Tag Archives: royalty

What is the Fair Market Value of a Song?

As the housing market in the U.S. heats up, the fair market value of homes is on the rise. As the digital age in music has brought more music available to more people than ever before, is the fair market value of songs on the rise as well?

Many of us have bought and sold houses at least once in our lifetime. When you want to sell yours, the process goes something like this. You look around at the market and determine what you think the house is worth compared to others around you, and then you price it a little above that. That’s the “starting point”. Normally, someone will make an offer which is less than the starting point price, not really expecting the offer to be accepted, but anticipating a counter offer of somewhere between the two. After some more back and forth, the price normally ends up somewhere right around the center of the starting point and the counter offer. You feel pretty good because you negotiated a deal in the ball park of your starting point, which would be considered successful if you sell a $200,000.00 house for $195,000.00. But what if the house you just sold had a fair market value of $400,000.00?

The seller normally sets the starting point price. It may not always be a realistic value, but it is the sellers right to set it wherever he wants. And by doing so, he sets a sort of expectation, or paradigm of the value of the house. And most of the time, others accept that price as a ballpark true value. The negotiations generally begin based on that starting point, even if it is way off the mark.

Let’s relate that to the music industry and the value of a song. When the royalties for owners of song copyrights used in recordings was first defined in the 1909 Copyright Law, they were based on piano rolls and the early phonorecord discs and cylinders. There was a physical product associated, and necessary, in order to bring the music to the consumer. The product’s primary function was music delivery. The license rates for songs started around 10% of the retail price of the product. However, over the following decades, as product prices increased and the statutory license rate stayed at 2 cents, that percentage decreased to substantially less than 10%. When statutory rates began increasing in 1978, song owners saw their royalties once again get closer to the 10% ballpark value of the physical product.

During that time, song uses in media like television, motion pictures, television advertising, and even video games became more popular. When both the song and the original artist’s recording were used, the licenses were normally of an equal value for each. That is, if the master recording received $5,000.00, then the song owner would receive $5,000.00. The process soon moved to each of the rights holders making the deal to include a “most favored nations” term, meaning that the recording and the song copyright owners would each be guaranteed to receive an equal amount. This “equal value” practice was accepted for uses where there was no physical product used primarily for music delivery. If there was physical product involved, its core purpose was to deliver some other value, such as a movie, a show, or a game.

As an industry, we seemed to settle in to valuing a song compared to a recording around 10 to 90 for licenses for physical delivery products, and 50/50 for uses without physical products.

So my obvious question is this. Why do we use a ballpark 10% value as a “starting point” when negotiating rates with digital delivery entities, where no physical products are involved? Have we, as an industry, been lulled into accepting a 10 to 90 relationship with recordings when a more proper value is closer to 50%, as we have practiced in certain media? Should the creation of new words and music really be worth a tenth of the value of an artist’s interpretation and performance of that original work?

I applaud those who have been on the front line of negotiating new rates for songwriters and publishers. NMPA, NSAI, SGA, and others have continuously pushed for better and better rates for song copyrights. I believe the publisher and songwriter communities would be in a worse situation were it not for the efforts of these fine organizations and individuals. But I want to encourage all of us to pause a bit, look at the current valuation paradigm, and ask the question, “why not 50%”?

When we start with a ballpark 10% value, then we feel better when we negotiate a rate of 11.5% for certain rights. Sony ATV and EMI Publishing recently negotiated a direct performance license rate with Pandora which is estimated to be an increase of 25% from the prior rate. However, the old rate was 4.1% of Pandora’s revenue, compared to the almost 50% of revenue paid for the recordings. We started at less than a 10/90 ratio, and now applaud the fact that someone was able to nudge the rate up to about 10% of what recordings get.

Billboard recently published an interview with Marty Bandier, chairman/CEO of Sony ATV Publishing, who was asked about what Pandora thought when he asked for a higher rate for publishers and writers. Marty said, “When you compare it to the rate record companies are getting, it was really miniscule. How do you differentiate the song’s value from the artist performance? Are they that disparate to warrant that kind of spread?” Is Marty suggesting the “miniscule” rate for songs is way out of proportion?

Del Bryant, president/CEO of BMI, published an open letter to the industry just yesterday (2/12/13), regarding the withdrawal of catalogs from performing rights organizations by some music publishers for certain digital uses. In it, Del says, “While recent developments may have added complexity to an already complex rights landscape, we see opportunity. We see an opportunity to level the digital playing field and to allow the courts to consider all precedents across the digital spectrum. We see an opportunity to value performances of musical works fairly when compared to performances of sound recordings.” (Italics mine). Is Del saying he believes the values are unfair at the current levels?

