Source: https://theccc.org/resources/
Timestamp: 2019-04-22 09:05:46+00:00

Document:
After 15 years of decline, the business of recorded music is arguably in its healthiest state since 1995. (See “Recorded Music Developments 1995–Present” on page 23). The Recording Industry Association of America recently reported that overall revenues grew a robust 11.4 percent in 2016—a welcome return to significant growth for the industry.1 The primary business model of recorded music is now one of access to licensed services based on sponsor or subscription revenue rather than one of physical goods sold by units. As this new positive economic cycle for recorded music begins, it is worth surveying the legal structures that frame the primary revenue sources involved.
These reports are based on extremely granular per-listen data (as opposed to “per spin,” as is traditional for broadcast radio). Because the Internet is based on one-to-one connectivity, it is now possible to know very quickly not only that an album has sold or that the promoted single from the album has been broadcast but also that the third track on the album has unexpected heat and should be considered for secondary promotion. For music publishers, mechanical rights payments typically are now received 45 days after the close of the applicable quarter, whereas in the days of physical distribution, these royalties were received several quarters in arrears, after complex and obscure reserves calculations had been made to accommodate retailers’ right to return physical goods held on consignment.6 Perhaps most importantly, each “listen” on a streaming service is individually logged under the eyes of third-party auditors,7 creating a certified, high-resolution data set documenting music listening behavior and narrowing to a historical low the number of opportunities for nefarious accounting practices. Independent organizations like BuzzAngle8 and Nielsen9 are now able to report with extreme granularity many hundreds of billions of streams by type (audio, video, on-demand, noninteractive, ad-supported, subscription) in nearly real time.
There are numerous fronts along which the business and law of the recorded music industry are still rapidly evolving. Two audio streaming segments are of particular interest, as they are now the largest parts of the recorded music business: on-demand streaming and noninteractive webcasting.
The rights underpinning this business are primarily the rights to use the sound recordings (which the services obtain from recording distributors) and the musical compositions embodied in those sound recordings (which they obtain from music publishing administrators). Specifically, the single most valuable right in the “bundle of rights” afforded by the Copyright Act and implicated by these services is the right to publicly perform the sound recording via digital audio transmission.18 This right must be licensed from the owner of the sound recording copyright (typically a record label), usually through a sound recording distributor. Approximately 80 percent of this market is controlled by the label conglomerates known as the “majors,” of which there are three: Universal Music Group, Sony Music Entertainment, and Warner Music Group.19 Because the transmission of a sound recording must begin with a copy reproduced on a server, however, the reproduction right—and arguably the distribution right—is also implicated. Streaming services must therefore privately bargain with recording distributors to license these two primary rights, as well as related rights such as the rights to exploit the artwork and the trademarks, names, and likenesses associated with the music.
In the traditional physical record business, mechanical license royalties flow to publishers from record retailers through the record labels. For example, a label may obtain a mechanical license for a song from a music publisher and have one of its contracted artists interpret that song into a recording, which would then be sold wholesale to retailers. The statutory royalty rate operates effectively as a ceiling, because if the publisher does not agree to terms, the label can avail itself of the Section 115 license for making and distributing phonorecords.35 These royalties then flow back to publishers through the same chain, via the labels. This arrangement is fraught with data and accounting challenges that have led to historical underpayment problems, culminating most recently in a $264 million late fee settlement in 2009 referred to as the “Memorandum of Understanding” between the labels and publishers.36 As the on-demand streaming services emerged in the early 2000s, however, this structure shifted. Because the services are actually producing and distributing copies of compositions in this new “access” business, it falls to them to obtain the required mechanical licenses. Therefore, the labels must obtain mechanical licenses to make (and sell any physical or downloaded copies of) the recordings, and the DSPs must obtain separate mechanical licenses to operate their on-demand streaming businesses. Consequently, the publishers are now in direct privity of license with the parties exploiting their songs at the retail level for the first time in the history of the recorded music business.
The services have a range of options in obtaining these licenses. They can contract directly with publishing administrators, collectively license via, for example, the Harry Fox Agency, which represents a group of affiliated publishing administrators, or avail themselves of the statutory license by sending each publishing administrator a Notice of Intention to Obtain a Compulsory License.37 In practice, most DSPs license their services using some combination of these approaches. The primary challenge, however, is that sound recordings are largely controlled by a relatively manageable group of distributors and each tends to be owned by a single party, whereas there are at least 57,000 publishing administrators who tend to own compositions in fractional shares. This creates an enormous transactional challenge in terms of licensing, license administration, and royalty accounting. This challenge, and the consequences of imperfection in meeting it, were laid bare in late 2015 and early 2016 when two class action lawsuits were filed against Spotify,38 and a separate $30 million settlement was announced with the National Music Publishers Association.39 The issues raised in these disputes bear a striking resemblance to those raised in the labels’ late fee settlement.
