Free the Music Now! An Examination of the
John P. Kellogg
Berklee College of Music
This research was funded by a 2006 Junior Faculty Research Grant from the Music & Entertainment Industry Educators Association.
The U.S. Copyright Act includes antiquated provisions that, in effect, stifle the ability of digital music providers to obtain licenses to a vast number of recordings in record company catalogs. Over the past several years, legal barriers to music licensing for digital distribution inherent in the U.S. Copyright Act have been a topic of great debate and concern. As a result, many in the industry are demanding that the U.S. government take immediate action to “free the music” so that the recording industry can grow and thrive in the digital environment.
As the music industry evolves in the twenty-first century, the rapid emergence of digital distribution of recorded music has created a situation similar to one in the early twentieth century, when Congress enacted the 1909 U.S. Copyright Act. The 1909 act included a compulsory license provision primarily intended to address piano rolls, a new technological development in which musical works were “recorded” on a roll of paper and then performed on a mechanical device known as a player piano.1 At that time, Congress recognized that the continued growth of this fledgling industry required a drastic change in the law to ensure promotion of one of the basic tenets of copyright law: balancing the interests of copyright owners and users. Congress’ enactment of the 1909 and subsequent 1976 Copyright Act Section 115 established a legal framework for licensing compositions that proved to be effective for the better part of almost one hundred years.2 During that time, music created in the U.S. went on to become the predominant form of recorded music in the world. However, the emergence of digital distribution of music over the last ten years, and recent developments in the music marketplace, have wreaked havoc on major record la-bels and threatens the current balance of the rights of copyright owners and users unless steps are taken to change U.S. Copyright Law.
Since the beginning of this century, the rise of the MP3 format (developed in the 1990s) and the enormous growth of peer-to-peer file sharing has destabilized the conventional recording industry. In 2006 the sale of physical discs hit a low point that was particularly frightening for record companies and CD retailers alike. As of the end of 2006, album sales were down 17% from the industry high of 721M in 2001.3 There was also a drastic reduction in the number of traditional music retailers (i.e., record stores) in 2006. The retail chain Musicland filed for Chapter 11 Bankruptcy and, as a result, 565 of their 900 stores were shuttered in 2006.4 Giant retailer Transworld closed 134 stores, 85 of which were Sam Goody and FYE outlets.5 The entire Tower Records retail chain was also liquidated in 2006, thus eliminating one of the last and largest outlets for record company catalog offerings.
The highlight of 2006 was an increase in digital sales, though still not significant enough to offset the decline in physical album sales. Digital track sales in 2006 grew by 65% over 2005 and nearly equaled album sales for the first time. Digital album sales more than doubled during that year, accounting for 5.5% of all album sales. However, first quarter 2007 figures are staggering. The ratio of peer-to-peer file-sharing to paid downloads is 20 to 1.6 In addition, U.S. album sales through April 2, 2007 show a steep drop-off of 16.6% from 2006 year-to-date figures.7 Physical disc sales during the same period were down 20.5%.8 In four out of the first eight weeks of 2007, the number one album on the weekly Billboard Top 200 sold no more than 100,000 copies. As a result, label executives might have reason to be concerned that not only have album sales (particularly in the physical disc configuration) hit a wall but may have fallen over a cliff from which there can be no recovery.
Record companies have recently taken action to reduce expenses in an effort to stop the fiscal bleeding. In January 2007, EMI announced layoffs and a consolidation of several departments in anticipation of acquisition offers from such suitors as Warner Music Group and private investors.9 A cash offer for the assets of EMI made by Warner Music was rejected in March of 2007.10 In May 2007 both Island/Def Jam and Warner Music Group announced lay-offs numbering in the hundreds.11 Subsequently, a European investment company, Terra Firma, made an acceptable bid and purchased EMI in August 2007.12
Even though the maturation of the digital age is currently decimating major label earnings, many pundits believe in the “long tail” theory that purports if more music titles were available for purchase online, a significant increase in sales would result. Although illegal downloading is one of the culprits impeding the progress of digital sales, the roots of the problem may not lie entirely with illegal file-sharing. Digital sales may also be suffering because of the inability of digital music providers such as iTunes, Rhapsody, and Napster to make a broader selection of recordings available for purchase.