I realize I will probably ruffle quite a few feathers in the industry with this view, especially record companies and artists. But I would call on all of us in the publishing industry to shift our paradigms on the value of songs. As in house selling, if we identify our “starting point” around a 10% or slightly higher value, we can only expect slight increases. But if we work to shift the industry’s thinking to something around a 50% value for the song, as we have already accepted in many areas of licensing, then perhaps we really can, in Del Bryant’s words, level the digital playing field and value music works more fairly when compared to recordings.

I am only one opinion. I welcome and encourage comments and discussion on this topic. Let’s kick this around a bit. What do you think? Feel free to comment below.

Why not 50%?

John Barker
ClearBox Rights, LLC

“We see the world, not as it is, but as we are – or, as we are conditioned to see it.” – Stephen Covey

© 2013 John Barker. All rights reserved. Information contained in this Blog is of a general nature and should not be considered or relied on as legal advice. Any reader of this Blog who has legal matters related to information addressed in this Blog should consult with an experienced attorney. This Blog contains no warranties or representations that the information contained in it is true or accurate in all respects or that it is the most current or complete information on the subject matter covered. John Barker is President and CEO of ClearBox Rights, LLC.

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The Standard U.S. Mechanical License Ceiling Is No Longer 9.1 Cents

In fact, it never was. That is a truth that surprisingly few people understand, and even fewer practice.

The reality is, as a copyright owner, I can charge as much as I want for someone to make and distribute a recording of my song. Twenty cents? I can charge that. Now granted, the user may have an option to go and get a “compulsory license” to use my song and pay only 9.1 cents, as long as it is not a first use, and as long as they jump through certain legal hoops in order to qualify. But very rarely are compulsory licenses used, with the exception of some of the recent online digital providers. And here’s the kicker. If anyone who wants to use my song has already manufactured the product over 30 days prior, or distributed the recording before they acquired a license (which happens all the time), they are permanently barred from getting a compulsory license for that use. They no longer qualify. So their only option is a negotiated license with me. And I have no legal limits on what I can charge.

Here’s a little history. In the early 1900s, Congress was concerned that the right to make mechanical reproductions of songs might become a monopoly controlled by a single company, so they introduced what is known as the “compulsory license” in the 1909 Copyright Act. This allowed anyone to make a mechanical reproduction, or phonorecord, of a musical composition without the consent of the copyright owner, provided the person adhered to certain provisions of the license as defined in the Copyright Law. This compulsory license was an alternative to a negotiated license, but was only available after the song had already had an initial distribution to the public in the United States under the authority of the copyright owner.

At that time, Congress also set what is called the “statutory mechanical rate”, which is the rate to be paid under the compulsory license, at 2 cents. That rate has been increased over the years to its current rate of 9.1 cents (for a 5 minute or less song). In recent years, various industry groups have negotiated, and the Copyright Royalty Judges have approved, certain digital uses to fall under the definition of Section 115 of the Copyright Law (which defines compulsory licenses), and agreed to additional statutory rates to cover such newly defined uses. However, the practice throughout the years has been that most users of copyrights would negotiate a mechanical license, rather than jump through the numerous legal hoops defined in Section 115 necessary for such a compulsory license.

Here’s the part many people don’t realize. All of these rates we call “statutory” are only applicable to compulsory licenses. Nowhere does the Copyright Law state that these statutory rates are to be applied to negotiated licenses, or any other licenses outside of Section 115. Nowhere. “Statutory Rate” is not even a defined term in the Copyright Law. It is merely a rate established by a legislative body to be applied to a unique compulsory license.

In the 2009 update to the Code of Federal Regulations (CFR), which is where the more recent negotiated rates and terms for compulsory licenses for physical and digital phonorecords are published, it is clear in §385.1 to say the scope of these new rates and terms are for licenses in accordance with Section 115 (compulsory licenses), and further, in relationship to voluntary agreements, “…the rates and terms of any [negotiated] license agreements entered into by Copyright Owners and Licensees shall apply in lieu of the rates and terms of this [compulsory license] sub-part…”.

So why does the industry, as a practical matter, stick to a maximum mechanical rate of 9.1 cents in negotiated licenses? Because (I believe) most people assume it is the maximum defined by law. And that is clearly not true. Unfortunately, I have found various trustworthy sources who mention this rate in context as it is used as a ceiling. In the popular book, “This Business of Music”, under the section “Negotiated License”, a statement is made referring to the statutory rate that it “…is likely to serve as a ceiling on royalties in United States negotiated licenses..”.¹ An article by Jeff & Todd Brabec on 2010 Mechanical Royalty Rates says, “This statutory mechanical rate represents the songwriter/music publishing royalties payable for songs contained on all physical audio recordings which are made and distributed…”.² Even Marybeth Peters, the past Register of Copyrights, in a statement to the House Judiciary Committee, referred to the compulsory license rate set by Congress by saying it “acted as a ceiling for the rate in privately negotiated licenses.”³

But it doesn’t have to.

