by Edward (Ned) R. Hearn
In the late 1990s, the development of digital compression technology, concurrent with the wide acceptance of the Internet, created an environment that shook up the old rules of the music industry and challenged the traditional music business to adapt to changes in consumer preferences. Since then, many more changes have happened, including continued development of digital delivery technology, statutes, court cases, contractual agreements, and new economic models, along with dramatic decreases in the retail sales of the music industry’s principal product format, the CD, which is now in the minority percentage of sales formats.
These changes have contributed to creating a new paradigm on how to service consumers with recorded music. Music publishers and record companies have attempted to control the economic returns due to them and to the creators of music and sound recordings and have waged a battle with file-sharing services and depressions in the economy. We will discuss the rights of master owners, recording artists, music publishers, and composers in this ever-evolving landscape. We will explain how changes to the U.S. Copyright Act, including business developments, are affecting the ongoing efforts to provide an economic return for music and recordings in the legitimate digital media world as distinct from the all-pervasive “shadow” digital media world of peer-to-peer (P2P) file sharing. Despite music industry efforts, P2P file sharing still accounts for a significant volume of the distributed recorded music content.
Due to time and space limitations, we will not examine all of the diverse and ever-evolving mechanisms for accessing music, but will provide a basis for understanding how the legal and economic models available apply to the use of music and master recordings in the digital world.
As reported in Forbes and The New York Times, in the first half of 2014, music streaming revenues surpassed CD sales for the first time in the United States, according to data published by the Recording Industry Association of America. Total streaming revenues in the United States, including revenues from subscription-based and ad-supported, on-demand services, as well as non-interactive online radio services, increased 28% year-over-year to reach $860 million in 2014. Meanwhile, CD sales continued to fall and are now only the third-largest source of income for the U.S. music industry.
CDs are not the only medium affected by the rise of streaming services. Download stores, which initiated the CD’s demise a decade ago, are also suffering from the new streaming digital competition. After download revenues declined for the first time in 2013, the negative trend continued in the first half of 2014, with revenues dropping 13% to $1.34 billion. Rumors have even circulated that Apple may phase out its iTunes download store in favor of its Apple Music streaming service.
Increases in Subscription Streaming Services
In its 2016 Mid-Year Report, the Recording Industry Association of America (RIAA) noted that during the first half of 2016, subscription streaming services, which does not include publishing rights, ticket sales, merchandising, or other avenues, has strongly increased since the 1990s.
“For the first half of 2016, strong growth in revenues from subscription streaming services more than offset declines in unit-based sales of physical and digital music download products. Overall revenues at retail increased 8.1% on a year-over-year basis to $3.4 billion, the strongest industry growth since the late 1990s.
“Revenues from streaming services continued to grow strongly both in dollars and share of total revenues. First half (1H) 2016 streaming music revenues totaled $1.6 billion, up 57% year-over-year, and accounted for 47% of industry revenues compared with 32% in 1H 2015. This category includes revenues from subscription services (such as Apple Music, TIDAL and paid versions of Spotify, among others), streaming radio service revenues that are distributed by SoundExchange (like Pandora, SiriusXM, and other Internet radio); and other nonsubscrip- tion on-demand streaming services (such as YouTube, Vevo, and ad-supported Spotify).
Revenues from permanent digital downloads (including albums, single tracks, videos, and kiosk sales) declined 17% to $1.0 billion for the first half of 2016. . . .
The total value of shipments in physical formats was $672 million, down 14% versus 1H 2015.
These first half 2016 results illustrate the emergence of paid subscriptions as a primary revenue driver for the U.S. music industry. For the first time, paid subscriptions were virtually on-par with paid downloads as the big- gest single format revenue source. Streaming became the overall largest revenue contributor by a wide margin.” 1
How big will streaming services get? A report titled Global Mobile Music Forecast 2010–2022, finds that by 2022, streaming will account for 95% of mobile music, and full track downloads will decrease from 1.1 billion to 0.6 billion. The report says that “the number of users will more than double to reach 950 million . . . the majority of streamers use free, ad-funded offers, and [this] will remain so until the end of the forecast period.” The increases were consumer driven.2
Conclusions from this report are quoted widely by such magazines as Hypebot and Forbes.
Digital Performance of Sound Recordings
When you compose and record music, you create two properties, both of which are protected by the copyright laws: the music you write and the musical performances you record. As the copyright owner of the music and the sound recording, you have the exclusive right to reproduce, distribute, display, perform, and create derivative works with those properties.
The sole exception is that in the United States you have no exclusive rights to perform the sound recording in a nondigital environment (as distinct from the performance of the music on the sound recording); namely, anyone can perform the sound recording in a non-digital environment without having to make any payment to you for it. Examples of performing the sound recording in a non-digital environment include playing, broadcasting, or transmitting those sound recordings over radio or television.
This situation resulted from the National Association of Broadcasters effectively lobbying for and representing the broadcast industry when sound recordings first became subject to federal copyright protection in 1972. The broadcast industry was able to get Congress to exclude from the exclusive rights of the owner of sound recordings the right to perform those works. The argument used was that the broadcast industry was already paying music publishers royalties for the performance of the music contained on the recordings, namely, the payments collected today by BMI, ASCAP, SESAC, and Global Music Rights.
The recording industry has engaged in consistent efforts since the January 1, 1978, effective date of the 1976 Copyright Act to change this aspect of the Copyright Act, but to date that effort has not been successful. Good sources from which to follow this legislative activity to enable or prevent the payment of a fee for the performance of masters in a non-digital environment, otherwise known as terrestrial media, are the SoundExchange website (www.soundexchange.com) for the sound recording owners’ perspective and www.broadcastlawblog.com for the broadcast industry’s perspective.
