Background

The Digital Performance Right in Sound Recordings Act of 1995 amended copyright law to provide a new performance right specifically for when songs are transmitted digitally. The new right was provided in section 106 of the Copyright Act and limitations were codified in section 114.

Different Services Different Licenses to transmit music

Section 114 adopts a three-pronged approach. First, it completely exempts over-the-air radio transmissions from any license obligations, effectively “grandfathering-in” radio broadcasters since the performance right in sound recordings themselves did not exist until well after radio broadcasts. Second, Internet radio, and satellite radio are subjected to a compulsory license. A compulsory license provides a license to use a work without the copyright owner’s permission but is subject to payment of a set compensation. Although a compulsory license acts as a limitation on a copyright owner’s right, copyright law uses it in many instances where business models need to license large amounts of copyrighted works but licensing from individual owners would be near impossible, or in cases where one of the parties to the transaction has disproportionate market power. The section 114 compulsory license extends to radio-style digital transmissions from satellite radio such as XM and Sirius satellite radio and Internet radio stations such as Live365 and Yahoo! Music. Third, interactive services that give the listener choice in the music that is delivered, like Last.fm are denied the benefit of the compulsory license and are required to seek permission directly from the copyright owner in order to transmit their music.

Conditions for getting a license

All services that are eligible for the compulsory license must meet several conditions. They have to display information identifying the artist, title, lyricist, and composer of the track being transmitted. They must also abide by what is called the “sound recording performance complement” which restricts the number of songs that can be played from the same album or same artists within a three-hour period. This condition is apparently designed to prevent consumers from recording their favorite artists or albums thereby displacing CD sales. Services are prohibited from evading this condition by causing channels to switch automatically. In addition, services that started after 1998, chiefly Internet radio, must not induce or encourage copying and must use technology to prevent copying, called Technological Protection Measures (TPMs), also known as Digital Rights Management (DRM) if the technology permits using them.

Rate Setting

If music services and rights owners fail to agree upon a license fee, section 114 sets up different standards for setting fees for pre and post 1998 services. The body responsible for setting these fees is called the Copyright Royalty Board (CRB). The CRB consists of three administrative judges who determine rates and terms for various compulsory licenses under the copyright act and receive and distribute royalties collected by the Copyright Office. For pre-1998 services, such as satellite radio and Music Choice, the CRB is required to set a fee that ensures the most creative works are available to the public. The CRB also must consider the relative roles of the service transmitting the music and the record label in making the work available and to afford both a fair return. By contrast, for the post-1998 services, the CRB is directed to consider whether the service would diminish record sales and other sources of revenue for copyright owners and also the relative contributions of the service and the label in making the work available. The standard for post-1998 services is clearly titled in favor of the labels.

Section 114 requires copyright owners to “designate common agents” to distribute the statutory fee. SoundExchange and Royalty Logic have emerged as the designated agents. The fees are distributed evenly among performing artists and record labels.

Controversies Surrounding the Performance License for Sound Recordings

Platform Parity

The term “platform parity” refers to the idea that there should be equal treatment under the law for all types of services that transmit music, regardless of the medium used, whether analog or digital, or when the service was established. As we have already pointed out, the current law distinguishes between over-the-air radio, satellite radio, Internet radio and other types of transmission services in terms of the licensing rates and the conditions imposed in order to be eligible for the statutory license. At one end of the spectrum, over-the-air radio is completely exempt from any conditions or from the obligation to pay a royalty. On the other end of the spectrum, Internet radio services have been saddled with the highest rates and the most onerous conditions. The companies that market these services are currently leading the charge for parity. The recording industry has supported these calls for parity as well.

The broadcasters, on the other hand, argue for a continuation of the status quo. They claim that Congress has thus far exempted over-the-air radio from a performance fee in recognition of the fact that radio play promotes record sales. However, the Copyright Office has rebuffed these claims. Register of Copyrights Marybeth Peters explained in her testimony before the House of Representatives that broadcasting is no longer the only promotional tool because consumers are exposed to music from numerous other sources. She pointed out that the Copyright Arbitration Royalty Panel (CARP) (the panel that set webcasting rates for the period 1998- 2002) had observed that webcasting was just as promotional as broadcasting. Additionally, the Office has also suggested that a rollout of HD radio and satellite radio devices would threaten to displace record sales. Therefore, the Office has urged Congress to require radio broadcasters to pay a sound recording performance license.

