[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



                   SECTION 115 OF THE COPYRIGHT ACT: 
                         IN NEED OF AN UPDATE?

=======================================================================

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 11, 2004

                               __________

                             Serial No. 75

                               __________

         Printed for the use of the Committee on the Judiciary


    Available via the World Wide Web: http://www.house.gov/judiciary


                                 ______

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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
CHRIS CANNON, Utah                   SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama              MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana          MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin                WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania        TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona                  ANTHONY D. WEINER, New York
MIKE PENCE, Indiana                  ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia            LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee

             Philip G. Kiko, Chief of Staff-General Counsel
               Perry H. Apelbaum, Minority Chief Counsel
                                 ------                                

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
ELTON GALLEGLY, California           JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia              RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
SPENCER BACHUS, Alabama              MAXINE WATERS, California
MARK GREEN, Wisconsin                MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  WILLIAM D. DELAHUNT, Massachusetts
MELISSA A. HART, Pennsylvania        ROBERT WEXLER, Florida
MIKE PENCE, Indiana                  TAMMY BALDWIN, Wisconsin
J. RANDY FORBES, Virginia            ANTHONY D. WEINER, New York
JOHN R. CARTER, Texas

                     Blaine Merritt, Chief Counsel

                         David Whitney, Counsel

                          Joe Keeley, Counsel

              Melissa L. McDonald, Full Committee Counsel

                     Alec French, Minority Counsel


                            C O N T E N T S

                              ----------                              

                             MARCH 11, 2004

                                                                   Page
The Honorable Lamar Smith, a Representative in Congress From the 
  State of Texas, and Chairman, Subcommittee on Courts, the 
  Internet, and Intellectual Property............................     1
The Honorable Howard L. Berman, a Representative in Congress From 
  the State of California, and Ranking Member, Subcommittee on 
  Courts, the Internet, and Intellectual Property................     2

                               WITNESSES

The Honorable Marybeth Peters, Register of Copyrights, Copyright 
  Office of the United States, The Library of Congress
  Oral Testimony.................................................     4
  Prepared Statement.............................................     5
  Biography......................................................    18
Mr. Jonathan Potter, Executive Director, Digital Media 
  Association
  Oral Testimony.................................................    19
  Prepared Statement.............................................    20
  Biography......................................................    30
Mr. Carey R. Ramos, Counsel, Paul, Weiss, Rifkind, Wharton and 
  Garrison, on behalf of the National Music Publishers 
  Association
  Oral Testimony.................................................    31
  Prepared Statement.............................................    32
  Biography......................................................    36
Mr. Cary Sherman, President and General Counsel, Recording 
  Industry Association of America
  Oral Testimony.................................................    37
  Prepared Statement.............................................    38
  Biography......................................................    42

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement by the Honorable Lamar Smith..................    54
Prepared Statement by the Honorable Howard Berman................    57
Letter to Chairman F. James Sensenbrenner, Jr. from Eric Polin, 
  Partner, Wixen Music Publishing, Inc. with attached letter to 
  David O. Carson, Esq., General Counsel, United States Copyright 
  Office and letter to the Honorable Marybeth Peters, Register of 
  Copyright, United States Copyright Office from Eric Polin, 
  Partner, Wixen Music Publishing, Inc...........................    59
Letter to Chairman Lamar Smith and the Honorable Howard Berman 
  from Marilyn Bergman, President and Chairman of the Board, 
  American Society of Composers, Authors and Publishers (ASCAP)..    66
Letter to Chairman Lamar Smith from the Honorable Marybeth 
  Peters, Register of Copyrights, United States Copyright Office.    69
Letter to the Honorable Lamar Smith and the Honorable Howard 
  Berman from Frances W. Preston, President, Chief Executive 
  Officer, Broadcast Music, Inc. (BMI)...........................    72

 
                   SECTION 115 OF THE COPYRIGHT ACT: 
                         IN NEED OF AN UPDATE?

                              ----------                              


                        THURSDAY, MARCH 11, 2004

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 12 p.m., in 
Room 2141, Rayburn House Office Building, Hon. Lamar S. Smith 
(Chair of the Subcommittee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order.
    Today's oversight hearing is on ``Section 115 of the 
Copyright Act: In Need of an Update.'' I'll recognize myself 
for an opening statement, then the Ranking Member, and then 
we'll proceed to hear the testimony of the witnesses today.
    Let me open this hearing by recognizing a simple truth: 
Most people don't think about music licenses when they listen 
to music at home, in their car, or on their iPods. Technology 
continues to change how we hear music. From piano rolls, to 
vinyl records, to eight-tracks, to CD's, and now MP3's, 
Americans have many ways to enjoy music. Only within the past 
decade have Americans been able to regularly access music 
transmitted in digital form.
    Digital formats not only ensure that the listener hears a 
perfect reproduction, but they also create new business models. 
Yet the laws that govern music licensing have changed 
infrequently. Some testifying today feel that more changes to 
the Copyright Act are required to update it. Others feel that 
existing laws are adequate.
    Online music has quickly become a growth industry 
generating additional revenues for artists and providing legal 
alternatives to online pirate, peer-to-peer sites. No longer 
can a music pirate attempt to rationalize his or her theft by 
saying that there are no legal online alternatives.
    I'm pleased to see that the catalogues of online music 
services continue to expand. It is true that a few artists have 
chosen not to make their recordings available online, and that 
is certainly their right. It is also my right to listen to 
music on 45's instead of on a CD; not that I would make that 
choice. So I would urge artists who have not made their music 
available online to enter the 21st century.
    This Subcommittee examined online music issues a few years 
ago to determine if Congressional intervention was warranted. 
The Subcommittee decided to wait until the market matured. 
Although the focus of the Committee several years ago was on 
webcasting, the public has expressed a far greater interest in 
legal downloading. This change is an important reminder to 
Congress, as we review section 115 of the Copyright Act.
    Although some in Washington may believe that we can predict 
the future, Congress has repeatedly proved it cannot. The role 
of Congress should be to set general guidelines for the 
marketplace, without preventing new business models from 
developing.
    I am concerned that laws and procedures first designed in 
the piano-roll era may not be adequate for the digital era. So 
I am pleased to see that the Copyright Office already is 
updating some of the procedural requirements of section 115.
    The private sector is often the best place to resolve the 
disputes that inevitably arise as new business models evolve. I 
am pleased that the RIAA, the NMPA, the Harry Fox Agency, and 
the Songwriters Guild agreed in October 2001 on some basic 
principles concerning online music subscription services. 
However, it might have been better if online webcasters had 
been a party to this agreement. Since this was not the case, I 
look forward to hearing from the witnesses today on webcasting 
concerns related to section 115. We should clarify the legal 
issues that remain outstanding, to ensure that this market 
continues to grow.
    This concludes my opening statement, and the gentleman from 
California, Mr. Berman, is recognized for his opening 
statement.
    [The statement of Mr. Smith follows in the Appendix]
    Mr. Berman. Thank you, Mr. Chairman. Our private sector 
witnesses appear to share a strong interest in the success of 
the legal music marketplace: The business survival of Digital 
Media Association members depends on the success of the 
legitimate online music services. The success of new legal 
music offerings like downloads and DVD audio will provide vital 
new sources of royalties for members of the National Music 
Publishers Association. RIAA members will benefit in a number 
of ways, through the distribution of their works in secure new 
formats, through their ownership of some online music services, 
and through the royalties generated by independent services.
    Our witnesses are similarly united in the desire to stem 
music piracy. Though in different ways, piracy, both online and 
off, bedevils DiMA, NMPA, and RIAA members alike. Since the 
success of new music formats and online music services is a 
critical element in stemming the piracy tide, our witnesses 
have additional reasons to work to achieve the success.
    So at least at the macro level, the interests of our 
private sector witnesses today are strongly aligned. 
Unfortunately, this alignment of interests doesn't translate 
into an alignment of strategies for stimulating the legal music 
marketplace. Our witnesses appear to disagree pretty strongly 
about the availability, scope, cost, and convenience of both 
voluntary and statutory licenses for making reproductions of 
copyrighted musical compositions. NMPA appears to maintain that 
such licenses are easily obtained, and points to the success of 
iTunes Music Store as proof. Our other witnesses appear to 
strongly disagree.
    Clearly, the legitimate online music marketplace has made 
tremendous strides in the past few years, and these strides 
demonstrate that copyright owners are fully committed to its 
development. In fact, all our witnesses deserve--including the 
Copyright Office--deserve some measure of credit for these 
advances.
    In 1999, only the pirate version of Napster provided music 
consumers an opportunity to download a wide variety of popular 
music. Today a number of legitimate services, including Napster 
Version 2, iTunes, Rapsody, PressPlay, MusicNow, and many 
others, offer consumers cheap, legal mechanisms for downloading 
hundreds of thousands of songs.
    Unfortunately, despite their meteoric growth, legal online 
music services still represent the equivalent of a fly on the 
back of the online piracy elephant. The 30 million downloads 
sold by iTunes in the past year are encouraging, but are 
nothing compared to the billions of copyrighted songs illegally 
downloaded through peer-to-peer services every month. The 
approximately 500,000 songs available through most legal music 
services represent an exponential increase from a few years 
ago, but pale in comparison to the millions of different songs 
available through the illegal services.
    While the downloading revolution calls into question the 
long-term viability of music--physical music formats, they will 
continue to make up the lion's share of the music market in the 
near term. Thus, it is clear that music copyright owners must 
mitigate--migrate to secure physical formats. If they continue 
to make music available on unprotected CD's, they are driving 
their own piracy problem.
    The rollout of new secure physical formats, unfortunately, 
has been less than dramatic. Only a handful of albums have been 
released on copy-protected CD's in the U.S. DVD audio has not 
penetrated the marketplace. And the pre-loading of music on 
personal computers or other devices hasn't gotten much 
traction. Clearly, something must be done to make new legal 
music offerings, both online and off, more competitive with the 
abundance of conveniently available, free, illegal music.
    As I have noted, success in achieving this challenge will 
benefit all of our private sector witnesses. And my questioning 
of the witnesses will be directed through the prism of two 
interrelated questions. First, does 115 facilitate or hinder 
the rollout of new legal music offerings? Secondly, depending 
on the answer to the first question, what, if anything, should 
Congress do to change Section 115? I'll be interested in 
hearing our witnesses. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Berman follows in the 
Appendix]
    Mr. Smith. Yes. Thank you, Mr. Berman. And without 
objection, the opening statements of other Members will be made 
a part of the record, as will the complete statements of all of 
our witnesses.
    Also, in the interest of time today and because there are 
time constraints, without objection, I will make a part of the 
record the complete biographies of all of the witnesses today, 
too.
    Mr. Smith. Our witnesses today are the Honorable Marybeth 
Peters, Register of Copyrights, Copyright Office of the United 
States, The Library of Congress; Jonathan Potter, Executive 
Director, Digital Media Association; Carey R. Ramos, Counsel, 
Paul, Weiss, Rifkind, Wharton and Garrison, on behalf of the 
National Music Publishers Association; and Cary Sherman, 
President and General Counsel, Recording Industry Association 
of America.
    Ms. Peters, we'll begin with you.

    STATEMENT OF THE HONORABLE MARYBETH PETERS, REGISTER OF 
COPYRIGHTS, COPYRIGHT OFFICE OF THE UNITED STATES, THE LIBRARY 
                          OF CONGRESS

    Ms. Peters. Mr. Chairman, Mr. Berman, distinguished Members 
of the Subcommittee, I appreciate the opportunity to appear 
before you today to testify regarding possible revisions of the 
compulsory license for the making and distributing of 
phonorecords. Technological developments have changed how the 
music industry makes and markets its products to consumers. 
Computers and digital technology allow anyone to reproduce a 
sound recording and the musical work embodied in it, and 
distribute those works to the world with the stroke of a key.
    Because of these changes, Congress adjusted the compulsory 
license in 1995, to provide for the making and distribution by 
transmission of digital phonorecords. Record companies and most 
publishers have favored the continued existence of this license 
when the issue has come up for review. Yet despite changes to 
Section 115 in 1995, businesses still find it difficult to use 
the compulsory license to provide digital downloads and on-
demand performances.
    Today, NMPA in its testimony states its member companies do 
not find the license an impediment to launching new services. 
They take the position that 115 is not broken, and doesn't need 
to be fixed. I question this position. How does a service like 
MusicNet or iTunes clear the rights in the music, rights that 
need to be cleared quickly? It seems extremely difficult.
    The compulsory license requires searching Copyright Office 
records to determine the owner of each work; serving notices of 
intention to use each and every work on a copyright owner 
identified in the records of the office. Where the owner of the 
musical composition is not identified, a notice for that work 
must be filed with the Copyright Office itself. The Office has 
not received any notices from music services.
    If the compulsory license isn't used, then a voluntary 
negotiated license is necessary. NMPA says its licensing 
affiliate, the Harry Fox Agency, can accommodate the licensing 
of these musical compositions. The recording industry states 
that 40 percent of the works to be licensed cannot be licensed 
by Fox. And of course, under the compulsory licenses, record 
companies could license musical compositions; but to our 
knowledge, they are not using the compulsory license.
    With respect to the administrative provisions, relief is in 
sight. Today we did propose rules that were published in the 
Federal Register. And they would, to the extent possible, get 
rid of many of the obstacles; but not all of the obstacles.
    Unfortunately, a service wishing to use compulsory licenses 
will still need a large amount of time and money to identify 
the copyright owner of each work, in order to serve the 
required notice.
    More importantly, there are some fundamental problems 
regarding the scope of the license. Emerging businesses that 
provide easily accessible music in multiple digital formats 
need to make multiple reproductions. The question is: Does 115 
cover them?
    These questions currently before the office deal with this 
issue. In the midst of our consideration of these questions, 
RIAA, NMPA, and Harry Fox concluded an agreement that 
represented a marketplace solution to the licensing problems 
associated with these models. This does eliminate legal 
ambiguities. It does not, however, solve the legal questions 
for a service that wants to use the Section 115 compulsory 
license to clear rights.
    Moreover, many online music services, such as those 
represented by DiMA, disagree, and object to the solutions 
reached. And I am not optimistic that these issues can be 
resolved by means of a Copyright Office regulation.
    So the question for you is, what, if anything, should be 
done? My first choice would be to eliminate the license and 
replace it with a collective licensing system--a collective 
licensing system similar to that used throughout the world and 
already in place in this country for clearing public 
performance of music. I'm referring to the ASCAP and BMI models 
of voluntary blanket collective licensing. They seem to be the 
most cost-effective, time-efficient method to ensure that there 
are no infringed rights or economic harm to the copyright owner 
resulting from unauthorized online uses.
    Voluntary blanket license would seem particularly useful 
when there are hundreds of thousands of songs to be 
transmitted. And they can adapt to new technology, and they 
work well internationally; unlike compulsory licenses, which 
are limited to a particular country.
    In conclusion, I do think change is necessary. The 
compulsory license either needs to be eliminated, or it needs 
to be made workable. I look forward to working with you on 
this.
    [The prepared statement of Ms. Peters follows:]

                 Prepared Statement of Marybeth Peters

    Mr. Chairman, Mr. Berman, and distinguished members of the 
Subcommittee, I appreciate the opportunity to appear before you to 
testify on the Section 115 compulsory license, which allows for the 
making and distribution of physical phonorecords and digital 
phonorecord deliveries. The compulsory license to allow for the use of 
nondramatic musical works has been with us for 95 years and has 
resulted in the creation of a multitude of new works for the pleasure 
and consumption of the public, and in the creation of a strong and 
vibrant music industry which continues to flourish to this day. 
Nevertheless, the means to create and provide music to the public has 
changed radically in the last decade, necessitating changes in the law 
to protect the rights of copyright owners while at the same time 
balancing the needs of the users in a digital world.

                               BACKGROUND

1.  Mechanical Licensing under the 1909 Copyright Act
    In 1909, Congress created the first compulsory license to allow 
anyone to make a mechanical reproduction (known today as a phonorecord) 
of a musical composition \1\ without the consent of the copyright owner 
provided that the person adhered to the provisions of the license. The 
impetus for this decision was the emergence of the player piano and the 
ambiguity surrounding the extent of the copyright owner's right to 
control the making of a copy of its work on a piano roll. The latter 
question was settled in part in 1908 when the Supreme Court held in 
White-Smith Publishing Co. v. Apollo Co.\2\ that perforated piano rolls 
were not ``copies'' under the copyright statute in force at that time, 
but rather parts of devices which performed the work. During this 
period (1905-1909), copyright owners were seeking legislative changes 
which would grant them the exclusive right to authorize the mechanical 
reproduction of their works--a wish which Congress granted shortly 
thereafter. Although the focus at the time was on piano rolls, the 
mechanical reproduction right also applied to the nascent medium of 
phonograph records as well.
---------------------------------------------------------------------------
    \1\ The music industry construed the reference in Section 1(e) of 
the 1909 Act as referring only to a nondramatic musical composition as 
opposed to music contained in dramatico-musical compositions. See 
Melville B. Nimmer, Nimmer on Copyright, Sec. 16.4 (1976). This 
interpretation was expressly incorporated into the law by Congress with 
the adoption of the 1976 Act. 17 U.S.C. Sec. 115(a)(1).
    \2\ 209 U.S. 1 (1908).
---------------------------------------------------------------------------
    Congress, however, was concerned that the right to make mechanical 
reproductions of musical works might become a monopoly controlled by a 
single company. Therefore, it decided that rather than provide for an 
exclusive right to make mechanical reproductions, it would create a 
compulsory license in Section 1(e) of the 1909 Act which would allow 
any person to make ``similar use'' of the musical work upon payment of 
a royalty of two cents for ``each such part manufactured.'' However, no 
one could take advantage of the license until the copyright owner had 
authorized the first mechanical reproduction of the work. Moreover, the 
initial license placed notice requirements on both the copyright owners 
and the licensees. Section 101(e). The copyright owner had to file a 
notice of use with the Copyright Office--indicating that the musical 
work had been mechanically reproduced--in order to preserve his rights 
under the law, whereas the person who wished to use the license had to 
serve the copyright owner with a notice of intention to use the license 
and file a copy of that notice with the Copyright Office. The license 
had the effect of capping the amount of money a composer could receive 
for the mechanical reproduction of this work. The two cent rate set in 
1909 remained in effect until January 1, 1978, and acted as a ceiling 
for the rate in privately negotiated licenses.
    Such stringent requirements for use of the compulsory license did 
not foster wide use of the license. It is my understanding that the 
``mechanical'' license as structured under the 1909 Copyright Act was 
infrequently used until the era of tape piracy in the late 1960s. When 
tape piracy was flourishing, the ``pirates'' inundated the Copyright 
Office with notices of intention, many of which contained hundreds of 
song titles. The music publishers refused to accept such notices and 
any proffered royalty payments since they did not believe that 
reproduction and duplication of an existing sound recording fell within 
the scope of the compulsory license. After this flood of filings 
passed, the use of the license appears to have again became almost non-
existent; up to this day, very few notices of intention are filed with 
the Copyright Office.

