Indies Need Options Under Compulsory License Reform: The Case for Competition

The bitter struggle between music publishers and digital music services over the rates and terms of publishing licenses for online use has caught the attention of Congress -- so much so that an oversi

Les Watkins is VP of business affairs and business development for Music Reports Inc., which administers publishing licenses for digital music services.

The bitter struggle between music publishers and digital music services over the rates and terms of publishing licenses for online use has caught the attention of Congress -- so much so that an oversight hearing was held March 8 before the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property regarding digital music licensing and revision of Section 115 of the U.S. Copyright Act.

Section 115 (the compulsory mechanical license section for compositions) authorizes music distributors -- such as record labels and digital music services -- to reproduce and distribute songs that have been previously released as recordings, without asking permission of the music publisher, simply by sending a notice to the publisher, its agent or to the Copyright Office, provided that the distributor then properly administers the license and pays the publisher an arbitrated fee (i.e., the "statutory rate").

It is understandable why Congress would believe that there is a need to revise Section 115 to create a more "user-friendly" compulsory license. While licenses based on it can be administered by digital music services, generally with the use of a third-party agent, the real and transactional costs of administration have proven to be either too expensive or too cumbersome to facilitate music usage on the broad scale required by digital music services.

However, judging from the statements at the hearings, Congress was not advised of a critical aspect of any compulsory license, insofar as benefits to music copyright owners, artists, music distributors and consumers are concerned: competition among entities that are authorized to collect compulsory royalties.

The witnesses at the hearing included a representative of the trade association for the digital music services, a senior executive at one of the major record labels, a representative of the National Music Publishers' Assn. and a songwriter. Absent was any representative of the tens of thousands, if not hundreds of thousands, of independent publishers in the United States.

Traditionally, the Harry Fox Agency, a subsidiary of the NMPA, has acted as the agent for the collection of Section 115-based royalties for publishers representing the majority of musical works in the United States. However, by many estimates, approximately 40% of songs that are used commercially in this country are controlled by publishers who are "self-published" and who do not use HFA to collect these royalties. Their reasons for doing so are varied, but include a desire to avoid HFA's administrative fees; the delay in payment from an agent, as opposed to direct payment from the music distributor; to be in contractual privity with the music distributor, for purposes of audits of the distributor; and to remain autonomous, insofar as the choice to license or not is concerned.

Surprisingly to some, the independent publishers include a number of the most popular U.S. recording artists/writers. These artists can afford to "pass" on the advances proffered by music publishers and thereby avoid transferring their rights to them. They aim to gain the benefits of self-publishing and build a cottage industry out of publishing administration.

Nonetheless, it appears that the independent publishers will no longer enjoy the autonomy of self-administration when it comes to Section 115 royalties for online music services. Judging again from the tenor of the hearings, it appears that the record labels, music publishers and the digital music services have collectively convinced Congress that Section 115 should be revised so that the digital music services may be licensed, virtually automatically, to use the universe of songs in the United States without asking permission of each music publisher and without accounting directly to each music publisher. (At least, it appears that this will be the case with respect to subscription-based music services selling "tethered" or "limited" downloads and on-demand streams.)

The independent music publishing community could respond to this seemingly catastrophic event by petitioning Congress to preserve their right to choose whether or not to license their songs. But it is doubtful, at this point, that such an effort would be successful; Congress appears ready, maybe rightfully so, to accept a solution to an industry squabble and move on to the issues that the voting public cares about, such as the war in Iraq.

Even more, by advocating the right to say "no" to a digital music service license request, the independent publishers would play into the hands of the services and the record labels -- these entities appear to have convinced Congress that the biggest impediment to the growth of a digital music business is the acquisition of music publishing licenses.

A wiser move by the indie music publishers would be to lobby for the authorization of one or more agencies in addition to HFA to bring the benefits of competition to Section 115 royalty collection. This model would then be similar to the ASCAP/BMI/SESAC competitive framework for collection of royalties for the public performance of songs, as well as the framework under Section 114 of the Copyright Act -- the digital public performance of sound recordings -- which authorizes such entities as Royalty Logic (an affiliate of Music Reports) to compete with SoundExchange for the collection of royalties for the public performance of masters by digital music services.

As noted in 2001 by the Antitrust Division of the U.S. Department of Justice, in connection with its oversight of ASCAP and BMI, competing collectives benefit music copyright owners, artists, music distributors and the public.

When there are multiple collecting societies, copyright owners and artists benefit, because competing collectives offer lower administrative charges, better service and even advances as an enticement to affiliate. Digital music services benefit because competition creates a faster and more efficient marketplace for music license administration. And the public benefits, because the lower costs of license administration are inevitably reflected in the price of music to the consumer.

As demonstrated by the proliferation of illegitimate file sharing, it is no longer practicable in a digital age for individual music copyright owners to control the licensing of music over the Internet. Congress recognized this fact in creating a compulsory license in Section 114 for certain digital performances of sound recordings, and it appears to be on the verge of doing so by revising the compulsory license in Section 115 for compositions.

Copyright owners and artists should now focus on maximizing the flow of license fees derived from compulsory licensing. The best way to do that is to foster competition among collectives that are authorized to collect compulsory license fees. Monopolies in compulsory royalty collection will lead to diminished fees for all.