Clear Channel’s Giant Step

Originally published in the Jul-2012 of The Music Business Journal – Berklee College of Music

By Luiz Augusto Buff and Nicholas Spanos

The largest broadcasting group for radio in the US is Clear Channel Communications, and much of its holdings are in terrestrial radio.  It recently struck a special deal with Big Machine, the country music label whose artist roster includes, among others, Taylor Swift and Rascal Flatts. In a move that is a first in the US, Clear Channel will pay sound recording royalties on terrestrial performances to Big Machine.

Radio had always paid blanket broadcast performance licenses to ASCAP, BMI, and SESAC, and they in turn distributed the collected income to songwriters and publishers.  However, US law does not so far consider any payment by broadcasters on the sound recording right of a performance. This is unlike Europe and the rest of the world, where broadcasters do pay costs for sound recording rights and collection societies distribute such funds regularly to songwriters, publishers–and even sidemen in a recording.

In the US, broadcasters have justified not paying the sound recording right by arguing that radio airplay affords labels and performers much promotional value.  They have so far won, preserving the status quo despite continuous lobbying by the recording industry. Now, a free market solution that does not yet involve the drafting of new laws and regulations may be the seed of a new standard for royalty payments on broadcast radio.

Background

When streaming and listening to music over the Internet became a reality in the early 1990’s, laws were put forth to ensure proper payment of royalties on digital transmissions. For the new model of digital transmissions, the record companies were able to receive royalties for their sound recordings through a pay-per-play basis model, collected and then distributed by the collective management society SoundExchange, (which was created specifically for that purpose). This was agreed upon when streaming music was a very small portion of the music trade. And however much legislators were bowing to new developments, they also recognized that the ruling applied only to that incipient market.  In fact, they had no intention to transfer their exception on the treatment of music streams to the much larger market for terrestrial radio.

As Clear Channel’s terrestrial listeners are still 98% of the total (though there has been much growth in streaming music, both interactive and non- interactive), the conclusion must be that the pay-per-play basis for royalty payments on digital transmissions acted as a disincentive for Clear Channel to develop new online businesses.

The Deal

The deal that Clear Channel signed with Big Machine is in fact a beta test for a new standard of royalty payments that will allow the company to promote and advance its online services at lower costs; under the existing rules, the broadcasting giant cannot scale them down as it expands. The surprise over the deal is Clear Channel’s willingness to take a loss early on. The hope is that the rapid changes in this industry will save money in the long term, and help the company expand with new media.

The terms of the deal, and its novelty, are best appraised by comparison with the existing arrangement. Instead of paying the legislative mandated fixed rate of $0.0021 per song played on digital transmissions, Clear Channel has decided to share an undisclosed percentage of their advertising revenue – generated both from terrestrial and digital transmissions – with Big Machine Records. This gives them use of Big Machine’s music catalog in different radio platforms.

The deal bypasses the existing royalty structures for sound recordings, leaving SoundExchange outside of the collection process, with the broadcaster paying monies to Big Machine directly. Big Machine will then allegedly split the payments equally with their artists. Again, and as was mentioned earlier on, it is important to note that in the rest of the world the concept of paying sound recording performance royalties already exists, so Clear Channel and Big Machine are not inventing the wheel. Rather, they are pioneering the concept in the US.

The Future

The conflict between artists and broadcasters goes back, in the end, to the early days of radio. Yet it is possible that at long last radio can do more for talent than simply argue for their preeminent role in artists’ discovery and later success. Certainly, the parties involved in this bilateral and historical entendre see it as a forward-looking agreement. Above all, this is because the principle of a percentage take out of revenue is easy to work with. As Clear Channel’s CEO, Bob Pittmann, has said,  “I can’t build a business space paying money for every song I play, but I can [taking a] percentage of [the] revenue I bring in.” Ditto for Scott Borchetta, CEO of Big Machine Label Group: “Now, we can align our interest with radio in a predictable model based on ad revenue so that we can drive digital growth.”

It remains to be seen if other labels or artists will adopt their own agreements with broadcasters. Skeptics hypothesize that if this happened, indie labels and artists that were left behind could be cut out of radio playlists: if their content did not drive enough ad revenue, there would be no commercial advantage for Clear Channel or others to sign with them—clearly not the case with Taylor Swift’s Big Machine. If the value of indie repertoire suffered, it is suggested too that smaller radio stations might endure forced acquisitions. This, however, has not happened in Europe, although the broadcast sound recording right there is not negotiated on a piecemeal basis.

Europe and the US

Many have argued that expediency has trumped politics, for US legislators could not be expected to move fast and find a general market solution for the treatment of performance sound recording royalties. Europe has made progress on a country-by country basis, because each nation is a smaller market onto itself and speaks its own language. This brings affected parties to the negotiating table more easily, in part, because the broadcasting industry there does not have the weight that mass media can attain in the Anglo-speaking US. As a result, there are powerful stakeholders in the US that make this legislation difficult. Plus, the role of the state in Europe is generally more defensive of authors’ societies, and tends to intervene on their behalf and accelerate reform more than can be expected of the US government.

Conclusion

Musicians can be happy that America’s largest radio company seems to be taking the lead in finding a practical solution to its growth and recognizing a new right for music in terrestrial radio. It is possible that other labels will want to cut similar deals. If so, this will be the first step to a more sustainable industry wide solution that recognizes a fairer compensation for the use of artistic copyrighted materials created by performers and producers.