Just last week, I was challenged on this very issue by a person in business affairs at one of the major record labels. In a license we had offered to the label, I was not asking for more than a 9.1 cent rate, but I was simply adding some reasonable terms of my own. The person’s response was, “This is a Statutory Rate license. The statutory language should be correct in a license or not included.” (the person actually did capitalize the words as if it were a defined term). Sorry, but wrong on all counts. Our license is a negotiated license. There is no such thing as a Statutory Rate License. While there may be a Compulsory License which uses a statutory rate, what I offered was a negotiated license for a product that has already been released. We use my terms…. or don’t use the song.

Bottom line, those who control copyrights should understand that they can license normal uses, mechanical or others, on their terms, and not the terms of the users, whether major companies or non-commercial individuals. There is no such thing as a ceiling rate for a negotiated license. I am not calling for unfair rates or terms, but merely challenging us to better understand our rights as copyright owners, and stick to our guns with what we believe are good and fair business practices.

John Barker
ClearBox Rights, LLC

Be sure to put your feet in the right place, then stand firm”. – Abraham Lincoln

¹ “This Business of Music” – Krasilovsky/Shemel (Billboard Books) Chapter 21, “Negotiated Licenses”
² “Music, Money & Success” Brabec/Brabec (Shirmer Trade Books) as quoted on taxi.com
³ Statement before Subcommittee on Courts, The Internet and Intellectual Property of the House Committee on the Judiciary – March 11, 2004

 
© 2013 John Barker. All rights reserved. Information contained in this Blog is of a general nature and should not be considered or relied on as legal advice. Any reader of this Blog who has legal matters related to information addressed in this Blog should consult with an experienced attorney. This Blog contains no warranties or representations that the information contained in it is true or accurate in all respects or that it is the most current or complete information on the subject matter covered. John Barker is President and CEO of ClearBox Rights, LLC.

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Is Copyright Registration Necessary? (Part 3)

It is possible you could be missing certain royalties for your songs because you haven’t registered the copyright in the U.S. Copyright Office.

In Part 1, I answered the question, “Is copyright registration necessary for copyright protection”? The answer is a simple “no”. Copyright protection exists as soon as the song is put into any tangible form. In Part 2, I went over some of the advantages of registering your copyrights, which are 1) making a public record, 2) creating “prima facie evidence”, 3) the necessity in order to file an infringement suit, and 4) the ability to receive statutory damages and attorney’s fees. In this next and final Part 3 on registrations, I’ll address the ability, or lack thereof, to receive certain royalties for your copyrights.

The “Compulsory License” was first introduced in the Copyright Act of 1909, with the intent of making licenses more easily available for mechanical piano rolls, and the newly introduced phonorecord cylinders and discs. However, the practice throughout the years has been that most users of copyrights would negotiate a mechanical license, rather than jump through the numerous legal hoops defined in Section 115 necessary for such a compulsory license. (We’ll get into the details and terms of compulsory licenses in a later blog). The compulsory license was a little used clause for most of 100 years. In fact, Mary Beth Peters, the acting Register of Copyrights, testified to a subcommittee of Congress in 2004 that “Up to this day, very few notices of intention (for compulsory licenses) are filed with the Copyright Office”.

Then along came the increased activities of digital music delivery sites. With these digital providers attempting to clear millions of songs in order to launch their services, they began hiring “License Agents” to file for and administer compulsory licenses for their digital music offerings. They did this by having the License Agents send a “Notice of Intention” (NOI’s) of the use in order to comply with the compulsory license as defined in the Copyright Law.

However, a little noticed clause in Section 115(c)(1) says, “To be entitled to receive royalties under a compulsory license, the copyright owner must be identified in the registration or other public records of the Copyright Office. The owner is entitled to royalties for phonorecords made and distributed after being so identified, but is not entitled to recover for any phonorecords previously made and distributed.”

So, according to the law, even though your song has been published (which is a requirement before a compulsory license is available), and you may have earned significant income from your song, and even though your song may be well known and identified in many public records, until your copyright is registered in some manner with the copyright office, you are not legally “entitled” to receive royalties from compulsory licenses; or even to recover past royalties earned after you register the copyright.