Digital music providers need to license both performance and mechanical (reproduction and distribution) rights in order to exploit musical works online.13 Current mechanisms for licensing performance rights are very effective and cost efficient. Performance rights organizations ASCAP, BMI, and SESAC license virtually all non-dramatic musical works and use a collective licensing system that allows them to issue blanket licenses to various users (Radio, TV, Cable, Satellite, and digital music providers). However, the system for obtaining reproduction and distribution rights from musical copyright owners is both confusing and time consuming. This has caused significant problems for digital music providers, who have to obtain licenses for these two distinct rights. It also compromises their ability to offer many recordings for digital purchase thus “imprisoning” many valuable recordings in record company vaults. In light of these concerns, the
U.S. Congress is feeling great pressure to enact legislation to make it easierfor digital music providers to license and “free the music.”
In testimony before a Congressional committee in June of 2005, Marybeth Peters, the U. S. Register of Copyrights, proposed a solution she dubbed “The 21st Century Music Reform Act.”14 Citing several problems digital music providers are confronted with when trying to unlock the doors of record company vaults, Peters maintained that the use of the U.S. Copyright Act Section 115 compulsory license provision is virtually nonexistent; negotiated licenses are almost always utilized. Section 115 allows anyone to reproduce and distribute previously-released musical works provided they pay the minimum statutory mechanical royalty rate and otherwise comply with cumbersome notice and accounting requirements. As a result, the provision only serves as a ceiling for establishing a royalty rate in privately negotiated licenses.
While performance rights organizations license nearly all non-dra-matic musical works, the largest agent for licensing mechanical rights, the Harry Fox Agency, is unable to license a significant percentage of works. There are literally thousands of copyright owners not represented by Harry Fox. Compositions owned by those publishers must be licensed on a song-by-song basis by digital music providers. For historical and legal reasons, performance rights organizations have licensed only public performance rights while the Harry Fox Agency only licenses mechanical rights. This impedes the process by which digital music providers license music by requiring them to negotiate with, and pay, two separate agents for the same copyright owner. This impedes the free flow of legal music on the internet. Peters contends that the authors’ exclusive right to exploit their works as codified in the compulsory license provision conflicts with the public’s interest of having music readily available, and is therefore in contravention to the Copyright Act.
At Peters’ urging, and after significant negotiation with several interested parties, Congress introduced the Section 115 Reform Act of 2006 (“SIRA”) on June 8, 2006. SIRA was designed to streamline the complicated digital licensing process.15 The measure was proposed to the House Judiciary Subcommittee on the Courts, the Internet, and Intellectual Property. Although the committee tabled the measure in October 2006, it at least provided a good framework upon which Congress can construct better legislation that may be passed in the near future. Under SIRA, digital music providers would continue to license performance rights from performance rights organizations. However, reproduction and distribution rights would no longer be licensed on a song-by-song basis. Instead, digital music providers could obtain licenses for these valuable rights on a collective blanket licensing basis from what would initially be one, general designated agent given special powers to license digital reproduction and distribution rights of all publishers and copyright owners. The adoption of SIRA might have eliminated current inefficiencies in licensing both rights and created a one-stop shop for digital music providers, ultimately resulting in more music being freed for commercial availability online.
Even though the bill was tabled, an extensive examination of its contents reveals the complexity of several important issues relating to digital licensing that must be resolved before such legislation can be passed. The bill was comprehensive and included key provisions dealing with the following topics.