2.  The Mechanical License under the 1976 Copyright Act
    The music industry adapted to the new license and, by and large, 
sought its retention, opposing the position of the Register of 
Copyrights in 1961 to sunset the license one year after enactment of 
the omnibus revision of the copyright law. Music publishers and 
composers had grown accustomed to the license and were concerned that 
the elimination of the license would cause unnecessary disruptions in 
the music industry. Consequently, the argument shifted over time away 
from the question of whether to retain the license and, instead, the 
debate focused on reducing the burdens on copyright owners, clarifying 
ambiguous provisions, and setting an appropriate rate. The House 
Judiciary Committee's approach reflected this trend and in its 1976 
report on the bill revising the Copyright Act, it reiterated its 
earlier position ``that a compulsory licensing system is still 
warranted as a condition for the rights of reproducing and distributing 
phonorecords of copyrighted music,'' but ``that the present system is 
unfair and unnecessarily burdensome on copyright owners, and that the 
present statutory rate is too low.'' H. Rep. No. 94-1476, at 107 
(1976), citing H. Rep. No. 83, at 66-67 (1967).
    To that end, Congress adopted a number of new conditions and 
clarifications in Section 115 of the Copyright Act of 1976, including:

          The license becomes available only after a 
        phonorecord has been distributed to the public in the United 
        States with the authority of the copyright owner 
        (Sec. 115(a)(1));

          The license is only available to someone whose 
        primary intent is to distribute phonorecords to the public for 
        private use (Sec. 115(a)(1));

          licensee cannot duplicate a sound recording embodying 
        the musical work without the authorization of the copyright 
        owner of the sound recording (Sec. 115(a)(1));

          A musical work may be rearranged only ``to the extent 
        necessary to conform it to the style or manner of the 
        interpretation of the performance involved,'' without 
        ``chang[ing] the basic melody or fundamental character of the 
        work,'' (Sec. 115(a)(2));

          A licensee must still serve a Notice of Intention to 
        obtain a compulsory license on the copyright owner or, in the 
        case where the public records of the Copyright Office do not 
        identify the copyright owner and include an address, the 
        licensee must file the Notice of Intention with the Copyright 
        Office (Sec. 115(b)(1));

          A licensee must serve the notice on the copyright 
        owner ``before or within thirty days after making, and before 
        distributing any phonorecords of the work.'' Otherwise, the 
        licensee loses the opportunity to make and distribute 
        phonorecords pursuant to the compulsory license 
        (Sec. 115(b)(1));

          A copyright owner is entitled to receive copyright 
        royalty fees only on those phonorecords made \3\ and 
        distributed \4\ after the copyright owner is identified in the 
        registration or other public records of the Copyright Office 
        (Sec. 115(c)(1)); \5\
---------------------------------------------------------------------------
    \3\ Congress intended the term ``made'' ``to be broader than 
`manufactured' and to include within its scope every possible 
manufacturing or other process capable of reproducing a sound recording 
in phonorecords.'' H. Rep. No. 1476, at 110 (1976).
    \4\ For purposes of Section 115, ``the concept of `distribution' 
comprises any act by which the person exercising the compulsory license 
voluntarily relinquishes possession of a phonorecord (considered as a 
fungible unit), regardless of whether the distribution is to the 
public, passes title, constitutes a gift, or is sold, rented, leased, 
or loaned, unless it is actually returned and the transaction 
cancelled.'' Id.
    \5\ This provision replaced the earlier requirement in the 1909 law 
that a copyright owner must file a notice of use with the Copyright 
Office in order to be eligible to receive royalties generated under the 
compulsory license.

          The rate payable for each phonorecord made and 
        distributed is adjusted by an independent body which, prior to 
        1993, was the Copyright Royalty Tribunal.\6\
---------------------------------------------------------------------------
    \6\ In 1993, Congress passed the Copyright Royalty Tribunal Reform 
Act of 1993, Pub. L. 103-198, 107 Stat. 2304, which eliminated the 
Copyright Royalty Tribunal and replaced it with a system of ad hoc 
Copyright Arbitration Royalty Panels (CARPs) administered by the 
Librarian of Congress.

          A compulsory license may be terminated for failure to 
        pay monthly royalties if a user fails to make payment within 30 
        days of the receipt of a written notice from the copyright 
---------------------------------------------------------------------------
        owner advising the user of the default (Sec. 115(c)(6)).

    The Section 115 compulsory license worked well for the next two 
decades, but the use of new digital technology to deliver music to the 
public required a second look at the license to determine whether it 
continued to meet the needs of the music industry. During the 1990s, it 
became apparent that music services could offer options for the 
enjoyment of music in digital formats either by providing the public an 
opportunity to hear any sound recording it wanted on-demand or by 
delivering a digital version of the work directly to a consumer's 
computer. In either case, there was the possibility that the new 
offerings would obviate the need for mechanical reproductions in the 
forms heretofore used to distribute musical works and sound recordings 
in a physical format, e.g., vinyl records, cassette tapes and most 
recently audio compact discs. Moreover, it was clear that digital 
transmissions were substantially superior to analog transmissions. In 
an early study conducted by the Copyright Office, the Office noted two 
significant improvements associated with digital transmissions: a 
superior sound quality and a decreased susceptibility to interference 
from physical structures like tall buildings or tunnels. See Register 
of Copyrights, U.S. Copyright Office, Copyright Implications of Digital 
Audio Transmission Services (1991).

3.  The Digital Performance Right in Sound Recordings Act of 1995
    By 1995, Congress recognized that ``digital transmission of sound 
recordings [was] likely to become a very important outlet for the 
performance of recorded music.'' S. Rep. No. 104-128, at 14 (1995). 
Moreover, it realized that ``[t]hese new technologies also may lead to 
new systems for the electronic distribution of phonorecords with the 
authorization of the affected copyright owners.'' Id. For these 
reasons, Congress made changes to Section 115 to meet the challenges of 
providing music in a digital format when it enacted the Digital 
Performance Right in Sound Recordings Act of 1995 (``DPRA''), Pub. L. 
104-39, 109 Stat. 336, which also granted copyright owners of sound 
recordings an exclusive right to perform their works publicly by means 
of a digital audio transmission, 17 U.S.C. Sec. 106(6), subject to 
certain limitations. See 17 U.S.C. Sec. 114. The amendments to Section 
115 clarified the reproduction and distribution rights of music 
copyright owners and producers and distributors of sound recordings, 
especially with respect to what the amended Section 115 termed 
``digital phonorecord deliveries.'' Specifically, Congress wanted to 
reaffirm the mechanical rights of songwriters and music publishers in 
the new world of digital technology. It is these latter amendments to 
Section 115 that are of particular interest today.
    First, Congress expanded the scope of the compulsory license to 
include the making and distribution of a digital phonorecord and, in 
doing so, adopted a new term of art, the ``digital phonorecord 
delivery'' (``DPD''), to describe the process whereby a consumer 
receives a phonorecord by means of a digital transmission, the delivery 
of which requires the payment of a statutory royalty under Section 115. 
The precise definition of this new term reads as follows:

        A ``digital phonorecord delivery'' is each individual delivery 
        of a phonorecord by digital transmission of a sound recording 
        which results in a specifically identifiable reproduction by or 
        for any transmission recipient of a phonorecord of that sound 
        recording, regardless of whether the digital transmission is 
        also a public performance of the sound recording or any 
        nondramatic musical work embodied therein. A digital 
        phonorecord delivery does not result from a real-time, 
        nonintegrated subscription transmission of a sound recording 
        where no reproduction of the sound recording or the musical 
        work embodied therein is made from the inception of the 
        transmission through to its receipt by the transmission 
        recipient in order to make the sound recording audible.

17 U.S.C. Sec. 115(d). What is noteworthy about the definition is that 
it includes elements related to the right of public performance and the 
rights of reproduction and distribution with respect to both the 
musical work and the sound recording. The statutory license, however, 
covers only the making of the phonorecord, and only with respect to the 
musical work. The definition merely acknowledges that the public 
performance right and the reproduction and distribution rights may be 
implicated in the same act of transmission and that the public 
performance does not in and of itself implicate the reproduction and 
distribution rights associated with either the musical composition or 
the sound recording. In fact, Congress included a provision to clarify 
that ``nothing in this Section annuls or limits the exclusive right to 
publicly perform a sound recording or the musical work embodied 
therein, including by means of a digital transmission.'' 17 U.S.C. 
Sec. 115(c)(3)(K).
    Another important distinction between traditional mechanical 
phonorecords and DPDs brought about by the DPRA is the expansion of the 
statutory license to include reproduction and transmission by means of 
a digital phonorecord delivery of a musical composition embodied in a 
sound recording owned by a third party, provided that the licensee 
obtains authorization from the copyright owner of the sound recording 
to deliver the DPD.\7\ Thus, the license provides for more than the 
reproduction and distribution of one's own version of a performance of 
a musical composition by means of a DPD. Under the expanded license, a 
service providing DPDs can in effect become a virtual record store if 
it is able to clear the rights to the sound recordings. More 
importantly, the DPRA allows a copyright owner of a sound recording to 
license the right to make DPDs of both the sound recording and the 
underlying musical work to third parties if it has obtained the right 
to make DPDs from the copyright owner of the musical work. See 17 
U.S.C. Sec. 115(c)(3)(I), S. Rep. No. 104-128, at 43 (1995).
---------------------------------------------------------------------------
    \7\ ``A digital phonorecord delivery of a sound recording is 
actionable as an act of infringement under section 501, and is fully 
subject to the remedies provided by sections 502 through 506 and 
section 509, unless--

      (I) the digital phonorecord delivery has been authorized by 
---------------------------------------------------------------------------
      the copyright owner of the sound recording; and

      (II) the owner of the copyright in the sound recording or 
      the entity making the digital phonorecord delivery has 
      obtained a compulsory license under this section or has 
      otherwise been authorized by the copyright owner of the 
      musical work to distribute or authorize the distribution, 
      by means of a digital phonorecord delivery, of each musical 
      work embodied in the sound recording.''

17 U.S.C. Sec. 115(c)(3)(H)(i).
    Apart from the extension of the compulsory license to cover the 
making of DPDs, Congress also addressed the common industry practice of 
incorporating controlled composition clauses into a songwriter/
performer's recording contract, whereby a recording artist agrees to 
reduce the mechanical royalty rate payable when the record company 
makes and distributes phonorecords including songs written by the 
performer. In general, the DPRA provides that privately negotiated 
contracts entered into after June 22, 1995, between a recording company 
and a recording artist who is the author of the musical work cannot 
include a rate for the making and distribution of the musical work 
below that established for the compulsory license. There is one notable 
exception to this general rule. A recording artist-author who 
effectively is acting as her own music publisher may accept a royalty 
rate below the statutory rate if the contract is entered into after the 
sound recording has been fixed in a tangible medium of expression in a 
form intended for commercial release. 17 U.S.C. Sec. 115(c)(3)(E).
    The amended license also extended the current process for 
establishing rates for the mechanical license to DPDs. Under the 
statutory structure, rates for the making and reproduction of the DPDs 
can be decided either through voluntary negotiations among the affected 
parties or, in the case where these parties are unable to agree upon a 
statutory rate, by a Copyright Arbitration Royalty Panel (``CARP''). 
Pursuant to Section 115(c)(3)(D), the CARP must establish rates and 
terms that ``distinguish between digital phonorecord deliveries where 
the reproduction or distribution of the phonorecord is incidental to 
the transmission which constitutes the digital phonorecord delivery, 
and digital phonorecord deliveries in general.''
    The difficult issue, however, is identifying those reproductions 
that are subject to compensation under the statutory license, a subject 
I will discuss in greater detail.

                          REGULATORY RESPONSES

1.  Notices of Intention to Use and Statements of Account
    Section 115(b) requires that a person who wishes to use the 
compulsory license serve a notice of his or her intention to use a 
musical composition with the copyright owner before or within thirty 
days after making, and before distributing any phonorecords. 
Regulations in place since the enactment of the 1976 Copyright Act 
followed the statutory scheme and required that a separate Notice of 
Intention be served for each nondramatic musical work embodied or 
intended to be embodied in phonorecords to be made under the compulsory 
license. Following the statutory scheme, the regulations provided that 
if the registration or other public records of the Copyright Office do 
not identify the copyright owner of a particular work and include that 
owner's address, the person wishing to use the compulsory license could 
file the Notice of Intention with the Copyright Office. 37 C.F.R. 
Sec. 201.18. The regulations also implemented the statutory requirement 
that each licensee pay royalties, on a monthly basis, to each copyright 
owner whose musical works the licensee is using, and that each licensee 
serve monthly statements of account and an annual statement of account 
on each copyright owner. 37 C.F.R. Sec. 201.19.
    The regulations governing this requirement were amended after the 
passage of the DPRA in order to accommodate the making of DPDs. Initial 
amendments to the rules were promulgated on July 30, 1999, and 
addressed when a DPD is made, manufactured, or distributed for purposes 
of the Section 115 license such that the obligation to pay the royalty 
fee attaches. The amended regulation provided that a DPD be treated as 
a phonorecord made and distributed on the date the phonorecord is 
digitally transmitted. The amended regulation also provided a mechanism 
for the delivery of a usable DPD where, in the first instance, the 
initial transmission failed or did not result in a complete and 
functional DPD. 64 FR 41286. (July 30, 1999). Because these rules were 
dealing with new concepts applicable to developing services in a 
nascent industry, the Office adopted the rules on an interim basis and 
left the door open to revisit the notice and recordkeeping 
requirements.
    Two years later, the Office initiated a second rulemaking 
proceeding to address concerns of musical work copyright owners and 
users of the compulsory license, especially those developing new 
digital music services with the intention of developing extensive music 
libraries with hundreds of thousands of titles in order to offer these 
recordings to their subscribers for a fee. See 66 FR 45241 (August 28, 
2001). Both sides wanted easier ways to meet the requirements for 
obtaining the license, including more convenient methods to effect 
service of the Notice of Intention to use the license on the copyright 
owners, a provision to allow use of a single notice to identify use of 
multiple works, a simplification of the elements of the notice, and a 
provision to make clear that a notice may be legally sufficient even if 
the notice contains minor errors.
    We thought many of these suggestions were appropriate and perhaps 
long overdue. Thus, we are pleased to announce that the Office is 
publishing today in the Federal Register proposed amendments to the 
regulations governing the notice and recordkeeping requirements that 
are designed to increase the ease with which a person who intends to 
utilize the license may effect service on the copyright owner and 
provide the information required to identify the musical work. We are 
aware that many interested parties will not find the proposed changes 
sufficient to create a seamless licensing regime. However, the extent 
of any change we can make in the regulations is limited by the scope of 
the law and, as we explain in the current notice, a number of the 
changes proposed by the interested parties would require a change in 
the law. Nevertheless, we believe the proposed amendments represent 
progress in meeting the needs of digital services seeking use of the 
license as a means to clear the rights to make and distribute a vast 
array of musical works in a DPD format, and they also offer 
improvements to the copyright owners who receive compensation under the 
Section 115 license. Specifically, the new rules propose the following 
notable changes:

          A copyright owner may designate an authorized agent 
        to accept the Notices of Intention and/or the royalty payments, 
        although the rules do not require that a single agent perform 
        both functions;

          In the case where the copyright owner uses an 
        authorized agent to accept the notices, the rules would require 
        the copyright owner to identify to whom statements of account 
        and royalty payments shall be made;

          A person intending to use the compulsory licence may 
        serve a Notice of Intention on the copyright owner or its agent 
        at an address other than the last address listed in the public 
        records of the Copyright Office if that person has more recent 
        or accurate information than is contained in the Copyright 
        Office records;

          A Notice of Intention may be submitted electronically 
        to a copyright owner or its authorized agent in cases where the 
        copyright owner or authorized agent has announced it will 
        accept electronic submissions.

          Multiple works may be listed on a single Notice of 
        Intention when the works are owned by the same copyright owner 
        or, in the case where the notice will be served upon an 
        authorized agent, the agent represents at least one of the 
        copyright owners of each of the listed works;

          If a Notice of Intention includes more than 50 song 
        titles, the proposed rules give the copyright owner or its 
        agent a right to request and receive a digital file of the 
        names of the copyrighted works in addition to the original 
        paper copy of the Notice.

          A Notice of Intention may be submitted by an 
        authorized agent of the person who seeks to obtain the license;

          Harmless errors that do not materially affect the 
        adequacy of the information required to serve the purposes of 
        the notice requirement shall not render a Notice of Intention 
        invalid.

          In order to recover the Copyright Office's costs in 
        processing Notices of Intention that are filed with the Office, 
        the filing fee that has been required for the filing of a 
        Notice of Intention with the Copyright Office when the identity 
        and address of the copyright owner cannot be found in the 
        registration or other public records of the Copyright Office 
        will also be required when a Notice of Intention is filed with 
        the Office after the Notice has been returned to the sender 
        because the copyright owner is no longer located at the address 
        identified in the Copyright Office records or has refused to 
        accept delivery; and

          The fee charged for the filing of a Notice of 
        Intention with the Copyright Office will be based upon the 
        number of musical works identified in the Notice of Intention. 
        We are studying the costs incurred by the Office in connection 
        with such filings and I will submit to Congress new proposed 
        fees that cover such costs. The resulting fee should be 
        considerably lower per work than the current fee.\8\
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    \8\ The fee for the filing of Notices of Intention may be changed 
only after a study has been made of the costs connected with the filing 
and indexing of the Notices. The fee adjustment must be submitted to 
Congress and may be instituted only if Congress has not enacted a law 
disapproving the fee within 120 days of its submission to Congress. 17 
U.S.C. Sec. 708(a)(5), (b).

    I am hopeful that these proposed changes will facilitate the use of 
the license for both copyright owners and licensees, and I expect to 
adopt the proposed rules in final form after considering comments on 
the proposed rules and making any necessary modifications. I believe 
that these changes represent the best that the Office can do under the 
current statute, but I recognize that it may be advisable to amend 
Section 115 to permit further changes in the procedure by which persons 
intending to use the compulsory license may provide notice of their 
intention. I will discuss some possible amendments later in my 
testimony.
    Moreover, these regulations only address the technical requirements 
for securing the compulsory license. During the last rate adjustment 
proceeding, questions of a more substantive nature arose with respect 
to DPDs, requiring the Office to publish a Notice of Inquiry to 
consider the very scope of the Section 115 license. I will now turn to 
a discussion of those issues.

2.  Consideration of what constitutes an ``incidental digital 
        phonorecord delivery''
    In 1995 when Congress passed the DPRA, its intent was to extend the 
scope of the compulsory license to cover the making and distribution of 
a phonorecord in a digital format--what Congress referred to as the 
making of a digital phonorecord delivery. Since that time, what 
constitutes a ``digital phonorecord delivery'' has been a hotly debated 
topic. Currently, the Copyright Office is in the midst of a rulemaking 
proceeding to examine this question, especially in light of the new 
types of services being offered in the marketplace, e.g. ``on-demand 
streams'' and ``limited downloads.'' See 66 FR 14099 (March 9, 2001).
    The Office initiated this rulemaking proceeding in response to a 
petition from the Recording Industry Association of America (``RIAA''), 
asking that we conduct such a proceeding to resolve the question of 
which types of digital transmissions of recorded music constitute a 
general DPD and which types should be considered an incidental DPD. 
RIAA made the request after it became apparent that industry 
representatives found it difficult, if not impossible, to negotiate a 
rate for the incidental DPD category, as required by law, when no one 
knew which types of prerecorded music were to be included in this 
category.
    Central to this inquiry are questions about two types of digital 
music services: ``on-demand streams'' and ``limited downloads.'' For 
purposes of the inquiry, the music industry has defined an ``on-demand 
stream'' as an ``on-demand, real-time transmission using streaming 
technology such as Real Audio, which permits users to listen to the 
music they want when they want and as it is transmitted to them,'' and 
a ``limited download'' as an ``on-demand transmission of a time-limited 
or other use-limited (i.e., non-permanent) download to a local storage 
device (e.g., the hard drive of the user's computer), using technology 
that causes the downloaded file to be available for listening only 
either during a limited time (e.g., a time certain or a time tied to 
ongoing subscription payments) or for a limited number of times.'' The 
Office has received comments and replies to its initial notice of 
inquiry. I anticipate that we will conclude the proceeding this year 
after either holding a hearing or soliciting another round of comments 
from interested parties in order to get a fresh perspective on these 
complex and difficult questions in light of the current technology and 
business practices.
    The perspective of music publishers appears to be clear. They have 
taken the position that both on-demand streams and limited downloads 
implicate their mechanical rights. Moreover, they maintain that copies 
made during the course of a digital stream or in the transmission of a 
DPD are for all practical purposes reproductions of phonorecords that 
are covered by the compulsory license. The recording industry supports 
this view, recognizing that while certain reproductions of a musical 
work are exempt under Section 112(a), other reproductions do not come 
within the scope of the exemption. For that reason, the recording 
industry has urged the Office to interpret the Section 115 license in 
such a way as to cover all reproductions of a musical work necessary to 
operate such services; and, we are considering their arguments. In the 
meantime, certain record companies and music publishers have worked out 
a marketplace solution.
            a.  Marketplace solution
    In 2001, the RIAA, the National Music Publishers' Association, Inc. 
(``NMPA''), and the Harry Fox Agency, Inc. (``HFA'') entered into an 
agreement concerning the mechanical licensing of musical works for new 
subscription services on the Internet. Licenses issued under the RIAA/
NMPA/HFA agreement are nonexclusive and cover all reproduction and 
distribution rights for delivery of on-demand streams and limited 
downloads and include the right to make server copies, buffer copies 
and other related copies used in the operation of a covered service. 
The license also provides at no additional cost for ``On-Demand Streams 
of Promotional Excerpts,'' which are defined as a stream consisting of 
no more that thirty (30) seconds of playing time of the sound recording 
of a musical work or no more than the lesser of ten percent (10%) or 
sixty (60) seconds of playing time of a sound recording of a musical 
work longer than five minutes.
    The industry approach to resolving the problems associated with 
mechanical licensing for digital music services is both innovative and 
comprehensive, resolving certain legal questions associated with 
temporary, buffer, cache and server copies of a musical work associated 
with digital phonorecord deliveries purportedly made under the Section 
115 license, as well as the use of promotional clips. The Office 
welcomes the industry's initiative and creativity, and fully supports 
marketplace solutions to what really are commercial transactions 
between owners and users.
    However, parties should not need to rely upon privately negotiated 
contracts exclusively to clear the rights needed to make full use of a 
statutory license, or need to craft an understanding of the legal 
limits of the compulsory license within the provisions of the private 
contract. The scope of the license and any limitations on its use 
should be clearly expressed in the law.
    The 1995 amendments to Section 115, however, do not provide clear 
guidelines for use of the Section 115 license for the making of certain 
reproductions of a musical work needed to effectuate a digital 
transmission other than to acknowledge that a reproduction may be made 
during the course of a digital performance, and that such reproduction 
may be considered to be an incidental DPD.
    But are they? Section 115 does not provide a definition for 
incidental DPDs, so what constitutes an ``incidental DPD'' is not 
always clear. While some temporary copies made in the course of a 
digital transmission, such as buffer copies made in the course of a 
download, may qualify, others--such as buffer copies made in the course 
of a transmission of a performance (e.g., streaming)--are more 
difficult to fit within the statutory definition. In either case, it is 
clear that such copies need to comply with the statutory definition in 
order to be covered by the compulsory license. In other words, the 
copies must result in an ``individual delivery of a phonorecord which 
results in a specifically identifiable reproduction by or for any 
transmission recipient of a phonorecord of that sound recording.'' 17 
U.S.C. Sec. 115(d) (emphasis added), Similar questions can be raised 
with respect to cache copies and intermediate server copies made in the 
course of (1) downloads and (2) streaming of performances.
    Apparently because of such uncertainties, the RIAA/NMPA/HFA 
agreement includes a section entitled ``Legal Framework for 
Agreement.'' It contains two provisions that delineate how temporary 
copies made in order to provide either a limited download or an on-
demand stream fit within the statutory framework of the Section 115 
license. Specifically, it provides that

        under current law the process of making On-Demand Streams 
        through Covered Services (from the making of server 
        reproductions to the transmission and local storage of the 
        stream), viewed in its entirety, involves the making and 
        distribution of a DPD, and further agree that such process in 
        its entirety (i.e., inclusive of any server reproduction and 
        any temporary or cached reproductions through to the 
        transmission recipient of the On-Demand Stream) is subject to 
        the compulsory licensing provisions of Section 115 of the 
        Copyright Act;[and]

        that under current law the process of making Limited Downloads 
        through Covered Services (from the making of server 
        reproductions to the transmission and local storage of the 
        Limited Download), viewed in its entirety, involves the making 
        and distribution of a DPD, and further agree that such process 
        in its entirety (i.e., inclusive of any server reproductions 
        and any temporary or cached reproductions through to the 
        transmission recipient of the Limited Download) is subject to 
        the compulsory licensing provisions of Section 115 of the 
        Copyright Act.