Webcaster Rates

As we mentioned before, if record labels and music services fail to agree upon a royalty rate, the Copyright Royalty Board will determine the cost of these royalties. So far, there have been two such proceedings, and Internet radio services have claimed that both have resulted in rates so high that most small webcasters would be driven out of business. These proceedings are referred to as “Webcaster I” and “Webcaster II.” Webcasters have complained that in both proceedings a standard that was wrong to begin with was misapplied.

The law requires that rates be set based on the what a willing buyer, in the position of an Internet radio company, would have paid a willing seller, in the position of the record label. In applying this standard the CRB may look at other licensing transactions as benchmarks. In both rate determination proceedings, the webcasters claimed that the wrong benchmarks were used. In Webcaster I, the CRB’s predecessor, the Copyright Arbitration Royalty Panel used the agreement between the RIAA and Yahoo! as a benchmark. Webcasters claimed that this agreement was based on a monopolistic market where the RIAA adopted a take-it-or-leave it approach to license sound recordings. In Webcaster II, the CRB set rates based on an agreement between interactive music services and record companies.

Webcasters have also claimed that the per-performance metric used to calculate royalties was wrong. Webcaster I, imposed a royalty rate based on one listener listening for one hour. Webcaster II set the rate based on one song streamed per listener. The Radio and Internet NewsletterRAIN gives the following example: 500 listeners listening to one song would result in 500 listener hours and the station would have to pay a royalty for each listener hour. It explains that the rate based on this metric would result in the webcaster paying more per song transmitted than the revenue they made per song.

Legislative Fixes

As it did in the past, Congress continues to address problems surrounding performance licensing in a piecemeal fashion. Bills have been introduced in both houses to rectify the perceived injustices of the webcaster rate proceedings, introduce platform parity and require over-the-air radio to pay a performance license. While most of these bills would go some way in improving the current morass, they do not go far enough. In addition, one of them threatens to erode consumer rights in the name of introducing platform parity.

Small Webcaster Settlement Act

Pursuant to calls by small commercial webcasters to set aside the Webcaster I ruling, Congress passed the Small Commercial Webcasters Settlement Act of 2002 (SWSA). The SWSA allowed SoundExchange to negotiate licenses directly with small webcasters. However, the SWSA specified that rates negotiated under the Act were a compromise that did not represent an actual market place transaction. As a result they were not to be regarded as benchmarks in any future CRB proceedings.

On December 12, 2002, SoundExchange and a coalition of small commercial webcasters called the Voice of Webcasters notified the Copyright Office that they had negotiated an agreement under the SWSA. The Office published the terms of this agreement, which became the alternate rates available to small commercial webcasters.

The agreement significantly lowered the rates for small webcasters. For 1998-2000, it allowed webcasters to pay either 8% of gross revenues or 5% of their total expenses—whichever was higher. For 2003 and 2004, these rates were set at 10% of gross revenue for the first $125,000 and 12% of revenue for any amount exceeding that figure.

Internet Radio Equality Act

Two companion bills, both named the “Internet Radio Equality Act” (IREA) were introduced in the House and Senate in 2007. Both bills aimed to nullify the May 1, 2007, royalty determination of the Copyright Royalty Board – Webcaster II.

Both bills proposed to replace the controversial willing buyer/willing seller standard for determination of royalties with current standards that apply to other digital music services such as satellite radio. Also, both bills would replace the rates set by Webcaster II. Under the bills’, all webcasters would have the option of paying either 0.33 cents per hour of transmission to one listener or 7.5% of revenues received by the provider.

A coalition of webcasters, calling itself the SaveNetRadio Coalition, has come out in support of the House bill. Because the bills are so similar, one can infer the coalition is likely to support the Senate bill as well. SoundExhcange and MusicFirst oppose the bills and contend that these rates would serve as a windfall for large webcasters. As of the publishing date of this website, both bills are pending before Congress.

The Perform Act of 2007

The Perform Act was introduced in the Senate on Jan 11, 2007. The bill seeks to reform rate-setting procedures and introduce platform parity. Like the IREA, this bill would change the controversial willing buyer/willing seller standard to one based on fair market value. It would also require uniform rate setting standards for webcasters, satellite radio providers and cable radio services. However, the bill would not apply to analog broadcasters, who could continue to transmit music without paying performers and record companies.

