[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]


 
                  DISCUSSION DRAFT OF THE SECTION 115 
                       REFORM ACT (SIRA) OF 2006

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON COURTS, THE INTERNET,
                       AND INTELLECTUAL PROPERTY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 16, 2006

                               __________

                           Serial No. 109-108

                               __________

         Printed for the use of the Committee on the Judiciary


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



                                 ______

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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
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana                  DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas

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

    Subcommittee on Courts, the Internet, and Intellectual Property

                      LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
ELTON GALLEGLY, California           JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia              RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee        ZOE LOFGREN, California
SPENCER BACHUS, Alabama              MAXINE WATERS, California
BOB INGLIS, South Carolina           MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida                  ROBERT WEXLER, Florida
DARRELL ISSA, California             ANTHONY D. WEINER, New York
CHRIS CANNON, Utah                   ADAM B. SCHIFF, California
MIKE PENCE, Indiana                  LINDA T. SANCHEZ, California
J. RANDY FORBES, Virginia

                     Blaine Merritt, Chief Counsel

                         David Whitney, Counsel

                          Joe Keeley, Counsel

                          Ryan Visco, Counsel

                    Shanna Winters, Minority Counsel


                            C O N T E N T S

                              ----------                              

                              MAY 16, 2006

                           OPENING STATEMENT

                                                                   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

Mr. David M. Israelite, President and Chief Executive Officer, 
  National Music Publishers' Association (NMPA)
  Oral Testimony.................................................     5
  Prepared Statement.............................................     7
Mr. Jonathan Potter, Executive Director, Digital Media 
  Association (DiMA)
  Oral Testimony.................................................    15
  Prepared Statement.............................................    16
Mr. Rick Carnes, President, Songwriters Guild of America (SGA)
  Oral Testimony.................................................    20
  Prepared Statement.............................................    22
Mr. Cary H. Sherman, President, Recording Industry Association of 
  America, Inc. (RIAA)
  Oral Testimony.................................................    30
  Prepared Statement.............................................    32

                                APPENDIX
               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard Berman, a 
  Representative in Congress from the State of California, and 
  Ranking Member, Subcommittee on Courts, the Internet, and 
  Intellectual Property..........................................    53
Separate Statement of SESAC, Inc.................................    54
Prepared Statement of the U.S. Copyright Office..................    55


     DISCUSSION DRAFT OF THE SECTION 115 REFORM ACT (SIRA) OF 2006

                              ----------                              


                         TUESDAY, MAY 16, 2006

                  House of Representatives,
              Subcommittee on Courts, the Internet,
                         and Intellectual Property,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 4:05 p.m., in 
Room 2141, Rayburn House Office Building, the Honorable Lamar 
Smith (Chairman of the Subcommittee) presiding.
    Mr. Smith. The Subcommittee on Courts, the Internet, and 
Intellectual Property will come to order. It is nice to see a 
nice audience out here interested in such an important subject. 
I also was going to say, but maybe now don't need to say, that 
I wasn't expecting any other Members to be present because 
votes were canceled for tonight and there are no votes for 
tomorrow. We especially appreciate the attendance of other 
Members who are here, and actually, I am expecting a couple 
more in addition to the ones who are already present.
    I am going to recognize myself for an opening statement, 
then the Ranking Member for an opening statement. Without 
objection, all other Members' opening statements will be made a 
part of the record, and after that, we will look forward to the 
testimony of our witnesses today.
    Today, the Subcommittee continues its efforts to reform 
section 115 of the Copyright Act, which addresses mechanical 
licensing. However, instead of identifying the problems in the 
music industry, we will hear today about a possible solution 
that has been jointly suggested by the music publishers and the 
on-line music companies. They deserve great credit for the 
overall time and energy they have spent and for the progress 
that has been made to date.
    The music industry has evolved from simple business models 
focused around the distribution of physical items, such as 
compact disks, to a dynamic digital marketplace where new 
business models evolve rapidly. The laws that set out the 
framework for the digital licensing of musical rights in this 
industry are outdated and, some say, beyond repair.
    The discussion draft before the Subcommittee today creates 
a new blanket license for certain digital uses of music. 
Digital music is the future of the music industry. The laws 
that enable this industry to operate need to look to the 
future, as well.
    In addition to creating a blanket license, the discussion 
draft creates competition among those who will issue such 
blanket licenses to ensure that antitrust issues do not arise. 
For missing copyright owners, the draft also ensures that a 
license can still be issued for the use of their work and give 
the owners 3 years to step forward to be paid their royalties. 
The draft also enables direct licensing to occur.
    When digital music services began, the lack of a legal 
framework for licensing became a major obstacle to meeting 
consumers' needs quickly. Online music companies made several 
millions of dollars worth of escrowed payments in order to 
obtain licenses for which rates had not been set. Those rates 
have still not been set, thereby preventing distribution of the 
royalties to the artists who, of course, deserve them.
    Upon enactment of this legislation, this escrowed money and 
more will finally be distributed to the artists. Outdated laws 
that make artists wait years to be paid are currently not fair 
to anyone involved.
    Although this discussion draft reflects agreement on many 
points between the Digital Music Association and the National 
Music Publishers' Association, there are a few areas in which 
agreement still has not been reached between the two parties. 
Two of the issues that remain outstanding between DMA and the 
publishers are, one, the cost of setting up and running a 
modern licensing system and who should bear those costs, and 
two, the proper definition of an interactive stream. The areas 
of disagreement are in bracketed text in the discussion draft 
that many of you all have in front of you.
    There are other issues we will hear about today. For 
instance, some think that the scope of this proposal should be 
expanded to cover all works, digital and physical alike. With a 
limit of four witnesses, the Copyright Office cannot be here in 
person. However, they have provided written testimony for the 
record, which I will read a statement from, and without 
objection, their entire statement will be made a part of the 
record, as well.
    Here is a quote from the Copyright Office. ``The immediate 
benefit that the SIRA,'' that is the underlying draft 
legislation, ``could bring to the music industry should not be 
delayed pending resolution of the other issues or bills, nor 
should the fate of the SIRA be tied to that of other 
legislation,'' end quote.
    [The prepared statement of the Copyright Office follows in 
the Appendix.]
    Mr. Smith. There is no question about the need, but only 
how to reform American music licensing laws. Music licensing 
reform is necessary to pay artists and to make legal copies of 
music available to consumers.
    That concludes my opening statement and the gentleman from 
California, Mr. Berman, is recognized for his.
    Mr. Berman. Thank you very much, Mr. Chairman. Thank you 
for scheduling this hearing on the discussion draft of the 
section 115 music licensing reform.
    We've come a long way from the initial piracy-laden version 
of Napster released in 1999. The IFPI, sometimes known as the 
International Federation of Phonogram and Videogram Producers, 
digital music report of 2006 notes the growth of digitally-
delivered content in the music industry. Four-hundred-and-
twenty million single tracks downloaded in 2005 globally, 
double that of 2004--more than double. Three-hundred-and-fifty-
three million single tracks downloaded in the U.S., up from 143 
million. The number of subscription services, such as Rhapsody 
and Napster, increased from 1.5 to 2.8 million globally in 
2005. In 2005, the number of legitimate music download sites 
reached 335, up from 50, 2 years ago. Digital sales in 2005 
accounted for approximately 6 percent of global music sales 
based on the first half of the year.
    Two-thousand-and-five was a landmark year for digital 
music. Just last week, The Washington Post reported that ring 
tones, once dismissed as nothing more than a passing fad, have 
become a $3 billion worldwide market. But the burden 
surrounding licensing often delays, if not prevents, certain 
music from getting to the consumer. Unfortunately, this 
inability to provide music at any time, at any place, in any 
format, may precipitate consumer migration back to unauthorized 
peer-to-peer services.
    Two years ago, the Copyright Office suggested that reform 
of the 115 license should reflect a structure similar to that 
which is currently available for the 114 license, a designated 
agent which serves as a collector to administer a blanket 
license. I am encouraged to see that the discussion draft 
reflects that idea. I commend the publishers on their hard 
work. They have tried diligently to resolve the problems that 
the DiMA companies have illustrated, particularly the double-
dip and one-stop-shop issues.
    However, I am concerned that with an impending markup less 
than 2 weeks away, a number of important details of the bill 
have yet to be agreed upon. I will focus on some of those 
issues during the question and answer.
    Furthermore, any solution can only be evaluated from a 
perspective of the scope of the problem originally identified. 
Two years ago at an oversight hearing on section 115, I posed 
two questions which I would ask again today. Does 115 
facilitate or hinder the roll-out of new legal music offerings? 
And depending on the answer to the first question, what, if 
anything, should Congress do to change 115?
    While this proposed legislation addresses many of the 
digital concerns, unresolved still are the many issues 
encountered in the physical market or in the area of hybrid 
services. The roll-out of new secure physical formats or high-
quality formats oftentimes require additional reproductions. 
This roll-out has been sluggish. There is little resolution to 
the business model which provides preloaded content on devices. 
Finally, many definitional questions remain, such as whether 
the license includes ring tones or if a kiosk service is a 
reproduction of digital case or digital phonorecord delivery 
service. Some of these questions may require a purely economic 
analysis. Others may require reevaluation on the processed 
level.
    So we have solved some issues. We have a potential solution 
to some issues. Other issues are not resolved. How we should 
handle that, I think is a question for this Subcommittee and I 
hope we can achieve greater clarity and further consensus as 
this bill moves forward.
    [The prepared statement of Mr. Berman follows in the 
Appendix.]
    Mr. Smith. Thank you, Mr. Berman.
    Before I introduce the witnesses, I would like to ask you 
all to stand and be sworn in, please. If you will raise your 
right hand, do you swear to tell the truth, the whole truth and 
nothing but the truth, so help you, God?
    Mr. Israelite. I do.
    Mr. Potter. I do.
    Mr. Carnes. I do.
    Mr. Sherman. I do.
    Mr. Smith. Thank you. Please be seated.
    Our first witness is David Israelite, the President and 
Chief Executive Officer of the National Music Publishers' 
Association. Founded in 1917, NMPA represents American music 
publishers and their songwriter partners. From 2001 through 
early 2005, Mr. Israelite served as Deputy Chief of Staff and 
counselor to the Attorney General of the United States. In 
March of 2004, the Attorney General appointed him Chairman of 
the Department's Task Force on Intellectual Property. Mr. 
Israelite earned his J.D. from the University of Missouri in 
1994 and received a B.A. in a double major of political science 
and communications from William Jewell College in 1990. David, 
we usually don't put in all those dates, but you got special 
attention today. [Laughter.]
    Mr. Smith. Our second witness is Jonathan Potter, who is 
the Executive Director of the Digital Media Association, DiMA, 
a position that he has held since DiMA was organized in June 
1998. DiMA's goal is to represent the leading companies that 
provide online audio and video content to consumers. Mr. Potter 
appears frequently before this Subcommittee and has worked with 
David Israelite to develop the discussion draft before the 
Subcommittee today. Mr. Potter is a graduate of New York 
University School of Law and the University of Rochester. No 
dates there, Jon.
    Our third witness is Rick Carnes, the President of the 
Songwriters Guild of America. Previously, Mr. Carnes has served 
as SGA Vice President and has represented SGA on numerous 
panels regarding contractual, technological, and legal issues 
affecting songwriters. A native of Memphis, Tennessee, Mr. 
Carnes and his wife, Janice, moved to Nashville in 1978. Soon 
after, they signed their first record deal with RCA Records, 
later recording for Warner Brothers and MCA Records. In 1983, 
Mr. Carnes wrote Reba McEntire's first number one hit, ``I 
Can't Even Get the Blues No More,'' and co-wrote with Janice 
and Chip Harding three top ten hits for the Whites, ``You Put 
the Blue in Me,'' ``Hanging Around,'' and ``Pins and Needles.'' 
Mr. Carnes is a graduate of Memphis State University with a 
B.A. in political science and a master's in elementary 
education.
    Our final witness is Cary Sherman, who is the President of 
the Recording Industry Association of America. The trade group 
has more than 350 member companies that are responsible for 
creating, manufacturing, or distributing 90 percent of all 
legitimate sound recordings sold in the United States. The $14 
billion U.S. sound recording industry is the largest market for 
pre-recorded music in the world. Mr. Sherman graduated from 
Cornell University in 1968 and Harvard Law School in 1971. An 
accomplished musician and songwriter, Mr. Sherman is an officer 
of the board of the Levine School of Music in Washington, D.C.
    We welcome you all and look forward to your testimony, and 
Mr. Israelite, we will begin with you.