Paragraph 8.1(a) and (b), respectively, of the RIAA/NMPA/HFA Licensing 
Agreement (as submitted to the Copyright Office on December 6, 2001).
    Of course, the parties' interpretation with respect to the scope of 
the Section 115 license is not binding on the Copyright Office or the 
courts. It merely represents their mutual understanding of the scope of 
the Section 115 license as a term of their privately negotiated 
license, an understanding that I believe is not shared by everyone in 
the world of online music services. This is an issue that I will 
address in the rulemaking proceeding concerning digital phonorecord 
deliveries, and it is quite possible that I will reach a different 
interpretation as to what falls within the scope of the license, 
especially with respect to on-demand streams.
    The critical question to be decided is whether an on-demand stream 
results in reproductions that reasonably fit the statutory definition 
of a DPD, and creates a ``phonorecord by digital transmission of a 
sound recording which results in a specifically identifiable 
reproduction by or for any transmission recipient,'' as required by 
law. Unless it does so, such reproductions cannot be reasonably 
considered as DPDs for purposes of Section 115, no matter what position 
private parties take within the four corners of their own agreement. 
What is more clear is that the delivery of a digital download, whether 
limited or otherwise, for use by the recipient appears to fit the 
statutory definition, since it must result in an identifiable 
reproduction in order for the recipient to listen to the work embodied 
in the phonorecord at his leisure.
            b.  Possible legislative solutions
    The Section 115 compulsory license was created to serve the needs 
of the phonograph record industry and has operated reasonably well in 
governing relationships between record companies and music publishers 
involving the making and distribution of traditional phonorecords. 
However, the attempt to adapt the mechanical license to enable online 
music services to clear the rights to make digital phonorecord 
deliveries of musical works has been less successful. With respect to 
problems involving the requirement that licensees give notice to 
copyright owners of their intention to use the compulsory license, I 
believe that I have exhausted the limits of my regulatory authority 
with the notice of proposed rulemaking published today. With respect to 
problems involving the scope and treatment of activities covered by the 
Section 115 compulsory license, I may soon be able to resolve some of 
the issues in the pending rulemaking on incidental digital phonorecord 
deliveries, but it seems clear that legislation will be necessary in 
order to create a truly workable solution to all of the problems that 
have been identified.
    At this point in time, I do not have any specific legislative 
recommendations, but I would like to outline a number of possible 
options for legislative action. I must emphasize that these are not 
recommendations, but rather they constitute a list of options that 
should be explored in the search for a comprehensive resolution of 
issues involving digital transmission of musical works. I certainly 
have some views as to which of these options are preferable, and in 
many cases those views will be apparent as I describe the options. I 
would be pleased to work with the Subcommittee and with composers, 
music publishers, record companies, digital music services and all 
interested parties in evaluating these and any other reasonable 
proposals.
    The options that should be considered fall into two distinct 
categories: (1) legal questions concerning the scope of the Section 115 
license, and (2) technical problems associated with service of notice 
and payment of royalty fees under the Section 115 license.
    Among the options that should be considered relating to the scope 
of the license are:

          Elimination of the Section 115 statutory license. 
        Although the predecessor to Section 115 served as a model for 
        similar provisions in other countries, today all of those 
        countries, except for the United States and Australia, have 
        eliminated such compulsory licenses from their copyright laws. 
        A fundamental principle of copyright is that the author should 
        have the exclusive right to exploit the market for his work, 
        except where this would conflict with the public interest. A 
        compulsory license limits an author's bargaining power. It 
        deprives the author of determining with whom and on what terms 
        he wishes to do business. In fact, the Register of Copyrights' 
        1961 Report on the General Revision of the U.S. Copyright Law 
        favored elimination of this compulsory license.
             I believe that the time has come to again consider whether 
        there is really a need for such a compulsory license. Since 
        most of the world functions without such a license, why should 
        one be needed in the United States? Is a compulsory license the 
        only or the most viable solution? Should the United States 
        follow the lead of many other countries and move to a system of 
        collective administration in which a voluntary organization 
        could be created (perhaps by a merger of the existing 
        performing rights organizations and the Harry Fox Agency) to 
        license all rights related to making musical works available to 
        the public? Should we follow the model of collective licenses 
        in which, subject to certain conditions, an agreement made by a 
        collective organization would also apply to the works of 
        authors or publishers who are not members of the organization? 
        Will the creation of new digital rights management systems make 
        such collective administration more feasible?
             In fact, we already have a very successful model for 
        collective administration of similar rights in the United 
        States: performing rights organizations (ASCAP, BMI and SESAC) 
        license the public performance of musical works--for which 
        there is no statutory license--providing users with a means to 
        obtain and pay for the necessary rights without difficulty. A 
        similar model ought to work for licensing of the rights of 
        reproduction and distribution.
             As a matter of principle, I believe that the Section 115 
        license should be repealed and that licensing of rights should 
        be left to the marketplace, most likely by means of collective 
        administration. But I recognize that many parties with stakes 
        in the current system will resist this proposal and that there 
        would be many practical difficulties in implementing it. The 
        Copyright Office would be pleased to study the issue and 
        prepare a report for you with recommendations, if appropriate. 
        Meanwhile, there are a number of other options for legislative 
        action that merit consideration.

          Clarification that all reproductions of a musical 
        work made in the course of a digital phonorecord delivery are 
        within the scope of the Section 115 compulsory license. This 
        may well be something that I will be able to do in regulations 
        issued in the pending rulemaking on incidental phonorecord 
        deliveries, but if I conclude that it is beyond my power to 
        reach that conclusion under current law, consideration should 
        be given to amending Section 115 to provide expressly that all 
        reproductions that are incidental to the making of a digital 
        phonorecord delivery, including buffer and cache copies and 
        server copies,\9\ are included within the scope of the Section 
        115 compulsory license. Consideration should also be given to 
        clarifying that no compensation is due to the copyright owner 
        for the making of such copies beyond the compensation due for 
        the ultimate DPD.
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    \9\ Technically, these are phonorecords rather than copies. See 17 
U.S.C. Sec. 101 (definitions of ``copies'' and ``phonorecords''), but 
terms such as ``buffer copy'' and ``server copy'' have entered common 
parlance.

          Amendment of the law to provide that reproductions of 
        musical works made in the course of a licensed public 
        performance are either exempt from liability or subject to a 
        statutory license. When a webcaster transmits a public 
        performance of a sound recording of a musical composition, the 
        webcaster must obtain a license from the copyright owner for 
        the public performance of the musical work, typically obtained 
        from a performing rights organazation such as ASCAP, BMI or 
        SESAC. At the same time, webcasters find themselves subject to 
        demands from music publishers or their representatives for 
        separate compensation for the reproductions of the musical work 
        that are made in order to enable the transmission of the 
        performance. I have already expressed the view that there 
        should be no liability for the making of buffer copies in the 
        course of streaming a licensed public performance of a musical 
        work. See U.S. Copyright Office, DMCA Section 104 Report 142-
        146 (2001); Statement of Marybeth Peters, The Register of 
        Copyrights, before the Subcommittee on Courts, the Internet, 
        and Intellectual Property, Committee on the Judiciary, 
        Oversight Hearing on the Digital Millennium Copyright Act 
        Section 104 Report, December 12-13, 2001. I have also pointed 
        out that it is inconsistent to provide broadcasters with an 
        exemption in Section 112(a) for ephemeral recordings of their 
        transmission programs but to subject webcasters to a statutory 
        license for the functionally similar server copies that they 
        must make in order to make licensed transmissions of 
        performances. DMCA Section 104 Report, U.S. Copyright Office 
        144 n. 434 (2001). In this respect, the playing field between 
        broadcasters and webcasters should be leveled, either by 
        converting the Section 112(a) exemption into a statutory 
        license or converting the Section 112(e) statutory license into 
        an exemption.
             I can also see no justification for providing a compulsory 
        license which covers ephemeral reproductions of sound 
        recordings needed to effectuate a digital transmission and not 
        providing a similar license to cover intermediate copies of the 
        musical works embodied in these same sound recordings, but that 
        is what Section 112 does in its current form. Parallel 
        treatment should be offered for both the sound recordings and 
        the musical works embodied therein which are part of a digital 
        audio transmission.

          Expansion of the Section 115 DPD license to include 
        both reproductions and performances of musical works in the 
        course of either digital phonorecord deliveries or 
        transmissions of performances, e.g., in the course of streaming 
        on the Internet. As noted above, many of the problems faced by 
        online music services arise out of the distinction between 
        reproduction rights and performance rights, and the fact that 
        demands are often made upon services to pay separately for the 
        exercise of each of these rights whether the primary conduct is 
        the delivery of a DPD or the transmission of a performance. 
        Placing both uses under a single license requiring a single 
        payment--a form of ``one-stop shopping'' for rights--might be a 
        more rational and workable solution.

    Among the options that have been proposed relating to service of 
notice and payment of royalty fees under the Section 115 license are 
suggestions by users who have expressed their frustration with the 
cumbersome process involved in securing the Section 115 license, 
including:

          Adoption of a model similar to that of the Section 
        114 webcasting license, requiring services using the license to 
        file only a single notice with the Copyright Office stating 
        their intention to use the statutory license with respect to 
        all musical works. Section 115 currently requires the licensees 
        to serve notices identifying each musical work for which they 
        intend to make and distribute copies under the compulsory 
        license. This system has worked fairly well and is sensible 
        with respect to the traditional mechanical license, but do such 
        requirements make sense for services offering DPDs of thousands 
        of musical works? The current system does have the virtue of 
        giving a copyright owner notice when one of its works is being 
        used under the compulsory license. Removing that requirement 
        would mean that a copyright owner would find it much more 
        difficult to ascertain whether a particular work owned by that 
        copyright owner is being used by a particular licensee under 
        the compulsory license. However, removing that requirement 
        would avoid--or at least defer--the problems compulsory 
        licensees currently have in identifying and locating copyright 
        owners of particular works. The problems might be only deferred 
        rather than avoided because the licensee would still have to 
        identify and locate the copyright owner in order to pay 
        royalties to the proper person--at least when the copyright 
        owner has registered its claim in the musical work.

          Establishment of a collective to receive and disburse 
        royalties under the Section 115 license. Again, Section 114 may 
        provide a useful model. Royalties under the Section 114 
        statutory license, which are owed to copyright owners of sound 
        recordings rather than of musical works, are paid to 
        SoundExchange, an agent appointed through the CARP process to 
        receive the royalties and then to disburse them to the 
        copyright owners. Such a model might be worth emulating under 
        the Section 115 license, especially if the requirement of 
        serving notices of intention to use the compulsory license on 
        copyright owners is abandoned. While such a scheme offers 
        obvious benefits to licensees, copyright owners (and, in 
        particular, those copyright owners who are readily identifiable 
        under the current system) might find themselves receiving less 
        in royalties than they receive under the current system, since 
        administrative costs of the receiving and disbursing entity 
        presumably would be deducted from the royalties and the 
        allocation of royalties might result in some copyright owners 
        receiving less than they would receive under the current 
        system, which requires that each copyright owner be paid 
        precisely (and directly) the amount of royalties derived from 
        the use of that copyright owner's musical works.

          Designation of a single entity, like the Copyright 
        Office, upon which to serve notices and make royalty payments. 
        I am skeptical of the benefits of this approach, which would 
        shift to the Copyright Office the burden of locating copyright 
        owners and making payments to them. The administrative expense 
        and burden would likely be considerable, and giving a 
        government agency the responsibility to receive such finds, 
        identify copyright owners and make the appropriate payments to 
        each copyright owner is probably not the most efficient means 
        of getting the royalties to the persons entitled to them.

          Creation of a complete and up-to-date electronic 
        database of all musical works registered with the Copyright 
        Office. I suspect that proponents of this solution have very 
        little knowledge of the difficulty and expense that would be 
        involved in creating an accurate and comprehensive list of 
        owners of copyrights in all musical works. Determining who owns 
        the copyright in a particular work is not always a simple 
        matter. Someone reviewing the current Copyright Office records 
        to determine ownership of a particular work would have to 
        search both the registration records and the records of 
        documents of transfer that are recorded with the Office. While 
        basic information about post-1977 registrations and documents 
        of transfer is available through the Office's online indexing 
        system, in any case where ownership of all or some of the 
        exclusive rights in a work have been transferred it would be 
        necessary to review the copy of the actual document of transfer 
        maintained at the Copyright Office (and not available online) 
        to ascertain exactly what rights have been transferred to whom. 
        Chain of title can often be complicated. Addresses of copyright 
        owners are not available in the Office's online indexes. And 
        the information in the Office's current registration and 
        recordation systems could not easily be transformed into a 
        database containing current copyright ownership information. 
        Moreover, neither registration nor recordation of documents of 
        transfer is required by law; therefore, there are many gaps in 
        the Office's records. Where there is a record, it is not 
        necessarily up to date. It is difficult to fathom how the 
        Office could create an accurate, reliable and comprehensive 
        database of current ownership of musical works. While the 
        registration and recordation system works reasonably well when 
        a person is seeking information on ownership of a particular 
        work, such information must usually be interpreted by a lawyer 
        (especially if there have been transfers of ownership). The 
        system is not well-suited for the type of large-scale licensing 
        of thousands of works in a single transaction that is desired 
        by online music services.

          Shifting the burden of obtaining the rights to the 
        sound recording copyright owner. Online music services 
        generally transmit performances or DPDs of sound recordings 
        that have already been released by record companies. The record 
        company already will have obtained a license--either directly 
        from the copyright owner of the musical work that has been 
        recorded or by means of the section 115 statutory license--for 
        use of the musical work. The record company may well have 
        already obtained a section 115 license to make DPDs of the 
        musical work as well, and one would expect that this will 
        increasingly be the case. Because record companies already have 
        substantial incentives and presumably have greater ability to 
        clear the rights to the musical works that they record, 
        consideration should be given to permitting online music 
        services--who must obtain the right to transmit phonorecords of 
        the sound recording from the record company in any event--see 
        17 U.S.C. Sec. 115(c)(3)(H)(i) (quoted above in footnote 7)--to 
        stand in the shoes of the record company as beneficiaries of 
        the compulsory license for DPDs. The online music company could 
        make royalty payments to the record company for the DPDs of the 
        musical works, and the record company (which might charge the 
        online music company an administrative fee for the service) 
        could pass the royalty on to the copyright owner of the musical 
        work. As noted above, Section 115(c)(3)(I) already appears to 
        permit the record company to license the right to make DPDs of 
        the musical compositions to other online music services. 
        Clarification of this provision and expansion to provide for 
        funneling royalty payments through the record companies might 
        lead to more workable arrangements.

          Creation of a safe harbor for those who fail to 
        exercise properly the license during a period of uncertainty 
        arising from the administration of the license for the making 
        of DPDs. Under current law, a person who wishes to use the 
        Section 115 compulsory license must either serve the copyright 
        owner with a Notice of Intention if he can identify and locate 
        the copyright owner based on a search of Copyright Office 
        records or file a Notice of Intention with the Copyright Office 
        if he cannot so identify or locate the copyright owner. While 
        the expenses involved in this process may be considerable, it 
        is hard for me to agree that there is uncertainty about how to 
        comply with the license. On the other hand, currently Section 
        115 exacts a harsh penalty for those who fail to serve the 
        Notice of Intention or make royalty payments in a timely 
        fashion: they are forever barred from taking advantage of the 
        compulsory license with respect to the particular musical work 
        in question. I have reservations about creating a ``safe 
        harbor'' for the making of unauthorized DPDs during a time when 
        a service has failed to comply with the requirements of the 
        license, but I believe consideration should be given to 
        affording a service the opportunity to cure its default and use 
        the compulsory license prospectively, even if the service is 
        liable for copyright infringement for the unauthorized 
        transmissions made prior to the service's compliance.

          Extension of the period for effectuating service on 
        the copyright owner or its agent beyond the 30 day window 
        specified in the law. There is merit in this proposal, 
        especially in light of the current provision that absolves a 
        licensee from making payments under the statutory license until 
        after the copyright owner can be identified in the registration 
        or other public records of the Copyright Office. Difficulties 
        in ascertaining the identities and addresses of the copyright 
        owners may also justify a more liberal approach. I could 
        imagine a system that, for example, required a service to serve 
        the copyright owner with a Notice of Intention within 30 days 
        of the service's first use of the musical work or within one 
        year of the time when the copyright owner is first identified 
        in the records of the Copyright Office--whichever date is 
        later--but with an obligation to make payments retroactive to 
        the date on which the copyright owner was first identified in 
        the Copyright Office records. Under such a system, services 
        would only have to search the Office's records once a year in 
        order to avoid liability for failing to have ascertained that a 
        copyright owner's identity has become available in the Office's 
        records.

          Provision for payment of royalties on a quarterly 
        basis rather than a monthly basis. It is my understanding that 
        most licenses negotiated with copyright owners under Section 
        115 (e.g., the licenses given by the Harry Fox Agency in lieu 
        of actual statutory licenses) provide for quarterly payments 
        rather than the monthly payments required under the compulsory 
        license. It is also my understanding that one of the reasons 
        for the statutory requirement of monthly payments, as well as 
        some of the other statutory requirements, was a determination 
        that use of the compulsory license should only be made as a 
        last resort, and that licensees should be encouraged to obtain 
        voluntary licenses directly from the copyright owners or their 
        agents, who would offer more congenial terms. Users might find 
        a requirement of quarterly payments rather than monthly 
        payments to be beneficial, but copyright owners presumably 
        would prefer to receive their payments more promptly; moreover, 
        if a licensee defaults on payment, a quarterly payment cycle 
        would be more disadvantageous to the copyright owner than a 
        monthly cycle. Amending Section 115 to require quarterly 
        payments might lead many more licensees to elect to obtain 
        statutory licenses rather than deal directly with publishers or 
        their agents. Consideration should be given to whether that 
        would be desirable.

