The Next Great Copyright Act Conference, music

Music Industry Specific Reforms

Moderator: Lydia Loren, Lewis & Clark Law School

Rube Goldberg-like design of rules, antitrust degrees, licenses, etc.: reform is hardest to contemplate, but most desperately needed.  So we need some ideas.

Gary Greenstein, Wilson Sonsini Goodrich & Rosati

What do music people want? Artists complain they aren’t collecting enough; not getting enough from labels. Labels are concerned with illegal alternatives, fair rates. Publishers/songwriters: losing mechanical royalties, as physical and digital downloads peak; too little money vis a vis the record labels; reform of the consent decrees. Services: too complicated/takes too long to get a license; if you get it wrong damages can be crushing.  Proposal for reform: creation of a unitary music license.  Digital services use music; they don’t care about musical work/sound recording; public performance/reproduction/communication to the public. They want to build a product. If you create a unitary license you could mandate a split to individual creators, or better yet copyright owners decide how to allocate the pool of money—cable and satellite compulsory licenses, where money is paid in and then different interest groups decide about allocation.  Universal Publishing and Universal Music could decide their own split, rather than fighting about “parity” (which doesn’t make sense based on the costs and risks in sound recordings); services wouldn’t have to get in between in that fight. Make it easier to reach the consumer, who’s often forgotten.

Other alternatives: reform §115’s mechanical license—for distribution to the public primarily for personal use.  You have to give advance notice to the copyright owner, but you may not know who they are.  Unitary license could solve that problem.  Another: expand §114 statutory license to include interactive services like Spotify, Rhapsody.  3 primary labels control vast majority of catalog that gets paid; there are MFN provisions. The economics of those deals are widely known: percentage of revenue per subscriber. High degree of certainty in industry now: make it statutory, so that industries can predict and won’t get socked with higher fees that won’t get passed to artists anyway.  Ephemeral statutory license: conditions on the license include destroying server copies every 6 months. If there is a worse provision in the Copyright Act he doesn’t know. It’s wasteful, environmentally destructive, and nobody is actually complying with it—could mean willful infringement.

SoundExchange is now collecting 100s of millions in royalties, potentially up to $1 billion. No gov’t oversight, self-perpetuating board. There should be mandatory transparency on how they handle money and resolve disputes. There should be reports to Congress and greater disclosures. They’re still using an outdated annual report. With all this money and people complaining it’s not going to creators, you want to have that information.

Zahavah Levine, Google Inc.

More incremental short-term suggestions. Right now there’s no transparency about who owns what; hard to license 100s of millions of works. Agents that represent groups can’t tell us accurately or reliably what songs they represent which makes it hard to value their licenses.  If you can’t find the owner, the compulsory license is broken. Untenable choice: don’t include works, which isn’t good for users and no one gets paid; or include the work with best intentions and try to pay, but nonetheless be exposed to crushing liability. Reduce fragmentation of licensing landscape. Combining all the different rights into one would have fantastic effect of making her job obsolete, but probably unlikely any time soon.  But incremental steps to break down fragmentation: complexity is not so much on the sound recording side, where labels have pretty much all the rights whether it’s streaming or downloads.

Publishing is much more complex for historical reasons. Reproduction, distribution, and synchronization are all different. In the old world, it was not as big a problem because it was more either/or. Europe has done an agency that manages both performance and reproduction rights together—one-stop shopping for musical works. We could do the same. Right now public performance is by consent decree, and reproduction is done by ratesetting at CRB; we would need to figure out reasonable nondiscriminatory terms, and comprehensive public database for transparency/valuation. Plus we’d need some protection/safe harbor for a service that does use the public system and escrowing funds for works that weren’t identifiable.

