As Spotify prepares to go public later this year, the company faces a $1.6 billion lawsuit. The suit alleges that Spotify is streaming such hits as Tom Petty’s “Free Fallin’,” the Doors’ “Light My Fire,” and tens of thousands of other songs without obtaining the necessary licenses and compensating copyright holders. Spotify is not the only target. Apple Music and other streaming services have also been hit with copyright infringement lawsuits.
The basic problem is that Spotify and other streaming services are trying to license music using a set of arcane procedures and institutions that, in some cases, haven’t developed in a century, to use on a platform that didn’t exist even a few years ago. Given that streaming services now account for more than 60 percent of music revenues and digital downloads for another 20 percent, the fit between the world of music licensing and the market will grow increasingly worse.
While the music distribution system has grown more competitive and changed dramatically with the introduction of new technologies, the music licensing system hasn’t kept pace. Using any piece of music or recording requires obtaining multiple licenses, each of which has its own rules. Some licenses are compulsory, some not. Most royalty rates are set in administrative or judicial proceedings. Some are established by direct negotiation between rights holders and licensees.
For example, Spotify and other “interactive” streaming services must obtain licenses to sound recording and performance rights, as well as “mechanical licenses” — at the center of the recent spate of lawsuits — in order to stream a song legally.
Sound recording rights refer to the original recording and are generally owned by record labels or recording artists. Spotify and other “interactive” distributors negotiate directly with the rights holders to obtain these licenses. For other types of distributors, such as satellite radio and noninteractive streaming services like Pandora, rates for these rights are established by the Copyright Royalty Board (CRB), and the licenses are compulsory: The rights owners cannot refuse a licensing request.
Performance rights are owned by songwriters or music publishers and cover the right to perform a song publicly, which includes streaming it. Rates for these licenses are largely determined by quasi-regulatory proceedings at the supervising court: the U.S. District Court for the Southern District of New York. This arrangement is due to the 1940s settlements of antitrust suits against the two large “performing rights organizations” (PROs) — ASCAP and BMI — that represent the songwriters and publishers. Rates for music licensed by other PROs — the Society of European Stage Authors and Composers or Global Music Rights — are determined in the market.
Finally, mechanical rights — the rights at issue in the Spotify and other lawsuits — include the right to reproduce and distribute copyrighted songs through permanent digital downloads, interactive streams, or other media. Mechanical licenses are compulsory, and their rates are determined in CRB proceedings.
While it is difficult to understand the full details of this system, it is easy to understand that it is a mess. The Music Modernization Act (MMA) — recently introduced in the House by Rep. Doug Collins, R-Ga., and in the Senate by Sen. Orin Hatch, R-Utah — is intended to solve the immediate problem, which involves nonpayment of royalties for mechanical rights. The bill has received widespread support from most parts of the industry, including music publishers and songwriters, who own and license these mechanical rights, and digital interactive streaming services, who purchase the licenses.
Ameliorating the nonpayment problem, as the MMA aims to do, would be an improvement over the status quo.
However, the MMA reinforces many of the long-standing aspects of music licensing that hinder competition: compulsory licenses; blanket licensing by a music collective; and regulated rates by the CRB. It does little to create a more competitive licensing regime with more direct negotiation between rights holders and licensees, which should be the long-run goal. This is indeed the same old song.
This goal of more competition is obtainable. Streaming services already negotiate directly for sound recording rights, suggesting that direct negotiation could also work for other rights, including the mechanical rights that are the subject of the MMA.
A major barrier to the emergence of more competition is the lack of a reliable, easily accessible database that would match songs to owners of the various rights. The MMA addresses this issue, but in a way that raises multiple questions about whether the system will be flexible enough to promote innovation in the licensing system and adapt to changes in the industry over time.
Major Questions
Should there be a single licensing collective?
Central to the MMA is a Musical Licensing Collective, which would be designated by the Register of Copyrights. The act requires that the MLC be a nonprofit. It would be governed by a board consisting primarily of music publishers plus a few songwriters. Digital music providers, who would not be on the board, would be assessed a fee to support the MLC’s operations.
The MLC would be empowered to grant blanket mechanical licenses for interactive streaming or digital downloads of musical works. It would be responsible for collecting royalty payments from music services and distributing those payments to songwriters and publishers.
Would such a monopoly collective have too much market power? The MLC would perform the same functions that performing rights organizations currently perform with respect to public performance rights for musical works. But these PROs — ASCAP, BMI, SESAC and GMR — compete with each other. New PROs can and do enter this market.
The MLC would also perform the functions with respect to mechanical licenses that firms like The Harry Fox Agency, Music Reports Inc., and newer companies, such as Audiam and Loudr, already do. Would these companies be driven out by the MLC?
The litigation resulting from nonpayment of royalties suggests dissatisfaction with the way this function is now being performed. However, there is no reason to believe that a government-certified nonprofit organization, facing no competition, would perform better.
In the absence of alternatives, the quality of service to the publishers and songwriters is likely to suffer. The act envisions a process for reviewing the MLC’s performance every five years and possibly designating a new MLC, but this represents a limited form of competition and in practice may be difficult to implement.