          Provision for an offset of the costs associated with 
        filing Notices with the Office in those cases where the 
        copyright owner wrongfully refuses service. In general, I 
        believe that persons using a statutory license should bear the 
        cost associated with obtaining the license. However, if the 
        copyright owner has wrongfully refused to accept service of a 
        Notice of Intention, there is something to be said for the 
        notion of shifting those additional costs incurred by the 
        licensee as a result of the wrongful refusal.

    In general, I do support the music industry's attempt to simplify 
the requirements for obtaining the compulsory license and its desire to 
create a seamless licensing regime under the law to allow for the 
making and distribution of phonorecords of sound recordings containing 
musical works.
    However, the need for extensive revisions is difficult to assess. 
Prior to the passage of the DPRA, each year the Copyright Office 
received fewer than twenty notices of intention from those seeking to 
obtain the Section 115 license. Last year, two hundred and fourteen 
(214) notices were filed with the Office, representing a significant 
jump in the number of notices filed with the Office over the pre-1995 
era. Yet, the noted increase represents only 214 song titles, a mere 
drop in the bucket when considered against the thousands, if not 
hundreds of thousands, of song titles that are being offered today by 
subscription music services. While we acknowledge that this observation 
may merely reflect the reluctance of users to use the license in its 
current form to clear large numbers of works, as well as the fact that 
users may file with the Office only when our records do not provide the 
identity and current address of the copyright owner, it may also 
represent the success of viable marketplace solutions.
    Certainly we have heard few complaints about the operation of 
Section 115 in the context of the traditional mechanical license. To 
the extent that reform of the license is needed, it may be that the 
traditional mechanical license should be separated from the license for 
DPDs, and that two different regimes be created, each designed to meet 
the needs of both copyright owners and the persons using the two 
licenses.
    In any event, the critical issue centers on clarifying the scope of 
the compulsory license in the digital era. I have outlined only a few 
possible approaches to reform of the Section 115 compulsory license. 
While there is a clear need to correct some of the deficiencies in 
Section 115, I believe that it is important for all the interested 
parties--copyright owners, record companies, online music services and 
others--to work together to evaluate various alternative solutions in 
the coming months. I commend you, Mr. Chairman, for convening this 
hearing to discuss the problems associated with the use of the Section 
115 license in a digital environment, and I look forward to working 
with you, members of the Subcommittee, and the industries represented 
at this table to find effective and efficient solutions to make the 
Section 115 compulsory license available and workable to all potential 
users and strike the proper balance between their needs and the rights 
of the copyright owners.



    Mr. Smith. Thank you, Ms. Peters.
    Mr. Potter.

STATEMENT OF JONATHAN POTTER, EXECUTIVE DIRECTOR, DIGITAL MEDIA 
                          ASSOCIATION

    Mr. Potter. Thank you, Mr. Chairman, Mr. Berman, and 
Members of the Subcommittee, for the opportunity to speak this 
morning about the importance of reforming Section 115.
    This Subcommittee leads the battle against piracy, and we 
applaud your promotion of enforcement and education. Today's 
hearing focuses on the third, most powerful weapon against 
piracy: the marketplace, where royalty-paying DiMA companies 
like AOL, Apple, Microsoft, Yahoo, and RealNetworks compete 
every day against online black markets.
    Millions of people who lawfully enjoy and purchase music 
online illustrate the power of consumer choice and of offering 
great music with flexible usage rules and fair prices. But we 
need to do even better. And we need your help to modernize 
Section 115, to ensure that our services and the creators to 
whom we pay royalties prevail against scofflaw alternatives.
    115 reform can be summarized in three points: First, why 
the Section 115 mechanical compulsory license, which should 
promote the growth of music markets and royalties payments, 
instead is inhibiting legal royalty-paying online media 
services. Second, why the private market for music publishing 
rights does not effectively substitute for the 115 license. And 
third, how Congress can streamline and clarify the law to 
benefit songwriters, music publishers, record companies, online 
services, and consumers, all while helping to curb piracy.
    First, license and payment administration reform. Online 
services must clear licenses for hundreds of thousands of songs 
owned by more than 40,000 publishers. In an age of digital 
databases and online banking, it seems silly to require card 
file searches to identify copyright owners or to send notices 
and royalties by certified mail. We thank Register Peters for 
announcing today that some administrative processes will be 
streamlined. And we urge you to provide the Register authority 
to fully improve these licensing rules.
    The scope of the 115 license also needs clarification. It 
is uncertain whether 115 authorizes only the copies of songs 
that are delivered to consumers, or also the copies that are a 
necessary part of the distribution process, such as server 
copies. And it is also uncertain whether 115 can authorize 
subscription services.
    Most difficult is the risk associated with streaming 
services that perform songs on demand to subscribers who pay a 
monthly fee. Online music services pay performance royalties to 
ASCAP, BMI, and SESAC for this activity; but music publishers 
assert that these performances also implicate mechanical 
reproduction rights.
    Since August 2001, Register Peters has publicly agreed with 
DiMA that only one right and royalty are implicated. However, 
because the Copyright Act has strict liability standards and 
very expensive statutory damages, some companies, including our 
members, have agreed to pay double royalties as litigation 
insurance. This is wrong. And we ask you to clarify in 
legislation that a second royalty is not due.
    My second point is that, contrary to others' suggestion, 
the private market cannot solve the 115 administration or 
statutory license scope issues. The Harry Fox Agency licenses 
only about 65 percent of available music. So even if Harry Fox, 
RIAA, and DiMA resolved all issues privately, 35 percent will 
remain stuck in the dysfunctional 115 licensing regime.
    Also, though HFA functions for many publishers as an issuer 
of variations of the compulsory license, it has stood as a 
gatekeeper, without guidance from courts or the Congress, 
deciding on a voluntary basis whom to license, on what terms, 
and whether to offer less rights than are available under 
Section 115, or to insist on more rights than the law requires. 
Moreover, HFA refuses to disclose in advance what works and 
what rights it can license. And then it denies about 50 percent 
of all license requests that are submitted by online services.
    Conversely, ASCAP and BMI license all comers for all 
musical works in a user-friendly manner. You sign a form; you 
get licensed. You play by the rules, and you will not be sued 
for infringement.
    Third, since private markets cannot provide effective 
solutions, DiMA suggests legislation as follows: Authorize full 
modernization of the 115 process, including electronic 
searches, notice, and payments. Additionally, good-faith 
licensees who try to pay royalties deserve safe-harbor 
protections against infringement liability.
    Second, modernize 115 so it licenses all reproduction 
associated with online distribution, including server and 
network copies.
    Third, confirm that online performance services do not 
implicate a second right or royalty, and that limited download 
subscription services are covered by Section 115.
    Fourth, provide a percentage-of-revenue royalty option 
which will promote product and service innovation, including 
more anti-piracy options.
    And finally, the Subcommittee should consider a statutory 
blanket license for the entire music repertory. An agent like 
ASCAP, or the Harry Fox Agency, if it chooses, could 
efficiently license all compositions and accept industry 
royalties to all copyright owners. A blanket license would 
enable services to launch without litigation risk, and ensure 
prompt royalty payments and distributions, which benefits music 
publishers, composers, and songwriters.
    Mr. Chairman, DiMA looks forward to working with you, with 
Mr. Berman, with Register Peters, and my colleagues at the 
witness table and others, toward a more workable, efficient, 
and modern mechanical compulsory license. Thank you.
    [The prepared statement of Mr. Potter follows:]

                 Prepared Statement of Jonathan Potter

    Mr. Chairman, Representative Berman, and Members of the 
Subcommittee:
    Thank you for inviting me to testify today on behalf of the 
innovative, royalty-paying online music services offered by DiMA member 
companies, including by AOL, Apple, Microsoft, MusicMatch, Napster, 
RealNetworks, and Yahoo!. DiMA companies' success is critical to 
America's music industry, so I appreciate the opportunity to share the 
great strides that our companies have made toward building attractive 
royalty-paying online music services. More importantly, however, I will 
highlight how Section 115 of the Copyright Act--which should be a 
building block of online music services' growth--instead remains the 
most significant roadblock impeding our industry's progress, and how 
this Subcommittee might consider updating the law to benefit all the 
relevant constituencies--artists, publishers, recording companies, 
online services, and consumers.
    DiMA members express their appreciation to Chairman Smith and 
Representative Berman for focusing the Subcommittee on curbing 
copyright piracy through a balanced approach that combines enforcement 
of the laws and public education. DiMA agrees with the Subcommittee 
that enforcement and education are critical foundations of any effort 
to deter piracy of copyrighted works. But, we believe firmly that 
piracy cannot be combated successfully unless consumers are offered a 
better choice--legal, royalty-paying services that include quality 
music, flexible usage rules, great personalization and first-class 
customer service, all for a fair price. By modernizing Section 115 of 
the Copyright Act and by clarifying how it applies to different types 
of digital music services, Congress can assist DiMA companies and the 
music industry compete against and curb piracy by ensuring the 
availability of the most comprehensive, most attractive royalty-paying 
offerings.
    In recent years this Subcommittee has responded several times to 
promote the business and legal environment of legitimate online 
services. A statutory license was provided for webcasters in 1998, and 
the Small Webcasters Settlement Act was enacted in 2002. Both of these 
measures established a relatively stable legal environment for 
webcasting, and stimulated the creation of thousands of Internet radio 
stations. Most recently this Subcommittee moved CARP reform legislation 
through the House and DiMA hopes this legislation will soon become law.
    In May 2001, three company CEOs, representing the online media and 
recording industries, testified before this Subcommittee that music 
publishing licenses were the single greatest impediment to launching 
great online music services. In December 2001 Register of Copyrights 
Marybeth Peters testified that music publisher representatives were 
taking advantage of legal uncertainties with respect to the application 
of Sec. 115 to new digital services and were aggressively demanding 
licenses for services already licensed by other collecting societies. 
Register Peters urged Congress to fix the problem by amending the law
    In the same December 2001 hearing, Messrs. Ramos and Sherman also 
testified, but from a different songbook. They promoted a so-called 
``landmark'' agreement between the recording and music publishing 
industries and The Harry Fox Agency, that they claimed would solve the 
problems identified in the May 2001 hearing and permit new subscription 
services to launch, gain publishing licenses easily and on a 
nondiscriminatory basis, and curb piracy.
    As the Subcommittee is aware, there has been recent good news in 
the online music industry. Every month tens of millions of Americans 
visit AOL Music, the iTunes Music Store, Rhapsody and the RealNetworks 
Music Store, Napster, MusicMatch, Yahoo Music and MSN Music. These 
services stream more than 500 million songs and videos every month, 
sell more than two million downloads each week.
    But again we are before this Subcommittee discussing how the 
outdated Section 115 of the Copyright Act continues to retard the 
success of online services. Although the online music situation has 
improved, it is not good enough--for songwriters, music services, 
record companies or, we hope, for Congress. What is holding back online 
music services today is the same impediment of three years ago: the 
inability of legal music services to easily obtain and pay for clear, 
certain, risk-free music publishing licenses, notwithstanding nearly 
100 years of federal policy which favors clarity, simplicity, and 
straightforward licensing.
    Congress established the Section 115 compulsory ``mechanical'' 
reproduction license in 1909 to facilitate the licensing of musical 
works for piano rolls. Congress's goal at that time, and during the 100 
years since, has been to promote the development of new music markets 
by making copyrighted compositions widely available, while also 
ensuring that copyright owners are aware of uses of their work and that 
royalties are paid.
    Fast-forward almost 100 years and the underlying goals and 
principles remain the same. Royalty-paying online services are 
precisely the type of new music market that Congress intends to 
promote; and the Section 115 compulsory mechanical license could and 
should be playing an important role in building online music services 
with broad catalogs and the ability to compete with online black 
markets. Unfortunately, Section 115 is not very useful to online 
services, because (i) the licensing process is unworkable for digital 
music services; and (ii) its ambiguous scope causes uncertainty, risk, 
and excessive double-dip royalty payments.
    The Sec. 115 licensing process is dysfunctional because:

        (a)
             it imposes outdated paper-based and traditional mailing 
        requirements that hinder prospective licensees' ability to 
        efficiently identify copyright owners, license their works and 
        pay them royalties. While these systems may have been 
        acceptable for licensing a few works at a time for compact 
        discs, they cannot support the launch of a new online music 
        service with a catalog of hundreds of thousands of songs;

        (b)
             its licensing and pricing standards were designed for 
        simple physical, manufactured products, and simply are not 
        feasible in the world of digital distribution;

        (c)
             its requirements are scrupulously precise and its 
        penalties for noncompliance are harsh. Failure to comply 
        strictly with these cumbersome requirements not only subjects a 
        service to infringement liability, it also disqualifies a 
        service form obtaining a compulsory license to that work 
        forever. And do not underestimate the chill in the online music 
        industry created by the Copyright Act's combination of a strict 
        liability standard with extraordinarily high statutory 
        penalties. Though intended to protect copyright owners and to 
        be used against pirates, this combination of strict liability, 
        high monetary penalties and a detailed, outdated statute is 
        promoting fear and paralysis rather than innovation and new 
        markets.

    There are several disagreements about the scope of Sec. 115's 
application to legal, royalty-paying digital music services:

        (a)
             there is disagreement about whether on-demand Internet 
        radio services which merely perform music require mechanical 
        reproduction licenses, though they do not permit users to make 
        or possess any reproduction; DiMA and the Register of 
        Copyrights believe that on-demand performances may justify a 
        higher performance royalty than pre-programmed radio services 
        (and ASCAP and BMI charge almost a 50 percent surcharge for on-
        demand performances), but that the server-based and incidental 
        reproductions associated with performance services are either 
        royalty-free fair use or should be exempted from royalties 
        under the ephemeral recording exemption that is provided to 
        terrestrial broadcasters in Sec. 112 of the Copyright Act;

        (b)
             there is disagreement about whether the Sec. 115 license 
        extends to subscription services, which charge consumers 
        monthly in contrast to download services that charge per song 
        purchased;

        (c)
             there is disagreement about whether the Sec. 115 license 
        extends to all reproductions that are necessarily made to 
        support distribution of a song, e.g., by a download store, or 
        whether incidental network and transient reproductions or 
        server copies require an additional license and payment.

    Though the law and its impacts are complex, the overall result of 
the shortcomings of Sec. 115 are quite simple. This compulsory, 
guaranteed-to-be-available publishing license that Congress intended to 
be a meaningful alternative to direct licenses with 10,000 publishers 
and thereby promote new music markets and generate royalties to 
songwriters, is instead so administratively burdensome and of such 
uncertain scope that it is no alternative at all, and is undermining 
rather than promoting innovation and new royalty-paying markets.
    To compete most effectively against online black markets DiMA 
companies' music selection must be comprehensive--we need all the music 
that a compulsory licenses promises. To achieve stability and promote 
innovation, we need clarity with respect to whether and how Sec. 115 
applies to online music business models of today and in the future.
    Several times the compulsory mechanical license has been updated to 
account for changing technologies and business models, but the evidence 
that it needs additional revision is overwhelming and conclusive. DiMA 
urges the Subcommittee to update this law for the next generation new 
market--innovative online services that with your support can be 
commercially successful and the best weapon against piracy.

                     I. WHAT ARE THE PROBLEMS WITH 
             THE SECTION 115 COMPULSORY MECHANICAL LICENSE?

A.  The license clearance process is so cumbersome as to be 
        dysfunctional
    The most apparent deficiencies of the mechanical compulsory license 
are its administrative requirements, which are obligated by the statute 
and Copyright Office regulations.
    Sec. 115(b)(1) requires users of compulsory mechanical licenses to 
``serve notice of intention [to use the compulsory license] on the 
copyright owner'' prior to a musical work's use (emphasis added). 
Regulations require copyright owners to receive actual advance notice 
of the intended use of a work by certified or registered mail. However,

          Finding copyright owners can be almost impossible. 
        Only about 20 percent of musical works are registered in the 
        Copyright Office; many are not registered until several months 
        after publication; and registrations are rarely updated when 
        ownership rights are transferred.

          For pre-1978 works, copyright owner information is 
        available only on card files that must be searched manually in 
        the Copyright Office on a song-by-song basis.

          If a copyright owner is identified, the licensee must 
        notify the owner using a 2-page form for each individual 
        composition, and send the form and then monthly statements of 
        use and royalty checks by certified or registered mail.

          If the copyright owner cannot be located users must 
        file a similar 2-page form in the Copyright Office, and pay a 
        $12 administrative fee per composition. This fee is 
        prohibitively expensive considering that typically 25% of 
        copyright owners cannot be located, meaning a comprehensive 
        online service might have to pay the fee (and fill out the 
        form) hundreds of thousands of times.

    The process of identifying and providing notice to a copyright 
owner, or determining that notice is not possible because there is no 
registration data or the data is incorrect, might take several weeks 
per copyright. This is not helpful when a service is competing against 
online black markets that have no licensing costs, no marketing costs, 
no content acquisition costs, and have made the song available while 
the royalty-paying service is still filling out forms and sending 
registered mail.
    At minimum, even merely as a matter of government oversight, 
modernization and customer service, there is no escaping that this 
licensing process does not work. And if the compulsory mechanical 
license is to continue to exist, we urge the Subcommittee to at least 
ensure that it is administrable, efficient, and employs modern 
technology.

E.  The scope of 115 does not comport with the necessary manufacturing 
        practices of the digital download business or the physical 
        recording business.
    The antiquated Section 115 undermines online services because it 
requires that royalties be paid for every reproduction that is ``made 
and distributed.'' This was reasonable for 90+ years when most 
observers believed that each reproduction or phonorecord--a piano role 
or a vinyl record or compact disc--was intended for distribution and, 
thus, deserved a royalty. For online services, however, not every 
fixation or reproduction is intended for distribution, because many 
reproductions necessarily occur in the electronic process of delivering 
a download.
    Read literally, Sec. 115 might mean that reproductions that are not 
distributed, but which are necessary to the manufacturing or 
distribution process (e.g., server copies, archive copies and network 
and cache copies and buffer copies), are not eligible to be licensed 
pursuant to Sec. 115. And if that is the case then digital download 
stores and subscription services may be risking crushing infringement 
lawsuits, because these technologically necessary copies are not 
currently being licensed separately with each of more than 10,000 music 
publishers.
    This is also an issue for the traditional recording industry, whose 
compact disc manufacturing process requires production of a so-called 
``glass master'' that the factory uses to stamp each blank CD into a 
phonorecord. Does the Sec. 115 license, by implication and based on 
historical practice, cover this reproduction though it clearly is not 
intended for distribution?
    The risk is even greater for online services than it is for 
physical CD manufacturers. Product manufacturers might have a waiver 
and estoppel defense based on decades of not being sued with respect to 
the glass master, but online services, whether independent or owned by 
traditional record companies, have no such defense available. The 
infamous MP3.com and Farmclub lawsuits brought by music publishers 
against online music services that had not secured reproduction rights 
licenses for their server copies, are evidence of the enormous swords 
that the current Copyright Act has handed to publishers to shut down 
new services that have not complied with the publishers' views about 
what licenses are required for server copies.
    Congress could not possibly have intended that a compulsory license 
must be accompanied by a direct license for the very same work with 
respect to the very same activity; otherwise the compulsory license 
would have no value at all. This, however, is the absurd result if the 
Sec. 115 license does not cover all necessary reproductions made in the 
process of manufacturing the reproductions that are intended for 
distribution.

F.  It is Unclear Whether or How Sec. 115 Applies to Subscription 
        Services and their Specific Offerings.
    Today--more than two years after they were the subject of the 
``landmark'' HFA-RIAA agreement that was to have solved associated 
publishing disputes--the activities at the heart of today's online 
music subscription services remain burdened by controversy and 
disagreement about what rights they implicate and what licenses are 
necessary.
    Generally these services (which may be of particular interest to 
the Subcommittee because they are at the heart of the new legal 
university-based services) incorporate two separate products--limited 
downloads and on-demand streams (or on-demand radio).
    With respect to on-demand streaming services, music publishers 
claim a mechanical right is implicated by the server copies and other 
reproductions of the composition which are merely intended to 
facilitate the licensed performance (which generates performance 
royalties, e.g., to ASCAP, BMI or SESAC). In this instance the 
publishers' mechanical right claims are not associated with 
distribution of a song, but rather because they claim that on-demand 
streams substitute for distributions that would have generated 
mechanical royalties. This analysis absurdly would obligate on-demand 
streaming services to pay two royalties to the same publishers for a 
single activity, although the performance rights organizations are 
already receiving a 50% surcharge for on-demand performance royalties 
as compared to pre-programmed Internet radio. Nevertheless, the double-
dip royalty has been agreed to by the recording industry in the RIAA-
HFA agreement. Fortunately the Copyright Office has maintained a 
principled position in this dispute, and in 2001 recommended that 
Congress clarify that performance royalties pay completely for on-
demand performances, and that mechanical royalties should not be 
obligated by Internet radio performances, including by on-demand 
performances.
    Another issue concerns whether limited downloads (which are 
generally locked on a consumer's PC hard drive and are usable only for 
a period covered by a subscription fee) are licenseable under 
Sec. 115(g)(4), which applies to phonorecords made for the purpose of 
distribution by ``rental, lease or lending.'' The Harry Fox-RIAA 
agreement explicitly covers subscription services under Sec. 115, but 
DiMA companies report to me that some publishers have disagreed with 
that view. If Congress wishes for innovative distribution services to 
flourish, including those that are explicitly and effectively 
substituting for online black markets, then clarification would be 
helpful.
    Questions have been raised as the applicability of Sec. 115(g)(4) 
to subscription services generally, perhaps because the subscription 
payment is not tied to a specific work that is being licensed. Here 
again we urge the Subcommittee to clarify the law based on simple goals 
that have withstood the test of time--promoting new markets and 
assuring payment of royalties. By focusing on these goals DiMA believes 
these scope issues will be resolved favorably, both for innovative 
royalty-paying services and the creators whose works are winning 
consumer loyalty.

