstances may become a decision binding on all subsequent owners of those
rights for all time and under all circumstances
31 In addition, “copyright friendly” audio players may raise “fair use” and free speech
concerns depending on whether and how they impede individuals from
communicating with each other. Obviously, if given the opportunity, consumers
would choose devices that accept all works
32 The music industry depends heavily on the sale of hit records. However, through
the Internet, the market for distribution by sale of individual recordings can be
ruined in a moment's time and without payment of any royalties to songwriters,
music publishers, recording artists or record labels. By the time a rights holder
discovers that its newly released recording is being distributed unlawfully online,
notifies the service operator demanding "takedown", and obtains removal of the
work from the service, the damage will have been done, the loss incurred. Under
these circumstances, the industry's sales-based revenue model will soon no longer
be sustainable
33 Faced with these market conditions and uncertainties, the industry has struggled to
extend its existing revenue model into the digital age. To this end, industry
members have largely refused to voluntarily license works for online use by others
34 Instead, they have launched their own branded services to offer subscription-based
access to limited portions of their catalogs. These have not been well received by
consumers. The industry also has turned to Congress and the courts for
vindication
35 This approach is understandable, especially in light of the uncertainty over how the
online music marketplace will develop, what form the next technology
breakthrough may take, and which licensing structure or structures will be most
beneficial in the long-run. It is also uncertain what role anti-trust and competition
laws may play. No one reasonably can fault such a mature industry for resisting
transformation and preferring preservation of the relationships upon which its past
successes have been based. However, circumstances have catapulted the music
industry into the forefront where every business decision is subject to scrutiny and
becomes part of the ongoing policy debate
36 There is no sound reason why public policy should not support the opportunity of
those who create and own copyrighted music and sound recordings to derive ample
rewards from their contributions to culture and commerce. It is our obligation to
secure their right to do so. By the same token, it is not reasonable for the music
industry to expect public policy to support its desire to do business in a particular
way
37 The industry reports that its worldwide revenues from the sale of recorded music
declined by approximately 15% for the eighteen-month period ending June 30,
2002. It attributes this decline, in substantial part, to those aspects of the global
digital network and other new technologies that are beyond its control. Others
question the contribution these factors may have made. In either event, the decline
may well have been sharper had the industry not pursued its legislative agenda and
campaign of enforcement litigation
38 Nevertheless, whatever short-term benefits the industry might gain from its current
approach, it will prove self-defeating in the long-run. The strategy will not
meaningfully reduce the threat of unauthorized distribution of recorded music
39 Consumers continue downloading and copying music from online services; and
unlicensed peer-to-peer file sharing networks are proliferating. And because its
strategy is necessarily reactive, the industry will always lag behind its latest
challenge
40 On the other hand, the strategy has stymied American technology firms in their
deployment of high-speed broadband connections for the consumer market
41 Consumers, it turns out, are reluctant to pay higher monthly access fees when
rights holders will allow so little sought-after content to be made lawfully
available. Similarly, consumer electronics makers, fearing liability, have been
reluctant to market new devices and systems with next generation capabilities
42 And for it all, the industry’s strategy has resulted in fewer licensed uses of fewer
works and slowed the growth of royalties that those in the industry otherwise may
have earned
III. Congress Should Create An Online Transmission Right For Musical Works And Sound Recordings
43
The Internet and other digital media will maximize the opportunity for music to be
used and for rights in music to be licensed. But technology may render certain
traditional rights unenforceable and blur the distinction between others. New
definitions of rights are needed to meet these newly arising circumstances
44 Prior to the Internet, public performances, as such, only involved the public
performance right in musical works. They did not involve the licensable
reproduction or distribution of music or any rights at all in sound recordings
45 Similarly, the making and distribution of recordings did not involve public
performances
46 Streaming media and the ability of end users to download and retain perfect digital
copies permit, for the first time, the simultaneous exploitation of the performance
and distribution rights in songs and in the recordings that embody them. In
addition, the loading of music onto a server's hard drive and the incidental,
transitory copies made in the course of transmissions to end users may count as the
reproduction and distribution of both the songs and the recordings involved
47 As a practical matter, it may not be possible to know whether end users only listen
to online performances or also download them. Nevertheless, knowing specifically
what end users are doing in each instance is key to licensing the performance and
distribution rights separately -- as had been the practice prior to the Internet, and as
continues to be with analog and other non-Internet uses
48 Not knowing which rights are being exploited in a particular transmission has