By Luiz Buff and Nicholas Spanos

Resources:

Christman, Ed, “Exclusive: Clear Channel, Big Machine Strike Deal to Pay Sound-Recording Performance Royalties To LabelArtists”; Billboard,  May 5 2012

Sisario, Ben, “Radio Royalty Deal Offers Hope for Industrywide Pact”, New York Times, June 10 2012

“Clear Channel and Big Machine Make Royalty Deal”, Rolling Stone,  June 11  2012

“Come Stream With Me”, The Economist, June 16 2012

“Performance royalties for terrestrial radio broadcasters back on the US music-industry agenda”, Music & Copyright, June 13 2012

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IMR’s Scoping Report

Originally published in the May-2012 issue of The Music Business Journal – Berklee College of Music

At the end of February, WIPO and its International Music Registry group (IMR) released a long-awaited “Study on the Role and Functions of the International Music Registry.” The MBJ has been covering the subject since December 2011, and last month we reported on a parallel initiative—the EU’s Global Repertoire Database.

The study’s author is Nicholas Garnett, now principal consultant with Interight. com.iGarnett is an intellectual property and information technology specialist with extensive international experience in the management and protection of intellectual property rights. He worked extensively with research and deployment of digital rights management (DRM) systems, as well as serving as Director General and CEO of the International Federation of Phonographic Industries (IFPI) from 1992 to 1999.

In this article we will report on the main points of IMR’s study. Its coverage includes (i) a comprehensive explanation of the various current and planned global initiatives in the field of music rights databases; (ii) a description of the necessities of rights management infrastructure in the current digital environment; and (iii) a proposal of functions and roles for WIPO and the IMR to support infrastructure developments to match the music industry needs on a global basis.

Rationale

The Internet is widening the global access to entertainment services and products, but an intricate system of rights, complex licensing models, and constantly changing and fragmented ownerships of rights make it extremely burdensome for rights users, who want to create services and products that require the authorization of a vast list of copyright owners. According to the study “there exists at this time no globally integrated system of rights management information for any of the three subject matters of copyright or neighboring rights protection in music: musical works, performances and sound recordings.” In a world where access for music is ubiquitous, illegal services prospered offering and circulating music for free because they did not have to bother with licensing the content. For legal alternatives to prosper, it is paramount that rights users have access to information on who owns what and where in order to obtain proper licenses.

In the traditional structure of the music industry, an RMO is a rights management organization: “an entity which has a role in administering rights in copyright work, whether as the owner of such rights or in some other capacity, such as the agent for the rights owner.” RMO’s typically enjoyed a monopoly power in local markets, offering licenses on behalf of the rights holders. The system offered standardized business models and licensing practices and the RMOs could decide which sorts of data were irrelevant for collection and processing. However, with the shift in the industry came a shift in the paradigm of rights management. With new nonlinear and complex structures – and sizeable global markets at stake – the RMO’s standard data-collection procedures seem to be less practical.

If on one hand technology is presenting challenges for the industry, on the other it is also offering new opportunities to support the increase in the overall demand for licensing. Metadata systems, fingerprinting and watermarking technologies, DRM systems, messaging protocol standards, and cloud-based systems are all examples of technological improvements that are essential to promote effective licensing structures and a global rationalization of rights management systems.

Interactions and Formalities

Understanding the core functions of rights management organizations in a manner that isolates the common denominators found among different kinds of licensing systems is an essential step to narrow the scope for the international registry initiative.

The nine core functions of the RMO’s were separated into three interactions called “rights holders,” “rights users,” and “internal.” All interconnect. For rights holders, the study illustrates issues involving the registration of works and participants, as well as the distribution of revenue. For rights users, the study examines the look up, licensing, and reporting operations. At an internal level, the study isolates dispute resolution and international reconciliation of music data.

Analyzing how these functions are performed across the globe, the study observes that for the most part there is a lot of repetition in the process: standardization and automation would be very helpful. Also, the way these functions are performed differently across territories has a direct impact on how music services are developed: some markets are excluded from accessing music services because the threat of statutory damages for unauthorized use is high and makes the development of a new service prohibitive. Better access to the relevant rights management information, i.e. easier look up terms for rights users, have a direct effect on revenue generation and the promotion of licensed services. In this regard, the identification with current technology of all the rights holders of a musical work would bring, it is argued, public awareness and access to that work and stop it from being the purvey of a few.

One important point noted in the scoping study is the prohibition of formalities for copyright protection. The Berne Convention established that no formal process should be required to guarantee copyright protection of a work. For instance, to secure a copyright in the US it is just necessary for a creative work to be original and fixed in a tangible form. Many countries have established voluntary registration systems for copyright in order to clearly establish authorship and ownership of rights. Garnett points out that the impact of digital technology and the internet are challenging the status quo, suggesting the need for revi- sion of the legal position of registration, as copyright may become meaningless without it.

Other Initiatives

When analyzing the ongoing and planned initiatives around the world, the WIPO study highlights that there is no single initiative that focuses on all the rights related to music at once, i.e. the copyright of the musical work, the separate right to its sound recording, and the claim over performance and neighboring rights.

As for the copyright of the musical work, it focuses extensively on the EU Global Repertoire Database (GRD) initiative, as it seems it is the one with most reach and potential so far.ii The study also lists the WIPOCOS and the West African Network Project as an example of a regional effort for a database and data exchange system, similar to others already in place in Latin America and Asia.

Regarding sound recording rights, the study refers to the ISRC identifier system, from the IFPI and currently the standard for sound recording registration that will soon need to be revised and updated. In neighboring rights the VRDB+ appears to be the reference application used for the identification of participating artists in sound recordings and audio-visual works.

Mr. Garrett carefully wrote the study to emphasize that the proposed IMR is not an initiative that is meant to overlap the efforts of these other initiatives, but to collaborate and serve as a registry of registries, in order to unify in a single place all the information necessary of a music work, ensuring interoperability and integration of the various systems.