G.  Requiring royalties to be calculated on a penny-rate and per-work 
        basis is overly restrictive in a dynamic market when consumer 
        offerings and prices are changing dramatically to meet demand
    In the 1976 Act Sec. 115(c)(2) required licensees to pay royalties 
of 2\3/4\ cents for each work embodied in a phonorecord, and authorized 
future rate adjustments to be negotiated or determined by arbitration. 
In the almost 30 years since the rate has always been set at a fixed 
penny-rate for each work embodied in a phonorecord. Today's rate is 8.5 
cents per work; in 2006 the rate will increase to 9.1 cents per work. 
This fixed-rate per-work royalty rate calculation creates several 
problems in today's music dynamic music industry.
    The most significant problem is that the rate structure cannot 
adapt to products and services that are changing in response to 
consumer demand and in an effort to inhibit piracy. Calculating 
royalties on a per-work or per-reproduction basis was reasonable during 
the several decades when albums and CDs included a fixed number of 
reproductions of songs. Today, however, copy-protected and copy-limited 
CDs and downloads are being offered, but they often include or permit 
several reproductions of the work. For example:

          A dual-session CD includes two versions of every 
        song, each version in a different format. This ensures consumer 
        flexibility, e.g., the ability to play the CD in a traditional 
        CD player and a computer, but it also limits consumers' ability 
        to use the PC to copy the songs or to convert them into 
        unprotected formats.
             Consumers perceive a copy-protected dual-session CD as a 
        single product that plays in the same devices as a traditional 
        CD, or perhaps as a product with less value than the 
        traditional unprotected CD that also played in multiple devices 
        but permitted unlimited copying. Publishers, however, 
        opportunistically view the dual-session CD as being two 
        reproductions and, thus, obligating two royalties. Should, 
        however, this CD generate double- or triple-royalties to 
        publishers because in an effort to stem piracy the CD has two 
        or three copy-protected reproductions of works rather than a 
        single unprotected reproduction? Recently the Harry Fox Agency 
        issued its formal opinion that multiple-session CDs require 
        multiple royalties.

          Similarly, an online service could test-market 
        downloads that limit consumers to making three copies on CD or 
        portable devices, but publishers have suggested that this would 
        require four royalties--one for the original download and three 
        more for the authorized consumer reproductions. One major 
        recording company has actually prohibited online services from 
        limiting how many copies of downloaded songs can be made, or 
        sought an indemnification from the online service, for fear 
        that this anti-piracy limitation would trigger double, triple, 
        and quadruple mechanical royalties, or more.

    In addition to the royalty issues associated with innovative 
products and services, today's sound recording prices are also 
innovative--they have dropped dramatically in response to consumer 
demand, and in an effort to retain market share in the competition 
against piracy. Three years ago CDs with about twelve songs were priced 
at $11 wholesale and $16 retail, and mechanical royalties were less 
than 10% of the wholesale price. Today downloads are priced at about 70 
cents wholesale and as low as 79 cents retail, and publishers are 
receiving 12 percent of the wholesale price and often 10 percent or 
more of the retail price. In 2006 downloads may be priced at $1.19, but 
DiMA companies expect they are just as likely to be priced at 69 cents; 
only time will tell. Whatever happens to prices, the publishers 
proportional share of revenue should not dramatically increase or 
decrease, but rather should adjust along with industry economics.
    Regardless of whether the publishers' interpretation of current law 
is correct, the issue for this Subcommittee is whether the law should 
be amended so as to not even permit the publishers' argument that it 
(a) requires only fixed-price royalties when all other prices are 
changing dramatically; and (b) imposes multiple royalties solely 
because the publishers works are being protected against unauthorized 
copying; and (c) creates risk rather than certainty whenever a new 
technology or business model (e.g., limited downloads and on-demand 
streams) is developed. And more generally, is Sec. 115 designed to 
promote new legal markets by simplifying the payments of royalties, or 
to promote piracy by requiring multiple royalties, fixed price 
royalties and increasing risk?

   II. THE HARRY FOX AGENCY DOES NOT OFFER A SERVICE THAT ADEQUATELY 
     SUBSTITUTES FOR A WELL-CRAFTED ADMINISTRABLE SEC. 115 LICENSE.

    Some may claim that the Sec. 115 license is outdated and 
irrelevant, and that the Harry Fox Agency licenses the same mechanical 
right more efficiently. The facts prove otherwise.
    First, Fox licenses only between 60 and 65 percent of available 
compositions, compared to the Sec. 115 license which covers 100 
percent. If royalty-paying online music services are to compete with 
royalty-free online black markets, we need the ability and right to 
license 100 percent of the music that is supposed to be available under 
a Sec. 115 compulsory license.
    Second, a compulsory license is available as a matter of right to 
all prospective licensees. By contrast, the Harry Fox Agency--unlike 
ASCAP, BMI or SoundExchange--is not required to and does not have the 
rights to license to all. When a prospective licensee seeks licenses 
for a new business model or technology, even if seeking only to bulk 
license the rights otherwise available through the Sec. 115 process and 
willing to pay full statutory royalties, HFA often refuses to license, 
or its member publishers do not permit it to license, or licensing is 
endlessly delayed. I have personally been told by a senior HFA 
executive that if an innovative business developer wants a license, she 
must be prepared to demonstrate the strength of the idea, the financial 
strength of the company, and to negotiate a royalty rate. This does not 
sound like ASCAP, BMI or SoundExchange, who post their license forms on 
public websites in an effort to attract licensees with a simple and 
nondiscriminatory process.
    Third, HFA is capable of providing a license that has rights 
equivalent to Sec. 115 rights, but it also can and does offer more 
rights or less rights when it suits its own institutional interests or 
those of its member publishers.

          In a widely-reported litigation between music 
        publishers and the Universal Music Group concerning UMG's 
        Farmclub online music service, billions of dollars in statutory 
        damages were implicated when the court found that UMG's 
        licenses from HFA did not include all rights that were 
        otherwise available under Sec. 115, but rather included fewer 
        rights. If the largest recording company in the world and all 
        of its sophisticated lawyers were confused by HFA and Sec. 115, 
        and as a result inadvertently infringed copyrights in 
        approximately 25,000 songs, the existing Sec. 115 is obviously 
        flawed for the online music industry and HFA is obviously not 
        the solution.

          The reverse occurred several months later, when the 
        recording industry sought to avoid future infringement suits 
        and Farmclub-like litigations by signing an agreement with HFA 
        that would provide the rights that otherwise would be provided 
        under Sec. 115. In this instance HFA refused to provide a 
        license for only the rights available under Sec. 115, and 
        instead required the recording industry to also license and pay 
        for non-existent mechanical rights associated with on-demand 
        streaming--license terms that the recording industry did not 
        want and that the Register of Copyrights has said are not 
        necessary.

    Fourth, even when HFA cooperates in licensing online services, and 
commits to expedite license clearances and provide legal certainty, it 
fails to provide the quality of service that business requires, and 
that Congress should expect, from a compulsory licensor. Consider the 
following:

          HFA refuses to disclose to licensees which publishers 
        it represents except on a song-by-song basis in response to a 
        formal license request. This secretiveness is contrary to 
        common business practice, when a seller or licensor eagerly 
        discloses what is available so as to attract purchasers or 
        licensees.

          Moreover, every publisher retains the right to 
        withdraw works from any HFA license. This creates significant 
        hardship among licensees who rely on HFA, only to later have 
        works withdrawn from their available catalog.

          When a service submits a license request and a list 
        of compositions to HFA the response often takes 1-2 weeks, or 
        longer. The response typically has three categories--songs that 
        are licensed, songs that are not in the HFA catalog, and ``we 
        don't know.''

          In the two and a half years that record companies and 
        online services have been operating pursuant to the RIAA-HFA 
        agreement, the experience of our members and other licensees 
        has been that 40-60 percent of the millions of licenses 
        requested have been denied, either because the songs are not in 
        HFA's repertoire or, more frequently, because HFA cannot 
        determine whether they are or not in the HFA repertoire. 
        According to HFA's own responses to the prospective licensees, 
        the largest majority of license denials are because the HFA 
        database--even after almost $20 million in recent investment--
        has not been able to match the composition data submitted with 
        the license request--title, composer, album, UPC code, etc--to 
        a particular song. Some might suggest that online services are 
        submitting faulty data to HFA, but our members report that the 
        data they submit to HFA is precisely the data provided to the 
        online service by the record company.

          Even HFA's confident ``yes'' responses have included 
        errors, and it is the online services that bear the very high 
        legal risk which results. On hundreds of occasions, HFA 
        responses to license requests have included false positives--
        approvals for compositions that actually are not in HFA's 
        repertoire. Why is this a problem? Because a service that 
        relies on HFA's approval will immediately make that song 
        available for distribution, and be liable for infringement 
        under the strict liability standards of the Copyright Act. 
        There is no safe harbor for well-intended licensees, and HFA's 
        contract with licensees does not indemnify licensees, even in 
        the limited situation of false positives. Moreover, once a 
        service has made available on its website an HFA ``false 
        positive,'' current section 115 permanently disqualifies that 
        service from ever utilizing the Sec. 115 compulsory license 
        with regard to that composition.

    So unless HFA can license with absolute confidence and legal 
certainty 100% of available compositions, and can approve and process 
licenses expeditiously, without regard to new technologies or business 
models and without coercively imposing unwanted license terms or 
denying license terms that are desired, HFA can never be an adequate 
substitute for an efficient and comprehensive Sec. 115 compulsory 
license.

 VI. THE UNWORKABLE AND INEFFECTIVE SEC. 115 LICENSING PROCESS LEAVES 
  LICENSEES NO CHOICE EXCEPT TO LICENSE THROUGH HFA, AND TO YIELD TO 
                       AGGRESSIVE HFA PRACTICES.

    In October 2001, following the stinging infringement verdict 
against Universal Music Group in the Farmclub lawsuit, the recording 
industry signed a license with the National Music Publishers 
Association and HFA to enable the launch of licensed online music 
services, in a manner that supposedly was free of legal risk. At the 
December 2001 hearing of this Subcommittee Messrs. Sherman and Ramos, 
who also join me before you today, congratulated their industries for 
their so-called ``marketplace'' agreement that reportedly resolved all 
the music publishing problems that theretofore had prevented licensed 
online music services from launching. However, as we have discussed 
above, the agreement solved very few of the fundamental publishing 
problems for online services.
    This RIAA-HFA agreement is remarkable for several reasons. Most 
notably, as described by Mr. Ramos in that December 2001 hearing, the 
recording and publishing industries agreed that the process of 
producing and delivering ``on-demand streams''--which are, of course, 
performances--``entail[s] the making and distribution of copies of 
musical works and, accordingly, constitute digital phonorecord 
deliveries (or `DPDs') within the meaning of Section 115 of the 
Copyright Act.'' In other words, the recording industry agreed that a 
transitory performance constitutes a ``distribution'' of a phonorecord, 
which heretofore had only been associated with physical manifestations 
such as piano rolls, vinyl records, cassettes and compact discs--and 
downloads which incorporate a possessory experience.
    Hopefully the Subcommittee will agree with the Register of 
Copyrights, who opined in the August 2001 Section 104 Study and in the 
December 2001 hearing that reproductions made in the technical process 
of delivering a performance--even an on-demand performance--are 
royalty-free fair use (a defense, by the way, that Universal Music 
Group did not raise in the Farmclub lawsuit); indeed, Register Peters 
suggested that copyright law should be clarified to ensure that such 
reproductions are exempted from royalty obligations--just as 
terrestrial broadcasters' ephemeral recordings are exempted by Sec. 112 
of the Copyright Act.
    But there is no principled legal basis to conclude--as the 
publishers and recording industry did in their agreement--that 
reproductions associated with the delivery of performances are ``made 
and distributed'' and therefore covered by Sec. 115 only if the 
performances are ``on-demand'' and not if the performances are part of 
a pre-determined program. However, no record label or online service 
that licenses music from HFA can complain about this unprincipled 
position, since the Agreement contains a specific silencer clause that 
prohibits signatories from disagreeing publicly--including before this 
Subcommittee--with HFA's imposition of payment obligations for 
nonexistent rights.
    What the recording industry wanted was to license to online 
services the right to offer consumers two new subscription offerings: 
on-demand streams and tethered downloads. Tethered downloads are 
downloads that cannot be removed from the subscriber's hard drive. They 
cannot be copied to a blank CD or an MP3 player or uploaded to the 
Internet. The consumer experience is limited compared to a CD, but the 
entirety of the song is actually distributed to and then located on the 
consumer's PC. There is no disagreement that tethered downloads are 
reproductions that are made and distributed, and therefore are covered 
by the Sec. 115 license. That is the license that the recording 
industry sought from the Harry Fox Agency. Yet, HFA refused to grant 
them that license, unless they also licensed on-demand streams.
    If there had been in place a workable Sec. 115 compulsory license, 
the recording industry would have been able to license every 
composition desired for the tethered download subscription services, 
and never would have signed a mechanical license for on-demand streams 
that they did not need or want, never paid the Harry Fox Agency a 
$2,000,000 advance that was never recouped, and would not still be 
paying $83,000/month to extend that unwanted and unnecessary license.
    But the reality is that Sec. 115 is antiquated, inefficient, and 
perhaps legally insufficient, which left the recording industry no 
choice but to accept rights they did not need as the price for the 
rights they wanted.
    As discussed in other parts of this testimony, the results of the 
HFA license have been disastrous. Licensees get no advance notice as to 
what publishers or compositions HFA does or does not represent. More 
than 50% of license requests have not been granted. Licensees have paid 
millions of dollars in advances to HFA, but still do not know what 
royalty rate will be charged them. And, there have been no reports that 
any of the millions of dollars paid by recording companies and online 
services to HFA have been paid to songwriters or publishers.
    Of course Messrs. Sherman and Ramos's rosy predictions of December 
2001 have not come to pass, which is why we are here today. But 
regardless of the administrative hurdles that continue unabated, it is 
essential that the Committee now implement the Register's 
recommendation--that transitory performances of sound recordings or 
compositions should not trigger a mechanical license or a reproduction 
right or royalty of any kind.
  vii. solutions are available that will ensure full compensation to 
   rightsholders, reduce services' legal risk and promote innovative 
  comprehensive offerings that can effectively compete against piracy.
    DiMA appreciates that today's oversight hearing does not require 
endorsement of a single solution, and so I will take this opportunity 
to suggest several alternatives that we believe merit this Committee's 
consideration. Given the need for online services to expand to meet 
consumer demand and to help fight online piracy, we urge the 
Subcommittee to rapidly consider the available alternatives and to move 
quickly toward a legislative proposal that will make the Section 115 
license effective and efficient. The end result of any of our suggested 
alternatives would serve to promote Congress's historical goals with 
respect to the Sec. 115 mechanical compulsory license--simple and 
straightforward availability of compositions, and assurance of 
royalties to songwriters and publishers.

    1.  Modernize Administration of Sec. 115 License. If the Committee 
chooses to simply improve the efficiency of the existing Sec. 115 
license, several steps are necessary and appropriate:

      a. Congress should direct the Copyright Office (or a contractor) 
to create an electronically searchable database of all known registered 
copyrighted works. DiMA and our companies want to pay creators all the 
royalties that are due, but copyright owners that cannot be found 
cannot be paid.

      b. End the requirement of separate notices for each song 
licensed, of paper-based forms, and of notice and payment by registered 
or certified mail. Instead Congress should authorize batch electronic 
filing of reports that compositions will be used or have been used, 
have notices transmitted electronically to registered copyright owners 
or maintained in the Copyright Office if works are not registered. Of 
course, Congress should also authorize timely and transparent 
electronic payments of royalties.

      c. Today the Copyright Office does not accept payments on behalf 
of songwriters and publishers, and if a work is not registered or the 
registration not up-to-date, the licensee can use the work royalty-
free. Instead, to ensure that creators are paid by licensees, Congress 
could direct the Copyright Office (or an agent) to accept royalties on 
behalf of Copyright owners whose works are licensed, with payment to be 
made when the copyright owner registers the work or updates 
registration information.

      d. Perhaps most importantly, licensees that have attempted in 
good faith to utilize the compulsory mechanical license should not be 
penalized for the inadequacies of the Copyright Office process or the 
Harry Fox database. Rather, any legislation should provide good faith 
licensees with ``safe harbor'' protection against penalties or 
infringement liability, so that section 115 becomes a tool for mutual 
benefit, not a trap for the unwary.

    2.  Modernize the Scope of the Sec. 115 License to Cover ``All 
Necessary'' Reproductions or Phonorecords. As discussed earlier, some 
have argued a literal interpretation of Section Sec. 115 that covers 
only phonorecords that actually have been ``made and distributed,'' but 
excludes the physical means used to produce them. This interpretation, 
if accepted by a court, would expose to infringement liability the 
glass master and stamper copies that are inherently necessary for the 
production of record albums and CDs, as well as the many copies of a 
work that necessarily are made as part of the technological 
underpinnings of a digital download service. This would undermine 95 
years of Congressional intent to promote the production and 
distribution of sound recordings that generate royalties for 
songwriters and publishers. Clarifying this ambiguity would not be 
complicated, and would meaningfully reduce the legal uncertainty 
associated with digital distribution.

    3.  Clarify that Sec. 115 Does Not Apply to Performance Services, 
and That it Does Apply to Limited Download Subscription Services. As 
discussed earlier, the Harry Fox Agency has aggressively exploited the 
ambiguities of Sec. 115 to demand licenses for on-demand performances, 
notwithstanding the Register of Copyrights' conclusion that no such 
license is required, and that royalties associated with such 
performances should be performance royalties rather than mechanical 
royalties. We urge the Committee to act on this recommendation. 
Additionally, clarity regarding the application of Sec. 115 to 
subscription services generally would be helpful, to confirm the 
general belief that limited download subscription services are covered 
by the Sec. 115 license.

    4.  Clarify Legal Authority to Set Percentage-of-Revenue Royalties. 
As discussed earlier, the availability of a percentage-of-revenue 
alternative for calculating mechanical license royalties would provide 
helpful rate flexibility at a time of product and service innovation 
and price fluctuation. Some have expressed concern that publishers' 
revenue would be disproportionately reduced in comparison to sound 
recording revenue or consumer electronics revenue. They worry, for 
example, that companies might give music away for free in order to sell 
associated goods and services, so the revenue bases for calculating 
publishing royalties would be substantially reduced. Such a concern is 
at best hypothetical. This has never been a problem for European 
publishers, who for several decades have calculated mechanical 
royalties on a percentage-of-revenue basis. Additionally, for several 
decades here in the United States--during economic booms and busts when 
broadcast revenue goes up and goes down--publishers have collected 
billions of dollars in performance royalties based on percentage of 
revenue calculations.