TESTIMONY OF DAVID M. ISRAELITE, PRESIDENT AND CHIEF EXECUTIVE 
     OFFICER, NATIONAL MUSIC PUBLISHERS' ASSOCIATION (NMPA)

    Mr. Israelite. Mr. Chairman, Mr. Berman, Members of the 
Subcommittee, I appreciate this opportunity to appear before 
the Subcommittee to address music licensing in the digital age 
and the proposed Section 115 Reform Act of 2006.
    Over the last year, we have been hard at work negotiating 
with the organizations represented at this table and with other 
music groups. The draft bill represents much progress from 
those negotiations. I would like to thank you, Mr. Chairman and 
Mr. Berman and your staffs for their hard work and your 
leadership on this issue.
    No one involved in the music industry today will tell you 
that the way that the industry is structured makes sense. 
Today's music business is the result of a great deal of 
historical anomalies and unnatural evolution. Issues involving 
music licensing can be very complicated and very confusing, but 
underneath all of the legislative language and legal concepts, 
there are some very simple principles.
    Every piece of recorded music contains two copyrights. One 
copyright belongs to the songwriter, represented by a music 
publisher, for the words and notes. The second copyright 
belongs to the artist, represented by a record label, for a 
recorded version of that song.
    This is what is known as a piano roll, used in player 
pianos that were popular 100 years ago. Through the late 19th 
century, the music industry was dominated by music publishers. 
Their business was sheet music and later piano rolls. There was 
no such industry as the recording industry. Because Congress 
was concerned about a potential monopoly in the piano roll 
business, in 1909, Congress imposed a compulsory license on 
music publishers and songwriters.
    The importance of recorded music grew in the early 20th 
century, and by the end of World War I, recorded music 
surpassed sheet music as the largest element of the music 
business. However, Congress never imposed a similar compulsory 
license on the copyrights owned by record labels. The result 
was the existence of two distinct, independent copyrights, one 
governed by a compulsory license and one free from Government 
regulation and control.
    I have had the honor of representing music publishers and 
their songwriter partners for a little more than a year. I have 
explained to a large number of people what a music publisher 
does and how the music business is organized. When I explain 
that every song contains two copyrights, one representing the 
songwriters' efforts and one representing the recording 
artist's efforts, the response is one of understanding. But 
when I explain that what a record label charges for the 
artist's copyright is determined in a free market but that the 
Government tells a songwriter how much money he or she will 
make on every song sold, the response is one of confusion and 
bewilderment.
    In the past, this system of unequal copyrights worked 
because music licensing involved music publishers licensing 
their copyrights to record labels. Those record labels then 
sold the music containing both copyrights to the consumer in 
the form of an album, an eight-track, a cassette, or a CD. But 
in just the last few years, the emergence of new technologies 
in the digital world has revolutionized the music industry.
    Most new entrants into the music business are third 
parties, like the companies that Mr. Potter represents, who do 
not own either copyright but wish to sell the copyrights owned 
by others. The result is that these third parties must engage 
in two different licensing processes, one with record labels, 
where the record labels can negotiate in a free market, and the 
second with music publishers, where the Government sets the 
terms and conditions.
    Put simply, the current process of licensing copyrights 
that are treated unequally under the law to third parties 
doesn't work. NMPA supports eliminating the compulsory 
licensing regime. We would prefer to bargain with third parties 
in a free market, as our friends do at the record labels. But 
until that is possible, music publishers are willing to help 
create a new licensing system for digital uses under section 
115. And again, we support these changes based on some very 
simple principles.
    First, we must not allow the perfect to be the enemy of the 
good. Congress will never be able to address all of the 
historical issues of the music industry in one piece of 
legislation and it should not slow real progress on music 
licensing just because consensus cannot be reached on 
everything. The physical licensing process has been in effect 
for close to a century and it is not broken. Physical products 
are licensed on a song-by-song basis, such as CDs and albums, 
and the vast majority of such products are, of course, already 
licensed. Unlike digital music providers, record labels are not 
in the position of suddenly needing licenses for a million 
different CDs.
    Second, the copyright of the songwriter and music publisher 
deserves no less respect and consideration than the copyright 
of the record label. Once a blanket licensing system is 
created, there is no good reason why music publishers and 
songwriters should not be able to license directly their 
property to third parties who wish to sell their property. The 
proposed legislation ends pass-through licensing and this is 
critical to our support of the bill.
    Third, this legislation must clarify, as it does in its 
current form, what Congress intended all along with respect to 
interactive streaming, that it constitutes a digital 
phonorecord delivery and is licensable under section 115.
    We thank you, Mr. Chairman, Mr. Berman, and the entire 
Committee for your work on this important issue and for your 
efforts on behalf of the songwriter and music publishing 
community.
    Mr. Smith. Thank you, Mr. Israelite.
    [The prepared statement of Mr. Israelite follows:]

                Prepared Statement of David M. Israelite



    Mr. Smith. Mr. Potter.

TESTIMONY OF JONATHAN POTTER, EXECUTIVE DIRECTOR, DIGITAL MEDIA 
                       ASSOCIATION (DiMA)