driven rights holders to increasingly great lengths to justify their online licensing
practices. For example, music publishers find a licensable performance in every
download and the distribution of copies in every performance. The performance
rights organizations, such as ASCAP and BMI, which license public performances
of the copyrighted musical works owned by their publisher members, assert that
every transmission of a musical work constitutes a performance of that work, even
if the music was transmitted only for downloading and was inaudible as it was
being sent. They seek to charge license fees for these unheard "performances"
even though their publisher clients also collect mechanical (reproduction and
distribution) license fees for the same transmissions
49 In addition, publishers seek to impose mechanical license fees even if no
permanent downloads are involved and the only “copies” made are transitory and
incidental to transmissions that are nothing more than performances. They are
especially concerned that "on-demand" streaming may substitute for record sales
and, therefore, eliminate the rationale for the publishers' mechanical license fee
50 When Congress passed the Digital Millennium Copyright Act ("DMCA") in
October 1998, its stated purpose was twofold: First, to ensure that rights holders
would be protected as new technologies affected the ways in which their creative
works were used; and second, to create fair and efficient licensing mechanisms that
address the complex issues facing rights holders and rights users as a result of the
rapid growth of digital audio services. See, H.R. Conf. Rep. No. 105-796, 105
Cong. 2d. Sess., at 79 (1998). Neither goal has been achieved. Congressional
intent was thwarted by an on-rush of circumstances that no one foresaw
51 Congressional action is again required. This time, however, Congress should take
a different approach. It should consider aggregating the separate rights of music
publishers and record labels in their respective works and creating hybrid online
transmission rights for music and sound recordings. These new rights would
subsume the parties' now-existing reproduction, performance and distribution
rights. Licenses under the online transmission right would authorize every act
cognizable under the Copyright Law that may be involved in transmitting musical
works and sound recordings to end users
52 Because the distribution and performance rights would no longer have independent
existence, the online transmission right could be licensed without regard to the
conduct of end users. It would not matter if they copied or only listened to
transmissions. It would not matter if they shared. It would not be necessary to
know how many copies, if any, were made in the course of a transmission. Nor
would it matter whether transmitted copies were temporary or permanent
53 Moreover, unlike the distribution right, but like the performance right, the online
transmission right could not be subverted by a single unlicensed service operator,
Internet user, or peer-to-peer file sharing network. Whether or not particular
transmissions were licensed would not affect the market for the online transmission
right over all
54 The experience of music performance rights organizations proves this point
55 ASCAP and BMI license radio stations for over-the-air broadcast performances of
the musical works in their respective catalogs. The broadcast license fees they
collect compose a major portion of their total annual revenue. However, even if
the largest radio station or group was not licensed at a particular time, the rights
organizations' ability to license the nation's thousands of other broadcasters would
not be impaired. People would continue to tune to their local stations to hear their
favorite songs over and over again; and the overwhelming majority of broadcasters
would continue to operate lawfully by securing the public performance rights they
need. Those who act outside the law can be sued for copyright infringement; and
the courts should continue to require infringers to pay more in damages and other
costs than they would have paid in license fees
56 Finally, an online transmission right would not depend on the efficacy of
exclusionary technology for its success. Far from needing to limit access to their
works, rights holders would have an incentive to encourage the most extensive
uses possible. This would free the industry from pursuit of unbreakable
encryption, allowing it to focus instead on development of the monitoring
techniques needed to implement its new configuration of rights
57 An online transmission right would represent a major shift in leverage and
economics within the music industry, and it almost goes without saying that rights
holders who think they have a strong position vis-a-vis other rights holders may
not be interested in negotiating alternate arrangements. Nevertheless, the policy
issues involved are broader than the interests of the music industry alone. In this
important area, policy should be guided by what is fair and what is feasible and
what is in the best interest in the long-run for everyone involved
IV. Online Transmissions Should Be Subject To A Statutory License
58
An online transmission right would enable transmissions of copyrighted music and
sound recordings to be made available from a vast number of licensed sources,
anytime, anywhere, to anyone with Internet access. It remains to be shown,
however, specifically how this new right can form the basis of a viable
marketplace for music
59 As a starting point, the online transmission right should be subject to a statutory
license
60 In principle, voluntary market-driven licensing arrangements are to be preferred
over statutory or compulsory licenses. In practice, statutory licensing or its
equivalent has been standard in the music industry for decades. Of the nowexisting
rights in musical works and sound recordings that the online transmission
right would replace, only the record labels' right to sell recordings is not already