    5.  Convert the Sec. 115 license into a blanket license, and 
conform it structurally with all modern compulsory and statutory 
licenses. The mechanical compulsory license is provided only on a per 
work basis because in 1909 when the license was developed, and in 1976 
when it was modified, licensees typically licensed only a handful of 
compositions at one time in order to produce a piano roll or 
composition book or a record album.
         Today, however, online services require hundreds of thousands 
or even a million licenses simultaneously, as they compete--against 
each other and against online black markets--to offer consumers the 
most comprehensive music selection possible. Only with a blanket 
license can services be confident of non-infringing access to all 
available music for purposes of lawful commercial distribution, which 
is precisely Congress's goal during the past 100 years. Only through a 
blanket license can services launch free of legal risk, which would 
free tremendous resources for marketing, customer service, and 
improving systems to deliver royalties electronically.
         I am not suggesting that the Congress consider granting online 
music services an all-you-can-eat-for-one-low-price license, nor am I 
suggesting that services would avoid providing detailed reports of use 
to ensure that royalties are paid accurately to deserving songwriters. 
Rather I am suggesting that just like ASCAP, BMI, SoundExchange, and 
license administration collectives in Europe, the Copyright Office or 
its designee simply could grant licenses on a non-discriminatory basis 
for the use of all copyrighted compositions for all necessary 
associated reproductions, contingent upon the regular filing of 
detailed reports of how compositions are used and which compositions 
are used. This would not transfer the burden of royalty accounting to 
songwriters, and would not eliminate the technological problems facing 
the Copyright Office and HFA today. But it would enable services to 
create robust offerings without legal risk, and to pay more money to 
songwriters and less to lawyers--and that is a win-win for America.

    Three years ago Mr. Ramos promised this Subcommittee that the Harry 
Fox Agency would bulk license, electronically, on a non-discriminatory 
basis, and enable online music services to launch without legal 
distress if they work with HFA. Instead HFA licenses only whom they 
please and when they please, rejects more than 50% of license requests 
submitted by licensees, hides their database from licensees that pay 
millions of dollars to use the repertoire and pay the songwriters that 
HFA represents, and causes more risk than it mitigates by aggressively 
seeking to license rights that do not exist and by providing false 
positives when licenses are approved.
    It is time for Congress to provide for today's online music 
environment the same rights it provided in 1909, 1976, and what this 
industry needs--a compulsory mechanical license that relieves legal 
risk to well-intended royalty-paying services, that promotes new 
markets for music, and assures royalty payments to songwriters. A 
simple, updated, functional risk-free non-discriminatory Sec. 115 
license would be a win-win for creators, distributors and consumers.
    Thank you.

    
    
    Mr. Smith. Thank you, Mr. Potter.
    Mr. Ramos.

  STATEMENT OF CAREY R. RAMOS, COUNSEL, PAUL, WEISS, RIFKIND, 
     WHARTON AND GARRISON, ON BEHALF OF THE NATIONAL MUSIC 
                     PUBLISHERS ASSOCIATION

    Mr. Ramos. Initially, I would like to thank the Chairman, 
Mr. Berman, and the distinguished Members of the Committee for 
the opportunity to appear here today on behalf of the National 
Music Publishers Association.
    I thought it might be helpful, for starters, if I explained 
a little bit about what NMPA is and what a music publisher is. 
The National Music Publishers Association, which was founded 
over 80 years ago, is the leading organization representing the 
interests of music publishers in the United States.
    What is a music publisher? A music publisher is a company 
or, in many instances, an individual, that represents the 
interests of songwriters by promoting their songs; by 
publishing their songs in sheet music; and by licensing the use 
of their songs for reproduction and distribution in CD's, on 
the Internet, through public performances, and exercising the 
other rights available under the copyright law.
    I want to stress, the role of the music publisher is to 
represent the interests of the songwriter. The music publishing 
industry, unlike the record industry, is very unconcentrated. 
The Harry Fox Agency, alone, represents over 27,000 music 
publishers. There are many music publishers who, as I said, are 
individuals. In fact, they are songwriters who have set up 
their own music publishing companies to represent them in 
licensing their music. That is a very common practice in the 
industry.
    And the typical arrangement between the songwriter and the 
music publisher is a split of all the licensing royalties that 
are received. Today, the average, I would say, is about three-
quarters going to the songwriter, and a quarter going to the 
music publisher. Obviously, in the case of the songwriter who 
has his own music publishing firm, they would collect 100 
percent.
    But when we talk about royalties here today, most of these 
royalties are going to the music publisher--forgive me, are 
going to the songwriter. And most of the costs associated with 
running systems to make licenses available are borne by the 
songwriter. That is important to keep in mind.
    In that respect, I'd just like to give a little bit of 
economic context. There's a lot of discussion here about law, 
but what's actually going on in the marketplace? To date, the 
Harry Fox Agency, which licenses over 90 percent of the 
commercially significant music that is distributed in the 
United States--and I emphasize commercially significant, 
because there are lots of obscure songs out there which Harry 
Fox may not represent. To date, the Harry Fox Agency has 
collected $2.6 million for digital distribution of music on the 
Internet, total to date. That is less than 0.2 percent of all 
the collections by the Harry Fox Agency. Most of the HFA's 
collections are for physical delivery. So far, this has been a 
very small part of their business.
    iTunes, which reports that it has made 30 million downloads 
since it was launched last April, has paid Harry Fox $150,000, 
or Harry Fox has received $150,000. Those licenses are going 
through the record companies. That's how much that Harry Fox 
has received so far. Harry Fox expects to receive much more. 
And this is the main message that the music publishers, the 
music publishing industry, has today for the Committee. They 
believe in the Internet. It is in their commercial interest to 
license their songs, because they don't distribute music. 
Unless they grant licenses, they won't collect royalties; they 
won't make any money.
    They have been working as hard as they can to make music 
available on the Internet, to increase that $2.6 million, that 
0.2 percent, to a much more significant figure. They are 
committed to doing that. And the Harry Fox Agency has adopted a 
number of significant changes, which would not be reflected in 
the law because they're done in the private marketplace, to 
achieve that.
    They do bulk licensing. They do not license on a song-by-
song basis; they do bulk licensing. They do it electronically. 
They don't require you to mail the application; they do it 
electronically. They have a quick turnaround, which they have 
shortened in recent months to 4 hours on a license request. 
They have agreed in the case of co-owned works to license the 
entire work, even if they do not represent all of the co-
owners; a major concession that is an expensive and potentially 
risky issue for them to undertake, but they have stepped up to 
the plate and done that.
    The Harry Fox Agency, as I have said, is committed to 
making a wide array of music available on the Internet and to 
work on a private marketplace basis to achieve those results. 
It's doing that now and, as I said, it has every reason to 
continue doing so. Thank you.
    [The prepared statement of Mr. Ramos follows:]

                  Prepared Statement of Carey R. Ramos

    Mr. Chairman, Mr. Berman, and Members of the Subcommittee, thank 
you for this opportunity to testify on behalf of the National Music 
Publishers' Association (NMPA) on the ``Mechanical Compulsory License'' 
under section 115 of the Copyright Act. NMPA is the principal trade 
association representing the interests of music publishers in the 
United States. The more than 800 music publisher members of NMPA, along 
with their subsidiaries and affiliates, own or administer the majority 
of U.S. copyrighted musical works. For more than eighty years, NMPA has 
served as the leading voice of the American music publishing industry--
from large corporations to small businesses--before Congress and in the 
courts.
    The Harry Fox Agency (``HFA'') is the licensing affiliate of the 
NMPA. It provides an information source, clearinghouse and monitoring 
service for licensing musical copyrights, and acts as licensing agent 
for more than 27,000 music publisher principals, which in turn 
represent the interests of more than 160,000 songwriters

                               BACKGROUND

    Enacted in 1909, the Mechanical License is the oldest statutory 
license in copyright law. This statutory mechanism allows commercial 
users of nondramatic musical works to invoke the compulsory license and 
reproduce and distribute such works at a royalty rate set by the 
statute, as long as the terms and conditions of section 115 are 
followed. The 1909 Act set the statutory rate at 2 cents per song, and 
this rate did not change for 679 years, when Congress added a rate-
adjustment mechanism for the statutory rate. Since that time, the 
statutory rate has increased--usually by industry negotiation--and 
today stands at 8.5 cents per song. If the mechanical right statutory 
rate had increased commensurate with the Consumer Price Index, the rate 
today would be 37 cents per song. At 8.5 cents, the current 
``mechanical rate'' thus represents a substantial bargain as compared 
to the rate set by Congress in 1909.
    While the 8.5 cents statutory rate acts as a ceiling, it does not 
act as a floor. Music copyright owners are free to negotiate lower 
rates with users of copyrighted musical works, and often do. In some 
instances, contractual provisions such as ``controlled composition 
clauses'' in the recording contracts of certain artists require the 
composers of musical works to accept 75% or less of the statutory rate. 
As a result, the average actual rate paid for musical works is 
significantly less than 8.5 cents per song.
    The most significant recent amendment of section 115 occurred in 
1995, when the Digital Performance Right in Sound Recordings Act 
confirmed that the reproduction and distribution rights of music 
copyright owners are implicated--and the statutory compulsory license 
is available--when a phonorecord is transmitted electronically by a 
``digital phonorecord delivery'' (``DPD''). Unfortunately, while 
Congress and the music industry assumed in 1995 that the Internet would 
provide an exciting new medium for the distribution of music, the 
environment turned sour in 1999 with the launch of the Napster service. 
Since then, unfortunately, piracy has dominated Internet distribution 
of music. No royalties from these ``peer-to-peer'' transmissions of 
copyrighted musical works are received by authors, songwriters, and 
music publishers. Since 1999, when Napster was launched, music 
publishers have seen their mechanical royalties plummet by 22 percent.
    Although unauthorized P2P services continue to dominate Internet 
delivery of music, the recent launch of Apple's iTunes service--and 
other paid download services--has finally begun to fulfill the promise 
that the Internet offered as a legitimate marketplace for music. NMPA 
and its members are excited about these new services and strongly 
support their efforts.
    It should be emphasized that our members have every economic 
incentive to issue as many licenses to new, legitimate Internet music 
services as possible. It is only through license agreements that our 
members are compensated. As of today, NMPA has issued over 1.75 million 
licenses for musical works to 39 different companies offering digital 
musical services. These licenses represent the vast majority of musical 
works for which there is any meaningful level of consumer demand.
    Pursuant to the 1995 Act, NMPA and RIAA negotiated an agreement in 
1997 whereby ``digital'' rates and terms for ``downloads'' of musical 
works would mirror the rates for ``physical phonorecords'' sold between 
January 1, 1998 and December 31, 2007. In the Fall of 2001, NMPA, HFA 
and RIAA negotiated a second agreement, under which the two sides 
agreed that: (1) compulsory licenses under section 115 would be made 
available to subscription services offering ``limited downloads'' and 
``on-demand streams'' of musical works, and (2) the subscription 
services could launch their businesses at the time of the agreement and 
pay royalties in the future when royalty rates for such transmissions 
were set. HFA has entered into similar subscription licensing 
arrangements with Full Audio, Listen.com the new Napster.

                            CARP REFORM BILL

    Mr. Chairman and Mr. Berman, we thank you for your help in drafting 
and advancing the ``CARP Reform'' bill to passage in the House. There 
are many changes in this legislation that are helpful to music 
publishers, through both a reform of the general ``arbitration'' style 
of rate- setting and distribution of royalties and various technical 
amendments to section 115.

                   PRESENT EVALUATION OF SECTION 115

    In the view of NMPA, no additional legislative changes to section 
115 are necessary at this time. The basic principles of the section 115 
compulsory license remain reasonable and appropriate, even in the 
digital era. In exchange for the guaranteed right of music users to 
reproduce and distribute nondramatic musical works, music copyright 
owners are guaranteed a return on their works (currently 8.5 cents per 
song, or up to $1.04 for a 12-song album that typically retails for 
$15). A rate-adjustment mechanism promotes voluntary agreements among 
music copyright owners and those who would use their works 
commercially, while affording ``the copyright owner a fair return for 
his creative work'' pursuant to the various factors under section 
801(b)(1)). These principles make as much sense in the digital era as 
they did in the physical phonorecord era.
    The recent success of iTunes confirms that current law is not an 
impediment to consumer demand for digital delivery of music when a 
commercially viable product is made available. In the last few years, 
this committee has heard from critics of section 115 that the unwieldy 
music publisher community impedes the mass licensing of music, and thus 
the electronic availability of wide ranges of music. These critics have 
suggested that amendments to section 115 would facilitate cheaper and 
faster access to musical works, and thus greater public acceptance of 
lawful sources of digitally-transmitted music. The recent success of 
iTunes shows, however, that the critics of section 115 should have 
spent less time lobbying Congress and more time developing products 
that U.S. consumers of music actually desired. The creators of iTunes 
appear to have figured out what U.S. music consumers actually want--
easy access to and reasonable prices for downloads from vast libraries 
of online music.
    The Harry Fox Agency, the licensing arm of NMPA, represents over 
27,000 music publishers. It has invested enormous sums of money on IT 
improvements in the past few years to ensure that large-scale 
electronic licensing is a reality. Tremendous strides have been made in 
the last few years. The available catalogue is well in the hundreds of 
thousands of musical works. And it will continue to grow.

                           A CAUTIONARY NOTE

    There is a great economic incentive for industries to encourage 
Congress to endorse by legislation the technological ``flavor of the 
month.'' Given section 115's prominent role in licensing music over the 
Internet and via other new technologies, copyright policy-makers should 
be particularly cognizant of the rapid technological change in this 
arena. Let me give a concrete example.
    Under Section 104 of the DMCA, the Copyright Office was directed to 
write a report on the impact of recent copyright law amendments on 
electronic commerce and technological development. The Copyright Office 
transmitted this report in August of 2001, and one of its 
recommendations was to exempt from the reproduction right ``temporary 
buffer copies that are incidental to a licensed digital transmission of 
a public performance of a sound recording and any underlying musical 
work.'' The Office noted that it had been persuaded by webcasters that 
such copies had ``no economic value.''
    There are both legal and technological problems with the Section 
104 Report.
    Legal Flaws. The Report predates our subscription services 
agreements with RIAA, Listen.com and others and, unlike those 
agreements, does not distinguish between on- demand and radio-style 
streaming. This is a critical distinction. To the extent that the 
Report recommends a statutory exemption from mechanical licensing for 
radio-style streaming, we respectfully submit that no exemption is 
needed. Publishers have never required, and have now expressly agreed 
not to require, mechanical licenses for such streaming. To the extent 
that the Report may be construed to seek a statutory exemption for on-
demand streaming, however, such legislation would seriously impair the 
copyright in musical works and deprive songwriters and music publishers 
of a vital source of licensing income.
    The Report correctly concludes that streaming involves the copying 
of musical works. The ``aggregate effect'' of streaming, it states, 
``is the copying of the entire [musical] work.'' \1\
---------------------------------------------------------------------------
    \1\ Report at 132.
---------------------------------------------------------------------------
    The Report, however, then proceeds to consider whether so-called 
``buffer'' copies made in the course of streaming are nevertheless a 
``fair use'' of copyrighted music. Applying the factors codified in 
Section 107 of the Copyright Act, the Report concludes that, because 
two of the four factors (the transformative nature and economic value 
of the use) favor the user rather than the copyright owner, a ``strong 
case'' could be made that the making of a ``buffer'' copy in the course 
of streaming is a fair use not subject to the payment of royalties.\2\ 
The law is crystal- clear, however--and the Report acknowledges--that 
the doctrine of fair use ``is limited to copying by others which does 
not materially impair the marketability of the work which is copied.'' 
\3\ In conducting the fair-use analysis, the law requires that 
consideration be given to whether, ``if [the use] should become 
widespread, it would adversely affect the potential market for the 
copyrighted work.'' \4\ Here, there can be no question that on-demand 
streams--which allow consumers to choose the songs they want, when they 
want to hear them--will displace record sales, and therefore directly 
affect ``the marketability of the work that is being copied,'' or the 
``potential market for the copyrighted work,'' so as not to qualify as 
a fair use. Under these circumstances, it defies economic reality to 
say that `buffer'' copies are fair use. Indeed, it would do violence to 
the fair use doctrine to do so.
---------------------------------------------------------------------------
    \2\ Report at xxiv.
    \3\ Report at 138 (quoting Harper & Row Publishers, Inc. v. Nation 
Enters., 471 U.S. 539, 566-67 (1985)).
    \4\ Report at 139 (quoting Sony Corp. v. Universal City Studios, 
Inc., 464 U.S. 417, 449-50 (1984)).
---------------------------------------------------------------------------
    The potential for the on-line delivery of music to displace record 
sales, in fact, was Congress's principal concern in enacting the 
Digital Performance Right in Sound Recordings Act of 1995 (the 
``DPRA''). The legislative history of the DPRA states that the Act was 
intended to respond to the concern that ``certain types of subscription 
and interactive audio services might adversely affect sales of sound 
recordings and erode copyright owners' ability to control and be paid 
for the use of their work.'' \5\ Or, in the words of then-Register of 
Copyrights Ralph Oman, ``[W]ill what you call the `celestial jukebox' 
replace Tower Records and the corner outlet stores and their glitzy 
stock of CD's, tapes, and records?'' \6\
---------------------------------------------------------------------------
    \5\ S. Rep. No. 104-128 at 362 (1995).
    \6\ Performers' and Performance Rights in Sound Recordings, 103d 
Cong. 4 (1993) (statement of Ralph Oman, Register of Copyrights, 
accompanied by Marybeth Peters, Policy Planning Adviser to the Register 
of Copyrights).
---------------------------------------------------------------------------
    Chairman Sensenbrenner put it this way: ``[N]ew interactive 
services are being created which allow consumers to use their TV's and 
computers to order any recording at any time. These subscriber services 
threaten sales of CD's, records and tapes.'' \7\
---------------------------------------------------------------------------
    \7\ 141 Cong. Rec. H10,098-108 at 10,103 (1995) (statement of Rep. 
Sensenbrenner).
---------------------------------------------------------------------------
    The Report did not consider on-demand streams in its analysis. It 
appeared to address only radio-style webcasting (for which, as noted, 
we do not seek mechanical licenses in our agreements with the RIAA and 
similar services). Given the direct and substantial impact that on- 
demand streaming will have on record sales, there is no basis for 
concluding that ``buffer'' copies made in the course of streaming a 
song on demand are a fair use of the underlying copyrighted work.
    Finally, the fair use doctrine is ill-suited to the inquiry and 
analysis undertaken by the Report here. It is an equitable doctrine, to 
be applied in fact-specific circumstances. To apply it broadly, without 
the benefit of a fully developed factual record, as the Report does, is 
inconsistent with the terms of Section 107.
    Technology. On the technological front, in June of 2002, NMPA 
engaged an expert in computer streaming technology (Dr. Andrew 
Cromarty) and delivered a report to the Copyright Office showing that, 
as of June 2002, ``temporary'' buffer copies incidental to digital 
transmissions of a sound recording were often not temporary, provided 
the consumer with many benefits of a permanent copy, and therefore did 
have economic value.
    Dr. Cromarty explained that the ``temporary'' copy is not so 
temporary, rather, it is saved permanently on the hard-drive of a 
consumer's computer in a ``cache''. This is done to provide the user a 
functionality equivalent to ownership: immediate playback on demand of 
the previously streamed content, and continuous playback in case the 
internet connection is unstable. These variations on streaming 
technology will continue to be made--especially because the competitive 
pressure from popular downloading services like iTunes will induce 
streaming services to offer download-like functionality. The point is 
simply that reliance on a term like ``temporary buffer copy'' in a 
dynamically changing technological context could create significant 
adverse, unintended consequences. This would especially be the case if 
such a malleable category were deemed exempt from copyright law: this 
would provide an incentive to use technology that barely met the 
definition while providing an economically significant benefit for 
which the consumer would be charged. In this situation, it would be 
unfair for the technology company to reap all of the benefit and for 
the artist to be uncompensated.
    In short, NMPA respectfully suggests that Congress treat with great 
caution a legislative request from any industry based on the assumption 
that a particular technology of the moment is here to stay and that the 
law should be amended to accommodate it. As we have seen over and over 
again, rapid technological change is inevitable. A change in the law, 
however, is much less certain.

                               CONCLUSION

    In summary, NMPA believes that section 115 is not in need of 
legislative change. While NMPA members continue to be battered by 
Internet piracy, we are enthusiastic about the new music download and 
subscription services and believe that they will ultimately prevail 
over unlawful copying. NMPA strongly supports these new business models 
through the licensing process both because it is in our economic 
interest and because it is the right thing to do. The basic policies 
set forth in section 115 remain wise and reasonable and do not require 
revision at this time.
    Thank you for this opportunity to testify, and I look forward to 
answering your questions.



    Mr. Smith. Thank you, Mr. Ramos.
    Mr. Sherman.

