LICENSING MUSIC ON THE INTERNET. Cydney A. Tune Pillsbury Winthrop LLP

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1 LICENSING MUSIC ON THE INTERNET Cydney A. Tune Pillsbury Winthrop LLP This article is the fourth and final in a multi-part series on music licensing. There are many ways that music is used on the Internet. Some Web sites use music peripherally, for example in a theme song that is played when a user lands on a home page, in videos shown on the Web site, or to add interest to online advertising. Other Web sites focus on the business of music, such as selling music online, Web casting or facilitating music file sharing. There are Internet radio stations that broadcast only on the Net and traditional radio stations that also have a Web site and broadcast their programming over the Internet. Some Web sites offer subscription services that allow the users to select music on demand. Other Web sites offer streaming of music performances or digital downloads. There are Web sites that offer music lyrics and/or notation, either alone or accompanied by sound recordings. Internet service providers (ISPs), even those who do not themselves use music on their sites, can have music questions arise because of conduct by their subscribers. As with any music licensing project, there are numerous matters to be considered in any instance in which music is being used on the Internet. If your client is using music on its Web site, you have to be sure that permission has been obtained from the owners for all rights that are implicated by the use of the music. If your client is an ISP, you should consider whether it could be liable for contributory or vicarious copyright infringement based on the conduct of its subscribers. If your client is an online music business, the issues are more clearcut, but you will still need to be careful to make sure that all rights have been properly licensed. It is clear that the Internet has the potential to change the music industry. Historically, there have been a limited number of major record labels that have exerted a great deal of control over the industry. These major labels also have tightly controlled the distribution systems for music. Traditional music sales have been made primarily by a small group of large labels. Independent labels (also known as Indies ) have presented alternative ways for new artists to record and distribute their music. The high costs of promotion and distribution, however, limit the ability of Indies to distribute their music. Moreover, when Indies became successful, they were typically acquired by one of the major labels. Digital distribution of music has the potential to diminish the power and control of the major labels over the music industry as well as the label profit margins. Under traditional industry practices, artists usually get a small percentage of the revenue generated by their records (often receiving less than 10 percent, or even nothing if the record is not profitable). Digital distribution of music offers the potential for artists to achieve greater financial benefit from their music. Some artists are taking advantage of these opportunities by publishing This article first appeared in Entertainment and Sports Lawyer, Volume 22, Number 2, Summer Entertainment and Sports Lawyer is a publication of the American Bar Association s Forum on the Entertainment and Sports Industries. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

2 their own music and offering it directly over the Internet. Other artists are participating in cooperative businesses in which groups of artists offer direct access to their music. New players are coming into the digital world with great frequency and there is an almost unlimited potential for more players to enter the field and for different business models to be developed for digital delivery of music over the Internet. There are two competing points of view with respect to digital distribution of music on the Internet. Those in favor of digital distribution believe that it will help artists by opening up the industry, make more music available to the public and lead to a wider distribution of profits. Those opposed to digital distribution of music believe that it promotes music piracy, undercuts the profits of all concerned and may destroy the music industry. There is obviously some basis for these concerns. Internet distribution of music allows a user to upload music file, at a low cost and disseminate those files instantly and widely. While it is clear that digital distribution of music presently does make music piracy easier and much more widespread, digital distribution is a reality and it is not going to go away. The Internet, however, is more than simply an additional way to distribute music in traditional media. Rather, music is distributed over the Internet in digital form. Once a digital copy is made of music, the reproduction of exact copies of the digital recording is easily accomplished and can be done with a standard PC. The fact that the copies are digital means that copies are virtually perfect. The fact that the distribution is through the Internet also means that the music can be distributed virtually anywhere in the world, almost instantly and with the potential for nearly unlimited redistribution. It is important, for music licensing purposes, to understand that a digital transmission of music does not involve the transfer of a physical object. Also, keep in mind that digital transmissions can be received in myriad ways including, for example, by wireless devices, cell phones, over phone lines, into personal computers and personal digital assistants and by cable television lines. Commercial uses of music on the Internet have proliferated and there are a number of different types of businesses involved as well as different delivery methods. An understanding of these different delivery methods and the players involved is critical for navigating Internet licensing concerns. Internet distribution methods Music is being distributed over the Internet primarily in two ways. One way is by streaming that is, by transmissions that are similar to radio broadcasts over the Internet, instead of over the airwaves, and to the public in general or directed to individuals at their request. The other way is by downloads transmissions that include the delivery of computer files that contain sounds playable on computers, portable players and wireless devices. Digital distribution by download: Digital distribution involves the downloading of a complete audio content file from the Internet onto a computer hard drive, often with CD quality. Once the music file is downloaded, it is stored locally on the user s computer and can be listened to on demand. At the present, there are competing formats for digital downloads. MP3 is the most popular format so far. MP3 stands for Motion Picture Experts Group (MPEG) 1 layer 3 and is a method of compressing audio files into a digital format that takes up substantially less memory -2-