The Context

WIPO sees a role as something similar to what was already created for patents and trademarks. As the music industry, especially in developed countries, is not yet convinced and even hostile of any direct involvement in the development of rights management information systems, the study emphasizes that WIPO’s involvement should avoid interfering with other industry initiatives. Instead it aims to support and enhance the potential of globalization by facilitating interaction between all the different stakeholders. One point of main concern for WIPO is to offer support for emerging countries such as the BRICS (Brazil, Russia, India, China, and South Africa). Also, WIPO sees its role as offering support for dispute resolution over intellectual property as one of its most distinctive and proven skills.

Theneedforgloballyintegratedrights management systems may be clear for many who would argue that benefits would accrue to rights holders, rights users, and many other music inter- mediaries. Still, it is not evident at this point that there is complete industry buy-in. The declining fortunes of traditional revenues, such as royalties for sound recordings, together with the emergence of new media and buying power in countries peripheral to the metropolitan economies, should at least encourage forward thinking and possibly compromise across stakeholders’ lines.

By Luiz Augusto Buff

Endnotes

i. http://www.internationalmusicregistry.org/export/sites/imr/ portal/en/pdf/imr_scoping_study.pdfii.

ii. See Peter Alhadeff, “Waiting for GRD”, The Music Business Journal, Mar. 2012 http://www.thembj.org/2012/03/waiting-for- grd/.

Facebook’s IPO and the Music Industry

Originally published in the mar-2012 issue of The Music Business Journal – Berklee College of Music

Less than ten years ago, Harvard student Mark Zuckerberg developed Facebook. Since then, many books, an Oscar winning movie, and, of course, the Internet have covered its remarkable story. A new turning point was announced at the beginning of February, when Facebook declared its intention to cease being a private company by filing papers for a public offering with the Securities and Exchange Commission (SEC).

Facebook’s IPO, i.e, its initial public offering, is expected to raise $5 billion or more. Diagnostic company data, released for the first time, indicates gross revenues of $3.7 billion in 2011, with net profits of $1billion. This margin of about one-to-three is impressive.   Close to nine-tenths of all receipts are in advertising; third-party companies using its social platform make up the remainder with commissions on sales of products and services.

The company’s trade value is estimated at $75 to $100 billion, and the projection is much, much, higher than the average multiple of twelve times net profits (Facebook would exceed the average by a factor of seven or more). Behind these bullish perceptions lie the rapid spread of Internet connectivity and the growth of mobile phone usage, especially in emerging countries.

Facebook reported that it has 845 million users and adds 451 every minute. It expects to reach the one billion mark in August, after its first public offering. That means that one in every seven people in the world will be connected via the website. More than four-fifths of the Americans connected to the Internet are also users of the website, and last year slightly more than half of the advertising revenue was generated just in the US. After the stock flotation, the company is said to have plans to expand globally creating more possibilities to grow ad revenue in prominent markets such as India and Brazil. Another big challenge for Facebook is to penetrate the Chinese market, where the website is currently blocked by the government.

Mr. Zuckerberg will still control most of the voting rights at Facebook. However, his decisions are now accountable to stockholders, whose concerns are more financial.  Because of this, Mr. Zuckerberg decided to write directly to potential investors and explain clearly his social mission and vision. He wrote that Facebook was created “to make the world more open and connected.” Zuckerberg acknowledged the necessity of profits, but, he added, “we don’t build services to make money; we make money to build better services.”

Facebook’s API

By encouraging and providing the tools for people to share anything from weekend pictures to articles recently read, Facebook has changed user behavior on the Internet. Every user, for instance, acquires an identity that other people and companies can interact with. In many cases, Facebook has removed the barrier between music artists and their fans by connecting them directly through the platform. It has also created a powerful recommendation tool, allowing users to share what they like so that others can appreciate, and engage, their artist of choice.

For example, the Facebook Application Programming Interface (API) allows other websites to communicate with Facebook and use its tools. It allows for a more personalized social experience, for instance, by embedding its ubiquitous Like button. Moreover, Facebook’s sign-in process eases sites’ registrations. Even MySpace, once a pre-eminent music network, is trying to reemerge as a sophisticated recommendation engine and music discovery tool that runs through Facebook.

Facebook’s presence is felt too as consumers trend towards streaming services. The freemium model allows listeners to access a vast catalog of songs and play them either for free, with some advertisements, or for a monthly fee that allows access to some benefits. Spotify, Rhapsody, MOG, and RDio are the main services here and all of them are using the Facebook API to permit access for users, connect them to their friends, and observe their listening habits.  Without Facebook, the impact and reach of these services would probably be much diminished.

Music Marketing and Zynga

In fact, a new generation of artist managers is now taking advantage of Facebook in order to break new artists. Berklee Alumnus Nils Gums is the businessman behind Internet sensation Karmin, with Amy Heidemann and Nick Noonan (both are also from Berklee). After producing more than thirty music videos for their channel on YouTube, the duo hit it big with 54 million views on a cover of Grammy winner Chris Brown’s “Look At Me Now.” The exponential force of Facebook’s Like and Share buttons was apparent. Karmin has since signed a deal with Epic Records and appeared on NBC’s Saturday Night Live. For that matter, marketing tools like Reverb Nation, Topspin, and BandCamp are based on the concept of the artist communicating directly with fans. That generally means going through Facebook.

A niche market that often falls below the radar of the music industry is gaming.  Yet Zynga, the company behind FarmVille, CityVille and many other social games that run through the Facebook API, accounts for 12% of the entire Facebook revenue. Composers and music publishers should take notice.  Last year Zynga developed a special avatar for Enrique Iglesias to showcase exclusive music in their games, while Lady Gaga’s Born This Waysingle was first released exclusively for players of FarmVille. Games, in short, are becoming an important platform for music discovery and artist promotion.