subject to statutory licensing or to court ordered mandatory licensing under antitrust
consent decrees. Given the experience to date, experimentation with a free
market for online rights in music may well result in continued market failure
61 There are hundreds of thousands of copyrighted musical works and sound
recordings and tens of thousands of rights holders. Moreover, each of several
rights holders may have an interest in any particular song or recording. Therefore,
a minimum of two licenses from separate rights holders would be required for each
recording of each song transmitted online. It would be impractical and unduly
burdensome to require every service operator to identify, locate and negotiate with
every music publisher and record label whose works the operator wishes to
transmit
62 The exploitation of online rights in music constitutes a new and evolving use for
which licensing experience is lacking. Many rights holders already have adopted a
wait and see attitude and refused to grant others online rights in their works. There
is also much uncertainty over pricing. Because of this, service operators who are
able to secure the rights they need have been required to pay license fees to
multiple parties calculated on inconsistent bases
63 A statutory license would guarantee that each qualifying service operator would
receive a license for all rights in all copyrighted works it transmits. Such a “onestop-
shop” for all online music licensing needs would also reduce the transactional
costs associated with rights acquisition. This savings could be shared with
consumers. Moreover, a statutory license would contain fees established on an
industry-wide basis through government administered arbitration proceedings
64 This would act as a check on excessive license fees and so-called "double dipping."
It also would standardize license fee calculation and reporting and payment
procedures and further decrease the administrative cost of compliance
65 Rights holders would also benefit from such an arrangement. As a condition for
the statutory license, service operators should be required to cooperate with rights
holders in marking works with identifying codes and tracking marked works when
they are transmitted. This information will be needed to calculate statutory license
fees; and it will be key to ensuring that royalties for licensed transmissions are
distributed only to those rights holders who are entitled to receive them
66 And finally, consumers would benefit because they would be assured full,
immediate and uninterrupted access to the musical entertainment they most want
67 Statutory licensing is warranted, but only a limited form of it is necessary. A
parallel free market could also operate in which individual rights holders and
service operators could enter into voluntary, non-exclusive license agreements on
whatever terms they find acceptable
V. The Statutory License Should Be Administered On A Collective Basis
68
Collective administration is the most efficient and effective way to implement the
statutory license. Of the rights that the online transmission right would replace,
only the record labels' right to sell recordings is not already administered -- for the
most part, successfully -- by a rights collective
69 Each of the existing collectives serves a narrow constituency in a divided industry
70 ASCAP and BMI, operating under federal court supervision, license music
performance rights for their respective songwriter and music publisher members
71 The Harry Fox Agency acts as a clearinghouse on behalf of music publishers for
compulsory mechanical licenses. And Sound Exchange, established by the
Recording Industry Association of America and recently given recognition by the
Librarian of Congress, administers digital performance rights in sound recordings
under the DMCA statutory license for the benefit of record labels
72 A separate collective should be established for the online transmission right. The
collective would act on behalf of all music and sound recording rights holders to
administer the new statutory license. It would seek to maximize compliance by
advising service operators how to fulfill their obligations under the law and, when
appropriate, initiate infringement litigation for unauthorized transmissions. It
would represent rights holders in industry-wide negotiations to set and adjust
license fees. If voluntary agreement on fees were not possible, the collective
would present the rights holders’ case in rate proceedings before the Copyright
Arbitration Royalty Panel or some designated successor tribunal. In addition, the
collective would analyze transmission data and distribute royalties to those rights
holders whose works were transmitted pursuant to the statutory license
73 Collective administration would reduce the cost to rights holders of administering
online rights in music. It would allow uniform standards to be employed for
marking works and tracking them when transmitted. And it would ensure that all
rights holders, large and small, would benefit from online transmissions of their
works
74 There are, however, long-standing divisions within the music industry, particularly
between music publishers and record labels regarding ownership, valuation and
administration of the different rights each group owns. For example, the record
labels blame music publishers, in large part, for blocking passage of a performance
right in sound recordings in the United States until 1995. Music publishers, in
turn, accuse record labels of substantial under-reporting and under-payment of
mechanical license fees owed for songs the labels record. There is also an ongoing
dispute between publishers and labels regarding the value of “timed-out”
downloads that automatically terminate the ability of end users to access music
files after a pre-determined number of uses or period of time
75 All of this may complicate efforts at collective administration. Nevertheless, in the
