DIGITAL MUSIC STREAMING IN THE 21 ST CENTURY: THE MUSIC INDUSTRY BECOMES RADIO-ACTIVE. Kaitlyn Paradise. A Thesis Submitted to the Faculty of

Transcription

1 DIGITAL MUSIC STREAMING IN THE 21 ST CENTURY: THE MUSIC INDUSTRY BECOMES RADIO-ACTIVE by Kaitlyn Paradise A Thesis Submitted to the Faculty of The College of Business In Partial Fulfillment of the Requirements for the Degree of Master of Science Florida Atlantic University Boca Raton, FL August 2014

2 Copyright by Kaitlyn Paradise 2014 ii

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4 ACKNOWLEDGEMENTS I would like to express my heartfelt gratitude towards my committee members, Dr. Kyle Prescott and Dr. Marc Rhorer, for taking the time to enrich my education, and to my committee chair, Alejandro Sánchez-Samper, for always having time for me with my best interest at heart. Additionally, I wish to express heartfelt gratitude towards Dr. Ira Abrams, Dr. Mary Kay Boyd, Michael Zager, my loving parents and friends, and all of my coworkers at AEG Live SE, especially Scott Gartner, for the combined and continuous support, patience, and encouragement I needed to get me through. iv

5 ABSTRACT Author: Title: Institution: Thesis Advisor: Degree: Kaitlyn Paradise Digital Music Streaming in the 21 st Century: The Music Industry Becomes Radio-Active Florida Atlantic University Alejandro Sánchez-Samper Master of Science Year: 2014 Digital music streaming websites have taken over the musical landscape. While the digital music market is booming, both data and time have revealed that the current system as it exists will not provide a sustainable future for creators of content or for technology companies. Although some consumers are willing to pay for content they can access for free, many are still enjoying content without paying. Both the technology companies and creators of content have sacrificed to meet consumer demands, but the technology companies have been too willing to make creators of content be the ones paying for free. Recent legislative efforts have provided a good start to balancing a system that is clearly in distress, but there is still much be done to move the music industry forward. This paper examines the current issues facing the digital music streaming industry and several legislative and industry-prompted efforts in current discussion. v

6 DEDICATION This manuscript is dedicated to the friends and family who saw my success when I could not see it in myself. I am forever grateful.

7 DIGITAL MUSIC STREAMING IN THE 21 ST CENTURY: THE MUSIC INDUSTRY BECOMES RADIO-ACTIVE List of Tables...ix Introduction...1 A Brief History of Copyright Law...4 Copyrights Within Musical Works...4 Mechanical Royalties and the Copyright Act of Sound Recording Royalties...7 Other Issues Facing Copyright at the Turn of the Century...9 The Political Side of Music...11 The Songwriter s Equity Act...12 The RESPECT Bill Music Licensing Hearings...13 Digital Music Streaming Services...15 The Beginning of Digital Music Streaming...17 Non-Interactive Digital Music Streaming...17 Interactive Digital Music Streaming...19 Issues Affecting Digital Music Service Providers...21 The Internet Radio Fairness Act...21 Pandora Fights to Define Fair in a Free Streaming Market...23 vii

8 Issues Affecting Creators of Content...28 The Access Versus Ownership Debate...29 Apple Gets Their Piece of the Pie...31 Private Clear Channel Deals with Record Labels...32 The Cost of Free...35 The Future of Performing Rights Organizations...36 A Review of Performing Rights Organization Consent Decrees...38 A Saving Grace for Performing Rights Organizations...38 Issues Affecting Consumers...41 Creating a Prosperous Future...43 RIAA Solutions for the Music Industry...43 Conclusion...46 Appendix A. Abbreviations and Acronyms...48 References...49 viii

9 TABLES Table 1. A Breakdown of Digital Music Service Types...17 ix

10 INTRODUCTION Digital music streaming websites are taking both the music industry and the Internet by storm. The number of music streaming websites available to users is growing every day at an astronomical rate, and eventually music streaming is predicted to make the sale of digital downloads obsolete. In addition to the growing number of available streaming websites, there are new types of websites and new ways to access digital streaming websites being born into existence every day. Gone are the days of simply listening to music users now posses the ability to create a personalized and unique listening experience wherever, whenever, and however they want to listen. Consumers have made it clear that digital music streaming abilities, available at the touch of a button, are the next big thing and the music industry has no choice but to follow the demand. Due to updates in technology that make consumers demands possible, artists and songwriters have also benefitted. Artists and songwriters are now able to reach fans in ways they were never able to before, generating profits without the backing of a label or publisher, which was once only dreamed of. With a demand this strong for access to content and multiple ways to reach consumers, the technology companies, artists, songwriters, record labels, and publishers alike should be jumping for joy as they cash in checks as large as the demand itself. However, several notable streaming websites have complained that they are not able to keep enough of the profit that is being generated by traffic to their website. Digital music streaming websites are required to pay out licensing fees and the royalties that 1

