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- 1. LA / NY / SF / DC / arentfox.com Return of The Digital Music Performance Royalty Apocalypse Paul Fakler SXSW 2017
- 2. Overview of DMS Music Licensing Landscape Recent Key Developments and Future Outlook Statutory Licenses - CRB - Web IV, Phonorecords III, SDARS/PSS III DOJ Consent Decree Review - Selective Withdrawal – Fractional Licensing Pre-72 Sound Recordings 2
- 3. Licensing Landscape for Streaming Services Two Distinct Copyrights History of Sound Recording Copyright 1888 – 1971 1972 – 1995 1995 – 1998 1998 – Present 3
- 4. Licensing Landscape for Streaming Services Rights Needed Public Performance Duplication / Mechanical (Interactive Only) Types of Licenses Available Direct Statutory / Compulsory Collective 4
- 5. Interactive / On-Demand Streaming and Limited Downloads 5 © Mechanical §115 HFA Performance ASCAP/BMI/SESAC Direct? ℗ Duplication Direct Performance Direct
- 6. Non-Interactive / Programmed Streaming 6 © Mechanical Not Needed Performance ASCAP/BMI/SESAC Direct? ℗ Duplication §112 SoundExchange Performance §114 SoundExchange
- 7. Music Royalty Rates for Streaming Services Total Royalty Burden: 55-75% of Gross Revenue Some higher Almost 20 year history of streaming – No streaming service has EVER been profitable on an annual basis What possible reason other than royalty burden? 7
- 8. Music Royalty Rates for Streaming Services Total Royalty Burden: 55-75% of Gross Revenue Sound recording licenses = vast majority of cost Interactive - © = 10.5% of revenue Programmed - © = Less than 5% of revenue 8
- 9. Why Are Sound Recording Rates So Much Higher Than Musical Composition Rates? Public Performance Rates for © Much Older More Stable Over Many Years Rate Court – Antitrust Consent Decree History of PROs and Consent Decrees 9
- 10. Why Are Sound Recording Rates So Much Higher Than Musical Composition Rates? On-Demand Rates Set by Unregulated Direct License Noninteractive ℗ Rates Set by CARP / CRB Different approach / concerns than PRO rate court (but changing) Initially set rates as equivalent – Rejected RIAA argument that ℗>© Web I – Adopted RIAA argument that ℗>© Web II – Interactive direct license benchmarks – Labels enjoy absolute pricing power – market is neither competitive nor rational 10
- 11. Recent Developments in DMS Royalties: Webcasting IV CRB Proceeding New Panel of CRJs Willingness to re-examine first principles First rate decrease ever (though still very high) Stayed with per-performance structure Rejected automatic annual increases Variations among sellers – segmented market / rates? 11
- 12. Recent Developments in DMS Royalties: Webcasting IV CRB Proceeding Relevance to Future Other rate proceedings Phonorecords III SDARS / PSS III Who will use webcasting license? What is future of market if rates stay high? 12
- 13. Recent Developments in DMS Royalties : DOJ Consent Decree Review Publishers’ Answer to Rate Disparity is to Increase Musical Composition Performance Rates Lack of Success Due to Rate Court Oversight 13
- 14. Recent Developments in DMS Royalties : DOJ Consent Decree Review Strategy – Selective Withdrawal Direct licensing – absolute pricing power DMS still needs license from PROs Hoped to use direct licenses as benchmarks in rate court 14
- 15. Recent Developments in DMS Royalties : DOJ Consent Decree Review Legal Challenge – Pandora Rate Court Cases ASCAP – selective withdrawal violates consent decree, therefore ineffective – works still in ASCAP repertory BMI – selective withdrawal violates consent decree, therefore construe withdrawal as total – works out of BMI repertory for ALL licensees After short period of chaos, withdrawing publishers returned 15
- 16. Recent Developments in DMS Royalties : DOJ Consent Decree Review Loss in court led to DOJ consent decree review DOJ agreed to consider, initiated two-year investigation Wish-list of changes requested by publishers DOJ initially seemed willing to allow partial withdrawal but slowly changed position During review, issue of fractional licensing arose Why does fractional licensing matter, and why an issue now? 16
- 17. Recent Developments in DMS Royalties : DOJ Consent Decree Review DOJ Closing Statement – August 4, 2016 Rejected all changes requested by publishers Changes were not in public interest But, clarified fractional licensing issue raised by licensees BMI challenged fractional licensing interpretation in rate court, BMI court rejected DOJ interpretation 17
- 18. Recent Developments in DMS Royalties : DOJ Consent Decree Review Where do we go now? Partial withdrawal appears dead Fractional licensing Appeal What happens if publishers win? Lose? SESAC antitrust cases GMR antitrust cases 18
- 19. Recent Developments in DMS Royalties: Pre-’72 Sound Recordings Pre-’72 Recordings = No Federal Copyright Consequently not covered by statutory license Is there any state law performance right? If so, terrestrial radio has been massively infringing 19
- 20. Recent Developments in DMS Royalties : Pre-’72 Sound Recordings Pre-’72 Recordings = No Federal Copyright Flo & Eddie Litigation RIAA Litigation Tennessee legislation Problem proving which recordings are really pre-’72 How to license? 20
- 21. Apocalypse Now? DMS Market – Going on 20 Years of Chaos If Market Is Ultimately Destroyed Who Benefits? Unlike DMS, record companies and publishers have remained profitable Record Companies Need To Reset Expectations – Streaming revenue is now more than offsetting decreases in sales revenue Unreasonable to expect return to pre-digital revenues, which were anomalous and unsustainable 21
Editor's Notes
- Return Background – from beginning of legal career worked in digital music space - mp3.com, yahoo launchcast, CRB, rate court Disclaimer Ask questions as we go
- Brief overview of mess that is copyright licensing for DMS Why apocalypse – almost 20 years no profitable streaming company – contrast music companies Then certain key developments relating to DMS licensing – CRB, PROs Consent Decrees, Pre-72 sound recordings- I identified as important to watch in 2014
- Two copyrights – Mcomp and SR History of SR copyright First hundred years of recording industry – no federal copyright at all State “common law” copyright – essentially anti-piracy statutes no performance right, radio, bars, restaurants, etc., paid only publishers 1971 – Sound Recording Amendment, SR created on or after Feb 15, 1972 – still no performance right 1995 – Digital Performance Rights in SR Act – added limited performance right – digital and statutory license for non-interactive subscription DMS 1998 – DMCA - expanded 114 license to non-subscription DMS
- Rights needed and types of license available depends upon functionality of service
- On-demand Circle P – phonogram GMR?