General Designated Agent
SIRA provided for the Copyright Office to initially select one general designated agent (GDA) that digital music providers may approach to secure a single-blanket license to digitally reproduce and distribute all copyrights subject to a compulsory license. The bill would amend the century-long compulsory licensing royalty provision (Sec. 115 of the Copyright Act) in favor of a collective licensing structure for digital delivery of recordings and authorize the GDA to offer “uni-licenses” that contain all the rights digital music providers need to commercially reproduce and distribute musical works online. Register Peters maintains the adoption of legislation such as SIRA would eliminate the compulsory license, “restore the free marketplace,” and bring the U.S. in line with the global framework.16 Virtually all other countries have eliminated similar compulsory licenses in favor of collective licensing of digital works. The GDA would be appointed by the Register of Copyrights and be an entity that represents the greatest number of music publishers during the prior three year period.
The only agency that meets the criteria is the Harry Fox Agency and, had the act been adopted, it would have been designated as the initial GDA. However, the act also proposed that any other entity that represented at least a fifteen percent share of the music publishing market could win approval as an alternative designated agent (ADA; hereafter GDA and ADA may be collectively referred to as DA). Other entities that currently meet this qualification are major music publishers EMI and Warner/Chappell. By automatically designating the Harry Fox Agency as the initial GDA, SIRA would have avoided the problem of creating a new bureaucratic agency to handle administrative aspects of the licensing system. In her 2005 testimony before Congress, Peters described the idea of forming a new bureaucratic agency to manage these licensing responsibilities as too expensive and unreasonable. Who can become an ADA and how many there might be is still an issue of debate. Analysts are concerned that establishing several ADAs could create more inefficiencies than those that exist currently.
Authors of books on the future of music have agreed with the idea of designating a single agency to administer a collective digital licensing system but propose alternatives to SIRA. Author David Kusek, Berklee Media Vice President, and co-author Gerd Leonhard, propose another method of licensing digital rights. In The Future of Music, they suggest charging consumers a “utility license” or tax on the purchase of items such as blank media, MP3 players and ISP and DSL services allowing people to freely download any and all music online. Kusek and Leonhard argue that the compulsory system is more feasible because in voluntary systems the interested parties never seem to agree on an equitable split of proceeds. However, in either model, copyright owners would have to register their works with the Copyright Office or designated governmental agency, and would be compensated from a large pool of money based on the relative popularity of a copyright’s use (i.e. downloads, P2P sharing, etc.).17 Entertainment lawyer and author Steve Gordon offers a similar solution in his book The Future of the Music Business. He advocates the legalization of file-sharing by a federal law creating a statutory license that compensates copyright owners for lost sales.18
Board Membership of the Designated Agents
SIRA provides for each DA board of directors to consist of five members. Three of the members must be music publisher designees; the other two are required to be professional songwriters who earn a substantial portion of their income from songwriting activities and have enough business experience to understand the complexity of the board’s deliberations. This provision resulted from contentious debate between music publishers and songwriters’ organizations. The initial draft of the legislation allowed only music publishers to participate as board members. As a result, songwriter representatives, who argued that their participation in board decisions was essential, stood firm that songwriters must also sit on the board.
Authority of Designated Agents
DAs shall administer the statutory license for the digital delivery of musical works as full downloads, limited downloads, interactive streams, and server copies that enable digital music providers to transmit the digital delivery of these works. The issue of whether a digital music service has to obtain a separate license for server, cache, or buffer copies of the musical works has long been in dispute. Copyright owners have argued that they are entitled to separate compensation for these uses, while digital music providers maintain that these uses facilitate the process of digital delivery of musical works and therefore should be included in the digital license. SIRA includes such uses in the license, creating a uni-license granting all the necessary rights digital music providers need to reproduce and distribute works on the internet. However, the uni-license excludes the right for a digital music provider to make copies of works for future listening unless the works are licensed for such a use. This exception was prompted by an announcement from XM Satellite Radio that it planned to market and sell a device that would give subscribers the ability to earmark and store copies of certain songs broadcast by its service for future listening. Record companies and publishers strenuously objected to including this in a SIRA unilicense arguing that such a use was more a download than a radio broadcast and would perhaps displace sales.19 The satellite services and electronics manufacturers countered that the failure to include this use under SIRA would violate fair use and would stifle the development of innovative new products. It has been widely speculated that this was the flashpoint for the tabling of SIRA; the lobby for the satellite services and electronics manufacturers wielded great power, particularly during the 2006 Congressional election year.