Having the song registered in the Copyright Office does not necessarily mean it has to have a copyright registration filed. But the law does say, “…the copyright owner must be identified in the registration or other public records of the Copyright Office.” Those “other public records” could include transfers of ownership, license agreements, termination of transfers, or other records where you, the owner of the copyright, are identified. But the law is clear that these public records must be filed in the Copyright Office in order for you (the copyright owner) to be “entitled” to receive these compulsory license royalties.

So, a song could be a number one hit on radio, or even number one on iTunes downloads, and yet have royalties legally withheld from any streaming service (Spotify, Rhapsody, etc.) which licenses their content through the practice of compulsory licenses, until the copyright and owner information has been registered in some manner in the Copyright Office.

This should be pretty good motivation for copyright owners to register, in some manner, their copyright and information in a timely manner, at least after the song has been released in some commercial manner, making it eligible for compulsory licenses.

I would love to hear any thoughts and comments from others in the industry about this practice.

John Barker
ClearBox Rights, LLC

“Education is learning what you didn’t even know you didn’t know.” – Daniel Boorstin

© 2013 John Barker. All rights reserved. Information contained in this Blog is of a general nature and should not be considered or relied on as legal advice. Any reader of this Blog who has legal matters related to information addressed in this Blog should consult with an experienced attorney. This Blog contains no warranties or representations that the information contained in it is true or accurate in all respects or that it is the most current or complete information on the subject matter covered. John Barker is President and CEO of ClearBox Rights, LLC.

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Is Copyright Registration Necessary? – (Part 2)

In Part 1, we answered the question, “Is copyright registration necessary for copyright protection”? The answer is a simple “no”. Copyright protection exists as soon as the song is put into any tangible form. However, there are advantages to registering your copyrights when it comes to defending your work, which I’ll address in this Part 2.

Before I dive into that, I want to clarify something. The act of “registering a copyright” (on Form PA) is different from “recording a document” related to a copyright. The former is used to register the actual copyright, showing the authors and then current owners. The latter is simply to put in public record a document related to the copyright, which can be a transfer of ownership of the copyright, an assignment, a termination of transfer, or other types of actions. A chain of title in a copyright is found through a string of recorded documents, and not through the registration of the copyright. In other words, each time a copyright is assigned or sold, a new document may be recorded to substantiate the action. But under normal situations, a Registration of Copyright is necessary only one time, which is what we’re talking about here.

Now, on to the advantages of registering a copyright, in which I believe there are two primary areas. The first is the act of making the copyright available in public searches. While the copyright office may not be the most commonly used site people use to search for copyrights, it is arguably the safest for accurate information and the most recognized. So to make a public record of a copyright, and provide a way for others to find the copyright and the owner’s information, you may want to register it. But the real advantages to registering a copyright are in cases where you need to defend the copyright against any kind of misuse or infringement, which is the second primary area that I’ll break that down into three parts.

First, a registration becomes what is called “prima facie evidence”, which means evidence that is legally sufficient to establish a case or fact. In the Copyright Act, Section 410(c) reads, “In any judicial proceedings, the certificate of a registration made before or within five years after first publication of the work shall constitute prima facie evidence of the validity of the copyright and of the facts stated in the certificate.” Other techniques in verifying your copyright, such as mailing it to yourself, or keeping recorded copies with dates, or other means of collecting witnesses to the fact that this was your copyright as of a certain date, can still be fine methods of eventually proving the facts. However, none may be as effective, or at least as easily proven and acceptable in the courts, as “prima facie evidence”.

Second, in the event your copyright is infringed, you cannot take the case to court until the copyright has been registered [Section 411(a)]. If you are aware of an infringement, you may immediately register the copyright. The valid date of registration will be the date stamped by the Copyright Office that your registration was received, not when the document was finally processed, which could be months later, (as long as the registration was ultimately acceptable by the Copyright Office).

Third, if you prevail in the infringement case, you are eligible, in most cases, to be awarded statutory damages and costs and attorney’s fees only if the song has been registered, and only for the infringements which took place after the effective date of registration, unless you happened to register the song within 3 months of the first publication [Section 412]. (By the way, statutory damages can be as high as $150,000.00 per infringement for “willful” infringements).

