Behind the Deal: Music Licensing Reform & Proposed Bills

For more than a year, the U.S. House Judiciary Committee's Subcommittee on Courts, the Internet and Intellectual Property has been holding hearings on music licensing needs in the digital age. It has focused specifically on section 115 of the U.S. Copyright Act, which governs mechanical licenses for compositions.

The following is a summary of the "working draft" of a bill presented by the Copyright Office on June 21 and the response of music and digital-media representatives.

COPYRIGHT OFFICE PROPOSAL: The Copyright Office proposal, called the 21st Century Music Licensing Reform Act, abolishes the compulsory mechanical license for cover recordings and could transform performing rights organizations and the Harry Fox Agency into competing one-stop license shops.

Under U.S. copyright law, anyone who wants to record someone else's composition for the first time and release the recording on "phonorecords" (generally defined as physical objects, such as CDs, that embody only sounds) must negotiate a mechanical license and a royalty rate with the publisher.

Section 115 takes negotiation out of the process, if the composition was previously recorded and distributed in the United States, by offering a compulsory license to requesting parties who notify the copyright owner or the Copyright Office and pay monthly royalties at the statutory rate.

Compulsory licenses have "steadily declined to an almost nonexistent level," Register of Copyrights Marybeth Peters told the subcommittee. The provision "primarily serves today as merely a ceiling for the royalty rate in privately negotiated licenses," she said, referring to HFA licenses and controlled composition clauses in recording contracts.

Peters noted that the transactional costs and time delays that digital music services face to secure licenses inhibit the music industry's ability to combat piracy. When legal online music services cannot obtain all the necessary rights, their music offerings become less attractive to the listening public than unlicensed services. Peters also testified that virtually all other countries have eliminated similar licenses in favor of private negotiations and collective administration.

The proposal offers a drastically different vision of the publishing world, addressing some current concerns while raising new questions.

As laid out in the draft, it appears that publishers would negotiate all mechanical rights and rates. They could offer labels or online services an exclusive license, which cannot be offered under current law, or they could refuse to permit cover recordings.

Also, the proposal essentially merges performance and mechanical licensing, replacing "performing rights society" in the Copyright Act with "music rights organization." The MRO is intended to address the problem of publishers' agents requiring two licenses -- performance and mechanical -- from separate sources to license one composition for a single digital transmission.

If a publisher elects to authorize an MRO to grant public performance licenses (for radio/TV broadcasting, webcasting and other performances), then that MRO also has the right to grant mechanical licenses. For digital audio transmissions (such as an online stream), the MRO must grant a mechanical license with a performance license.

ASCAP, BMI and SESAC would automatically become MROs because their members have authorized them to license public performance rights. HFA and other entities may also become MROs if they obtain necessary rights from publishers.

Publishers may elect not to use an MRO, retaining their rights to prohibit others from performing, recording and distributing their compositions unless the publishers grant third parties a license directly.

Peters said that while intermediaries serve a useful function, "it is the author -- and not the middlemen -- whose interest should be protected."

It is unclear who would resolve rate disputes and whether there would be a minimum royalty due for compositions. The National Music Publishers' Assn. is concerned about any development that would diminish the negotiating capacity of publishers and songwriters, president/CEO David Israelite says.

As they say on Capitol Hill, there is nothing like the threat of a bill to bring all parties to the table. Sources familiar with the hearings on section 115 say other proposals are expected.

THE RESPONSE: Nine music and digital-media trade groups with a wide range of ideas about music licensing voiced a single opinion June 28 to a House subcommittee. In a respectful manner, they trashed the U.S. Copyright Office's proposed bill that would abolish the compulsory mechanical license and form music rights organizations, or MROs.

While acknowledging the good intentions and hard work of Peters in proposing the 21st Century Music Licensing Reform Act, the groups wrote that requirements in the draft bill would not work in practice and would create financial havoc for some.

Among their concerns: that the proposal cannot ensure that the MRO mechanical-licensing process would run smoothly and efficiently, that publishers' bargaining power to negotiate rights and royalty rates would not be kept in check and that royalty rates could exceed reasonable limits.

While some groups suggested specific changes to the bill, many generally supported a "joint uni-license proposal" previously presented to the subcommittee by ASCAP, BMI and the National Music Publishers' Assn. as well as its subsidiary the Harry Fox Agency.

Although specific provisions are still under negotiations, this proposal focuses on only one aspect of the Copyright Office proposal: performance and mechanical licenses for online subscription services.

The uni-license proposal would create one "super agency" for all U.S. publishers that would handle "blanket" licenses granting performance and mechanical rights to digital subscription services. Similar to SoundExchange, which licenses and distributes non-interactive webcasting royalties to performers and owners of sound recordings, the new agency would also collect and distribute royalties to publishers or publishers' agents.

Negotiations on the uni-license proposal among certain publishing interests, the Recording Industry Assn. of America and the Digital Media Assn. (DiMA) are ongoing. The royalty rate tossed around at this point is 16.666% of a digital service's gross revenue, with a flat-fee dollar rate as a minimum payment.

This represents an increase from the current mechanical statutory rate of 8.5 cents per song, per download, a source says. It is intended to place a value on the ease of one-stop shopping to secure a license for all U.S. repertoire without the risk of copyright-infringement liability. In other words, it would help spread the cost of building an infrastructure to handle the administration responsibilities.

This proposal does not cover licenses for master ringtones or other new products -- something the RIAA and DiMA would like to resolve.

SESAC wrote in its response that it has been excluded from the uni-license negotiations and that it wants to have a voice in the operation of any such agency.

Most industry observers do not expect the Copyright Office's proposal to stand.

DiMA was among those that criticized the Copyright Office proposal for permitting an unlimited number of MROs to handle performance and mechanical licenses, which it said only "guarantees turbulence and uncertainty and increased risk for law-abiding services, which is precisely what the legitimate online music market does not need."

ASCAP wrote that performing right organizations do not have the internal structure to handle mechanical licenses.

The RIAA and some publishers' agents wrote that the bill changes the terms of current contracts and might invalidate many agreements, including mechanical licenses, recording contracts, songwriter agreements and subpublishing deals.

"The economic dislocation of this unprecedented action would be staggering," the RIAA wrote.

Additional reporting by Bill Holland in Washington, D.C.