Each DA also undertakes the activities of tracking, collecting license fees, and disbursing royalties to copyright owners. The determination of who may be considered a digital music provider is also very narrowly defined in SIRA. Only digital music providers that control how music is bundled, have a direct relationship with consumers, and can accurately report revenue and usage of compositions are allowed to obtain licenses from DAs. Aggregators and record companies are unable to qualify unless they fulfill those requirements. Only one DA may represent a copyright owner’s interests during any calendar year. Copyright owners will be able to choose which DA they desire to represent their interests by providing notice to the DA during the month of September prior to the succeeding calendar year. Copyright owners may also enter into voluntary agreements directly with digital music providers in lieu of the blanket license offered by DAs. In such case, any royalties paid under the voluntary agreements reduce any monies due the copyright owners under the DA blanket license.
Record companies often pay advances that are recoupable from an artist’s songwriter royalties. To protect the interests of record companies, SIRA included a provision directing royalties due copyright owners be payable by DAs to such companies to recoup advances. The bill also enabled DAs to allocate and use portions of their administrative fees to lobby and litigate any issues of concern regarding the bill. The Register of Copyrights opposed this provision on the grounds that using funds for this purpose would reduce the amount of license fees paid to rights holders.
Royalty Rate Determination
Copyright royalty judges determine royalty rates and terms, with interim rates to be set by the judges, upon request, for new formats so that the process will not delay the launching of innovative products. Songwriters and publishers would loathe the elimination of the pennies per unit statutory rate, something for which they fought long and hard. However, most other countries employ a royalty determined on a percentage basis.20 While Peters supports eliminating the minimum statutory rate for digital uses in favor of “free market negotiations,” the uni-license concept is not working well with respect to the negotiation of royalty rates for subscription services between the Digital Music Association (DiMA), the Recording Industry Association of America (RIAA), and the National Music Publishers’ Association (NMPA). In that negotiation it has been agreed that the RIAA will receive 40-50% of the revenue. Performance rights organizations and the NMPA have demanded 16 2/3% of revenue but DiMA has only offered those parties a combined royalty of 6.9%.
SIRA Ends the Practice of Record Labels Sublicensing Reproduction Rights to Digital Music Providers
Currently, record labels sublicense (pass-through) mechanical licenses they obtain from copyright owners to digital music providers. Under this scheme, the labels are the first point of receipt of digital royalties due the copyright owners. Typical recording contract royalty accounting provisions may not require the labels to pay those royalties to the copyright owners until three to six months later. As a result, the copyright owners are deprived the use of the funds during this period while the labels earn interest or otherwise invest these proceeds for their own benefit. SIRA cuts out the middleman by requiring the digital music providers to license directly from copyright owners through their designated agents who account quarterly to the copyright owners. The National Music Publishers’Association insisted upon the inclusion of this provision in spite of the strenuous objection of the RIAA.
Since the tabling of SIRA in October of 2006, Peters has testified before a Congressional committee reiterating her belief that, “…reform of the digital music licensing system is the most important music issue currently before Congress.”21 Her March 22, 2007 appearance served the purpose of updating the committee on the progress of reform. Peters identified four key issues that need to be addressed in any new reform legislation:
1) the scope of the license and clarification of rights; 2) the collection and distribution of royalty fees; 3) the efficiency of the licensing process; and 4) the establishment of rate-setting procedures.
