Industry Pushes Lawmakers For Help In Piracy Battle

U.S. lawmakers heard it clearly and heard it often throughout 2002: The major factors hurting the music industry are piracy, piracy, and piracy.

Of course, there were other issues that proved worthy of government attention this year. Congressional interest in artists' rights continued to grow. The Internet business remained a focus, with some members pushing the music industry to speed the development of legitimate online services and streamline licensing procedures for digital music. The radio and concert industries also were on the radar for some legislators, who heeded warnings that consolidation in those businesses could adversely affect artists and music companies. But nothing came close to the piracy crisis.

Throughout the year, the music industry had to bide its time for legislative help from a Congress faced with anti-terrorism and homeland security matters in addition to its usual duties. Further, all House members and one-third of the Senate members were up for re-election.

Piracy statistics tell a stark story. Domestically, more than 2.6 billion illegal music files are downloaded each month, according to the Recording Industry Assn. of America (RIAA). Internationally, at its annual meeting here in June, the International Federation of the Phonographic Industry reported that two of every five recordings produced around the world are pirate copies and that global sales of pirated product rose 50% in 2001 to a staggering 950 million units, estimated to be worth $4.3 billion. Sales of pirated CD-Rs alone tripled to 450 million units.

As RIAA chairman/CEO Hilary Rosen told attendees at the annual Congressional Black Caucus here in September: "The explosion in illegal copying is affecting the entire music community. And contrary to what some people would tell you, it's having a very real and harmful impact on countless musicians, songwriters, and performers—virtually everyone, from recording engineers to record-store clerks."

Throughout the year and around the globe, there were reports of businesses folding and of deep cuts in staffing at music companies of all sizes. Pressure was placed on marketing budgets, even as sales were declining in most major territories.

TRYING TO TEMPER PIRACY

Chipping away at the piracy problem was the intent of two limited bills introduced in Congress this year. In the Senate, Ernest Hollings, D-S.C., put forward in March a controversial bill that would have called for new technical anti-copying standards and devices. In the House, Howard Berman, D-Calif., introduced a measure in July that would have permitted copyright industries to employ so-called "self-help" technical measures short of spamming to slow down and defeat computer networks that allow unauthorized file sharing. Neither made its way out of committee.

Still, piracy—especially online piracy—remains on the Congressional radar. House Judiciary Committee chairman F. James Sensenbrenner Jr., R-Wisc., called for comments from the industry and others this spring on approaches to dealing with online piracy, and it is expected that his committee will hold hearings in 2003 on how to best attack the problem.

Rosen tells Billboard: "Next year, we're going to focus our Congressional efforts on enforcement, seeking additional help from the U.S. government on international and domestic enforcement. We also need continued trade [policy] pressure on copyright enforcement and technical assistance and law-enforcement training. There's a lot of people in our business who rightly think if we're giving millions and millions of foreign aid to developing countries, that some of that money ought to be going to making sure that their governments are supporting our intellectual-property interests."

In the meantime, the RIAA expanded its litigation efforts against such peer-to-peer networks as Aimster and Kazaa and in October sent letters to 2,300 colleges and universities asking for their help in putting out the fire of illegal downloading of copyrighted music on campuses.

The trade group's efforts to cut down professional piracy have also been expanded, as have diplomatic efforts. In Mexico, the House overwhelmingly passed a measure this month to snare large-scale, organized piracy rings with racketeering charges. The Senate is expected to follow. On the enforcement side, raids on suspected pirate facilities continue to pay off. In the latest instance, U.S. Secret Service agents—with the help of RIAA officials—staged a huge raid this month in New York, uncovering 35,000 finished CD-Rs, 10,000 DVDs, 421 CD-R burners, a high-end color copier, and other equipment.

Rosen says that "in a wrap-up for this year, the best thing we have going for us is that there's been a lot of pressure from politicians, consumers, and from ourselves on [establishing] the online music services and that now we have a really significant number of services that have content from all of the major record companies that offer consumers downloading and portability. So I think what we've long promised the politicians, we've delivered in the last couple of months. I think that makes the job a little easier next year to press for more enforcement. I think we're going to get the support that we need."

OTHER ISSUES TO ADDRESS

Jay Rosenthal, co-counsel of the Recording Artists' Coalition, agrees with Rosen that Congress will not deal with issues other than enforcement. That means it is unlikely there will be support for legislation addressing extended "fair use" for legitimate copying or federalization of California's seven-year statute, which excludes recording artists from a law that forbids personal contracts of more than seven years.