The royalty rates currently applicable to on-demand streaming services vary according to the type of offering a service provides.40 The rate that generally applies is roughly 10.5 percent of defined service revenue after application of several greater-of and lesser-of comparatives involving, among other things, a penny-rate per subscriber and a metric designed to maintain a rate that is roughly 21 percent of what the service pays to the labels for the corresponding sound recording rights. From this amount, moneys paid by the applicable licensee for public performance rights are deducted, because they also flow back to publishers and songwriters. Each month, licensees are required to perform this calculation to arrive at a total royalty pool, which is then divided by the number of plays on the service to arrive at a per-play rate.
Virtually all of those streaming sound recordings (excepting, for example, comedy sketches) embody musical compositions that also must be licensed. Whereas on-demand streaming by industry-wide agreement implicates the mechanical right, the noninteractive streaming market is entirely focused on the public performance right.
Because they constitute collective bargaining units with significant market power, ASCAP and BMI were sued by the U.S. Department of Justice (DOJ) during the middle of the last century (ASCAP in 1941; BMI in 1966) under the Sherman Act and have labored ever since under consent decrees administered by the U.S. District Court for the Southern District of New York.60 In recent years, antitrust scrutiny of the PROs has led to major shifts in the performance rights landscape that had been relatively stable for several decades prior.
Against this background, a licensee must seek licenses from each of ASCAP, BMI, SESAC, and GMR, each of which controls separate repertoire. The rates and terms of such licenses with ASCAP and BMI are well known, as they have typically been set through the public process dictated by the consent decrees. The most recent precedent for noninteractive audio streaming was effectively 1.85 percent of revenue for ASCAP68 and 2.5 percent for BMI.69 Not subject to consent decrees, SESAC and GMR are free to negotiate their rates through private free-market negotiations; therefore, comparative figures are not readily available.
Thus, at this stage of the business cycle, a set of relatively stable business models and new legal frameworks have emerged, edging out the traditional physical records business. This evolution has replaced a “unit sales” business model with a range of services based around access to streaming music, whether on a noninteractive or on-demand basis and whether advertising-supported or subscription-based. While the business is certainly no less complex than it has ever been, this new paradigm has come with enormous benefits for consumers in terms of access, as well as for rights owners in terms of direct, rapid, and transparent accounting. Looking to the future, however, the lack of profitability among the leading streaming music services constitutes a dark cloud over prospects for long-term stability in the business.70 It remains to be seen whether there is sufficient market demand for these emergent models to scale to profitability, or whether further drama lurks in the offing.
1995: CD ROM drives become standard on computers, and Columbia House adds CD ROMS to marketing program.1 MP3 released.2 allowing “ripping” of Red Book format audio CDs into individual track files small enough to fit an artist’s entire discography on one CD; audio files shared in Internet chatrooms.
1 Marilyn A. Gillen, CD-ROMs Join the Mail-Order Clubs, Billboard, Apr. 15, 1995, at 50. Eileen Fitzpatrick, Music Chains Drawn to CD-ROM, Billboard, Apr. 15, 1995, at 4.
2 See ISO/IEC 13818-3:1995: Information technology—Generic coding of moving pictures and associated audio information—Part 3: Audio, International Organization for Standardization, https://www.iso.org /home.html (last visited Feb. 21, 2017).
3 Richard Nieva, Ashes to Ashes, Peer to Peer: An Oral History of Napster, Forbes (Sept. 3, 2013), available at http://fortune.com. See, e.g., Stephen Witt, How Music Got Free: A Story of Obsession and Invention passim (2015).
4 U.S. Sales Database, RIAA.COM, http://www.riaa.com/u-s-sales-database (last visited Feb. 21, 2017).
5 Jordan Darville, Over Half of Vinyl Owners Don’t Listen to Their Records, Fader (Apr. 15, 2016), http://ww.thefader.com/2016/04/15/over-half-of- vinyl-owners-dont-listen-to-their-records.
8 Cary Sherman, 2016: A Year of Progress for Music, Medium.com (Mar. 30, 2017), available at http://medium.com/@RIAA/2016-a-year-of- progress-for-music-4e9b77022635.