Amendments to the Copyright Act for Performance of Sound Recordings
The record companies were determined not to let their experience with the loss of payment for the performance of sound recordings on radio or television be repeated in the digital world. Consequently, amendments to the Copyright Act were enacted in 1995, namely, the Digital Performance Right in Sound Recordings Act (DPRA), and in 1998, the Digital Millennium Copyright Act (DMCA). The DPRA vests in the owner of the sound recording the exclusive right to control the digital performance of the sound recordings over cable and satellite. The DMCA applies the same exclusive right to the owner of the sound recording with respect to webcasting over the Internet or wirelessly. (Two appendices at the end of this chapter summarize these acts.)
Under each of these acts, fees must be paid for the performance of the sound recording in the digital medium. The companies that wish to perform the sound recording digitally must get either a voluntary license for interactive streaming and conditional downloads (consumers can choose what they want to listen to whenever they want to listen to it) or a compulsory license for non-interactive streaming (consumers get to listen only to whatever selections the transmitting entity decides to program) if they are to avoid copyright infringement claims.
Examples of companies that rely on the compulsory licensing opportunities for non-interactive digital performances are satellite services such as SiriusXM Satellite Radio, cable systems like Music Choice, Muzak, and the Internet radio station features of webcasters such as Pandora Radio and RealNetworks’ Rhapsody. Certain digital music service providers, such as Spotify, TIDAL, Apple Music, Google Music, Amazon Music, and the recently launched Pandora Plus and Pandora Premium, which allow consumers to interactively select, or stream, what recorded music they want to listen to, negotiate voluntary licenses from record companies for streaming and transmittal features that do not fall within the scope of the compulsory license for non- interactive streaming. Efforts have been made to have the DPRA and DMCA provisions updated, but as of this writing changes have not yet been achieved.
The provisions of both acts are complex. Appendices A and B at the end of this chapter summarize the DPRA’s and the DMCA’s relevant provisions and the requirements that must be satisfied for cable, satellite companies, and webcasters to qualify for a compulsory license. Note also that, in the United States, these streaming companies also must pay music performance fees to collection societies—ASCAP, BMI, SESAC, and Global Music Rights—for the performance of the music. They pay similar fees to music collection societies in other countries as well.
If the cable and satellite industries and webcasters do not satisfy the compulsory license provisions provided for the digitally transmitted performance of the sound recordings in a non-interactive manner, then they must get permission from the owners of the sound recordings. Such permission is granted at the discretion of the master owners, and the owners can set their own rates based on negotiations with the digital music service providers, as further described below and in the section “Digital Phonorecord Deliveries of Sound Recordings.”
With regard to the DPRA’s compulsory licensing for non- interactive streaming, the record, cable, and satellite industries tried to negotiate and establish the rates that would be used to compute the fees, but failed to reach agreement. An arbitration panel, under the auspices of the Copyright Office, reviewed the matter and set the rates. On a number of occasions based on hearings and that covered the periods from 2002 through 2015, a similar situation occurred under the DMCA with respect to webcasters for non-interactive streaming. The disparity in fees that labels sought and webcasters offered paralleled the same positions experienced between the record companies and the satellite and cable companies. As the representatives of the record and webcasting industries were not able to settle on fees each time the requirement to set rates happened, the matter was submitted to arbitration before the Copyright Royalty Board (CRB) under the auspices of the Copyright Office. The CRB was established and empowered by the Copyright Royalty and Distribution Reform Act of 2004 to determine rates and terms for copyright statutory licenses (for example, the non-interactive streaming of master recordings) and the distribution of the statutory license royalties set by the CRB.
These rate setting procedures have been processed a number of times since the requirement to make payments began. The history of the rates set by the CRB can be reviewed at www.soundexchange.com.
The Copyright Royalty Tribunal, which consists of three copyright royalty judges that compose the CRB, issued its written determination of royalty rates and terms to apply from January 1, 2016, through December 31, 2020, to digital performance of sound recordings over the Internet by nonexempt, non- interactive transmission services (webcasters), and to the making of ephemeral recordings to facilitate those performances (see box story for those rates).
Allocation of Fees
The fees paid for the non-interactive digital performance of the master recordings are allocated 50% to the record company (i.e., the owner of the sound recording), 45% to the featured artist, 2.5% to non-featured musicians, and 2.5% to non-featured vocalists. Billions of dollars have been collected to date under the DPRA and DMCA, which have been paid to SoundExchange (www.soundexchange.com) as the representative of the sound recording copyright owners and artists. SoundExchange disburses that money to the labels and to recording artists in their respective shares on a quarterly basis, which, through the second quarter of 2016, was in excess of $4 billion.
The CRB also has ordered that commercial webcasters electing to accept the SoundExchange Agreement generally must provide census reporting (i.e., actual recordings played and total listenership, the latter of which is the total number of those who heard each song each time it was played) and retain server logs for at least four years. These reporting requirements facilitate processing royalty payments to artists and master recording copyright holders.
Keep in mind that the rates described for the various categories of digital audio services are subject to ongoing changes, and new developments occur frequently. To get updated reports on what rates are being charged and the results of ongoing negotiations, visit www.soundexchange.com and the Digital
Media Association website, www.digmedia.org, which provide substantial sources of information on the rates that apply and the requirements to be met by the cablecasters and webcasters.
Rates for Commercial and Noncommercial Webcasters: 2016–2020
A summary of the rates set by the CRB as quoted by SoundExchange.3
Applies to All Webcasters
Annual minimum fee: $500 per station or channel. Services with greater than one hundred stations or channels pay an annual fee of $50 thousand. These minimums are treated as advances against the monthly aggregate per-performance royalty fees noted below.
Services that are owned by a governmental entity for public purposes or owned by a tax-exempt service under Section 501 of the Internal Revenue Code (e.g., churches, schools, etc.) must operate as noncommercial webcasters. All other webcasters must operate as commercial webcasters (the noncommercial status of a webcaster is not based on an absence of advertisements or commercials on the website or within the programming).