11 result from the stream of copyrighted music, or content, over the Internet. Most digital music streaming websites are complaining that these rates are too high for them to ever become profitable. Some have even gone to court in an effort to lower their required royalty rates. Creators of the content being streamed, on the other hand, feel that they are getting less than what is fair market value for the licensed use of their work, often making percentage points of pennies for every stream, and sometimes even less. Why is there such a discrepancy when it is clear that the digital music industry is booming? At this moment, the question of whether digital music streaming will ever provide a profitable future for technology companies in addition to creators of content, which includes artists, songwriters, music publishers, and record labels, holds no promise of a fast answer. One of the major issues surrounding the topic of digital music streaming is that the necessary regulation for how much each party involved in digital music streaming should be compensated has not been legally set, leaving many players to fight, literally, for themselves. This has allowed the technology companies to lower the value that the industry places on those who create content, in addition to their songs. Without question, if the streaming industry continues on its current path, the digital music industry may be torn apart for good. Although the digital music streaming industry has the potential to become a highly profitable revenue stream, the monetization of digital music streaming has complicated what profits technology companies, artists, songwriters, record labels, and music publishers are entitled to; consequently, creators of content have seen their value within the music industry greatly minimized. 2

12 A BRIEF HISTORY OF COPYRIGHT LAW No discussion of digital music is complete without considering a history of copyright protection as it relates to music. Congress established the concept of copyright protection in 1787, meaning authors should be compensated for their creations in order to motivate them to keep creating. The Constitutional Provision Respecting Copyright reads, The Congress shall have the Power To promote the Progress of Science and Useful Arts, by securing for limited Times, to Authors and Inventors the exclusive Right to their respective Writing and Discoveries (U.S. Const. art. I, 8.). As explained in the Exclusive Rights in Copyrighted Works Statute (2011), the rights granted to an author through copyright include the right: (1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work; (3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; (4) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audiovisual works, to perform the copyrighted work publicly; (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly; and (6) in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission. Copyright protection is important for authors because it assures the author compensation for the use of his or her copyrighted works by others. Additionally, copyright protection backed by registration allows an author to sue for infringement, or 3

13 an illegal use of a work that occurs when the author s permission is not obtained by the end user. The public also benefits from copyright protection, as it allows and encourages new works to be created from copyrighted works, so long as the proper permission is obtained. In this way, a mutually beneficial situation exists because Federal law encourages the processes of creation and discovery. Copyright protection has become especially important in the digital age due to issues such as file sharing and illegal downloads. COPYRIGHTS WITHIN MUSICAL WORKS All recorded musical works in existence are protected by two separate copyrights. The first and oldest musical copyright protects the musical composition, which holds the basics of the song the notes, rhythms, harmonies, lyrics, etc. on a manuscript or written document. The income generated from the use of a musical composition by others, whether through streaming or through the purchase of the sheet music, generally goes to the songwriter and music publisher. In some cases, the songwriter is not always the recording artist, who is compensated separately for their contributions. The second copyright protects the sound recording that a listener hears when they listen to a song. The recording artist(s), record label, producer, and background musicians generally receive the income generated from the use of the sound recording (Brabec & Brabec, 2011). 4

14 MECHANICAL ROYALTIES AND THE COPYRIGHT ACT OF 1909 Although copyright was established in 1787, the Copyright Act of 1909 was the first act to establish copyright protection for musical compositions (Brabec & Brabec, 2011). For the first time in history, each public performance of a copyrighted musical composition or each sale of a song s sheet music would produce a royalty payment. The Copyright Act of 1909 also granted copyright protection to the musical composition written on piano rolls, which were very popular during that time (Moser & Slay, 2012). In 1909, the work must have been previous published to gain copyright protection. The Copyright Act of 1909 was also significant for music publishers because with this act came the creation of the mechanical license, an important license still used today. The Copyright Act of 1909 established that any person seeking to reproduce a musical composition is required to obtain a mechanical license from the copyright owner, usually the music publisher, before being lawfully allowed to distribute or reproduce the copyrighted work (Moser & Slay, 2012). In 1909 the mechanical royalty rate was set at 2 cents for each copy of the work. Today, that rate is set at 9.1 cents per download or 1.75 cents per minute for songs running over five minutes, whichever is greater (Brabec & Brabec, 2011). Although musical compositions were protected by copyright in 1909, sound recordings were not protected until much later. The creation of the mechanical license brought with it the need for an organization that could manage this license as it relates to public performances. Monitoring the public performance of a musical composition and collecting royalties from the users proved too difficult a task to be accomplished solely by the author of each 5

