The European Commission — the European Union’s regulatory arm — has been exploring the challenges legitimate online music services have when they want to license compositions throughout the EU. After more than 18 months, the EC released its recommendation to streamline the process.
The following generally explains how the EU licensing process differs from that in the United States and some problems with the current EU system. The EC’s full recommendation follows.
THE LICENSING PROCESS
The process to secure licenses in the United States to reproduce and perform musical compositions is very different from other parts of the world.
In the United States, publishers either license directly to users — record companies, online services, etc. — or authorize one of three competing organizations to license performance rights (ASCAP, BMI and SESAC) and the Harry Fox Agency or other companies to license mechanical (reproduction) rights.
Under European laws, collecting societies are the only licensing source that can secure the right to reproduce or perform compositions. In most EU countries, one collective rights manager (CRM) licenses mechanical and performance rights, collects royalties and distributes them to members or to CRMs in other countries for their members. In other EU countries, these rights are split between two CRMs.
Most CRMs enter “bilateral agreements” with CRMs in other countries, authorizing local licensing and royalty collection for their repertoire. To facilitate these arrangements, CRMs have formed alliances — umbrella organizations — that have prepared “model agreements” for CRMs to use. For example, BIEM represents the mechanical-right interests of publishers and has a model agreement.
The EC’s earlier report noted that these bilateral agreements include a number of restrictions that do not promote certain fundamental principles of the European community. For example, many CRMs agree among themselves that they will not accept as a member anyone who is a member of another CRM or with a nationality of the country where the other CRM operates. They also often agree that they will only license rights for their country.
In effect, a German publisher may only authorize a German CRM to handle its repertoire. That CRM authorizes CRMs in other EU countries to license rights and collect royalties, and then pay them to the German CRM, which then pays the local publisher. As the report noted, this means that there are multiple deductions for fees within this reciprocal network before rights holders receive revenue.
The EC also noted that in many agreements — either as written or as they are followed in practice — the distribution of royalties shows bias favoring domestic rights holders. For example, non-domestic repertoire represents 55%-62% of works exploited in Spain. Yet the royalties distributed from Spain to non-domestic CRMs have been below 12%. The EC wrote that this is “not good for the performance of the EU music sector as a whole.”
Further, this system does not promote “cross-border” licenses necessary for online music offerings — and the EC wanted to narrow the gap in online music revenue between Europe ($32.8 million in 2004) and the United States ($250 million in 2004), especially since 50% of mobile phone content revenue in the future is expected to come from music.
After considering responses to its report, the EC released its recommendation.
THE EC RECOMMENDATION
The following is the recommendation released by the EC:
THE COMMISSION OF THE EUROPEAN COMMUNITIES,
Whereas:
(1) In April 2004 the Commission adopted a Communication on the Management of Copyright and Related Rights in the Internal Market.
(2) The European Parliament, in its report of 11 December 20031, stated that right-holders should be able to enjoy copyright and related rights protection wherever such rights are established, independent of national borders or modes of use during the whole term of their validity.
(3) The European Parliament further emphasized that any action by the Community in respect of the collective cross-border management of copyright and related rights should strengthen the confidence of artists, including writers and musicians, that the pan-European use of their creative works will be financially rewarded.
(4) New technologies have led to the emergence of a new generation of commercial users that make use of musical works and other subject matter online. The provision of legitimate online music services requires management of a series of copyright and related rights.
(5) One category of those rights is the exclusive right of reproduction which covers all reproductions made in the process of online distribution of a musical work. Other categories of rights are the right of communication to the public of musical works, the right to equitable remuneration for the communication to the public of other subject matter and the exclusive right of making available a musical work or other subject matter.
(6) Under Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonisation of certain aspects of copyright and related rights in the information society and Council Directive 92/100/EEC of 19 November 1992 on rental right and lending right and on certain rights related to copyright in the field of intellectual property4, a licence is required for each of the rights in the online exploitation of musical works. These rights may be managed by collective rights managers that provide certain management services to right-holders as agents or by individual right-holders themselves.
(7) Licensing of online rights is often restricted by territory, and commercial users negotiate in each Member State with each of the respective collective rights managers for each right that is included in the online exploitation.
(8) In the era of online exploitation of musical works, however, commercial users need a licensing policy that corresponds to the ubiquity of the online environment and which is multi-territorial. It is therefore appropriate to provide for multi-territorial licensing in order to enhance greater legal certainty to commercial users in relation to their activity and to foster the development of legitimate online services, increasing, in turn, the revenue stream for right-holders.
(9) Freedom to provide collective management services across national borders entails that right-holders are able to freely choose the collective rights manager for the management of the rights necessary to operate legitimate online music services across the Community. That right implies the possibility to entrust or transfer all or a part of the online rights to another collective rights manager irrespective of the Member State of residence or the nationality of either the collective rights manager or the rightsholder.
(10) Fostering effective structures for cross-border management of rights should also ensure that collective rights managers achieve a higher level of rationalisation and transparency, with regard to compliance with competition rules, especially in the light of the requirements arising out of the digital environment.
(11) The relationship between right-holders and collective rights managers, whether based on contract or statutory membership rules, should include a minimum protection for right-holders with respect to all categories of rights that are necessary for the provision of legitimate online music services. There should be no difference in treatment of right-holders by rights managers on the basis of the Member State of residence or nationality.