Fees for 2017–2020
The rates for noncommercial webcasters are $500 annually for each station or channel for all webcast transmissions totaling not more than 159,140 aggregate tuning hours (ATH) in a month, for each year in the rate term. In addition, if, in any month, a noncommercial webcaster makes total transmissions in excess of 159,140 ATH on any individual channel or station, the noncommercial webcaster shall pay per-performance royalty fees for the transmissions it makes on that channel or station in excess of 159,140 ATH at the rate of $0.0017 per performance. The rates for transmissions over 159,140 ATH per month for the period 2017 through 2020 shall be adjusted to reflect the increases or decreases, if any, in the general price level, as measured by the Consumer Price Index applicable to that rate year, as wet forth in the regulations adopted by this determination.
Noncommercial Public Radio
This category includes NPR, American Public Media, Public Radio International, Public Radio Exchange, and certain other stations annually named by the Corporation of Public Broadcasting (CPB); for example, certain members of the National Federation of Community Broadcasters. The rates and terms areas described at 80 Fed. Reg. 59589 (Oct. 2, 2015).
From 2016-2020, CPB submits five annual payments of $560 thousand to SoundExchange (due December 31 of each prior year), as well as four quarterly Reports of Use, covering all stations within the terms of the above-referenced agreement. Streaming services that operate within this category do not submit payments or reporting of any kind to SoundExchange, and instead should
An old category for noncommercial microcasters is no longer applicable. The category was for low annual listenerships (approximately twelve listeners each listening for ten hours per day). Applicable services are encouraged to operate as a noncommercial webcaster.
Noncommercial Educational Webcasters
This category is for noncommercial services that (1) offer nonsubscription transmissions, (2) are primarily operated by students, and (3) are owned by accredited educational institutions.
Services that exceed the monthly threshold (159,140 ATH) must transition to operating as a noncommercial webcaster (CRB).
Fees for 2016-2020
The Value of Streaming in 2016
To help put into perspective the value of a stream of a master recording, Billboard magazine has reported that, in the reality of today’s music business, billions of streams, each one requiring precise metadata and tracks, pay fractions of a cent to rights holders and even less to creators. This is not a transposition of dollars to pennies. Today’s digital music business is collecting as many fractions of pennies as possible. Interactive service Spotify, for example, pays approximately $0.006 to $0.0084 per play.
A number of the companies, in addition to the download model discussed below, have interactive streaming subscription services. Interactive streaming is like listening to the radio, but occurs over the Internet, as for example, RealNetworks’ Rhapsody, Spotify, TIDAL, Google Music, and Apple Music. Interactive streaming—as distinct from the non-interactive streaming model (such as Pandora Radio and SiriusXM) —requires obtaining voluntary licenses from the sound recordings’ owners, and so the deals are all negotiated, and the statutory, compulsory non-interactive licenses discussed earlier do not apply.
To compete with Spotify, Apple Music, Google Music, and other Internet services, each of Amazon and Pandora launched $5-per-month limited interactive music subscription services. Pandora followed up with the launch of Pandora Premium, a fully interactive music subscription service at $10 per month, as has Amazon with Amazon’s Music Unlimited at $7.99 per month for Amazon Prime subscribers and $9.99 for non-Prime subscribers, and each have negotiated voluntary licenses with the record labels setting contractually negotiated license rates. For example, Amazon, for its Music Unlimited interactive subscription services, must pay the labels for the right to allow the subscribers to access its music library. The fees paid to the major labels by Amazon are reported to be between $5.50 and $6 per month per subscriber and an additional $1.50 per month per subscriber to the publishers and songwriters, which basically absorbs all of the subscription fees paid to Amazon by its customers. Amazon, however, can still afford to “lose” money in the service, as it is another avenue for it to push its core business; namely, selling product from its Internet store. Note that some of the other interactive streaming services, as further discussed below, also have negotiated streaming mechanical fees to be paid to the publishers for the music on the masters in addition to the PRO music performance license fees referenced earlier.
Pandora is adopting interactive streaming services, getting directly negotiated licenses from the major and independent label owners, and making negotiated payments directly to those label owners. This makes it likely that over time its reliance on the statutory licenses and making payments on a per stream basis to SoundExchange based on the statutory rate will decrease the money paid to SoundExchange. It will also likely decrease the pool of money paid to the labels and featured artists and session musicians. Instead, the labels will be receiving the label and artist shares of the interactive royalty payments. They will also be responsible for paying the artists based on their contracts with the artists, which generally will be equivalent to the royalty paid on the physical sales or digital downloads. As such, that amount will be much less than the 50% share paid to the featured artists and session musicians by SoundExchange for the non-interactive service fees. The one qualification is that a label may authorize Pandora (and similar services) to continue to pay the artist share of non-interactive fees to SoundExchange to remit to the artists rather than paying that money to the labels. Again, however, that amount of money most likely will continue to shrink as the amount of use of the Pandora non-interactive service (and similar services that compete in interactive) will decrease over time.
Also, note that the CRB is conducting hearings for the fees to be paid by satellite services for new rates for the period 2018 to 2022; SoundExchange, SiriusXM, Music Choice, and Muzak have proposed opposing rates. SoundExchange has proposed 23% of gross revenue and per subscriber rates of $2.48 per subscriber per month for SiriusXM and $0.019 per subscriber per month for Music Choice and Muzak, starting in 2018, with modest annual increases through 2022. SiriusXM pays 10.5% of gross revenue in 2016 and 11% in 2017. Subsequent to the hearings to be held during 2017, new rates will be announced by the CRB by December 15, 2017 to go into effect in 2018.
SiriusXM also is pursuing similar strategies in terms of negotiating direct licenses with the labels for the digital performances of the masters over its satellite service systems.