   STATEMENT OF CARY SHERMAN, PRESIDENT, RECORDING INDUSTRY 
                     ASSOCIATION OF AMERICA

    Mr. Sherman. Thank you, Mr. Chairman, Representative 
Berman, and Members of the Subcommittee. I am Cary Sherman, 
president of the Recording Industry Association of America. I'm 
grateful for the opportunity to present our views concerning 
the operation of the 115 mechanical compulsory license.
    I'd like to thank you for focusing attention on this 
arcane, but important, subject. As you know, while very few 
people are familiar with how musical works are licensed, it has 
a profound effect on the manner in which consumers are able to 
enjoy music. Whether consumers will be able to buy new physical 
products that combine in a single disc both CD technology and 
new high-resolution formats like DVD and super-audio CD's, a 
disc that will play in whatever devices the consumer may have, 
depends on the efficient and successful operation of the 
mechanical license.
    Whether consumers will enjoy the convenience of having 
their new computers or portable music players come with the 
music they want already on the machine also depends on a 
functional licensing system. And these are just two examples of 
the kinds of new products and services that are awaiting 
licensing.
    Record companies have had a long and generally successful 
business relationship with music publishers, based on Section 
115. However, that relationship has not been without its rough 
spots, and we are in a rough spot now. I'd like to briefly 
describe some problems that we are presently experiencing with 
the operation of the mechanical licensing system that are 
affecting our ability to bring consumers the exciting new 
formats I mentioned and many others. We are hopeful that, with 
your encouragement, we will be able to resolve our differences 
with the publishers in the marketplace. But presently, we are 
not making much progress, and so we can't rule out the 
possibility that addressing these issues legislatively may be 
necessary.
    The case of the new dual-disc format is a good 
illustration. This is a disc that will offer consumers the 
ability to enjoy new music on their existing CD players as well 
as the new DVD or super-audio CD player they may own or buy in 
the future. These products come with multiple versions of the 
same music in what is basically the different languages of the 
different players on which they can be used; much as a user 
manual might offer the same instructions in different 
languages, so that any user can read it.
    We believe it is clear that under Section 115, the required 
payment is one mechanical royalty per song, per disc. That is 
not just a sensible reading of the statute; it is a sensible 
business result. The user can only listen to the music on one 
player at a time.
    Moreover, consumers are demanding added value for their 
music dollars, and the industry must deliver attractive new 
products to get them back into the habit of buying instead of 
taking music for free. What better than a dual disc that gives 
them the flexibility of transitioning from their existing CD 
players to the new high-resolution formats of the future?
    To our surprise, the publishers issued a notice informing 
licensees that any disc with more than a single version of the 
same music on it would require separate and specific licensing, 
and requiring that licensees make a specific offer for payment 
in addition to the prevailing statutory rate. This would 
fundamentally change the economics of the industry by requiring 
multiple payments for the same music, when consumers are 
getting no more music, just a more convenient way of listening 
to it.
    We may think that we're right on the law, but as a 
practical matter, our companies cannot obtain licenses and pay 
the royalty required by law, because the compulsory licensing 
provisions of Section 115 are too cumbersome to be used. 
Therein lies the problem. We theoretically have a right to a 
license, but, as a practical matter, we can't exercise that 
right.
    The administrative burdens of current Section 115 are not 
the only problem. Existing regulations provide for a per-unit, 
penny-rate royalty. That worked fine when record companies sold 
only a few types of physical products. But that rigid structure 
has not adapted well to new technologies in the current dynamic 
marketplace. Record companies would like to sell and license a 
variety of great new products, but the cents-rate structure 
doesn't translate well for these new offerings.
    Take for example the new subscription services that offer, 
for a monthly fee, a combination of streams for listening and 
various kinds of downloads that offer everything from temporary 
to permanent ownership. How do you even calculate the cents-
rate for that service?
    A percentage royalty rate, by contrast, would enable these 
products to be launched and find an appropriate price point in 
a dynamic marketplace. The amount of the royalty would adjust 
automatically, as market conditions varied. Most foreign 
countries base mechanical royalty rates on a percentage of the 
selling price. Why can't we?
    These are complex issues, and resolving them is not easy. 
But if the overall purpose of Section 115 was to ensure the 
ready availability of musical compositions, that objective is 
no longer being achieved. We sincerely hope that we will be 
able to resolve these problems quickly in negotiations with our 
music publisher colleagues. But time is of the essence. The 
marketplace won't wait. The plague of piracy continues to 
spread. If we cannot get there on our own, we may be back to 
ask for your help. Thank you very much.
    [The prepared statement of Mr. Sherman follows:]

                 Prepared Statement of Cary H. Sherman

    I am Cary Sherman, President of the Recording Industry Association 
of America (``RIAA''), and I am grateful for the opportunity to present 
our views concerning the operation of the mechanical compulsory license 
provided by Section 115 of the Copyright Act. I would like to begin by 
thanking the Subcommittee, under the leadership of Chairman Smith and 
Ranking Minority Member Berman, for focusing its attention on the 
arcane but important subject of mechanical licensing of musical works.
    As you probably know, RIAA is the trade group that represents the 
U.S. recording industry. Its member record companies create, 
manufacture or distribute approximately 90% of all legitimate sound 
recordings produced and sold in the United States and comprise the most 
vibrant national music industry in the world. As such, we have somewhat 
mixed feelings about Section 115. On the one hand, RIAA's members have 
historically obtained the vast majority of mechanical licenses. On the 
other hand, as creators, we respect the rights of songwriters and other 
creators to exercise control over, and receive fair compensation for, 
use of their creative works. We do not in principle favor compulsory 
licensing, although after nearly a century of compulsory mechanical 
licensing, it is so woven into the fabric of the music publishing 
industry that it is difficult to contemplate the music business without 
it.
    Record companies have had a long, broad-based business relationship 
with the owners of musical work copyrights, based on Section 115. That 
relationship has generally been successful for both the music industry 
and consumers. However, that relationship has not been without rough 
spots, and we are in a rough spot now. This afternoon I will describe 
some problems that we are presently experiencing with the operation of 
the mechanical licensing system that are affecting our ability to bring 
consumers exciting new formats for the music they enjoy. We're hopeful 
that with your encouragement we will be able to resolve our differences 
with the publishers concerning these issues, as a business matter, in 
the marketplace. But presently, we are not making much progress. 
Congress could facilitate resolution of these issues by extending to 
physical product mechanical license negotiations the antitrust 
exemption that section 115 already provides for negotiations concerning 
downloads--as the House has voted to do in H.R. 1417 (the CARP reform 
bill). However, the antitrust exemption is not a complete solution to 
the present problems in the mechanical licensing system, so we can't 
rule out the possibility that it might ultimately be helpful to do 
something more to address some of these issues legislatively or through 
Copyright Office rulemaking.

                               BACKGROUND

    It might be helpful if I began with some background concerning the 
compulsory mechanical license. Compulsory licensing of ``mechanical'' 
reproductions of musical works--that is, reproductions of sound 
recordings of musical works--has been part of U.S. copyright law since 
1909, when Congress extended the rights of music publishers to 
mechanical reproductions. The recorded music business was in its 
infancy in 1909, so the compulsory license has provided the framework 
for the relationship between the recording and music publishing 
industries since the very beginning.
    Section 115 continues the basic structure of the 1909 Act 
compulsory license. In contrast to later statutory licenses and the 
practice in many foreign markets, Section 115 requires copyright users 
to license every individual work by following cumbersome procedures. 
The regulations provide even more cumbersome procedures for reporting 
usage information. Because the official procedures are so cumbersome, 
the marketplace long ago adopted workarounds. For example, the National 
Music Publishers' Association's subsidiary The Harry Fox Agency and 
others offer a simpler process for obtaining and reporting usage under 
mechanical licenses of essentially statutory scope. Even with these 
workarounds, record companies have borne a very large mechanical 
license administrative burden, but the system has generally worked.
    In addition, current Section 115 regulations provide for a per-unit 
penny-rate royalty set for long periods of time. As I describe below, 
that rigid structure has not adapted well to new technologies in the 
current dynamic marketplace. A percentage royalty increasingly looks 
like a better way of addressing new consumer products and services, and 
greater short term flexibility to respond to market conditions would 
improve the mechanical licensing system.

       MECHANICAL LICENSING ISSUES ARE IMPEDING INTRODUCTION OF 
                       NEW PRODUCTS AND SERVICES

    Anyone who has read the newspapers in the last several years has 
heard about the tremendous pain that piracy has inflicted on the whole 
music industry. Sales of recorded music products have declined some 25% 
over the past three years, depriving the public of creative new music 
as record companies have been forced to slash their artist rosters and 
support for new artists, as well as costing thousands of jobs due to 
retail store closings and record company retrenchment. Our colleagues 
the music publishers and songwriters feel this pain too, although less 
acutely due to the performance and other revenue streams they receive.
    We are working hard to lure customers back through a range of 
exciting new consumer product and service offerings. These include 
physical discs (we call them ``multisession discs'') that can be played 
on computers, SACD and DVD players, as well as CD players; computers 
and portable players preloaded with a broad array of music that 
consumers can ``unlock'' on a per-tune basis or as part of a 
subscription service; CDs and DVDs with extra tracks or even albums 
that consumers can buy, or keys to extra content that consumers can 
download from the Internet; and downloads and physical products with 
digital rights management systems that protect artists' rights while 
allowing users to make a limited number of personal use copies. We're 
also trying to develop new revenue streams by, for example, licensing 
master ring tones for use on cellphones.
    It is important that mechanical licenses be as available for these 
new offerings as they always have been for more traditional offerings. 
Toward that end, we have tried hard to work with publishers to keep 
them abreast of these offerings and work out any issues. However, 
disagreements concerning the application of the Section 115 license, 
and the inflexibility of the per-unit statutory royalty set for a 10 
year period (in contrast to a percentage royalty) are impeding the 
introduction of these offerings in the U.S. By contrast, in other 
countries, mechanical royalty rates are usually based on a percentage 
of the sales price. It is possible that mechanical licensing issues in 
the U.S. could lead to a situation where foreign markets have access to 
new consumer products that cannot be released in the U.S.
    The situation concerning multisession discs is instructive. 
Multisession discs can take many forms. Record companies are currently 
testing DualDisc, a format that typically contains an album encoded for 
traditional CD players on one side and the same album for DVD players 
on the other. Most SACD discs are also multi-session, including stereo 
and surround-sound SACD sessions and CD sessions. We think that these 
new consumer products are compelling for a number of reasons--they 
provide a single product playable on most consumer music players, they 
offer a new convenience to consumers, they reduce duplicative 
inventory, and they move the marketplace to products of higher quality 
and greater capacity than the CD. More importantly, we know that if we 
want consumers to buy our music, we have to let them play the music in 
whatever players they have. Multisession discs are the way to allow 
consumers to play music on the various platforms that are available.
    It's the ``multisession'' technology--putting differently-encoded 
renderings of the same music for each format on a single disc--that 
makes this possible. Thus, one disc could have two to five renderings 
of the same recordings. We believe it is clear that the Section 115 
license covers multisession discs and that the required payment is one 
mechanical royalty (e.g., 8.5 cents) per disc. However, the Harry Fox 
Agency (``HFA'') has suggested that each multisession disc is in fact 
two to five ``phonorecords,'' requiring specific licensing (and in the 
case of compulsory licenses, presumably payment at the statutory rate) 
for each session. But despite the merits of multisession discs, paying 
more than a single mechanical royalty would be unwarranted as a 
business proposition.
    Nonetheless, HFA has notified its licensees that it will not issue 
licenses on any other basis without specific publisher consent. From 
what I have heard, many individual publishers seem to have embraced 
HFA's view that payment of 2 to 5 mechanical royalties per disc is 
required, so individual company agreements have been few and far 
between. I am not hopeful that individual negotiations will meet market 
demand within a time that might help reverse the bite of piracy.
    Because this issue arises under a compulsory license and affects 
all of both industries, we have sought to discuss the issue with HFA on 
an industry basis. Citing antitrust concerns, the publishers have 
declined. As you probably know, later compulsory licenses in the 
Copyright Act contain language granting authority for collective 
negotiation of matters relevant to the operation of the compulsory 
license ``notwithstanding any provisions of the antitrust laws.'' As a 
result of an amendment in 1995, Section 115 contains an antitrust 
exemption for mechanical license negotiations concerning downloads. For 
historical reasons that exemption does not apply to physical products. 
We are grateful that in H.R. 1417 (the CARP reform bill), the House 
voted unanimously to remedy this historic anomaly and extend the 
Section 115 antitrust exemption to physical products.
    While we believe that extension of the antitrust exemption to 
physical products is important to help us bring consumers exciting new 
formats for the music they enjoy, the antitrust exemption is not a 
complete solution. Among other things, it would only allow us to do a 
private deal with HFA, not to obtain access to the 30-40% of works not 
licensable through HFA. Thus, it is possible that there may need to be 
a change in the Section 115 regime itself.
    It is likely that the section 115 regime ultimately will need to 
move toward a percentage royalty to give it the flexibility to adapt 
and retain its vitality in the face of technological innovation. When 
record companies sold only a few types of physical products, the cents 
rate worked well. But record companies are now selling, licensing or 
contemplating a great variety of products, including not only 
multisession discs but preloaded offerings that consumers can 
``unlock'' through online transactions; offerings with bonus material; 
products with digital rights management systems that allow limited 
personal use copying, and subscription devices that offer both streams 
and limited downloads for a single monthly fee. These products are 
distributed through different channels and have different economics. 
Applying the cents rate to some of the models is often impossible and 
economically infeasible. A percentage royalty rate, by contrast, would 
enable these products to launch and find an appropriate price point in 
a dynamic marketplace. The amount of the royalty would also adjust 
automatically as market conditions varied. The Section 115 regime also 
would benefit from the flexibility to adjust rates more frequently, and 
if necessary to open up rates between scheduled CARP proceedings to 
address new consumer product offerings.

           THE SUBSCRIPTION SERVICES AGREEMENT IS A MODEL OF 
                    HOW SUCH ISSUES CAN BE RESOLVED

    We have previously hit bumps in the road of our relationship with 
the publishers when questions have arisen concerning the application of 
the compulsory license to new technologies. But we have been able to 
resolve them. For example, several years ago, questions concerning the 
application of the compulsory license to subscription services, and our 
consequent inability to obtain licenses for those services promptly, 
became an impediment to the launch of services. We resolved those 
issues through a Subscription Services Agreement between RIAA, NMPA and 
HFA that provided a framework for licensing services. That agreement 
had its desired effect of allowing new services to enter the 
marketplace. In late 2001, RIAA and NMPA asked the Copyright Office to 
adopt regulations implementing the same framework as the agreement, to 
make clear that services can rely upon the compulsory license as to all 
musical works, and not just those licensable through HFA. We hope that 
the Copyright Office will act in the near future upon our joint request 
to adopt regulations implementing the agreement.

                               CONCLUSION

    We're hopeful that with your encouragement we will be able to 
resolve our differences with the publishers concerning the current 
generation of new formats as a business matter, just as we did in the 
case of the Subscription Services Agreement. This is a critical time 
for everyone in the music industry. Without new products to excite 
consumers, we risk losing an entire generation of music lovers to 
piracy. Record companies are working hard to meet that challenge, but 
we need the help of others in the industry to achieve that goal.