While the bill’s proposals to establish platform parity and reform rate-setting standards and procedures would bring about much needed reform, the bill also contains several provisions that are unfair to consumers. First, the bill would severely restrict home recording rights and require services to install DRM to achieve these restrictions. Consumers would be allowed to record only based on blocks of time and not on specific songs, albums or artists. In addition, the devices would have to be designed so that consumers could only listen to the recordings in the same order they were recorded. What does this mean in practical terms? It means that users would be allowed to record a random block of songs—say 5 minutes worth of songs from their favorite radio station—but would not be allowed to split that recording into separate songs or to attempt to record only specific songs played on the station.

The DRM provisions of the Perform Act are based on the reasoning that modern devices that allow consumers to record songs, create their own playlists and listen to music in whatever order they wish would amount to a distribution of music and displace record sales. Thus, any digital broadcast of an audio recording must be protected using technological protection measures. The reasoning seems to be specifically targeted at XM’s portable receiver called the inno.

The Performance Rights Act

The Performance Rights Act of 2007 was introduced in the House and Senate on December 18, 2007. Both bills would require over-the-air broadcasters to pay a performance license to labels and performers, as is the case for satellite, cable and Internet radio services. They would subject broadcasters to the same statutory license as webcasters and satellite radio services. However, the bills would still treat traditional broadcasters more favorably than satellite or Internet radio service providers by not requiring them to abide by all the conditions that the other services have to abide by in order to be eligible for the statutory license. The bills seek to alleviate any burden the license may cause on non-commercial and small radio stations by giving them a flat fee option.

The bills are a good first step towards achieving parity. However, they would fail to level the playing field among all providers of music services by not addressing the disparities in rate setting procedures. Also, they would not ensure that an artist’s share of the revenues is not used by record labels to “recoup” their advances—a remnant of the music industry’s archaic contract structure. The Perform Act has passed the House Subcommittee on Courts, the Internet and Intellectual Property.

Background

The “mechanical license” allows anyone to make a cover of a copyrighted composition, once the songwriter or composer has himself recorded the song and distributed it. The person making the cover must pay the copyright owner a set fee for each copy of the cover “made and distributed”. Additionally, he must serve the copyright owner with a notice of intent to use the work and provide monthly payments and statements of account.

The mechanical license has been around since the Copyright Act of 1909. However, the provisions contained in Section 115 are rarely used, perhaps because the notice and accounting requirements are cumbersome. Instead, most record labels or artists who want to create covers negotiate a license with the Harry Fox Agency, a collective of composers and publishers. While Section 115 does not prohibit voluntary negotiations between parties, it does act as a ceiling on the rate that can be charged for a license.

By amendment in 1995, Congress extended the mechanical license provisions of Section 115 to digital deliveries of music—referred to as Digital Phonorecord Deliveries or DPDs. This means that whenever a service such as iTunes allows a customer to download a song, the composer of that song must be paid the either the mechanical license or a voluntarily negotiated royalty.

Specific Problems with the Section 115 Licensing Process

Rate Structure

One of the most pressing questions regards the rate structure: should it be based on each record sold or on some other metric such as a percentage of the music provider’s revenue? Many record labels (see RIAA "Written Direct Testimony") and digital music providers (see "Introductory Memorandum") such as Napster, Apple and Yahoo! claim that rates should be based on a percentage of revenue—especially in a world where single track sales are outpacing the sales of full-length albums. Jonathan Potter, president of Digital Media Association (DiMA), a group that represents the interests of companies providing digital content, explains that the current penny rate is overly restrictive and does not account for changes in consumer offerings and prices. For instance, publishers see Dual Disc CDs (CD albums that contain CD audio on one side of the disc and DVD/multimedia content on the other side) as two separate copies of the album and thus, require two payments.

The Notice Requirement

Another complaint that digital media companies have regards the notice requirements of Section 115. Under these requirements, distributors have to physically mail notices of intent to each copyright owner. This requirement is outdated, the media companies argue, because nowadays, a digital storefront must offer at least one million songs in order to be competitive. Even though many songs may have the same copyright owner, digital music companies still have to physically mail an unreasonably high number of notices – a requirement that media companies claim is both wasteful and cumbersome.