The digital music service providers for the interactive streaming and conditional downloads pay a substantial percentage of their revenue to the labels and publishers as the negotiated fee for the rights granted to them. Spotify has reported that it pays 70% to 80% of its subscription fees to content owners, combining master owners and music publishers, and this is not atypical. Some digital music service providers will pay anywhere from a fraction of a penny to a full penny per stream against the percentage of revenue they receive, so the labels get the greater of these measuring formulas.
Subscriptions can range from $5 to $10 per month, usually commercial-free, but with the free streaming subscriptions embedded with commercials. Higher monthly rates usually accompany those subscription services that enable the customer to port content to portable devices so they can take their music library with them when they travel. If the monthly subscription lapses, any content in the conditional download library is lost. These programs of conditional downloads, however, are being replaced by the streaming subscription services discussed above.
The labels must compensate the artists/producers from the labels’ share of these subscription fees. The most common approach the major labels use is a royalty percentage equal to the royalty percentage paid on physical sales and downloads, for example, 15%, but with some independent labels sharing on a 50-50 split.
Payments for Streaming
The September 1, 2016, issue of Digital Music News reported significant advances paid to labels for interactive streaming subscription services. Most of these advances are likely kept by the labels, with little paid to the artists until reported performances are applied as credits against the advances. This approach has echoes of the old record club days. At that point, the artists are paid their share, namely, the artist’s royalty percentage times the reported value of the streams or applied against the artist’s unrecouped accounts. During the second quarter of 2016, “On-demand streaming services Spotify, Apple Music, TIDAL, Deezer, Rhapsody, and others—collectively paid nearly $1.6 million in guaranteed payments a day [article author emphasis] to the three major recording labels [Universal Music Group, Sony Music Entertainment, and Warner Music Group]. . . . Total ‘minimum guarantees’ topped $144 million over the 91-day period.”4
This money is treated as advances against royalties for actual plays, which reported plays likely quintupled that figure. “Overall royalty payments to the three major label groups topped $918 million during the second quarter of 2016, bringing the aggregate per diem to $10.1 million.“5
Using this benchmark, advanced payments represent around 16% of all label payments. An emphasis on streaming is having a downward impact on paid downloads, with double-digit declines in 2016 and, in turn, reduced compensation to the artists.
As another example, Digital Music News reported that, according to Vivendi’s third quarter 2016 report, “Its Universal Music Group made a whopping $4.48 million per day from music streaming services,” as well “$1.1 billion in music streaming revenue in the first three quarters of 2016.”6 What this shows is that music fans are moving away from buying individual songs and albums online and listening more to music streaming services.
However, payments to copyright holders for music streaming are not normalizing.
“What does streaming music pay in 2016? That’s becoming an increasingly tricky question. But here’s the latest breakdown from an artist royalty report.
It takes 776 streams on YouTube to earn a dollar, and just 32 on Microsoft Groove. On SoundCloud, you’ll need 766 streams to earn $1, while it only takes 96 from the SoundCloud GO premium service. In between, there are streaming music services Spotify, Apple Music, Deezer, Rhapsody, TIDAL, Google Play, and VEVO, all paying wildly different sums for the same exact song.
Why the polar extremes? We’ve been receiving—and posting—lots of streaming payout information on Digital Music News, only to learn that payouts aren’t normal- izing over time. Instead, they’ve become more divergent over time. Just recently, an independent hip-hop and R&B label shared an entire statement with Digital Music News, one showing multi-dollar payouts from Microsoft Groove (via Xbox), and almost worthless payouts from YouTube [see table for comparisons].
|Per Stream Royalty
# of Streams = $1
Indeed, some industry observers believe the streaming business model is broken. For example, Pierre Priot posted the following on the Music Think Tank blog:
“The streaming business model clearly fails to make profits from its tremendous audience acquisition. The more people play stream, the smaller the piece of the pie to be shared with each copyright holder. The availability of unlimited streaming for subscription users makes it impossible to keep revenue in sync with spins.
The per-stream-revenue ratio keeps plunging down as more and more users make the jump and quit physical and even downloads to switch to streaming services. Even if a large fringe [of] them may subscribe to a plan, [be it] Apple Music, Spotify, Deezer, or Tidal, the revenue won’t match the huge tidal wave of stream spins—over 200 billions as the industry expects for 2016.
This means that streaming services won’t have any other options than lower the producers and publishers revenue shares. Who’s gonna pay the price for this broken business model? Just as we feared, artists, creators . . . music makers. Don’t feel sorry about the big hit makers, they’ve got it all sorted, are getting paid advances when the regular guys get the dimes wired with a six months delay . . . and they will all [need] support [from] the industry’s big hot shot lawyers to negotiate guaranteed fees.”8
This segment of the record music industry is in a mode of quick and constant change, so periodically update yourself on and stay alert to those changes and do not rely only on the data detailed here.
Digital Performance of Music
In addition to fees for the streaming of sound recordings by satellite, cable, or webcasting, the streaming companies must sign license agreements with the music performance rights organizations (PROs)—BMI, ASCAP, SESAC, and Global Music Rights—for the performance of the music embodied on the sound recordings. Note that streaming companies also pay music performance fees to PRO collection societies for the performance of music in other countries, just as they pay to collection companies outside the United States for digital performances of master recordings. PROs allocate the fees collected and make payment to the publishers and writers. Note: These music performance royalties are distinct from (1) synchronization fees paid for the right to fix and reproduce the music and the sound recording on the soundtrack of an audiovisual production, (2) mechanical license fees paid to reproduce music on phonorecords, and (3) the streaming mechanicals paid to stream the music in interactive digital music services.
