Behind the Deal: Digital Music Licensing Hearing

Representatives for music publishers, songwriters, labels and digital media companies testified before members of Congress March 8 discussing their views on necessary changes to the Copyright Act's co

Representatives for music publishers, songwriters, labels and digital media companies testified before members of Congress March 8 discussing their views on necessary changes to the Copyright Act's compulsory mechanical license provision.

The oversight hearing on digital music licensing and section 115 of the Copyright Act, held by the House Judiciary Committee's Subcommittee on Courts, the Internet and Intellectual Property, is one step in the process of determining whether legislation is necessary to change the current law.

In the past, music publishers said there is no need to change the licensing provision. Now they are taking a new position.

David Israelite, president/CEO of the National Music Publishers' Assn., told the subcommittee that publishers are working with the Digital Media Assn. (DiMA), which represents online music services, and the Recording Industry Assn. of America to formulate solutions that will ensure the availability of songs for subscription services and guarantee a level playing field in determining mechanical royalty rates.

To show publishers' commitment to the new technology, Israelite noted that NMPA members and Harry Fox Agency affiliates have issued more than 2.85 million licenses to 215 different licensees for digital delivery of compositions. He also said publishers have underwritten legitimate music services since their inception by licensing on a "use now, pay later" basis to allow tethered downloads and on-demand streams even though rates had not yet been determined.

Israelite also pointed out the disparity under copyright law between owners of compositions and owners of sound recordings. He reminded the members that publishers are subject to the compulsory mechanical license provisions -- requiring them to license mechanical rights to all users including online music services -- and that ASCAP and BMI, under the consent decree under which they operate, must license nondramatic public performance rights to any user who requests it.

This places publishers at an inherent disadvantage in negotiating rates since labels have no compulsory license, no collective agency and no obligation to license, with the limited exception of the compulsory license for public performance by non-interactive digital transmissions, Israelite said.

Israelite said that publishers are simply asking for "fair compensation comparable to that received by other music copyright owners." He noted that if the statutory mechanical royalty rate had increased in an amount commensurate with the Consumer Price Index since it was first introduced at 2 cents per song in 1909, the rate today would be 40 cents per song. As a result of controlled composition clauses in recording contracts, however, the average actual rate paid for songs is significantly less than even the current 8.5 cents per song.

Songwriter Wood Newton echoed this concern. "If you consider inflation, we are earning less today than we did a century ago." Yet with all things considered, he said, "I can attest that there are two words songwriters fear hearing: 'controlled composition.' " He called on the members to end the practice of asking a songwriter to accept a reduced rate on a song as they did in 1995 for digital phonorecord downloads.

Newton, whose credits include Kenny Rogers' "20 Years Ago" and the Oak Ridge Boys' "Bobbie Sue," spoke to the members about the life of a songwriter. He said that the system for collecting royalties has become so complex that it is almost impossible for individual songwriters to get a full and accurate accounting of their royalties and to track those royalties. He urged the members to consider requiring disclosure requirements on anyone who collects royalties on behalf of songwriters.

Larry Kenswil, president of Universal Music Group's UMG/eLabs, also took a new position on behalf of labels. He told the members that labels are OK with online music services licensing mechanical rights directly from publishers. In the past, most services paid labels an all-in rate so labels would then pay publishers, a practice that most publishers did not prefer.

However, Kenswil urged the members to introduce blanket licensing of compositions and to provide greater royalty rate flexibility -- a royalty more responsive to the marketplace.
Kenswil said the antiquated structure of compulsory license procedures -- one-song-at-a-time, one-publisher-at-a-time -- is frustrating the introduction of new products. Even licensing through HFA is challenging, since the publishers' agent typically issues separate licenses for each configuration -- CD, DVD, download, etc.

UMG needs to obtain or verify rights to more than 30,000 musical works each year for more than 2,000 new album or compilation releases. In 2004, UMG requested more than 130,000 individual mechanical licenses in the United States, Kenswil said.

As a result of the current licensing model, transactional costs for licensing have become an obstacle to making recordings available, he said.

Jonathan Potter, executive director of DiMA, said his group's members seek four amendments to the compulsory mechanical license law.

First, they want to replace the "dysfunctional" compulsory license with a simple, transparent, comprehensive statutory blanket license that can be triggered on one notice.
Second, they seek clarity in the scope of music publishers' licensable rights regarding "ephemeral" and incidental reproduction of compositions associated with streamed performances. He said it is time to end "infamous royalty double-dipping" where publishers claim a mechanical and a performance right.

Third, they want clarity in the definition of interactive services regarding sound recording performance rights. Online music services want to ensure that Internet radio programming based on user preferences falls within the statutory license as long as the programs do not violate certain restrictions.

Finally, the services seek to equalize sound recording performance royalty standards so that all radio competitors -- broadcast, cable, satellite and Internet -- pay the same royalty to artists and record companies.

Subcommittee chairman Lamar Smith (R-Texas) has said he hopes to have a bill presented this year, but some executives believe the members may wait to draft any bill until the various industries can negotiate some rates. After May 2005, recent legislation will permit the industries as a whole to negotiate rates on physical goods without violating anti-trust regulations.