Cary Sherman on Section 115
p2pnet.net News:- March 11 was the date of the Subcommittee on Courts, the Internet, and Intellectual Property Oversight hearing on Section 115 of the Copyright Act- “Scope of exclusive rights in nondramatic musical works: Compulsory license for making and distributing phonorecords.”
Making sure everything went smoothly was, of course, chairman F. James Sensenbrenner, Jr, a dear friend of Hollywood and the entertainment arts whom the Webcaster Alliance claims is “abusing his power for the benefit of the Recording Industry”.
Cary – that’s Cary Sherman, president of the RIAA – was there to profer his thoughts and below is a complete and unexpurgated rendering of his ‘evidence’.
Wiping a tear from his eye, he alluded to “the tremendous pain that piracy has inflicted on the whole music industry,” the falling record sales that are “depriving the public of creative new music” because the Big Five “have been forced to slash their artist rosters and support for new artists” and, cribbing from Jack Valenti’s tried-and-trusted ‘injured workers’ script, the “thousands of jobs” lost due to “retail store closings and record company retrenchment”.
Music publishers and songwriters feel this pain too, he said – although not as badly “due to the performance and other revenue streams they receive”.
He didn’t say if by ‘pirates’ he meant organized criminal counterfeiters, or the ordinary people his organization routinely sues as a means of educating the public that buying record label ‘product’ is the only intelligent way to go.
Now read on >>>>>>>>>>>>>>>
I am Cary Sherman, President of the Recording Industry Association of America (”RIAA”), and I am grateful for the opportunity to present our views concerning the operation of the mechanical compulsory license provided by Section 115 of the Copyright Act. I would like to begin by thanking the Subcommittee, under the leadership of Chairman Smith and Ranking Minority Member Berman, for focusing its attention on the arcane but important subject of mechanical licensing of musical works.
As you probably know, RIAA is the trade group that represents the U.S. recording industry. Its member record companies create, manufacture or distribute approximately 90% of all legitimate sound recordings produced and sold in the United States and comprise the most vibrant national music industry in the world. As such, we have somewhat mixed feelings about Section 115. On the one hand, RIAA’s members have historically obtained the vast majority of mechanical licenses. On the other hand, as creators, we respect the rights of songwriters and other creators to exercise control over, and receive fair compensation for, use of their creative works. We do not in principle favor compulsory licensing, although after nearly a century of compulsory mechanical licensing, it is so woven into the fabric of the music publishing industry that it is difficult to contemplate the music business without it.
Record companies have had a long, broad-based business relationship with the owners of musical work copyrights, based on Section 115. That relationship has generally been successful for both the music industry and consumers. However, that relationship has not been without rough spots, and we are in a rough spot now. This afternoon I will describe some problems that we are presently experiencing with the operation of the mechanical licensing system that are affecting our ability to bring consumers exciting new formats for the music they enjoy. We’re hopeful that with your encouragement we will be able to resolve our differences with the publishers concerning these issues, as a business matter, in the marketplace. But presently, we are not making much progress. Congress could facilitate resolution of these issues by extending to physical product mechanical license negotiations the antitrust exemption that section 115 already provides for negotiations concerning downloads – as the House has voted to do in H.R. 1417 (the CARP reform bill). However, the antitrust exemption is not a complete solution to the present problems in the mechanical licensing system, so we can’t rule out the possibility that it might ultimately be helpful to do something more to address some of these issues legislatively or through Copyright Office rulemaking.
Background
It might be helpful if I began with some background concerning the compulsory mechanical license. Compulsory licensing of “mechanical” reproductions of musical works – that is, reproductions of sound recordings of musical works – has been part of U.S. copyright law since 1909, when Congress extended the rights of music publishers to mechanical reproductions. The recorded music business was in its infancy in 1909, so the compulsory license has provided the framework for the relationship between the recording and music publishing industries since the very beginning.
Section 115 continues the basic structure of the 1909 Act compulsory license. In contrast to later statutory licenses and the practice in many foreign markets, Section 115 requires copyright users to license every individual work by following cumbersome procedures. The regulations provide even more cumbersome procedures for reporting usage information. Because the official procedures are so cumbersome, the marketplace long ago adopted workarounds. For example, the National Music Publishers’ Association’s subsidiary The Harry Fox Agency and others offer a simpler process for obtaining and reporting usage under mechanical licenses of essentially statutory scope. Even with these workarounds, record companies have borne a very large mechanical license administrative burden, but the system has generally worked.
In addition, current Section 115 regulations provide for a per-unit penny-rate royalty set for long periods of time. As I describe below, that rigid structure has not adapted well to new technologies in the current dynamic marketplace. A percentage royalty increasingly looks like a better way of addressing new consumer products and services, and greater short term flexibility to respond to market conditions would improve the mechanical licensing system.
Mechanical Licensing Issues Are Impeding Introduction of New Products and Services
Anyone who has read the newspapers in the last several years has heard about the tremendous pain that piracy has inflicted on the whole music industry. Sales of recorded music products have declined some 25% over the past three years, depriving the public of creative new music as record companies have been forced to slash their artist rosters and support for new artists, as well as costing thousands of jobs due to retail store closings and record company retrenchment. Our colleagues the music publishers and songwriters feel this pain too, although less acutely due to the performance and other revenue streams they receive.
We are working hard to lure customers back through a range of exciting new consumer product and service offerings. These include physical discs (we call them “multisession discs”) that can be played on computers, SACD and DVD players, as well as CD players; computers and portable players preloaded with a broad array of music that consumers can “unlock” on a per-tune basis or as part of a subscription service; CDs and DVDs with extra tracks or even albums that consumers can buy, or keys to extra content that consumers can download from the Internet; and downloads and physical products with digital rights management systems that protect artists’ rights while allowing users to make a limited number of personal use copies. We’re also trying to develop new revenue streams by, for example, licensing master ring tones for use on cellphones.