Should there be a single database?
The MLC also would be charged with creating and managing a database of mechanical rights. A music database is a potentially pro-competitive outcome of the MMA. Accurate and easily obtainable information on who owns what is a necessary precondition for a more competitive licensing regime with more direct bargaining between rights holders and licensees. However, combining the database with the other functions of the MLC would add to its market power.
Creating a useful database may require a push from the government, such as is provided in the MMA. However, a number of nongovernmental groups are already working on this problem. The Open Music Initiative — a venture of the Berklee College of Music, the MIT Media Lab and others — is developing an open source protocol for identifying music rights holders using blockchain technology.[1] Others, such as Dot Blockchain Music, are developing music rights management systems based on blockchain.[2] SoundExchange has put together a database of the songs whose royalties are being held in escrow by the Copyright Office because the licensee could not identify who to pay.[3] They will make the database available to publishers for free.
The danger is that a government-sanctioned effort would crowd out these private efforts and eliminate competition between various databases and database technologies.[4] Ultimately, without competition, the MLC is more likely to settle on an inferior technology.
This discussion raises the question of whether the economies of scale in maintaining a music database are large enough that it should be considered a natural monopoly. If so, we might be less worried about the MLC driving out competitors. However, we should still be concerned about the process of gaining a monopoly position through a government certification process rather than market competition on the merits. The presence of a number of private sector entities working in this area suggests that competition — either within a multifirm market, or as competition for the market — would produce good results.
Should the licensing function and the database function be combined in a single entity?
Even if policymakers determine that the government should provide assistance in some form to the creation of a music rights database, it doesn’t follow that the database function should be combined with the license administration function. And even if the database were a monopoly, the licensing function, which includes administering payments to rights holders, could and probably should be competitive. Entities that perform that function — such as ASCAP and BMI — are agents of the publishers and songwriters, who would benefit from competition for their business.
Under the MMA structure, it’s not clear if publishers or songwriters would be able to withdraw from the MLC and bargain directly with the streaming services (as the publishers had wanted to be able to do with the PROs). The existence of the compulsory license would make that difficult.
Should a database also include other rights?
The MMA envisions a database operated by the MLC, which presumably is only concerned with mechanical licenses. If the MLC’s database becomes the definitive database, shouldn’t it also include information on other rights, such as performance and sound recording rights? Wouldn’t a comprehensive database increase licensing efficiency? Admittedly, a more comprehensive database would be more difficult to assemble, since it would require data from a much broader scope of entities.
The Same Old Song
Whenever an opportunity for pro-competitive reform of music licensing arises, policymakers seem to revert to the traditional regulatory model that discourages competition. They never miss an opportunity … to miss an opportunity. The MMA — with its reliance on compulsory licensing, blanket licensing by a marketing collective, and regulated rates — is the latest of several recent examples.
Another example involves ASCAP and BMI, which have operated since 1941 under antitrust consent decrees that encourage blanket licensing of their entire catalogues and provide for regulated rates by the antitrust court. But music publishers now want the ability to partially withdraw their catalogues from the PROs in order to negotiate directly with the new streaming music platforms. With that aim, the publishers initiated a review by the Antitrust Division of the U.S. Department of Justice. The division concluded in 2016 that it would not seek to modify the decrees to permit partial withdrawal. This would have been an opportunity to encourage a more competitive market, with more direct bargaining between rights holders and distributors.
Yet another example involves the payment of royalties by terrestrial radio. Unlike every other music platform, old-fashioned terrestrial radio stations — by statute — pay no royalties to record companies on the theory that radio stations provide a promotional service. Some in Congress are attempting to do away with this zero price rule. But rather than allowing market forces to determine the royalty for radio play, the Fair Play Fair Pay Act proposes to incorporate radio into the current regulatory system with CRB-determined royalties.
The current highly regulated system for licensing music is largely an artifact of the analog era of music distribution and performance. The digital technologies now available make it possible for competition to replace much of the traditional regulatory structure for music licensing and rate determination. Unfortunately, this won’t happen until lawmakers sing a different song. The tune and lyrics ought not to be hard to learn; after all, the Congress after many years endorsed the flexible markets that competitive auctions have brought for wireless spectrum usage. Perhaps the Congress just needs to sing that song in a different key.
[1] http://open-music.org/blog/2018/1/8/blockchain-and-the-music-industry-turning-pennies-into-dollars
[2] See Bill Rosenblatt, Dot Blockchain Media Makes Blockchain plus Watermarking a Reality, Jan. 24, 2018 at https://copyrightandtechnology.com/2018/01/24/dot-blockchain-media-makes-blockchain-plus-watermarking-a-reality/
[3] Searching for Unclaimed Royalties is About to Get Easier for music Publishers with New SXWorks Database, 12/14/207 at https://www.billboard.com/articles/business/8070540/soundexchange-sxworks-searchable-database-copyright-office-nois
[4] See Bill Rosenblatt, Music Modernization Act Proposes Single Solution to Mechanical Licensing Problem, Dec. 20, 2017 at https://copyrightandtechnology.com/2017/12/30/music-modernization-act-proposes-single-solution-to-mechanical-licensing-problem/