No one has disputed the right of PROs to collect such sums nor the obligation of the satellite, cable, and webcasting companies to obtain licenses and pay for the performances of music. Most cable and satellite companies, as well as webcasters and streaming media companies (such as Real Networks, Pandora, and Apple Music), obtain licenses from PROs. The issue has been how much to pay.
Three PRO websites—www.ascap.com, www.bmi.com, and www.sesac.com—provide details on how they compute the fees for the performance of music over the Internet (and Global Music Rights does not). Fees also have been negotiated on a case-by- case basis and been litigated, such as the hearings before the ASCAP and BMI Rate Courts. As with other segments in this industry, changes happen frequently in this area, so you need to periodically review developments, such as provided by the PRO websites, to stay current with the economic and legal aspects of this field.
The common position on how labels compensate artists for digital downloads has been challenged through various litigations members, argued that the arrangements between labels and digital music service providers, such as iTunes, are licenses subject to a 50-50 split of the proceeds between the label and the artist, rather than a sale by the label through regular retail channels subject (F.B.T. Productions v. Aftermath Records), reclassify the arrangements with the digital music distributors as a license rather than a sale, a shift that would significantly bump the 50 split of revenue received by the label after deducting the mechanical royalty license fee for the music on the sound recording.
In the lower court ruling, which found in favor of the Aftermath Records label, those digital download formats were lumped with 9 The decision did not outline the This decision, however, squarely put this issue back into prime contention.
Relevant language from the Appeals Court’s decision is as follows:
“However, the agreements also provide that ‘notwithstanding’ the Records Sold provision, F.B.T. is to receive a 50% royalty on ‘masters licensed by [Aftermath] . . . to others for their manufacture and sale of records or for any other uses.’ The parties’ use of the word ‘notwithstanding’ plainly indicates that even if a transaction arguably falls within the scope of the Records Sold provision, F.B.T. is to receive a 50% royalty if Aftermath licenses an Eminem master to a third party for ‘any’ use. A contractual term is not ambiguous just because it is broad. Here, the Masters Licensed provision explicitly applies to (1) masters (2) that are licensed to third parties for the manufacture of records ‘or for any other uses,’ (3) ‘notwithstanding’ the Record Sold provision. This provision is admittedly broad, but it is not unclear or ambiguous.. . . Pursuant to its agreements with Apple and other third parties . . . Aftermath did not ‘sell’ anything to the download distributors. The download distributors did not obtain title to the digital files. The ownership of those files remained with Aftermath. . . . [W]here a copyright owner transfers a copy of copyrighted material, retains title, limits the uses to which the material may be put, and is compensated periodically based on the transferee’s exploitation of the material, the transaction is a license. . . .
“It is easily gleaned from these sources of federal copyright law (i.e., Section 114(f) on digital performance of master recordings, and Section 115 on compulsory mechanical licenses for music) that a license is an authorization by the copyright owner to enable another party to engage in behavior that would otherwise be the exclusive right of the copyright owner, but without transferring title in those rights. This permission can be granted for the copyright itself, for the physical media containing the copyrighted work, or for both the copyright and the physical media.
“When the facts of this case are viewed through the lens of federal copyright law, it is all the more clear that Aftermath’s agreements with the third-party download vendors are ‘licenses’ to use the Eminem master recordings for specific purposes authorized thereby—i.e., to create and distribute permanent downloads and mastertones—in exchange for periodic payments based on the volume of downloads, without any transfer in title of Aftermath’s copyrights to the recordings. Thus, federal copyright law supports and reinforces our conclusion that Aftermath’s agreements permitting third parties to use its sound recordings to produce and sell permanent downloads and mastertones are licenses. . ,
Because Aftermath permitted third parties to use the Eminem masters to produce and sell records, in the form of permanent downloads and mastertones, F.B.T. is entitled to a 50% royalty under the plain terms of the agreements.”10
Digital Phonorecord Deliveries of Sound Recordings
Since the right to reproduce and distribute copies of sound recordings is recognized as an exclusive right of the copyright owner under the U.S. Copyright Act, the DPRA and the DMCA did not have to address rules that would apply to digital phonorecord deliveries (DPDs) as they relate to sound recordings. DPDs are basically music downloads to computers and mobile devices. The Copyright Act gives copyright owners of the master recordings the right to negotiate rates with downloaders. As such, the economics of DPDs has evolved based on marketplace experiments and contractual arrangements between recording companies and other owners of sound recordings and artists on one hand, and third parties that license those sound recordings to distribute them digitally to consumers on the other hand.
Sound recordings can be digitally delivered directly to consumers’ computers over the Internet, wirelessly through carriers to mobile devices, and through kiosks at retail outlets that have connections to the Internet or have the masters stored on servers at the retailer. At the kiosks, consumers can download masters and have them burned onto compact discs or loaded into portable MP3 players or their mobile devices. This was a more common approach in the first decade of this century, but less so since the expanding ubiquity of Internet access to content and the growth of streaming services.
The birth of the significant digital download market happened in spring 2003, when Apple launched its iTunes store. Apple was the first company to convince major labels to make their masters available for digital downloads to consumers’ desktop and laptop computers and now to mobile devices. This undertaking coincided with Apple’s launch of the iPod, and now Apple’s iSeries and Android products have become the dominant products in the portable digital marketplace. The arrangement between Apple and the majors opened the door for other companies to pursue supplying digital files to consumers in this market and for other labels to get their content into digital distributed media. Since the launch, Apple has extended its reach throughout the world and, as of this writing, is the leading music retailer in the United States.
The other significant players involved in digital music download distribution include Google Music, Amazon Music, and Rhapsody-owned Napster. Other players, such as AOL/ MusicNow, Yahoo!, MTV’s Urge, and Sony Connect, have either left the scene, transferred, or merged their business units with others. There are other niche market digital download stores, but iTunes continues to be the major market leader.