It is important that mechanical licenses be as available for these new offerings as they always have been for more traditional offerings. Toward that end, we have tried hard to work with publishers to keep them abreast of these offerings and work out any issues. However, disagreements concerning the application of the Section 115 license, and the inflexibility of the per-unit statutory royalty set for a 10 year period (in contrast to a percentage royalty) are impeding the introduction of these offerings in the U.S. By contrast, in other countries, mechanical royalty rates are usually based on a percentage of the sales price. It is possible that mechanical licensing issues in the U.S. could lead to a situation where foreign markets have access to new consumer products that cannot be released in the U.S.
The situation concerning multisession discs is instructive. Multisession discs can take many forms. Record companies are currently testing DualDisc, a format that typically contains an album encoded for traditional CD players on one side and the same album for DVD players on the other. Most SACD discs are also multi-session, including stereo and surround-sound SACD sessions and CD sessions. We think that these new consumer products are compelling for a number of reasons – they provide a single product playable on most consumer music players, they offer a new convenience to consumers, they reduce duplicative inventory, and they move the marketplace to products of higher quality and greater capacity than the CD. More importantly, we know that if we want consumers to buy our music, we have to let them play the music in whatever players they have. Multisession discs are the way to allow consumers to play music on the various platforms that are available.
It’s the “multisession” technology – putting differently-encoded renderings of the same music for each format on a single disc – that makes this possible. Thus, one disc could have two to five renderings of the same recordings. We believe it is clear that the Section 115 license covers multisession discs and that the required payment is one mechanical royalty (e.g., 8.5ยข) per disc. However, the Harry Fox Agency (”HFA”) has suggested that each multisession disc is in fact two to five “phonorecords,” requiring specific licensing (and in the case of compulsory licenses, presumably payment at the statutory rate) for each session. But despite the merits of multisession discs, paying more than a single mechanical royalty would be unwarranted as a business proposition.
Nonetheless, HFA has notified its licensees that it will not issue licenses on any other basis without specific publisher consent. From what I have heard, many individual publishers seem to have embraced HFA’s view that payment of 2 to 5 mechanical royalties per disc is required, so individual company agreements have been few and far between. I am not hopeful that individual negotiations will meet market demand within a time that might help reverse the bite of piracy.
Because this issue arises under a compulsory license and affects all of both industries, we have sought to discuss the issue with HFA on an industry basis. Citing antitrust concerns, the publishers have declined. As you probably know, later compulsory licenses in the Copyright Act contain language granting authority for collective negotiation of matters relevant to the operation of the compulsory license “notwithstanding any provisions of the antitrust laws.” As a result of an amendment in 1995, Section 115 contains an antitrust exemption for mechanical license negotiations concerning downloads. For historical reasons that exemption does not apply to physical products. We are grateful that in H.R. 1417 (the CARP reform bill), the House voted unanimously to remedy this historic anomaly and extend the Section 115 antitrust exemption to physical products.
While we believe that extension of the antitrust exemption to physical products is important to help us bring consumers exciting new formats for the music they enjoy, the antitrust exemption is not a complete solution. Among other things, it would only allow us to do a private deal with HFA, not to obtain access to the 30-40% of works not licensable through HFA. Thus, it is possible that there may need to be a change in the Section 115 regime itself.
It is likely that the section 115 regime ultimately will need to move toward a percentage royalty to give it the flexibility to adapt and retain its vitality in the face of technological innovation. When record companies sold only a few types of physical products, the cents rate worked well. But record companies are now selling, licensing or contemplating a great variety of products, including not only multisession discs but preloaded offerings that consumers can “unlock” through online transactions; offerings with bonus material; products with digital rights management systems that allow limited personal use copying, and subscription devices that offer both streams and limited downloads for a single monthly fee. These products are distributed through different channels and have different economics. Applying the cents rate to some of the models is often impossible and economically infeasible. A percentage royalty rate, by contrast, would enable these products to launch and find an appropriate price point in a dynamic marketplace. The amount of the royalty would also adjust automatically as market conditions varied. The Section 115 regime also would benefit from the flexibility to adjust rates more frequently, and if necessary to open up rates between scheduled CARP proceedings to address new consumer product offerings.
The Subscription Services Agreement Is A Model of How Such Issues Can Be Resolved
We have previously hit bumps in the road of our relationship with the publishers when questions have arisen concerning the application of the compulsory license to new technologies. But we have been able to resolve them. For example, several years ago, questions concerning the application of the compulsory license to subscription services, and our consequent inability to obtain licenses for those services promptly, became an impediment to the launch of services. We resolved those issues through a Subscription Services Agreement between RIAA, NMPA and HFA that provided a framework for licensing services. That agreement had its desired effect of allowing new services to enter the marketplace. In late 2001, RIAA and NMPA asked the Copyright Office to adopt regulations implementing the same framework as the agreement, to make clear that services can rely upon the compulsory license as to all musical works, and not just those licensable through HFA. We hope that the Copyright Office will act in the near future upon our joint request to adopt regulations implementing the agreement.
Conclusion
We’re hopeful that with your encouragement we will be able to resolve our differences with the publishers concerning the current generation of new formats as a business matter, just as we did in the case of the Subscription Services Agreement. This is a critical time for everyone in the music industry. Without new products to excite consumers, we risk losing an entire generation of music lovers to piracy. Record companies are working hard to meet that challenge, but we need the help of others in the industry to achieve that goal.