While SIRA provided a great deal of clarification of the rights that should be included in a new digital licensing system, in early 2007 a new issue arose in litigation between digital music providers AOL, Real Networks, Yahoo, and the performance rights organization ASCAP. The parties sought a court’s determination as to whether or not a digital phonorecord delivery (or download) is also a public performance.22 Peters’ opinion is that a download only implies a reproduction and distribution, not a performance, but the dispute itself further points to the need for Congress to clarify digital rights once and for all. SIRA may have established effective methods for the collection and distribution of royalties, modeling an efficient and transparent system.23 Peters endorses any future legislation similar to SIRA that utilizes the efficiency of a blanket licensing system based on the filing of a single notice to the DA. Copyright royalty judges were to govern SIRA rate setting procedures. Digital music providers maintain that royalties should be based on a percentage of revenue rather than the current per unit basis, while copyright owners are reticent to vary from an historical royalty basis that has proven to be effective for them.
Peters recommends two options:
1) Adopt a blanket licensing system for the reproduction and distribution of digital works similar to that utilized under Section 114 of the Copyright Act which allows blanket licenses for public performance rights for sound record- ings embodied in digital transmissions.24 Section 114 requires a single filing notice of use with the Copyright Office, authorizes rates set by copyright royalty judges, and designates an agent (Sound Exchange) to collect and distribute royalties. This blanket license system has proven to be effective because it makes all works easily available for use; or
2) Allow record companies to sublicense the mechanical rights to digital music providers. Record companies would clear
the rights for the use of the composition and collect and distribute royalties due owners of the works. However, under this option, Section 115 should be amended to allow record companies a safe harbor for a digital music provider’s failure to pay the owners the appropriate royalties in a timely manner. The digital music provider, not the record company, would therefore be liable for any infringement actions arising from its uncompensated use of the musical works.25
Streamlining the digital music licensing process in the U.S. will ensure the availability of more music and result in lower transaction costs. It will have multiple benefits for creators, companies, and consumers by “freeing” more music for sale online. It is anticipated that, under the leadership of strong copyright proponent Congressman John Conyers (D-Mich.), Chair of the Judiciary Committee, a new bill similar to SIRA will be proposed and, hopefully, passed in the near future. While the Reform Act of 2006 stalled in committee, it was still a significant first step towards streamlining the digital licensing process. It is, after all, in our collective best interest to craft a new paradigm that will nurture, protect, and promote fairly the rights of the creators of America’s great musical works.
1 1909 U.S. Copyright Act, Section 1(e) (1909).
2 Section 115 of the Copyright Act of 1976, 17 U.S.C. Section 115 (1976), adopted new provisions accommodating needs of both copyright owners and users caused by the rapid growth of the sale phonograph record albums.
3 Ken Barnes, “The Good, Bad and the Digital,” USA Today (January 5, 2007): 3D.
4 Ed Christian, “Out of Business,” Billboard (March 3, 2007): 25.
6 Anthony Mason (CBS News business correspondent), “A Lesson In Copyright Law,” reported on the CBS Evening News, April 10, 2007.
7 Merrill Lynch Analyst Jenner Rief Cohen says, “the music industry is headed in the wrong direction” and projects a global sales decline of three percent this year.
9 Dan Sabbagh,“EMI Board Spurns 2.1 Billion Euro Cash Bid From Warner Music,” Times On Line (March 3, 2007). EMI rejected a February, 2007 Warner Music Group bid to purchase the company. The EMI board cited the low offer and concerns that the deal would take too long to be approved by regulatory authorities as reasons for the rejection.
11 Paul Resnikoff, “Digital Staff Shuffles at Warner Music Group, Isquith Enters,” Digital Music News (May 7, 2007).
12 Billboard.Biz, “EMI To Cancel LSE Listing On September 18,”
13 Statement of Marybeth Peters, The Register of Copyrights, before the Subcommittee on Courts, the Internet, and Intellectual Property, Committee on the Judiciary, United States House of Representatives 109th Congress, 1st session, June 21, 2005.
14 Statement of Marybeth Peters, The Register of Copyrights, before the Subcommittee on Courts, the Internet, and Intellectual Property, Committee on the Judiciary, United States House of Representatives 109th Congress, 1st session, June 21, 2005.
