Copyright Office Offers A Sketch of the Future of Music Licensing

245-page report takes no action, but suggests important changes to the music licensing process

Almost one year after launching a far-reaching inquiry into the "effectiveness of existing methods of licensing music", the Copyright Office (CO) has released the 245-page report setting out its conclusions. Titled "Copyright and the Music Marketplace", it doesn't actually change anything - but it sets out a wide range of observations and recommendations that could resonate for years in Congress and elsewhere, possibly leading to major changes throughout the music licensing universe.

I wrote about the CO's initial two Notices of Inquiry last March and July. They posed 24 questions across eight different subjects relating to music licensing. The CO also held public roundtables in Nashville, Los Angeles and New York. It is therefore not surprising that the CO's report is comprehensive. And here's a surprise: Despite my earlier prediction that the CO's eventual conclusions would likely be unfavorable for broadcasters, as it turns out several recommendations actually favor users of copyrighted music, including broadcasters. And to the extent that the CO is looking to a possible overhaul of pretty much all aspects of the licensing process, all participants in that process could end up benefiting from a less fragmented, more consistent system.

But the report clearly urges Congress to move legislation that would create a performance right applicable to over-the-air broadcasting (though not exclusively), so one side of the industry is still likely to benefit more.

Before delving into some of the details, we should probably note some general principles identified in the report. According to the CO, the study revealed broad consensus on four key principles:

• Music creators should be fairly compensated for their contributions.
• The licensing process should be more efficient.
• Market participants should have access to authoritative data to identify and license sound recordings and musical works.
• Usage and payment information should be transparent and accessible to rights owners.

Several additional principles also bubbled up:

• Government licensing processes should aspire to treat like uses of music alike.
• Government supervision should enable voluntary transactions while still supporting collective solutions.
• Ratesetting and enforcement of antitrust laws should be separately managed and addressed.
• A single, market"oriented ratesetting standard should apply to all music uses under statutory licenses.

As a responsible blogger, I urge you to read the report for yourself, but who am I kidding? It's 245 pages long, for crying out loud. So go ahead and do what you were probably planning to do: read the Executive Summary. That should give you a solid overview of everything the CO is proposing.

Also, be sure to read the section titled "Music Licensing Landscape". Sure, it's 50 pages long, and it doesn't include any CO recommendations. But it does provide an excellent summary of important copyright licensing concepts. For instance, do you know what a PRO is? (Spoiler alert: it's a "performance rights organization" - think ASCAP, BMI, SESAC.) How about the difference between a "musical work" and a "sound recording", and who gets paid when I want to use one or both of them? What's the difference between the "mechanical reproduction right", the "synchronization right" and the "performance right", and who do I talk to to obtain any of these?

But before you delve too deeply in the report, read the rest of this post (Our motto: We read it so you don't have to.) to get oriented about the high points as far as broadcasters go. I'll break those high points down into "The Good", "The Bad", and "Other Stuff You Should Probably Know About".

The Good

Somewhat to my pleasant surprise, there are many aspects of the CO report that broadcasters (and others who use copyrighted music) should welcome. These include:

Bundling licensing of mechanical and performance rights: The "mechanical right" is the right to reproduce a musical work or sound recording. The "performance right" is the right to ultimately broadcast or stream that musical work or sound recording to the public. On the sound recording side, these tend to be "bundled": when a broadcaster negotiates for the right to reproduce a sound recording, the right to perform the same sound recording is part of the negotiation. But that's not always the case, and the current set-up makes it very difficult to do that with regard to musical works (as opposed to sound recordings). The CO suggests that the current PROs (ASCAP, BMI and SESAC) be allowed to do more than just license the performance of musical works; they should be allowed to license reproduction as well. This should allow broadcasters and other users of music more flexibility and opportunities, and it should also lead to increased efficiency in the licensing process.

Public Broadcaster Statutory License: Noting that "[p]ublic broadcasters must engage in a multitude of negotiations and ratesetting proceedings in different fora to clear rights for their over-the-air and online activities", the CO suggests that the ratesetting processes for public broadcasters be streamlined under a single, unified structure.

The Bad

But, yes, most of the recommendations will make broadcasters turn up their noses. These include:

Extend the public performance right in sound recordings to terrestrial radio broadcasts: This, of course, is the provision that broadcasters have feared, and fought, for years. Terrestrial broadcasters have never had to pay for a performance right for sound recordings - but that's just what the CO is now recommending. The CO would have these rights administered by SoundExchange, which already has experience administering the public performance right paid by digital services like webcasters and satellite radio.

As the CO sees it, "federal law currently exempts a $17 billion dollar industry from paying those who contribute the sound recordings that are responsible for its success." Further, as the market for music shifts away from actual music ownership, the potential for sales has diminished and the promotional value of radio may be less apparent. The CO stops short of claiming that radio's promotional value is gone entirely. But instead of giving broadcasters a complete exemption, the CO would have that promotional value be included as one factor to be considered under the "willing buyer/willing seller" standard that would be used in setting the royalty rate.