A New Standard

The biggest challenge for Facebook will be to meet investors’ expectations. More sources of revenue will be likely needed. Facebook could invest its surplus IPO cash in startup companies that advance Facebook’s platform—like Google has done with Google Ventures. The benefit to the startup is not just the money tendered but the mentoring opportunity that founding entrepreneurs receive from Facebook. On the other hand, even a small pick of winners could bring Facebook untold market power gains. In the meantime, there might be added value from a more expert management of advertising data. It is likely that Facebook will enter the advertising market seeking an important new acquisition.

The future of Facebook looks promising, and so do the benefits that the music industry might reap indirectly from a successful IPO.  However it is extremely important for Facebook to be aware of the risks of loosing its users – their most important asset. Since Facebook’s business model is based on mining data, issues surrounding privacy may rise as the company becomes more aggressive and pays more attention to its bottom line.

By Luiz Augusto Buff

Toward Global Rights

Originially published in the Dec-2011 issue of The Music Business Journal – Berklee College of Music

by Peter Alhadeff, Zosia Boczanowski, Luiz Augusto Buff, and Aaron Gottlieb

Music is a complex commodity bundled with many rights. As intellectual property, it requires licenses to transact legally. But in today’s marketplace, clearances from owners or intermediaries can be difficult to track both nationally and internationally. Often, many parties are involved before permission can be granted for a single trade. In effect, it may be more practical to license a collection of songs rather than a single song, biasing usage against the non-commercial and cultural repertoire of lesser known artists and works. As a result, the diffusion of musical production and the livelihood of music creators, two tenets of international copyright law, are coming under threat.

The problem for buyers and sellers of music has been compounded since the new millennium. Music is bought and sold in TVs, computers, smart phones, and satellite radio. There are more playback devices and distribution channels, so the number of transactions is growing exponentially. More trade, however, does not mean a higher returned value because the typical tradable item before the millennium was the album, and it returned ten times the worth that a single song does presently.  Musical purchases today, in short, are dominated by myriad low- priced transactions.

The perception is that the rights’ shell of music is now hindering business more than ever, not just by adding friction in the music exchange but also by preventing trade. As the fortunes of the global recorded music market have declined catastrophically since the new millennium, with the business only grossing half the value that it did back then, a new sense of urgency is being felt both by music stakeholders and governments.

Regarding stakeholders: When music users are not getting access to creative content because of the logistical difficulties that music intermediaries, including online music distributors, have clearing music rights, the market takes a hit.  As for governments: The State tends to become involved where copyright industries are deemed significant and/or music is thought of as a cultural good worth protecting. Another issue here is the migration of music into the ‘public domain’. The transition can never be seamless unless there is clarity and tractability about ownership rights. The end of the commercial exploitation of a musical piece, of course, is never really accepted gladly by the interested party.

A New Series

The Music Business Journal will start its first ever article series on a multinational effort to build a better infrastructure to trade music.  The object is to draw attention regularly in future issues to a new momentum behind international song registries and one-stop initiatives for global rights’ clearances. As we write, a new architecture for the music trade is being attempted under existing intellectual property laws. (Because of this, the Journal will concentrate its efforts on the creation of such registries and continue to cover general legal developments elsewhere in the publication.)

We will look at all the parties involved, the agreements and compromises that will be necessary to carry these novel ideas to fruition, and the implications of these registries for the future of music. It took many years to get nation states to agree to submit their economic data to the League of Nations, and for the latter to begin compiling national income statistics. Similarly, sellers and owners of music copyrights, as well as public libraries and other publicly owned music repositories, have to come to the negotiating table willingly. The drama is likely to last.

Yet the development of mechanisms for better rights’ documentation, data-collection, and rights’ clearances is arguably as urgent today as when the onslaught of online music challenged the recorded industry after 2001.  Inaction, of course, has a steep price in an economy in crisis, and global efforts to build song registries have derived impetus from the Great Recession. Naturally, the music market has a better chance to discover new trades and reduce transaction costs if it centralizes and lays bare its arcane permit strictures.

IMR, GDR, and CISAC

The Journal has picked up increased coverage on the subject, and done its part1.

The United Nations’ World Intellectual Property Organization (WIPO) is presently focusing on developing an international intellectual property system and has made the case for an International Music Registry (IMR) in the past year. Specialists, academics, and stakeholders have been convened for special forums, for instance at the World Copyright Summit in Brussels in June, throughout October and November in Geneva, and at a Harvard-Berklee Rethink Music workshop in Boston in November.

Earlier, in 2008, the European Competition Commissioner of the EU established a working group which included representatives from Amazon, Universal Music, EMI, iTunes, Nokia, and three collection societies: PRS (United Kingdom), SACEM (France), and STIM (Sweden). The aim was to develop a Global Repertoire Database (GRD) that would stand as the reliable central database for multi-territorial licensing2.

Both groups are of course weary of competing with each other. WIPO has made it clear that IMR and GRD should cooperate to make the most efficient international licensing database possible, while, early in 2011, at a joint IMR-GRD meeting, the GRD Chair noted that the GRD could connect to the system that IMR developed3.

At the same time, the International Confederation of Societies of Authors and Composers (CISAC), an umbrella organization for mostly, but not exclusively, performing rights’ societies, joined the GRD in March 2011. CISAC developed the International Standard Musical Work Code (‘ISWC’), which identifies musical works from information procured by the rights-holders4.  Its expertise in copyright data management is thus political as well as technical.

Our Coverage

Clearly, the trade of music is recognizing that it can benefit from a new and more federated approach. For more in-depth coverage, the MBJ intends to publish, in the months ahead, individual pieces on (i) the potential for a synergy between IMR and GRD, (ii) the technological solutions being discussed, (iii) possible funding mechanisms for a global register or registries, (iv) the politics of stakeholders and the role of government, (v) the management and control of global song databases, and (vi) the unavoidable legal challenges of antitrust concerns, formalities, orphan works, and conflicting claims.

