SF Music Tech Summit Highlights Need for Legal Speed

Musicians, technologists, activists, business executives, entrepreneurs, and lawyers collided for an informative and thought-provoking event at the inaugural SanFran MusicTech Summit. The conference touched on many aspects of the evolving music/business/technology ecosystem. From a legal perspective, current and emerging trends in music licensing were covered in two CLE-approved discussion panels.

An overarching theme addressed by both panels is the significant discontinuity in the development speeds between music technology and music business. Not surprisingly, traditional music licensing models are struggling to keep up with innovative product uses for music. This discontinuity has caused substantial uncertainty and tension for all parties involved - artists, consumers, businesses that produce music, and businesses that use music. Some attendees joked that this turbulent business climate is the perfect environment for lawyers.

With regard to business solutions for the issues created by discontinuity, what is needed most from the legal sector is a streamlined process. From an entrepreneurial perspective, cumbersome licensing models are creating barriers to business growth. Online music services are currently saddled with securing multiple rights in multiple jurisdictions from multiple entities. In an ideal world, businesses that license music would have an efficient way to secure bundled rights to music for use on a global scale.

How can the law and lawyers streamline this process and facilitate growth, while preserving the divergent interests of all relevant parties? The SanFran MusicTech panels offered insight into some possible solutions.

Hot Topics In Music & Technology Law

Attorneys on the Hot Topics In Music & Technology Law panel included:

  • Matt Burrows, Moderator and Senior Counsel at Apple's iTunes Division
  • Ann Chaitovitz, Esq., Chairman of the Future of Music Coalition (FMC)
  • John Blaufarb, Partner at Davis, Shapiro, Lewitt & Hayes, formerly in house counsel with Sony Muisc
  • Tony Berman, of the Berman firm which specializes in the convergence of entertainment and technology
  • Cydney Tune, counsel at Pillsbury Shaw & Pittman, San Francisco where she leads the firm's Copyrights practice and Media & Entertainment industry teams
  • This entire panel discussion can be viewed freely at BrightcoveTV.

 

The Hot Topics in Music & Technology Law panel opened with an optimistic statement by attorney Cydney Tune: "The near future will see more music access in more ways, and it will be compensated."

Focusing on how licensing models can achieve Tune's prediction, the speakers discussed "360 deals", by far the most debated and polarizing topic of the panel. Under these recording deals between artist and record label, the label receives a share of the four main revenue streams in music - master recording, tour, merchandise, and publishing revenues. Traditionally, labels only obtained rights to the master recording revenues, as opposed the other three ancillary revenue sources.

Future of Music Coalition chairman Ann Chaitovitz took issue with 360 deals, as did attendee David Baskin of the CMRRA. Their basic argument is that 360 deals put too many rights in the hands of record companies, who do not always have the best interests of artists at heart.

From another perspective, 360 deals represent a way to achieve speed and efficacy in doing innovative deals. Cydney Tune stated that some 360 deals act as a "one-stop shop" for artists who want to license their music in new and unusual ways, such as mash-ups.

According to Tune, major labels can be slow to get "one off" contracts done for unusual product deals, and this is where 360 deals can be beneficial for artists. In theory, if a label has rights to all revenue streams, it is well-positioned to efficiently license different portions of that bundle to businesses seeking music for innovative product uses.

A music/tech entrepreneurial attendee expressed similar sentiments, adding that digital rights management (DRM) makes it nearly impossible to effectively license music rights. From his product-oriented standpoint, 360 deals are welcome because they put the entire bundle of music rights in a single location. "It's far easier to deal with an aggregator of rights as opposed to individual artists. When millions of people are listening to millions of things, having rights in one place is helpful."

Issues in Music-Technology Licensing

Attorneys on the Issues in Music-Technology Licensing panel included:

 

The Issues in Music-Technology Licensing panel opened with a brief history and explanation of music copyright law.

Brief Summary of Music Copyright Law

As moderator Whiteny Brossard stated, "Whatever copyright is, it wasn't really built for the digital environment." He continued to note that copyright law was designed for sheet music sales around the turn of the 20th century. Since then, the law has slowly evolved to cover emerging technologies, like radio and phonograph records. "The DMCA was an attempt to modernize copyright law, but most people think they [Congress] got that wrong."

There are two basic rights involved in music copyright:

  • the copyright to the song (words and lyrics); and
  • the copyright to the master recording (the particular recording of the song).

 

Thus, a preexisting song has two copyrights, the copyright to the song and copyright to the master recording.

Contained in each of these two copyrights, there are four distinct rights:

  • the right to copy;
  • the right to distribute the copies;
  • the right to make derivative works (important for user generated content sites); and
  • the right to publicly perform those copyrights on the radio, TV, in nightclubs, stores and on the Internet.

 

Within this framework, there are two compulsory licenses - one for the song and one for the master recording. A compulsory license is one set up in the law that says that someone who wants to use copyrights can avail themselves to a compulsory license where the rates are set by the government. "It makes things easier for someone who wants to use that content because they don't have to go to every copyright owner to clear the rights," according to Broussard.