    Mr. Potter. Mr. Chairman, Mr. Berman, Members of the 
Subcommittee, on behalf of America's digital music innovators, 
I'm pleased to testify today to announce DiMA's agreement with 
NMPA in support of a new section 115 statutory reproduction 
rights license that will dramatically improve the digital music 
service's ability to compete against piracy and deliver more 
royalties to all industry creators.
    For several years, DiMA members, including AOL, MSN, 
Yahoo!, Real Networks, and Napster, have sought to streamline 
the licensing of musical works' reproduction rights so that the 
process mirrors the licensing of performance rights. Simple, 
efficient administration with assurances that infringement risk 
has been eliminated if a company takes a reasonably 
standardized license and pays a fair royalty.
    DiMA welcomes today's discussion draft as it is intended to 
accomplish precisely what we have requested, to update a 1909 
statute for the digital era. DiMA and NMPA have agreed on many 
significant legislative goals that are reflected in the 
discussion draft bill. Everyone in the music industry wins, 
digital services, music publishers, songwriters, record labels, 
recording artists, and retailers, if the following changes 
become law and digital services can compete more effectively 
against piracy.
    One, legal clarify. The discussion draft ensures that 
investors and innovators will know what rights are implicated 
by new digital music services, and as a result, the services 
will spend less money on lawyers and more on product 
development and marketing.
    Number two, blanket license coverage. No longer will 
transaction costs and legal risk associated with song-by-song 
licensing undermine investment in new digital music offerings.
    Three, flexible licensing alternatives. The draft 
authorizes the Copyright Royalty Board to decide the right 
royalty rate and the right royalty structure for each type of 
business activity that is licensed. The CRB will decide whether 
substantive and economic evidence supports a penny rate, a 
percentage of revenue rate, or something completely different.
    Four, technologically neutral rights and licenses. The 
draft does not establish or limit rights, royalty standards, or 
obligations based on a services method of transmission 
technology or a consumer's choice of device. Uniform standards 
apply equally to cable, satellite, and internet services, as 
well as to PCs, mobile phones, and portable music devices.
    Five, internet radio parity with broadcast radio. The 
discussion draft promotes fair competition by providing 
internet radio with effective royalty-free parity with 
broadcast radio with respect to server and incidental 
reproductions that facilitate a stream.
    There are several provisions in the discussion draft that 
represent significant concessions by DiMA members. Quite 
significantly, DiMA members are willing to end years of dispute 
with NMPA by conceding the existence of reproduction rights in 
association with streaming services. DiMA and NMPA have agreed 
to split our differences, which the discussion draft reflects 
in its provision of a royalty-free license for reproductions 
that facilitate internet radio and a potentially royalty-
bearing license for reproductions that facilitate interactive 
streaming.
    We agree that the legislation should not set a value for 
this or any other reproduction right, but rather that future 
negotiation or arbitration will determine the royalty rate. 
Moreover, we agreed that the legislation should leave open the 
possibility that the value of a reproduction right in some 
context might be zero.
    DiMA disagrees, however, with the discussion draft's 
characterization of the interactive streaming reproduction 
right as a delivery or a distribution right. DiMA agrees with 
the Register of Copyrights that digital bits streamed to render 
a performance should not be deemed a legal distribution or 
delivery.
    DiMA has also conceded to share in the costs music 
publishers will incur in modernizing their existing song-by-
song licensing system in order to manage the new blanket 
license. This is a first, as such costs are typically covered 
by or deducted from royalty payments themselves. No other 
statutory or compulsory license imposes cost-sharing 
obligations on licensees, but as NMPA has absolutely insisted, 
we have agreed.
    Finally, DiMA is caught in the decades-old battle between 
record companies and publishers regarding the draft's effective 
elimination of contractual controlled composition provisions as 
applied to digital licensing. DiMA understands both points of 
view. On one hand, the traditional sublicensing model has 
worked well for licensing digital phonorecord deliveries and 
legislative change is not necessary. On the other, publishers 
are demanding to license DiMA services through their own 
designated agents so as to remove intermediaries between their 
rights and their licensees and they have called this issue a 
deal breaker.
    Mr. Chairman, these disagreements are meaningful and 
important, but not nearly as significant as our agreements. We 
believe the disagreements should be manageable in the context 
of moving forward on this legislation.
    Once again, I thank Chairman Smith and Representative 
Berman for your leadership and for the opportunity to testify 
today. We look forward to working with you and your staffs to 
resolve remaining differences and to refine this discussion 
draft so it can become law in this session of Congress.
    Mr. Smith. Thank you, Mr. Potter. I appreciate that.
    [The prepared statement of Mr. Potter follows:]

                 Prepared Statement of Jonathan Potter

    Mr. Chairman, Mr. Berman and Members of the Subcommittee:
    I am pleased to join you today and announce the Digital Media 
Association's agreement with the National Music Publishers Association 
in support of a new, improved Section 115 statutory reproduction rights 
license that will dramatically improve the legal and business 
environment for digital music services. If stakeholders and the 
Subcommittee collectively can overcome some final hurdles and gain 
enactment of the conceptual agreements I will discuss, the result will 
be more innovation and competition among digital music providers, 
expanded music choice for consumers, and fair compensation to 
songwriters and music publishers.
    As you know, DiMA represents America's leading digital music 
service innovators. Our member companies provide Internet radio, music 
download and music subscription services to millions of consumers 
nationwide. Offerings from AOL Music, Yahoo! Music, MSN Music, 
RealNetworks, the iTunes Music Store, MTV, Napster and many more DiMA 
members are the marketplace solution to music piracy. As the new 
generation of music performance, music enjoyment and music retail 
services gain traction in the marketplace, our members' consumer-
friendly innovations, feature-rich offerings, attractive pricing and 
passion for music will persuade American consumers that legal services 
are not just safer and smarter than illegal ones--they are better.
    For several years DiMA members have sought to streamline the 
licensing of musical works' reproduction rights so that the process 
mirrors that of licensing musical works' performance rights--efficient, 
low-cost administration and assurances that infringement risk has been 
eliminated if a company takes a reasonably standardized license and 
pays a fair royalty. Today, I am hopeful that we are taking a giant 
step toward that outcome. For nearly two years, with this 
Subcommittee's encouragement and support, DiMA has negotiated with NMPA 
to develop a new reproduction rights licensing structure for digital 
music services. At various points, our negotiations also included 
several additional organizations and industries, including RIAA, NARM, 
BMI, ASCAP, SESAC, the Songwriters Guild of America, Nashville 
Songwriters Association, and the Recording Artists Coalition. But DiMA 
and NMPA determined that a narrower agreement among our two industries 
was most attainable this year, so we focused on what was possible.
    Today I am pleased to report that DiMA and NMPA have agreed jointly 
to support several major amendments to the Copyright Act, including:

        1.  the creation of a statutory blanket license that will 
        enable royalty-paying digital music services to gain all 
        necessary musical work reproduction rights licenses from one or 
        a handful of collective licensing organizations;

        2.  the clear provision of reproduction rights associated with 
        digital radio services, including a royalty-free reproduction 
        rights license for non-interactive digital radio; and

        3.  flexible, technologically-neutral rights, licensing 
        processes, and reporting requirements.

    Agreement to support this combination of amendments did not come 
easily to either digital music services or music publishers. But after 
years of disagreement and many difficult months of negotiations, DiMA 
and NMPA recognized our prevailing common goal--developing a healthier, 
stronger, broader-based and more dynamic digital music marketplace.
    Legal Clarity and Simple Licensing Processes. Digital music 
services offer an extraordinary array of alternatives for consumers to 
enjoy: pre-programmed radio and paid downloads are most like 
traditional means of enjoying music--broadcast radio, and CDs sold at 
retail, respectively. In addition, digital services include:

          On-demand streaming, where a consumer creates a 
        playlist and listens only to pre-selected songs

          Subscription downloads, which are essentially all-
        you-can-enjoy music rentals paid for with one monthly fee.

