Last month, at <i>Billboard</i>'s inaugural Digital Entertainment Conference in Los Angeles, senior executives of several online music services answered one critical question with surprising unanimity
Jonathan Potter is executive director of DiMA, the Washington, D.C.-based trade organization devoted to the online audio and video industries.
Last month, at Billboard's inaugural Digital Entertainment Conference in Los Angeles, senior executives of several online music services answered one critical question with surprising unanimity. Asked to identify the single biggest hurdle between their initial modest success and hockey-stick growth in the future, they did not give the easy answer (piracy).
Rather, these executives identified music publishing rights as their single biggest problem. They spoke particularly about outdated sections of the Copyright Act that cause risk and uncertainty for companies that most need stability: royalty-paying online music services that are creators' best weapon against piracy.
Why are Copyright Act minutiae distracting music service executives from their primary mission of weaning music-loving consumers off pirate networks and onto legitimate services? Because the music publishing provisions of the Copyright Act that were intended to promote distribution of music are instead inhibiting these services' access to content.
Moreover, the application of music publishing rights to digital products and services is so uncertain that music publishers are limiting the services' growth by aggressively demanding double-dip royalties on Internet radio performances and Internet-delivered downloads.
As a result, digital music services' commercial efforts to compete against piracy are hampered by a lack of content, and piracy continues to flourish.
Until Congress modernizes the music publishing provisions of the Copyright Act, online services will continue to be held hostage to legal uncertainty and risk-and opportunistic music publishers.
To accomplish legislation, however, Congress may have to stare down the publishers who prefer to profit from legal uncertainty rather than adjust the law to meet its historical goals and promote royalty-paying innovation and online services. Fortunately, the House Judiciary Committee has held a hearing on this issue and seems likely to initiate the legislative process in 2005.
For most of the 20th century songwriters and music publishers have been paid "performance" royalties when a song is publicly performed (e.g., over the radio or an in-store music service) and "mechanical" royalties each time a consumer purchases a vinyl record or a CD.
For digital services, this system is logically extended by obligating Internet radio to pay performance royalties and download providers to pay mechanical royalties.
But music publishers' characterization of digital services' publishing royalties has been opportunistically focused on the double-dip. Since the mid-1990s, publishers have asserted that the Copyright Act imposes two royalty obligations -- performance and mechanical -- on Internet radio play and digital downloads.
Publishers claim the law supports the application of the mechanical right when any "reproduction" occurs, and certainly there are reproductions occurring in the course of streaming performances over the Internet. Similarly, publishers say that "transmissions" occur when a song is downloaded, and they assert that a performance right is implicated with any transmission, even if the qualitative act is a distribution.
This aggressive effort to promote legal uncertainty is exacerbated because the Copyright Act imposes statutory damages of up to $150,000 per work, leaving digital services' entire business exposed should litigation be initiated. The result is uncertainty, risk and diminished growth of royalty-paying services -- a triple play in favor of pirate networks.
Fortunately, Register of Copyrights Marybeth Peters has repeatedly said that publishers are mistaken and that Congress should act. In reports and testimony, Peters states that rights and royalties are triggered only in association with the relevant qualitative act. Thus, a performance right and royalty is associated with online streamed performances, and a mechanical right and royalty is associated with digital distribution or download.
To shut down the publishers' opportunistic endeavors, Peters has urged Congress to confirm her analysis by passing clarifying legislation.
A second publishing-rights problem that vexes online services (and record companies) is access to mechanical licenses, which the law requires be made available. Performance licenses have for decades been easily available on a blanket (or bulk) basis through ASCAP and BMI. Mechanical licenses, in contrast, are largely unavailable because the industry-wide organization, the Harry Fox Agency, makes available only 65% of U.S. copyrighted works, and the statutory Copyright Office process has proved inadequate for digital services.
Again, Peters has urged congressional action to modernize the compulsory mechanical licensing process to accommodate digital services' bulk licensing needs. One alternative Peters identified is to convert today's song-by-song mechanical license into a blanket license covering all U.S. repertoire, so it would work as efficiently as the licenses administered by ASCAP, BMI and SoundExchange.
Another proposal is to price mechanical licenses on a percentage-of-revenue basis, as ASCAP and BMI have done for decades. In times of dynamic pricing and business models, penny-rate licensing is inflexible and can result in mechanical royalties being undervalued (as occurred for decades in the 1900s) or overvalued (for example, if the market pushes down digital singles to 49 cents or less).
In a March 2004 hearing, Texas Republican Lamar Smith, chairman of the House Subcommittee on Courts, the Internet and Intellectual Property, asked if a statute developed in the piano-roll era could adequately serve digital industries. The subcommittee's ranking Democrat, Rep. Howard Berman of California, wondered whether the Copyright Act promotes or hinders the development of legal online services and their ability to compete against piracy.
At the recent Billboard conference, industry-leading executives sent Congress a clear message: The piano-roll provisions of the Copyright Act are outdated; Congress must act affirmatively to fix the law; and only then will online services be adequately armed to win the continuing battle against piracy.