Reconsider Consent Decrees: The CO advocates in favor of the repeal of the Consent Decrees that have governed ASCAP and BMI for decades. While the CO acknowledges that the fate of those Decrees is a subject for the Department of Justice - whose antitrust suit against ASCAP and BMI led to judicial oversight of those two PROs - rather than the CO, the CO weighs in nonetheless: "The Office strongly endorses [DOJ review of the Consent Decrees], and - in light of the significant impact of the decrees in today's performance-driven music market - hopes it will result in a productive reconsideration of the75-year-old decrees."

Allow SoundExchange to terminate noncompliant licensees: Despite all the pressure that SoundExchange puts on webcasters who aren't complying with the statutory license, SoundExchange actually has only limited ability to enforce the statutory license. The CO wants to change that. Such a change would increase the need for webcasters (including webcasting broadcasters) to understand and comply with the statutory license applicable to webcasting. And if a public performance right in sound recordings were to be imposed on terrestrial broadcasters and administered by SoundExchange (see above), then all affected broadcasters would also be subject to SoundExchange's increased enforcement authority - meaning that it would be essential for broadcasters to get their arms around this license immediately.

Other Stuff You Should Probably Know About

The CO report reminds readers that "the problems in the music marketplace need to be evaluated as a whole, rather than as isolated or individual concerns of particular stakeholders." Therefore, other recommendations will have an impact on those already identified. These include:

Fully federalize pre-1972 sound recordings: The CO argues that the Copyright Act should be extended to cover pre-February 15, 1972 sound recordings. Our regular readers should know that there is no federal copyright in these older sound recordings. (Fuzzy on this? Go to our Archives and search for "Flo and Eddie".)

Why isn't this in the "bad" category? Because it's a complex issue. As my posts about the string of Flo and Eddie cases (in which state-based rights for pre-1972 sound recordings have been found) strongly suggest, the imposition of some kind of performance right obligations for these older sound recordings may be inevitable. But as things are now going, such obligations would be state-imposed, and thus would likely vary - rate-wise, process-wise, otherwise - from state-to-state. While many broadcasters obviously don't want to pay royalties for these sound recordings (especially if it involved paying not just for digital transmission but over-the-air as well), if such payments were to be unavoidable, a uniform rate structure under the federal Copyright Act would probably present a preferable method.

Adopt a uniform market-based ratesetting standard for all government rates: The CO wants to eliminate the distinction between the dual ratesetting standards that are used to determine the rates paid for different rights and different services. Currently, Section 801(d) of the Copyright Act is used to set the rates for just about all rights and all services except webcasting rates. Those latter rates are set according to a "willing buyer/willing seller" standard. The CO prefers that standard, or something akin to it which takes into account the "fair market value" of the copyrighted work being licensed.

Consider ratesetting distinction between custom and noncustom radio: The CO notes that, since a 2009 case involving Yahoo's Launchcast service, the statutory license applicable to webcasting treats so-called "custom" webcasters like Launchcast, Pandora and others the same as radio stations. The "custom" services provide individualized programming to individual listeners based on those listeners' individual preferences, while broadcasters simply stream their programming to their entire audience at once. The CO proposes giving the Copyright Royalty Board the ability to effectively create a new classification of non-interactive webcaster that covers custom services.

Creation of MROs: Consistent with the proposal to bundle mechanical and performance rights, the CO suggests restructuring the PROs into various "MROs" (Music Rights Organizations). An MRO would be "any entity representing the musical works of publishers and songwriters with a market share in the mechanical and/or performance market above a certain minimum threshold." That would include not only ASCAP, BMI, SEASC - all of whom already clear performance rights - as well as others that don't, like the Harry Fox Agency (which deals primarily in mechanical rights). While this could consolidate more power in the already-powerful PROs, it also offers the possibility for streamlining the process of clearing multiple rights and the promise of more transparency (as suggested by the CO in the report).

Creation of GMROs: Overseeing those MROs would be a "GMRO" (General Music Rights Organization). The GMRO would be a non-profit entity designated and regulated by the government, essentially the equivalent of SoundExchange (the CO actually suggests the name "SongExchange"). Again, this could help streamline and regulate the process of licensing musical works by coordinating licensing and royalty payments across the various MROs (and the increasingly growing number of independent publishers). But it also might result in a slightly higher royalty rate for use of musical works, as the CO contemplates funding the GMROs via a separate licensing surcharge determined by the Copyright Royalty Board.

Again, this is just the tip of the iceberg. The CO itself warns that its "recommendations should be understood as high-level and preliminary in nature - more of a sketch than a completed picture". But since a number of influential members of Congress have already signaled their intention to act in this area as well, this sketch could quickly develop into a framed work of art.

Check back here for updates.