In our next issue, we will be reporting from MIDEM, at Cannes, France.  There, late in January, IMR and GRD representatives will engage in a debate with participants from around the globe. The expectation is that they will release their own independent study shortly after.

_____

See Luiz Augusto Buff, “WIPO Tallies Song Credits Worldwide”, The Music Business Journal, Oct. 2011, 10; and, same author, “The G8 and Copyright”, MBJ, Aug. 2011, 4 (also at http://www.thembj.org).

Berkman Center for Internet & Society, Rethinking Music: The Challenges of Creating and Maintaining a Music Rights Registry, Working Draft, Nov. 2011, 3.

Ibid., 4.

Ibid., 5.

_____

by Peter Alhadeff, Zosia Boczanowski, Luiz Augusto Buff, and Aaron Gottlieb

A Primer on Termination Rights

Originally published in the Apr-11 issue of The Music Business Journal – Berklee College of Music

By default a person that makes an original work and fixes it in a tangible form owns its copyright and consequently the exclusive right that will permit the extraction of commercial benefits from the creation. The economic exploitation of copyrights is commonly made through the granting of transfers and licenses to other parties in exchange for compensation.

Generally speaking, songwriters assign rights of a musical composition to publishers, while artists transfer their rights over their sound recordings to the record labels. Many of these licenses and transfers are usually granted before the publication of the work, when it is not possible to predict its success. For this reason, authors are usually in a worse bargaining position than the transferees or licensees–and end up collecting less than they could.

The Issue

In order to protect authors, the 1976 Copyright Act established termination or “recapture” rights that give authors a second chance depending on when the grant was executed. The statutory termination of transfers and licenses allows the renegotiation of these grants, either by renewing the contract with the original grantee or by recapturing that right in order to enter into a new agreement with a third party.

Termination is considered for any works other than works made for hire, and only for U.S rights that are copyright related. It excludes the possibility of recapturing foreign rights, trademarks, or any other federal or state rights. The terminated grantee has the right to exploit derivative works that were prepared under their grant, but not others.

The Letter of the Law

The provisions of the termination rights can be found in the 1976 Copyright Act in two different contexts, depending on when the grant was executed. The first, under Section 203, provides that grant of transfer or licenses that were executed by the author in or after 1978 may be terminated. Generally, the author, as well as his heirs or a duly authorized agent, has a period of five years, beginning after thirty-five years of the mentioned grant, to effect the termination. Works that were created prior to that date, but for which the grants were executed on or after January 1st, 1978, are also included.

For works created prior to 1978 and for which the grant was also executed before that date, the provisions of Section 304 (c) and (d) are applied. The general rule is that the termination may be effective during a five year period starting fifty-six years after the copyright was first secured, regardless of the date of the grant. In these cases, for the grant to be subject to termination, it is not required that it be executed only by the author, as in Section 203, but also by his heirs or executors.

Inventorying the Transfers

However, the transfer of rights back to authors is not automatic. In order for the termination to become effective under both Sections, the majority of the authors, heirs or duly authorized representatives must serve a notice upon the grantees, expressing the effective date of termination. In order to be valid, a copy of this notice must be registered in the Copyright Office prior to the effective date of the termination. The service of the notice should occur no later than two years and no earlier than ten years of the desired date of termination.

In the absence of action, the termination right disappears after the closing of the five-year window, leaving rights in the work permanently in the hands of the grantee until statutory expiration of the copyright term. For instance, for a grant executed on January 1st, 1978 the termination window will begin thirty-five years after the grant – from 2013 to 2018. If the author decided that they would want to terminate the transfers at the earliest possible date a notice should have been sent at any time between 2003 and January 1st, 2011.

With regards to the application of the Section 304, a point to be highlighted is that as sound recordings were not contemplated by the Copyright Law until 1972, the first terminations of transfers for sound recordings made before 1978 will only be effective in 2028, fifty-six years after 1972. The first notices for such terminations will start to be served in 2018.

There are certain works for which grants were signed prospectively by authors before 1978, but the works only came into existence after January 1st, 1978. These so called “gap grants” were the subject of recent analysis by the Copyright Office. At issue was whether or not the “gap grants” could be terminated, as the provisions of Section 203 are applicable only for grants executed after 1978 (Section 304 is not applicable because it requires a subsisting copyright in 1978 to become valid). After receiving comments from different stakeholders, the study clarifies that the Copyright Office will accept notices of termination for these works (it considers that the execution of the grants only becomes effective on the date when works come into existence). However, whether such notices of termination fall within the scope of section 203 will ultimately be a matter to be resolved by the courts.

Rewriting Existing Contracts

Many agreements between writers and publishers anticipate that any termination right should be renounced, with the publisher owning the copyright for its entire term. However, the Law states that the “termination of the grant may be effected notwithstanding any agreement to the contrary.” The intention of the legislation was to secure for the author the rights of termination independently of any language that might be set out in an agreement, i.e. forcing them to give up their future rights without renegotiation.

“Agreements of the contrary” were the subject of recent court decisions addressing the Section 304 termination provision. In the cases of Milne v. Stephen Slesinger, Inc. (9th Cir. 2005, Winnie the Pooh Character) and Penguin Group (USA) Inc. v. Steinbeck (2nd Cir. 2008, works of John Steinbeck), the courts decided that the renegotiation of the agreement during the termination window revoked the original grants and were not deemed to be “agreements to the contrary”. They denied, therefore, the possibility of termination. However, in the Classic Media, Inc. v. Mewborn, (9th Cir. 2008, Lassie Works) the court preserved the termination rights considering a post-1978 assignment as an “agreement to the contrary” and therefore “attending the congressional intent to give the benefit of the additional renewal term to the author and his heirs”. There is yet no case law related to Section 203, as its provisions will only become effective on 2013.

