[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





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                       COMMITTEE ON THE JUDICIARY

            F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois              JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina         HOWARD L. BERMAN, California
LAMAR SMITH, Texas                   RICK BOUCHER, Virginia
ELTON GALLEGLY, California           JERROLD NADLER, New York
BOB GOODLATTE, Virginia              ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio                   MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California        ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee        SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah                   MAXINE WATERS, California
SPENCER BACHUS, Alabama              MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina           WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana          ROBERT WEXLER, Florida
MARK GREEN, Wisconsin                ANTHONY D. WEINER, New York
RIC KELLER, Florida                  ADAM B. SCHIFF, California
DARRELL ISSA, California             LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona                  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

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               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.

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 Letter from The Register of Copyrights of the United States of America




                                 
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