The compulsory license for the song is used by those who want to make physical records, like vinyl, CD, cassette and digital phonograph deliveries (DPD). Digital downloads from services like iTunes or Rhapsody, are covered by this particular compulsory license.

The compulsory for master recordings is more limited, and it applies only to non-interactive webcasting and satellite radio. A non-interactive webcast is a standard webcast where the listener has no real ability to choose the playlist, as opposed to a service like Rhapsody's where the listener can choose the playlist and listen to virtually anything on demand. "There are other restrictions there that make this not a terribly useful license."

On-Demand Music Services

As more and more consumers purchase and listen to music via an online service, customization of music services has become increasingly important. On-demand music services, where a listener can access virtually any piece of music at any time, is one example of such customization.

Cecily Mak, senior counsel for Rhapsody, stated that the subscription on demand music playback service is at the heart of Rhapsody's business. Perhaps the greatest question in the on-demand space is what license fees will apply be when the U.S. Copyright Board (CRB) sets royalty rates for subscription downloads?

Currently, the industry is unaware of what rates will apply for a compulsory mechanical license for on demand music, so Rhapsody and others have been essentially operating in a vacuum. As a safeguard, in 2001 Rhapsody entered into an agreement with the Harry Fox Agency, the organization that represents music publishers. The parties agreed that at some point in the future when the rates are set for subscription downloads, Rhapsody will ensure that all the music publishers, via the performance rights organizations (PRO), are properly compensated for distribution in their services. "At that time, it was reasonable to expect the rate would be set in 2003 or 2004," Mak noted. "It is now 2008, and there is still now rate set. The CRB is still working on this, allegedly."

The uncertainty of not knowing what the compulsory license rates for two primary methods of music delivery (conditional download and on demand stream) creates substantial business risks for on-demand service providers. These rates could be a percentage of revenue, or a per-play rate, or some combination. As a result, music businesses in this space are burdened to maintain their reports as accurately as possible. Rhapsody has counted every stream over seven years, which now totals in the billions. And then there's the accounting uncertainty which involves accrual of a "reasonable guess" as to what those royalty rates will be.

Mak noted that many artists have a similar frustration with the ongoing lack of a definitive royalty rate because they may not see any money from the distribution of their music through online services.

Music in Video Games

Although the tech-innovation side of music has developed ahead of the licensing/business side, there are examples where the emergence of new products for music is adequately addressed by existing licensing models. Brian Fukuji, who licenses music for Sony PlayStation, discussed the wildly popular Guitar Hero and Rock Band games. These titles integrate entire compositions into games in which the goal is to perform in sync with various songs.

Fukuji indicated that these games use licenses for the song's master recordings and synchronization rights, the same types of licenses used in film and television. Licensing fees in the video game context are usually on a royalty, per-use basis, as opposed to a flat fee. According to Fukuji, video game companies pay "movie dollars" for catalog material (well-known songs). However, bands that want exposure in video games will charge significantly less to license their music.

Alternative License Models

The loss of control over content is a major challenge to content providers who operate in the online space. Although licensing a song for use in a video game, film or television show continues to operate under the rubric of traditional licensing models, the era of Web 2.0 and user generated content has obliterated copyright owners' control over content.

The panel discussed a collective licensing solution as one viable way to address this issue of control, whereby a single entity would govern multiple international territories for licensing purposes. Mak described this utopian paradigm as, "One royalty scheme in which everybody is compensated for the billions of uses that are happening every single day on the Internet."

Such a blanket solution would alleviate many of the problems experienced by music services when attempting to secure world-wide clearance of rights through multiple entities for multiple uses. A "one stop shop" would also enable rights holders to recover some revenues for the use of their content in innovative online services.

Not surprisingly, there are a host of legal and logistical hurdles associated with the creation of a unified international blanket licensing scheme. In the U.S., an antitrust problem is created when an aggregation of rights holders come together to set prices. Price fixing by competitors is considered a violation of the Sherman Act.

One proposed work-around to the antitrust issue is to enter into a consent decree with the U.S. Department of Justice, much in the same way that domestic PROs. ASCAP, BMI and SESAC did. A consent decree would, in effect, excuse the violation and set out clear guidelines about what a bulk licensing entity could and could not do.

Another hurdle is the financial question of where to fix fees under a blanket solution. Two ideas discussed by the panel included levying a tax at the Internet Service Provider (ISP) level, which would be passed through to consumers, or creating a compulsory license. For various reasons, however, rights holders are typically averse to the notion of expanding compulsory licenses beyond their current form.

According to Fukuji, entertainment industry leaders do favor of a blanket licensing solution, but real questions remain about control. Essentially, the issue of who will manage the entity and control the money is an open question. In his view, "The challenge is getting everybody to the table, and then getting everybody to agree on a rate and a process."

An ISP levy, compulsory licensing, and collection society - these blanket licensing alternatives have been discussed for several years, yet no one solution is clearly in the lead. Because this issue now has global implications, it may take even longer to address, as resolution now implicates multiple government organizations. However, "copyright holders have very powerful lobbying organizations, so trying to resolve this question through the government is difficult," Brossard noted.

Thus far, direct and often lengthy negotiation with multiple rights holders has been the most effective way to ensure license clearance.