1 Cary Sherman, 2016: A Year of Progress for Music, Medium.com (Mar. 30, 2017), available at http: //medium.com/@RIAA/2016-a-year-of- progress-for-music-4e9b77022635.
3 Spotify Artists, http://artists.spotify.com/features (last visited Feb. 21, 2017).
4 Paul Resnikoff, F*&k It: Here’s the Entire Spotify/Sony Music Contract, Digital Music News, May 22, 2015, available at http:// www.digitalmusicnews.com/2015/05/22/fk-it-heres-the-entire-spotifysony-musiccontract (last visited Feb. 21, 2017) [hereinafter Resnikoff].
5 See 17 U.S.C. §115(c)(5); 37 C.F.R. §210.16(g)(1).
6 See, e.g., 37 C.F.R. §§210.13, 210.14.
7 See 37 C.F.R. §210.16(f)(1)(v)(B) (monthly statement of account (MSOA) prepared by third party must be accompanied by certification that the MSOA was prepared using “processes and internal controls” subject to examination by CPA applying recognized accounting standard).
8 U.S. Music Industry Report: A Report on 2016 U.S. Music Industry Consumption, BuzzAngle Music 15, available at http:// www.buzzanglemusic.com/wp-content/uploads/BuzzAngle-Music-2016-U.S.-Report.pdf (last visited Feb. 21, 2017).
9 See Year-End Report U.S. 2016, Nielsen Music, available at http://www.nielsen.com/content/dam /corporate/us/en/reports-downloads/2017-reports/ 2016-year-end-music-report-us.pdf (last visited Feb. 21, 2017).
10 Joshua P. Friedlander, News and Notes on 2015 RIAA Shipment and Revenue Statistics 3, RIAA.Com, https://www.riaa.com/wp-content/uploads/ 2016/03/RIAA-2015-Year-End-shipments-memo.pdf (last visited Feb. 21, 2017) [hereinafter Friedlander].
11 Charlotte Hassan, Concrete Data Shows That Downloads are Falling Faster Than Physical Sales, Digital Music News, July 6, 2016, http:// www.digitalmusicnews.com/2016/07/06/digital-downloads-falling-faster-physical.
12 Music & Radio, Global Entertainment & Media Outlook 2016-2020, PricewaterhouseCoopers, http://www.pwc.com/gx/en/entertainment-media/ pdf/outlook-music-and-radio-article-2016.pdf (last visited Feb. 21, 2017).
13 Spotify Monthly Active User Base Reaches 100 Million, Reuters.com, June 20, 2016, http://www.reuters.com.
14 Jon Russell, Spotify Reaches 50 Million Paying Users, Techcrunch (Mar. 2, 2017), https://techcrunch .com.
15 Marc Schneider, Apple Music ‘Well Past’ 20 Million Subscribers, Billboard, Feb. 14, 2017, http://www.billboard.com.
16 These are global subscriber numbers and many ex-U.S. subscribers pay a lower monthly fee, so this is a rough estimate for purposes of simplification. Spotify and Apple Music are only the top two such services, and they and others are adding subscribers at a very significant rate.
17 See, e.g., Friedlander, supra note 10, at 1.
19 Heather McDonald, Big Three Record Labels, The Balance (Aug. 10, 2016), https://www.thebalance.com.
20 See, e.g., Micah Singleton, This Was Sony Music’s Contract with Spotify, The Verge (May 19, 2015), http://www.theverge.com (“At the request of the copyright owner, the contract has been removed.”).
21 See, e.g., Chris Cooke, MMF and FAC Officially Welcome Spotify Artists, CMU (Dec. 5, 2013), http://www.completemusicupdate.com/article/ mmf-and-fac-officially-welcome-spotify-artists/(quoting artists and managers on past lack of transparency).
22 Resnikoff, supra note 4.
23 Tim Ingham, Universal: Yes, We Share Digital Breakage Money with Our Artists, Music Business Worldwide (June 2, 2015), http:// www.musicbusinessworldwide.com/universal-yes-share-breakage-payments-artists.
24 Don Rys, IMMF Raises Concerns Over Labels’ Promise to Share Potential Stock Payout from Spotify, Billboard, Feb. 11, 2016, available at http:// www.billboard.com.
25 See 17 U.S.C. §106(4). Cf. 17 U.S.C. §106(6).
26 See, e.g., Promoting Investment and Protecting Commerce Online: The Art Act, the Net Act, and Illegal Streaming: Hearing Before the Subcomm. on Intellectual Property, Competition and the Internet of the H. Comm. on the Judiciary, 112th Cong. 19 (2011) (statement of Maria A. Pallante, Acting Register of Copyrights) (when streaming prerecorded material, making “server copies” without authorization constitutes infringement of the reproduction right, and streaming activity “can also implicate the distribution right”), available at http://judiciary.house.gov/_files/hearings/printers/ 112th/112-77_66614.PDF.