digital age, and under the online transmission right, music publishers and record
labels will become increasingly interdependent and will need to work
cooperatively together for their mutual success
76 In any event, under a statutory license, collectively administered, any marketplace
disruption that may result from lingering or latent antagonism within the music
industry would likely be limited to the royalty distribution phase of the rights
administration process. This would have no effect on service operators, however
77 Those operators who qualify for the statutory license still would be guaranteed
access to all covered works, and fees still would be determined through arbitration
78 Nevertheless, in order to further protect the interests of individual rights holders,
service operators and the public at large, and in recognition of the inherent
volatility of the mix, the collective should operate in all respects on a transparent
basis and be subject to judicial supervision and Congressional oversight
VI. Digital Rights Management Requires Cooperation Among Rights Holders, Service Operators And Technology Firms
79 Cooperation Among Rights Holders,
Service Operators And Technology Firms
Rights management for music in the digital age begins and ends with the ability to
monitor online transmissions. Knowing which works have been transmitted and
by whom underlies licensing, enforcement, contract administration and royalty
distribution
80 Initially, it is necessary to determine who is transmitting covered works in order to
know who needs a license. If a license is refused, identification of works
transmitted without authorization is necessary for enforcement litigation. Once
licensed, transmission data will be needed to calculate fees due. And knowing
specifically which works were transmitted by each licensed service is necessary in
order to know who among the rights holders is entitled to receive royalty
payments
81 The foundation of digital rights management is the creation of a database
identifying all works that are subject to the statutory license. Neither all music nor
all sound recordings are copyrighted. For example, U.S. recordings first made
prior to February 15, 1972, are not subject to copyright protection. In addition,
works that once were copyrighted may no longer be protected either because of the
passage of time or failure of the works' rights holders to comply with technical
requirements of the law. Works that are not protected by copyright would not be
covered by the statutory license
82 Service operators need to know which works are protected so they will know if and
when they need to comply. Those who are licensed need a way to confirm that
they are not paying license fees specifically for transmission of works in the public
domain
83 For the most part, service operators, acting on their own, will be unable to
distinguish between copyrighted and public domain works. Yet, in order to avoid
infringement, operators must obtain authorization before they transmit any
copyrighted works. On the other hand, rights holders know precisely which of
their works are protected and which are not. Under these circumstances, rights
holders should shoulder the burden of identifying the works in which they claim
protection
84 Rights holders must agree on a universal numbering system by which a unique
identifying code would be assigned to each musical work and to each sound
recording. By cross-referencing these codes with other information in the
collective's database, it would be possible to determine each work's title, and to
identify its writer, publisher, recording artist and record label. The reverse also is
true. By knowing a work's title and the performing artist who recorded it, one
could derive the relevant unique identifying code numbers
85 Much of the data needed for this identification system already has been compiled
86 Some of it is held in databases operated by the existing rights collectives. Some is
in the rights holders' own databases. Some of it is publicly available. Most of it is
treated as trade secrets. Yet, all of this data must be aggregated into a single
database to be made accessible through the Internet to all service operators;
without it, the systematic and comprehensive monitoring of online transmissions
will not be possible
87 Whether or not a work is listed in the collective's database, its transmission by
service operators who otherwise qualify for the statutory license should be deemed
to be authorized and, therefore, not infringing. However, if a work is not listed in
the database, then its transmission under the statutory license should not be subject
to payment of any license fee. In any event, if a work were not listed, the rights
collective would be unable to verify if or when that work has ever been
transmitted; and, accordingly, the collective would have no basis to distribute
royalties to rights holders of such a work for transmissions occurring during any
period the work was not listed
88 Rights holders who list their works in the collective's database will benefit from the
statutory license to a greater degree than will those who choose not to identify the
works in which they claim protection. This bias in favor of rights holders who
actively participate in a uniform system of rights management flows from the
nature of the global digital network itself and is not a mere formality thrown as a
roadblock to protection
89 Digital rights management also requires a means for physically marking audio files
with codes identifying the works they contain and a means for tracking online
transmissions of marked works. For this, the cooperation of service operators is
essential
90 The process of marking digital audio files requires access either to the files
themselves or to the recordings from which they were made. Until recently no one
considered it necessary to encode recordings with the data needed to track their
transmission in a global digital network. Therefore, existing recordings are not