15 work. A larger entity was needed to provide these services to authors. Performing rights organizations have been established to continually meet these needs. The first performing rights organization, or PRO, was established in 1914 to solve the issues surrounding the public performance of musical compositions. The American Society for Composers, Authors, and Publishers, better known as ASCAP, was created by a group of American composers who wished to police the use of their works and ensure the payment of royalties owed to authors for the public performance of copyrighted musical compositions. ASCAP is a non-profit entity that collects and distributes royalties directly to artists and songwriters. Direct distribution is a huge benefit to artists and songwriters because no other entity can keep part or all of an artist or songwriter s profits under this distribution structure. Over 100 years later, ASCAP still exists to grant blanket licenses for use of its catalogue to entities seeking to publicly perform copyrighted musical compositions and collects and distributes royalties for the artists and songwriters who have representation in ASCAP s catalogue (Moser & Slay, 2012). ASCAP is not the only PRO in existence. The Society for European Stage Authors and Composers, or SESAC, was the second PRO to exist, starting in Initially, SESAC was only available to authors located in Europe, but it has since grown to include American authors as well. SESAC is a for-profit entity, and is the smallest of the PRO s operating in the U.S (Brabec & Brabec). Finally, Broadcast Music Incorporated, BMI, came into being in the U.S. in Initially, BMI was created due to the fact that radio broadcasters claimed ASCAP s fees were becoming too high for them to keep operating. These broadcasters joined together to stop ASCAP s rate increases (Moser & Slay, 2012). Today, BMI operates in the same fashion as ASCAP, as it is also a 6

16 non-profit entity. All three PRO s are still in operation throughout the U.S. for the advocacy of artists and songwriters. BMI is currently the largest performing rights organization in America (BMI, 2014). The Harry Fox Agency is not a performing rights organization, but acts as a third party to distribute mechanical licenses for the reproduction and distribution of musical compositions. The HFA is different from PRO s because it only distributes mechanical licenses for the purposes of reproducing and distributing copies of a musical composition; the rights granted from the HFA do not include the public performance of musical compositions (HFA, 2013b). The HFA also represents all of the PRO catalogues. The HFA charges a 6.75% commission rate to copyright owners of musical compositions, usually a music publisher, in order to issue mechanical licenses, collect royalties, and distribute these royalties appropriately (Moser & Slay, 2012). SOUND RECORDING ROYALTIES Sound recordings faced challenges until the mid part of the twentieth century. Performance royalties were only to be paid for the musical composition contained within a sound recording, and not for the sound recording itself (Spahn, 2013). In 1972, an amendment to the 1909 Copyright Act finally afforded copyright protection to sound recordings created after the amendment s effective date, on a limited basis (Moser & Slay, 2012). These limitations brought many challenges to the music industry towards the turn of the century, when the Internet phenomenon created a new outlet for music to be publicly performed. It was not until 1990 that Congress recognized that leaving the public 7

17 performance of a sound recording out of the scope of public performance rights was highly problematic concerning the growing and massively popular Internet. Congress created The Digital Performance Right in Sound Recordings Act, or DPRSRA, in 1995 to grant copyright protection for the public performance of sound recordings. This was an important step for copyright protection because the digital transmission of copyrighted sound recordings were now included in the public performance right. With this act, compensation to copyright owners for the digital transmission of sound recordings through an on-demand or subscription streaming service became mandatory (Brabec & Brabec, 2011). The U.S. Copyright Act, Title 17, Section 106 (6) reads, Subject to sections 107 through 122, the owner of copyright under this title has the exclusive rights in the case of sound recordings, to perform the copyrighted work publicly by means of digital audio transmission. The performing rights organization SoundExchange was created after the enactment of this act to issue licenses for the public performance of sound recordings and to monitor the usage of these licenses for the purpose of collecting and distributing royalties (Thomson, 2004). SoundExchange is responsible for the distribution and royalty collection of a different license from ASCAP, BMI, or SESAC SoundExchange specifically distributes statutory licenses that cover the digital performance of copyrighted sound recordings as outlined in Section 112 and 114 of Copyright Law. ASCAP, BMI, and SESAC only cover the license for the underlying musical composition. By law, SoundExchange is the only organization that is allowed to collect royalties from digital music streaming websites that stream sound recordings under the aforementioned Copyright sections (Brabec & Brabec, 2011). SoundExchange keeps 5.3% of the royalties it collects for 8

