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IAEL: Digital Licensing Hot Issues - midem exclusive white paper


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Digital exploitation has evolved significantly as cloud-based services and new business models emerge. As the digital market diversifies and matures, and as digital initiatives become a means to legitimize markets that previously were virtually unmonetizable, digital licensing models become increasingly important.

As a result, new digital licensing issues continue to arise on a frequent basis.

Here are some key digital licensing issues that bear watching in 2012, and beyond:

- Cloud/Locker services
- Subscription services
- Collective licensing
- Digital radio/Turntable FM
- Previously unmonetized markets

This exclusive white paper was written by Jeff Liebenson, Principal of Liebenson Law in New York City and President of the International Association of Entertainment Lawyers (the IAEL). The IAEL will discuss the above issues at several of its sessions at Midem, January 28-31, 2012.

The schedule of the IAEL’s sessions at midem can be found here:

IAEL: Digital Licensing Hot Issues - midem exclusive white paper

  1. 1. Digital Licensing: Hot Issues Jeff Liebenson, Principal, Liebenson Law ( (USA) )
  2. 2. Table of Contents1. Introduction oduc o2. Cloud/Locker services3. Subscription services4. Collective licensing5. Digital radio/Turntable FM6. Previously unmonetized markets7. Conclusion
  3. 3. 1.1 IntroductionDigital exploitation has evolved significantly as cloud-based services and newbusiness models emerge. As the digital market diversifies and matures, and asdigital initiatives become a means to legitimize markets that previously werevirtually unmonetizable, digital licensing models become increasingly important.As a result, new digital licensing issues continue to arise on a frequent basis.Here are some key digital licensing issues that bear watching in 2012, andbeyond:b d
  4. 4. 2.2 Cloud/Locker servicesThe licensing of locker services takes place with a backdrop of unresolved legalissues regarding how music is copied on the server in the cloud, the source ofthe music, and the manner in which that music is accessed by the consumer.When a consumer copies his or her own music into a cloud-based locker, theyarguably may have a fair use defense in the US (although there is no clear court g y y ( gruling to this effect), and the source of their files may be a factor in determiningthis. However, there is no fair use in Europe, and where fair dealing exists it canbe more narrow in its effect. Also, there is no private copying right in the UK. Sothis creates issues for the international launching of cloud services. (Apple’s g ( ppiTunes Match service just recently launched in several countries outside of theUS.)The recent ruling regarding MP3Tunes stated that that service was not ineligiblefor the DMCA safe harbor to insulate it from liability in the US (although it had notproperly followed procedures to do so). That ruling is under appeal, and thesituation may differ in other markets.
  5. 5. In a market where an individual may “space shift” a legally obtained file from one personaldevice to another, that still may be treated differently than a company that provides acommercial service that permits the widespread shifting of legal and unauthorized files.Also, if fair use or a similar defense does not apply in a market, then all tracks uploaded toa locker may constitute infringements. This may create the type of “red flag knowledge”which invalidates a service’s opportunity to operate in the safe harbor.Uploading and copying music to the cloud involves a reproduction by the consumer, but theperformance or communication to the public right is implicated when the consumeraccesses the music from the cloud. Various locker services operate differently. Amazon’s t e us c o t e c oud a ous oc e se ces ope ate d e e t y a o sand Google’s services require each consumer to upload a distinct copy (even though otherconsumers may have uploaded their own copies of the same tracks). That strengthens theargument that fair use may apply in the US to those uploads.Moreover, if a consumer streams from his or her own file rather than from the service’smaster copy in the cloud, then that file is streamed by the service to only one consumer, notto the general public. That would not be a public performance or a communication to thepublic.public This could avoid the need for the service to license the public performance (orcommunication to the public) right and avoid royalty payments, but it would betechnologically highly inefficient.
  6. 6. Although Amazon initially maintained that no digital licensing was required for its lockerservice and it launched without them, Apple chose to obtain digital licenses and Googleeventually did so as well (other than with Warner).They did so in part to gain certainty regarding the unresolved legal issues. Apple alsoavoided requiring its consumers to upload their own copies of tracks by licensing the rightsto “scan and match” each consumer’s music library to the copies already on Apple’sservers and to permit them to upgrade to Apple’s high quality copies of those tracks.