    Unfortunately, not all these services fit neatly into the current 
reproduction rights legal regime, so well-intended DiMA members that 
have launched digital services have been in legal limbo for several 
years.
    To reduce legal uncertainty and permit new types of services to 
launch, NMPA and The Harry Fox Agency, on behalf of HFA's publisher 
principals, agreed in 2001 to collectively license new digital music 
services to the extent legally possible, so long as the services paid 
agreed-upon advances against royalties (with a rate to be agreed in the 
future or determined by the Copyright Royalty Board). However, 
questions were raised as to whether the agreements actually 
accomplished the parties' goals and whether they could do so absent 
clarifying legislation. Fortunately, today's discussion draft and 
DiMA's agreement with NMPA are intended to provide the necessary 
clarification and ensure the effectiveness of these agreements, and to 
pave a clear path to similar agreements in the future.
    By clarifying when reproduction rights apply and how those rights 
must be licensed, legislation will enable digital services to seek 
capital, innovate and build businesses with legal certainty. As I have 
testified before, the combination of legal uncertainty and statutory 
copyright damages chokes investment and innovation, which all too often 
leaves piracy as the most compelling consumer alternative.
    Blanket license coverage. Under current law originally enacted in 
1909, the right to reproduce or distribute a composition that is 
incorporated into a sound recording is compulsory, but song-by-song 
approvals by copyright owners are required. In the era of digital 
music, this song-by-song process has created enormous transaction costs 
for parties wishing to utilize the compulsory license, as new services 
require more than 1 million songs for an offering to be competitive, 
and each song must be licensed again for each new service that is 
introduced.
    The Harry Fox Agency can play an important role in streamlining the 
process, but only for publishers that authorize the agency to act on 
their behalf and only on a song-by-song offering-by-offering basis. 
Unfortunately HFA's well-intended effort to license compositions to new 
subscription services has fallen short, as many publishers have not 
signed up for the program. Highlighting this lack of uniformity, 
recently a DiMA member was sued for copyright infringement with respect 
to the activities and musical works that the service understood to be 
licensed by HFA.
    The discussion draft changes this song-by-song license process and 
limits future risk of this type by ensuring that all copyrighted 
musical works are licensable on a blanket basis through one of a small 
number of collective licensing organizations referred to in the draft 
as Designated Agents. Like the SoundExchange system for sound 
recordings that are webcast and the ASCAP, BMI and SESAC systems for 
musical works' performance rights, the Designated Agent system enables 
simple, streamlined licensing processes and substantially reduces legal 
risk. If this agreement becomes law, digital music services will be 
able to access all necessary rights to all musical works and to thereby 
offer consumers a complete catalog of copyrighted sound recordings. In 
the words of NARAS President Neil Portnow, digital music services must 
compete against pirate networks by offering consumers access to all the 
music. This legislation will be a giant step forward in this regard.
    Flexible Licensing Alternatives. As DiMA testified previously in 
this Subcommittee, consumer tastes are fickle and competing against 
piracy is challenging, so music pricing must be dynamic. Dynamic retail 
pricing must be supported by flexible pricing of rights, and this is 
permitted under the discussion draft. In this discussion draft, the 
Copyright Royalty Board is not bound to set penny-rate royalties, unit-
rate royalties or percentage-of-revenue royalties, nor is the royalty 
rate pre-determined. Rather the CRB has the flexibility to do whatever 
seems most sensible for each business model, based on the evidence it 
hears from licensors and licensees.
    Internet Radio Parity with Broadcast Radio. As the Subcommittee is 
aware, throughout DiMA's 8-year history we have urged Congress to 
implement technologically-neutral copyright policy. Today, we are 
pleased that NMPA has agreed to provide Internet radio services--or 
non-interactive webcasters--with effective legal parity as compared to 
our terrestrial broadcast competitors with respect to server copy 
reproductions. The discussion draft provides for royalty-free 
reproduction rights licenses to cover the server and incidental network 
cache copies of Internet radio services, so long the radio service is 
not taking affirmative steps to promote consumer recording of the radio 
programming. It differs in form from the terrestrial radio ephemeral 
copy exemption from copyright, but its effect is to essentially 
equalize how the law treats Internet radio compared to broadcast radio. 
We applaud this progress.
    Technologically Neutral Rights and Licenses. DiMA is also pleased 
that the discussion draft does not provide different rights, royalty 
standards or obligations based on a service's method of transmission 
(e.g., cable or satellite or Internet) or the device used to convert 
digital bits into audible music (e.g., a PC or a mobile telephone or a 
stand-alone portable device). Rather, the discussion draft 
appropriately creates a set if rights and licensing processes that is 
technologically agnostic, and that avoids unnecessary and problematic 
attempts to classify technology by focusing instead on the proper 
issue--fair payment for the exploitation of copyrighted works, 
regardless of the particular medium or means of the exploitation.
    DiMA Concedes Regarding Interactive Radio Rights Licensing; Though 
Royalty Rates to be Negotiated or Arbitrated. NMPA for several years 
has asserted that on-demand and interactive radio performances are more 
likely to substitute for consumer purchases and music subscriptions 
than are traditional pre-programmed radio, and thus justify a 
``mechanical'' right payment which is traditionally associated with 
distributions of music that are actually possessed by a consumer. DiMA 
members, in contrast, hold to the principle that consumers experience 
music in one of two ways--either by enjoying a performance that is 
heard and then is no longer available; or by possessing music 
(permanently or temporarily, through ownership or subscription 
``rental'') which occurs as a result of a distribution. In simple 
terms, the consumer's experience justifies either a performance right 
and royalty or a distribution right and royalty, but not both.
    However, to reach a compromise that will support business certainty 
and growth, DiMA members have agreed that legislation should clarify 
that interactive streaming implicates a reproduction right, in addition 
to its implication of the performance right. DiMA and NMPA have agreed 
that the legislation should not set a value for this (or any other) 
reproduction right, but rather that future negotiations or perhaps 
arbitration will determine the royalty rate. Moreover, we are agreed 
that the legislation should leave open the possibility that the value 
of the reproduction right in some contexts might well be zero, and that 
the mere existence of the right should not ensure a final determination 
that a royalty is due.
    Licensees to Contribute Financially. Recognizing that a modern 115 
license will benefit licensees, DiMA has agreed that licensees will 
share with publishers the costs associated with a new General 
Designated Agent though this concession violates all precedents 
associated with statutory and compulsory licensing. Music publishers 
insist that cost-sharing is a deal-breaker, and so DiMA members have 
agreed conceptually but in the absence of a agreed formula, we support 
the Discussion Draft's referral of this issue to the CRB.
    It is important that the Subcommittee recognize the uniqueness of 
the situation before you, and clarifies that licensee cost-sharing is 
not appropriate in any other compulsory or statutory license contexts. 
In other situations compulsory and statutory licenses are associated 
with rights that are newly created, or licensors' collective 
organizations are voluntary. Only in Section 115 has Congress 
historically imposed costs on licensees, and today's Discussion Draft 
merely continues that policy.
                               __________
    DiMA disagrees with the way the discussion draft implements certain 
concepts I have outlined above. Specifically, DiMA believes that the 
reproduction right associated with on-demand or interactive streaming 
should be characterized as a reproduction right rather than as a 
``digital phonorecord delivery,'' which suggests that a distribution 
has occurred. As discussed above, DiMA members do not believe that 
performances implicate distribution rights.
    DiMA firmly agrees with the Register of Copyrights' conclusions in 
the 2001 Copyright Office Report on Section 104 of the DMCA and with 
the Register's written testimony today. To accomplish enactment of 
legislation our members are willing to accept the existence of a 
reproduction right incidental to streaming performances, but it is 
substantively and analytically incorrect to characterize a transmission 
of streaming digital bits for the purpose of rendering a performance as 
a ``delivery'' or ``distribution.'' Similarly, the reproductions of the 
musical work that must reside on servers controlled by the music 
service or within the network might technically be characterized as 
reproductions, but are not reasonably characterized as either 
``deliveries'' or ``distributions'' of a phonorecord. Rather, we 
propose that the Subcommittee characterize this right as a 
``reproduction'' right pursuant to Section 106(a) of the Copyright Act, 
and create a new Section 115A to implement the compulsory license 
associated with this right.
    This disagreement by no means should diminish what is otherwise a 
significant agreement with NMPA. DiMA members have conceded that 
streaming radio services implicate a reproduction right and that our 
efforts should focus on determining the economic value of that right in 
context. DiMA members pledge to work to reach agreement on words that 
will accurately convey our more meaningful agreement about rights.
    Finally, DiMA is concerned that the discussion draft's proposed 
elimination of record companies' option to sublicense musical works' 
reproduction rights to digital services is causing such consternation 
among our members' record company partners. As the subcommittee knows, 
controlled composition clauses, which are contractually agreed to 
between recording companies and recording artists, have for many years 
been a flash point in relations between the recording and music 
publishing industries. DiMA services are now caught in the middle of 
this battle. DiMA members are ready, willing and able to pay publishers 
through their own designated agents for the value of the musical works 
that they own and that were created by songwriters. However, it is true 
that the traditional sublicensing model for physical sound recordings 
and for digital downloads is not broken, and does not require 
legislative repair.
    We are hopeful that our partners in the recording, publishing and 
songwriting communities can reach a prompt and satisfactory resolution 
of this issue, and we are available to assist if the parties or the 
Subcommittee would find it helpful.
    Once again, I thank Chairman Smith and Representative Berman for 
your leadership and for the opportunity to testify today. We value your 
continued encouragement as we iron out these remaining, albeit 
significant differences, and refine this discussion draft so it can 
become law in this session of Congress.

    Mr. Smith. Mr. Carnes.

             TESTIMONY OF RICK CARNES, PRESIDENT, 
               SONGWRITERS GUILD OF AMERICA (SGA)

    Mr. Carnes. Chairman Smith, Ranking Member Berman, and 
Members of the Subcommittee, thank you for the opportunity to 
provide comments on behalf of the Songwriters Guild of America 
on draft legislation entitled Section 115 Reform Act of 2006. 
We greatly appreciate your invitation.
    My name is Rick Carnes and I am President of the 
Songwriters Guild of America. The SGA is the nation's oldest 
and largest organization run exclusively by and for 
songwriters. We represent approximately 5,000 songwriter 
members and the estates of deceased songwriters. SGA provides 
royalty collection and audit functions for its members as well 
as music licensing. This year marks our 75th anniversary. We 
were born in New York City the same year as the Empire State 
Building. And I'm proud to say that although we're old, we're 
both still standing tall.
    I want to begin my comments by commending the efforts of 
David Israelite of NMPA and Jonathan Potter of DiMA for their 
earnest attempt to negotiate a deal. This legislation is a real 
balancing act and you've got a lot of affected parties here 
with a lot of conflicting interests. But this draft legislation 
has some important components that songwriters can and will 
support.
    First, the SGA fully supports the overall objective of 
simplifying the rules and procedures of section 115 to 
facilitate the licensing of all digital deliveries of musical 
works. We are fully committed to this process.
    We also strongly support the attempt to resolve the record 
company as gatekeeper problem and encourage that the bracketed 
language on page 42 of the bill be included. We realize that 
the record labels want to continue to interpose themselves 
between the digital music distributors and the songwriters and 
music publishers so they can, among other things, continue to 
enforce the controlled composition clauses, which allow them to 
pay songwriters and artists 75 percent of the statutory rate.
    But here is what that means to songwriters. Currently, 
after I divided my royalties with my publisher and my recording 
artist cowriter, I only earn on average about $22,750 per song 
on a million-selling CD. Then when the 75 percent controlled 
composition rate is enforced by the record label, I only get 
$17,000. If that is the one recording I get this year, then the 
difference controlled composition makes is that it actually 
places my earnings $2,000 a year below the poverty line. For 
one million sales, I am eligible to receive a platinum award 
from the RIAA, but it is cold comfort when I can't afford a 
house to hang it in.
    Controlled composition clauses are unfair and need to be 
ended. The record labels should no longer be the gatekeepers 
and we applaud the idea of direct payments from digital music 
services to music publishers and songwriters.
    We are also pleased to see that the draft legislation 
confirms that interactive streams of music are recognized as 
digital phonorecord deliveries, as this clarification is 
essential to any legislative effort on this topic.
    The tradeoff here is the requirement to provide royalty-
free licenses for server copies of musical works for the 
purpose of facilitating non-interactive streaming. The 
elimination of rights for all server copies clearly reduces the 
rights of music copyright owners and under current law would 
reduce the economic returns for songwriters and music 
publishers. While this will mean convenience and higher profits 
for the DiMA companies, it also might mean that I can't afford 
to send my daughter to college. We hope to hear more about the 
ways this bill can strike the proper balance in this area.
    We do not oppose the principle of establishing a general 
designated agent to collect digital royalties. However, if 
songwriters are to lose some of their rights by having them 
bound by the licensing decisions of a statutory agency, this 
loss of rights should be balanced by gaining the right to 
meaningful participation in the governance of these entities.
    Mr. Chairman, to paraphrase a real estate broker, the three 
essential features of an effective designated agent bill are 
transparency, transparency, and transparency. We believe there 
is no reason for this bill to limit distribution of audit data 
solely to music publishers, even though publishers collect such 
payments on behalf of songwriters. In fact, newer music 
publishing contracts often provide songwriters up to 75 percent 
of the royalty payments. In this instance, there is no doubt 
that the songwriter is an interested party entitled to 
information from the designated agent on the extent and amount 
of payments received from the digital music providers. To this 
end, we have included in our written testimony some suggested 
language that would help address this issue as well as the 
crucial issue of meaningful participation.
    As we stated at the beginning, SGA supports the objectives 
of this legislation and desires to take a constructive role 
going forward. We seek to understand the benefits better so 
that we can balance them against the negative aspects of the 
bill to our members.
    Mr. Chairman and Members of the Subcommittee, we seek to 
work with you to ensure that the legislation strikes that 
proper balance and will be beneficial to the songwriters upon 
whom the entire music industry relies. Thank you for your 
attention and consideration of these views.
    Mr. Smith. Thank you, Mr. Carnes.
    [The prepared statement of Mr. Carnes follows:]