18 administrative purposes, then gives 50% of the remaining royalties to the sound recording s owner, usually the label, 45% goes to the featured recording artist, and 5% is split between all backup musicians (Peoples, 2012). PRO s, including SoundExchange, have become even more important to artists and songwriters as the music industry has transitioned into a predominately digital market. The royalties generated from the digital stream of songs has become one of the biggest sources of income for artists and songwriters as the sale of digital and physical records decline. All PRO s are essential because they keep the digital music streaming websites honest about usage they directly monitor the stream of songs, allowing PRO s to assure the artists and songwriters they represent that the royalties paid to them by digital music streaming websites, as well as others who use the work of a creator of content, are accurate. With the size and scope of the music industry today, this is a task that could not be easily managed without PRO s. Congress saw, still, the expansion and widespread use of the Internet and sought to provide authors with greater protection from users illegally acquiring their copyrighted works through file sharing networks. The Digital Millennium Copyright Act (DMCA) was brought to life three years after the DPRSRA. The DMCA contains five titles, which cover three main issues: prevention of piracy, the liability of online service providers including safe harbors, and guidelines for webcasters. These provisions have been set forth in order to make the Internet a safe place for both creators of content and for the technology companies that wish to use copyrighted content for financial gain. The DMCA also protects users by creating boundaries for the legal and digital consumption 9

19 of copyrighted music, and provides safe harbor for websites that might otherwise be held liable for infringement due to the illegal activity of its users (Moser & Slay, 2012). OTHER ISSUES FACING COPYRIGHT AT THE TURN OF THE CENTURY With the advent of the Internet came technological advances that extended to computer equipment. In the early 1990 s, consumers were able to purchase equipment that would allow them to copy works protected by copyright as many times as desired, with the end copy still exhibiting exceptional listening quality (Lamy, Duckworth, & Kennedy, 1997). This led to a decline in record sales for creators of content, as consumers were able to illegally copy albums from friends and relatives for free rather than purchase the albums from a licensed distributor. The Audio Home Recording Act of 1992 was created to establish that manufacturers distributing equipment with the ability to copy digital audiotapes also include security features that prevent users from being able to copy these digital audiotapes multiple times (Landes & Lichtman, 2003). Additionally, manufacturers of this type of equipment must pay royalties to artists and songwriters referred to as DART royalties for each piece of equipment manufactured. Manufacturers of personal computers do not have to pay DART royalties on new personal computers. DART royalties must also be paid on blank mediums that consumers use to hold copies of works, such as blank tapes or blank CD s. DART royalties were deemed necessary by the Audio Home Recording Act in order to offset any financial losses artists and songwriters would face from the illegal mass copying and distribution of their legally protected works (Landes & Lichtman, 2003). 10

20 THE POLITICAL SIDE OF MUSIC Certainly, there have been positive changes to the legislative landscape as the music industry has grown and changed. Compensation for the legal use of a work s musical composition and sound recording are now guaranteed thanks to developments in legislation. In fact, creators of content are able to receive royalties at all for the digital stream of music thanks to efforts in legislation that have brought the industry forward, and legislation that prevents the illegal use of works. Acts such as the Digital Performance Right in Sound Recordings Act have even been created to meet the needs of creators of content in an ever-changing technological landscape, while the Digital Millennium Copyright Act has provided a safe harbor for technology companies. These efforts were truly just the beginning of a much larger battle. Rising in equity with the popularity of digital music streaming websites are the issues surrounding them. Real changes need to be made to ensure that the technology companies and creators of content and their advocates are all treated fairly as the music industry moves forward into the digital age. As of right now, technology companies, which include digital music streaming websites, terrestrial radio, and others, have the upper hand within the music industry and with legislators due to their clout. The digital music streaming system is also unbalanced in favor of the technology companies, which has led to the devaluation of creators of content within the entire industry. However, creators of content are starting to be heard by legislation and possibilities for changes to the current system are in sight. 11

21 THE SONGWRITER S EQUITY ACT Rep. Doug Collins (R-GA), a member of Congress, introduced the Songwriter s Equity Act in the early part of 2014 (Christman, 2014a). If passed, the Songwriter s Equity Act would provide creators of content with more fairly based royalties for the use of their works in the digital music streaming marketplace. Specifically, the Songwriter s Equity Act would allow the Copyright Royalties Board, which determines the mechanical royalty rate, to consider other royalties when setting new royalty rates, and would allow for an increase to the current mechanical royalty rate of 9.1 cents. ASCAP writes, The Songwriter s Equity Act is an important step toward modernizing the music licensing system and leveling the playing field to ensure that songwriters, composers, and publishers are appropriately compensated for the use of their intellectual property (ASCAP, n.d.). As digital music streaming websites attract more users, the need for a fair and clearly defined royalty rate is essential. If passed, the Songwriter s Equity Act would provide fairness to creators of content, subsequently bringing value back into the goods they provide. THE RESPECT BILL Another legislative effort that has recently come to life is the RESPECT Bill. This bill was born from the fact that creators of content are no longer receiving royalties for the digital stream of their sound recordings that were made before February 15 th, The copyright law that applies to songs written prior to 1972 is different from today s songs, and digital music streaming websites have translated the copyright law surrounding these recordings to mean that a license is not needed for the public 12