    Mr. Smith. Thank you, Mr. Sherman.
    Let me address my first question to all the witnesses who 
are here today. And this is only slightly digressing, but it's 
a little bit of a question on behalf of songwriters. I am just 
curious--and maybe, Ms. Peters, we'll start with you--whether 
you think that royalty payments should be a flat rate, or a 
percentage amount?
    Ms. Peters. I don't have a preference one way or the other. 
I think, whatever it is, it has to work. And certainly, with 
the hundreds of thousands of songs, it seems that if you go 
song by song, it may not be the appropriate model.
    Mr. Smith. Okay. Mr. Potter?
    Mr. Potter. We believe there should be the option. We think 
there should be the option of a percentage of revenue. We think 
it adds flexibility for innovative products and services, as 
Mr. Sherman was describing. We think it's worked at least 
reasonably well in Europe for a long time. Songwriters have 
been paid through a percentage-of-revenue royalty.
    Mr. Smith. Okay. Mr. Ramos?
    Mr. Ramos. We believe that the rates should be, as it has 
been for close to a century, a flat rate, a set rate. And there 
are a couple of reasons for that. And this is really with the 
songwriters' ultimate interests in mind.
    First, if you have a percentage rate, that would subject us 
to the risk that companies which took licenses would use music 
as a loss leader. iTunes is a good example. And I'm not 
accusing Apple or iTunes, because I think it's a wonderful 
service. But it's no secret that Apple's primary interest is in 
selling computers and iPods. And the music is what attracts 
people to their site to buy that equipment. If they offer the 
music, they'll sell the equipment. It's a wonderful business 
model for them. It may not be a good business model for 
songwriters, who don't sell computer equipment. That's one 
significant concern.
    The other concern is that--is really an auditing concern. 
Computers, if they can do one thing, they can count. They can 
count the number of times that songs are downloaded. And to 
simply assign a number to each count and say, ``That's how much 
the songwriter gets,'' we think is a simple, easily audited 
system; where we don't have to get into questions about how 
much revenue they earned, and did they take deductions for, you 
know, this item or that item. It's just a much simpler system. 
Thank you.
    Mr. Smith. Okay. And Mr. Sherman?
    Mr. Sherman. Well, we feel strongly that the time has come 
to look at a percentage royalty. We think it will solve many of 
the problems that we're presently confronting in the 
marketplace, and make irrelevant many of the legal issues that 
have surrounded the offering of these new services.
    It is true that there is always a risk that a company like 
Apple would look at music as a loss leader, but record 
companies don't look at it that way. Record companies have 
exactly the same interests as music publishers in the way that 
they license. And in any event, there are certainly mechanisms 
that we'd be able to agree upon to avoid that kind of risk.
    Mr. Smith. Okay. Thank you, Mr. Sherman. It sounds like two 
for percentage, one for flat rate, and one for whatever works 
best.
    What about additional royalty payments for second-session 
CD's, Mr. Sherman?
    Mr. Sherman. We feel that this is a counterproductive 
proposal, frankly. We think that we, as an industry, ought to 
be offering consumers more value on the physical discs that 
we're selling. The notion of asking record companies to pay 
more in order to provide more convenience for consumers doesn't 
make a lot of sense to us. They're still getting just one music 
album; it just happens to play in two different ways.
    Mr. Smith. Thank you. Okay. Mr. Ramos?
    Mr. Ramos. Mr. Sherman and I are in agreement that this 
should be negotiated, and we think that it can be. One matter 
of clarification----
    Mr. Smith. This should be what?
    Mr. Ramos. Mr. Sherman and I are in agreement that this is 
a matter that should be negotiated. In fact, we've been working 
to do that. And this Committee has assisted us in that regard 
by passing the CARP reform legislation, which will include an 
antitrust exemption to give us, you know, protection from 
potential lawsuits, in order to be able to do that.
    But the most important thing I wanted to say is that the 
Harry Fox Agency policy is not that they would collect multiple 
royalties for each of these sessions; but rather, that each of 
the sessions needs to be licensed. What the rates should be, is 
a different question.
    In the marketplace today, these products, these SACD and 
DVD audios, generally sell for prices substantially higher than 
CD's. So there is additional value there, and we think that 
should be reflected in a fair rate paid to the songwriter.
    Mr. Smith. Okay. Thank you. Mr. Potter?
    Mr. Potter. The additional value, I think, would be 
reflected in a higher royalty if we were on a percentage-of-
revenue system. So if the prices are higher for super-audio 
CD's, that would address the additional value issue.
    We are troubled by the idea of negotiating in the private 
market the laws, essentially, which would then extend to the 35 
or higher percentage of music that the Harry Fox Agency does 
not control. Mr. Ramos said 90 percent of commercially 
significant music. I would think there's a definition of 
``commercially significant music'' that extends to small 
songwriters and small record labels who sell smaller amounts, 
but whose royalties are just as valuable.
    Mr. Smith. Okay. Thank you, Mr. Potter.
    Mr. Ramos, I want to squeeze in one more question. Ms. 
Peters, in her written testimony, at least, said that one 
option was to eliminate Section 115, in favor of a system that 
we have in Europe where you have a collaborative effort, and 
various organizations would merge. What do you think of that 
idea? And would you be willing to participate? Just be very 
brief, if you will.
    Mr. Ramos. I will. The music publishers favor marketplace 
solutions. So if we were to ship to--I mean, they would 
certainly be open to considering repealing 115, doing away with 
the compulsory license, and going to a marketplace solution. No 
question about it.
    I think, Mr. Chairman, you might want to ask that question 
to my clients' customers, on this side here----
    Mr. Smith. If my time had not expired, that was my intent.
    Mr. Ramos. Yes.
    Mr. Smith. With everybody's allowance, perhaps, Mr. 
Sherman, can you respond very quickly? And then we'll go to Mr. 
Potter.
    Mr. Sherman. Well, by and large, we would be open to 
considering anything that would create a workable system. The 
problem that we've got is not whether it's compulsory licensing 
or not; it's that we have a system that just is no longer 
functional in the digital age.
    Mr. Smith. Something has to happen. Yes, Mr. Potter.
    Mr. Potter. I think if the Harry Fox Agency wanted to, you 
know, go visit the Justice Department and get a consent decree 
to operate with transparency and in a blanket license manner, 
where they licensed all comers on a non-discriminatory basis, 
we would be open to that sort of system.
    Mr. Smith. Thank you all. The gentleman from California is 
recognized for his questions.
    Mr. Berman. Thank you, Mr. Chairman. I had a chance to meet 
with both the--at separate times, thank God--with the music 
publishers and with DiMA, on some of these 115 issues. And my 
first question is for Mr. Potter. This whole issue of the 
principle versus the money; the issue of what should be--
changing the licensing mechanism, versus how much you're paying 
to do it, and to what extent are you standing on a--and 
fighting for a principle here which isn't central to the 
fundamental business of how much money are you having to pay.
    The publishers come to me and they say, ``We're willing to 
negotiate and be reasonable on money, but there is this 
principle that we think is important, and we don't want to 
change that principle.''
    Let me put it a different way. You take the position that 
for on-demand--that the Harry Fox Agency's position on on-
demand streaming services, that they should obtain licenses for 
the server, catch, buffer, and other reproductions that may 
occur in the course of an on-demand stream. The law shouldn't 
be interpreted to require a royalty for such reproductions. And 
they apparently refuse to take an available license from the 
Harry Fox Agency, your members do, for these reproductions. And 
instead, you're asking us to exempt them from incurring any 
copyright liability.
    When we met, one of your member companies noted that it had 
begrudgingly taken a license to the one-click patent from 
Amazon, even though it harbored reservations about that 
patent's validity; reservations that Mr. Boucher and I have 
been interested in, a question in the larger context that we've 
been interested in, in some legislation that we've introduced.
    The company chose to take a license, despite these 
reservations, due to business considerations. Amazon is a 
distributor of that company's products. The company doesn't 
want to pay seven to ten million in patent litigation costs. I 
mean, understandable reasons why principle didn't have to get 
in the way of doing business.
    Your association is not asking that Congress pass 
legislation to protect your members from liability against 
these questionable patent claims. What's the difference between 
the two situations? If fear of infringement liability, 
potential litigation costs, and the desire to maintain a good 
relationship with a business partner justify licensing a 
questionable patent from a fellow technology company, why don't 
the same business considerations justify licensing questionable 
uses of copyrights--questionable in your mind, uses of 
copyrights from music publishers? If you can work out the 
price, what's the difference whether it's one license, or two 
licenses, or three licenses?
    Mr. Potter. In the first instance, Mr. Berman--and I 
appreciate the question. I recall the conversation well. I 
think that the Congress is considering patent reform. And the 
Patent Office is studying a whole lot of these issues, as to 
whether they should be issuing those sorts of patents. So in 
fact, some of those companies who were paying those litigation 
insurance royalties, if you will, have approached the Congress 
and asked it. So it is a similar circumstance, in that regard.
    As a second matter, if the Congress would like to guarantee 
a zero royalty, then perhaps my members would be willing to 
agree that everything can be licensable; but only if the 
license is available. The problem is, the licensing system 
doesn't work. If they license all comers, for all uses, on a 
percentage-of-revenue basis, this issue probably, perhaps, goes 
away. But there is a--we have a strict liability statute. We 
have a very expensive statutory damages statute. So if you do 
not take a license for everything that someone views, and 
you're wrong, you're out of business. You are cold-cock out of 
business, with an injunction, lickety-split. So we have a 
problem where it is true gun-to-the-head licensing.
    With all due respect, Universal Music has marvelously 
sophisticated lawyers. They thought through their Farm Club 
business plan for a long time before they launched it. I am 
confident they did not think they were infringing on the 115 
compulsory license.
    The recording industry has signed a deal with the Harry Fox 
Agency which these gentlemen touted two and a half years ago as 
resolving these issues. It hasn't done the job. I'm not sure 
what is the ultimate solution, but giving on principle in order 
to make a business deal ultimately might work, but it has to be 
a package deal.
    Mr. Berman. All right. Well, are we in recess? Is there a 
bomb attack? Or are there a lot of votes coming up? [Laughter.]
    Mr. Green. [Presiding.] There are a fair number of votes 
coming up. We're just finding out if these are the final votes 
of the day, and then we'll notify Members and make a decision 
accordingly.
    Mr. Berman. Right.
    Mr. Green. I'd like to proceed on with my questions at this 
time. Ms. Peters, just so I understand clearly your testimony 
and your concept of perhaps eliminating the statutory--115 
statutory license, is that because you believe that that 
provision can no longer be stretched and tweaked enough to work 
with modern technology and the changing marketplace?
    Ms. Peters. In part. In part, what I'm really saying is 
that it only works for activities within the United States; 
that as it exists today, it's very hard to have it adaptable to 
all the possible permutations that may come up. And there 
really just doesn't seem to be the need. I don't see a need 
where you're saying the marketplace can work here.
    Mr. Green. Okay. Thank you. A question for each of the 
witnesses. Would you support making the 115 statutory license 
similar to the Harry Fox license?
    Mr. Potter. No. The Harry--what you're suggesting, sir, is 
that the Harry Fox/RIAA agreement which essentially blends over 
all the gray areas and all the disputes by sort of just 
characterizing everything as the reproductions that happen to 
occur while you're doing your service, whether it's a 
distribution service or a streaming service you're willing to 
pay for. The answer is, no.
    We have a situation in this country where the terrestrial 
broadcasters have an absolute flat exemption for the 
reproductions they make that facilitate licensed performances. 
So they don't pay a reproduction right. They are not subject to 
that liability.
    There is a--you know, I heard Ms. Peters a week or so ago 
in the Satellite Home Viewer Act testimony, and I've heard her 
speak otherwise, about how competitive services, equivalent 
services, should be treated alike as a matter of law. And 
that's been a DiMA principle since the day we founded this 
organization.
    Merely because our services choose to use the Internet as a 
pipe, instead of the radio as a pipe, the terrestrial airwaves 
as a pipe, should not mean we are subject to more liability, to 
more royalties, or to any discriminatory legal treatment.
    Mr. Green. If I can, real quickly, from Mr. Ramos and Mr. 
Sherman.
    Mr. Ramos. We would certainly favor the application of the 
Harry Fox agreement, the license agreement we made with RIAA, 
to the music publishing industry, generally. We think that that 
would be a good thing for the marketplace, and we would fully 
support that.
    Mr. Sherman. The--if you're asking the question more 
broadly, about the relationship between the Fox license and the 
115 license, the fact of the matter is that the Fox license 
only works marginally better than the 115 system. We operate 
under the Harry Fox license right now. That's where 99.999 
percent of the licensing is done. And we just aren't getting 
licensed what we need. This system isn't working.
    And the examples that I gave earlier about multi-session 
discs, percentage royalty, those are the problems. Because when 
the Fox Agency says ``No,'' there's no way to get the issue 
resolved. And that's the problem we're facing.
    Mr. Green. Okay. Thank you.
    At this point, we're going to break. We have one 15-minute 
vote, and two 5-minute votes. With your indulgence, we'll 
return and finish up our questioning at that point. The 
Committee stands in recess until that point.
    [Recess.]
    Mr. Green. We'll resume our hearing. And I appreciate the 
patience of the witnesses.
    Mr. Boucher of Virginia, the time is yours for questions.
    Mr. Boucher. Thank you very much, Mr. Chairman. I want to 
commend our witnesses for joining us here today, and for your 
patience while we had to attend votes on the floor.
    Ms. Peters, let me ask you this. Do you believe that when 
there is a download of digital music, that both a performance 
royalty and a mechanical royalty should be paid?
    Ms. Peters. I think, the answer's going to be ``It 
depends.'' Clearly, when there is a download, there is a 
reproduction. And the question is whether or not there is also 
a performance. And if in fact the licensed activity is the 
download, and the transmission is made only to enable that 
licensed activity, we have taken the position that that is not 
a separate--we don't believe that that's a separate economic 
activity; and in our Section 104 report we concluded that that 
would be a fair use.
    Mr. Boucher. And so under the state of facts as you have 
phrased the state of facts, you would not support an 
interpretation of existing law to require that both a 
performance royalty and a mechanical royalty be paid; is that 
correct?
    Ms. Peters. In that specific fact situation, if it's just 
the mere transmission----
    Mr. Boucher. Right, as you have described it.
    Ms. Peters. Right. No. For us, the beneficiaries are the 
music publisher and the songwriter. And you should look at what 
is the purpose of the activity, and the price should be set 
according to the value of that activity. And splicing it up, 
saying, ``This is a performance, and this is a reproduction,'' 
doesn't make sense to us, because we believe the transmission 
just enables the download.
    Mr. Boucher. Okay. Thank you. Do you believe that the 
statute should be amended to clarify that view?
    Ms. Peters. Every time you amend a law and you start doing 
exceptions, the question is: Do you do damage? We're in a time 
period where technology is changing and bringing about 
different results. I'm not sure. I'd have to really look at 
what the language would be, before I would ever want to say 
there should be an exception.
    Mr. Boucher. Well, I mean, I understand the care with which 
you answer all of your questions here. But let's presume that 
the language is written in such a way--perhaps in a draft that 
your office would assist us in constructing--as to carry 
forward your intent. Would you not agree that some statutory 
clarification, to prevent this double-dipping, would be 
appropriate?
    Ms. Peters. We actually would support that. Of course, you 
realize that the performing rights organizations would be very 
strongly opposed.
    Mr. Boucher. Oh, I understand that. But I'm asking you.
    Ms. Peters. Yes.
    Mr. Boucher. All right.
    Ms. Peters. Yes.
    Mr. Boucher. Thank you. Let me further carry forward my 
questioning to you, with respect to incidental server copies. 
When music is made available for legal downloading across the 
Internet, typically, a lot of caching occurs, in order to 
promote the efficiency of the delivery of the music and speed 
up the delivery times. And under current law, some have 
interpreted the separate making of caching copies on servers 
located throughout the Internet to require the separate payment 
of royalty fees for each of these copies.
    A separate copy has to be made for every bit rate. A 
separate copy has to be made in every format in which the music 
is delivered. And before long, when you multiply this out, you 
could be talking about a thousand or more copies made solely 
for the purpose of delivering a single song across the 
Internet.
    And the question is, should these incidental copies, made 
only for the purpose of effectuating the delivery, require the 
payment of separate fees with respect to each of those? Or 
should we treat this essentially as one copy?
    Ms. Peters. This is exactly the question that we have 
before us in an ongoing rulemaking proceeding. And we do intend 
to address that in our rulemaking, so I'm not going to prejudge 
at this moment where we're coming out. But we will be dealing 
with this shortly.
    Mr. Boucher. So you're saying you are aware of the 
problem----
    Ms. Peters. Oh, absolutely. It's currently before us.
    Mr. Boucher.--and you have a rulemaking that addresses it?
    Ms. Peters. We have before us a variety of questions on the 
scope of the Section 115 compulsory license.
    Mr. Boucher. All right. Okay. Let me ask you about another 
key concern. And that is that with regard to the publisher 
copyright interest, the songwriter/publisher interest, the 
Harry Fox Agency, as I understand it, has the current authority 
to clear something on the order of 60 to 65 percent of the 
inventory of music that companies would like to place on the 
Internet for lawful download. But that leaves on the order of 
35 to 40 percent of the music unaccounted for, in terms of even 
identifying who owns the publisher interest in that music.
    And given the current structure of minimum statutory 
damages in the copyright law for every incident of a violation, 
a person would place that music on the Internet for lawful 
download at his peril. And the burden really does, under 
current law, rest on the person who wants to use that music, to 
identify who owns the publisher interest and then obtain 
clearance of that copyright. And that's a very difficult 
process. It involves going through card files, and it's a very 
laborious and time-consuming process, and is practically 
impossible in the current state of things.
    Would you support some kind of statutory provision that 
would enable the more efficient clearance of that interest with 
regard to the 30--or to 35 to 40 percent of music for which the 
Harry Fox Agency does not have clearance authority?
    Ms. Peters. I think, actually, I've sort of answered that. 
We have to have a system that works. We have to be able to 
license material. To the extent that today there's a statutory 
license that's there, and where you can't find copyright owners 
you file with us and there's no liability, that system doesn't 
work. So, yes, I certainly do favor a system that enables 
clearance of these works.
    Mr. Boucher. Well, thank you. And would you agree that this 
is something we will need to address statutorily?
    Ms. Peters. Yes.
    Mr. Boucher. Okay. Thank you.
    Mr. Chairman, my time has expired. But Mr. Chairman, with 
your indulgence, let me just ask Mr. Sherman if he could also 
offer a comment on that last question.
    I perceive that the labels have a need to have a more 
efficient clearance process for these publishing interests that 
really are very difficult to identify. Would you agree with 
that?
    Mr. Sherman. I don't think this is an issue that divides 
anybody, you know. I think everybody wants a system that works. 
I think that the Fox Agency would love to be able to speak for 
100 percent of the publishers, if it can. And certainly, labels 
and other licensees of the music would like that, as well. Any 
system that can help get us there would be a plus.
    Mr. Boucher. And you agree that a statutory system of some 
kind that promotes the more efficient clearance would be 
appropriate?
    Mr. Sherman. I don't know whether a statutory system is 
necessary. It's possible to do something with some kind of 
voluntary collective approach. But we'd be interested in 
talking about anything that would work.
    Mr. Green. The gentleman's time having expired----
    Mr. Boucher. Thank you very much, Mr. Chairman.
    Mr. Green. And Mr. Berman, I think we have time for you to 
ask one more question.
    Mr. Berman. Thank you, Mr. Chairman. And I appreciate that 
the votes and the late start here prevent us from getting into 
it as deeply as we might want; but let me ask one more 
question.
    Let me ask this one to Mr. Ramos. Mr. Potter has identified 
a number of problems arising from situations where, due to the 
architecture of digital technology--we've just been discussing 
this, in fact--music performances may also necessitate 
reproduction of the musical work. He expresses frustration that 
on-demand streaming companies have to seek a performance 
license from the performing rights organizations, and then seek 
a reproduction license from music publishers. In fact, that's a 
frustration he's been expressing for a long time.
    However, on-demand streaming companies apparently do not 
have the same frustrations with securing both reproduction and 
performance licenses from the owners of sound recordings. I 
assume this is because owners of the sound recordings can act 
as a one-stop shopping location; while antitrust rules prohibit 
the performance rights organizations and music publishers from 
granting both performance and reproduction licenses.
    Getting away from the issue of ``Is it a performance or is 
it''--assuming both are implicated, as I think there's a basis 
for saying, should Congress now explore amending the antitrust 
laws so on-demand streaming companies could obtain all 
necessary rights to the musical work from one entity?
    Mr. Ramos. In my view, that would not be necessary. And the 
reason is that I think that the mechanisms exist to obtain 
those licenses currently. I think the only question is what the 
rate should be.
    I do not perceive there to be a significant obstacle to 
licensing, to have to obtain a license from the PRO's as well 
as Harry Fox. And indeed, as a practical matter, since most of 
these services will engage in downloads as well as streaming--I 
realize there may be some companies that focus on just one or 
the other--they will have to deal with both of those 
organizations in any event. And as a result, I think it will be 
equally efficient if it's licensed separately.
    The key is the rate, is coming up with a fair rate. The 
deal that we made with RIAA was designed to facilitate that, to 
allow the services to get up and running so that we would not--
the music publishers would not be an obstacle; and to give us a 
framework that we could then arrive at a rate.
    Unfortunately, the level of activity in on-demand streaming 
has been relatively small, as compared to downloads. Consumers, 
it appears, want to own the music, and they appear to be more 
interested in the download services. And as a result, there has 
been little economic data that we can use to arrive at what we 
think would be a fair rate. But currently, the rate is zero 
from Harry Fox, as a practical matter. They don't have to--the 
deal is: Use now; pay later. And it's only when we arrive at a 
rate, will they have to pay.
    So for those two reasons, I think this is not an obstacle. 
And I think, at least at this time, an antitrust exemption 
would not be necessary. I wouldn't rule out the possibility 
that at some point in the future, when we actually get into 
real negotiations on what the rate should be--and hopefully, I 
would have those with Mr. Potter, as well--that we might, among 
us, conclude that we need some assistance from Congress in the 
form of an antitrust exemption, or some statutory amendment to 
facilitate that. But at least at this stage, sitting here 
today, I don't think that's necessary.
    Mr. Green. Thank you. I'd like to thank the witnesses for 
their testimony. The Subcommittee very much appreciates your 
contribution.
    This concludes the oversight hearing on section 115 of the 
Copyright Act. The record will remain open for 1 week. Thank 
you for your cooperation. The Subcommittee stands adjourned.
    [Whereupon, at 1:35 p.m., the Subcommittee was adjourned.]

                            A P P E N D I X

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               Material Submitted for the Hearing Record









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          Prepared Statement of the Honorable Howard L. Berman

    Mr. Chairman,
    I look forward to what should be a truly compelling hearing today. 
While the title may be dull, and the statute in question impenetrable, 
the dynamics are really quite interesting.
    Our private-sector witnesses appear to share a strong interest in 
the success of the legal music marketplace. The business survival of 
Digital Media Association members depends on the success of their 
legitimate, online music services. The success of new legal music 
offerings, like downloads and DVD-Audio, will provide vital new sources 
of royalties for members of the National Music Publishers Association. 
Recording Industry Association of America members will benefit in a 
number of ways: through the distribution of their works in secure new 
formats, through their ownership of some online music services, and 
through the royalties generated by independent services.
    Our witnesses are similarly united in the desire to stem music 
piracy. Though in different ways, piracy - both online and off - 
bedevils DiMA, NMPA, and RIAA members alike. Since the success of new 
music formats and online music services is a critical element in 
stemming the piracy tide, our witnesses have additional reasons to work 
to achieve this success.
    So, at least at the macro level, the interests of our private-
sector witnesses are strongly aligned. Unfortunately, this alignment of 
interests does not translate into an alignment of strategies for 
stimulating the legal music marketplace.
    In particular, our witnesses appear to disagree pretty strongly 
about the availability, cost, scope, and convenience of both voluntary 
and statutory licenses for making reproductions of copyrighted musical 
compositions. NMPA appears to maintain that such licenses are easily 
obtained, and points to the success of the iTunes Music Store as proof. 
Our other witnesses appear to strongly disagree.
    Clearly, the legitimate online music marketplace has made 
tremendous strides in the last few years, and these strides demonstrate 
that copyright owners are fully committed to its development. In fact, 
all our witnesses, including the Copyright Office, deserve some measure 
of credit for these advances. In 1999, only the pirate version of 
Napster provided music consumers an opportunity to download a wide 
variety of popular music. Today, a number of legitimate services, 
including Napster Version 2, iTunes, Rhapsody, pressplay, MusicNow, and 
many others, offer consumers cheap, legal mechanisms for downloading 
hundreds of thousands of songs.
    Unfortunately, despite their meteoric growth, legal online music 
services still represent the equivalent of a fly on the back of the 
online piracy elephant. The 30 million downloads sold by iTunes in the 
past year are encouraging, but are nothing compared to the billions of 
copyrighted songs illegally downloaded through peer- to-peer services 
every month. The approximately 500,000 songs available through most 
legal music services represent an exponential increase from a few years 
ago, but pale in comparison to the millions of different songs 
available through the illegal services. Through admittedly anecdotal 
accounts, I understand that many users of legal online services still 
frequent illegal P2P services to obtain otherwise unavailable tracks.
    While the downloading revolution calls into question the long-term 
viability of physical music formats, they will continue to make up the 
lion's share of the music market in the near-term. Thus, it is clear 
that music copyright owners must migrate to secure physical formats. If 
they continue to make music available on unprotected CDs, they are 
driving their own piracy problem.
    Unfortunately, the rollout of new, secure physical formats has been 
less than dramatic. Only a handful of albums have been released on 
copy-protected CDs in the U.S., DVD-Audio has not penetrated the 
marketplace, and the pre-loading of music on PCs or other devices 
hasn't gotten much traction.
    Clearly, something must be done to make new legal music offerings, 
both online and off, more competitive with the abundance of 
conveniently available, free illegal music. As I have noted, success in 
addressing this challenge will benefit all of our private-sector 
witnesses. Therefore, I intend to examine the testimony of our 
witnesses through the prism of two inter-related questions. First, does 
Section 115 facilitate or hinder the rollout of new legal music 
offerings? Second, depending on the answer to the first question, what, 
if anything, should Congress do to change Section 115?
    I am very interested in hearing our witnesses' arguments on these 
question, so I yield back the balance of my time.

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