Steve Marks, RIAA

Would like to reduce friction/inefficiencies for everyone in the market, to leave more money left over for everyone. We agree that music publishing is something to focus on, because no one is happy: songwriters, publishing companies, record labels, and services. Everyone thinks it’s broken because it was built over years for other marketplaces. Inefficient, complicated, balkanized. Because of the way §115 works now, you could need up to 215 licenses for an album—you have to license work by work, and you have to license for every use; if you have a music video that’s not covered by the album license; then there’s many owners for each works, so you might need license from each of 10 people who own a share, which is very common in certain genres.  Arduous process just to get it out the door. Now multiply by services looking for millions of compositions.

Brian Zisk, Future of Music Coalition

Interests of authors are intertwined with interests of public. Immediate effect is fair return, but ultimate goal is to stimulate creativity for the general public good. In the vast majority of major label contracts: royalties are reduced for broken goods, because the album might break, still being taken on digital goods; new media deductions are still being taken on CDs. If a digital download lacks characteristics of sale, such as resale right, it should be treated as license, so artists are compensated at the higher license rate. Controlled composition clauses: labels insist that songwriters are paid 75% of minimum statutory right, and cap on number of tracks per CD. It’s as if industry has agreed to pay 75% of minimum wage, and also cap despite making you work more hours than we pay for. These are silly provisions. Money retrieved through litigation should come to the artists.  This practice carried over from record clubs (big advance, small payment to artists). 

Other incentives that labels and copyright aggregators should have: fiduciary duty to account properly to artists. The royalty statements are unintelligible, lack sufficient info (e.g. “sample”).  Royalty statements should be signed under penalty of perjury, which is what we ask of digital services.  When there’s a negotiation to put out an album, it shouldn’t be forced on the artist to agree that it is a work for hire, where the album was created before the contract was entered into. Reversion/termination of transfer should be less complex, with clear right to recapture instructions. Bad faith objections to termination should be sanctioned. Artists are filing, but know they’re facing a fight from a well financed opponent.  Better tracking of chain of title, as with Bitcoin; even the labels agree. 

Appropriate fees: 90% to artist, 10% to service.  Should have terrestrial broadcast right too, with same split.

Q: including pre-1972 sound recordings in compulsory licenses: safe harbors too?

Marks: there are complicated questions about federalization and we’re trying to figure out how to do that. We’re in favor of federalizing under the right conditions if term and ownership are dealt with.

Levine: we need parity in rates between internet and terrestrial stations. Right now terrestrial stations pay nothing to labels.  Purely historical/sound recording right was created when digital was in its infancy.  Rates are crazy out of whack; Pandora has a discount and is paying 55% of revenues; 5-15% for cable/satellite; 0 for radio. We need parity for rates, no discrimination against any medium in delivering music services to users. Rate should foster growth of radio services.

Marks: everyone here agrees that terrestrial radio should be paying (interruption: Levine says she wants parity, which could be no one paying; Zisk says he can’t agree; some discussion about payola).  If broadcasters would agree to free market rate for our exclusive rights we’d be all for it. It’s not correct to say that satellite and cable as categories pay under a different rate standard.  (I think we can see how even with some people not at the table, such as terrestrial radio, this is not going to be easy.)  Some services pay other rates; we’re talking about 1000s of services. Every service under the compulsory license except for 3 companies pays willing buyer/willing seller.  This discount for 3 companies should not be the model, but rather the 2000 services that pay willing buyer/willing seller, if we’re going to restrict the exclusive rights of the copyright owner.  Get rid of existing exemption.

Levine: so you’re saying everyone should pay 55% (or more).

Marks: rates have been going down as they monetize.

Greenstein: grandfathering was included when record industry first got a right that was intended to be limited.  Five services in two industries: subscription services and satellite radio.

Marks: the categories specifically state the companies. So it doesn’t allow new entrance.