22 performance of the sound recording for songs falling into this category. Paying out royalties to these creators of content for use of the sound recording, therefore, is not mandatory. Organizations such as SoundExchange, on the other hand, view these recordings as essential to the development of music as a whole, citing that these recordings represent the hitmakers of Motown, the legends of Jazz & Blues, and the people who gave birth to Rock & Roll (Project72, n.d.). SoundExchange also estimates that $60 million has been lost to the industry just in the year 2013, and half of those dollars should have gone directly to the respective artists and songwriters who created those works (Project72, n.d.). The good news for these creators of content is that this bill has more of a likelihood of becoming a reality due to the fact that it addresses only one concern in the music industry, instead of trying to conquer multiple issues (Peoples, 2014b). Although there are efforts in place to establish fairness within the music industry, real legislation takes time to develop and to be passed. This process can take years to get underway, and each step that a new legislative effort must go through to be passed presents a threat to the possibility of that legislation becoming a reality (Spahn, 2013). Furthermore, it is not usually one party that is able to reap the benefits of legislation, but rather a compromise over what each party believes should happen. Without a doubt, the fact that Congress is starting to open its eyes to the issues that plague the music industry today is promising but these efforts only scratch the surface of the changes that need to be in place for creators of content to thrive in the digital music streaming marketplace. 13

23 2014 MUSIC LICENSING HEARINGS It has become apparent that Congress is willing to take the issues within the music industry seriously enough to start affecting change. June 10 th, 2014 marked the first of two hearings set to take place regarding the current state of music licensing. Several key players in the music industry, such as Neil Portnow, President and Chief Executive Officer of the Recording Academy, David Israelite, President and Chief Executive Officer of the National Music Publishers Association, and Michael O Neill, Chief Executive Officer of BMI were present to tell their sides of the story. The topics at hand included potential changes to the current licensing system, how and when each party expected these changes to occur, and what benefit each of these proposed changes would have for the future of the music industry as a whole. Specific topics included the Songwriter s Equity Act, the RESPECT Bill, and terrestrial radio, among other topics (Peoples, 2014c). Mr. Portnow, Mr. Israelite, Mr. O Neill, and Mr. Lee Thomas Miller, songwriter and President of the Nashville Songwriter s Association International, all expressed to Congress the dire situation facing creators of content today. Each representative also shared with the U.S. Judiciary system just how imperative it is that changes occur quickly in order to keep the music business thriving. Mr. Portnow said in his opening argument, We are not asking for special treatment. We are simply asking for what is fair. Fair market pay, for all music creators, across all platforms. A simple concept. A single bill. A just framework for music licensing (USHR02: Music Licensing under Title 17 part one, 2014). Despite several counterarguments from technology company executives such as Mr. Lee Knife of the Digital Media Association on the rise in royalty payouts creators of 14

24 content have seen over time, Congress appeared to be interested this time in hearing from those who represent the creators that copyright law was created to protect. The next hearing will certainly be telling as to whom Congress is listening to (Peoples, 2014c). 15

25 DIGITAL MUSIC STREAMING SERVICES The later part of the 20 th century saw some very important developments in copyright law with respect to music streaming over the Internet, including the creation of PRO s, and many changes are clearly still ahead. Much of the issue surrounding today s digital music streaming debacle is based on the necessary licensing of copyrighted musical compositions and sound recordings so that songs may be legally broadcasted. To understand why updates are so important to the digital music industry as it continues to develop its online market, an understanding of the role that copyright plays in digital music streaming must exist. Today, there are several different types of digital music streaming available to users. The most basic type is referred to as non-interactive, which applies to both Internet and Satellite radio only, when speaking digitally, although this discussion focuses solely on digital music streaming via an internet connection. There are even more ways that a user can stream music in an interactive setting, as indicated in Table 1 below. A brief overview of music licensing as it pertains to the digital world follows. 16

26 Table 1. A Breakdown of Digital Music Service Types Service Type Paid Download Free noninteractive streaming with ads Interactive streaming Digital Satellite Radio Interactive Streaming with Tethered Downloads Description Consumer pays to download a song o album; unlimited listening Consumer can listen to choice of stations with ad interruptions; no paid subscription required Consumer can listen to choice of stations or artists without ads; paid subscription required Consumer can listen to choice of stations anywhere at any time; paid subscription required Consumer can listen to choice of stations or artists without ads or may download content; paid subscription required; downloads disappear when payment stops (HFA, 2013a) Required Licenses Service Example Mechanical license, paid by the consumer Blanket performance right for musical composition; sound recording performance right Blanket performance right for musical composition; sound recording performance right; mechanical license paid by service provider Blanket performance right for musical composition; sound recording performance right; mechanical license paid by service provider Blanket performance right for musical composition; sound recording performance right; mechanical license paid by service provider (Donnelly, Aguirre, Munoz, and Sparkler, 2014) 17 itunes Pandora (free subscription only; paid subscription eliminates ad interruptions) Spotify (paid subscription only; free service has ad interruptions) Sirius XM Radio Spotify Mobile (paid subscription) Download Abilities? Yes No Yes (paid and mobile subscriptions only; downloads disappear when payment stops) No Yes (paid and mobile subscriptions only; downloads disappear when payment stops)