In the most common U.S. economic model for DPDs, the average retail price for a single track is 99 cents to $1.29 from iTunes, and 89 cents or lower from Amazon.com. On average, album downloads are sold at $9.99 or lower from Amazon. com. By way of illustration, from a 99-cent price point, the digital distributor will pay the label between 60 and 70 cents as a wholesale price, or $6 to $7 for an album (i.e., on average 30%), and a bit higher with regard to major label superstars; for example, $1.29 and $12.99 for a single track and an album, respectively, and will keep the difference as its share. iTunes, and later Amazon, introduced variable pricing levels of 69 cents, 99 cents, and $1.29 for catalog, standard, and “superstar” releases respectively, with essentially the same 70-30 split between the labels and iTunes. From that wholesale payment, the label will pay the mechanical royalties, 9.1 cents per download or 1.75 cents per minute of recordings greater than five minutes in duration, and a royalty to the artist and producer, which is usually based on the royalty rate paid to the artist/producer on the retail sale price of physical product. For artists/producers with a 12% royalty, they would see 12 cents on a 99-cent download. The label keeps the difference of what is paid by the digital music distributors minus the mechanical royalty.
Occasionally, a label may treat the artist/producer so that he or she would share with the label on a 50-50 basis or some other percentage of the wholesale price paid for the download minus mechanicals. That, however, is the exception rather than the rule. Most labels will not take packaging deductions or free goods allowances—typical standard deductions in the physical product market—on the downloads, since there is no packaging and there are no free goods. Sometimes the artist and the label may agree to distribute a track at no cost as a promotional device.
Now, most labels in their recording agreements with the artists state explicitly that downloads and streams are not to be characterized as licenses, but as sales, and the royalty to the artists will be the same as the royalty percentage on the sale
of physical media, that is, a percentage of wholesale or retail, so that the royalty arrangements for downloads and streams under the recording agreements during the past 10+ years are not in dispute. The 50-50 license fee arrangement has been “quarantined” to the heritage artist agreements, and for the most part such claims have been settled on a business level resolving the class action lawsuits brought by the artists.
Delivery of Content to Mobile Devices
In the first years of this twenty-first century, another development that had a significant impact in the digital distribution market was the delivery of content directly to mobile devices, including ringtones (monophonic, polyphonic, and mastertone), ringbacks, over-the-air (OTA) downloads of full tracks, and audio and video streaming. Both monophonics—a cover recording having only a single melodic line of the song— and polyphonics—a cover recording having both the melody and harmony of the song—are now mostly abandoned markets. Mastertones, a digital sound recording of a song’s original master recording of the song, have superseded polyphonics. A ringback is the recording of a song the caller hears while waiting for the called person to answer. The mastertones market is now a substantially smaller market, with its heyday being in the 2002–2007 period.
While the major labels have the catalog depth and breadth to do direct deals with carriers (i.e., the companies with the delivery pipelines), few independent labels, let alone individual artists, have that capacity. Instead, indies and individual artists must go through aggregators to get into the markets of downloading tracks, albums, and videos, as well as ringtones and OTAs. Carriers sometimes contract with mobile aggregator companies, such as Mobile Streams, to access label content. The aggregators license from labels the rights for mastertones, OTAs, and video, to sell that content to consumers for downloads to cell phones and other mobile devices. These companies also make deals with carriers to use the carriers’ platforms as delivery pipes for sales to consumers. The economics of these arrangements are described below, with carriers and labels getting a major share of the income and the aggregators getting a small percentage to cover their cost of business and relatively slim profit margins. Consumers, in turn, in purchasing ringtone downloads may do it à la carte or they may subscribe for a monthly fee that enables them to download a finite number of mastertones. This market, while substantial in the first twelve years of 2000, has been in serious decline during the last few years.
The economics of the mobile delivery marketplace are different from the more traditional economics of digital distribution to computers and laptops, which on average work off the 89 or 99 cents per track model (and the $8.99 or $9.99 per album model). The significant difference is that a carrier is delivering the content, which adds a party into the mix and takes a bigger percentage of sales than do the online digital downloaders. The retail prices with mastertones, ringtones, and ringbacks are higher, even though the content is much less, namely just a clip to be used as a ringer on your phone. An average price for a download of a ringtone is $2.49, with some content priced at $1.99 and other content at $2.99. From this amount, carriers will take 30% to 50% with the principal carriers being Verizon, Sprint, and AT&T Mobility. Major labels generally get 45% to 50% of the retail price against a minimum of 75 cents to $1.25 per download. Independents will get 30% to 40% of the retail price against a minimum of 35 cents to 50 cents. The balance is kept by the aggregator. From the label’s share, it has to cover mechanicals and artist and producer royalties. Most labels apply the same royalty calculation approach to ringtones for the artists/producers as they apply to full-track downloads for an Apple iTunes or other download company; namely, the percentage of the retail price or wholesale price equal to the percentage paid by the label to the artist on the sale of physical product. See “Digital Phonorecord Deliveries of Music” below for a discussion of mechanical royalties on ringtones.
With regard to OTAs, an average retail price has declined from $1.99 to 99 cents, with the carrier, again, getting between 35% to 50% and the label getting 30% to 40% usually against a minimum to the label based on the average retail price of 60 cents to 95 cents per OTA download. The balance goes to the aggregator company selling OTAs.
There also is the advertiser-supported market, sponsored by such established companies as YouTube and Facebook. These companies have not generally charged consumers for access to the music, but instead share their advertising revenue with the owners of the master recordings and compositions based on negotiated participation percentages. This approach has generated complaints by labels and artists about underpayments relative to the value of the masters and music, which is a subject that merits its own analytical article, so any more details will be deferred to a later time, especially as these models are still evolving.
The landscape for these services keeps changing almost daily, so you need to stay alert to these adjustments as they happen if you are to stay current with the field’s legal and economic aspects.