Scope of the License

The third major problem with the Section 115 license relates to the scope of the license. Because of the nature of digital technology, a number of copies—known as incidental reproductions—are made in the course of the transmission of a song. For example, let’s say that you purchase a track from an online music service like iTunes. In order for iTunes to transmit that file to you, it might need to make incidental copies of that file—for purposes of caching or buffering. On the user side, incidental copies might also be made—for example, a file that is downloaded to your desktop and then “imported” (i.e. copied) into your music library, which lives elsewhere on your hard drive. While these incidental copies do not result in the customer receiving an additional, permanent copy of the music in question, some copyright owners claim that these files are still implicated under Section 115 and should be licensed just like any other piece of music.

The National Music Publishers Association claims that incidental reproductions made in the course of both on-demand streams (where the user is able to select songs and create playlists, unlike in traditional radio) and limited downloads (files that download to your hard drive that become unusable after a certain number of plays or after a certain amount of time has elapsed) should be licensed.

Music publishers claim that on-demand streams allow customers to choose the music they want, when they want it and additionally, allow those customers to record that music. For these reasons, they argue that on-demand streams constitute a distribution of music on the same order as a permanent download and thus, should be licensed like any other piece of music. In fact, the National Music Publishers Association, the Harry Fox Agency and the Recording Industry Association of America have already entered into an agreement to this effect.

But that’s not all. Performance rights societies i.e. ASCAP, BMI claim that on-demand streams also constitute a performance of the work in question and for this reason, charge a higher performance royalty for such streams. As a result, digital media companies end up paying two royalties for the same song—one to the performance rights societies and one to the National Music Publishers Association or the Harry Fox Agency. DiMA companies concede that while on-demand streams may warrant higher performance royalties, they should be exempt from the Section 115 license. Furthermore, they feel that incidental reproductions should be completely exempt from any license.

Ambiguity in Section 115 has certainly created a lot of room for confusion on all sides of the debate. Section 115 defines the standard unit of measurement for digital music sales—Digital Phonorecord Deliveries or DPDs—as a “specifically identifiable reproduction” of a piece of music, regardless of whether or not that reproduction also constitutes a public performance. This creates the possibility of interpreting a piece of music as both a DPD and a performance!

Why Not go to the Harry Fox Agency Instead of Using Section 115?

Despite all this talk of Section 115, as we mentioned earlier, the Section 115 license is actually seldom used—most record labels simply go to the Harry Fox Agency for a mechanical license when releasing a physical product that requires licensing (for example, a cover album). This being the case, why can't a digital media company also go to Harry Fox and obtain a mechanical license, thereby sidestepping the hassles involved in the Section 115 license? Well, as DiMA would say, the Harry Fox Agency does not represent all music copyright owners and DiMA companies often need to access works that fall outside of Harry Fox's domain. These companies claim that that's not the only problem with The Harry Fox Agency: the Agency refuses to disclose all of the publishers that it represents and publishers are free to withdraw their works from the Harry Fox catalog at any time. According to DiMA president Jonathan Potter, between 40 and 60 percent of all license requests are denied by The Harry Fox Agency because the songs are not in its repertory—or because the Agency isn't sure if it holds the rights to the song.

Reform Proposals

We have outlined the problems with the current licensing regime under Section 115 of the Copyright Act—but what are the potential solutions? Several reforms have been proposed over the years, ranging from a complete elimination of the license in favor of marketplace-driven negotiations to smaller changes that would only require clarification of specific ambiguities in the scope of the license. Here are a few of the more notable proposals.

Elimination of the License

In her testimony before the House Subcommittee on Courts, Internet and Intellectual Property, Marybeth Peters, the U.S. Register of Copyrights, proposed a complete elimination of the Section 115 license. The Register argued that the license limited the bargaining power of authors. She explained that the performance rights societies—ASCAP, BMI and SESAC—have functioned efficiently without a compulsory license and the same model should be adopted for licensing mechanical rights. Expanding on this testimony a year later, the Register proposed the introduction of the 21st Century Music Reform Act. Under this Act, Music Rights Organizations (MROs) would be created with the right to license performance, reproduction and distribution rights. Thus, the functions performed by ASCAP, BMI, SESAC and The Harry Fox Agency would all be subsumed by one entity. This would eliminate the need to license different rights from different entities in order to use one piece of music.