- Advent of the “full stack” service blurring licensing distinction between on-demand and non-interactive Once record companies have service under thumb, can effectively deprive ability to use rate court
- Difficult to be precise – per play vs percentage of revenue, public companies, press reports Have seen some companies paying over 100% in some periods Royalty burden is unsustainable Hundreds of services, different sizes, scale, functionality, revenue models, etc. Performance revenue to record companies now exceeding declines in sales revenue, yet streaming services still losing money
- Interactive – 10.5% subject to minimum of 18 or 22 % of payment to record companies. – effective rate can sometimes be higher. Programmed – can be higher, much higher, if forced into direct deals instead of regulated PROs
- Radio – long history of paying low single digits – currently about 3.5% of revenue. Even though ASCAP & BMI able to obtain slightly higher rates for digital services, not by much and certainly not by multiples, due to rate court PRO rate courts product of antitrust consent decree History of consent decrees, ASCAP, BMI Collective licensing inherently anticompetitive BMI v CBS – saved from per se antitrust violation only because, as moderated by consent decrees, has benefits for both copyright owners and licensees
- Direct license – no competition – total market power History of CARP – ad hoc Change to CRB – three full time judges with 5 year terms, subject to renewal Yahoo RIAA benchmark in Web I .07 cents Equivalence of SR and MComp – recognized in various foreign jurisdictions – CRB rejection currently on appeal Web II – Interactive webcasting direct licenses -- phased up to .19 cents Web III – phased up to .25 cents – WSA commercial .24 cents, pureplay .13 cents (nonsub) .25 cents (sub, bundled)
- .17 cents, down from .24 or .25 (but higher than pureplay of .13) still much higher than original .07 cents Segmented market – fundamental principle of economics – uniform pricing is not typical in a competitive market
- If Record cos getting 50+% and publishers want parity off of those inflated rates, math
- By selectively withdrawing, keep benefits for bars, restaurants, radio, television, etc., but force webcasters to get direct licenses Beginning of 2013, Sony/EMI then UMG – immediately obtained 25% rate increase from Pandora by direct license
- Fractional licensing – joint owners default copyright law BMI v CBS – whole reason collective licensing allowed - immediate, indemnified access to entire repertory Businesses that use large volume of music – need this Why now? Selective withdrawal, Problem of unaffiliated songwriters, GMR
- DOJ if licensee relies, PROs can charge for increased admin PROs chose not to appeal to ASCAP court, because felt they were likely to lose there. BMI court seen as more publisher friendly based on recent Pandora decisions
- Partial withdrawal dead in absence of legislation – would require broad antitrust exemption
- If there were a state law performance right, radio would have been massively infringing for 100 years
- Sirius – RIAA lawsuit, SX lawsuit, 3 Flo & Eddie class action suits (CA, NY, FL) Tennessee – would create statutory copyright for pre-72 SRs, with only digital and satellite performance right (would not apply to terrestrial radio) – died Litigation – RIAA sued last but settled first, took wind out of sails of Flo & Eddie case Flo & Eddie class action kind of settled with SXM in CA, but cases still going through courts – CA – won district but on appeal. FL, lost district but on appeal. NY, won district but lost on appeal settled in NY Creates uncertainty and mess. Only sensible answer is federalization Record companies have been resisting for decades, but heard Steve Marks yesterday so maybe there is finally hope (now that they lost NY).
- Current royalty rates unsustainable Several current developments have potential to drive rates even higher Destroying industry counterproductive for all - will not increase record sales or other revenues Record sales - No question that on-demand streaming has some negative impact on record sales, but obviously not 100% Streaming is not sole reason for decreased record company revenues. Commoditization of the music. Failure to timely adapt to consumer desires re: digital crated mindset where piracy was OK, music devalued. Product replacement cycle. Total unit sales, including album equivalent tracks, roughly same as it was in 70s.