So there are advantages to registering the copyright in the U.S. Copyright Office. Are those advantages worthy of spending $35.00 – $65.00 per registration for all songs? That answer is dependent on your frame of mind and approach to these kinds of legal issues. I would say it is not a great danger to not register all your copyrights, but there is certainly a level of risk associated. I do know that most publishers and successful songwriters only register their copyrights once they are published, if at all. And if your initial decision is to not register the copyright, it can always be done at a later date. You just might miss some damages and awards for wrongful uses prior to that registration, but how likely is it that something like this might occur with your songs? Much like buying insurance, you should weigh the cost of security with the likelihood of an unpleasant event occurring. But now, at least you should be making a more intelligent choice based on your better understanding of the complex copyright law, and the risks and benefits associated with registering your copyrights or not.

Are there other advantages to copyright registrations? There are, related to what is called “compulsory licensed uses” and collecting certain royalties, which we’ll address in Part 3 next week.

John Barker
ClearBox Rights, LLC

“If you steal from one author, it’s plagiarism; if you steal from many, it’s research.” – Wilson Mizner, US playwright, author (1876-1933)

© 2012 John Barker. All rights reserved. Information contained in this Blog is of a general nature and should not be considered or relied on as legal advice. Any reader of this Blog who has legal matters related to information addressed in this Blog should consult with an experienced attorney. This Blog contains no warranties or representations that the information contained in it is true or accurate in all respects or that it is the most current or complete information on the subject matter covered. John Barker is President and CEO of ClearBox Rights, LLC.

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Is Copyright Registration Necessary? (Part 1)

I hear this question all the time. A songwriter asks, “Do I need to register my song to get copyright protection?”, and then another writer will give their misinformed opinion. Here is my answer, in simple, black and white:

Registering a copyright with the U.S. Copyright Office does not provide federal copyright protection to the song.

That is not my opinion. That is a fact. Unfortunately, it is a fact that most songwriters, and many publishers, don’t get. There is a difference between “securing copyright protection” and “registering the copyright” of a song. These are two distinct events.

Before the Copyright Act of 1976, a song obtained federal statutory copyright protection only after the song was both published and had a notice of copyright affixed to it. (If no notice was affixed to the song which was “published” prior to January 1, 1978, then there was no copyright protection, and the song was considered public domain). However, the Copyright Act of 1976 changed that by stating that federal statutory copyright protection is obtained as soon as a song is fixed in any “tangible medium of expression”. [Section 102(a)]. No publishing of the work is necessary; no accompanying copyright notice is necessary; and no registration of the copyright is necessary. This means that your song is fully protected by federal copyright law the moment you write it on a napkin, record it on your smart phone, or any other means in which you put it into a tangible form. Period. That’s all it takes.

With this copyright protection, the owner now has the full and exclusive rights to reproduce the song, prepare derivative works, distribute, display, or publicly perform the song, and to give (or deny) permission to others to do any of those activities. (This includes the ability to prevent anyone from using the song under a compulsory license, which we’ll get to later).

So what does the act of registering a copyright in the U.S. Copyright Office provide? For one, it creates a public record that you claim you wrote this song as of a certain date. But the $35.00 to $65.00 filing fee per registration (depending on whether you file electronically or by paper), can be expensive, especially for developing writers who may write multiple songs per week with less likelihood of earning royalties. Remember, the song already has full copyright protection. The goal is to generate proof that this is your original work as of the date it was created without having to pay the prohibitive registration fees.

If you affix the song in some tangible medium and then put it away on a shelf somewhere for fear that someone might steal all or parts of it, then you may have a tougher time in proving that the song was created by you and actually existed as of the date that you wrote it. You want to do certain things to stack the odds in your favor that you can successfully prove it is yours. Rather than hide the song, you should make it known. The more people you play it for, the more people you create as “witnesses” to the fact that this is your song. Some people suggest mailing the song to yourself and receiving a postmark showing the date on the unopened package. That’s fine. Some will perform it and record it with a date stamp. Also good. Some may store it on a computer or in an on-line storage locker with a date. Any way you can show that the song existed, written by you, with a date attached, will provide a certain level of proof that you are the copyright owner.

As we’ve gone over, the act of registering has nothing to do with copyright protection. In fact, in Section 408(a), the law clearly states, “Such registration is not a condition of copyright protection.” So to answer the first question, “Is copyright registration necessary for copyright protection”? The answer is a simple “no”.

The act of registering the song also does not prevent the unlawful activity of copying or infringing on the song. So why would anyone need to register the copyright with the copyright office? Well, the registration does provide the copyright owner with certain abilities and advantages in defending the copyright, and also in receiving certain royalties, which are both important. We’ll cover those advantages in Part 2 next week.