"Piracy is No. 1, absolutely," Rosenthal says. But he thinks Congress will further investigate huge radio and concert companies, specifically Clear Channel Communications (CCC), which dominates both fields. "There are three important developments of 2002," he says. "The first is the continued decline in record sales due to peer-to-peer 'sharing.' Artist projects were put on hold, promotion money dried up, and fewer artists were signed. The second was Clear Channel, which was buying everything in sight—artist-management companies, promotion companies, radio stations, and venues. The third is the unprecedented Congressional interest in fixing artist/label problems."

Rosen does not think Congress will step in to try and reform artist contracts. This is despite the interest shown by Senate Judiciary Committee chairman Orrin G. Hatch, R-Utah, in developing a bill that would allow artists to exploit their out-of-print recordings if companies do not; Hatch is also interested in studying ways to simplify record contracts. For one thing, Rosen says, the labels themselves are beginning to simplify contracts. In May, Koch Entertainment announced it would offer simpler, more transparent contracts; more recently, BMG Entertainment and Universal Music Group revealed plans to revise their royalty accounting procedures.

"For those lawmakers who have been impatient with record companies," she says, "what they have seen is the marketplace responding. More importantly, it's about how record companies see their future."

As for CCC, it is the main focus of a pending bill by Sen. Russ Feingold, D-Wisc., to investigate its policies and the subject of a possible Department of Justice (DOJ) inquiry sought by Berman. Rosenthal predicts the DOJ will go ahead with the probe and quips, "Move over, Bill Gates."

BILLS, BILLS, BILLS

Congress only passed one bill this year that involved the music community. That legislation lowered the rate of the new digital-performance royalty for small-company Webcasters with revenue of less than $1 million a year. After being unanimously passed in the House, the bill was almost scuttled in the Senate after retiring Sen. Jesse Helms, R-N.C., placed a hold on it because of objections from religious broadcasters. The legislation was hurriedly redrafted to exclude mandated rates, which broadcasters feared would hurt their current court challenge of the rule that subjects online simulcasts of terrestrial broadcasts to digital-performance royalties. The bill finally passed Nov. 15.

Other industry-related bills never got out of committee. The most controversial was the Music Online Competition Act (MOCA), re-introduced this year by Rep. Rick Boucher, D-Va. The bill, opposed by enough of Boucher's colleagues—and the RIAA—to ensure it would not reach the House floor, would have amended sections of the Digital Millennium Copyright Act (DMCA), which Boucher views as restrictive.

MOCA contained provisions to ensure non-discriminatory music licensing for services not controlled by the major labels, to allow consumers to make archival "backup" copies of downloads, to allow Webcasters to make royalty-free, ephemeral "cached" copies, and to provide for direct payment of digital royalties to artists. It also contained a performance-royalty exemption for retailers offering 30- and 60-second online sound samples. The National Assn. of Recording Merchandisers supported the measure.

Boucher also introduced the Digital Media Consumers' Rights Act, which would modify the DMCA to enable hardware manufacturers to introduce multipurpose technology as long as it is capable of substantial non-infringing use. Introduced late in the session, it stalled in subcommittee.

NEWS FROM THE COURTROOM

In October, the Supreme Court heard the first-ever challenge to the constitutionality of the Copyright Act in the Eldred vs. U.S. case, which questions Congressional authority to extend the term of copyright to life of the author plus 70 years. The challenge comes from publishers of public-domain material who say that the Constitution calls only for a "limited" copyright term and that a longer term restricts free use of creative material at the expense of the public good. No judgment has yet been rendered, but insiders are betting that the court will rule that Congress can extend the term, even if, to quote Justice Sandra Day O'Connor, it may result in "bad public policy."

In another significant court case, attorneys general in 41 states and three U.S. commonwealths announced Sept. 30 a $143 million settlement of price-fixing charges against the five major U.S. distributors, as well as Trans World Entertainment, Tower Records, and Musicland Stores. The settlement ended an antitrust lawsuit filed in August 2000 in federal court in which the states, led by New York and Florida, charged that the companies conspired from 1995 to 2000 to inflate CD prices in violation of state and federal laws, costing consumers millions of dollars. The suit claimed that the defendants illegally used minimum-advertised pricing (MAP) policies to raise CD prices and that this resulted in a reduction of discounting and competition among music retailers.

In the settlement agreement, the distributors and retailers did not admit to any wrongdoing. Universal Music & Video Distribution, BMG Distribution, WEA, and EMI Distribution issued statements saying they believe MAP policies are legal but that protracted litigation would have been prohibitively expensive.