  7. 7. 3.3 Subscription servicesThe download market shows signs of maturing and the music industry needs todevelop new sources of digital revenue. Access-based subscription models seempoised to be the main opportunity to do this, as well as being a potential means todirect users away from piracy. So subscription services are vitally important to thefuture of the industry, and the ability of labels and artists to be paid for their works.SubscriptionS b i ti services h i have offered th b t value proposition f some ti ff d the best l iti for time, b t butthey have been under-marketed, poorly understood, and faced a number of otherproblems. Now with the advent of Spotify and other freemium and low costservices, subscriptions are generating lots of buzz and surging subscribernumbers. bPublishing rates and other licensing issues still remain a challenge to theirinternational expansion. When the Copyright Royalty Board in the US followedyears of proceedings with it 2008 ruling, it settled th publishing rates f on- f di ith its li ttl d the bli hi t fordemand streaming on subscription services (as well as for certain other digitaluses). This removed great uncertainty for the digital licensing of subscriptionservices in the US.
  8. 8. Key issues remain regarding obtaining licensing with respect to publishing splitsand from unknown publishers. The absence of a central registry of publishingrightsholders continues to ffrustrate digital services wishing to obtain thenecessary licenses. RightsFlow was a prominent company assisting distributorsin this area, but its recent acquisition by Google may take it out of themarketplace.Meanwhile, in Europe the international licensing situation in some ways may beeven more difficult. GEMA still has not licensed Spotify so it is not available inGermany. Spotify just launched in its Nordic neighbor, Denmark, this pastOctober, hi h indicates the h llO t b which i di t th challenges of meeting th necessary li f ti the licensing and i drights issues to launch in multiple countries.The industry is attempting to navigate a transition, while encouraging subscriptionservices t b i to become an i important f t t t feature of th f t f the future di it l marketplace. digital k t lBusiness models are changing and royalties on a per stream basis are lower thanfor downloads.
  9. 9. Recently Coldplay, The Black Keys and others have pulled their repertoire fromSpotify due to the low royalty payments they receive, and the concern that theservice may cannibalize other more lucrative digital opportunities. The currentroyalty amounts for these services are low because, among other things,subscriber levels are just beginning to build, and new subscribers are justbeginning to be encouraged to upgrade to the enhanced premium paid service. Inthe US,th US a six month h i th honeymoon period expires l t thi week when S tif ’ f i d i later this k h Spotify’s freesubscribers will start experiencing usage restrictions. The unlimited Spotifyexperience will begin to shift towards limitations, until free users are required todecide whether to pay in order to maintain the same type of experience. If andwhen paid subscribers i h id b ib increase, so t will royalty payments. too ill lt tSo while some artists focus on protecting their short-term revenue opportunities,the industry has a long-term strategic need for these subscription services todevelop i t significant revenue generators i th f td l into i ifi t t in the future.
  10. 10. 4.4 Collective licensingThe EC has been in a complex dance with the European collective rights societiesto encourage more streamlined European-wide licensing. Those efforts have ffresulted only in increasingly complex licensing requirements.Before the EC efforts, rights needed to be licensed from the society in eachEuropean market. Urging th societies t engage i cross-border liE k t U i the i ti to in b d licensing h i hasresulted in the major publishers taking greater control of their rights, withdrawingthe digital rights for their Anglo-American repertoire from the European societies,and creating their own new entities from which those rights must be licensed.This has l furtherThi h only f th complicated th li li t d the licensing requirements f E i i t for European di it l digitalservices. The EC recently announced that it is planning to publish draft legislativeproposals early this year for new rules for the cross-border licensing of digitalmusic.While this situation continues, a similar development occurred this past year in theUS when EMI withdrew the digital performance rights for its April Music catalogfrom ASCAP so it could exercise those rights through direct licenses. Thiscreated greater control for EMI and the opportunity to require advances, but it t d t t lf d th t it t i d b tfurther complicates an already complex digital licensing environment.
  11. 11. 5.5 Digital radio/Turntable FMPandora has become the leading US digital radio company (and it has had asignificant public offering) because it benefits f f ff ) f from the compulsory licensingprovisions under the DMCA provisions of US copyright law. This avoids the needfor it to engage in any direct licenses with the record labels. Pandora’sprominence and intense lobbying also enabled it to negotiate a reduction in thelicense rate f it t for its iIt has been hard to replicate these advantages so far in Europe, so Pandoraremains a US-only service despite its need for growth.The US compulsory license has been a haven for many services which wish toavoid the time and expense of obtaining digital licenses from the industry.Meanwhile, while iM hil hil innovative services and b i ti i d business models continue t d d l ti to develop, lthey strain the limits of what is permitted by the compulsory licensing scheme. Towhat extent can these new services take advantage of the compulsory license?TheTh US l law it i itemizes a number of objective f t b f bj ti factors which must b met t merit th hi h t be t to it thecompulsory license. Their overall intent is to limit the compulsory license to non-interactive streams, and to require direct licenses to be negotiated for interactivestreaming.