John Barker
Clearbox Rights

“Get your facts first, then you can distort them as you please.” – Samuel Clemens

© 2012 John Barker. All rights reserved. Information contained in this Blog is of a general nature and should not be considered or relied on as legal advice. Any reader of this Blog who has legal matters related to information addressed in this Blog should consult with an experienced attorney. This Blog contains no warranties or representations that the information contained in it is true or accurate in all respects or that it is the most current or complete information on the subject matter covered. John Barker is President and CEO of ClearBox Rights, LLC.

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Intangible is not Insignificant

This is one of my pet peeves.

Someone will contact us about using a song we represent, and they will want to use it for free. The reason? They are making copies to give away as a promotion. We’re told the artist has agreed, and if we all give a gratis license for this marketing use, it should promote more products to be sold in the future, in which we can all enjoy our share.

The music industry has generally accepted this practice as reasonable. Perhaps the promotion is giving away 5,000 units in order to “prime” the marketplace. Maybe it is to package the music at no additional cost with some other product that is popular in order to be introduced to a new market. Perhaps it is to be used as a loss leader to entice the buyer into a purchase, a “buy one, get one free” campaign. Or even as a fund raiser for a good cause.

All good marketing, right? But here’s my rub.

Marketing is an expense. It is standard practice to pay for an advertisement, or a sponsorship, or any other type of brand awareness, including promotional trinkets and merchandise. There’s a budget for that. In the physical recording product world, that budget pays for things like mastering, duplication, the cost of plastic CDs, the paper packaging and inserts, printing, and shipping costs. All the tangible parts have a price tag. And no one asks for those parts to be given for free.

But what is the real value in the product being given away? Are people enticed because they want something tangible like a shiny plastic disc, or cool packaging? Or is their interest in the intangible part; a new song or a new recording?

When asked to license something for free…whatever the reason…my first question is normally whether or not the CD manufacturer, the print company, or the other participants have agreed to give their parts for free as well. If the argument that giving some away now will encourage greater sales in the future, wouldn’t that apply to all parts, including the plastic and paper?

I know where the real value is. It is in the unique creation we call a “song”, and the performance we call a “recording”; the intangible parts. We should treat those with greater respect and consideration. All of the other elements exist primarily for presentation and delivery.

Don’t be so quick to give the real value for free.

John Barker

“If you undervalue yourself, no-one’s going to come along and raise your price.” – David Williams

© 2012 John Barker. All rights reserved. Information contained in this Blog is of a general nature and should not be considered or relied on as legal advice. Any reader of this Blog who has legal matters related to information addressed in this Blog should consult with an experienced attorney. This Blog contains no warranties or representations that the information contained in it is true or accurate in all respects or that it is the most current or complete information on the subject matter covered. John Barker is President and CEO of ClearBox Rights, LLC.

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Simple Complexity – Music Licensing in the Digital Age

(This is an unedited version of an article published in MusicRow Magazine “Digital Toolbox” Issue, Dec. 2012)

The complexity of music licensing for new formats is nothing new. Do you remember a number of years ago when the courts got the recorded music license rates wrong before Congress stepped in and corrected things? But wait… I’m not talking about the beginning of this millennium. I’m talking about a century earlier; in the early 1900s. Remember that one?

The year was 1909, and a newly published song was “By the Light of the Silvery Moon”, by Gus Edwards and Edward Madden. The popular song was available in sheet music, player piano rolls, phonograph cylinders, and the newly introduced gramophone discs. While Mr. Edwards and Mr. Madden were able to license and collect royalties for their song in print music, they almost missed out on royalties for the other uses. The year before, in February 1908, the Supreme Court ruled that manufacturers of player piano rolls did not have to pay royalties to composers (White-Smith Music v. Apollo Company). The reason? The court ruled that piano rolls were not copies of the song, but instead parts of the machine that reproduced the song. The primary issue was whether or not something was recognizable to an ordinary human being to be a copy of a song. And of course, it would be next to impossible for anyone to simply look at a cylinder punched with holes and recognize music. Further, this same argument could be applied to phonograph cylinders and gramophone discs which were filled with grooves. In 1908, the future record industry had been set up by the Supreme Court to operate royalty free!

Fortunately for songwriters, along came Congress with the Copyright Act of 1909. The Act specifically identified player piano rolls as a “copy” of a song, and introduced a “compulsory license” for what they termed a “mechanical” use, named so because the piano roll was indeed a mechanical machine component to play music. The term and license also applied to the phonorecord cylinders and discs. And the amount of this new license was set at two cents per song, per copy. These royalties were normally paid twice a year, at six-month intervals, due to the laborious task of manual accounting.

The number of opportunities for songwriters was growing. The publishing license world was simple. And the royalty flow was slow.