27 THE BEGINNING OF DIGITAL MUSIC STREAMING The first digital radio platform to exist was satellite radio, which has its beginnings in the early 1990 s. The first satellite radio company to exist was XM Satellite Radio, followed quickly by Sirius Satellite Radio. Satellite radio offers consumers channels to choose from much like terrestrial radio, such as a news channel or a genrespecific channel; unlike terrestrial radio, a user can choose from over 150 stations. Furthermore, these stations travel with the user and can be heard clearly at any location in the U.S., as the stream of satellite radio is connected to a satellite orbiting above Earth (Frenzel, 2012). In 2008, the two existing satellite radio companies merged to form Sirius XM Radio. Satellite radio is perhaps most known for its presence as an added bonus feature found in many new cars (Reuters, 2010). Satellite radio has become an important part of the access versus ownership of music debate due to its presence in new cars, making access to music instant and available at any place, anytime. The presence of satellite radio in new vehicles has led to over 25 million paying subscribers for digital music (SiriusXM, 2014). NON-INTERACTIVE DIGITAL MUSIC STREAMING Thus far in the development of the digital music streaming industry, noninteractive streaming seems to be the most preferred among users (Holmes, 2014). As previously mentioned, there are two copyrights involved in the stream of each song, regardless of whether the stream is played under an interactive or non-interactive setting. The first copyright protects the musical composition, and the second protects the actual 18

28 sound recording that the user hears when the song is streamed. Non-interactive streaming relies on temporary copies of songs that are stored as ephemeral copies on the website s server. This allows one song to stream as the next song to be streamed is loading. This type of streaming also prevents users from being able to illegally duplicate the song onto their computer or other device at any point during the stream (Donnelly et al., 2014). When a digital music streaming website wants to add a song to their noninteractive streaming catalogue, they must obtain two licenses. First, a license to be able to legally and publicly perform the musical composition on a digital platform, which is issued by the PRO representing that particular song, is required. PRO s generally award digital music streaming websites a blanket performance license for use of any song contained in their catalogue for a specific amount of time. Also required is a license to have the ability to legally and publicly perform the sound recording on a digital platform. SoundExchange issues this license. Both PRO s and SoundExchange pay royalties to the proper parties for the monitored usage of licensed works, based on the number of streams each song generates on a particular digital music streaming website (Donnelly et al., 2014). Spotify works a little differently, as it pays royalties based on an artist or songwriter s percentage of total plays rather than on a per-stream basis. Thanks to this model, creators of content have seen a gradual increase in Spotify royalty rates over time (Spotify, 2013). An artist or songwriter must reach a minimum number of plays for their works in order to be compensated (Donnelly et al., 2014). A user does not need to pay for an ad-supported non-interactive streaming subscription; therefore, the user does not have as many capabilities as they would with a 19

29 paid subscription. The non-interactive streaming system follows the same skeleton as terrestrial or AM/FM radio a user may pick a specific station based on an artist or genre, but the user is not able to call upon a specific song or artist and have their choice(s) played on demand. A subscription fee is required by most digital music streaming websites to be able to stream songs on-demand. INTERACTIVE DIGITAL MUSIC STREAMING Although based around the same idea as non-interactive streaming, interactive or on-demand streaming works a little differently. There are several different types of interactive streaming, but this paper focuses on on-demand streaming without downloading only. In an interactive streaming setting, a user may call upon any song or artist in the catalogue at will and immediately hear the selection. Unlike non-interactive streaming, the user is in complete control and can determine which song or artists they want to hear next. Because of the way this system works, the user is required to maintain a paid subscription with a digital streaming service in order to have access to this type of streaming, without ad interruptions. Three licenses go into the play of a song over an interactive streaming site. A digital music streaming website must pay the licensing fees for the public performance of the musical composition and for the public performance of the sound recording, just like in a non-interactive streaming setting. However, the streaming website must additionally pay for a license to digitally reproduce the musical composition, also known as a mechanical license. When a digital music streaming websites wants to add a song to their 20

30 interactive catalogue, a mechanical license must be supplied by the Harry Fox Agency or by the copyright owner of the musical composition (Donnelly et al., 2014). The difference between non-interactive streaming and interactive streaming is that a song is reproduced when a user demands the song, hence the need for a mechanical license for the reproduction of the musical composition. Due to the fact that the user has no knowledge of the song that will follow in a non-interactive setting, an ephemeral copy suffices. For interactive streaming, the entire catalogue needs to be able to be accessed immediately, which makes a mechanical license a necessary component of this type of streaming. Digital music streaming is a complicated process, but it has become an easy service for users to access when and where they want. Artists are therefore available the instant a user wants access to them, which has pushed the music industry to develop a new market and expand upon current revenue possibilities. Thanks to the Internet, creators of content and fans are able to connect in ways that were not possible in the past, leading to increased listening time by users. Creators of content and technology companies should be cashing in on increased listening and their good fortune yet the many issues currently surrounding the digital stream of music means the music industry is in a troubling state of despair. 21