3 than earlier technologies. It also allows downloading without deterioration of sound quality. MP3 files can also be easily sent to others. Streaming: Some sites broadcast music by streaming audio. In streaming, no permanent copy is made on the recipient s computer and the sound quality is poorer than CD quality. Music storefronts often allow a visitor to preview music clips by streaming. Also, Internet radio broadcasting or Web casting is normally streamed. Sites with streaming media include, for example, and The players Online music retailers: One type of business that is disseminating music on the Internet is the online music retailer. These include Amazon.com and traditional music sellers such as Borders.com and TowerRecords.com. Many online music storefronts offer music downloads with some - such as itunes - offering a user the ability to download a song for as little as 99 cents. Other online music retailers are subscription services. Many traditional retailers, such as Tower Records, also have online music storefronts. IUMA.com, one of the first online music storefronts, was started in For approximately $250 per year, artists can create their own sites on IUMA, which allow the artist to sell that artist s music and merchandise directly to consumers online and allows the artist to receive most of the revenue from such sales. Artistdirect.com is another site that permits artists to sell their music and merchandise directly to consumers. Other music storefronts include, for example, and cdnow.com. The major record labels have also entered into a number of joint ventures with digital distribution services. This business space is presently in flux, with a lot of experimentation and a number of companies seeking entry. Eventually there should be more stability, with more established subscription models and pricing and with a more stable group of players. Web casters: In addition to music retailers, there are also a large number of online radio stations. Some of these are Web-based radio broadcasters who only broadcast on the Internet. In addition, many land-based, traditional radio stations now also operate their own Web sites and transmit their programming over the Internet. Miscellaneous: Music is also played over the Internet when movie trailers are viewed online, usually on sites hosted by the movie s producer or distributor. Additionally, online games almost always include music. Advertisers sometimes use music in connection with their online ads. Artist Web sites often contain streaming samples and may also offer downloads. Some businesses have music playing when a user arrives on their home page. I m sure there are many other examples as well. A review of copyrights involved Remember that when a sound recording is digitally transmitted, two different works of authorship are included in the transmission the musical composition (the song ) and the sound recording of the song (the specific recorded version of the song). Thus, if your client wants to get a license to use a musical recording, the use will normally involve two separate copyrights. As I have -3-

4 explained in previous articles in this series, the copyright in the sound recording is completely different from the copyright in the song. Also, it is important to keep in mind the difference between the copyright owner s reproduction right and the copyright owner s public performance right. As is explained in more detail below, when a transmission results in a download of music, a copy or phonorecord is made and the reproduction right is thus implicated. On the other hand, when the transmission streams the music and no copy is made, the transmission nevertheless constitutes a public performance of the music. This distinction can be particularly important in determining the appropriate copyright owners to contact when seeking a license. Note that while the difference between a download of music and streaming of music sounds fairly clear, it can sometimes be difficult to tell the difference. There is also some controversy as to whether a mechanical license fee must be paid in circumstances where there is interactive streaming of music but it is unclear whether a copy was made by the recipient. Music publishers have taken the position that a mechanical license fee (for reproduction) must be paid in those circumstances. Music publishers also consider all download transmissions to be public performances of the underlying song for which performance royalties must be paid. The transmission of musical notation or lyrics from a Web server to an individual computer would require an electronic display license. If video programs are produced specifically for the Internet, use of music as part of the production would require a synchronization license. If the transmission is of a pre-existing audiovisual work, a videogram license would need to be obtained. These licenses must be negotiated and obtained from the music publisher or other copyright owner who owns the relevant rights. None of these types of licenses are covered by the compulsory license provisions of the Copyright Act; copyright owners can thus deny permission and have a great deal of flexibility in negotiating the fees to be charged and other license terms. Some basic terminology In order to understand the licensing issues that arise in cyberspace, certain terms must be understood. These include: Digital: Digital means that letters and numbers are represented by an ordered series of 1 s and 0 s, also known as binary code. Transmission: A transmission of sounds or images means that the sounds or images are communicated by any device or process whereby they are received beyond the place from which they were sent. Digital transmission: A digital transmission is a communication of sounds or images from one place to another in binary code and results in the recipient receiving an exact copy of the sounds or images that were transmitted. Streaming transmissions: These are transmissions in which the transmission is a performance but no copy is made of the work being transmitted. Downloads: These are transmissions that result in the reproduction of the work in a new copy or phonorecord. -4-