Unilicense

This proposal was put forth by the Songwriters Guild of America in 2005. The Guild proposed a blanket license for licensing reproduction, distribution and performance rights. The royalty would be 16 and 2/3 percent of the gross Internet subscription revenues with a minimum dollar fee as the floor. Songwriters and publishers would each share 50 percent of the royalties. This proposal, like the 21st Century Music Reform Act, would provide for one-stop shopping for all rights needed to transmit a piece of music.

Shifting the burden to record companies

Another proposal put forth by the Copyright Office was to shift the burden of obtaining a license to transmit a DPD to the record company. Register Peters, in her testimony before the House Subcommittee on Courts, the Internet and Intellectual Property, explained that current law allows record companies to seek permission from recording artists, in their contracts, to make music available through DPDs. This provision could be clarified and expanded upon to funnel payments for DPDs through record companies.

Legislative Efforts to Reform Section 115

The Section 115 Reform Act (SIRA)

The Section 115 Reform Act or SIRA was introduced in the House Subcommittee on Courts, the Internet, and Intellectual Property on June 8, 2006. The stated purpose of the bill was “to provide for licensing of digital delivery of musical works”. The bill would have provided a blanket license to digital music providers that would cover all digital deliveries of music including full downloads, limited downloads and on-demand streams, in addition to all incidental copies made in the course of licensed downloads. The act would have also established agents, referred to as the "general designated agent" and "additional designated agents" to issue licenses and collect royalties on behalf of copyright owners. The Copyright Royalty Judges would set the royalty rates and the rights of parties to enter into voluntary licensing agreements would also have been preserved.

Problems with SIRA

While these provisions were positive and would have improved the licensing process for digital music delivery, SIRA contained provisions that would have perpetuated unfair record label contract clauses, and unfairly curtailed the rights of the consumer and artists.

Diverting Licensing Fees From Artists to Labels

For example, provisions of the SIRA would have allowed recording artists to direct designated agents to divert their license fees to record labels, in order to recoup advances that the labels had provided them. While technically, the artist would have had the choice whether or not to divert such payments, the difference in bargaining power between the artists and labels cast doubts on the fairness of the arrangement. Besides, there was arguably no need for copyright legislation to contain provisions that aided record labels in recouping their costs.

In the event that an artist could not be located ("orphan works" ring a bell?), the record label could itself direct the designated agent to make payments directly to the label. As Public Knowledge President Gigi Sohn has pointed out, these provisions would have pre-empted or superseded any state laws that address unclaimed property. Why is this important? It appears that these provisions may have been aimed at New York settlements where record labels and publishers were required to pay back $50 million in royalties that should have been paid to artists. New York state law states that if an owner entitled to funds cannot be found, the property escheats to the government. The government then holds this money until the artist claims it. Despite such provisions, SIRA would have prevented some artists from receiving their publishing royalties.

Unfair to Consumers

SIRA would also have curtailed consumer home recording rights (often referred to as “fair use” right). SIRA would have required a license, albeit a royalty free license, for all incidental reproductions in the course of non-interactive streaming, such as an Internet radio webcast, only if the service in question did not “authorize, enable, cause, or induce” the recording of streams. Thus, SIRA would have prevented consumers from making noncommercial personal recordings and backups—for example, a homemade CD of tracks that were originally purchased online. Additionally, because a license could be denied to a transmitter that allowed the fair use kind of recording, SIRA would have restricted the kinds of music listening devices on which music could be recorded. Finally, the provision, if enacted, would have interfered with outcome of a lawsuit brought against XM Satellite Radio, over the previously mentioned inno player.

SIRA had other problems as well. While it covered all incidental reproductions in the course of a DPD within the scope of a license, it did not exempt incidental reproductions from a license requirement. Requiring licenses for incidental copies, which even the Register of Copyrights acknowledges have no independent economic value, would have unnecessarily and unfairly increased the cost of using music services for consumers. Additionally, while SIRA treated interactive streams as DPDs it did not clarify that such streams were not performances. As a result, the bill would have done nothing to prevent copyright owners from demanding payment for both the mechanical and performance rights for the same stream.