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Article: July 2015: Entertainment Litigation Update

July 01, 2015
Business Litigation Reports

How Proposed Changes at the Copyright Office Will Affect the Music Business. In February 2015, the U.S. Copyright Office released “Copyright and the Music Marketplace,” a report that details several recommendations to overhaul the current music licensing regime. The recommendations aim to modernize music licensing regulations in light of technological changes that have altered the music marketplace, such as new outlets for online streaming. The report proposes specific changes to regulations as well as measures to implement those changes. The report’s main recommendations are as follows: 

1. Extend the public performance right in sound recordings to terrestrial radio broadcasts. The Copyright Office proposes that AM/FM radio stations (“terrestrial” radio stations) pay a public performance right for playing sound recordings. This requirement would have two major consequences. First, when a song is broadcast on AM/FM radio, the performing artist and record label would be compensated; under the current regime, only the songwriter and publisher are compensated. Second, because satellite radio providers (such as Sirius) and internet radio services (such as Pandora) currently have to pay for performance rights, while terrestrial radio stations do not, all of these music platforms would compete under the same regime, changing the current competitive balance. 

2. Federalize pre-1972 sound recordings. Currently, pre-1972 sound recordings are protected only by state, rather than federal, copyright law. According to the Copyright Office, it is not always certain whether digital music providers need to pay royalties to stream pre-1972 sound recordings under state law. The Copyright Office proposes bringing all pre-1972 sound recordings completely under federal copyright protection, claiming that full federalization would “improve the certainty and consistency of copyright law.” 

3. Move to a uniform, market-based rate-setting standard. Two performance rights organizations (“PROs”)—the American Society of Composers, Authors and Publishers (“ASCAP”) and Broadcast Music Inc. (“BMI”)—control the public performance rights of over 90 percent of songs available for licensing in the U.S. These two PROs are governed by Department of Justice antitrust consent decrees, which require that ASCAP and BMI grant a license to any entity that applies for one. Most such licenses are blanket licenses, which grant performance rights to any song in the PRO’s repertoire for a flat licensing fee. Under the consent decrees, if the PRO and the licensee cannot agree on a fee, a federal court will determine a fair rate.

PROs and copyright owners contend that these court-determined rates are below true market value. Thus, the Copyright Office proposes adopting a single standard for rate-setting that would be based on fair market value—what is often referred to as the “willing buyer/willing seller” standard. Under this proposal, all rate-setting procedures would be handled by the Copyright Royalty Board (“CRB”), which would have more expertise than federal courts. However, a market-based rate-setting approach, while perhaps more favorable to PROs and copyright owners, might increase costs for online music service providers. As a result, prices for streaming music online could increase for consumers.

4. Permit collective licensing of mechanical rights. Currently, licensees must obtain mechanical licenses to reproduce and distribute musical works on a song-bysong basis. Given the needs of online music services, which make an unprecedented number of musical works available to the public, the Copyright Office proposes that mechanical rights be licensed through a collective system, whereby licensees could obtain mechanical rights through a blanket license. This recommendation would allow for online music services to obtain licenses more efficiently.

5. Allow publishers to opt out of blanket licenses and bargain for licensing deals independently. The Copyright Office proposes that music publishers be able to withdraw certain songs from blanket licenses. After opting out, these music publishers would be free to bargain for higher rates directly with service providers. However, the Copyright Office recommends that withdrawal of public performance rights be limited to interactive streaming rights for digital services (such as, Spotify). This recommendation may also result in higher costs to interactive streaming service providers, again, perhaps at the expense of higher prices to consumers.

6. Create music rights organizations (MROs) to administer mechanical and public performance rights. The Copyright Office suggests that publishers and songwriters license both public performance and mechanical rights through proposed entities called MROs. MROs would effectively act as PROs by collecting and distributing royalties. But MROs would be authorized to license both public performance rights and mechanical rights. The Copyright Office also proposes the creation of a general MRO that would maintain a “publicly accessible database of musical works represented by each MRO.” This information would include a list of musical works not represented by an MRO. By allowing licensees to potentially obtain all necessary rights from a single entity, this proposed framework might allow for greater efficiency and transparency in the licensing process.

All in all, the recommendations appear to focus on attaining greater consistency in regulation, fairer compensation for music industry players, and mechanisms for more efficient and transparent licensing. The full report from the Copyright Office can be found at: copyright-and-the-music-marketplace.pdf.