15 Section 115 Reform Act of 2006 (SIRA), 2006.
16 Statement of Marybeth Peters, The Register of Copyrights, before the Subcommittee on Courts, the Internet, and Intellectual Property, Committee on the Judiciary, United States House of Representatives 109th Congress, 1st session, June 21, 2005.
17 Dave Kusek and Gerd Leonhard, The Future of Music (Boston, Mass.: Berklee Press, 2005). The authors recommend adoption of principles set out in Harvard professor William Fisher’s book, Promises to Keep, suggesting either a compulsory system funded by user fees or taxes managed by a governmental agency or a voluntary system funded by subscription fees based around an entertainment coop model.
18 In Gorden’s model, like Kusek and Leonhard, those directly profiting from file-sharing (makers of CD burners, computer manufacturers, and ISPs) would pay fees to a body designated by the copyright office. The funds would be paid to copyright owners based on a system similar to that used by performance rights organizations, ASCAP and BMI. Gordon’s plan goes a step further and proposes the statutory license cut through contract restrictions for use of recordings on the internet and provide that the allocations from the fund for each recording be divided equally between the record label and artist, with a separate allocation for division by publishers and songwriters.
19 Susan Butler, “Uncle Sam to Weigh In on Digital Music,” Billboard (April 1, 2006): 16.
20 David Kostiner, “Will Mechanicals Break the Digital Machine?: Determining a Fair Mechanical Royalty Rate for Permanent Digital Phonographic Downloads,” Hastings Comm. & Ent. L.J. 27 (2005): 656.
21 Statement of Marybeth Peters, Register of Copyrights, before the Subcommittee on the Courts, the Internet, and Intellectual Property, Committee of the Judiciary, March 22, 2007.
22 In an action in the Southern District of New York Federal Court, ASCAP sued AOL, Real Networks, and Yahoo seeking to have the court determine rates for the streaming activities of digital music providers. In February 2007, ASCAP also asked the court to declare that downloads also require the payment of performance royalties. Historically, performance royalties have only been paid for streaming activity, not downloads. See more at Susan Butler, “The Publisher’s Place: Are Downloads Performances?” Billboard (March 17, 2007): 36.
23 SIRA collecting and distribution provisions required digital music providers to account to the designated agents on a quarterly basis with stiff penalty provisions for late or nonpayment. It also provided that designated agents account to copyright owners within sixty days from the end of each calendar quarter and provided that copyright owners could access records of the designated agents accountings online as far back as four years.
24 Statement of Marybeth Peters, Register of Copyrights, before the Subcommittee on the Courts, the Internet, and Intellectual Property, Committee of the Judiciary, March 22, 2007.
JOHN P. KELLOGG, Esq., is Assistant Chair of the Music Business/ Management Department at the Berklee College of Music in Boston, Massachusetts and an entertainment attorney. He is a graduate of Syracuse University where he received a Bachelor of Arts degree in Political Science and a Master of Science degree in Television and Radio from the Newhouse School of Communications. Mr. Kellogg attended Case Western Reserve University School of Law where he earned his Juris Doctor degree and attended the college’s Weatherhead School of Management. Licensed to practice in the states of New York and Ohio, he has represented recording artists LeVert, The O’Jays, Eddie Levert, Sr., LSG, Stat Quo of Shady/Af-termath Records, G-Dep of Bad Boy Records, and serves as a member of the management team for the late R&B recording star Gerald Levert, whom he represented throughout his career. Attorney Kellogg is a current member of the board of directors of the Music and Entertainment Industry Educators Association (MEIEA), a former board member of the Black Entertainment and Sports Lawyer’s Association (BESLA), and a 2005 inductee into the BESLA Hall of Fame. A former vocalist with the group Cameo, he is the author of numerous legal articles and editorials and the book Take Care of Your Music Business, The Legal and Business Aspects You Need to Know to Grow In the Music Business. Attorney Kellogg has also been profiled in Billboard, Ebony, Black Issues, and In the Black magazines.