                   Prepared Statement of Rick Carnes




    Mr. Smith. Mr. Sherman.

  TESTIMONY OF CARY H. SHERMAN, PRESIDENT, RECORDING INDUSTRY 
              ASSOCIATION OF AMERICA, INC. (RIAA)

    Mr. Sherman. Thank you, Chairman Smith, Ranking Member 
Berman, and other Members of the Subcommittee for giving me an 
opportunity to testify on music licensing reform. As you know, 
new technology, new formats, and new business models have 
presented new opportunities to offer consumers new products and 
services and lure them away from the illegal services with 
which we must compete. But we've been frustrated by an 
antiquated mechanical licensing system that makes it difficult 
for us to respond to marketplace demands.
    As new formats and business models have proliferated, 
uncertainty and disagreements have paralyzed the licensing 
process and the existing one-size-fits-all licensing system is 
ill-suited to the many new business models we're trying, like 
digital music services, ring tones, multi-session disks, locked 
content, preloaded content, music videos, and hybrid offerings, 
such as in-store kiosks. Each has presented new mechanical 
licensing challenges and there is no process for resolving 
them.
    Believe me, we understand the complexities of resolving 
these issues, and Mr. Chairman, we are especially grateful to 
you as well as to Mr. Berman for continuing to focus on this 
issue and trying to find a way through the morass.
    Unfortunately, the current draft of SIRA, which represents 
a deal between the music publishers and digital music services, 
does not resolve most of the problems we face. While we are 
heartened by the efforts that have been made to arrive at a 
reform package and we congratulate NMPA and DiMA for their 
earnest efforts to arrive at a solution, SIRA addresses only 
about 5 percent of the market's recorded music. What about the 
remaining 95 percent? Are we to ignore the pressing need for 
reform for the overwhelming majority of the existing 
marketplace?
    In our view, SIRA represents a missed opportunity. We're 
also concerned that it introduces new inefficiencies, requiring 
digital music services to replicate the royalty payment 
infrastructure that record companies have built up over 
decades. But more troubling still is that the few changes it 
does make are at the expense of record companies.
    SIRA nullifies thousands of contractual agreements 
negotiated by record companies with artist songwriters over 
many decades and will cost record companies and services many 
millions of dollars each year in additional royalties to the 
benefit of the music publishing companies. This is unfair 
because it undoes a principle that we, the publishers, 
committed to in 1995, that changes in contracts, such as 
controlled composition provisions, should be prospective only. 
SIRA would retroactively eviscerate a key provision on which 
the overall economic terms of contracts with artist songwriters 
were premised.
    I am confident that music publishers would be very upset if 
key economic terms of their contracts with their songwriters 
were simply abrogated by Congress, fundamentally rewriting the 
deals on which they based their decisions about advances, 
royalty rates, royalty splits, and the like. We simply want our 
contracts with our artist songwriters to be honored, just the 
way music publishers want their contracts with their 
songwriters to be honored.
    Importantly, the effect would be to transfer millions of 
dollars from record companies, whose revenues have been 
decreasing, to music publishers whose revenues have been 
increasing. This makes no sense.
    SIRA also requires that record companies pay administrative 
costs as both licensors and licensees. In an unprecedented 
change, SIRA would shift costs of distributing section 115 
royalties from music publishers to their licensees. We are not 
opposed to cost sharing, but if that is going to be the rule 
when record companies are licensees, it ought to be the rule 
under sections 112 and 114 when record companies are licensors.
    There are several other problems we see with the discussion 
draft and I refer you to my prepared statement for details on 
those.
    To improve SIRA and achieve real reform, we propose that 
the blanket license be extended to all products and services 
covered by the mechanical compulsory license, including 
physical products and hybrid physical online offerings. This 
would go a long way toward solving the problems I have just 
highlighted and we would be happy to work with the Committee to 
bring about that reform in a manner that is fair to all the 
parties.
    Failing that, we urge you to limit the blanket license to 
subscription services. We think that this would represent 
incremental progress and something that can be achieved 
quickly. That way, you can achieve reform in an area where it 
would do some good and where the Copyright Office identified a 
specific need without hurting record companies and digital 
music services. Downloads are one of the few bright spots in 
the bleak mechanical licensing picture. It would be terrible to 
jeopardize a business that is working well and add new costs 
and confusion. If comprehensive reform is not to be, we should 
experiment with limited reform for subscription services. If a 
line is to be drawn, it is important to draw it in the right 
place.
    Should you go forward with legislation on subscription 
services, there are a few modest improvements that you can make 
in the current system that would help address our problems. 
These are detailed in my written statement, but the most 
important is to create a dispute resolution mechanism. Every 
new format and business model has raised questions concerning 
the interpretation of section 115. A fair and expeditious 
mechanism to resolve these questions would facilitate licensing 
and entry into the marketplace.
    We wish we could be more supportive of SIRA, but at this 
point, we worry that it would cause more harm than good, at 
least for us, and we don't feel like record companies should 
bear the financial and business burdens of very limited reforms 
that do not address our needs. But we are certainly prepared to 
work with the Committee, the Copyright Office, NMPA, DiMA, and 
any others to improve the proposal to the point where it 
provides the real benefit that is so badly needed.
    Let me thank you again for your efforts on this. We think 
this really is important and we are very grateful for your 
efforts on our behalf.
    Mr. Smith. Thank you, Mr. Sherman.
    [The prepared statement of Mr. Sherman follows:]