(12) Royalties collected on behalf of right-holders should be distributed equitably and without discrimination on the grounds of residence, nationality, or category of rightholder. In particular, royalties collected on behalf of right-holders in Member States other than those in which the right-holders are resident or of which they are nationals should be distributed as effectively and efficiently as possible.
(13) Additional recommendations on accountability, right-holder representation in the decision-making bodies of collective rights managers and dispute resolution should ensure that collective rights managers achieve a higher level of rationalisation and transparency and that right-holders and commercial users can make informed choices. There should be no difference in treatment on the basis of category of membership in the collective rights management society: all right-holders, be they authors, composers, publishers, record producers, performers or others, should be treated equally.
(14) It is appropriate to continuously assess the development of the online music market.
HEREBY RECOMMENDS:
Definitions:
1. For the purposes of this Recommendation the following definitions are applied:
(a) “management of copyright and related rights for the provision of legitimate online music services at Community level” means the provision of the following services: the grant of licences to commercial users, the auditing and monitoring of rights, the enforcement of copyright and related rights, the collection of royalties and the distribution of royalties to right-holders;
(b) “musical works” means any musical work or other protected subject matter;
(c) “repertoire” means the catalogue of musical works which is administered by a collective rights manager;
(d) “multi-territorial licence” means a licence which covers the territory of more than one Member state;
(e) “collective rights manager” means any person providing the services set out in point (a) to several right-holders;
(f) “online rights” means any of the following rights: (i) the exclusive right of reproduction that covers all reproductions provided for under Directive 2001/29/EC in the form of intangible copies, made in the process of online distribution of musical works; (ii) the right of communication to the public of a musical work, either in the form of a right to authorise or prohibit under Directive 2001/29/EC or a right to equitable remuneration under Council Directive 92/100/EEC, which includes webcasting, internet radio and simulcasting or near-on-demand services received either on a personal computer or on a mobile telephone; (iii) the exclusive right of making available a musical work under Directive 2001/29/EC, which includes on-demand or other interactive services.
(g) “right-holder” means any natural or legal person that holds online rights;
(h) “commercial user” means any person involved in the provision of online music services who needs a licence from right-holders in order to provide legitimate online music services;
(i) “reciprocal representation agreement” means any bilateral agreement between collective rights managers whereby one collective rights manager grants to the other the right to represent its repertoire in the territory of the other.
General:
2. Member States are invited to take the steps necessary to facilitate the growth of legitimate online services in the Community by promoting a regulatory environment which is best suited to the management, at Community level, of copyright and related rights for the provision of legitimate online music services.
The relationship between right-holders, collective rights managers and commercial users:
3. Right-holders should have the right to entrust the management of any of the online rights necessary to operate legitimate online music services, on a territorial scope of their choice, to a collective rights manager of their choice, irrespective of the Member State of residence or the nationality of either the collective rights manager or the right-holder.
4. Collective rights managers should apply the utmost diligence in representing the interests of right-holders.
5. With respect to the licensing of online rights the relationship between right-holders and collective rights managers, whether based on contract or statutory membership rules, should, at least be governed by the following: (a) right-holders should be able to determine the online rights to be entrusted for collective management; (b) right-holders should be able to determine the territorial scope of the mandate of the collective rights managers; (c) right-holders should, upon reasonable notice of their intention to do so, have the right to withdraw any of the online rights and transfer the multi territorial management of those rights to another collective rights manager, irrespective of the Member State of residence or the nationality of either the collective rights manager or the right-holder; (d) where a right-holder has transferred the management of an online right to another collective rights manager, without prejudice to other forms of cooperation among rights managers, all collective rights managers concerned should ensure that those online rights are withdrawn from any existing reciprocal representation agreement concluded amongst them.
6. Collective rights managers should inform right-holders and commercial users of the repertoire they represent, any existing reciprocal representation agreements, the territorial scope of their mandates for that repertoire and the applicable tariffs.
7. Collective rights managers should give reasonable notice to each other and commercial users of changes in the repertoire they represent.
8. Commercial users should inform collective right managers of the different features of the services for which they want to acquire online rights.
9. Collective rights managers should grant commercial users licences on the basis of objective criteria and without any discrimination among users.
Equitable distribution and deductions:
10. Collective rights managers should distribute royalties to all right-holders or category of right-holders they represent in an equitable manner.
11. Contracts and statutory membership rules governing the relationship between collective rights managers and right-holders for the management, at Community level, of musical works for online use should specify whether and to what extent, there will be deductions from the royalties to be distributed for purposes other than for the management services provided.
12. Upon payment of the royalties collective rights managers should specify vis-à-vis all the right-holders they represent, the deductions made for purposes other than for the management services provided.
Non-discrimination and representation:
13. The relationship between collective rights managers and right-holders, whether based on contract or statutory membership rules should be based on the following principles: (a) any category of right-holder is treated equally in relation to all elements of the management service provided; (b) the representation of right-holders in the internal decision making process is fair and balanced.
Accountability:
14. Collective rights managers should report regularly to all right-holders they represent, whether directly or under reciprocal representation agreements, on any licences granted, applicable tariffs and royalties collected and distributed.
Dispute settlement:
15. Member States are invited to provide for effective dispute resolution mechanisms, in particular in relation to tariffs, licensing conditions, entrustment of online rights for management and withdrawal of online rights.