5 Interactive transmissions: An interactive transmission is one that allows a recipient to select the particular song to be transmitted or to select the order in which songs will be transmitted. Non-interactive transmissions: These are transmissions that go to the public at large and over which the recipient has no control over song selection and no advance knowledge as to which songs will be transmitted or when. Ephemeral transmissions: These are temporary copies that are made on the servers of digital music providers during the process of transmitting music over the Internet. MP3: MP3 is a set of mathematical algorithms used for compressing sound files into a format that can be downloaded or streamed over the Internet. Digital rights management: Digital rights management is a term that is used to refer to technologies that help content owners protect their content from copyright infringement by the free exchange of MP3 files without compensation to the copyright owners or from piracy. Recent relevant statutes In addition to the basic terminology, there are also two relatively recent statutes that apply to digital transmissions of music. It is important to be at least somewhat familiar with these two statutes if your client will be licensing music for use on the Internet or will be using music on the Internet. The Digital Performance Rights In Sound Recordings Act of 1995 (the DPRA) was enacted to address the new digital environment and to address concerns of copyright owners of musical compositions and of sound recordings raised by this environment and by the way new technologies were being used. The act contains provisions that changed the licensing of music in significant ways. For example, DPRA created a new digital public performance right for sound recordings. The 1976 Copyright Act does not include a performance right for sound recordings. The new public performance right included in the DPRA, however, is limited; it only applies to sound recordings that are publicly performed by means of a digital audio transmission. This right is particularly pertinent to Web casting. The DPRA also broadened the Copyright Act s compulsory license provision, for mechanical licenses, to include the reproduction and delivery of musical works by digital transmission. Under Section 115 of the Copyright Act, as long as a musical composition has been recorded and distributed in the United States, anyone can compel the song s copyright owner to license use of the song for use on phonorecords, by paying a license fee at the statutory license rate or at a negotiated rate that is less than the statutory rate. The DPRA amended Section 115 to apply the existing compulsory license provisions to downloadable music files. The DPRA refers to the transmissions covered by the compulsory license as digital phonorecord deliveries. The Digital Millennium Copyright Act of As the use of digital technology advanced and grew, it became clear that many issues raised by the use of such technology in connection with entertainment content had not been addressed by the DPRA. Also, the World Intellectual Property Organization (WIPO) entered into two treaties in 1996 the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty the terms of which needed to be implemented in the United -5-

6 States. For these and other reasons, Congress enacted the Digital Millennium Copyright Act of 1999 (DMCA). The DMCA contains many provisions that are not relevant to the topic of music licensing. However, the DMCA is relevant here because it changed some of the key provisions of the DPRA with respect to Web casting. The DMCA, for example, established that certain types of Web casts are exempt from the performance right for digital audio transmissions and it more clearly defined which types of Web casts are covered by the compulsory license provisions. Note that digital audio transmissions that are not exempt and that do not qualify for a statutory license must be licensed from the owner of the copyrights in the sound recording and that the copyright owner can freely set the amount of the license fee to be charged or can deny permission. Exempt transmissions do not require a license from the owner of the rights in the sound recording. Nonsubscription broadcast transmissions and certain other transmissions were exempted from the new digital audio performance right for sound recordings under Section 114(d)(2). Section 114 contains detailed and precise requirements that you need to review carefully if advising clients in this area. As you would imagine, nonsubscription broadcast transmissions are those that go to the public for free, such as radio broadcasts. Traditional radio stations can continue to perform copyrighted sound recordings without paying a performance royalty to the sound recording copyright owner (SRCO). However, if such stations simulcast their signal over the Internet or by satellite, the U.S. Copyright Office has ruled that they must pay performance royalties to the SRCOs for those performances. The certain other exempt transmissions include transmissions to or within a business establishment for use in the ordinary course of its business as long as the business does not retransmit the transmission outside of its premises. Compulsory statutory licenses - Other types of public performances by digital audio transmissions were not exempted but were made subject to the compulsory license provisions of Section 115, thus permitting a transmitter to compel the SRCO to grant a statutory license in some circumstances. The statutory license provisions that pertain to the digital transmission of music are found in Sections 112 and114 of the Copyright Act (17 U.S.S. Sections 112 and 114) while the rates and terms that have been adopted for the statutory licenses are set forth in Chapter 37 of the Code of Federal Regulations, Parts 260, 262, and This compulsory license right applies to subscription digital audio transmissions. Subscription digital audio transmissions are transmissions that are not freely available to the public but rather are controlled and are limited to recipients who pay a fee in order to receive the transmission. Such transmissions include, for example, those that are received by subscribers of cable radio or of satellite TV broadcasts. Under Section 114, eligible nonsubscription transmissions also qualify for the statutory license. An eligible nonsubscription transmission is defined as a noninteractive digital audio transmission that is not exempt under Section 114 but that is part of a service that provides audio programming consisting of performances of sounds recordings, including retransmissions of broadcast transmissions, if the primary purpose of the service is to provide such audio or other -6-