27 The earliest examples being ASCAP, organized to administer public performance rights in 1914, and the Harry Fox Agency, organized to administer mechanical rights in 1927. See ASCAP, Happy Birthday, ASCAP!, ASCAP.COM, http://www.ascap.com/100 (last visited Mar. 7, 2017); Harry A. Fox Agency, What does HFA do?, hfa.© Music Publishers, http://www.harryfox.com/publishers/what_does_hfa_do.html (last visited Mar. 7, 2017).
29 See 17 U.S.C. §§801 et seq.; 17 U.S.C. §115(c)(3).
30 See Final Determination of Rates and Terms, U.S. Copyright Royalty Judges, No. 2006-3 CRB DPRA, 74 Fed. Reg. 4510 (Jan. 26, 2009), available at http://www.gpo.gov/fdsys/pkg/FR-2009-01-26/pdf/E9-1443.pdf.
32 Brian T. Yeh, Cong. Research Serv., RL 33631, Copyright Licensing in Music Distribution, Reproduction, and Public Performance 10 (2015), available at http://fas.org/sgp/crs/misc/RL33631.pdf.
-further-proceedings-mv2.0.pdf. See also 17 U.S.C. §803(c)(1).
34 See Determination of Rates and Terms for Making and Distributing Phonorecords (Phonorecords III), No. 16-CRB-00030PR (2018-2022) 81 Fed. Reg. 255 (Jan. 5, 2016), available at http://www.loc.gov/crb /fedreg/2016 /81fr255-256.pdf.
35 See 17 U.S.C. §115.
36 Ed Christman, NMPA, Major Labels Sign On Terms of Agreement, Billboard, Oct. 7, 2009, http://www.billboard.com.
37 See 17 U.S.C. §115(b).
38 See Tom Ingham, Spotify Hit with Second US Songwriter Lawsuit – This Time for $200M, Music Business Worldwide (Jan. 9, 2016), http:// www.musicbusinessworldwide.com/spotify-hit-with-second-songwriter-lawsuit-in-the-us/. The cases, later consolidated, were Lowery, et al. v. Spotify USA, Inc., No. 15-9929 (C.D. Cal. Dec. 28, 2015) and Ferrick, et al. v. Spotify USA, Inc., et al., No. 16-0180 (C.D. Cal. Jan. 8, 2016).
39 Ed Christman, Spotify and Publishing Group Reach $30 Million Settlement Agreement Over Unpaid Royalties, Billboard, Mar. 17, 2016, available at http://www.billboard.com/articles/business/7263747/spotify-nmpa-publishing-30-million-settlement-unpaid-royalties.
40 See 37 C.F.R. §§385.10-.14.
42 See Participants’ Written Direct Statements, Determination of Rates and Terms for Making and Distributing Phonorecords (Phonorecords III), No. 16-CRB-00030PR (2018-2022), Rate proceedings, CRB, available at http://www.loc.gov/crb/rate/16-CRB-0003-PR/statements.
43 Craig Smith, 78 Interesting Pandora Statistics and Facts (March 2017), DMR, http://expandedramblings .com/index.php/pandora-statistics/ (last updated Mar. 10, 2017).
44 Brad Hill, iHeart Radio Reaches 80-Million Registered Users, Radio & Internet News, Jan. 21, 2016, http://rainnews.com/iheartradio-reaches-80- million-registered-users.
45 Anna Washenko, MusicWatch Time Spent Listening Data Sees Pandora in the Lead for 2016, Radio & Internet News, Jan. 19, 2017, http:// rainnews.com/musicwatch-time-spent-listening-data-sees-pandora-in-the-lead-for-2016.
46 For example, this list of simulcasts of radio stations in the vicinity of Oxnard, Cal., provided by iHeart Radio: http://www.iheart.com/live/country/ US/city/oxnard-ca-510 (last visited Mar. 8, 2017).
47 See, e.g., Skips, Pandora.com, http://help.pandora.com/customer/en/portal/articles/24601-skips (last visited Mar. 8, 2017).
48 See 17 U.S.C. §114(d)(2).
49 See 17 U.S.C. §112(e).
50 See 17 U.S.C. §114(f).
51 See Determination of Royalty Rates and Terms, U.S. Copyright Royalty Judges, No. 14-CRB-0001-WR (2016-2020) (“Web IV”), 81 Fed. Reg. 26,316 (May 2, 2016), available at http://www.gpo.gov /fdsys/pkg/FR-2016-05-02/pdf/2016-09707.pdf.
