[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
______
92-480 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
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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
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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
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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?
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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.
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\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).
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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\
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\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\
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\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).
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\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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