Works for Hire

Works made for hire are the significant exception for termination provisions and will provide a fertile ground for litigation in the following years. The exemption exists because in such cases there is no transfer of copyright and the employer or commissioner shall be considered the author of the work from the moment of its creation.

Record labels would like to consider sound recordings as works made for hire. Artists, however, argue that this cannot be applied to sound recordings, as they do not fall in one of the nine types of works listed on the definition of a work for hire (Section 101 of the Copyright Law). As sound recordings are typically a joint work of different artists, producers and engineers, the discussion of who can be considered the author will increase. In effect, the period between the service of a notice and the effective date of the termination resembles a period of renegotiation for record labels and artists–at least for those who have maintained commercial value throughout the years.

At Stake

As we approach 2013, discussions about the termination provisions are becoming more relevant. The Future of Music Coalition recently affirmed “as more copyrights become eligible to revert back to creators, we may find that the artists themselves exploit their works in novel ways that could be beneficial to the overall health of the music marketplace.” At the very least, the upcoming termination of transfer provisions will provide a valuable window for authors to exploit.

By Luiz Augusto Buff

The Music Industry in 2011

Originally published in the Feb-11 issue of The Music Business Journal – Berklee College of Music

More than ten years have passed since the debut of Napster shook the record industry. The file-sharing software gave music listeners access to an immense diversity of music for free, causing a shift in industry power from record labels to consumers. The popularity of MP3 files increased even more with the success of the iPod. Even before Napster, recorded music sales were dropping year after year, due to discounts that labels were given to wholesale prices globally. Those numbers dropped even further when the demand shifted to the free content available on the Net. After the panic, artists and the music industry started to understand the opportunities that the Internet was offering, and started to migrate to new models of marketing and distribution through the online world. Still, adaptations are a necessity in the legal system to guarantee the functioning of the creative process. The fight against piracy continues but hopefully a new business model that takes advantage of the “feels like free” system will drive people to a legal form of consumption that not only will attend the demand for lower prices, but will help elevate the value of music back to a sustainable level.

Apple
In 2003, with the intention to provide legal content for their successful iPod, Apple developed the iTunes Store. The iPod had become the worldwide standard media player but the lack of legal content was the main issue that the company had to face. After forming agreements with all the major record labels, the digital retailer store was a booming success and is now responsible for more than 70% of the digital sales and the biggest retailer store in the overall music market, accounting for 25% of the market share, accordingly to IFPI (International Federation of the Phonographic Industry).

Before the online-based sales of music products, in order to get access to one specific song the listener had to buy an entire album. That meant that to buy one song, one had to pay for the ten (or more) other songs that came with it. One of the major changes that happened with the iTunes Store was the commercialization of single tracks- making it cheaper for listeners to buy their favorite songs. The number of units sold increased significantly but the sales performance of the recorded music products dropped radically.

When the iTunes Store first opened, prices were fixed at $0.99 for a single-track and $9.99 for an album. Being the most prominent store in the online environment, major record labels started pressuring them to reconsider this pricing structure; maybe not every song was worth the same to costumers. The concept behind the argument is the price elasticity of demand. To maximize revenues the labels defended that hit songs could be sold at higher prices without loosing significant demand and deep catalog songs had to be sold at lower prices, driving interest for more people to buy them. In 2009 Apple accepted the claim and introduced a three-tier system, with variable prices of songs at $0.69, $0.99 and $1.29. The labels could raise revenues, and the system could help redirect interest to album sales, as they became cheaper. Higher quality files, bundled with bonus features such as animated lyrics, artist photos and liner notes were part of other new ideas to help boost album sales. The iTunes LP was a line of albums that offered these premium contents to fewer people at higher prices, in effect aggregating the old visual experience of the physical album into a download.

Apple’s agreement with major labels stated that 33% of the income is kept by the iTunes Store, similar to traditional values of physical distribution. The remaining 67% goes to the labels that split it with artists as traditional CD sales. When all is said and done, the artist usually ends up with around 10% of the price of a download. Labels get away with this by wording contract agreements to consider such downloads as sales of song copies and applied traditional accounting schemes. Now there is a current of thought that argues that iTunes Store downloads are licenses and not distribution of products. In fact, recent court decisions are adopting the argument of licenses, applying a 50/50 split between labels and artists, which is devastating for the former but great for the latter.

Free Music and the Record Labels
Even with digital channels being responsible for more than one quarter of the overall music sales in the world, the fight against piracy and illegal file sharing is still running. Accordingly to BMR – the UK’s umbrella organization representing the industry of the British music industry, just 37% of listeners download music legally. The majority is still taking advantage of illegal file sharing, and the difference for the digital market of less developed countries could be even bigger. As expected, in their study, BMR also identified that the main reason for downloading music illegally is that it is free and it saves money.

Digital retail stores are competing with free content spread on the web. To prevail in this new scenario, legal business models have to take advantages of gratis opportunities and not just look at its downside. For some futurists, it is important to give away control of their works in exchange for attention, thus affording them an expanded consumer audience. Just like word-of-mouth, file sharing could be viewed as a marketing tool for people to discover new music; if they like what they hear, they will seek more and different product by that artist.

With very few marginal costs in online distribution, it is easy to give away songs for free in an effort to reach a small segment that is willing to pay for premium content. This is the idea that inspired business models like Topspin. The company provides a structure with powerful marketing and selling tools with which the artists can develop a profitable relationship directly with the fans after giving away a couple of songs for free.