Digital Phonorecord Deliveries of Music
When a record is manufactured and sold, the record company must pay the publisher a mechanical royalty to reproduce the music on phonorecords. Likewise, the DPRA provide that a mechanical royalty must be paid for digitally downloaded music as is paid for music on phonorecords sold in hard media. Most record contracts try to limit the statutory rate that has to be paid to reproduce music on phonorecords written by the recording artist (i.e., a controlled composition) to 75% of the statutory rate, often with a cap of ten to twelve songs per album as opposed to the actual number of compositions on an album, if there are more than that. Under the directives of the DPRA, the RIAA, and the National Music Publishers’ Association (NMPA) agreed that the same mechanical royalty rate would apply to both physical phonorecords and digital phonorecord deliveries (DPDs). The statutory rate through December 31, 2017, is set at 9.1 cents per song or 1.75 cents per minute for songs greater than five minutes for physical product and permanent digital downloads. In 2016, the CRB proposed mechanical royalty rate change hearings, with new rates to go into effect January 1, 2018 through December 31, 2022. There has been an initial period of voluntary negotiation between the record labels, music publishers, and internet service providers during the first half of 2016, and some agreements were reached. The National Music Publishers Association (NMPA) and the Nashville Songwriters Association (NSA) have reached a voluntary agreement with Sony, Warner Music, and Universal that the statutory mechanical royalty rate will stay at 9.1 cents or 1.75 cents per minute for recordings of songs greater than five minutes and zero seconds through 2022 for physical sales and digital downloads, and 24 cents for ringtones. On-demand streaming mechanicals are still to be negotiated, and if they are not, the CRB will hold hearings and by December 15, 2017 announce the rate for streaming mechanicals for the 2018 to 2022 period.
Under the DPRA, contractual efforts to impose a fractional limit on mechanical royalties for music on digitally delivered phonorecords written or controlled by an artist is not permitted, except for agreements that predate June 22, 1995, or agreements made after that date when the songs in question were recorded with the artist/songwriter thereafter agreeing, in writing, to a reduced rate. Absent these qualifications, the full statutory mechanical royalty rate must be paid for music on digital phonorecord deliveries.
The Copyright Office also has adopted the industry- negotiated mechanical royalty rates for streams and conditional downloads or incidental DPDs, such as digital phonorecord deliveries that time out or that are streamed on-demand and temporarily buffered or cached in that process. Those rates are 10.5% of revenue less music performance fees (if applicable) retroactive to January 1, 2008, with an 8.5% rate less music performance fees to apply to the prior seven years, subject to minimal royalties described in detail in the Schedule for these fees released by the Harry Fox Agency (www.harryfox.com). These rates are in effect through December 31, 2017, but as noted above, are in the process of being changed, and if not agreed to by industry negotiations, will be set by the CRB after hearings, with the rates announced by December 15, 2017, so check the sources noted above for any adjustments to these rates.
For mechanical royalties on ringtones, record labels and ringtone aggregators in the past had negotiated royalty rates with the publishers in the range of 10% of the retail selling price per download, against a minimum of 10 cents to 12.5 cents per download, plus a one-time fixing fee of $25 per composition to store the music on the ringtone company’s servers. These terms are usually on a favored nation basis. The publishers’ position has been that ringtones are not phonorecords and therefore are not subject to the compulsory licensing provisions of the United States Copyright Act for statutory mechanicals, and thus the publishers could quote any fee they wanted for granting the right to use their music on the ringtones, or even to withhold permission if they wanted.
Record companies (even though the majors also own publishing companies) took exception and asked the United States Copyright Office, with opposition from publishers, to render an opinion on whether ringtones were phonorecords and subject to the statutory mechanical compulsory licensing provisions of the Copyright Act. In response, the Copyright Office ruled that ringtones are phonorecords, and that compositions used for ringtones do fall under the compulsory licensing provisions of the Copyright Act. As such, publishers are not free to withhold permission to use their compositions or to negotiate rates with the record companies for royalties to be paid for ringtones. The Copyright Office’s ruling set mechanical royalty rates for ringtones at 24 cents per download, which, based on industry negotiations, have been agreed to be extended through 2022.
As noted previously, a good way to monitor current development in this area is by accessing the websites for the United States Copyright Office (www.copyright.gov), RIAA (www.riaa.com), and the Harry Fox Agency (www.harryfox.com).
To be subject to the compulsory licensing provisions of the Copyright Act, the ringtones may not recast, transform, or adapt the compositions or include additional material in a way that it becomes an original act of authorship, that is, a derivative work. If it does, then a license must be negotiated with the publisher.
The Copyright Office’s decision also makes the recorded portion of a composition that has been sold only as a ringtone subject to a compulsory license for use by others, even if it has never been released on a physical phonorecord or sold as a full track permanent download. In such cases it is deemed to have been recorded and distributed to the public as a phonorecord with authorization from the copyright owner, which is the condition precedent for allowing use of the statutory compulsory mechanical license.
Just as labels and artists use a network of independent distributors to get their physical product into stores, specialized distributors facilitate the ability of smaller labels and artists to get their content distributed digitally to consumers through digital music service providers. Initially, such distribution was available for the independents and artists under direct deals with Apple iTunes, Amazon Music, and others, but making individual deals with the thousands and thousands of independent labels and artists became administratively inefficient for them. Also, the work labels and artists must do to service the initial delivery and continually submit their content to digital music service providers can be quite a burden, not just with regard to the major digital music service providers, but also because of the rapid increase in alternative outlets through which independent labels and artists can have their content delivered to the consumer.
As a result, digital distributors known as aggregators have developed. They act as the conduit to get content from the independent labels and artists to the numerous digital music service providers available. These include the majors, such as Apple iTunes, as well as several smaller outlets that deal with digital downloads, streaming, ringtones, OTAs, and even in-store kiosks. There are also direct deals with manufacturers of high- tech equipment that preload their hardware with musical content.
