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The Digital Music Performance Royalty Apocalypse
- 1. LA / NY / SF / DC / arentfox.com The Digital Music Performance Royalty Apocalypse Paul Fakler SXSW 2014
- 2. Overview of DMS Music Licensing Landscape Where We Have Been Where We Are Going Web IV Pre-72 Sound Recordings Publisher Withdrawals From PROs 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 15 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 9
- 10. Why Are Sound Recording Rates So Much Higher Than Musical Composition Rates? ℗ Rates Set by CARP / CRB Different approach / concerns 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. Key Issues for DMS Royalties in 2014: Webcasting IV CRB Proceeding New Panel of CRJs Will they re-examine first principles? Notice of institution of proceeding indicates they may Variations among sellers – segmented market / rates? Per-play or percentage of revenue? Inherent value of music? 11
- 12. Key Issues for DMS Royalties in 2014: Webcasting IV CRB Proceeding New Panel of CRJs Benchmark issues iTunes Radio Broadcaster direct deals PRO benchmark – on appeal 12
- 13. Key Issues for DMS Royalties in 2014: Webcasting IV CRB Proceeding New Panel of CRJs Overall dynamic – every past CRB proceeding has led to a substantial increase in the webcasting sound recording royalty rate Will that change? 13
- 14. Key Issues for DMS Royalties in 2014: 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 14
- 15. Key Issues for DMS Royalties in 2014: Pre-’72 Sound Recordings Pre-’72 Recordings = No Federal Copyright Sirius XM litigation Tennessee legislation Problem proving which recordings are really pre-’72 How to license? 15
- 16. Key Issues for DMS Royalties in 2014: Publisher PRO Rights Withdrawal Publishers’ Answer to Rate Disparity is to Increase Musical Composition Performance Rates Lack of Success Due to Rate Court Oversight 16
- 17. Key Issues for DMS Royalties in 2014: Publisher PRO Rights Withdrawal Strategy – Selective Withdrawal Direct licensing – absolute pricing power DMS still needs license from PROs Hope to use direct licenses as benchmarks in rate court 17
- 18. Key Issues for DMS Royalties in 2014: Publisher PRO Rights Withdrawal 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 18
- 19. Key Issues for DMS Royalties in 2014: Publisher PRO Rights Withdrawal What Now? Attempts to modify consent decrees Attempts to eliminate consent decrees SESAC antitrust cases Attempts to change evidentiary rules / benchmarking – Songwriter Equity Act of 2014 19
- 20. Apocalypse Now? DMS Market – 15 Years of Chaos Several New Threats With Potential to Increase Rates Further If Market Is Ultimately Destroyed Who Benefits? Record Companies Need To Reset Expectations – Cannot Expect Streaming, Especially Non-Interactive, to Subsidize Revenue Declines Not Caused by Streaming 20
Editor's Notes
- Background – from beginning of legal career worked in digital music space - mp3.com, yahoo launchcast, CRB, rate court
- Where we have been – history of DMS royalty rates and impact on industry Where we are going – Key issues for DMS licensing in 2014 developments have potential to further increase royalty rates
- 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 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
- Circle P - phonogram
- Difficult to be precise – per play vs percentage of revenue, public companies, press reports Royalty burden is unsustainable Hundreds of services, different sizes, scale, functionality, revenue models, etc.
- Interactive – 10.5% subject to minimum of 18 or 22 % of payment to record companies.
- 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 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)
- Segmented market – fundamental principle of economics – uniform pricing is not typical in a competitive market Percentage of revenues – looking for pros and cons; difficulty of determining revenue attributable to music? Problem of services not trying to maximize profits, focusing on scale?
- Benchmark issues always the key CRB rejects other methodologies so far But inherent problem with benchmarking – there is no rational, competitive market for SR licenses
- Given existing rates, any increase would be apocalyptic
- 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)
- 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
- SESAC – 3/3/14 – SDNY denied SESAC summary judgment motion, claims will proceed to trial
- 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.