                 Prepared Statement of Cary H. Sherman




    Mr. Smith. Let me say to you all, I think this is the first 
panel I can ever remember where all witnesses have stayed 
within the time limit. Maybe that has to do with your sense of 
rhythm, I don't know, but nevertheless, it's appreciated.
    Mr. Israelite, let me start off with my questions directed 
toward you, but also let me say we're probably going to have a 
couple of rounds of questions because I know all the Members 
here have much they want to discuss.
    One initial question, just to get this on the record, you 
favor keeping the legislation like it is, limiting it to 
digital music, not expanding it to include physical copies of 
music. Why is that?
    Mr. Israelite. Yes, Mr. Chairman, that's true. We believe 
that the method by which we license physical product isn't 
broken. It's been in existence for nearly 100 years, and as I 
explained in my opening statement, it's a transfer with our 
copyright to the label's copyright to the consumer. That seems 
to work. The problems have arisen with regard to when third 
parties want to come in and obtain a massive amount of licenses 
and that's why we think we're best focused in the digital 
arena. We're talking about a third party that doesn't own 
either copyright, doesn't have a background in the music 
industry, and is looking to obtain millions of copyrights in a 
very short period of time, and that's why we've proposed it for 
just the digital space.
    We think that if it's going to be in the digital space, 
however, it ought to be in all of the digital space and not 
just limited to subscription services. I think one of the 
reasons you'll hear a desire by some to limit this to just 
subscription services is because record labels do not pass 
through our licenses currently in subscription services. They 
pass through our licenses in other digital services, like Apple 
iTunes.
    And so we've tried to make this very broad to include 
things like kiosks, like cell phone delivery, like all the 
products that Jon's clients want to offer, and we think that 
that's probably the best first step. It is still a small part 
of the market, about 6 percent of the worldwide market, but in 
the last year, it's grown 300 percent, and I think most people 
think that the future of the music business is going to be 
digital, and therefore, if we can fix licensing for that new 
type of service, we think it'll fix the music industry 
licensing process for a long time to come.
    Mr. Smith. Thank you, Mr. Israelite.
    Let me go to one of the concerns that I mentioned a minute 
ago and I'm going to be addressing the same type of question to 
Mr. Potter, as well, and this goes to the definition of 
interactive stream as a DPD. Number one, why is that so 
important to you? Number two, how do you explain the Copyright 
Office taking a different view?
    Mr. Israelite. It's important to us for a couple of 
reasons, Mr. Chairman. First of all, it's important to us for 
its practical effect. Part of the beauty of this agreement, in 
my opinion, is that we agreed that we would leave fights that 
didn't need to be fought in this arena to other arenas. So, for 
example, when it comes to the value of the section 115 right 
for on-demand streaming or interactive streaming, we have 
agreed that we will have that fight during the Copyright 
Royalty Board proceeding, not as a part of this bill. It's 
important to us, therefore, on a practical level, that when we 
argue about the value of the rate in the CRB, we are arguing 
the value over a DPD, something that everyone understands.
    It's also important to us, very important to us, in terms 
of the policy reasons. We believe that these interactive 
streams constitute a DPD under section 115. We believe that the 
legislative history supports that. We believe that our current 
contracts with several of Mr. Potter's members support that. 
And we believe it was part of the deal that we made when we 
agreed to offer a gratis license for server copies for pure 
streaming services. We thought that that was an exchange we 
made as a business arrangement. So we believe the law supports 
it, but even if the law didn't, we think it was part of a 
business arrangement that we came to a conclusion about.
    Mr. Smith. Okay. Thank you, Mr. Israelite.
    Mr. Potter, let's go back to that definition of interactive 
stream. It's my understanding that in the existing contracts 
with the publishers, interactive streams--under the definition 
of an interactive stream as a DPD already is in writing in 
those contracts. Why shouldn't that continue in the current 
legislation as we go forward since it already exists in the 
current contracts?
    Mr. Potter. Mr. Chairman, we have testified about those 
agreements several times in this Subcommittee as well as before 
the Copyright Office. We have some member companies that signed 
licenses that were essentially take it or leave it licenses 
under the threat of litigation or essentially not entering into 
this business. Candidly, they could have made some of those 
choices back then and they chose to engage in a license, to 
sign that license.
    So the fact that they were willing to concede a point of 
legal principle that suggested an interactive performance was 
actually a delivery or a distribution should not reflect public 
policy, and I think that the Register has also testified 
several times that she does not endorse and the Copyright 
Office does not endorse the comment--the interpretation that 
was in that license.
    We believe it's fairly simple. There are reproductions that 
are associated with the delivery of a performance, but it is a 
performance that is being delivered, not a reproduction that is 
being delivered, and therefore, we would--it is plain and 
simple terms in the Copyright Office what is a reproduction and 
we don't see a reproduction ultimately being distributed here. 
We see a performance being delivered, a performance being 
distributed.
    Mr. Smith. My time is up, but nevertheless, that's the 
clear language of the current contracts that you have with 
publishers.
    Mr. Potter. That's the clear language of--and the precedent 
has been set, has it not? I would--there is precedent in a few 
contracts signed by a few companies. There is legal precedent 
here that is arguably more important both domestically and 
internationally about the Congress deciding what is and is not 
a distribution.
    Mr. Smith. Congress can decide that and contracts can 
change. I recognize that. I was simply going to the existing 
language, but thank you for your answer to that question.
    Mr. Berman, you are recognized for your questions.
    Mr. Berman. Thank you very much, Mr. Chairman.
    Let me just jump to that issue for a second. Why isn't an 
interactive stream the 21st century functional equivalent of a 
delivery of a phonorecord? I mean, in other words, if I can 
press a button and hear anything I want at any time, that's 
easier than sticking the CD in the machine or getting that 
record to go down over that thing. I mean, I get it whenever I 
want it. It's like, why would I ever want to buy a record?
    Mr. Potter. I am not taking a position that an on-demand 
stream might be substitutional and, in fact, entirely 
substitutional for sales of CDs. If we have on-demand access to 
our music collection or a music collection at any time, any 
place, then it may be the case that that activity is entirely 
substitutional. The question is whether that activity is an on-
demand performance or whether it is a distribution and we 
already pay, ASCAP and BMI----
    Mr. Berman. Everything is both. I listen to a CD at home 
and I hear somebody performing some music. Now we're talking 
about an individualized on-demand ability to get the music out 
of one essentially instantaneously with my desire to have it.
    Mr. Potter. There were several months of negotiations, as 
you're aware, that included the PROs and the Harry Fox Agency 
and the NMPA and the Songwriters about whether we should have a 
uni-license that would recognize the integration or convergence 
of the performance and distribution rights and would set up a 
single system for licensing all of the rights in the bundle.
    Mr. Berman. I'm not sure I'd go back there.
    Mr. Potter. Those negotiations did not succeed. In this 
context, we have conceded to the idea of a reproduction right 
that supports the delivery. The question is whether the 
reproduction is or is not what is actually delivered or what is 
actually distributed and we take a position that the 
performance is what is delivered. It is the reproduction that 
facilitates the delivery of that performance.
    Mr. Berman. That sounds like 20th century.
    Mr. Potter. Actually, I think it's quite 21st century.
    Mr. Berman. This is to the entire panel. These guys want a 
revision of the physical, the mechanical, in the context of a 
physical. Your proposal restricts it to digital. Is that a 
bright line these days? Is it clear that we would always know 
whether something was physical or digital? What are kiosk 
services? What are ring tones?
    Mr. Sherman. Is that for the panel, because----
    Mr. Berman. Yes.
    Mr. Sherman. I'm very glad you raised that question because 
when we refer to physical, we're not just referring to old-
fashioned CDs. We're referring to the fact that nobody knows 
what the distinction is between physical and digital anymore. 
When we sell a CD that has locked content on it that can only 
be unlocked by going to a website and then downloaded, what is 
the licensing system for that CD? Is it partly the old-
fashioned license and then a new blanket license for just 
locked content? What about if we put pre-loaded content onto an 
iPod or the hard drive of a computer, 2,000 songs? It's a 
physical disk that is being sold, a physical portable device. 
Is that physical or is that digital?
    We don't have the answers to any of those questions and I 
didn't see anything in SIRA that would help us resolve those 
issues, yet that is key to how these things have to be 
licensed. So I think you've put your finger on a very important 
problem.
    Mr. Berman. So this could be both, metaphysical and meta-
digital? [Laughter.]
    Mr. Sherman. Exactly.
    Mr. Berman. Anybody else?
    Mr. Israelite. First of all, if there's a question about 
whether something is covered by section 115 or not, which I 
think some of your examples, that's the debate where it falls, 
that's a debate to be held in the Copyright Royalty Board, not 
as a part of this bill.
    If it is something covered by section 115, then I think the 
bill does a very good job----
    Mr. Berman. What are the tools the Copyright Royalty Board 
has? What are the standards they use to make a decision?
    Mr. Israelite. We're in a CRB process right now, and when 
we get to the actual proceeding, I have no doubt that all of 
the parties here at this table will make arguments about 
whether something is or isn't covered by section 115. There are 
procedures for that. There are processes for that.
    One of the things about this bill that I think was very 
wise is it leaves those fights for that forum. Instead, in this 
forum, it's just a licensing process, and I think the bill does 
a very good job of defining what digital delivery means. It 
does mean kiosks. It does mean a lot of the new products where, 
in effect, the consumer gets it from a digital delivery. It 
pretty much leaves out the traditional CD, record, eight-track, 
cassette, because that's a process that, number one, is 
declining, but number two, we have a working licensing system 
that's been in place for 100 years.
    Mr. Berman. Mr. Chairman, my time is up. I see we've worn 
out the other Members of the Subcommittee, so--we will have 
more rounds.
    Mr. Smith. Let me go to the second concern that I raised in 
my opening statement, Mr. Israelite, and that has to do with 
overhead costs and who should pay for them. Mr. Potter, this 
question will be going your way, as well.
    I don't expect you all to negotiate in open court, but 
could you at least give me a range of--an acceptable range that 
you all might consider, either a percentage or dollar amount, 
whatever it might be? I do think it's resolvable by all the 
parties involved, but I'd like to hear your take on it now.
    Mr. Israelite. Sure. Mr. Chairman, as I referenced in my 
opening statement, we still continue to believe we'd like to 
get rid of section 115. But part of the problem is that along 
with a compulsory licensing system, there are pros and cons. 
One of the things about the current compulsory licensing system 
is that anyone who chooses to use it must pay 100 percent of 
the administrative fees. So if you are a user that wants to 
invoke section 115, you have a choice. You can pay directly the 
copyright owner the full amount every month, or you can go to 
the Copyright Office if you can't find the person and drop $12 
per title for them to do it. If we are going to fix the 
compulsory licensing system instead of going to a free market 
system that we favor, we've asked that we go back to the intent 
of compulsory licensing, which is the user help pay the 
administrative fees.
    In terms of a dollar amount, I don't have a number to give 
you, but I would hope that it would be something based on a 
percentage system where we believe it would be a shared cost. 
We're not asking for a 100 percent contribution. We're just 
wanting to make sure that publishers and songwriters aren't 
asked to finance a new system that really is designed for the 
users, and if we're not able to resolve this issue among 
ourselves, the bill, I think, wisely sends it to a process to 
be resolved, which is the CRB, and we've accepted that as a 
compromise.
    Mr. Smith. Okay. Mr. Potter, what is your solution to the 
problem of who pays the overhead costs? Are you happy to go to 
the Royalty Board, as well?
    Mr. Potter. Mr. Chairman, this is something that we have 
agreed to share the burden in. We have agreed if we are unable 
to agree how to share the burden, I think we are comfortable 
sending it to the CRB. I should share with you that Mr. 
Israelite's staff, or the staff of the Harry Fox Agency, the 