The significant players in the aggregator market include The Orchard (www.theorchard.com), which acquired Digital Music Services, IODA, and BFM Digital; CD Baby (www.cdbaby.com); TuneCore (www.tunecore.com); INgrooves (www.ingrooves.com); and DistroKid (www.distrokid.com). For many smaller labels and artists, getting onto the digital music service provider platforms can now only be done through such aggregators. Generally, a deal with an aggregator is done on an exclusive basis, usually for a term of one to three years. Unlike distributors in the physical market, however, the aggregator companies are much better at collecting payments and making timely payments to the labels and artists they represent, and are reasonably accurate in their reporting. In turn, many of the digital music service providers that deliver digital music to consumers, such as Apple iTunes, make timely accountings and payment to the aggregators.
Generally, for a reasonable percentage, with the average range being 12% to 20% of receipts, aggregators take the content of the labels and artists; encode, format, and deliver it to the digital music service providers; and collect and make timely payment based on receipts from those digital music service providers. Accounting to the labels and artists is generally done on a monthly basis, usually no later than the end of one or two months following the month during which the aggregators receive payment; that is, within two to three months from the time of the download. This is unheard of in the physical market.
Technology will continue to provide ways to expand how the consumer can access content, challenging laws and economic factors to keep up, as well as authors of textbook chapters like this one. The creators and owners of the audio content need to stay alert on how to translate those technological enhancements into commerce so that their creative, marketing, and distribution efforts can be sufficiently rewarded to support and encourage their continued activities.
1 Friedlander, Joshua P. (Senior Vice President Strategic Data Analysis,) “News and Notes on 2016 Mid-Year RIAA Music Shipment and Revenue Statistics,” Recording Industry Association of America, September 20, 2016. http://www.riaa.com/wp-content/uploads/2016/09/RIAA_Midyear_2016Final.pdf
2 Report by Wei Shi was funded by Strategy Analytics, a company that provides data and analysis, business consulting, advisory, and strategic market research services in the United States and internationally. https://www.strategyanalytics. com/strategy-analytics/news/strategy-analytics-press-releases/strategy-analyt- ics-press-release/2016/09/29/streaming-to-account-for-95-of-mobile-music- by-2022#.WAfMCjKZNQO.
4 Resnikoff, Paul, “Spotify, Apple Music, Tidal Paying $1.6 Million a DAY in Major Label Guarantees,“ Digital Music News, September 1, 2016. http://www.digitalmusic-news.com/2016/09/01/spotify-apple-tidal-millions-daily-guarantees/. Resnikoff credits Midia Research analyst Mike Mulligan for the data.
6 Sanchez, Daniel Adrian, “UMG Makes $4.48 Million a DAY from Streaming Music,” Digital Music News, November 10, 2016 (http://www.digitalmusicnews.com/2016/11/10/vivendi-umg-1-billion-music-streaming/)
7 Resnikoff, Paul, “How Many Streams Does It To Take to Earn $1? Take a Look.“ Digital Music News, September 15, 2016.
8 Priot, Pierre. “Why the streaming business model is broken.” Music Think Tank blog posted September 20, 2016. http://www.musicthinktank.com/blog/why-the-streaming-business-model-is-broken.html. Quoted under the terms of the Creative Commons License
9 F.B.T. Productions v. Aftermath Records, 9th Circuit, 621F, 3rd 958 et seq., September 3, 2010, Case No. CV 07-3314 PSG (MANX).
Qualifications for Compulsory License under the Digital Performance Right in Sound Recordings Act of 1995 (DPRA)
In 1995, the Digital Performance Right in Sound Recordings Act of 1995 (DPRA) provided a public performance right in a sound recording for the copyright owner, for the first time in the United States (amending Section 106 and Section 114 of the Copyright Act). This grant applied, however, only in certain limited circumstances:
The following are the conditions a Web broadcaster must meet to qualify for a compulsory license, without which transmission would be an infringement of copyright:
1998 Digital Millennium Copyright Act (DMCA-SECTION 405)
The Digital Millennium Copyright Act (DMCA) further amends Section 114 of the Copyright Act by granting a public performance license for digital transmission or streaming of sound recordings by webcasters, that is, playing or performing (as distinct from a digital download) of audio musical sound recordings over the Internet. This activity does not fall directly within the categories addressed by the Digital Performance Right in Sound Recordings Act (DPRA), and Section 405 of the DMCA amended the DPRA to expand the statutory (compulsory) license for nonsubscription transmission to include webcasting as a new category of eligible transmission, and therefore subject to a compulsory license. As such, the sound recording’s copyright owner cannot prevent the webcasting, provided that all of the criteria required by the statute (see below) are satisfied by the webcaster and it has filed for a compulsory license in a timely manner.
Webcasters took the position that the DPRA did not apply to them as their conduct was a “nonsubscription transmission” and “non-interactive,” and therefore exempt from requiring the permission of sound recording copyright owners.
The position of the Recording Industry Association of America (RIAA) was that webcasters were required to get licenses from the sound recording copyright owners (i.e., the DPRA’s exemptions were only available to FCC- licensed terrestrial broadcasters).
The DMCA confirmed that a license, either compulsory or voluntary, was required, by providing that the sound recording copyright owners have the exclusive right to control online or Internet delivery of their sound recordings.
The statutory license applies, however, only to certain non-interactive subscription and nonsubscription transmissions. Interactive service is defined in the DMCA to exclude transmission of songs specifically requested by and for a particular user, and programming specifically designed for a particular user.
To be eligible for the statutory license, a webcaster’s service and programming must meet several criteria. Services that do not meet the criteria must obtain (i.e., negotiate) voluntary licenses directly from the recording companies.
The eligibility criteria for the compulsory license include the following: