[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
DIGITAL MUSIC LICENSING AND SECTION 115 OF THE COPYRIGHT ACT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MARCH 8, 2005
__________
Serial No. 109-6
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
U.S. GOVERNMENT PRINTING OFFICE
99-724 WASHINGTON : 2005
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government
Printing Office Internet: bookstore.gpo.gov Phone: toll free
(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail
Stop SSOP, Washington, DC 20402-0001
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 ADAM SMITH, Washington
MIKE PENCE, Indiana CHRIS VAN HOLLEN, Maryland
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
ELTON GALLEGLY, California JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
SPENCER BACHUS, Alabama MAXINE WATERS, California
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
Alec French, Minority Counsel
C O N T E N T S
----------
MARCH 8, 2005
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
The Honorable John Conyers, Jr., a Representative in Congress
from the State of Michigan..................................... 3
WITNESSES
Mr. Wood Newton, Nashville Songwriters Association, International
Oral Testimony................................................. 5
Prepared Statement............................................. 7
Mr. David Mark Israelite, President and Chief Executive Officer,
National Music Publishers' Association
Oral Testimony................................................. 9
Prepared Statement............................................. 10
Mr. Larry Kenswil, President, e-Labs, Universal Music Group
Oral Testimony................................................. 13
Prepared Statement............................................. 15
Mr. Jonathan Potter, Executive Director, Digital Media
Association (DiMA)
Oral Testimony................................................. 19
Prepared Statement............................................. 21
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.......................................... 37
Letter from the The Register of the Copyrights of the United
States of America to Representatives Sensenbrenner, Conyers,
Smith and Berman............................................... 39
DIGITAL MUSIC LICENSING AND SECTION 115 OF THE COPYRIGHT ACT
----------
TUESDAY, MARCH 8, 2005
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 4:40 p.m., in
Room 2141, Rayburn House Office Building, Hon. Lamar Smith
(Chair of the Subcommittee) presiding.
Mr. Smith. The Subcommittee on Courts, the Internet, and
Intellectual Property will come to order. I am going to
recognize myself for an opening statement, then the Ranking
Member, then, we will look forward to hearing from our
witnesses today.
Today, this Subcommittee begins updating compulsory music
licenses, focusing on section 115, mechanical licenses. Over
the past few years, the growth in the online music business has
been phenomenal, demonstrating the strong demand by consumers
for legal music. Last year, the iPod had record sales. Music
subscription services are increasingly popular. Digital music
not only has a future in the music business; it is the future.
Many businesses and the Register of Copyrights have stated
that existing law does not accommodate these new business
models. Outdated laws written for the piano roll era have
hindered and will continue to hinder the growth rate for
digital music services. Last March, this Subcommittee held an
initial oversight hearing on section 115 in which three of the
groups testifying today were represented. Since that hearing,
hundreds of millions of digital music downloads have occurred.
However, the overwhelming success of one company does not
necessarily mean that there are no problems with the law. The
solitary success of one company is an indication to some that
the digital music market is tilted toward one entity, raising
further questions.
The Copyright Office hosted several meetings last fall to
identify the problems with existing law and what arguments, if
any, if any could be reached to address these problems. A copy
of the Register's response, dated September 17, 2004, is
available on the testimony table. It appears that there was
agreement on what the issues are but little to no agreement on
what the solutions are. It is my intent to look into section
115 and other statutes to determine what music license statutes
need to be modernized, and I have several goals in mind.
And I might say we eventually might take up not only
section 115 but also 112 and 114. The several goals I have in
mind are these: first, artists deserve to receive fair
compensation. Second, consumers need to know what they are
paying for and what restrictions, if any, exist on their use of
digital music. Third, businesses need certainty regarding their
rights and responsibilities under the law so they can continue
to innovate and create new products and business models.
Finally, where contractual or royalty disputes arise, there
should be a process to settle them quickly and equitably.
Some of the policy issues raised so far involve royalties
related to multisession discs, 30-second samples and server
copies, the design and operation of a blanket mechanical
license, what new or existing organization should operate such
a blanket mechanical licensing system, the end of controlled
composition clauses.
This is not an exclusive list by any means, and this
Subcommittee will undertake a review of all of the issues that
require legislative attention. I expect in the months ahead
that this Subcommittee will hold additional hearings on related
issues such as digital music interoperability and oversight
hearings of the existing performing rights organizations to
determine how they have functioned. While many have viewed
SoundExchange and its royalty collection operations as a
success, local television stations continue to battle SESAC
over royalties for the music contained in reruns.
I encourage all parties interested in music licensing to
promptly put on the record their interests and concerns.
Mechanical licensing reform is necessary, and I look forward to
beginning that process this afternoon. Also, I would like to
invite interested parties to comment in writing on a list of
issues that I will identify shortly. In other words, we are
serious about legislation.
That concludes my opening statement, and the gentleman from
California, Mr. Berman, is recognized for his.
Mr. Berman. Well, thank you very much, Mr. Chairman, both
for scheduling the hearing on section 115, and I have to agree
with you that legislation, I think probably needs to be the end
result of what we're doing here. It's been a year since the
last hearing on this issue, and I think it is important to
assess developments that have occurred in the digital music
arena and what strides the parties have made to address the
concerns expressed last year.
A primary concern for all those making and distributing
music is the threat of piracy. Piracy threatens to harm an
industry that is responsible for providing many jobs in my
district and throughout the country, from the recording
artists, to the backup singers, to sound engineers, musicians,
songwriters, lyricists and all the businesses that support
these talents.
There are things we can do to restrict piracy. Technology
can provide digital rights management technologies. We can
strengthen civil and criminal copyright laws. We can address
the liabilities of those who are involved in developing peer-
to-peer networks which exist primarily for infringing purposes.
We can incentivize prosecution of egregious offenders. We can
work on our trade laws and on foreign counterfeiting.
All these mechanisms are important aspects in battling
piracy, but part of all of this has to be to provide music in a
fashion, in the way people want it, digital and online in any
format to anyplace someone wants. I have come to the conclusion
that aspects of the section 115 license hinder the development
of new services. This, in turn, makes theft of music more
attractive and then denies all segments of the music industry
and those facilitating legitimate services their rightful
compensation.
Last year, the National Music Publishers Association
described this issue as the flavor of the month. It has really
become the flavor of the next decade. The Washington Post
reported that in the next decade, the CD likely would be
surpassed as a format of choice. Replacing it will not be a new
physical format but a data file. The success of Apple iTunes
and the launch of Napster subscription service may not speak to
the death of the physical format, but it definitely speaks to
its decline. In helping to facilitate movement from the use of
CDs to the digital age, we need to ask how the section 115
license would best be reformed.
The last time we addressed this issue, we were at least
united on a core principle, the prevention of piracy. Each
party here has a vested interest in preventing the theft of
intellectual property that continues to this day. Each party
also has an interest in being available to deliver as much
music as possible to maximize revenues or royalties. However,
other than piracy and the need to provide access to music, the
parties have presented divergent views about change to section
115. Furthermore, subsequent digital music licensing hearings
on the application of the section 114 license elicited many
differing opinions as well.
I'm going to skip over some of the history here and
basically go to my thought. We have a good example of private
parties resolving a way to deal with physical reproduction
issues, and that example is the EMI Music Publishing and Sony-
BMG deal last year. In that vein, I'd like to throw out an idea
that all of the interested parties, including the performance
rights organizations, come together and negotiate changes to
section 115 that would facilitate both the copyright and
consumer interests, and if by a time certain, the community has
not been able to come to an agreement, then, working closely
with the Copyright Office, we would in a bipartisan way
consider creating our own changes.
The focus needs to remain on providing rightful
compensation to those who provide the music, and facilitating
the performance and distribution of music in the ways that
consumers want. Our efforts must continue to focus on
preventing piracy and help facilitate legitimate digital online
services. I look forward to hearing from the witnesses about
how changes to section 115 would help in achieving our goal.
Thank you, Mr. Chairman.
Mr. Smith. Thank you, Mr. Berman.
I would like to recognize the presence of the Ranking
Member of the Judiciary Committee, who is here today, and ask
him if he has any comments he would like to make.
Mr. Conyers. Just a few, Mr. Chairman, and I thank you for
inviting me to participate in this discussion. I'm impressed
with both your statements, particularly my colleague, Mr.
Berman. He didn't say anything that sent me off my chair, not
that he does regularly, but I find his statement very good.
Within a few years, copyright holders have gone from being
victims to embracing the Internet market with their works.
Copyright owners, including recording companies, songwriters,
responded to consumer demands by working with Internet sites
like iTunes to provide digital content to consumers. In
essence, they're taking advantage of the very technology that
threatens their livelihood.
Despite the turnaround, though, we're still hearing that
music is still not widely available online and that the reason
is the difficulty in getting licenses from music publishers
over the musical compositions. Companies seeking the licenses
claim the procedures are outdated and the laws not clear on
which online music services require the licenses. There are
even suggestions that Congress should alter the licensing
scheme into a blanket license so that the users of compositions
pay royalties into a pool, and the Copyright Office divvy up
the money amongst publishers.
But this Member at this point in time would be concerned
with proposals that limit the ability of songwriters and
publishers to negotiate licenses for their compositions.
Despite the fact that they actually create and write the songs
that we listen to, songwriters and publishers receive what
appear to be the lowest royalties in the music industry.
Publishers should not be penalized for protecting their
property rights the same way every other industry has done.
The record companies have sued individuals for copyright
infringement, and file sharing companies have sued record
companies and others for copyright violations. So simple
economics dictate that it is in the publishers' self-interest
to license their work to anyone who can protect it from piracy
and who can pay the royalties, so simply put, publishers and
songwriters have no incentive to keep music off the Internet,
but limiting their rights even further could create
disincentives.
I am concerned about one question that's going to, I hope,
be dealt with: if the blanket license and designated agent
proposals are established, do you mind dealing directly with
publishers instead of going through the record labels? DiMA
pays royalties to RIAA and probably would be fine with paying
publishers directly if all the other issues are resolved, and
so, I welcome the witnesses and look forward to this
interesting discussion.
Thank you, Mr. Chairman.
Mr. Smith. Thank you, Mr. Conyers.
Our first witness is Wood Newton. Born and raised in
Hampton, Arkansas, population 1,600, his songs echo his roots.
Wood is a plain-spoken musical spokesman whose compositions
reflect the heart and soul of typical Americans. Wood graduated
from the University of Arkansas with a degree in business
administration in 1970. Some of the other artists who have
recorded Wood's songs include Anne Murray, Willie Nelson, Gary
Stewart, B.J. Thomas, Rita Coolidge, and Marty Robbins.
In addition to his writing and production work, Wood is
actively involved in songwriter advocacy, serving as a
Washington, D.C. liaison for the Nashville Songwriters
Association, International, with more than 100 chapters
throughout the United States and abroad. Let me say to those
who are in the room although Wood Newton has a written
testimony, which he will deliver shortly, after we finish our
hearing today, he is going to sing a song that is also very
pertinent to the subject matter at hand, and in fact, the title
of the song, I believe, is called article I, section 8, which
you will appreciate is related to intellectual property. And
so, when we finish, don't run out. Stay around. We're going to
enjoy that song.
Our next witness, David Mark Israelite, is the newly
appointed president and chief executive officer of the National
Music Publishers Association. Founded in 1917, the National
Music Publishers Association represents American music
publishers and their songwriter partners. From 2001 through
early 2005, Israelite served as deputy chief of staff and
counselor to the Attorney General of the United States. In
March 2004, the Attorney General appointed Israelite chair of
the Department's Task Force on Intellectual Property. As
chairman of the task force, Israelite led a team of higher-
ranking officials in examining all aspects of how the
Department of Justice handled intellectual property issues and
implemented proposals developed by the task force.
Israelite earned his juris doctorate from the University of
Missouri in 1994 and received an M.A. with a double major in
political science and communications from William Jewel College
in 1990.
Our third witness is Larry Kenswil, president of Universal
E-Labs, a division of Vivendi Universal Music Group. E-Labs is
dedicated to exploring, developing, and evolving global
business and new technology strategies to expand the role of
music in consumers' lives. Mr. Kenswil has headed E-Labs from
its founding in 1999. Previously, he was UMG's executive vice-
president, business and legal affairs.
Mr. Kenswil sits on the board of directors of the Recording
Industry Association of America. Mr. Kenswil holds a B.A. from
Cornell University, an M.S. from Boston University and a J.D.
from Georgetown University.
Our final witness is Jonathan Potter, who is the executive
director of the Digital Media Association. Today, DiMA
represents the leading companies providing online audio and
video content. Additionally, Mr. Potter was instrumental in
creating the European Digital Media Association. Mr. Potter is
a graduate of the New York University School of Law and the
University of Rochester.
Welcome to you all. Without objection, your entire written
testimony will be made a part of the record, and Mr. Newton, we
will begin with you.
TESTIMONY OF WOOD NEWTON, NASHVILLE SONGWRITERS ASSOCIATION,
INTERNATIONAL
Mr. Newton. Mr. Chairman, Mr. Berman, and Subcommittee
Members, I want to thank you all for this important opportunity
to speak on behalf of all professional working songwriters in
America.
To give you a little snapshot of what it's like to be a
professional writer in this country, most of my friends that
are not in the music business, they think it's easy. They think
these songs just pop into my head, and I get them to an artist,
and then, I wait at my mailbox until the millions roll in. But
the truth is very different. Most of us in this business spend
years and decades before we even have the courage to make the
move to one of the major music centers in America like
Nashville or Los Angeles, New York, Detroit, and we risk our
young lives to do that.
There are no guarantees, and as we say in Nashville, you've
got to be present to win. It's really important. It would be
nice if we could just stay home in the security of our family
and friends and write these songs and send them to somebody
that exploits them, but you've got to be present to win. We
take that chance. And once we do get our big break, a lot of
times, that is it. Over half of the songwriters who get a top
five record never get another one.
I was on the plane ride up here, I was sitting next to a
guy who's a Ph.D. in disease control. He works for the State of
Tennessee. He is also a guitar picker. So after I recommended a
good guitar teacher in Nashville, I asked him the question that
I like to ask a lot of people: how much do you think a
songwriter makes from each song that goes on a record? And he
thought about it for awhile, and he came up with 25 cents.
Now, we would be really happy as songwriters and publishers
if that were true, but as you know, the statutory rate is eight
and a half cents. And to put that in terms, if you're lucky
enough to get on a million-selling record which generates $15
million at least in revenue for all of those people in that
chain, if I co-write that song, and I don't have part of the
publishing, my share of that million-performance platinum
record is $20,000. And you know what? If I'm in a publishing
deal, then, I don't even see that, because it goes to pay back
the money they've been paying me. If I'm very lucky to get a
hit on the radio, the performance money can be really good, but
last year, there were only 44 top-five country songs in country
music, which is the format that most of my music plays in.
Even the very best of us have our good and lean years. I
come from farm families, and I compare it to being like a small
family farmer without any subsidies. It is really tough. I'll
be honest: I was on the phone today talking to my banker, and I
am very happy to tell you that he approved a loan for me to
stay in business a little longer. So I am a small businessman,
and I have had to do other things, like freelance photography
and remodel houses and whatever I can to stay in business, and
many of us are the same way. So we are truly America's smallest
small businessmen.
I was honored to be part of a Grammy-winning album just a
few weeks ago: 18 different artists and producers got together
and did an album on the songs of Stephen Foster, America's
first professional songwriter. So Stephen Foster is on a roll
again, or he may be rolling in his grave, because he died with
38 cents in his pocket. He had some good and lean years, but he
died with 38 cents in his pocket.
The startling fact is, and I want you to take note of this,
is that America has lost more than half of its professional
songwriters over the last decade due to the deregulation of
radio and corporate mergers and piracy. I have witnessed many
good songwriters just give up, and America is the loser in that
scenario. If I had represented songwriters in 1909 when
Congress formulated the structure of how composers are
compensated, I would have asked those lawmakers to consider
disclosure requirements on anyone who collects royalties on my
behalf.
The system has become so complex, and it is almost
impossible for an individual songwriter to ever get a full and
accurate accounting of their precious royalty dollars and track
those royalties to their source. Songwriter income passes
through many hands, and no songwriter should ever have to make
the hard decision whether to hire an attorney or an accountant
and risk spending more money than they might be owed attempting
to trace their payments or to have to perform an audit that
would strain professional relationships. I do not believe the
60th Congress ever imagined that I would not have easy access
to every record involving my payment history.
Songwriters waited from 1909 to 1978 to have that two-cents
maximum wage raised. When you consider inflation, we are
earning less today than we did a century ago. As a new payment
structure emerges, Congress should favor a system that takes
this into account and one that is flexible enough to allow for
technology's evolution. If new costs are added to the
collection of our royalties by the creation of a new designated
collection agency, songwriters should at least be able to bear
those costs.
And while we're talking about 100 years between pay raises,
I can attest that there are two words that songwriters fear
hearing, and that is controlled composition. The practice of
asking a songwriter to accept a reduced rate on a song is
fundamentally wrong. Controlled composition should end not just
for digital music but across the board. After all, the entire
music business is built on the back of the songwriter.
For almost a century----
Mr. Smith. Mr. Newton, we're going to need to conclude your
testimony.
Mr. Newton. Okay; I can do it real quick here. Thank you
very much.
For almost a century, our lawmakers have been wise in
preserving our compulsory license system, and generally, it is
fair and offers songwriters protection. These new digital
rights, there is no collective agency and no obligation to
license whatsoever, and so, there is a lot of this up in the
air. And we want to be at the table, our songwriters. We are
represented well by the Nashville Songwriters Association and
the Songwriters Guild of America.
Thank you for letting me speak today on behalf of America's
professional songwriters, and I respectfully ask that these
remarks be submitted for the record.
[The prepared statement of Mr. Newton follows:]
Prepared Statement of Wood Newton
Mr. Chairman, Mr. Berman and Subcommittee Members--
I want to thank you for allowing me this important opportunity to
speak on behalf of every working songwriter in America.
First, let me offer a snapshot of what it really means to be a
professional songwriter in this country.
Most people, even my own friends, have the mistaken impression that
I just put a few words to some chords, take them to a star and go to my
mailbox to collect millions of dollars. The truth is very different.
Songwriters spend years perfecting their gift and their craft. We
proceed, despite even our loved ones wondering why all we want to do is
sit around and write songs. At some point in our lives we take a big
risk, put everything we own in the car, and head to a city like
Nashville, New York, Chicago, Seattle, Austin, Miami, Los Angeles or
Detroit, where professional songwriters practice their craft. Even if
we were a ``big fish'' in our little pond back home--at least people
thought we were really good because we were the only songwriter in
town--we stop our car, ready to receive praise and hear our songs
proclaimed to be ``undeniable hits.''
Ten years later, working two part-time jobs with no insurance and
accustomed to rejection, someone finally records one of our songs. But,
it doesn't make it onto the album. Finally, one day we get our ``big
break.'' It is a statistical fact that most songwriters who get a top
five record NEVER get another one. But a few of us persist and get
lucky. Every time someone purchases a CD containing my song, I receive
8.5 cents, which I share with my co-writer. Of course, we split that
royalty again with the publisher of the song. If I am very lucky my
song becomes a ``single'' and gets played on the radio, and I earn a
performance royalty. Last year there were only 44 top five radio songs
in country music.
Songwriters hope that through the course of their career they will
have three or four good years. There are long dry spells in between,
but we keep writing songs anyway. Throughout my nearly 30 years as a
professional songwriter I have had four or five good runs that helped
carry me through those lean times. I also remodeled houses, worked as a
freelance photographer and in assorted other jobs. Songwriting is a
profession where no matter how hard you work there is a constant
reality that your last recorded song may be your last recorded song--
ever.
Page 2
Please don't mistake me. I will always write songs. Regardless. I
personally feel that being able to write songs professionally is a God-
given privilege. Later, I am going to play a song I co-wrote with one
of our founding fathers, James Madison. Our composition is titled
``Article One, Section Eight.'' Madison authored that section of the
Constitution, which gives authors and composers the right to be
compensated for their works.
My first job, as a ``paperboy,'' shares many characteristics with
being a professional songwriter. I am my own secretary, accountant,
mailroom and song-plugger. I am America's smallest small business.
Stephen Foster was America's first professional songwriter. He died
with 38 cents in his pocket.
Sadly, he might not fare much better today. The startling fact is,
and I beseech you to take note, America has lost more than HALF of its
professional songwriters over the last decade. Due to the deregulation
of radio, corporate mergers and piracy, I have witnessed many gifted
composers just give up. And America is the loser.
Mr. Chairman, had I represented songwriters in 1909 when Congress
formulated the structure of how composers are compensated, I would have
asked those lawmakers to consider disclosure requirements on anyone who
collects royalties on my behalf. The system has become so complex that
it is almost impossible for an individual songwriter to ever get a full
and accurate accounting of their precious royalty dollars and track
those royalties to their source. Songwriter income passes through many
hands, and no songwriter should ever have to make the hard decision
whether to hire an attorney or accountant and risk spending more money
than they might be owed attempting to trace their payments, or have to
perform an audit that will strain professional relationships. I don't
believe that the 60th Congress ever imagined that I would not have easy
access to every record involving my payment history.
Songwriters waited from 1909 until 1978 to have their two-cent
``maximum wage'' raised. If you consider inflation, we are earning less
today than we did a century ago. As a new payment structure emerges,
Congress should favor a system that takes this into account, and one
that is flexible enough to allow for technology's evolution. If new
costs are added to the collection of our royalties by the creation of a
new designated collection agent, songwriters should at least be able to
bear those costs.
And while we are talking about 100 years between pay raises, I can
attest that there are two words songwriters fear hearing: ``controlled
composition.'' The practice of asking a songwriter to accept a reduced
rate on a song is fundamentally wrong. Controlled composition should
end, not just for digital music, but across the board. After all, the
entire music industry is built on the back of the songwriter.
Page 3
For almost a century, our lawmakers have been wise in preserving
the ``Compulsory License'' system. Generally, it is fair and offers
songwriters protection. However, when it comes to the rights of
reproduction and distribution for masters for interactive digital
transmissions, there is no compulsory license, no collective agency,
and no obligation to license whatsoever. Some record labels have
negotiated licenses with subscription services that call for payment of
40% to 50% of their gross revenues for master rights. What is that
going to leave the songwriter? It is MY song, yet I have not seen a
penny from subscription services. In what other occupation could
someone sell a product based on my creation without me first agreeing
on the compensation scheme? Congress, in 1909, was concerned that the
right to make mechanical reproductions of musical works might become a
monopoly controlled by a single company. With that in mind, I do not
believe their intent was to have such reproduction rights controlled by
one facet of the industry.
Many of the parties involved in collecting my royalties are
discussing these issues with the Nashville Songwriters Association
International and the Songwriter's Guild of America. I understand that
we need to let this process work. My purpose is not to assign blame.
The system has just evolved this way. But as you consider changes to
copyright law, now and in the future, please remember that it all
begins with a song.
The tile of my song today is ``Article One, Section Eight.'' Its
message is that, of all the parties involved in this important debate,
only authors are mentioned in our Constitution. And our founding
fathers gave the rights exclusively to the author!
Thank you for letting me speak today on behalf of America's
professional songwriters. I respectfully ask that these remarks be
submitted for the record.
Mr. Smith. Okay; thank you, Mr. Newton.
Mr. Israelite.
TESTIMONY OF DAVID MARK ISRAELITE, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, NATIONAL MUSIC PUBLISHERS' ASSOCIATION
Mr. Israelite. Good afternoon, Mr. Chairman, Mr. Berman,
Members of the Subcommittee. My name is David Israelite. I am
the president and CEO of the National Music Publishers'
Association, and I thank you for inviting me to testify today
about digital music licensing and section 115.
While I am still in my first month of this new position,
for the last year, as you mentioned, Mr. Chairman, I had the
honor of serving as chairman of the Justice Department's Task
Force on Intellectual Property, and in that position, I worked
closely with this Committee and gained a profound understanding
of the importance of protecting this nation's valuable
intellectual resources. I thank this Committee and its staff
for its important work in protecting intellectual property and
look forward to continuing our work together in this endeavor.
I also had the privilege of working with members of the
recording industry, the Digital Media Association and
songwriters, and I am hopeful that our previous experience of
working together to combat theft of intellectual property can
help us to work together in the future to meet the new
challenges and opportunities of the information age.
For more than 80 years, the NMPA has been the principal
trade association representing the interests of music
publishers and their songwriter partners in the United States.
I am here today not just as a new face working out of new
headquarters in Washington, D.C. I am here representing a new
organization with fresh ideas about how to approach the
challenges that face the music industry.
I am pleased to report that in the last few weeks, NMPA has
already begun new discussions with the Digital Media
Association, the recording industry and others. We have common
goals. While the emergence of digital technology provides an
exciting new medium for the distribution of music, it also
allows for unauthorized peer-to-peer trafficking of copyrighted
works. Let me be clear: most peer-to-peer systems are not used
to share files. They are used to steal. The success of Apple's
iTunes service and other lawful online music services has
finally begun to fulfill the promise that the Internet offers
as a legitimate marketplace for music. NMPA and its members are
excited about these new services, and we strongly support their
efforts.
Music publishers and songwriters have made significant
contributions and taken great risks to support legitimate music
services since their inception by licensing music on a use now
and pay later basis.
In 2001, the NMPA and its subsidiary, the Harry Fox Agency,
entered into a historic agreement with the recording industry
to assist the launch of new subscription services by creating a
framework for mechanical licensing, despite the fact that
applicable royalty rates had not been determined.
The parties agreed to make bulk licenses available
immediately with the understanding that royalties would be paid
at a future date when rates are determined. Similar agreements
were made with independent subscription services. These
agreements paved the way for the launch of online music
services offering a broad catalogue of music. And while the
recording industry and individual companies have deposited
advances on these future royalties, songwriters and publishers
have not yet been paid, despite the fact that their music has
been licensed for over 3 years.
Publishers and songwriters did this to make these new
services work, and we are prepared to do more. NMPA's members
and the Fox Agency's affiliates have issued over 2.85 million
licenses to over 200 different licensees for the delivery of
digital music works. These licenses represent the vast majority
of musical works for which there is any meaningful level of
consumer demand.
There are still challenges, and the system can work better,
but the NMPA stands ready to consider new and innovative
approaches to meet these challenges of the new environment in
which we operate, and we look forward to working with this
Committee and the entire music industry to do so.
Thank you very much.
[The prepared statement of Mr. Israelite follows:]
Prepared Statement of David M. Israelite
Good afternoon, Mr. Chairman, Mr. Berman and Members of the
Subcommittee. I am David M. Israelite, President and Chief Executive
Officer of the National Music Publishers' Association (``NMPA''). I
thank you for inviting me to testify today about possible statutory
changes concerning digital phonorecord delivery (``DPD'') licenses.
As many of you know, I recently served as Deputy Chief of Staff and
Counselor to the Attorney General of the United States, and as Chairman
of the Justice Department's Intellectual Property Task Force. In that
position, I worked closely with many members of this Committee and
gained a profound understanding of the importance of protecting the
nation's valuable intellectual resources. I thank this Committee for
its important work in helping to protect our nation's intellectual
property. I also had the opportunity to work with the other members of
the panel today--all of whom play an important role in protecting music
from theft. I am hopeful that our experience of working together to
combat theft of intellectual property can help us work together to find
solutions to many of the problems that have plagued the music industry
for decades and to meet the new challenges and opportunities of the
information age.
In my new role as President and CEO of NMPA, the principal trade
association representing the interests of music publishers and their
songwriter partners in the United States, I intend to work diligently
to find those solutions and meet those challenges. For more than eighty
years, NMPA has served as the leading voice of the American music
publishing industry--from large corporations to self-published
songwriters--before Congress, the administration and in the courts. The
approximately 600 music publisher members of NMPA, along with their
subsidiaries and affiliates, own or administer the great majority of
the musical compositions licensed for manufacture and distribution as
phonorecords in the United States. It is important to distinguish the
copyright in these musical compositions, which form the foundation of
today's music industry, from the copyright to the sound recording of an
artist's rendering of those compositions. Both ingredients--the
``musical work'' and the ``sound recording''--are essential to make
music as the public knows it.
I am pleased to report that NMPA has been engaged in discussions
with the Digital Media Association (``DiMA'') and the Recording
Industry Association of America (``RIAA'') regarding the licensing of
DPDs by online subscription services in an effort to formulate
solutions that we hope will ensure the availability of all songs for
licensing by subscription services and guarantee a level playing field
for the determination of rates.
nmpa's role in supporting new digital music services
Nearly a century ago, a new technology emerged that changed the
music industry forever. That new technology was the piano roll--
essentially long perforated sheets that operated a player piano's keys.
To make sure that musical compositions were widely available for
reproduction as piano rolls and in other media and technologies,
Congress enacted the mechanical compulsory license in 1909. This
statutory mechanism allows users of nondramatic musical works to invoke
the compulsory license and reproduce and distribute such works at a
royalty set by the statute, as long as the terms and conditions of
section 115 are followed.
Following the enactment of the 1909 Act, a collective society of
musical composition copyright owners developed to offer one-stop
shopping for obtaining compulsory licenses. Founded in 1927, that
society, The Harry Fox Agency, Inc. (``HFA''), is a subsidiary and the
licensing affiliate of the NMPA. It provides an information source,
clearinghouse and monitoring service for licensing musical copyrights,
and acts as licensing agent for more than 27,000 music publishers,
which in turn represent the interests of more than 160,000 songwriters.
Today the emergence of new technologies once again is set to change
the music industry forever. The most significant change is the ability
to distribute phonorecords electronically over the Internet. While this
development provides an exciting new medium for the distribution of
music, it also allows for unauthorized ``peer-to-peer'' trafficking of
copyrighted musical works for which no royalties are received by
songwriters and music publishers. Although illegal ``peer-to-peer''
services continue to dominate Internet delivery of music, the success
of Apple's iTunes service--and other lawful online music services--has
finally begun to fulfill the promise that the Internet offers as a
legitimate marketplace for music. NMPA and its members are excited
about these new services and strongly support their efforts.
In order to combat the theft of music and ensure the lawful
availability of musical works online, NMPA's members have generously
underwritten legitimate music services since their inception by
licensing on a ``use now, pay later'' basis. In the fall of 2001, NMPA
and HFA entered into an historic agreement with the Recording Industry
Association of America (``RIAA'') to assist the launch of new
subscription services by creating a framework for mechanical licensing
of such services to offer tethered downloads and on-demand streams
despite the fact that agreement had yet to be reached as to the
applicable royalty rates. In that agreement, the parties agreed to make
licenses available immediately on a bulk basis with the understanding
that licensees will pay royalties at a future date when rates are
determined, either by agreement or arbitration. The parties further
agreed to clarify the scope of rights licensed in order to avoid
disputes--and potential litigation--in favor of jump-starting new
businesses. To that effect, the parties stipulated that on-demand
streams and limited downloads involve a mechanical, and that pure
``radio-style'' streaming does not involve a mechanical. In the wake of
that historic agreement, NMPA and HFA entered into similar agreements
with independent subscription services on essentially the same terms.
These agreements paved the way for the launch of a wide array of
subscription services offering a broad repertoire of music to online
subscribers.
Indeed, NMPA's members have every economic incentive to issue as
many licenses to new, legitimate Internet music services as possible.
It is only through such license agreements that our members are
compensated. For this reason, the songwriting and music publishing
communities have consistently worked with new businesses to promote
broad public access to their works on fair and reasonable terms. Time
and again, when called upon to help jump-start new distribution
channels for their music, songwriters and music publishers have risen
to the challenge.
While the influx of new online music companies that want to offer
immediately every song ever written has put an enormous strain on the
music publishing industry in licensing mechanical rights, music owners
have made a Herculean effort to satisfy that demand. As of today,
NMPA's members and HFA's affiliates have issued over 2.85 million
licenses to 215 different licensees for digital delivery of musical
works. These licenses represent the vast majority of musical works for
which there is any meaningful level of consumer demand.
We are grateful to Congress for its foresight in preserving the
statutory compulsory license for musical compositions over the years,
and amending section 115 when necessary to maintain a level playing
field for copyright users and rightsholders--all for the ultimate
benefit of the listening public. The compulsory license has made it
possible over the past century for virtually any performing artist to
record our members' musical compositions, while guaranteeing
compensation to songwriters for their creative efforts. Consumers have
been the winners.
In the original 1909 Act, Congress set the statutory rate for
reproducing and distributing musical works at 2 cents per song.
Remarkably, this rate did not change for 67 years, until 1976 when
Congress added a rate-adjustment mechanism for the statutory rate.
Since that time, the statutory rate has increased--usually by industry
negotiation--and today stands at 8.5 cents per song. If the mechanical
right statutory rate had increased commensurate with the Consumer Price
Index, the rate today would be 40 cents per song.
While the 8.5 cents statutory rate acts as a ceiling, it does not
act as a floor. Music copyright owners are free to negotiate lower
rates with users of copyrighted musical works, and often do. In some
instances, contractual provisions such as ``controlled composition
clauses'' in the recording contracts of certain artists require the
composers of musical works to accept 75% or less of the statutory rate.
As a result, the average actual rate paid for musical works is
significantly less than 8.5 cents per song.
Even though mechanical royalties remained frozen for nearly seventy
years, NMPA is not looking to recoup those historical losses. Instead,
we are simply asking for fair compensation comparable to that received
by other music copyright owners.
the need for a level playing field
Online music services have expressed concern regarding the
availability of licenses for subscription music services. In order to
offer those services, online music services need to obtain multiple
rights from multiple copyright owners. From the copyright owners of
sound recordings, online services need to obtain rights of
reproduction, distribution and public performance with regard to the
sound recording masters. From the copyright owners of musical works or
their representatives, online services need to obtain the equivalent
rights with regard to the underlying musical compositions.
Songwriters and music publishers were the innovators in creating
ASCAP as a performing rights organization (``PRO'')--and supporting BMI
after it was founded as a competing PRO--and in creating the HFA as a
collective mechanical rights agency, for the purpose of facilitating
the licensing of musical works. Pursuant to the consent decrees under
which they operate, the PROs must license nondramatic public
performance rights to any user who requests it, including online music
services. Likewise, the compulsory licensing provisions of the
Copyright Act require music publishers to license mechanical rights to
all users, including online music services.
In the case of master rights, Congress first recognized the
efficacy of a compulsory license in 1995, but that compulsory license
was limited to the right of public performance, and only for non-
interactive digital transmissions. With regard to the rights of
reproduction and distribution for masters for interactive digital
transmissions, however, there is no compulsory license, no collective
agency, and no obligation to license whatsoever.
This legal regime has placed songwriters and music publishers at an
inherent disadvantage in negotiating mechanical rates for subscription
services. Because of the ``use now, pay later'' deals that NMPA and HFA
have made with RIAA and independent subscription services, the absence
of a negotiated rate has not stood in the way of the launch of
subscription services offering a broad repertoire of music. Exercising
their unfettered right to license their master rights for reproduction
and distribution, however, record labels have negotiated licenses with
subscription services that call for payment of 40% to 50% of their
gross revenues for master rights, while songwriters and music
publishers have yet to earn any mechanical royalties from subscription
services and the subscription services, in turn, have been unable to
close their books due to uncertainty as to the royalties they owe for
musical work rights.
We look forward to working with Congress to find a way to correct
this problem--enabling creators to be compensated for the use of their
works and subscription services to balance their books and enjoy a fair
return on their investment.
conclusion
In sum, we believe that a level playing field is essential in order
to ensure the availability of all songs for licensing by subscription
services, and to guarantee that songwriters and music publishers obtain
fair rates for their creative works.
I thank the Committee for this opportunity and ask that my written
remarks be made part of the record.
Mr. Smith. And thank you, Mr. Israelite.
Mr. Kenswil.
TESTIMONY OF LARRY KENSWIL, PRESIDENT, e-LABS, UNIVERSAL MUSIC
GROUP
Mr. Kenswil. Thank you, Mr. Chairman.
I would like to thank the Subcommittee under your
leadership, Mr. Chairman, and Ranking Democratic Member Berman
and the rest of the Subcommittee for focusing its attention on
the relatively arcane but important subject of mechanical
licensing. I would also like to thank you, while I have a
chance, for your leadership in adding to section 115 a limited
antitrust exemption to facilitate industry negotiations of
mechanical royalty rates for physical products.
I am here today to describe some of the new technologies
and distribution platforms that Universal is using to give
consumers more enjoyable and more convenient ways to access
digital music. Unfortunately, I must also tell you about ways
that the antiquated structure of section 115, with its one song
at a time, one publisher at a time licensing model is
frustrating the introduction of these new products.
That structure imposes unreasonable transaction costs on
any effort to meet the public's voracious appetite for digital
music. The section 115 licensing system is broken. We should
all work together to try to fix it.
This is a revolutionary era in the music business. For
those of us who embrace change, it is the best time. It used to
be the record companies introduced a major new technical format
every decade or so, but the formats were merely evolutionary.
Now, new formats mean business models, new revenue sources, new
abilities for consumers to control their listening and more
places and more ways for people to find a broader array of
music and music-related products.
At Universal, we are talking to potential business partners
every day, and when we see business propositions that make
sense, we close deals as fast as we can to get those products
and services on the market. So I would like to describe some of
the businesses that record companies and their partners are
bringing to the market to meet the consumer demand for greater,
better, and more flexible access to music.
As we all know, online music services have now come of age.
Apple alone has sold over 300 million downloads, and over a
million and a quarter households subscribe to music through
services such as Napster. Ringtones and other
telecommunications products are one of the hottest things in
music. Consumers can play actual recordings of music by the
original artists, both for signaling incoming calls and for
private listening. But ringers are only the beginning. Mobile
services want to offer their customers full song downloads,
videos and other music-related products.
Multi-session discs are new products that provide superior
audio fidelity, surround sound, greater storage capability,
videos and other value-added content as well as improved
security to reduce piracy. To enable consumers to play their
music on whatever device they own, we are introducing dual
disc, which provides a CD on one side and a DVD with advanced
resolution audio and video on the other.
Kiosks are yet another way for consumers to access the
music they want. Through in-store offerings, such as Starbucks
Hear Music Media Bar in Austin, Texas, consumers can listen to
songs, create a custom mix, and burn it to a CD. One of our
current priorities at UMG is the distribution of music videos
by streaming or download services on the Internet, through
interactive cable and satellite, video on demand set-top boxes
as well as to cell phones and other new receivers. These new
services will allow us to create new streams of income for
everyone in the music business.
With the proliferation of music formats and business models
we are seeing today, section 115 has made it difficult or
impossible to launch many new services. The biggest problem is
the enormous transaction cost it entails. We have been using
the compulsory licensing system for dual disc releases, and we
will spend many times on accounting and audit costs what we pay
in royalties.
Licensing for new technology and formats is even harder. We
have hundreds of thousands of recordings that we want to make
available using all kinds of new technologies. We should all
want to make it easy for a service to launch with a million
tracks or for a large number of physical products to be
rereleased in new formats, but every new technology is
effectively a new configuration for which our whole catalogue
needs to be licensed separately again by countless publishers.
Any one of several co-owners both known and unknown of a song
can effectively block its use.
Technology entrepreneurs are often shocked to learn that
even though our sound recording rights can be licensed readily,
they are stymied. For our catalogue to be on their proposed
service, either they or we must undertake a massive effort to
relicense all the relevant musical work on a work-by-work,
copyright owner-by-copyright owner basis and on a
configuration-by-configuration basis. It should come as no
surprise that startup businesses are not interested in
replicating our copyright licensing and royalty accounting
departments and information systems. As a result, too many of
our potential business partners have thrown up their hands and
abandoned their plans.
Section 115 licenses are unique among all the Copyright
Act's compulsory licenses in that it is not a blanket license.
For example, an Internet Webcaster can perform all commercial
sound recordings by filing a single notice. There are other
problems: section 115's per unit cent rate does not reflect the
economic realities of the new technologies, and we believe that
ringtones are covered by the section 115 license, but
publishers have disagreed. We think that multiformat discs, we
should only have to pay once per track. Some publishers
disagree, and there are countless other questions.
Nobody wants to enhance the availability of music through
legitimate new product and service offerings more than
Universal. However, a compulsory licensing system designed a
century ago for piano rolls and wax cylinders, not ringtones
and dual discs doesn't work.
In the past, our collaborative efforts with the publishers
have produced some outstanding successes, such as Mr. Israelite
has mentioned. We want to work with them again to find a common
ground to reform section 115.
Thank you for your time, and we would be happy to take any
questions.
[The prepared statement of Mr. Kenswil follows:]
Prepared Statement of of Lawrence Kenswil
My name is Larry Kenswil. I am President of UMG/eLabs, which is
Universal Music Group's new media, business development and advanced
technology division.
I would like to thank the Subcommittee, under the leadership of
Chairman Smith and Ranking Minority Member Berman, for focusing its
attention on the arcane but important subject of licensing of musical
works under the mechanical compulsory license provided by Section 115
of the Copyright Act. I would also like to thank you for your
leadership in the last Congress in adding to Section 115 a limited
antitrust exemption to facilitate industry negotiations of mechanical
royalty rates for physical products. That modification is important to
our efforts to address the kinds of problems I will describe today,
even if it is not enough to solve those problems.
The purpose of my testimony today is to describe some of the new
technologies and distribution platforms that Universal is using to give
consumers more enjoyable and more convenient ways to access digital
music. Unfortunately, I regret that I also must tell you about the ways
that the antiquated structure of Section 115, with its one-song-at-a-
time, one-publisher-at-a-time licensing model, is frustrating the
introduction of those new products. That structure imposes
insurmountable transaction costs on any effort to meet the public's
voracious appetite for digital music. Indeed, the transactional costs
of licensing musical compositions are the obstacle to making sound
recordings available through new technologies and in new formats. The
bottom line is that even though technology companies, record companies
and music publishers have a common interest and a great desire to
launch new music services, that will is not enough to overcome a
licensing system designed almost a century ago for making piano rolls.
The Section 115 licensing system is broken. We should all work together
to try to fix it by introducing blanket licensing of musical
compositions and providing greater royalty rate flexibility so that
structural impediments to licensing musical compositions do not
continue to deprive consumers of the benefit of new and exciting ways
to access music, and everyone in the music value chain can benefit.
background
By way of background, Universal Music Group, or UMG, is the world's
leading music company. UMG's artists are among the most popular across
all types of music, including George Strait, Shania Twain, Mary J.
Blige, Mariah Carey, Toby Keith, Stevie Wonder, Eminem, Sting, Sheryl
Crow, U2, and Black Eyed Peas. Our record labels include Decca,
Deutsche Grammophon, DreamWorks, Geffen, A&M, Interscope, Island, Def
Jam, Philips, Motown and Verve. UMG releases over 2,000 new albums or
compilations each year in this country, and UMG has often led the way
by making its music available through new technologies and distribution
platforms.
It is important to understand that because every musical recording
embodies a musical composition, every exploitation of our product
requires licensing by a musical work copyright owner. We need to obtain
or verify rights to over 30,000 musical works each year just for our
new releases in traditional formats. In fact, we requested over 130,000
individual mechanical licenses last year in the United States. Because
the statutory process for obtaining licenses and accounting for use
under Section 115 is so cumbersome, UMG usually relies on licenses
based on Section 115 but obtained directly from copyright owners or The
Harry Fox Agency. Those licenses are typically issued separately for
each ``configuration,'' such as CD, DVD or download.
The number of licenses we obtain is much larger than the number of
songs involved because of so-called ``split copyrights.'' Few musical
works are owned by only one copyright owner. Indeed, it is not uncommon
for the rights to a single song to be split among four, five or more
different copyright owners. And while they would not need to, most will
require that consent and a separate license be obtained from all their
co-owners. As a result, it is common to deal with dozens of copyright
owners to clear a single album. In addition, while many licensing
transactions are straightforward and involve publishers with
sophisticated licensing systems and with whom we work well every day,
there are tens of thousands of active music publishers, and countless
individuals who may own fractional interests in some musical works
without being actively engaged in the business. Sometimes it is even
hard to find co-owners whose consent we need.
new technologies
This is a revolutionary era in the music business. For those of us
who embrace change, it is the best time. It used to be that record
companies introduced a major new technical format every decade or so,
but the formats were merely evolutionary. The basic business model of
selling physical products in bricks and mortar record stores was not
much changed from 10-inch 78 RPM shellac, to 12-inch 33 RPM vinyl, to
5-inch polycarbonate CDs played by a laser. But now new formats mean
new business models, new revenue sources, new abilities for consumers
to control their listening, and more places and more ways for people to
find a broader array of music and music-related products. New formats
are now revolutionary, not evolutionary, bringing with them great
promise, not to mention the challenge of easier piracy. My job is to
enhance the new while ensuring a fair return to songwriters,
publishers, artists and record companies alike. Technology
entrepreneurs and many established companies that haven't traditionally
been in the music business are excited about bringing new musical
offerings to the public, and we're excited to work with them. At
Universal we're talking to potential business partners every day, and
when we see business propositions that make sense, we close deals as
fast as we can to get those products and services on the market. And I
know that other record companies are doing the same.
I'd like to describe some of the businesses that record companies
and their business partners are bringing to the market to meet the
consumer demand for greater, better, and more flexible access to the
music they love.
Online Music Services. Anyone who saw the dueling iTunes and
Napster advertisements during the Superbowl knows that legitimate
online music services have come of age. Apple has sold over 300 million
downloads, and over a million more every day. Over a million and a
quarter households subscribe to music through services such as Napster
that offer unlimited access to over a million songs. Each service
offers opportunities for consumers to ``burn'' music to a disc or move
it to a portable device. And there other services, from customized
radio stations uniquely tailored to the individual, to fan sites that
expand the artist's community. New ideas come to us and from us every
day.
Ringtones and Other Telecommunications Products. Cell phone
ringtones are one of the hottest things in music. Although until
recently most cell phones had tinny speakers that could only play the
simplest of tunes, the latest phones are powerful music listening
devices that, among other things, allow consumers to play actual
recordings of music by the original artists to signal incoming calls.
Now, consumers can select ``ringback tones'' that will be heard by
people calling them, and ``reverse ringback tones'' that they can hear
while waiting for an outgoing call to go through. This cultural
phenomenon has to date been limited to wireless networks, but there are
lots of interesting possibilities for people to interact with music on
all kinds of telecom devices. One of the biggest potential
opportunities lies in the rollout of cellular 3G networks this year.
Mobile service providers want to offer their customers full song
downloads, videos, and other music related products. We are ready,
willing, and able to deliver those products, if we can get the rights
to the underlying compositions.
Locked Content. While the name ``locked content'' isn't very
appealing, new digital rights management technologies give us almost
infinite flexibility to put music into the hands of consumers, let them
``sample'' it before they make a purchase decision, and then allow them
to buy what they want, while ensuring that songwriters, publishers and
artists are paid. Sometimes this might involve encrypted copies of
music preloaded on devices, such as computer hard drives, cell phones
or portable music players, that consumers can unlock by making a
purchase or subscribing to a service. We're also interested in
distribution models that would allow a consumer to share an encrypted
copy of a recording with a friend, and then allow the friend to listen
to it a limited number of times, or over a limited time period, before
making a purchase decision.
Multisession Discs. The CD format is now well over 20 years old.
New technologies provide superior audio fidelity, including surround
sound, greater storage capacity, videos and other value-added content,
as well as improved security to reduce the sting of piracy. To realize
those advantages, we are experimenting with all kinds of different
formats, including SACD and DVD-Audio. To minimize consumer confusion
and frustration as the number of available formats multiplies and
consumers demand access to music on more and more new devices, we are
also introducing DualDisc, which provides a CD on one side and a DVD
with advanced resolution audio and video on the other, all designed to
maximize playability.
Kiosks. Yet another way for consumers to get access to the music
they want is in-store offerings such as Starbucks' Hear Music media bar
that allows consumers to listen to songs, create a custom mix, and burn
it to CD, all while they enjoy a cup of coffee. We expect kiosks to be
rolling out from coffee shops to places as disparate as big-box
discount retailers and airport lounges.
Music Videos. One of the things we are most excited about at UMG
are new possibilities for distributing music videos through streaming
or download services on the internet, through interactive cable and
satellite video-on-demand set-top boxes, as well as to cell phones and
other new receivers. There is a huge consumer demand for music video
content. To date, shelf space and broadcast technology limitations have
made it impracticable to meet that demand, but new technologies will
allow us to satisfy that demand and create new streams of income for
everyone in the music business, which may be critical to offset the
harm caused by peer-to-peer infringement.
licensing difficulties
We at UMG are excited about all of the products I have discussed
and working hard to get these offerings into the hands of consumers. As
far as rights to sound recordings are concerned, the marketplace is
working well; lots of services have been able to obtain rights to the
vast majority of sound recording repertoire. I believe that many of our
music publisher colleagues are equally excited about these technologies
and want to license musical works for these new uses. However, the
basic structure of Section 115 is almost a century old, and in Internet
time, the revisions the publishers sought in 1995 to graft download
licensing onto that basic structure might as well have been made a
century ago. With the proliferation of formats and business models we
are seeing today, this archaic licensing system has made it difficult
or impossible for new technologies to go forward with licenses to any
significant portion of the musical works that consumers want.
The biggest problem with Section 115 and the whole licensing system
that has grown up around it is the enormous transaction costs it
entails. In the case of licensing for traditional channels, we have
overcome this by building up over decades copyright licensing and
royalty accounting departments and information systems to correlate
recordings to musical works and manage publisher splits. But from an
industry-wide perspective, this system requires significant and
duplicative effort among record companies, musical publishers and
licensing agents that unnecessarily takes money out of all our pockets.
We would all benefit from a more efficient system for licensing new
releases of physical products.
Licensing for new technologies and formats is much harder. We have
hundreds of thousands of recordings that we would love to make
available using all kinds of new technologies. And I'm sure that in
principle our music publisher colleagues would be happy to license the
musical works for many of these uses. We should all want to make it
easy for a service to launch with a million tracks or for large numbers
of physical products to be re-released in new formats. But every new
technology is effectively a new configuration for which our whole
catalog needs to be licensed separately all over again, by countless
publishers, where any one of several co-owners of a song can frequently
block its use. Faced with the need to clear large amounts of content,
the mechanical licensing system defeats the will of consumers, record
companies, music publishers and technology companies to get new
offerings licensed.
Technology entrepreneurs are often shocked to learn that even
though our sound recording rights are readily available, making our
catalog available on their proposed service would require that either
they or we undertake a massive effort to re-license all the relevant
musical works on a work-by-work, copyright owner-by-copyright owner,
and configuration-by-configuration basis. It should come as no surprise
that they are not interested in replicating our copyright licensing and
royalty accounting departments and information systems. And their
business plans contemplate negotiation with a few record companies, not
thousands of publishers. They want us to provide one stop shopping. But
for many offerings, as to most of our catalog, we simply cannot do
that. The number of tracks that need to be re-licensed is so large--
many times the number we clear for new releases in a year--and the
average return from any individual track often so low, that the current
system does not allow us to clear more than a small part of our
catalog. As a result, too many of our potential business partners have
thrown up their hands and abandoned their plans, and we have been far
less successful than we would like in making our recordings available
using new technologies. And songwriters and music publishers have
suffered too, because they lose potential income from every song not
being played as the result of the recording not being made available.
The Section 115 license is unique among all the Copyright Act's
compulsory licenses in that it is not a blanket license. For example,
an Internet webcaster can perform all commercial sound recordings by
filing a single notice of intention and paying a single Section 114
royalty to the ``designated agent.'' Likewise, cable systems can carry
broadcast television programs by filing a single statement of account
and paying a single royalty under Section 111. We need a similar system
under Section 115.
You should be aware of other problems as well. The antiquated
structure of Section 115 does not allow for the flexibility necessary
to license emerging business models. The regulations implementing
Section 115 historically have required a per-unit, cent-rate royalty
payment. Such a per-unit payment often does not reflect the economic
realities of a new technology. In addition, use of new technology has
brought business arrangements much more complex than the sale of
physical products. The traditional cent rate is inflexible and poorly
suited to allowing both musical work and sound recording copyright
owners to share fairly in diverse revenue streams. When a subscription
service or distribution of locked content presents a different value
proposition than the sale of traditional products, the mechanical
royalty should reflect that. And if consumers are prepared to pay a
premium price for a ringtone or DVD, or record companies are able to
realize new revenue streams such as fees for loading locked content or
sharing in ringback tone service revenues, it is appropriate that
songwriters and publishers get their fair share.
In addition, in previous hearings, this subcommittee has heard
about how uncertainty and disagreements concerning the application of
Section 115 have paralyzed the licensing process. For example, we spent
a year negotiating a structure for licensing of subscription services,
and now over three years later we still have not agreed to royalty
rates. We believe that ringtones are covered by the Section 115
license, but publishers have disagreed, insisting on privately
negotiated licenses and rates. We think that distribution of a multi-
format disc such as DualDisc should require payment of a single
mechanical royalty per track, but because the disc is designed for
playback on multiple devices, the same recording must be encoded
several times in different formats. As a result, some publishers have
asked for a multiple of the statutory royalty.
Because Section 115 is a relic of a different time, there are
countless other questions. Must the royalty on locked content be paid
when the content is unlocked or when the physical medium leaves the
distributor's hands? Is a product sold from a kiosk a download or a
physical product? If a consumer is allowed a second, convenience
download so that they can enjoy the song on a second computer, all for
the same price, wouldn't it be strange for us to pay double mechanical
royalties, while if the consumer simply downloads once and makes their
own copy, we do not? Why should the same business model and same
consumer offering result in a different mechanical being due simply
because a different technological solution is utilized?
Under the current structure, these are all important issues, some
more controversial than others. Under a blanket license structure with
a royalty more responsive to the marketplace, many of these issues
might go away. However, for now, the uncertainty, and the resulting
risk of legal liability, has severely limited our ability to clear
tracks for use in new technologies and so retarded the growth of new
consumer offerings.
conclusion
Record companies succeed by bringing consumers music they love in
formats they want. As the world's leading music company, nobody wants
to enhance the availability of music through legitimate new product and
service offerings more than Universal. However, I hope my remarks make
clear that the widely diffuse and split ownership of vast numbers of
musical work copyrights makes individual negotiation of licenses for
every new product or service offering an impossibility, and that a
compulsory licensing system designed a century ago for piano rolls and
wax cylinders, not ringtones and DualDiscs, is inadequate to remedy the
situation. Accordingly, I look forward to working with this
subcommittee, other record companies, as well as our colleagues in the
music publishing and technology industries, to see if we can find
common ground to reform Section 115 by introducing blanket licensing
through a ``designated agent'' and greater royalty rate flexibility.
Only by doing so can consumers have the benefit of new and exciting
ways to access music and everyone in the music value chain benefit from
new technologies.
I thank you for your time and would be happy to take your
questions.
Mr. Smith. Thank you, Mr. Kenswil.
Mr. Potter. I might say, Mr. Potter, the last time you
testified, I think you had just returned from your honeymoon;
is that correct? So----
Mr. Potter. Yes, sir, it is.
Mr. Smith. You didn't show any sense of distraction then.
I'm sure your testimony will be good today, too, so please
continue. [Laughter.]
TESTIMONY OF JONATHAN POTTER, EXECUTIVE DIRECTOR, DIGITAL MEDIA
ASSOCIATION (DiMA)
Mr. Potter. I'm in trouble for a long time. Do I get an
extra 2 minutes for that?
Thank you, Mr. Chairman, and Mr. Berman. Today, I'd like to
use my time to offer a live action demonstration of a day in
the life of an online music executive. XYZ Company is planning
to launch an online music service. ``Potter'', says my boss,
``put together several options for our customers: preprogrammed
radio, 100 channels to compete with local broadcasters and XM
Radio; consumer-influenced radio: play artists and songs people
like and then lots more, so they discover new music that that
might enjoy and buy; on demand radio, the songs people want
when they want, unlimited choice and music on demand, a new
subscription service; subscription portable downloads also,
like a movie rental service offering all you want, all the
time, but don't miss a payment, or your music will disappear;
and of course, sell permanent downloads. Consumers understand
those. Buy it today, and own it forever.''
``And Potter, get all the rights, pay all the royalties.
Let's not get sued, because that Copyright Act is harsh: strict
liability, statutory damages of $150,000 per copyright. No
mistakes permitted.'' So I go to work, mindful that the
recorded music includes two copyrights I must license, in the
sound recording and the composition and that both copyrights
have sub-rights, for performances like radio and for
distributions like CDs.
Licensing the preprogrammed radio is easy. One notice to
SoundExchange, ASCAP, and BMI; I am fully licensed. I negotiate
a royalty, I report the music we provide, and the creators get
paid.
Consumer-influenced radio should be just as easy, and for
publishing, it is. For sound recordings, well, that's another
story. The Copyright Register and the Congress say consumer
preferences may influence programming, and it's still permitted
under the DMCA statutory license. SoundExchange has even
licensed services that way, but record companies have sued
Webcasters, and they say in court that consumer-influenced
programming is not allowed by the DMCA. Why? Perhaps because
they get to charge higher royalties, and they don't have to
share 50 percent with artists. My problem is that if I guess
wrong about our service being eligible for the statutory
license, I'm out of business or at least out of a job.
What's the solution? The interactive service definition in
section 114 needs to be amended to ensure that consumer
influence in programming is permitted, so long as generally
applicable programming restrictions are not violated. That's a
simple solution.
Now, back to licensing. On-demand radio is even harder.
With no statutory recording license, I have to call the four
major labels and hundreds of independents to negotiate sound
recording licenses. Publishing should be easier. Back to ASCAP
and BMI, because on-demand radio is just performing the music
just like radio. But wait: someone asks me ``have you gone to
see Harry Fox? Have you gotten those mechanical reproduction
rights for on-demand radio?'' ``Of course not,'' I say.
Broadcasters pay performance royalties only, and the Copyright
Register says that should be the same for online broadcasts or
online radio. Did Congress really intend that broadcast and
satellite radio pay performers once for performing music but
that Internet radio pay twice?
Bottom line, to avoid lawsuits, I pay the Fox Agency double
dip royalties on top of ASCAP and BMI royalties. What's the
solution for Congress? Clarify that there is no licensable
reproduction in online radio of any kind and that server copies
get the same 112 exemption as exists for broadcasters. Online
radio and broadcast radio should be treated alike.
Now, licensing subscription downloads, that's even harder,
because Fox licenses on a song-by-song basis, and they won't
even tell what songs they offer. I request a million songs, and
they match only half. How can I compete with Grokster if I
can't put another half million songs on my service? The
solution, of course, is the blanket license that everybody is
discussing. But then, I still have a problem: I offer a
percentage of revenue royalty, because that is what works with
monthly subscription fees. They don't want that. They want 8.5
cents per reproduction. That just doesn't work in today's
business.
Then, Fox says to me they'll license subscription downloads
only if I also pay them for nonexistent mechanical rights and
on-demand radio. Is that a tying arrangement? Oh, and there's
more: my service is offering time-limited downloads. It's a
download; it's not a performance. But ASCAP and BMI want public
performance royalties as well. Sounds like another double dip.
I'm just trying to pay the publishers, but I only want to pay
them once.
Licensing paid downloads, now, that should be easy. I'll
get my Fox Agency mechanicals, and just like CDs, I'll pay one
royalty per song. But now, Fox says they want more royalties,
because we are permitting consumers to make several personal
use copies for their iPod and their home stereo. But CDs pay
only one royalty. They permit unlimited personal copies. How
can this be? Multiple royalties at 8.5 cents each? I'll go
broke with downloads priced at 99 cents and record labels
taking the first 65 cents of that.
And guess who's back on the paid downloads? ASCAP and BMI.
They want performance royalties for downloads. This is a real
mess. Congress needs to amend sections 114 and 115 of the
Copyright Act to clarify and simplify the process of obtaining
statutory licenses for legitimate royalty-paying online
services. License processes that work for piano rolls, vinyl
records and CDs don't for digital services; in fact, they
obstruct progress. DiMA companies pay royalties today to
publishers, producers, creators and performers, but we will
gain more consumers, and we will pay more royalties if we can
offer compelling services that compete effectively against
piracy.
Thank you.
[The prepared statement of Mr. Potter follows:]
Prepared Statement of Jonathan Potter
Mr. Chairman, Representative Berman, and Members of the
Subcommittee:
Thank you for inviting me to testify today on behalf of the Digital
Media Association and the online music industry regarding certain
amendments to the Copyright Act that will trigger extraordinary growth
in legitimate royalty-paying online music and a concomitant reduction
in piracy. By clarifying and simplifying the compulsory composition
mechanical license and the statutory sound recording performance
license, Congress will provide business and legal certainty to
legitimate online music innovators and eliminate multi-million dollar
infringement risks that never were intended to affect law-abiding
royalty-paying enterprises. By doing so, Congress immediately will
promote the development and growth of DiMA companies' online music
services as well as royalty payments to creators.
In significant part DiMA seeks four amendments:
1) Replace today's dysfunctional Section 115 compulsory
composition mechanical license with a simple, transparent,
comprehensive statutory blanket license that can be triggered
on one notice, as described among the alternatives suggested to
this Subcommittee in March 2004 by Register of Copyrights
Marybeth Peters.
2) Clarify the scope of music publishers' licensable rights
with respect to ``ephemeral'' and incidental reproductions of
compositions that are associated with royalty-generating
streamed performances, so as to finally end the infamous
royalty ``double-dipping'' problem.
3) End years of confusion and litigation by clarifying the
``interactive service'' definition in Section 114, with regard
to sound recording performance rights, to ensure that Internet
radio programming based on user preferences falls squarely
within the statutory license so long as the generally
applicable programming restrictions for the statutory license
are not violated and so long as users are not permitted to
control how much a particular artist is heard or when a
particular song might be played.
4) Equalize sound recording performance royalty standards so
that all radio competitors--broadcast, cable, satellite and
Internet--pay the same royalty to artists and recording
companies.
Online music services offered by AOL, MSN, Napster, RealNetworks,
Yahoo and other DiMA members compete every day against free music
available on black market networks. DiMA companies are up to the task,
but to successfully compete against free black markets, a music service
must have a comprehensive catalog and be user-friendly, feature-rich
and fairly priced. DiMA's proposed amendments will accomplish these
goals, and in doing so will promote certainty, reduce litigation and
risk, ensure royalty payments, and help legal online music services
defeat piracy.
In March and July 2004, DiMA testified before this Subcommittee
about the Section 115 and 114 licenses for compositions and sound
recordings, respectively, which are historical business-model-specific
anachronisms needing amendment by this Congress in order to achieve the
laudatory goals for which they were intended. The Copyright Office also
testified about these provisions, and provided a clear overview of
several of their statutory shortcomings in the digital environment.
Today's testimony will focus on the practical business implications of
these outdated laws, and specifically on how legal online services'
development (and our effort to wean consumers from pirate networks) is
significantly hampered by the liability and business risks associated
with these licenses.
i. section 115 of the copyright act is an enormous roadblock to online
music services' success and our ability to defeat piracy in the
marketplace.
Recently, senior executives of three online music services--
RealNetworks, Napster and Sony Connect--were asked to identify the
biggest obstacle to turning today's moderate success into more robust
growth. They did not give the obvious answer--piracy. Instead, these
executives identified difficulties associated with music publishing
rights as their single biggest business problem. Not their biggest
legal problem--their biggest business problem.
Perhaps this is not surprising. As you heard from DiMA, the RIAA,
and the Register of Copyrights in March 2004, the Section 115
compulsory mechanical license for musical compositions is broken in
significant ways--primarily because it was developed for business
models and technologies of the past and is too rigid to accommodate the
business models and technologies of today and of the future. As a
result, this Congressionally-created license that was intended to
simplify and promote the sale and distribution of royalty-bearing music
is failing in the digital world.
The victims of Section 115's failure are those who invest in the
music industry ecosystem--creators who are losing royalties, record
stores that are unable to offer comprehensive in-store CD burning
services, and online music companies that are not growing as fast as we
should be. The beneficiaries are those who ignore royalties and
licenses and creators--the black market networks that profit from
unauthorized distribution of free music.
DiMA members' business goal is simple--to build innovative, fairly
priced royalty-paying services that offer consumers every song that is
also available on black market networks. The goal of the Section 115
compulsory license has always been to help companies like ours by
making available the mechanical reproduction rights to every
composition ever previously distributed.
But as the Subcommittee heard in March 2004, the 115 license is not
up to its Congressionally-assigned task. Its scope is unclear, it is
administratively dysfunctional, and the private market does not offer
an alternative. Even in the year since the Subcommittee's last hearing,
and amidst Congressionally-monitored negotiations, The Harry Fox Agency
has remained unable to issue licenses for more than 50 percent of the
compositions that DiMA companies seek to offer on our new subscription
services. So instead our companies continue navigating the music
publishing thicket, confronting obstacles that reduce the quality of
our royalty-paying services while hoping eventually Congress will
recognize the reality--that under current law it is essentially
impossible to license a comprehensive music catalog for a modern music
service.
Let's be crystal clear today:
Aided by statutory uncertainty, music publishers
continue to assert the existence of double-dip mechanical
rights in streamed performances that the Register of Copyrights
has repeatedly said do not exist.
The Harry Fox Agency, the music publishers' in-house
collective licensing agent, is absolutely unable to license
mechanical reproduction rights in a fashion that works for
comprehensive digital services.
-- Unlike many other countries' mechanical licensing
organizations, HFA does not represent all publishers, and even
those it represents can opt-out of any license that HFA agrees
to.
-- HFA's multi-million dollar processing system and its
130-person staff are unable or unwilling to tell us even what
songs HFA does or does not have authority to license, so that
we can seek licenses and pay royalties elsewhere when
appropriate.
Third, there is disagreement even among music
publishers regarding the scope of rights needed by online
services, including whether the compulsory 115 license provides
all rights needed by subscription download services that
Napster, RealNetworks and other DiMA companies offer or will
soon offer.
And fourth, if the 115 license does provide the
rights necessary to offer subscription and purchase download
services, the licensing process is so expensive and inefficient
that even the Copyright Office has asked Congress to authorize
its repair.
The practical impact of this statutory and market failure is, for
our industry, staggering:
First, legal online music services have substantially
less music than black market networks.
Second, the balkanized licensing system creates
inconsistencies among companies' own offerings that promote
confusion and consumer disappointment. The most frequent
complaints from university students and others who try legal
download and subscription services relate directly to music
publishing problems:
-- ``Why can I hear a song on your radio service but I
can't purchase it?"
-- ``Why can I purchase this song for 99 cents but I can't
enjoy it as part of the portable subscription service that I am
paying for?"
-- ``Why are five songs from a CD available for purchase or
the subscription service, but five other songs from the same CD
are not available?"
-- ``Why are these songs not available on your service at
the same time I can buy them on a CD?"
Third, online music services are forced to operate
with extraordinary legal and financial risk--a risk that is
recognized by investors and analysts. The ambiguity regarding
whether an online radio performance implicates a licensable
reproduction right is not a law school exam question. Coupled
with the Copyright Act's strict liability and statutory damages
of up to $150,000 per work, a service of any size--particularly
if its offering is innovative--is inviting trouble unless it
agrees to publishers' demands for double-dip royalties. Some
companies have chosen instead simply to stop innovating.
And finally, from an operations standpoint, music
publishing uncertainty imposes staff requirements, legal fees,
insurance and administrative costs. DiMA companies spend
millions of dollars annually just administering music
publishing rights, beyond payment of the royalties themselves.
This absorbs funds that our companies instead should use to
develop and market innovative products and services, which will
in turn grow our services, help defeat piracy and generate more
royalties.
Simple Solutions are Available that Would Benefit Creators and
Online Services. DiMA supports replacing today's dysfunctional
compulsory composition mechanical license with a simple, transparent,
comprehensive statutory blanket license that can be triggered on one
notice, as described among the alternatives suggested to this
Subcommittee last year by Register of Copyrights Marybeth Peters. DiMA
companies are prepared to account for and report distribution of sound
recordings and their embedded compositions directly to an agent
designated by the songwriters and publishers, and to pay royalties
directly to the agent who would in turn remit payments to publishers
and songwriters. DiMA is prepared to negotiate fair royalties for
songwriters and music publishers on an industry-wide basis, and to
arbitrate a royalty rate if one cannot be agreed upon--just as today's
115 license requires.
This solution is not new; it would merely require adoption of the
model used in the Section 114 statutory license that relates to sound
recording performance rights. Services operating under the Section 114
license send one notice and secure a license to effectively the whole
universe of sound recordings and then pay royalties to a designated
agent. Music publishers, of course, are familiar with blanket licenses,
and in the past few months, particularly with new leadership in place,
the NMPA has expressed renewed interest in developing win-win solutions
that can simplify all our lives by reducing risk and increasing our
businesses and publishers' royalties. As concerns composition
performance rights, ASCAP and BMI for several decades have provided
comprehensive blanket-license solutions to songwriters, music
publishers and licensees. While we continue to have differences with
the performing rights organizations over whether performance licenses
are required for certain business models, we agree that the blanket
license works well for clearing large volumes of rights and royalties.
A transparent blanket-license solution would also benefit
songwriters and publishers. Even assuming agreement about when a
license is necessary, DiMA companies face unpleasant choices when HFA
cannot make licenses available, and songwriters and publishers suffer
also. Either we offer to consumers far fewer songs than they want and
we lose consumers to pirate services, or we have to incur legal risks
that Congress never intended and which would not arise if Section 115
could flexibly adapt to new business models. Whichever a service
chooses, if HFA's licensing system cannot match license requests,
royalties that are deserved are not getting to songwriters and
publishers. Under a blanket license system, all songwriters and
publishers get paid.
And as for the double-dip royalty issue, the Register of Copyrights
has made several suggestions regarding solutions over the past four
years, and virtually every one would be acceptable to DiMA companies. A
simple clarification of the scope of publishers' licensable rights with
respect to ``ephemeral'' and incidental reproductions of compositions
would solve these problems.
ii. clarify and simplify internet radio laws to promote service growth
and increase royalties to record companies and artists.
1. ``Interactive Service'' Confusion Inhibits Innovation and Stunts
Growth of Services and Royalties.
As the Subcommittee is aware, whether an Internet radio service is
``consumer-influenced'' and qualifies for the Section 114 statutory
performance license, or is ``interactive'' and does not qualify, has
been the subject of two lawsuits and a Copyright Office proceeding.
Nevertheless, five years into this dispute and after millions of
dollars wasted on legal fees, the recording and online music industries
are no closer to having transparent rules that promote compliance
rather than uncertainty. And unfortunately, just as music publishers
have exploited uncertainty regarding reproduction rights issues to
litigate into a better business position than Congress intended, so has
the recording industry relied on legal uncertainty and litigation to
inhibit Internet radio innovation and seek inflated royalties.
The ``interactivity'' dispute creates a very straightforward
problem. Internet radio pays millions of dollars in royalties every
year to artists and the recording industry. Broadcast radio--even
digital broadcast radio--pays zero. If Internet radio is saddled by
rules forcing our programming to be like broadcast radio, or forcing
company-by-company negotiations regarding royalties that our broadcast
competitors are not even required to pay at all, then how are we to
compete, succeed, and generate even more royalties for sound recording
companies and artists?
The problem is fairly simple: In the 1995 Digital Performance Right
in Sound Recordings Act and its 1998 amendments, Congress sought to
promote Internet radio as a competitive consumer-friendly medium that
benefits the recording industry by generating royalties and promoting
sales of sound recordings. The 1995 Act limited the benefits of the
statutory license by imposing programming restrictions on the radio
services (e.g., limiting how many times a single artist can be played
in a 3-hour period) and disqualifying ``interactive'' programming that
essentially provided on-demand or near-on-demand service. There was no
uncertainty nor any litigation regarding this standard.
The 1998 amendments modified the definition of ``interactive''
service, changing it from a fairly straightforward and objective test
to one requiring a complex subjective analysis. Typically American law
is comfortable with ``reasonableness'' standards and balancing tests,
but in the copyright environment where there is strict liability with
high statutory damages, uncertainty can chill innovation and destroy
the entrepreneurial spirit.
Moreover, where an online music service provides on-demand
streaming and digital download or subscription offerings alongside
statutory radio offerings, the direct licenses necessary for the on-
demand services provide the labels with significant leverage through
which to enforce their view of the scope of the statutory license.
The Register of Copyrights and the RIAA (in public filings and its
licensing practices) have agreed that services can benefit from the
statutory license even if they permit consumers to express preferences
as to genre, artists and specific songs. But the recording industry's
litigation position has been markedly different, going so far in one
instance as to assert that webcasts are not permitted to allow any
level of individual consumer influence over a program to qualify for
the compulsory license.
To compete against broadcast radio--which pays no royalties--and
cable and satellite radio--which do pay, but pay less that Internet
radio, Internet radio must be able to create innovative consumer-
influenced offerings using the power of our technology. Instead of
holding back the royalty-paying medium, we urge the recording industry
and Members of Congress that believe sound recording companies should
be paid, to consider unshackling Internet radio's programming
restrictions and promoting the medium that pays.
And let's not forget the artists. The statutory license requires
that 50% of royalties paid by statutory license Internet radio services
be paid directly to recording artists. The recording companies' efforts
to restrict the scope of the statutory license by defining all
innovative services as ``interactive'' directly decreases the amount of
royalties paid to artists by Internet radio services.
Once again, in furtherance of fully-licensed litigation-free
royalty-paying online music, DiMA urges the Subcommittee to amend the
``interactive service'' definition to ensure that programming based on
user preferences falls squarely within the statutory license, so long
as the generally applicable programming restrictions for the statutory
license are not violated and so long as users are not permitted to
control how much a particular artist is heard, or when a particular
song might be played. DiMA companies want to focus our energy on
developing exciting royalty-paying products and services that combat
piracy, rather than on lawyers and litigation.
2. All Radio Services, or At Least all Digital Radio Services, Should
Pay the Same Royalties and Play by the Same Rules.
i. Sound Recording Performance Royalty Should be Equalized.
Today DiMA renews our request that the Subcommittee equalize the
sound recording royalties paid by radio services. Setting aside the
legalese and the history of how we got to today's disparity, let's
focus today on fairness--to competing services, to artists and to
recording companies.
All competitors deserve a level playing field, particularly when an
obligation is structured by government. As technologies are developed
and new competitive services develop, government should not favor or
disfavor any single service or technology absent compelling
circumstances, which are not apparent in the radio programming market.
The Subcommittee is familiar with cable and satellite television
programming royalties and the basis for equity in that marketplace. The
same holds true in radio--broadcast, cable, satellite and Internet
radio.
As a starting point DiMA acknowledges the frustration that Mr.
Berman and others have long expressed regarding the U.S. broadcast
industry's exemption from sound recording performance royalties. But
let's not get bogged down on that issue, as significant as it clearly
is. Instead, the Subcommittee should address forthrightly the
anticompetitive impact when Internet radio pays artists and recording
companies nearly 11 percent of revenue, and our cable and satellite
radio competitors pay less than 8 percent of revenue. As DiMA pointed
out in the July 2004 hearing, one cable music service has launched a
broadband radio service, yet apparently has found a royalty loophole
because it is using a transmission technology that is not Internet
protocol. This sort of gamesmanship cannot be what Congress intended,
but Congress can put an end to them by setting technology-neutral
royalty standards.
Putting aside which of the many possible standards should prevail--
and whether the right choice already exists in current law or whether a
new standard should be developed--basic fairness requires that
competitors pay the same royalties to the same providers of the same
content. Similarly, artists and recording companies deserve a fair
value placed on their creative works which is impossible in a world of
multiple royalty standards, and fairness to consumers obligates a level
playing field so that competition is robust and the most innovative and
efficient radio service wins, rather than the service that is most
favored by Congress.
ii. The Inequity is Multiplied by the ``Aberrant''
Ephemeral Sound Recording Reproduction Royalty.
As the Copyright Office noted in a 2001 Report to Congress, there
is an imbalance in the legal and financial treatment of so-called
ephemeral copies of compositions in the broadcast radio context, and
similar copies of sound recordings utilized by Internet radio.
Since 1976 broadcast radio has enjoyed a statutory exemption to
make reproductions of compositions so long as the reproduction remains
within the radio station's possession and is used solely to facilitate
licensed performances of the same music. Internet radio services also
require ephemeral recordings to enable their webcasts, but while
broadcast radio typically requires a single ephemeral copy webcasters
require several copies to accommodate competing consumer technologies
(e.g., RealNetworks or Windows Media) and services (e.g., dial-up or
broadband Internet access). Each of a webcaster's ephemeral recordings
functions precisely like the copy exempted for radio broadcasts, but
Internet radio is saddled with having to license these copies, rather
than having an exemption. In the first Internet radio CARP, the
recording industry was awarded nearly a 9 percent bonus on top of the
performance royalty for the making of these ephemeral copies.
In its Section 104 Report to Congress, the Copyright Office said
that the compulsory license for sound recording ephemerals, found in
Section 112(e) of the Copyright Act, ``can best be viewed as an
aberration'' and that there is not ``any justification for imposition
of a royalty obligation under a statutory license to make copies that .
. . are made solely to enable another use that is permitted under a
separate compulsory license.'' Section 104 Report, p. 144, fn. 434. The
Copyright Office urged repeal of this compulsory license; DiMA asks the
Subcommittee to act on this request.
iii. Competitors Should Not Have Different Programming and
Functionality Rules Based Only On Their Different
Technologies.
As the Subcommittee may recall, the Section 114 sound recording
performance right includes several rules that apply to Internet radio
but not our competitors. Since technology has evolved and our
competitors have become available over the Internet or other flexible
digital formats, it seems reasonable to amend the sound recording
performance complement rules that needlessly differ among competitive
technologies and services. One example is the prohibition against
engineering Internet radio programming to facilitate recording, which
is not similarly applied to cable and satellite radio. The result is
that XM Radio markets a marvelous MyFi device that records up to five
hours of programming for consumers' portable enjoyment, but Internet
radio companies cannot offer a similar product.
Additionally, programming restrictions that were put in place to
reduce the substitutional impact of Internet radio should be relaxed,
as digital broadcasters whose programming is available over the
Internet present the same piracy risk to recording companies yet they
do not have anti-recording obligations, are not saddled with
programming restrictions, and of course they do not pay sound recording
royalties.
__________
Years before the introduction of subscription download services
DiMA brought to the attention of the Congress and the Copyright Office
the limitations on innovation and the legal uncertainty associated with
Section 115 of the Copyright Act. More recently, we have highlighted
the limitations on innovation, and the anticompetitive impacts, of
Section 114. In both instances the statutory weaknesses are results of
the provisions' exacting requirements and their construction in support
of only the business models that existed or were anticipated at the
time of enactment.
Today, the Copyright Office, the recording industry and even the
music publishers finally recognize the validity of many of our
concerns. We hope the Subcommittee agrees, and we hope you will
expeditiously enact amendments to Section 115 and 114 to promote legal,
flexible, innovative royalty paying digital music solutions. Don't do
it for online services' benefit; do it for the creators who will
benefit from the growth of legal services and the associated reduction
in piracy.
Thank you for the opportunity to testify today.
Mr. Smith. Thank you, Mr. Potter.
Let me acknowledge the presence of the gentleman from South
Carolina and the gentleman from Utah. I appreciate their
attendance.
It seems to me that there is general agreement on the need
to reform section 115, and Mr. Newton, let me address my first
question to you. What I'd like to do is ask some specifics. And
as we reform section 115, Mr. Newton, if we were to move toward
a system similar to the SoundExchange business model, is that
something that you would support?
Mr. Newton. I appreciate you asking me that. This all gets
so complicated that I don't feel comfortable answering for our
organization, and I would----
Mr. Smith. Fair enough. Is there anybody else who would
want to answer that question? Mr. Kenswil, you mentioned a
number of business models, nothing in particular. How does that
strike you?
Mr. Kenswil. Well, SoundExchange is set up as a performance
royalty organization. Mechanicals are a bit different, but the
general idea of a place to notify that you are using material
and to send your payments so that these companies don't have to
worry about 10,000 different royalty statements going out we
think is a very good idea.
Mr. Smith. Right; a good improvement.
Let me ask all the witnesses today, going to the subject of
royalty rates, and again, this is asking you maybe to be more
precise than you want to be. Would you favor generally flat
rate or a percentage royalty rate? Mr. Newton, do you have a
preference there or not?
Mr. Newton. You know, the technology that exists to move
around music from the owners to the consumer is so amazing
these days that to me, the technology should be to account for
it. And it is my understanding that some places, they are
already doing it. So whether it is a percentage
or----
Mr. Smith. Flat.
Mr. Newton.--or a flat rate, but even if it is a flat rate,
it should float along with inflation, because the Constitution
says that they want to promote the progress, so I think we
really have been going backwards since 1909 as our percentage
as what that statutory rate.
Mr. Smith. And you made the point in your testimony that it
has not kept up with inflation.
Mr. Newton. No, it hasn't.
Mr. Smith. And I agree.
Mr. Israelite.
Mr. Israelite. I think in the pure mechanical downloading
field, which is the most analogous to the sale of music, the
publishers and songwriters would probably prefer to keep penny
rate, although they'd like to see it adjusted upwards. But in
the brand new world that we call subscription services, the
publishers are very open to new models and, in fact, have
proposed considering percentage models, as long as there would
be some type of basement that would make sure that you didn't
get in a situation where we're already being squeezed but
earning less under a new system.
Mr. Smith. Right; Mr. Kenswil?
Mr. Kenswil. Well I think we have to be careful every time
we draw a line between different types of services getting a
different type of rate, so if you had a penny rate on one and a
percentage rate on another, that just means drawing that line
becomes more difficult. I think a percentage rate solves many,
many, many of the problems that we're facing, whether it be the
fact that songwriters get less as a percentage of high priced
items and more of a percentage of low-priced items under the
flat rate; that makes no sense at all.
The up side of increasing penny rates is fine during an era
when sales rates are increasing, but we made a price cut last
year of over 20 percent of our wholesale price, yet our cost
for mechanical royalties went up. And I would say if you look
at what the percentage of two cents was to the price of a wax
cylinder in 1909, I think you may find that the percentage, the
8.5 cents out of a dollar now being received on downloads may
well be higher.
Mr. Smith. Thank you, Mr. Kenswil.
Mr. Potter.
Mr. Potter. I think we support percentage of revenue
pricing across the board. We are in a time of very dynamic
pricing. Mr. Kenswil mentioned the price is going down in the
sound recording industry. I will tell you that our goal is to
wean consumers off pirate services, and if we have to charge
them 39 cents or 59 cents or 79 cents, it is better than them
taking the music for free.
I would agree with Mr. Israelite that there probably should
be a floor. If we are giving music away for free, they should
not get nothing; if we are giving music away as a loss leader,
they shouldn't get nothing, but in a time of pricing dynamics
and in times of trying to attract consumers away from free,
we've got to figure out what the right price point is.
Mr. Smith. Both Mr. Berman and I have a special interest in
interoperability. Mr. Potter, you are the one here today who is
probably less likely to think that there is a problem with the
lack of digital interoperability. And I do anticipate having a
hearing on the general subject of interoperability; however, I
do want to take advantage of the opportunity today to ask you
what you think about it, and if we have time, I will ask the
other panelists to respond as well.
Why should we not be concerned about that?
Mr. Potter. I think we should be concerned about
interoperability, but I think if we look at people who can now
send a WordPerfect document to someone who uses a Microsoft
computer, Microsoft decided it was worthwhile to interoperate
with Corel software, or whoever owns WordPerfect today, and
they decided to do it in the marketplace, and it worked.
You know, the hue and cry of consumers is what our
companies listen to every single day. I happen to believe that
when people can move their music to all their devices
seamlessly, they will buy more music; they will buy more
devices, and it will be better for everybody.
Mr. Smith. Okay; thank you, Mr. Potter.
Mr. Berman is recognized for his questions.
Mr. Berman. That is funny, because in a way, your answer to
the question on interoperability, I could hear the music
publishers give that as an answer to questions on reforming the
115 license, but that does not mean it should not be reformed.
But I am--in your statement, Mr. Potter, you say the Harry
Fox Agency, the music publishers' in-house collective licensing
agent, is absolutely unable to license mechanical reproduction
rights in a fashion that works for comprehensive digital
services. Mr. Israelite, you say as of today, NMPA's members
and Harry Fox Agency's affiliates have issued over 2.85 million
licenses to 215 different licensees for digital delivery of
musical works. These licenses represent the vast majority of
musical works for which there is any meaningful level of
consumer demand.
These sound like different versions of reality. Could each
of you respond to the other one's comments and kind of develop
this for us a little more?
Mr. Israelite. I'd be happy to start. I have a great deal
of respect for Mr. Potter, but I think that his testimony was
probably more relevant last year. Since the hearing last year,
the National Music Publishers and the Harry Fox Agency have
come forward with a completely new openness to considering new
types of models for subscription services, and so, in the
letter that was submitted to you, Mr. Chairman, that's been
shared, we are open to the idea of bulk licensing. We are open
to the idea of a designated agent. We are open to the idea of a
blanket license. We're open to the idea of a percentage of
royalties for these subscription services.
So I think there has been quite a bit of movement by my
organization in that regard. With regard to the pure
downloading, I think that's working pretty well, and I think
the success of the iTunes model shows that for pure
downloading, that's a system that can work pretty well under
the current system.
Mr. Potter. Let me start by thanking Mr. Israelite for
confirming the statement in my testimony that they're willing
to look forward and fix the system by creating a blanket
license and agreeing to a blanket license. We agree that a
blanket license is necessary, so I don't think we need to focus
our time on the flaws in the existing system.
Mr. Berman. It sounds like we have a deal. [Laughter.]
There are many bizarre aspects to this situation in a world
where performances versus distributions and transmissions have
different statutory mechanisms for compensation and issues of
ephemeral copies and whether something is a performance or a
distribution. These are sort of metaphysical questions that--I
mean, it sounds like the issue a lot is about how are the
creators in this new world going to get compensated?
I don't believe the songwriters or the music publishers
have a fundamental interest in metaphysical questions about how
many different reproductions are made in some kind of digital
online service. They're worried about getting shafted in this
particular world. And I guess percentage of revenues is fine. I
mean what happens in a situation where you allow 30 days free?
Is it percentage of revenues to that specific recording? Is it
the revenues of the entire company then divided up by some
monitoring agency like ASCAP and BMI do in that world? And how
are we supposed to figure out what the just rate of return is
in this particular situation?
Eight cents sounds pretty small. For some reason, it's a
maximum, because apparently, the record labels have some
ability through a device known as controlled compositions to
pay less than that if they can, I guess, leverage that kind of
an agreement with a songwriter, a music publisher, and I'm just
wondering if this--the notion that how we are going to come to
terms with this if you folks can't sort of negotiate, all of
you taking some risks in negotiating a feasible sense of
compensation for this new world that we all seem to agree is
absolutely critical to providing an alternative to the piracy
that's going on now, I mean, somewhere, everybody has to get
off sort of fixed positions and figure out, sort through this
in a way that lets you bring on new services; lets you folks
facilitate these sound recordings coming to people in the ways
they want to hear; and allows the creators to get adequate
compensation and be incentivized to continue to produce new
music.
I will yield back.
Mr. Smith. Thank you, Mr. Berman.
The gentleman from Utah, Mr. Cannon, is recognized for
questions.
Mr. Cannon. Thank you, Mr. Chairman. I didn't realize we'd
been abandoned, I was so engaged in Mr. Berman's questioning. I
appreciate the time.
Mr. Potter, in your testimony, you urged that we clarify
the definition of interactive service to ensure that
programming based on user preferences falls squarely within the
statutory license. For example, consumers should be able to
rate an album, the artist or the song according to the
customer's preferences without the service being rendered
interactive. Is that right?
Mr. Potter. Yes, sir.
Mr. Cannon. And then, the idea is to enable the Internet
radio to create innovative technological services in order to
be able to compete with broadcast radio as well as cable and
satellite, which either pay no royalties or pay less than
Internet radio; is that right?
Mr. Potter. Yes, sir.
Mr. Cannon. And, Mr. Potter, section 115 was developed for
business models and technologies of the past. It is not able to
adapt to current technologies or future technologies. Can one
safely assume that inaction by Congress in this area would
hamper technology and innovative growth?
Mr. Potter. Undoubtedly. I think Mr. Kenswil's industry and
my industry have had our fights over the years about how to
license in ways that promote innovation, and frankly, our
companies are working much more closely together on new
services and new opportunities and new licensing schemes. I
think the publishers and the songwriters have had a slower
awakening, and I think that Mr. Israelite is right that in the
last several weeks since his arrival, and frankly, even in the
last several months immediately before his arrival, we have had
much healthier discussions, and I think there has been a much
greater recognition that we are all on the same side.
We need laws, as Chairman Smith said back in last March's
hearing a year ago, that set general guidelines, and the laws
need to set general guidelines on what the rules are so that
the technologies and the business people and the product
developers and the consumers can drive toward the future in
legal ways that spin out a lot of royalties to creators.
Mr. Cannon. And when you say a lot of royalties to
creators, you mean you want them to make more money in this
process.
Mr. Potter. I would love to see them make more money in
this process, because if they make more money, I think our
companies will, also.
Mr. Cannon. As you know, I love music, and I like the idea
of having a more and more robust market. We have come a long
way in the last 8 years or so; really wonderful things are
happening, and your industry has a lot to do with that. But in
a letter to Chairman Smith, the National Music Publishers
Association suggested that online services' combined royalties
to record companies and music publishers should not exceed 50
percent of revenue. Mr. Potter, would your members support
that?
Mr. Potter. I think they would, sir. We are happy to agree
with Mr. Israelite and his organization on that one.
Mr. Cannon. And the same letter to NMPA suggested that
online services royalties should be divided two-thirds to
recording companies and artists and one-third to music
publishers and songwriters. Would your members agree with that
formula?
Mr. Potter. I think our members would stay far away from
that agreement or disagreement. You know, our view is everybody
needs to get their fair share from their creative inputs, but
at the end of the day, I'm not going to tell Mr. Kenswil or Mr.
Israelite or their respective colleagues in their industry or
members how they should divide the royalty pie. That is just
none of my business.
Mr. Cannon. You just want it fixed or in a way that's clear
so you guys can innovate and create and get it out better.
Mr. Potter. The most important thing is the rights have to
be fixed and clear. The rights have to be clear so that we can
innovate without getting sued and without getting sued out of
business by the statutory liability and strict liability
statutory damages. The second thing is to have a clear path
toward resolving the royalty disputes, and frankly, the simpler
path, the fewer transaction costs, the fewer arbitrations and
rate courts, the better, because we need to go innovate in
products and services, and these guys need to go create new
music.
Mr. Cannon. Thank you for saying that. That was very clear,
very precise, elegant and right to the point, and I agree with
that.
Mr. Israelite, at the March 2004 hearing that was just
referred to, the NMPA representative who testified before the
Subcommittee testified that section 115 mechanical compulsory
license does not need to be updated and that the Harry Fox
Agency offers a marketplace solution for the licensing needs of
digital musical services. It sounds like you are more open to
legislation that would convert the existing compulsory license
into a blanket license; is that correct?
Mr. Israelite. I think that the Publishers Association and
their songwriter partners have come a long way since the
hearing from last year. We've heard the Committee. We've
listened to a lot of the industry, and one of the things that
we are now open to is the idea of a blanket license. We think
we should first try it in the space that is known as
subscription services. So that is everything between pure
downloading, which is most analogous to sale, and pure radio,
and everything in between, which we call subscription services,
which includes on demand; it includes limited downloads and
things of this nature. We are very open to these new ideas, and
in fact, in response to, I think, an appropriate comment from
Mr. Berman, we've taken risks, and we have actually agreed to
license without having any guaranteed rate in the future.
We don't know what the rate is. And for over 3 years, the
songwriters and the individual publishers haven't been paid by
those subscription services, because we agreed to go ahead and
license now and wait until we work out a rate in the future.
And that was something that I think our folks did in good faith
to try to make a new technology work. And so, I think we are
doing exactly what's appropriate in the marketplace, which is
we are taking risks, and we are also open to new ideas, as
we've been, as I suggested, since the last hearing by
supporting the idea of a blanket license in the subscription
world.
Mr. Cannon. Thank you.
I note, Mr. Chairman, that my time has expired, and I yield
back.
Mr. Smith. Thank you, Mr. Cannon.
The gentleman from Michigan, Mr. Conyers, is recognized for
questions.
Mr. Conyers. Thank you, Mr. Chairman.
Mr. Newton, I was really excited about your CD article I,
section 8, because the only time I have referred to article I,
section 8, was to remind the Administration that only the
Congress has the right to declare war. And so, I was very
anxious to get this back to my equipment upstairs, but then, I
realized that you were, in fact, referring to another part of
article I, section 8. [Laughter.]
Mr. Conyers. And I am still going to play it, but not with
the anticipation that you are a political activist in disguise
who has come to this hearing today. [Laughter.]
Nevertheless, I wanted to try to figure out a way that we
can deal with the issue of the publishers and composers, and I
just wanted to begin by asking Mr. Israelite that under a
blanket license, why shouldn't service providers receive
licenses from and report directly to a centrally-designated
agent or individual copyright owner of a nondramatic musical
composition?
Mr. Israelite. Mr. Conyers, we are very open to that idea
of direct reporting from the providers. We think that we should
try it first in the subscription world, but that would be
something we would be open to.
Mr. Conyers. Well, you know, the royalties for the
publishers go through RIAA first, which sometimes delays the
receipt of the royalties by the publishers, and I think we have
to try to figure a way how we deal with this so that these
creators on the bottom, they are on the end of the food chain,
and by the time they go through all of these hoops, there can
be a very diminished reward for the ones that have created the
music, and that compels me to approach what we do with 115 very
carefully.
For example, if a blanket license and designated agent
proposals are established, would anyone mind dealing directly
with the publishers instead of going through the record labels?
Is that beyond contemplation?
Mr. Kenswil. Well, certainly, if I can respond, right now,
there are many services that only want to deal with the record
labels. We're told, for instance, by cellular companies that
they will not carry our product on all the services they have
unless we clear the publishing rights and pay the publishers.
Much of that is because we have the infrastructure to do that,
and they do not. If that infrastructure problem was resolved,
we would absolutely have no problem with any service that
chooses to go directly with the publishers to do so.
We really don't have any interest in spending all the
overhead money we spend now in collecting the money and then
paying it back out again.
Mr. Conyers. Is it true that DiMA now pays royalties
through RIAA and probably wouldn't mind going directly to
publishers if all these other issues were resolved?
Mr. Kenswil. That varies company by company, since it deals
directly with the companies. I can only speak for Universal,
and our subscription deals provide for the DiMA members to pay
the publishers directly, as they now stand. Other companies may
have different arrangements.
Mr. Conyers. Mr. Potter, did you have a comment?
Mr. Potter. I did, sir. I think on the--and Mr. Kenswil can
probably confirm this as well--on the issue of paid downloads,
similar to what we all know Apple is selling with the iTunes
for 99-cent singles, those publishing rights are typically
sublicensed by the record companies. On the subscription
services, which is the on demand radio or which is the tethered
download or the rental system, the Napster to Go service, for
example, those are typically direct from the Harry Fox Agency,
and in all cases with performance royalties, we pay directly to
ASCAP and BMI.
Our companies are entirely agnostic as to who we write the
checks to and who we report to. We have the data to report to
everybody, and we're prepared to give it to them directly and
quickly as well as to give them their money directly and
quickly.
Mr. Conyers. I close on this observation if anyone wants to
comment on it. Have the music publishers ever been challenged
in court for asserting rights that they do not have? Because
the Internet companies believe that the law doesn't permit
publishers to get royalties for temporary copies, but and they
say the law is unclear, but at the same time, I don't recall
anyone trying to verify this analysis by filing a challenge
with either the Copyright Office or in Federal court. Do you?
Mr. Potter. I think that the Copyright Office, Mary Beth
Peters, has actually made her position very clear on the issue
of what we obviously articulate as the double dip royalties,
and she said that our position is the correct one. She said it
in her 104 report in August of 2001, and she said that several
times before this Committee. She has said that this is the way
the law is in some circumstances, and it should be in all
circumstances.
Having said that, it's obviously up to the Congress to
legislate, but the music industry has been a see no evil, hear
no evil business for many, many decades. There's a lot of folks
at this table and behind us in our industries who understand
that there is a lot of gray areas in the law, and there's no
reason to challenge it, because it can probably hurt you more
than it helps you.
So, our plea is to you to clarify the law, to minimize the
risk, to let us spend less money on lawyers and more money on
marketers and innovators so we can sell more music and pay more
royalties.
Mr. Smith. Thank you, Mr. Conyers.
Mr. Conyers. Thank you.
Mr. Smith. The gentleman from Virginia, Mr. Goodlatte, is
recognized for his questions.
Mr. Goodlatte. Mr. Chairman, thank you for holding this
very interesting hearing.
Mr. Potter, I would like to follow up; in fact, I would
like to ask all of you on the conversation you had with Mr.
Berman regarding the progress that you are making toward
working out these issues in the private sector since last
year's hearing. I think we are not quite to where Mr. Berman
described it as having a deal, and I would like to hear you
tell us what kind of progress you are making and whether you
think the parties can come up with a final workable solution
without intervention by the Congress.
Mr. Potter. I think that we have to start from the premise
that Congressional action is absolutely necessary. It may be a
consensus presentation by the industries and a request, a joint
request to legislate, but the law that exists today, both in
115 and 114, is remarkably micromanaging, and it is built,
constructed specifically for industries as they existed at the
time of enactment or as some who are in the room thought the
industries might develop.
That is a very hard way to legislate, because as soon as
the industry veers off into a new direction that's unexpected,
and that could be any industry. It's sort of like if you
literally by statute said gas stations must be full service,
and then, somebody said, well, why can't we be self service? We
want to have you pump your own gas. But they had to go back to
Congress. That's the level of detail that 115 includes and in
some respects 114. So I think regardless of what negotiations
transpire and results transpire, we do have to come back to
legislation.
Mr. Goodlatte. Mr. Israelite, do you want to comment on
that?
Mr. Israelite. Thank you. It is difficult for me to
evaluate this, being so new on the job, but what I can tell you
is in just the few weeks that I've been on the job, we've had
very productive initial discussions with the digital folks and
with the recording industry and with the songwriting groups,
and so, I'm encouraged, and I'm optimistic.
The music business is one where there are historical
conflicts, and one of the things that I think can help us is
that we are all very united in the fight against piracy, and I
think that a lot of our efforts in that regard can help us to
learn to work better together, and so, I'm optimistic about
that, but I do think that we ought to give negotiations a
chance to work, and I think if you look at the progress from
just last March to where we are today, you see some significant
movement. And so, I'm optimistic that we can continue that.
Mr. Goodlatte. Mr. Kenswil or Mr. Newton, do you have any
comments on that?
Mr. Newton. I did want to comment, and this goes back to
your question, Mr. Conyers, about how shocked you were that I
used article I, section 8 in dealing with these issues, and we
understand that it was James Madison who wrote the very
powerful and concise words that deal with these copyright
issues. I was shocked when I saw that it was on the same page
as the war powers and the Post Office and building roads, but
to me, it also shows how important he thought it was to give it
incentive.
And the only profession mentioned in that article I,
section 8 is authors. The inventors are not involved in this
discussion we are having today. It mentions inventors, but we
are talking about authors. We sign away some of those exclusive
rights to our publishers. Sometimes, our publishers are our own
selves; that's in my case, some cases. So it is very clear,
very ungray, the exclusive rights, and that's the point of my
song, and I hope we get a chance to get to that. The exclusive
rights are given only to the authors.
Mr. Goodlatte. Mr. Newton, you are on my nickel, and I need
to get----
Mr. Newton. Okay; sorry.
Mr. Goodlatte.--a couple of other questions in.
Mr. Kenswil, did you want to respond?
Mr. Kenswil. Obviously, the marketplace is usually the best
place to decide these things. I agree that we probably need to
come back to you. Hopefully, we will get to an agreement. If
everybody agrees to work day and night for several weeks, I'm
sure we could get there. It's a matter of the desire, and then,
hopefully, we can come back to you with an agreement that could
be codified, which will probably be necessary.
Mr. Goodlatte. Mr. Potter, in Mr. Israelite's written
testimony, he states that the National Music Publishers
Association members and the Harry Fox Agency affiliates have
issued over 2.85 million licenses to 215 different licensees
for digital delivery of musical works. Have online music
services been able to satisfy consumer demand for specific
types of content, or are there still types of music for which
there is significant consumer demand that are unavailable to
online music service companies, and can a consumer obtain these
types of music legitimately online?
Mr. Potter. Your question goes to types of music, and
that's a tough one to answer. Let me provide a couple of ideas.
One is that any single song, if the consumer wants it at that
moment, and it's not on our service, it's available on Grokster
and Kazaa. It's a really simple proposition for the consumer.
If I can't get it legally, I know I can get it illegally.
Mr. Goodlatte. I understand that. Can they get it legally?
Mr. Potter. Can they get it legally? There are still
several bands, frankly, that have not authorized their songs;
several people on the master recording issues, and that's an
issue that----
Mr. Goodlatte. But there's no genre or type of music that
isn't being licensed.
Mr. Potter. I don't know that there is a genre or type of
music that is not being licensed, but there are several holes
in the catalogue for several online services.
Mr. Kenswil. I can identify one just off the top of my
head, and that's international music. There are many, many
millions of songs that have never been available in this
country, and there is a marketplace for them. The reason for
that is in the past, it has not been economic to release them.
Online makes it economic to release them. But we go back, we
have a large Indian repertoire, a large Mandarin repertoire of
music, Cantonese repertoire at Universal. It's very hard to do
that, because not only can't we find the publishing companies
to license; we probably, in many cases, there isn't one,
because those rights have never even been assigned in this
country.
Mr. Potter. That might get to the orphan copyright study
that I know the Copyright Office is doing.
Mr. Goodlatte. I think Mr. Israelite wanted to comment, if
that's all right.
Mr. Israelite. I'll just mention that at least in the
subscription world, we've agreed to license everything, and
we've agreed to do that without even knowing what our
compensation will be in the future, and again, we're also open
to a blanket license that would license everything in that
space. And so, you know, one of the things that's important to
remember is that as quickly as these services want to offer
music, ultimately, the money has to find the right people who
need to get paid. And so, part of the equation is being able to
provide the proper information, make the request in the proper
way, and so, we've been working through those issues, but it's
something we're committed to doing.
Mr. Goodlatte. Thank you, Mr. Chairman.
Mr. Smith. Thank you, Mr. Goodlatte.
We will be continue the discussion, as I mentioned. We will
be identifying some issues we would like for you all to comment
on.
Mr. Newton, we promised you time to sing the song, and you
had mentioned, and I think others had mentioned as well, the
article I, section 8. There aren't very many Subcommittees in
Congress, maybe fewer than six, who can point to the
Constitution as a basis for their jurisdiction, and the
Intellectual Property Subcommittee is one of those, and that is
what, I think, makes it a little bit distinctive. Now, as you
proceed to sing that song, are you going to sit right there, or
do we need to----
Mr. Newton. No, I think I would like to stand.
Mr. Smith. That would be great.
Mr. Newton. I find that it is much easier to remember the
lyrics to songs than it is to memorize a speech, and in
preparation for coming up here a few years ago, it just
occurred to me that these words were so precise that they would
make a good song, so this takes about 2 minutes.
[Mr. Newton performs song.]
[Applause.]
Mr. Smith. Thank you, Mr. Newton. I don't know about the
U.S., but that will be number one on our chart in any case.
[Laughter.]
Thank you very, very much.
I think we need to conclude. I appreciate everybody's
interest. We stand adjourned. Thanks.
[Whereupon, at 5:54 p.m., the Subcommittee adjourned.]
A P P E N D I X
----------
Material Submitted for the Hearing Record
Prepared Statement of 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
Mr. Chairman, thank you for scheduling a hearing on Section 115. It
has been a year since the last hearing on this issue and I think it is
important to assess developments that have occurred in the digital
music arena and what strides the parties have made to address the
concerns expressed last year.
A primary concern for all those making and distributing music is
the threat of piracy. Piracy threatens to harm an industry that is
responsible for providing many jobs in my district and the country,
from the recording artists to the back-up singers, sound engineers,
musicians and the businesses that supports these talents.
There are things we can do to restrict piracy: technology can
provide digital rights management technologies, we can strengthen civil
and criminal copyright laws, we can address the peer to peer networks,
incentivize prosecution of egregious offenders, include more efficient
provisions in trade laws and I can go on. All of these mechanisms are
important aspects in battling piracy.
The issue of piracy comes to the forefront when facilitating the
distribution of music--digital and on-line, in any format, to any place
someone wants. I've come to the conclusion that aspects of the Section
115 license hinder the development of new services. This in turn makes
theft of music more attractive and then denies all segments of the
music industry and those facilitating legitimate services their
rightful compensation.
Last year, NMPA described this issue as the ``flavor of the
month.'' It is more likely the flavor of the next decade. Recently, The
Washington Post reported that within the next decade the CD likely
would be surpassed as a format of choice. Replacing it would be not a
new physical format, but a data file. The success of Apple iTunes and
the launch of the Napster subscription service may not speak to the
death of the physical format, but definitely speaks to its decline. In
helping to facilitate movement from the use of CDs to the digital age,
we need to ask how the Section 115 license would best be reformed.
The last time we addressed this issue, we were at least united on a
core principle--the prevention of piracy. Each party here has had a
vested interest in preventing the theft of intellectual property that
continues to this day. Each party also has an interest in being able to
deliver as much music as possible to maximize revenues or royalties.
However, other than piracy and the need to provide access to music, the
parties have presented divergent views about change to Section 115.
Furthermore, subsequent digital music licensing hearings on the
application of the Section 114 license elicited many differing opinions
as well.
There seems to be little progression in terms of agreement on how
to address Section 115. The Copyright office found little consensus in
the negotiations they observed last summer and DiMA's testimony still
reflects concerns identical to those voiced in that hearing.
The issues to be resolved in Section 115 seem arcane and dull, but
have enormous impact on the way music reaches its listener. The parties
have raised a number of questions which need to be resolved to enable
digital music distribution. For example, should we modernize the
administrative requirements to obtain a Section 115 license? Currently
these requirements are burdensome for users and don't seem to work with
newer digital business models.
Furthermore, should we provide clarity to the scope of Section 115
by explaining what we intended to be encompassed within the meaning of
the words ``digital phonorecord delivery?'' The definition we provided
does not do much good if those who use it do not know what it means.
Finally, there is the issue of valuation of the work. On this point I
digress for a moment to note that the static rate of 2 cents per copy
for a musical composition which lasted for almost 70 years was
reprehensible. We cannot, however, change the past. We must focus on
the future and establish the most effective way to determine the actual
value of a reproduction of a musical composition. The rate that has
always been used is a per reproduction rate. This may have worked when
the reproductions were piano rolls, but does it work in the digital
world when there is no tangible item to hold onto?
Perhaps it would be best to let the market figure out a solution to
the problem. We already have a good example of private parties
resolving a way to deal with physical reproduction issues, and that
example is the EMI Music Publishing and Sony BMG deal at the end of
last year. In that vein, I would like to throw out the idea that all of
the interested parties, including the Performance Rights Organizations
come together and negotiate changes to Section 115 that would
facilitate both the copyright owner's and consumer interests. If by a
time certain the community has not been able to come to an agreement,
then working closely with the Copyright Office we will in a bi-partisan
way consider creating our own changes.
The focus needs to remain on providing rightful compensation to
those who provide the music. Our efforts must continue to focus on
preventing piracy and help facilitate legitimate digital online
services. I look forward to hearing from the witnesses about how
changes to Section 115 would help in achieving our goal.
I yield back the balance of my time.
----------
Letter from The Register of Copyrights of the United States of America