With the decreasing power of record labels, artists will start to organize themselves as small businesses, benefitting from the social media networking tools that allow a direct and two-way relationship between artists and fans. Inspired by that direct relationship, companies like Artist Share are now offering artists the opportunity to raise money for projects through fan funding. The idea is to build a sustainable environment that remunerates artists in their creative process. With this model, fans can contribute with all sorts of monetary values in exchange for access to the artist’s creative process—at audio sessions for album credits, in the production of videos, sheet music, and other. It is a sustainable system that affirms that the true value of music lies on the artist’s creativity.

In past years, artists got similar type of investment through record label advances. The old model was based in a recoupment system that often made it very difficult for artists to start generating revenues from the sale of their products. In the fan-funding model, 85% of all generated income goes directly to the artist. Maria Schneider – one of the most important contemporary jazz composers – won a Grammy for best large jazz ensemble album with a fan funding based project via the Artist Share website.

Monetizing the Cloud
Probably the most important growth trend of the music industry is streaming. The model is based on acquiring access to a large database of songs that can be played directly into users devices without file transferring. Free subscriptions are sustained by advertisements, while paid subscriptions allow users access to improved content such as higher quality audio files, expanded database, mobile capacity and offline usage, all commercial free.
Non-interactive streaming offers pre-made playlists that are configured to try match listener’s interests and tastes. It is a passive service that is authorized by blanket licenses for the use of the compositions from performance rights organizations (ASCAP, BMI, etc.) and a compulsory license for the use of sound recording issued by Sound Exchange. To keep the service legal, there are certain restrictions that companies like Pandora have to follow in order to avoid interactive streaming.

Allowing users to manage the database, choose songs and create playlists to share with friends requires a totally different form of licensing. In addition to the blanket licenses issued by PRO’s for the use of compositions, interactive streaming requires mechanical licenses and a license for the digital performance of the sound recording negotiated with each appropriate rights owner. These requirements make interactive streaming much more expensive to the service providers and it can be impractical to license all the content. In Europe, the Spotify model has been experiencing high levels of success. The company made an agreement with a Swedish Internet Service Provider that allowed the user to pay the premium subscription on their broadband bill. Recently they declared that two thirds of their income was used to pay licensing agreements and other rights to keep the service legal. Currently, Spotify is trying to arrange license agreements in order to make the service available in the US. With the company planning global expansion, they are aiming to turn illegal file-shares into users of their services.

Phones, Concerts, and Rights’ Collections
Expanding the opportunities for the music industry even further, mobile phones are becoming the easiest interface between users and the online world. These small portable devices are consistently getting cheaper and reaching all different social classes. Ringtones and ringbacks are helping artists to develop their marketing strategies as well as making revenue. A recent study made by Myxer -a broadband service provider- pointed out that almost three quarters of mobile phone users listen to music on their phone, via MP3, streaming or through the use of apps.

Despite this, Nokia recently shut down its unlimited download service, Ovi Music Unlimited (formerly “Comes With Music”) in more than thirty countries, leaving it available only in China, India, Brazil and South Africa. However, they are still exploring the Ovi brand, with applications and music stores as well as other services. Nokia also just announced a strategic alliance with Microsoft, in order to develop a new mobile ecosystem. Vodafone, the largest mobile phone telecommunications company of the world also has a music service called 360 Music, offering unlimited downloads for subscribers.

There’s no denying that the changes brought with the digital era have had a negative effect on record sales, but fortunately, the live music sector is still in constant growth. Concert ticket sales almost tripled in value in the last ten years and that only accounts for the public sector. Private sector events like weddings and corporate banquets make up a much more substantial industry and have been experiencing similar rates of growth. Consolidating both of these values would make the real figure for live music much bigger than it is being reported. Live music in the past was used as a marketing tool to sell recorded music, now it is becoming a vital source of income for artists. The live experience is enhanced with sophisticated venues and breath-taking productions that are driving price increases of tickets and also encouraging people spend more money in merchandising.

Digital advances are providing a better structure for the publishing sector of the music business as well. Sophisticated mechanisms of tracking song performances bring more evenly distributed royalties as well as increased revenue from collection. Issuing mechanical licenses is getting easier with new services RightsFlow, which handles all procedures involved with license acquisition online. Before the development of these tools, the process to obtain a license was very difficult and many times, independent artists didn’t get licenses because they didn’t know how.

Moving Forward

It is evident that the digital era has brought new forms of business to the music industry. New models will most likely survive best on the mantra that music is everywhere and that it should be free (or at least feel like it). The industry may be in somewhat of a slump, but value at the consumer level is increasing quicker than ever- in essence rebuilding a foundation for the business for the sake of sustainability and longevity. Never before have people had the unlimited access to music that they do now. Direct relationships with artists and fans will create a more democratic environment, as more artists will have opportunity to reach their listeners.

By Luiz Augusto Buff

Sources
Alhadeff, Peter. “US Music Industry Statistics: A Reappraisal.” MEIEA Journal, 2008.
Alhadeff, Peter. “The Value of Music and the Trappings of the Market place, 1990-2005.” MEIEA Journal, 2006.
Bargfrede, Allen/Mak, Cecily. “Music Law in the Digital Age”. Berklee Press, 2009.
Beall, Eric. “Making Music Make Money”. Berklee Press, 2004.
Hosein, Trish. “Mechanical Dues and Rightsflow”. The Music Business Journal, 2010.
Kusek, David/Leonhard, Gerd. “The Future of Music – Manifesto for the Digital Music Revolution”. Berklee Press, 2004.
Leonard, Gerd. “Music 2.0”. Gerd Leonhard, 2008.
Madden, Mary. “The State of Music Online: Ten Years After Napster”. Pew Internet, 2009.
Owsinski, Bob. “Music 3.0 – A Survival Guide for Making Music in the Internet Age”. Hal Leonard Books, 2009.
Music and Copyright, Issue 415. Informa UK Ltd.
IFPI Digital Music Report 2010.
“What’s Working in Music – Having a Ball”. The Economist, 2010

Mash-Ups & Fair Use: Girl Talk

Originally published in dez-10 – The Music Business Journal – Berklee College of Music

With the development of digital music in the mid-1990s, the act of sampling became very popular and is now a fundamental element for musical styles like Rap and Hip-hop. The use of samples to construct new songs is considered a derivative work and usually a license is required. Copyright owners have already successfully sued Hip-hop artists that tried to use samples without these licenses.

