Pub Issues Still Cloud Web Picture

As the growth of the legitimate digital music business accelerates, many difficult questions regarding publishing royalties remain unanswered.

In the burgeoning world of permanent paid downloads, some publishers say the prevailing mechanical rate does not reflect the liberal usage rules of new download stores.

On the subscription front, the picture is even more complex. Although such services as MusicNet, Rhapsody and Pressplay (now Napster) are covered by a 2-year-old peace treaty between U.S. music publishers and the major labels, no rate has been set for either rental downloads or on-demand streams, the key offerings of these services.

Despite such unresolved issues, the digital music realm continues to unfold under what one source describes as "a low-key, peaceful stalemate."

"Ultimately these rates will have to be negotiated or arbitrated. But the timing of that is uncertain," says Steve Marks, senior VP of business and legal affairs for the Recording Industry Assn. of America.

Most industry excitement of late has focused on the rise of such pay-per-track services as Apple's iTunes Music Store, MusicMatch and Napster.

The flexibility of these services—which enable consumers to reproduce and move around music they purchase—has heightened publishers' concerns about the fairness of the current mechanical rate of 8 cents per song.

"The music publishers have not objected to any of the business models that are being offered currently," says Carey Ramos, an attorney representing the National Music Publishers' Assn. (NMPA). "But there are issues there. If a service offered you unlimited burns of a song, that's going to have an impact on sales."

Ramos says the publishers are in discussions with labels and service providers about personal-use rules going beyond the bounds of what would be covered under a mechanical license.

He says the question centers on what defines a single "copy" covered under a basic mechanical statutory rate.

The goal for publishers is to maintain parity with usage rules associated with CDs. "They regard as a fair rate a rate that is on a par with what they get in the terrestrial world," Ramos says.

Publishers have suggested that in instances where users get more liberal copying ability with the downloads they purchase, something greater than the basic 8-cent mechanical royalty—perhaps a percentage of revenue—might be in order.

"As the market evolves, there will be new terms for music publishing," Ramos says.

UNLIMITED COPYING

Labels and service providers counter that CDs already enable unlimited copying. Further, they argue that downloads from the new legitimate services already are more secure than the overwhelming majority of CDs and therefore should not be subject to a higher rate.

Any change in the publishers' share would be crucial for a digital music business built on low price points like 99 cents for single downloads.

Similarly, royalty rates are a key factor in the future of the subscription business. Still, with little revenue to date, the publishers—who are receiving modest advances from the recording industry and select services under the existing short-term deal—do not see a need to press the issue at this point.

"In the context of a business environment that's focused on doing everything possible to promote the legal services, people are willing to set aside their differences for a while," says Jonathan Potter, president of the Digital Media Assn. (DiMA), a trade group representing digital music services. "But these issues are not going away. They've been set aside, but they're going to come back."

Ramos agrees. "No one feels comfortable putting prices on these things until they get a better sense of how the market is going to develop and what consumers want."

Sean Ryan, VP of music services at RealNetworks—owner of the Rhapsody subscription service—adds, "Unlike other issues that are on absolute deadlines, this is a much more fluid one."

Sporadic negotiations over publishing rates are described as "amicable."

Marks says the need for digital services to know their costs will help drive negotiations.

"For companies that are trying to put together business models, it's important for the market to have some certainty on those rates," he says.

Among other issues still to be hammered out are the extent to which operators of subscription businesses are on the hook for both performance and reproduction royalties on conditional downloads and on-demand streams.

Digital music services that offer on-demand streams are already paying performance royalties to ASCAP and BMI.

Under the 2001 subscription "peace treaty" between the RIAA and the Harry Fox Agency (HFA), the collection arm of the NMPA, the majors conceded that a mechanical also is required for on-demand streaming.

Under that deal, the labels (through the RIAA) paid a $1 million advance to HFA—which represents more than 27,000 music-publisher principals—for a two-year "bulk" license on musical works.

The initial term of that deal is over, but the pact has automatically renewed, with the RIAA paying HFA an annual advance of $750,000 until a rate is set. The money is paid in monthly installments.

But the agreement does not address at which point in the streaming process the mechanical is required. Nor does it spell out the rate.

The labels' concession on mechanicals was based on the need for digital services to use backup copies in connection with an on-demand stream.

At the time of the deal, RIAA president Cary Sherman told Billboard, "It's clear that we are going to need a license for the server copy, even for pure streams. That being the case, it makes sense to not quibble over whether the copies made after the server copy are reproductions."

Murky Issues

The licensing issues related to conditional downloads are even murkier.

It is widely acknowledged in the industry that services offering downloads that expire after a subscription is discontinued are on the hook for some sort of mechanical royalty.

But labels and service providers want it to be less than the full mechanical rate.

"For limited-use downloads, logic would dictate that the rate should be lower than [it is] for copies where the consumer has complete and permanent ownership," Marks says.

At the same time, it is unclear whether conditional downloads will also require the payment of a performance royalty.

DiMA members are staunchly opposed to the notion of the publishers "double dipping" on rental download royalties.

Potter says publishers have to be careful about what they ask for.

"Those who are trying to promote commercial legitimate services need to have their royalties be within a reasonable range of their cost of doing business," he says.

As digital music publishing negotiations go forward, some question what role the RIAA will play.

"The online services aren't dependent upon [the RIAA] to get publishing rights, especially given what's happened in the market," Marks acknowledges.

Music publishers are encouraging the digital services to cut direct licensing deals—both for pay-per-download and subscription offers—rather than piggyback on the RIAA deal.

Ramos suggests that in doing direct deals, services can negotiate sub-statutory rates for some content.

"There's an opportunity to work out deals that are satisfactory to all parties," he says.