52 Glenn Peoples, D.C. Sets New Webcasting Rates: Free Streams Up, Paid Streams Down (With an Asterisk), Billboard, Dec. 16, 2015, available at http://www.billboard.com/articles/business/6812915/new-webcasting-rates-free-streams-up-paid-streams-down-pandora.
53 See Final Determination of Rates and Terms, U.S. Royalty Judges, No. 2005-1 CRB DTRA, at 81 (Apr. 23, 2007), available at https:// www.loc.gov/crb/proceedings/2005-1/final-rates-terms2005-1.pdf.
54 Ed Christman, SoundExchange Paid Out $884 Million in 2016, Billboard, Jan. 31, 2017, available at http://www.billboard.com/articles/business/ 7676176/soundexchange-2016-royalties-884-million.
55 Angus MacDonald, Pandora Is Now Over 50% SoundExchange’s Royalty Collections; Implications for Webcasting IV, Radio & Internet News, Apr. 10, 2014, http://rainnews.com/pandora-is-now-over-50-soundexchanges-royalty-collections-implications-for-webcasting-iv/.
56 John Paul Titlow, Inside Pandora’s Plan to Reinvent Itself—And Beat Back Apple and Spotify, Fast Company (Apr. 24, 2016, 8:00 AM), http:// www.fastcompany.com/3058719/most-innovative-companies.
57 See Todd Brabec & Jeff Brabec, PRO Licensing – Multiple Choices, Considerations and Results, AIMP Articles, http://www.aimp.org/ aimpArticles/7/PRO_Licensing_Multiple_Choices,_Considerations_and_Results (last visited Mar. 8, 2017).
58 Ben Sisario, New Venture Seeks Higher Royalties for Songwriters, N.Y. Times, Oct. 29, 2014, available at http://www.nytimes.com/2014/10/30/ business/media/new-venture-seeks-higher-royalties-for-songwriters.html.
59 Ingrid Lunden, Kobalt Quietly Acquired AMRA to Launch Its Own Global Collection Group for Digital Music, TechCrunch (Jun. 8, 2015), http:// techcrunch.com/2015/06/08/kobalt-quietly-acquired-amra-to-launch-its-own-global-collection-group-for-digital-music.
60 See United States v. Broadcast Music, Inc., 275 F. 3d 168 (2d Cir. 2001) (reviewing history of ASCAP and BMI consent decrees and collecting cases).
61 See Radio Music License Committee, Inc. v. SESAC, Inc., et al., No. 2:12-cv-05807-CDJ, at 20 (E.D. Pa. June 26, 2014).
62 See Radio Industry and SESAC Reach Settlement, SESAC, Radio Music License Committee, available at http://www.radiomlc.org/pages/ 6282116.php (last viewed Mar. 30, 2017).
63 See Statement of the Department of Justice on the Closing of the Antitrust Division’s Review of the ASCAP and BMI Consent Decrees, at 2 (Aug. 4, 2016), available at http://www.justice.gov/atr/file/882101/download.
65 See United States v. Broadcast Music, Inc., No. 64 5iv. 3787, 2016 WL 4989938, at *3 (S.D. N.Y. Sept. 16, 2016).
66 Ed Christman, Dept. of Justice Appeals BMI Consent Decree Decision, Billboard (Nov. 11, 2016), available at http://www.billboard.com/articles/ business/7573537/doj-appeal-bmi-consent-decree-decision-fractional-licensing. The Second Circuit case number is 16-3830.
67 See Press Release, ASCAP & BMI, ASCAP and BMI Join Forces to Fight the Department of Justice’s Interpretation of Their Consent Decrees (Aug. 4, 2016), available at http://www.ascap.com/press/2016/08-04-ascap-bmi-join-forces-to-fight-doj.
68 See What ASCAP Members Need to Know About the Pandora Rate Court Decision, ASCAP, http://www.ascap.com (last visited Mar. 20, 2017).
69 See Ben Sisario, Ruling in Royalty Case Gives BMI a Victory Against Pandora, N.Y. Times, May 14, 2015, available at http://www.nytimes.com.
70 See Robert Cookson, Losses Point to Bleak Future for Music Streaming Services, Financial Times (Dec. 3, 2015), available at http://www.ft.com.
Copyright 2017 Los Angeles Lawyer. Reprinted with permission.

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