Another sample-based derivative work is the Mash-Up; a type of composition that blends two or more pre-recorded sounds creating an entirely new musical composition. While Mash-Ups are also considered a derivative work, artists like Gregg Gillis – known as DJ Girl Talk – are trying to push the boundaries of the strictures of the law by trying to include these musical collages under the fair use concept.

Girl Talk’s latest album, All Day, was released as a free download on November 15th and has more than 350 samples of different sound recordings in approximately seventy minutes of runtime. Obtaining all of the necessary licenses for each sound recording used would have been very costly and extremely time consuming.  Gillis, having planned to release the album for free, decided to move forward without licensing a single track – not even the three-minute use of Black Sabbath’s War Pigs– claiming that his creations fit the guidelines of fair use.  However, to determine congruency with the fair use doctrine, it is necessary to understand the origins and basis of the fair use concept.

Fair Use Revisited

Following a tendency that had been developed through case law, the 1976 Copyright Act recognized the fair use doctrine as a defense against copyright infringement. The goal of that concept was to permit certain uses of copyrighted works that encouraged the advancement of learning and knowledge and to provide wide access to creative works for the public. It is important to understand that fair use is not an affirmative right, but merely a defense against a copyright infringement. There is a false common belief that it is considered “fair use” to use an unlicensed, copyrighted work as long as one gives credit to the author or copyright owner (the assumption that a use is fair can be risky, and technically speaking, it is considered fair only when a court decides so).
The Copyright act listed certain types of use that are likely to be considered as fair, such as criticism, comment, news reporting, teaching, scholarship and research. This list is just illustrative and there are other types of uses that can be considered fair as well. Also, Section 107 of the Copyright Act lists four main factors to be considered by a court to determine whether or not a particular use is fair:

  1. The purpose and character of the use, including whether such use is of commercial nature or is for nonprofit educational purposes;
  2. The nature of the copyrighted work;
  3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole;
  4. The effect of the use upon the potential market for, or value of, the copyrighted work.”

Girl Talk

The first factor focuses on the observation of how the work is being used. If the use is related to information and/or education, it is more likely to be considered as fair since there are public benefits in these purposes. In general, the nonprofit character will weigh towards fair use, but the commercial use by itself does not discard the fairness of the use, since most uses are commercial to some extent. The court’s main concern is finding out if the user stands to profit from exploitation of the copyrighted material without paying the customary price for the licenses–and Girl Talk’s does profit from the act.
The transformative quality of the use is also analyzed here as a means to distinguish infringement and fair use. A use that is transformative, rather than imitative, has more of a chance to be qualified as fair, for it inserts the piece in a different context and purpose.  Girl Talk’s sample works are transformative, in that he transforms different pieces of existing sounds recordings into a new work of his own.  However, his purposes are strictly commercial and do not involve educational value or critical commentary.  In addition, the good faith of the defendant is extremely relevant in court analysis of the first factor. As the album was distributed on a website called Illegalart.net, the presumption of good faith can be quite a stretch.

When analyzing the nature of the copyrighted work, the court must determine if the work was published or unpublished, or if it is a factual or creative work. As musical works are creative in essence, this factor usually weighs against fair use- even more so when it is an unpublished work, in which case, the original author has the right of first use before a derivative creator. Gregg Gillis’ samples come from published original works- a fact that does not harm the first use principle.  The third factor refers to the portion of the copyrighted material used. There is no absolute rule to determine how much of a work can be used to be considered fair. Not only is the size and proportion of the work relevant, but also the qualitative dimension of the portion used. The greater the amount used, the less likely a use will be considered fair.  Yet in some cases, the use of even a very small part- if considered signature to a song- may characterize the use as an infringement.

Probably the most important of the four factors is the final, stating that it is important to analyze the value and the potential market of a copyrighted work. Any use of a copyrighted work –fair or unfair- it will automatically affect the copyright owner to some extent, as since they are not receiving any licensing incomes. This is tolerated due to the public benefits afforded from the fair use of the work. However, if the new work competes with, or reduces the potential commercial market for the original copyrighted material, then the use will most likely be deemed unfair. Again, a commercial use has a presumed adverse impact on the market for the original copyrighted work and reduces the credibility of fairness. Girl Talk’s main argument relies on the last two factors:  He alleges that his work is based on various small portions of original works, and the substantiality of it will not substitute or harm the copyright holder’s original or potential markets.

Conclusion

Girl Talk is aware of the risks that he is taking by not licensing the samples that he uses. There is no way to prevent a lawsuit of copyright infringement by claiming fair use and only a court has the power to determine his particular uses as fair or infringed. The expenses needed to prove fair use in court can be very high, sometimes surpassing the amount needed to obtain the legitimate licenses in the first place. Although Girl Talk has not yet faced a lawsuit for copyright infringement, the major distributors of digital music decided to not offer his albums on their websites. Major labels and publishers are most likely holding their moves against the artist because they are afraid of the negative attention and the potential setting of precedent in favor of the fair use.

By Luiz Augusto Buff