technology staff, and several technology folks from my 
companies have spent many hours over the course of several 
weeks sitting in a room trying to determine what type of system 
needs to be put in place so that we can report music usage 
accurately and they can distribute royalties accurately on an 
ongoing basis.
    Mr. Smith. Are you closer now than you were several weeks 
ago?
    Mr. Potter. The answer is, yes, we are closer. There have 
been fits and starts, as there always are with multi-party 
negotiations. But the answer is, yes, we're closer to answers. 
We still don't have firm price tags, but we are closer to 
answers.
    Let me share one point that is responsive to one of Mr. 
Sherman's points. We don't think that setting up this 
designated agent system will duplicate our company's 
administration costs for license reporting or music reporting. 
We have worked out, and we think we will work out in a final 
form a music reporting system with the publishers that 
essentially is almost redundant. We will be providing to the 
publishers almost the exact same data, if not the exact same 
data, that we provide to the record companies, and therefore, 
in fact, we don't think the costs of the ongoing reporting 
process will be significantly different than the costs that we 
already have reporting to the record companies.
    Mr. Smith. Okay, good. Thank you, Mr. Potter.
    Mr. Carnes, I want to go back to the point that you made or 
the triple point you made, transparency, transparency, 
transparency. That seems to make sense. However, you can 
understand that someone else might not want to reveal all of 
their business model, how their profit is always determined. 
They may not want competitors to know all their privileged 
information. So what kind of a compromise can we have there 
whereby you could be satisfied that no one was trying to take 
advantage of you, at the same time, protecting the proprietary 
interest of other parties?
    Mr. Carnes. Well, first, we're very early on in this 
process. I mean, I just got this bill Friday at 4:30, so I 
really can't--I don't want to say more than I know. I probably 
already have. But basically, what I would like to say is, for 
instance, with the case of the administration fees, we would 
like to have some input on that or at least see what's going 
on. We're not asking for a seat on the Harry Fox Board or 
something, but if there's going to be a designated agent set up 
by statute, we feel like that's a rights-taking thing and a 
blanket license where they take our rights. The general 
designated agent, of course, gets to take everybody's rights 
and I think the tradeoff for that is some sort of transparency 
for us, some ability on the front end to have input on what the 
rights might be.
    Mr. Smith. Mr. Israelite, what do you think about that?
    Mr. Israelite. Well, I certainly appreciate what Rick is 
trying to do and I think it's a shared goal of making sure that 
writers and publishers are comfortable with the transparency of 
the system. There are a lot of what are called singer 
songwriters that do their own publishing, and for those people, 
they, in effect, are their own publishers. They can run for our 
board. In fact, we have them on our board.
    Other writers choose to assign their copyrights to a 
publisher, and when they do that, that is a private contractual 
arrangement. They're not forced to do it. They can administer 
it themselves. But those who choose to assign their copyright 
to a publisher have entered into a business relationship, and 
one of the principles we've tried to keep intact in this bill 
is to not have more Government interference into the private 
contractual arrangements among parties.
    And so we've proposed, for example, establishing a dispute 
resolution committee as a part of the DA that would be made up 
of half songwriters, half publishers. We've been in very 
productive negotiations with Rick's group and other songwriter 
groups about how to make this work. But I think as a principle, 
publishers believe that when songwriters assign their 
copyrights and enter into private contractual arrangements, 
those truly are not the proper place for Government to 
interfere, and so we hope we can work this out without there 
being more Government mandates on how publishers do their job.
    Mr. Smith. Okay. Thank you, Mr. Israelite.
    Mr. Berman?
    Mr. Berman. Two sort of whimsical comments. The first is 
you don't want your contracts with the publishers providing for 
controlled compositions to be abrogated. You don't want your 
contracts with the songwriters to be abrogated. And I'm a 
Democrat and I live to abrogate contracts. [Laughter.]
    Mr. Berman. The other one that comes to mind is that old 
thing of, I've got friends on one side and friends on the other 
and I'm with my friends. [Laughter.]
    Mr. Berman. So, as you try to work through this, because 
unfortunately in this business we can't always indulge all our 
friendships, and shouldn't, the Songwriters Guild, Mr. Carnes, 
talks about what happens to him under controlled compositions. 
It reminds me that underlying this somewhat, this may be a 
fight about money. So I start to think, what if we could 
deploy, as they finish with the border, we deploy the National 
Guard to deal with the piracy problem, make the pie much 
bigger, and you don't need controlled compositions and 
percentages are an easier substitute. I'm trying to find a 
dynamic.
    The RIAA would like a much broader coverage. If you're 
going to reform 115, notwithstanding when Mr. Israelite says it 
works, I've heard record company executives tell me it impedes 
their ability to put new technologies on the market because of 
the way the existing 115 operates and their ability to do that.
    What's the dynamic by which record companies' traditional 
role in conveying publisher rights along with sound recording 
rights can be given up in the context of a new system, and at 
the same time, we deal with the broader issue of how to reform 
and modernize 115? And what is the dynamic that turns this into 
a broader conversation? I know there's a lot of conversations, 
but a broader effort? So that's one question. I have one more.
    Mr. Sherman. Well, our feeling really is to the extent it's 
not broken, we shouldn't be fixing it. And the one thing in the 
digital area that is not broken is the download market. The 
system has worked efficiently and well.
    Mr. Potter said that we wouldn't be duplicating the music 
reporting system and there wouldn't be any additional burden on 
the music services, and perhaps I'm wrong about that, but I'm 
under the impression that when there are multiple designated 
agents, it'll be up to the licensee to figure out to whom to 
send those royalty checks for publishing. That is not the 
information that they currently have in their database. They're 
going to have to figure out year by year who gets what 
fractional share of what copyrighted musical work, depending on 
what use was made that year, and that is going to be a very 
intensive administrative process which we already do for free 
for the digital music services because we have an 
infrastructure built up for it.
    So if we're going to experiment with something and we want 
to try moving into a new world, let's start with subscription 
services and move from there. But I don't think that if we move 
to the entire digital market that we're going to do much good 
because the next thing we're going to be arguing about is 
what's digital and what's physical and where do multi-session 
disks fit in and everything else and we're just going to have a 
new set of issues to resolve and not even know how to license 
them.
    Mr. Berman. So you're basically saying, go all the way or 
take just a very small step?
    Mr. Sherman. Precisely.
    Mr. Berman. And your reaction?
    Mr. Israelite. I think it's a difficult position to take to 
say that the DPD market of licensing works just fine, but we 
ought to fix physical. The truth of the matter is is that if 
you can put out a CD in a physical format, you can license 
through a DPD store. The truth of the matter is, licensing 
works just fine with physical formats, and the truth is, 
licensing works pretty well with DPDs, too. The reason why if 
we create a new blanket licensing structure it should be 
applied to all digital is because it doesn't make any sense to 
build us a brand new Cadillac but tell us we can't drive it out 
of the driveway.
    This new system will give DiMA what it wants. They've asked 
for blanket licensing. They've asked for one-stop shopping. And 
so we think it makes perfect sense to cover all digital 
products.
    Mr. Sherman. If I can just respond----
    Mr. Smith. Let me yield the gentlemen a couple additional 
minutes because this is a question I was going to ask, as well, 
so we're getting double-dancer here.
    Mr. Sherman. It isn't that our feeling is simply that we 
ought to have one system, that we're creating artificial 
boundaries, drawing artificial lines in a world of convergence 
where next week, we're going to have a new product and we're 
not going to know whether it's physical or digital. We 
shouldn't be having parallel systems for licensing when we 
could have one system, and we'd love for it to be a blanket 
licensing system, but this isn't a question of whether physical 
is working well enough. It's creating a new blanket licensing 
system for all of us for everything.
    Mr. Berman. I'd like to hear Mr. Potter and Mr. Carnes get 
into this issue, and let me just also interrupt. Is there a 
phase-in process, you do one thing right away and one thing in 
a couple of years? Is there a way of sort of creating that kind 
of a transition period that makes sense?
    Mr. Potter. We clearly have partners in business on both 
sides of me, even on all three sides of me, if we were sitting 
at a square table.
    Mr. Berman. And you're with your partners.
    Mr. Potter. I'm with my partners, because we don't own 
anything. We just license it from everyone. It's a tough 
business to be in.
    As I said in my testimony, there's a fair amount of 
righteousness that the DPD system works, but Mr. Israelite 
acknowledges the DPD system works. There's a need for 
modernizing the entire system, both for certain physical 
products and hybrid products. There's a need for modernizing 
the entire system so it takes care of the innovative digital 
products. We certainly went into this in the, I guess it was 2 
years ago in the intensive negotiations, thinking we were going 
to take care of subscription service products and that would 
cover the hybrid products and things have changed. There's a 
lot of ways we can support progress. Transition provisions are 
certainly something we would be willing to talk about.
    I will say, however, that it is intriguing for us to hear 
Mr. Sherman's concern about what is digital and what is 
physical. Particularly if somebody hands you an iPod with 
preloaded songs, there's a whole lot of ways to define what's 
digital and what's physical, what's inside a license or what's 
outside of the license. When Mr. Sherman's group in the 
interactivity debate is trying to figure out what's inside or 
outside the box, they look for infringement litigation and sue 
our companies and deal with that in the court of law. When they 
are on the licensee side of the misunderstanding or the box 
that they're not sure whether they're inside or outside of, 
they look for a dispute resolution mechanism inside the 
statutory license to keep them out of court as defendants.
    So I would only say if we're going to create a dispute 
resolution mechanism to figure out if we're inside or outside 
the box, we'd like to do that for 114 as well as 115.
    Mr. Berman. On the discussion draft bill, the Chairman and 
I got into an area that the partners seemed to going in 
different directions on and that's how to turn this interactive 
delivery, and I guess the question I have is whether--I mean, 
if this draft were a bill and it were coming up for a vote, do 
you support this draft, Mr. Potter, given how that issue is 
framed in this discussion draft?
    Mr. Potter. I think these issues are manageable. I'm not 
prepared to negotiate these issues out in public, but I think 
these issues are manageable.
    Mr. Berman. Do you?
    Mr. Israelite. I would support the current draft bill.
    Mr. Berman. But do you think the issues are manageable?
    Mr. Israelite. As long as Jon would support the current 
bill, I think the issues are manageable. [Laughter.]
    Mr. Israelite. That is as far as you are going to get right 
now, I think.
    Mr. Berman. Mr. Carnes, are you suggesting we actually 
legislate in the area of this transparency at this point, or 
are you saying there's a process----
    Mr. Carnes. Well, there's a process----
    Mr. Berman.--to work with the publishers on to try and----
    Mr. Carnes. There's a process going on right now with the 
publishers where we discuss this. The reason why in my written 
statement we gave you the language and everything was because 
we wanted to put a marker down that we feel that this principle 
is correct. But I certainly would rather solve this in 
negotiations with----
    Mr. Berman. So you want to at least threaten to legislate.
    Mr. Carnes. Absolutely. [Laughter.]
    Mr. Berman. All right. Thank you, Mr. Chairman.
    Mr. Smith. Thank you, Mr. Berman. That was a good ending, 
and it's frankly encouraging for me to hear that you all are 
still trying to iron out the last couple of remaining wrinkles. 
We have a deadline and we're trying to get this done in the 
next few days and you all know that, but I do think progress is 
being made and that's good to hear. It's good for the industry, 
it's good for the future of music, and it's good for us, as 
well.
    So I appreciate all your contributions and hope that you 
all will continue working together. Make sure that all parties 
are involved, if you all will, and we can get to a successful 
conclusion. Thank you again. We appreciate your testimony.
    The Subcommittee is adjourned.
    [Whereupon, at 5:09 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