  12. 12. launched this year to great public interest, but some of its featuresraise issues about whether it is entitled, as it hoped, to avail itself of thecompulsory license and its rates.These issues arise when the technology and functions of the serviceare carefully analyzed in light of the statutory standards for the compulsorylicense. Users who listen to hear streams of music programmed byDJs, like in a DMCA-compliant radio service that qualifies for compulsory , p q p ylicensing. But the service also permits its users to become the DJs who select themusic that will be streamed.Even if the service is non-interactive as viewed from the perspective of the users p pwho merely listen to the DJs’ selections, do the DJs who pick the songs that arestreamed operate within the terms of the compulsory license? If the DJs’selection and listening to tracks is interactive, then that would require the serviceto obtain direct licenses (and probably to pay advances). ( p y p y )The Launch Media case addressed whether a service was interactive by focusingon whether it permits “a degree of predictability—based on choices made by theuser—that approximates the predictability the music listener seeks when pp p ypurchasing music.” The service in that case was held to be non-interactive.However, differs in many respects from that situation in which theusers could not select specific songs to be streamed, as do the DJs
  13. 13. There are a number of other possible issues to consider including whether thetracks that users upload are properly obtained, since the DMCA provides that thecompulsory license applies only if the tracks are “lawfully made.” If the users’tracks are not “lawfully made,” would have a safe harbor defense?The Pandora and situations illustrate that services would like toavoid licensing, but not all will be able to do so. As more innovative services aredeveloped, whether licenses are required or not may become increasinglyimportant.
  14. 14. 6.6 Previously unmonetized marketsChina has long been a tantalizing, but frustrating, market. Recognizing itschallenges of widespread piracy and the difficulty of enforcing IP rights, the f ff f findustry has been extremely flexible in structuring a model specifically designedfor this market.Baidu (basically, the Google of ChiB id (b i ll th G l f China with approximately 80% of th search ith i t l f the hmarket) has been providing its users with deep linking to pirate content, while thewidespread consumer perception has developed that music is meant to be freelyavailable. Pressure was applied by the major labels through lawsuits againstBaidu. Then breakthrough commitment was made thB id Th a b kth h it t d through th US Chi J i t h the US–China JointCommission on Commerce and Trade that China’s judiciary would pursue the in-depth study of internet intermediary liability. These events combined to lead Baiduto enter into an innovative deal with the major labels this past summer underwhich th l b l di i hi h the labels dismissed th i l d their lawsuits, and B id agreed t li it d Baidu d to license th l b l ’ the labels’rights from One-Stop China--a joint venture of Universal, Warner and Sony--toprovide free licensed music. Baidu will pay the labels per performance and perdownload, and they will exploit the music in a new social music service, Ting!It is hoped that this may be the approach that will develop a legitimate market inChina. As technology spreads around the world, this type of open-mindedapproach may enable other markets to be developed as well.
  15. 15. 7.7 ConclusionThe nature and scope of digital licensing issues varies by market, and it takesplace in the context of business and governmental developments. How thesedigital licencing issues develop and are resolved will impact on the f future shapeof the digital marketplace.And as that digital marketplace continues to evolve, new digital licensing issuesare sure t arise. to i
  16. 16. About the authorThis exclusive white paper was written by Jeff Liebenson, Principal ofLiebenson Law in New York City and President of the InternationalAssociation of Entertainment Lawyers (the IAEL). The IAEL willdiscuss the above issues at several of its sessions at Midem Midem,January 28-31, 2012.The schedule of the IAEL’s sessions at midem can be found here: report is brought to you by midemmidem is the place where music makers, cutting-edge technologies, Contact us: info.midem@reedmidem.combrands & talent come together to enrich the passionate relationship Visit midem’s website - www.midem.combetween people & music, transform audience engagement & formnew business connections. Follow usmidem takes place every 3rd week of January and brings together6,8506 850 professionals f f i l from 77 countries. ti Download midem iPhone App THIS REPORT ON AND TWITTER 16