marked and cannot be tracked systematically when transmitted. Even once the
industry begins marking newly made recordings, the problem with previously
distributed unmarked works will remain
91 The solution lies with service operators. They select the works to be made
available for transmission and operate or control the servers from which these
transmissions originate. This places service operators in the best position to ensure
that only properly marked works are transmitted
92 Therefore, as a condition of the statutory license, service operators must share
responsibility for ensuring that the works they transmit are properly marked. If the
copy of a work that an operator wishes to transmit is not already identified, the
operator must obtain the relevant information from the rights collective's database
and embed it in the file prior to transmitting it. In addition, operators must neither
alter nor remove previously embedded identification codes. Transmission of
works with altered codes, or works from which embedded codes have been
removed, or transmission of works that are not properly marked but for which the
identification codes are available from the rights collective's database, should
subject the service operator to a suit for copyright infringement
93 It would only be necessary for service operators to mark particular digital audio
files one time. Once recorded, a work’s identity is fixed: Its title, and the names
of the songwriters and performing artists cannot change. Only the identity of the
rights holders could be subject to change, for example, through the sale of a music
publishing catalog, or the purchase of one record label by another. In the event of
any such transfer of rights, the collective would modify the database to reflect the
new ownership interests and, subsequently, would pay royalties to the new rights
holders. However, the primary identifying code for each work involved would not
have changed and there would not be any additional obligations imposed on
service operators. In this way, operators could build libraries of compliant digital
music files for their ongoing use under the statutory license
94 The solution to tracking online transmissions also lies with service operators
95 Operators generate and maintain log files to document activity on their services
96 At a minimum, they should be required to capture the information that would
identify which music they transmitted and when. The relevant data from these log
files must be made accessible to the rights collective for purposes of confirming
license fee reports and payments and to support a royalty distribution system
97 Transmission of a covered work that is not disclosed by an operator's log files
should subject that operator to liability for copyright infringement even if the
service otherwise qualifies for the statutory license
98 Digital rights management places a heavy burden on service operators, particularly
smaller ones. Therefore, every effort should be made to minimize the cost of
compliance. The works database must be readily accessible through the Internet,
easily searched and fully supported. Ideally, the rights collective itself would
make compliant digital audio files of all works available through the Internet for
use by licensed operators
99 As a group, service operators constitute a new community of music users
100 Individually, their experience with rights licensing varies widely. Some have, or
have had licenses for uses of music in other media. Many have no prior experience
at all with music rights licensing, and know little about the complex relationships
that characterize the music industry. Under these circumstances, the music
industry has the opportunity to foster mutually supportive relationships where none
existed previously. It should seek to do so as quickly as possible
101 Digital rights management cannot succeed without the assistance of the
information technology and consumer electronics industries. It is fair that they
should assume a full measure of responsibility in this regard. After all, they will
benefit greatly from growth of the online music marketplace. Moreover, the
sooner the digital music copyright dilemma is resolved, the sooner they will be
able to profit from selling consumers products and services with the most
appealing capabilities
102 The technology industries should collaborate with rights holders and service
operators to develop standards for the management tools needed to optimize
implementation of the online transmission right. Software must be developed to
facilitate the works’ matching, marking and logging processes. Certainly, tools to
track the online use of works will be easier to create, use and maintain than are
those tools needed to exclude people from accessing, copying and further
distributing desired works
103 Whatever tools may be needed by service operators to comply with the
requirements of the statutory license should be made available to them free of
charge by the rights collective; and the terms and conditions of license agreements
for use of these and the other management tools needed to implement the online
transmission right should be negotiated by the rights collective and the owners of
the intellectual property rights in the tools involved
VII. Qualifications For The Statutory License Should Be Limited To Those That Are Needed To Support Digital Rights Management
104
Eligibility for the statutory license should be conditioned only on those
requirements and limitations needed to support digital rights management
105 Therefore, in order to qualify, operators may only transmit properly marked works
and must track and log those transmissions, as discussed above. Beyond that, they
must comply with financial reporting requirements and pay the applicable license
fees in a timely manner
106 Subject to these eligibility criteria, the statutory license for the online transmission
right would be available to all service operators regardless of the business model