Over the next 69 years, the music industry saw lots of changes. Phonorecord singles and albums became the format, and stereo sound was introduced. Radio became the popular means to discover new music, and ASCAP, BMI and SESAC (Performing Rights Organizations, or “PROs”) were formed to monitor performance royalties. Television and motion pictures began broadcasting lots of music. Popular artists were selling millions of copies of recorded product. The recording music industry had increased exponentially,… and the mechanical rate for songs remained at two cents.

In 1978, the compulsory license rate increased to $.0275 (although it has since increased to today’s rate of $.091). In the 80s and 90s, new formats, including compact discs were introduced, and the music industry kept on growing. At that time, there were five primary categories of licenses for music; mechanical (recorded), print, synchronization (visual and audio combined), performance, and other, (such as dramatic and grand rights). The royalties were still normally paid twice a year, at six month intervals.

There were now even more opportunities for songwriters. An increasing number of songwriters made more money. The simple world of licensing had become more complex. And the royalty flow was still slow.

Then came digital.

According to IFPI (International Federation of the Phonographic Industry), in 2004, there were approximately 1 million digital tracks available by licensed providers, and the digital music trade revenue was $420 million. In 2011, there were close to 20 million tracks available, with trade revenue of $5.2 billion. According to RIAA, in 2000, the music industry was 100% physical product. In 2011, it was about 50% digital. With this rapid growth in digital formats came the added complexities of new licenses for songwriters.

In an attempt to somewhat simplify the multifaceted digital landscape, I will break down the classifications of digital uses to seven categories. Each of the digital music providers known today fall under one or more of these groups.

(1) Permanent Digital Downloads (PDDs)

(2) Limited Downloads (subscription, limited time/plays)

(3) Interactive Streaming (on-demand streams)

(4) Digital Performance (non-interactive streaming)

(5) Ringtones

(6) Digital Print Music / Lyrics

(7) Digital Video

A good example of PDDs would be iTunes. We purchase the song and permanently download it to our devices for future, unlimited, private use. Other digital providers in this category include eMusic, Amazon, Microsoft’s newly introduced Xbox Music, and Rhapsody (until they recently announced they were dropping song download sales). The license rate for songs in PDD’s is the same mechanical rate as for physical product, which is $.091 per song, per copy.

Limited Downloads and Interactive Streaming include subscription models, such as Spotify, Xbox Music, and the new Rhapsody, where the user can access their songs as long as their subscription is active, or they can control the streaming. There are very complex license rates which apply to these uses, which we’ll look at a little later. Digital Performance, which is for the most part not controllable by the user, would include Pandora, XM/Sirrius Radio, iHeartRadio, and other internet radio stations. These entities pay artist and record label royalties to SoundExchange, and the publishers and songwriter royalties to ASCAP, BMI or SESAC. SoundExchange then distributes those royalties almost evenly between the labels and artists for the recorded rights, and the PROs distribute the song royalties to publishers and writers.

Ringtones are licensed at a recently agreed rate of $.24, and Digital Print Music/Lyric reproductions are normally based on a percent of the actual price of the digital print use. Digital Video, which includes YouTube, is licensed using an intricate formula based on advertising revenue.

In early 2009, the Copyright Royalty Board (CRB) published an agreement between music industry trade associations for record labels, music publishers and songwriters, and digital music providers, to define five offering types of Interactive Streaming and Limited Downloads, and to set license rates for each. Those types were 1) Standalone non-portable subscription streaming, 2) standalone non-portable subscriptions for mixed uses, 3) standalone portable subscriptions for mixed uses, 4) bundled subscriptions services, and 5) Free non-subscription ad-supported services. Each of the uses have a distinct formula which starts with the greater of 10.5% of the service’s applicable revenue, or a service type minimum, which includes a penny rate for each monthly subscriber and varying percentages of the service royalty. This is all less performance royalties paid to the PROs, and then measured against a royalty pool floor based on the number of monthly subscribers.

Easy enough, right? Well, maybe not. In fact, most of the digital providers ended up hiring a third party company to license, calculate and distribute these royalties to the publishers. Three of the primary third party companies, or “license agents”, are The Harry Fox Agency, Music Reports, Inc (MRI), and RightsFlow, which was acquired by Google about a year ago.

Bet let’s add to the complexity. This year, the same group that defined the 2009 rates added five more mechanical use categories, with their own defined rates, which should be published soon by the CRB and effective beginning 2013. Those are 1) Mixed Service Bundle (if your cell phone service subscription includes a music service), 2) Paid Locker (a subscription locker service, like what iTunes offers), 3) Purchased Content Lockers (a locker, possibly free, made available for purchased downloads or physical product), 4) Limited Offering (a subscription service offering limited streams or downloads for select sets of recording), and 5) Music Bundles (when multiple physical or digital records, or ringtones, are bundled as one transaction). These rates are based on a percentage of revenue (such as 17.36% for some formats), varying on label content and whether the costs are direct or pass through, less performance royalties.