31 ISSUES AFFECTING DIGITAL MUSIC SERVICE PROVIDERS Although the technology companies represent a larger entity within the music industry that hold more clout than creators of content, digital music streaming websites and terrestrial radio alike are facing their own challenges. Many digital music streaming websites have yet to become financially successful businesses, despite their immense popularity with users. Pandora has been at the forefront of the issues that plague technology companies as the music industry changes to a digital market. Pandora has even pushed for legislative action to try and change the distribution structure of royalties, affording them greater compensation to cover the overhead costs they have struggled to pay. THE INTERNET RADIO FAIRNESS ACT Since Pandora cut the ribbon of its digital open banner in 2000, the company has fought left and right to keep as much revenue as possible. Pandora has been so public about its financial battle that it is doubtful that any consumer who knows about Pandora does not also know how hard it has fought to become profitable. The Internet Radio Fairness Act, heavily backed by Pandora as well as others technology companies, was introduced to Congress in 2012 to create fairness within the digital music marketplace. In truth, Pandora backed this act with the intention of making it legal to pay creators of content less of its revenue, putting more revenue into its pocket to create profitability. In the end, the Internet Radio Fairness Act was not passed, but it did reveal that certain 22

32 technology companies, including Pandora, are more interested in their own profits than in helping creators of content keep the music business alive. The Internet Radio Fairness Act of 2012 stated that its purpose was, To adopt fair standards and procedures by which determinations of Copyright Royalty Judges are made with respect to webcasting, and for other purposes. The IRFA was founded under the idea that the licensing fees that digital music streaming websites are required to pay in order to stream music have translated into a reality where technology companies are not able to exist profitably (Lewis, 2012). The IRFA sought to create an even platform between the royalty rates that digital music streaming websites pay out to creators of content and the royalty rates that terrestrial radio stations must pay to music publishers, which are traditionally very low due to the promotional value of terrestrial radio play. At its core, the IRFA was created to financially benefit technology companies such as Pandora, leaving creators of content with, literally, pennies for use of their works. MusicFIRST is an open group of music lovers that has been dedicated to the fair pay of creators of content since its start in 2007 (musicfirst, 2014a). MusicFIRST discusses the math regarding the proposed biased bill, stating that 85% of the profits that go to artists and songwriters would have been cut if the IRFA had passed (musicfirst, 2014b). Clearly, the money that would no longer be paid out to artists and songwriters would instead stay with technology companies, which hardly seems fair. This would certainly solve the technology companies profitability issues, but it would do so at the expense of creators of content. That puts artists and songwriters out of money, and out of the inspiration that the Copyright Act sites as being necessary to promote the continuous creation of arts (U.S. Const. art I, 8). 23

33 Luckily for creators of content, Congress saw through any mention of the word fair by technology companies to the true nature of the IRFA, and the act was not passed. One article notes of the hearings, Lawmakers criticized the National Association of Broadcasters representative for seeking lower online royalty rates even though terrestrial radio stations do not pay sound recording owners a performance royalty (Peoples, 2013). The IRFA quickly faced its demise and was even abandoned by Pandora due to its failure (Peoples, 2013). Efforts to undercut creators of content through legislation made it clear that technology companies have no interest in the success of the creators of content that they take from. Holding more revenue when creators of content are already seeing so little payouts reminded the public of the true interest of big business itself. PANDORA FIGHTS TO DEFINE FAIR IN A FREE STREAMING MARKET In 2012, Pandora had enough of its fight for prosperity and went so far as to file a lawsuit against performing rights organization ASCAP. In filing suit, Pandora s goal was to establish a royalty rate that would be more fairly based for their services. Pandora believed it had been overpaying the artists and songwriters represented by ASCAP for use of its catalogue within Pandora s streaming catalogue, which includes songs streamed for free. If the court battle turned out to be successful, Pandora believed it could keep more revenue and finally become a profitable company. At the start of the infamous 2012 trial, Pandora s chief executive at the time, Joseph Kennedy, testified that Pandora was to pay artists and labels almost $250 million this year that s more than 50% of the company s revenue (Knopper, 2012). That number is staggering, but it does not translate as clearly as Kennedy makes it seem. The 24