they employ, the nature or density of their music use, or the content of their
programming
107 By contrast, under current law, the DMCA limits availability of the statutory
license for sound recordings only to webcasters who offer eligible non-subscription
transmissions that are also non-interactive in nature. Many services will not
qualify
108 As yet, it is not clear what degree of user influence or interaction will render a
service "interactive" and therefore not eligible for the DMCA statutory license
109 Moreover, under the DMCA, eligibility as a non-subscription service does not
depend only on whether the service is limited to subscribers, but also, in part, on
the purpose for which the service is operated. Those that are operated for the
purpose of providing audio entertainment programming are eligible, whereas those
that are primarily oriented to the promotion of a particular company are not. The
DMCA statutory license is not available to ordinary commercial web sites or other
online services for which music is merely background entertainment. These do not
qualify as non-subscription services even if they are available to all end users
without distinction and for free. See, H.R. Conf. Rep. 105-796, 105 Cong. 2d
110 Sess., at 87 (1998). Those services that do not qualify for the DMCA statutory
license are relegated to free market negotiations with rights holders who may
refuse to grant online rights in the works they own
111 The DMCA also imposes several program content restrictions on otherwise
qualifying webcasters. For example, the DMCA limits the number of songs by the
same artist or from the same recording that can be transmitted in any running three
hour period. It prohibits transmitting programs shorter than five hours long if the
program is available on demand by end users and always accessed at its beginning;
and prohibits transmitting longer programs if made available for more than two
weeks. It also prohibits transmitting continuous or looped programs that are less
than three hours long
112 Moreover, the DMCA limits the ability of service operators to build a listener base
through advertising. It prohibits advance announcement of programs that are
shorter than one hour if they are transmitted more than a few times every couple of
weeks and contain recordings in a predetermined order. And it prohibits
publishing program schedules or making prior announcements of what is going to
be played in any program of any length
113 These extraordinary and exceedingly complicated limitations are unique to the
DMCA webcasting statutory license. It is difficult to imagine how they could be
won in free market negotiations. They are the statutory equivalent of technological
anti-copying measures and just as unlikely to succeed. Under the online
transmission right, none would be necessary, and none would be required
VIII. Statutory License Fees Should Be Based On A Percentage Of Revenue Derived From Operation of Licensed Services
114
The diverse rights in musical works and sound recordings that are granted under
current law are administered by different parties. Therefore, service operators who
are able to obtain authorization for online uses are required to pay several separate
license fees calculated on inconsistent bases
115 For example, a pay-per-play-per-listener license fee model has been adopted for
the sound recording performance right component of the DMCA webcasting
statutory license. The fee, as of this writing, is seven cents per hundred listeners
per recording per transmission. In addition, service operators must pay a
mechanical license fee to music publishers for server copies needed to facilitate
transmissions of the publishers' songs. This fee is 8.8% of the total amount
otherwise due for the sound recording performance right. They must also pay
ASCAP and BMI public performance fees for musical works. The ASCAP fee is
1.6% of reportable revenue plus an additional fixed charge each time a user visits
the licensed service. The BMI fee is 1.75% of reportable revenue
116 Moreover, with respect to each work they transmit, service operators must provide
the title of the song; classification of the song by musical genre; name of the
recording artist; title of the album; name of the music publisher and of the record
label; whether the work is instrumental or vocal; the number of times each work
was transmitted; the date and duration of each transmission; and whether end users
only listened to these transmissions or also made their own copies of them. It is
unrealistic to expect service operators, particularly smaller ones, to know most of
this information and unfair to require them to provide it in order to maintain their
licensed status
117 By contrast, under the online transmission right, only a single license fee payment
would be due for any reporting period. Because the online transmission right
would substitute for the parties’ reproduction, performance and distribution rights,
this single payment would cover all rights in all musical works and sound
recordings that may be implicated by transmissions under the statutory license
118 Moreover, the only music use information that service operators would be required
to provide is the server log file data showing when each work was transmitted and
the publicly available unique identification number for each work
119 The fee for an online transmission right would be established either through
voluntary negotiations between the rights collective and service operator
representatives or by recourse to government supervised arbitration. Regardless of
how it is accomplished, this process requires determination of a license fee
structure, a rate and the base against which the rate is to be applied
120 With respect to structure, the percentage of revenue approach is preferable to the
pay-per-play model, especially from a public policy perspective
121 The pay-per-play approach is obvious, straightforward and easy to implement. It
also resonates with a rough fairness borne of the notion that one ought only use as