7 entertainment programming to the public and is not to sell, advertise, or promote particular products other than the sound recordings or other music-related events. The Section 114 statutory license covers public performances by four classes of digital music services: Eligible nonsubscription services - noninteractive Web casters and simulcasters that don t charge fees for their services; Preexisting subscription services - residential subscription services that provide music over digital cable or satellite TV; New subscription services - noninteractive Web casters and simulcasters that charge a fee; and Preexisting satellite digital audio radio services (such as SIRIUS satellite radio service). The Section 112 statutory license covers: Ephemeral reproductions made by all digital music services covered by the Section 114 license; and Certain background music services that are exempt from paying public performance royalties under Section 114. Key players involved in licensing digital transmissions of music For music licensing in general, the key players include the songwriters and music publishers who own or control the copyrights in songs, the recording companies or other owners of copyrights in sound recordings, the traditional performance rights societies (ASCAP, BMI, and SESAC), and The Harry Fox Agency, which grants mechanical licenses. Digital transmissions of music over the Internet have resulted in the creation of an important new player SoundExchange. SoundExchange - As discussed above, the DPRA and the DMCA created a new public performance right for certain digital and satellite transmissions of sound recordings. SoundExchange is a nonprofit performance rights organization that was created to collect and distribute the new revenue stream created by DPRA from such public performances. It was originally created in 2000 as a division of the Recording Industry Association of America and was spun off as an independent organization in September SoundExchange is the principal administrator of the statutory licenses under Sections 112 and 114 of the Copyright Act and collects performance royalties for SRCOs and for both featured and nonfeatured artists. It currently represents more than 500 record companies, their 3,000 labels and thousands of artists. SoundExchange licenses to those who qualify for the statutory licenses. It collects performance royalties from the statutory licensees and collects and processes all data associated with the performance of the sound recordings. It then allocates royalties for the performance of each sound recording based on all of the data collected. -7-

8 After the allocation is completed, SoundExchange distributes the SRCO s share directly to the SRCO, distributes the featured artist s share directly to the artist, and distributes the nonfeatured artists share to the American Federation of Musicians and to American Federation of Television and Radio Actors, as appropriate. It also provides detailed reports that include the titles, featured artists and royalty amounts for each of the sound recordings performed by the statutory licensees. SoundExchange does not administer royalties for interactive performances of sound recordings, such as those provided by on demand services that allow listeners to select the tracks they wish to hear or to select the order that the tracks will be played. It also does not license the making of copies by digital downloads. Rather, licenses for interactive performances and for digital downloads must be obtained directly from the respective copyright owners. SoundExchange distinguished from ASCAP, BMI, and SESAC - There has been some confusion concerning the difference between Sound-Exchange and the traditional U.S. performance rights societies. There have been three performance rights societies in the United States - ASCAP, BMI and SESAC. These societies handle licensing for music publishers and songwriters but only for performances and only for songs, not for sound recordings. They enter into performance licenses with, and collect license fees from, performance locations such as nightclubs, restaurants, and hotels, and from broadcasters, including radio and TV. They grant blanket licenses that permit the licensee to use any of the songs that are represented by the particular society and have developed special forms of licenses for online performances. Locations typically pay a flat fee while broadcasters often pay a fee that is based on a percentage of the broadcaster s advertising revenue. The societies survey the songs that are played during a particular year, allocate the total revenue collected among the songs that were performed and pay each songwriter and publisher an amount that is supposed to represent the amount that song earned in performance royalties that year. SoundExchange, on the other hand, licenses and collects performance royalties for owners of the sound recording copyright and for the featured and nonfeatured artists. It thus performs a completely different function and does not compete with ASCAP, BMI, and SESAC. In fact, a copyright owner who owns both the rights in songs and in sound recordings should consider joining one of the traditional performance rights societies and SoundExchange. SoundExchange distinguished from music publishers. Music publishers enter into contracts with songwriters to commercially exploit songs written by that songwriter. The recording artist may also be the songwriter and some recording artists own their own music publishing company. Music publishers license songs for a myriad of uses including, for example, use in recordings made by record companies, in live and recorded performances in restaurants, hotels, nightclubs, etc., and in broadcasts on TV, radio and other broadcast media, including digital media. SoundExchange does not handle these types of licenses and thus a license must still be obtained directly from the copyright owner of the song or the owner s representative, before the song is publicly performed by digital transmission over the Internet. SoundExchange distinguished from The Harry Fox Agency. The Harry Fox Agency represents music publishers and primarily issues mechanical licenses that allow record labels and their artists to reproduce songs on records in various media, such as a CD. The mechanical licenses are compulsory licenses so the fee charged for the license cannot exceed the statutory rate and the -8-