Prepared Statement of the Honorable Howard Berman, a Representative in 
Congress from the State of California, and Ranking Member, Subcommittee 
           on Courts, the Internet, and Intellectual Property

    Mr. Chairman,
    Thank you for scheduling this hearing on the discussion draft of 
Section 115 music licensing reform.
    Over the past couple of years, this Subcommittee has analyzed the 
compulsory licensing scheme for mechanical rights both as described in 
the statute and the alternative provided for by the Harry Fox Agency. 
With the development of new technologies for music distribution, we 
recognize that neither model is sufficient to meet consumer's demand 
for music.
    And this demand is rising: We have come a long way from the initial 
piracy-laden version of Napster released in 1999. IFPI's (International 
Federation of Phonogram and Videogram Producers) Digital Music Report 
of 2006 notes the growth of digitally delivered content in the music 
industry.

          420 million single tracks were downloaded in 2005 
        globally - more than double the number downloaded in 2004 (156 
        million).

          US: 353 million single tracks downloaded (up from 143 
        million) [Nielsen SoundScan]

          The number of users of subscription services, such as 
        Rhapsody and Napster, increased from 1.5 to 2.8 million 
        globally in 2005.

          In 2005, the number of legitimate music download 
        sites reached 335, up from 50 two years ago.

          Digital sales in 2005 accounted for approximately 6% 
        of global music sales based on the first half of the year. 2005 
        was a landmark year for digital music.

          Just last week the Washington Post reported that 
        ``Ringtones, once dismissed as nothing more then a passing fad, 
        have become a $3 billion worldwide market.''

    However, the burden surrounding licensing often delays, if not 
prevents certain music from getting to the consumer. Unfortunately, 
this inability to provide music at anytime, any place, in any format 
may precipitate consumer migration back to unauthorized Peer-to-Peer 
services.
    Two years ago, the Copyright Office suggested that reform of the 
115 license should reflect a structure similar to what is currently 
available for the 114 license--a designated agent which serves as a 
collective to administer a blanket license. I am encouraged to see that 
the discussion draft reflects that idea. I commend the publishers on 
their hard work. They have tried diligently to resolve the problems 
that the DiMA companies have illustrated - particularly the ``double 
dip'' and ``one-stop-shop'' issue. However, I am concerned that with an 
impending mark-up less then two weeks away, many important details of 
the bill have yet to be agreed upon. I will focus on some of those 
issues during the Q &A.
    Furthermore, any solution can only be evaluated from the 
perspective of the scope of the problem originally identified. Two 
years ago at an oversight hearing on Section 115, I posed two questions 
which I will once again ask today: 1) Does 115 facilitate or hinder the 
roll-out of new legal music offerings? and 2) depending on the answer 
to the first question, what if anything should Congress do to change 
115?
    While this proposed legislation addresses many of the digital 
concerns--unresolved, are the many issues encountered in the physical 
market or in the area of hybrid services. The roll-out of new secure 
physical formats, or higher quality formats, often times require 
additional reproductions, has been sluggish. Furthermore, there is 
little resolution to the business model which provides pre-loaded 
content on devices. Finally, many definitional questions remain such as 
whether the license includes ringtones, or if a kiosk service is a 
reproduction in the physical sense or digital phonorecord delivery 
service. Some of these questions may require a purely economic 
analysis--others may require a re-evaluation on the process level.
    I hope though that we can achieve greater clarity and further 
consensus as this bill moves forward.

                               __________

                   Separate Statement of SESAC, Inc.

    SESAC, Inc. (``SESAC'') appreciates the opportunity to submit this 
statement to the Subcommittee regarding the discussion draft of the 
Section 115 Reform Act of 2006 (``SIRA''). In addition the comments 
contained in the contemporaneously submitted joint written comments of 
the three performing rights societies, SESAC submits these additional 
comments:

        1.  SESAC understands that, as a compromise solution between 
        the NMPA/HFA, on the one hand, and DiMA, on the other hand, 
        those parties propose that, in exchange for DiMA's 
        acknowledgment that the reproduction right is implicated in 
        interactive streaming, NMPA/HFA is willing to grant digital 
        music services a royalty-free compulsory mechanical license for 
        ``the making of server and incidental reproduction to 
        facilitate non-interactive streaming.'' Although SESAC 
        understands the motivation for this compromise to accomplish 
        the broader purpose of formulating a bill acceptable to DiMA 
        and NMPA/HFA, it is concerned that music services might at some 
        time incorrectly deduce from this provision that, by the same 
        token, SESAC should be willing to grant royalty-free public 
        performance licenses for so-called ``full'' or ``limited'' 
        downloads. SESAC's position on this topic has remained 
        constant: Under the Copyright Act, all digital transmissions, 
        including such downloads, constitute performances justifying 
        royalty payments. In light of DiMA's continued insistence, as 
        reflected in Mr. Potter's testimony at this hearing, that a 
        given digital transmission implicates ``either a performance 
        right and royalty or a distribution right and royalty, but not 
        both,'' DiMA should not be heard to argue in the future that 
        SESAC's support of this compromise solution concerning 
        mechanical rights in any way suggests that SESAC has acquiesced 
        in DiMA's position. In short, NMPA/HFA has the right to make 
        such decisions on behalf of its own members, and SESAC 
        maintains its positions on behalf of its affiliates.

        2.  SESAC understands that the 15 percent of market share 
        requirement was included in SIRA to address DiMA's concerns 
        that, if it were required to deal with too many designated 
        agents having small market share, the efficiency benefits of 
        blanket licensing would be lessened or lost. And, SESAC 
        acknowledges that this is a proposed compromise solution 
        between NMPA/HFA and DiMA only for licensing the mechanical 
        right in digital media and to facilitate and maintain 
        efficiency under this new proposed Amendment to Section 115 
        relevant to mechanical licensing. SESAC believes the record 
        should be clear that this 15 percent market share criteria is 
        relevant only to mechanical licensing and not to public 
        performance licensing, where over the course of history one or 
        more of the three performing rights organizations mentioned in 
        the copyright law (ASCAP, BMI and SESAC) have not enjoyed a 15 
        percent market share. Although SESAC acknowledges that it does 
        not control a 15 percent share, the public performance market 
        place as divided among the three performing rights 
        organizations has served as the gold standard of music 
        licensing for over seven decades. As stated by Mr. Potter of 
        DiMA in his testimony at the hearing, ``the ASCAP, BMI and 
        SESAC systems for musical works' performance rights'' enable 
        ``simple, streamlined licensing processes'' that substantially 
        reduce legal risk.'' In short, SESAC's agreement with the 15 
        percent threshold is limited to mechanical licensing as 
        embodied in this proposed legislation.

    Finally, like NMPA/HFA, SESAC believes as a matter of general 
principal that, in a perfect world, the licensing of all musical rights 
be accomplished solely by fair marketplace dynamics. Nevertheless, 
SESAC understands the particular historic problems attendant to the 
present compulsory mechanical licensing scheme, particularly in the 
digital realm, and supports the efforts of NMPA/HFA and DiMA to craft a 
blanket mechanical licensing system that will facilitate greater 
legitimate music uses to the benefit of music publishers and 
songwriters, who are also SESAC's constituents. SESAC would be happy to 
expand on these comments, answer any questions raised, and otherwise be 
of assistance to the Subcommittee in its consideration of this proposed 
licensing reform.

                              ----------                              


            Prepared Statement of the U.S. Copyright Office




                                 
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