much of a thing as one can afford. Nevertheless, it would deprive rights holders of
the opportunity to share proportionately in the growing dollar-value of the bounty
created by online transmissions of their works. It is also regressive. It
discriminates against smaller service operators and will result in a marketplace in
which only highly subsidized services and those that derive substantial revenue
from advertising or the sale of goods will be able to transmit much music at all
122 The revenue based approach avoids these shortcomings. In addition, it can
accommodate significant differences in business models and music use among
licensed services. It also results in a fair fee for all operators; one that is
proportionate to the economic benefit each operator derives from transmissions of
covered works
123 For example, some services will be music intensive, offering transmissions of
numerous works in various formats that are accessed by nearly all users. Others
will make more limited uses of music. And, for some services, music use will be
occasional and incidental to the primary purpose for which the service is in
operation. These differences in the prominence of music use among services can
be reflected in the license fee each service pays. This can be done by adjusting the
revenue base against which the fee is calculated by the relative number of users
who access any music at any time during their visit. Thus, a service with $100,000
in reportable revenue and users who all always access music every time they visit
would pay twice the license fee of a service with the same revenue but whose users
only access music every other time they visit
124 In addition, not all works a service transmits will be protected by copyright; and
for some that are protected, the service operator will have obtained authorization
directly from the rights holders involved. This difference also can be reflected in
the license fee each service pays. This can be done by adjusting the revenue base
by the relative number of transmissions of works for which authorization is needed
under the statutory license. Thus, a service with $100,000 in revenue that only
transmits protected works that are not directly licensed by their rights holders
would pay twice the fee of a service with the same revenue that transmits an equal
number of protected and public domain works
125 These adjustments are not mutually exclusive; rather, where appropriate, they can
be cumulative; and they would only be invoked at the discretion of the service
operator involved
126 The session tracking data needed to determine whether end users access music
during their visits can be derived from the log files that each operator already
would be required to maintain under the statutory license. The data needed to
calculate the relative number of transmissions of copyrighted and public domain
works also could be derived from server log files. The latter of these calculations
would require the ability to identify and log transmissions of all works, not merely
those that are protected. Therefore, the system by which the rights collective will
assign unique identifying numbers to protected works should be extended to
include the identification of public domain works as well
127 The rights collective will need to distinguish between copyrighted and public
domain works in any event. Each year the copyrights in numerous protected works
expire, allowing those works to fall into the public domain. The rights collective
will need to manage this change in the status of individual works so that operators
are not charged fees for transmissions of works that are no longer protected and so
that rights holders are not paid royalties beyond the time when they are entitled to
receive them
128 With respect to the base against which the statutory license fee is calculated, and
subject to the adjustments discussed above, the starting point should be the greater
of service revenue or annual operating expenses
129 There are several possible sources of service revenue. These include, for example,
sponsor or advertising revenue, subscriber fees, payments made by program
suppliers and other content providers, payments made by end users for their online
purchase of goods, and payments associated with syndicated selling programs. As
new online business models arise, new sources of service revenue will follow
130 Nevertheless, all service revenue, and not merely that which is directly generated
by transmissions of covered music, should be subject to the statutory license fee
131 The nature of streaming media makes it difficult to separate a service into music
and non-music areas. This, in turn, makes it difficult to separate service revenue
into that which is earned because of music and that which is not. For example, an
end user who launches an audio stream from one area of a service in which no
revenue is generated can continue to listen to that music while browsing another
area of the same service which contains advertisements and in which goods are
offered for sale. The music may or may not still be playing at the moment the end
user notices the advertisement or decides to make an online purchase of goods. If
the only revenue subject to fee were that earned from the area in which the music
stream was launched, the service operator either would pay no license fee at all, or
pay only some designated minimum fee. Arguably, however, this result would not
reflect the value derived from the use of music on this service. If the use of music
did not benefit the service, it would be given up
132 In addition, account also must be taken of those services that are able to operate
without revenue. Unlike the broadcast, cable and satellite industries, where startup
and operating costs are enormous, the cost of entry into the online marketplace
is relatively low. Because of this, online services need not necessarily make
money in order to be viable for their operators. For example, many services are