34 money that is paid out by digital music streaming websites must be split in a number of different ways. So, Pandora is not paying out to artists and record labels directly as one might interpret from Kennedy s statement. While Pandora may actually be paying out 50% of its revenue, by the time any profit reaches an artist or songwriter, it has been divided multiple times, often translating to a royalty rate of fractions of one penny per stream (Peoples, 2012). Furthermore, the 50% of revenue that Pandora claims to be paying out pales in comparison to the approximately 70% of gross revenue that Spotify pays out to creators of content each year (Spotify, 2013). Keeping in mind that PRO s are paid for both the free and paid stream of music in a digital music streaming setting, the breakdown of where this revenue goes is as follows. Any group that has administered publishing rights to Pandora is entitled to royalties that are earned based on the number of songs streamed and the number of times each songs was streamed, per each PRO s catalogue. Pandora keeps what is not paid out to performing rights organizations and the Harry Fox Agency. Once the profit is distributed to these three PRO s and the HFA an administrative fee is kept to keep the PRO s functioning, and a fee is kept by the HFA. The remaining profits are then distributed out to the proper creators of content. The division of which specific creators of content get what, at this point in the division process, is not an even percentage; cite the previous breakdown of how SoundExchange divides royalties paid to the various creators of content. Still, Pandora believed the rate it was required to pay ASCAP for use of its catalogue was too high. The motivation behind Pandora s decision to target ASCAP in its lawsuit was questionable. Pandora was seeking to have its required royalty rate for publishers match 25

35 that of terrestrial radio, which is currently set at 1.7% for the use of catalogued songs (Sisario, 2014b). In 2013, Pandora paid only 4% of its revenue to publishers, of which, ASCAP only saw 1.85% (Sisario, 2014a). That means ASCAP, and thus the artists and songwriters it represents, are receiving crumbs. Pandora s claim seems outrageous due to the fact that, in any form of a digital music subscription, Pandora s programming does not provide users with the same overall content format as AM/FM radio. Terrestrial radio has DJ s with daily talk shows in between the play of songs, news features, weather, traffic, and other features that Pandora simply does not offer. Claiming that free digital music streaming is the same as terrestrial radio because it is free to users seems to be another way to undermine an already distressed portion of the music industry. ASCAP s goal for the lawsuit s outcome was for artists and songwriters to see a higher licensing payout to match the success of digital streaming websites and to more fairly compensate artists and songwriters with the decline of downloads. Due to the decline in downloads and the rise of digital music streaming, artists and songwriters will soon begin to see digital streaming royalties as their main source of income. As the digital market continues its expansion, it will become even more important that artists and songwriters are more fairly compensated. The president of the National Music Publisher s Association, David Israelite, has said of the suit, It s outrageous Pandora would try to reduce the already nominal amount they pay songwriters and music publishers, when Pandora s business model is based entirely on the creative contributions of those songwriters (Sisario, 2012). By choosing to pay songwriters what is less than a fair rate, ASCAP argued that Pandora was devaluing the role that songwriters and other artists play in the music industry, and 26

36 especially in Pandora s success as a household name. Certainly, Pandora could find a way to balance the monetization of digital music streaming with their overhead costs without de-valuing the parties it takes from, although that was not what Pandora chose to do. Unfortunately for ASCAP, Judge Denise L. Cote sided with Pandora in her March 2014 ruling. Yet the ruling did not truly play out in any particular party s favor. Pandora is still required to pay out the same 1.85% of revenue to ASCAP that it was paying before the suit. ASCAP, on the other hand, will not see a gradual rate increase in Pandora s payout over time, as it desired (Sisario, 2014b). This case could have set a benchmark for the word fair as it pertains to digital streaming rates paid to music publishers, adding even a little value to work that creators of content do; instead, the only benefit that will come out of the case is that Pandora and ASCAP will not be able to fight as much over royalties. The issue regarding Pandora s continuous battle to become profitable is not the fact that Pandora and other digital music streaming websites are attempting to become profitable; the issue is that these companies have attempted to create profitability at the expense of the creators of content they exploit. Like Pandora, Spotify has yet to become a profitable digital music streaming website, yet the company has not been at the forefront of efforts to make itself profitable at the expense of creators of content. After review, it seems that all efforts by Pandora to become profitable have attempted to take profit away from the creators of content whom Pandora and other digital music streaming websites rely on to exist in the first place. 27

37 Financially undercutting creators of content is not the only way that Pandora could eventually become a profitable digital music streaming website. Pandora opened in 2000, yet it has not considered raising the rates it charges paying subscribers until this year, 2014 (Pagliery, 2014). Instead, it has sought other ways so that consumers are not inconvenienced by Pandora s attempts to break a profit. Although Pandora is the most popular digital music streaming website and a potentially strong revenue stream for creators of content, each effort to lower royalty rate payouts puts Pandora in a bad light. Pandora s efforts have in part left a bad taste in the mouths of certain music industry members, including certain artists and songwriters, especially considering creators of content have other battles to face within the changing landscape. The irony of the situation is that, for all of their efforts to take revenue away from creators of content, the technology companies still are not able to profit. But to be fair, if digital music streaming websites are not able to eventually become profitable, creators of content may have bigger issues to contend with, such as what their next sustainable revenue stream will be. 28