Greenstein: so rate was established in 2002 by biggest players like AOL and Microsoft. Small Webcaster Settlement Act was the result; Congress granted authority to SoundExchange to enter into alternative arrangements. Second webcaster proceeding in 2007; Greenstein and Marks were on the same side then against Levine, but what happened was a rate standard and then a Congressional intervention with two pieces of legislation.  You’ve got the largest, most efficient radio service—Pandora—is a public company that reports content acquisition fees. They’ve recently gone below 50%, but until Q3 of last year it was over, and at times in the 60% range.  And they’re the most efficient in monetizing, but they’re paying 46% for the sound recordings; they’re paying rates negotiated with SoundExchange under an extraordinary proceeding; and they’re excluded from being used as a comparator in the CRB proceedings. Their rate would equate to roughly half of the supposed willing buyer willing seller rate, which means that 92% would go to labels.  Now you see the problem of “parity” with the publishers.  184% of revenues to rightsowners isn’t a sustainable business model.

When we talk about efficiency, the record labels want publishers to be subject to regime where they give up all their rights and the labels are the gatekeepers. If you’ve ever seen a record label agreement, that’s not frictionless, and that’s not an agreement in which artists get paid, not even pursuant to their contracts.  Label licenses iTunes, but doesn’t pay as if it’s licensed.  All of a sudden it’s a sale with a low royalty rate. The structure of the industry is broken. There’s 100s of millions getting paid in, but not going out; that’s why people attack Pandora, Spotify, and YT; it’s not that they’re unwilling to pay, but they’re being held up and there’s too much friction.

Marks: Every industry has some contractual disputes.  Argument by anecdote. 

Zisk: It’s an anecdote about a standard contract clause.

Marks: record labels pay more than 25% of revenues as royalties to artists.  (Zisk disagrees.) Costs for artist royalties have risen by almost 40% over past ten years. Myth of advances not getting paid is simply not true.  Better for us to focus on something like streaming.  Clearly a transition to streaming services.  Consumers are now viewing them as attractive. Artists withholding them repertoire makes services less attractive, and consumers go elsewhere for free; YT pays much less than Spotify. Need to come together to offer consumers the services they want.

Levine: music industry alone has gotten more than $1 billion from YT in past few years.

Q from Chris Sprigman: deals with distributors are most effective antipiracy campaigns.  Why wouldn’t your strategy be growth now, extract later.

Marks: not saying they’re extracting now.

Zisk: equity in Spotify pays off later.  When the labels cash out, the money isn’t going to go to artists. (Marks says don’t assume that; Zisk says he will because it’s not in the contract.) Beatz and Spotify are creatures of the labels.

Marks: we absolutely want to grow the market. But they aren’t scaled yet. 6 million subscribers in the US; Netflix has over 40 million. Once those services scale, and hopefully that’s quick, through distribution and bundling deals, debates over fractions of pennies should fall by the wayside.

Greenstein: If you’re paying out 70% of revenue because of per-subscriber minimums, marketing is harder to fund.  A $5 package bundled with every cellphone would make you more money, but the labels still want to hold on to the revenue stream from CDs.  Industry is grabbing for digital and afraid to let go of physical. Crushing advances prevent investment; don’t be surprised if more services fail. Yahoo! and AOL left the streaming business. 

Marks: but they’ve got a lot of funding. (Levine: Have they turned a profit?) Well, it takes time to earn a profit.

Peter Menell: the irony here is that the most important potential marketer isn’t here. Artists aren’t plugging these services.  They all agree that these services aren’t really designed for them, or to encourage the next generation of artists. Consumers join the services for convenience. Marketing idea: could we come up with deals like Eminem’s 50/50 split of digital? The costs of delivery are so minimal; labels wouldn’t have to solve the marketing problem because artists would tell consumers to join.  Maybe you take a little less now, but there’ll be a lot more later if everyone joins.

Marks: a handful of artists don’t support the services; many others do support the services and disagree.

Levine: we agree.  There are vocal holdouts, but that’s largely from lack of scale.

Marks: artist marketing would be great, though that hasn’t been part of their day to day experience.

Zisk: artists promote Bandcamp because they believe they’ll get paid, and they do get paid.

Marks: bands didn’t do commercials for their albums back in the day.  (Hunh?)  Would love for that to happen, but would be fairly remarkable change.
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