Now, let me first say that I applaud those who were involved in the negotiation of these sophisticated rates. It had to be done, it needed to be comprehensive, it needed to be agreed to by all parties, and timing was critical. And I believe publishers and songwriters were well represented. Well done!

But… the U.S. music royalty structure is beginning to look dangerously similar to the U.S. tax system, which has been called an “extraordinarily complex mess.” I’m beginning to reminisce about the simple two cent rate for a player piano roll. Or at least the $.091 for a simple physical record or an “old fashioned” permanent digital download. (Did I really just use “old fashioned” with PDD?). Not only are the rates next to impossible to understand, the license and royalty flow is becoming a tangled network. I made a diagram using all the players in the digital music license space, from the service providers, the product owners, the license agents, the collection entities, down to the publishers and writers. (This does not include the label and artist royalties paid through SoundExchange). After I painstakingly attempted to connect the flow of licenses and royalties to each appropriate entity, (not counting the ten newly defined mechanical uses), and realizing that there are easily over 60,000 publishers and hundreds of thousands of writers, I stepped back and realized why our license space is in such disarray; and this is just the digital part. (See diagram below).

Current Digital License Space for Publishing

ImageWe can do better. Einstein said, “Out of complexity, find simplicity”. As an industry, we’ve successfully set up the first part (complexity). Now let’s find that second step. Maybe we need to change it up a little. Maybe we need to challenge our current perspective a bit.

The complexity of licensing is definitely a problem area. There is no centralized database of songs. There have been, and continue to be endeavors at setting this up. But unfortunately, the attempts almost always include a large number of players with different agendas. And trying to satisfy everyone dilutes the efforts and ultimately fails, which is what we’ve seen so far. Who will step up with a simple solution?

Another problem area is the proper value of a song, and how that compares to the value of a recording. Publishers want increased fees from Pandora, while Pandora is suing ASCAP and lobbying SoundExchange to pay less. Publishers are arguing that the digital performance royalties paid to labels and artists through SoundExchange are greater than the royalties publishers receive for those same performances. (Pandora’s 2012 annual report shows it paid 49.7% of its revenue to SoundExchange for artist and label royalties, while 4.1% went to PROs for writers and publishers). Publishers and songwriters normally receive a lesser percentage of revenue for any format of downloads than the labels and artists, yet in the world of film & television licensing, most standard licenses for the publishers and masters are of equal value. What is the correct balance?

The timing, efficiency and transparency of the licenses and royalty flow are slow, inaccurate, and a bit foggy. Many companies continue to pay royalties twice a year, a six month intervals, although our advanced computer systems have taken the place of pen and paper ledger entries which existed when this payment structure was initially set up. In a digital age where we have the full data of a sale almost immediately, and digital providers who can easily pay at least on a monthly basis, there are publishers who prefer not to receive the royalties monthly, as it is more difficult for them to process. (Kudos to SESAC who recently announced monthly accounting for some of its members).

One monitoring service stated that they believe 80% of music played on commercial television is unreported or misreported, yet we can use our smart phones to identify the song we’re hearing while sitting in a restaurant. Some digital royalties continue to be paid to publishers without specific songs identified. And I have personally experienced negotiations with a significant digital user who refuses to allow standard audit rights for publishers. Where is the efficiency and transparency we are capable of? I just wonder how long any of us would stay with a bank which concealed this fundamental data. .

We can do better. We should demand better. We allow ourselves to be seduced into accepting lesser accomplishments because they are new and unproven, when we should instead be insisting and delivering on superior achievements which closer match the technology capabilities we possess.

I’m an optimist. I’d rather be optimistic and wrong, than pessimistic and right. (At least the journey would be more enjoyable). And I believe this is an exciting, dawning of a new age in the music industry. More music is available to more listeners, on more devise in more places, than ever before. Is today a better day for a songwriter than any decade before? Absolutely!

So who’s going to figure this out? How can we define the simplicity? Who’s going to win? Einstein also said, “The significant problems we face cannot be solved by the same level of thinking that created them”. So the answer may not be more steps in the same direction. Maybe the answer will be found by looking back at history; or maybe it will be sparked by some small startup company with a new approach; or maybe the answer will be illuminated like it was in 1909, “By the Light of the Silvery Moon.”

John Barker

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