used to promote the offline, core business of the service operator and may never be
an independent source of revenue unto themselves. Other services may be
operated by organizations to provide information to end users that is not related to
any business venture. And still others will be operated by individuals as a hobby
and without any money making motive
133 For all services of this sort a surrogate measure for revenue is needed. Annual
operating expenses is a measure of the value placed on a service by its operator and
can be used as a fair surrogate for revenue for the purpose of statutory license fee
calculation. This approach was introduced by ASCAP in the 1997 version of its
license agreement for webcasters; and even though ASCAP later abandoned it in
favor of the regressive pay-per-user-visit approach, annual operating expenses
again became an element of license fee calculations under the Small Webcasters
Settlement Act of 2002
134 A determination must also be made as to the rate that will be applied against the
base to calculate the statutory license fee for each service. For this, relevant,
current economic data will be needed. It will be the responsibility of the rights
collective and service operator representatives to adduce such data during license
fee negotiations or before an arbitration panel, should a rate setting proceeding be
necessary. Accordingly, a decision as to rate must wait the day
135 Finally, the statutory license fee must contain rates for members of peer-to-peer
file sharing networks as well as other online communities that provide the means
for their members to transmit covered works. For this, a flat monthly fee per
member may be appropriate. Music use reports would still be required
IX. Royalty Payments Should Correspond Precisely With Fees Collected For Licensed Transmissions
136
Internet transmissions are digital and occur in a networked environment. It is
possible, therefore, to identify all covered works that are transmitted online
137 Cooperation between service operators and rights holders coupled with the
marking, tracking and logging requirements of the statutory license will provide
the data on which such a census could be based. Only through a census can
payment of royalties correspond precisely with licensed transmissions of individual
works. This would ensure that Internet royalties are paid only to those rights
holders who are entitled to receive them
138 By contrast, sample surveys, such as those relied on by ASCAP and BMI, credit
only a fraction of licensed uses. Royalties generated from transmissions that fall
within the sample are paid to the owners of the works in question; but royalties for
transmissions of works that do not fall within the sample are not paid to the owners
of those works; instead, they are paid to rights holders of other works that do fall
within the sample. Thus, a royalty distribution system grounded in sampling
necessarily results in rights holders not receiving royalties for all licensed uses of
their works and may result in some rights holders never receiving royalties for any
licensed uses of their works
139 Similarly, if entitlement to royalties were directly determined by a census of online
transmissions it would not be necessary to rely on indirect measures, such as pointof-
sale data from record stores, to determine a work's value in this new medium
140 Census-based royalty distribution under the online transmission right would be a
two-phase process. In the first phase, the fees paid by each licensed service would
be divided into two funds: one for musical works rights holders and one for sound
recording rights holders. This division could result from voluntary negotiations
between these two groups conducted under the auspices of the rights collective
141 However, if music publishers and record labels are unable to agree upon an
allocation of royalties, an arbitration panel would be available to make that royalty
distribution determination. This procedure is the same as that employed under
other statutory licenses to divide a single, undifferentiated royalty fund among
competing copyright claimant groups
142 In making this determination, consideration should be given to the fact that sound
recordings made prior to early 1972 are not protected by copyright. On the other
hand, the musical works embodied in these public domain recordings may
themselves still be subject to copyright protection. In addition, the Internet is
especially well suited to live performance. These would involve the online
transmission right in the songs that were performed but would not involve any
rights in sound recordings
143 The second phase of royalty distribution requires the further division of each of the
two royalty funds among the individual rights holders within the musical works
and sound recordings claimant groups. Distribution of royalties to individual
rights holders for transmissions of their works by licensed services could be made
on a pro rata basis, service-by-service. Thus, a rights holder whose works account
for 10% of all instances of properly logged transmissions of covered works by a
particular licensed service would receive a royalty equal to 10% of the statutory
license fees paid by that service for the reporting period in which the rights holders
works were transmitted. This approach would ensure that all rights holders, large
and small, receive a share of royalties that is proportionate to the money actually
paid as license fees for online uses of their creative works. It would also reduce
the likelihood that royalty distribution disputes would arise and would limit the
nature and scope of those that did
X. Conclusion
144 The online transmission right, collectively administered, and subject to a statutory
license, is the best model for music rights administration in the digital age; it is a
full, fair and feasible solution to the dilemma of online music licensing. If
implemented, it will allow an online music marketplace to flourish
145 New York, New York
November 22, 2002