9 licenses cannot be denied. Harry Fox then pays the fees to the music publishers, who in turn pay a portion to the songwriters. Some music publishers enter into licenses directly with the record labels but most prefer to offer the licenses through Harry Fox. Harry Fox never licenses performances but it does offer reproduction licenses for digital downloads. SoundExchange does not handle licenses for digital downloads and thus does not overlap or compete with The Harry Fox Agency. Statutory licenses for digital transmissions and ephemeral copies To obtain a statutory license to publicly perform sound recordings by digital transmission or to make ephemeral copies to effectuate such transmissions, one must first file a Notice of Use with the Copyright Office to notify the SRCO. This must be filed before making the first ephemeral copy or first digital transmission of a sound recording. Also, all entities that digitally transmit sound recordings and that were in existence before April 12, 2004 must file a Notice of Use with the Copyright Office by July 1, 2004, even if it already filed a Notice of Intent with the Copyright Office. It is likely that such entities will be required to update their Notice of Use periodically, though that requirement will be in the final Notice and Recordkeeping regulations, which have not yet been issued. There is no form license or agreement issued by SoundExchange that must be completed and signed. Rather, all of the license rates and terms for the statutory licenses are included in the provisions of the Copyright Act and in the relevant regulations. After the Notice of Use has been filed, a service may begin making digital audio transmissions as long as it complies with all of the terms and conditions of the statutory license and makes the payments and files statements of account and reports of use when they are due. Note that small commercial Web casters, noncommercial Web casters and other services wishing to operate under discounted license rates and terms are required to file Notice of Election forms at specified times in order to qualify for those rates. The Copyright Office has established recordkeeping requirements for the statutory licenses. In order to comply with these requirements, a statutory license must provide to SoundExchange the following information: the name of the service making the digital transmissions; the identification of the transmission category (from 11 possible choices); the name of the featured artist; the title of the sound recording; the album title and marketing label or the International Standard Recording Code (ISRC); and the aggregate tuning hours, channel or program name and play frequency or the number of total performances. There are also transmission limits that have been established for services that operate under a statutory license. For example, such a service may not, during any three-hour period, transmit more than three different songs from one album and may not transmit more than two such songs consecutively. Further, the service may not transmit more than four different selections by the same featured recording artist or from a single boxed set of albums and may not transmit more than three of those songs consecutively. There are a number of other limitations and requirements and you should review the relevant statutes and regulations carefully before advising a client in connection with a statutory license. -9-

10 Conclusion The use of music on the Internet presents many opportunities but also many challenges. Copyright owners are searching for ways to protect their works from copyright infringement so that they can feel comfortable allowing their works to be used on the Net. Digital Rights Management is a burgeoning area with many players trying to find the right solution to protect copyrighted works from unauthorized copying and distribution. On the other side, technologies that enable or enhance the ability to infringe copyrights are also proliferating. The business of music is also growing and mutating on the Internet. Entities are experimenting with different business models to deliver music over the Internet, whether for free or on a subscription basis and whether by streaming or download. Record labels are seeking to participate in this new digital environment and are themselves experimenting with new business models and delivery methods. SoundExchange is trying to capture and distribute the new royalty streams generated by the new statutory licenses. The relevant law is also in play. New federal statutes, addressing copyright protection and digital issues, are being debated. New regulations will be issued, particularly with respect to the statutory licenses. There are numerous cases pending that concern interpretation of the relevant statutes and the lawfulness of various kinds of conduct on the Internet. From a licensing point of view, the constant change in business practices, statutes, case law and regulations make this area a moving target. As a result, this practice is both stimulating and challenging at the same time. If your clients are going to be licensing music for use on the Internet, whether as a licensor or as a licensee, a careful check must be made of the relevant authorities and most recent developments. This article first appeared in Entertainment and Sports Lawyer, Volume 22, Number 2, Summer Entertainment and Sports Lawyer is a publication of the American Bar Association s Forum on the Entertainment and Sports Industries. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. -10-