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Clearing Music Recordings and Compositions for Use in
Digital Music Services

Entertainment Law & Finance, Part II, March 2002.
By Steve Gordon


Part 1 of this article addressed master use and mechanical licenses required for the delivery of music by services offering Internet downloads and interactive streaming of music. Part II covers performing rights licenses that are required for such services and licenses required for webcasting.

Public Performance
ASCAP and BMI represent the vast majority of all songs still under copyright in the United States. SESAC, a third public performance organization, represents a small fraction of copyright music. But together these three public performance organizations represent virtually all of the songs still protected by copyright that have been recorded, and through their agreements with foreign performing right organizations, they represent virtually all the songs still protected by copyright that have been recorded throughout the world. These three organizations grant public performance licenses that cover both webcasting and interactive streaming. ASCAP, BMI and SESAC all offer blanket licenses for use of all songs in their respective repertories.

Interactive Streaming/Webcasting
Under the copyright laws, the owner of a musical composition has the exclusive right to publicly perform that composition. Public performance obviously includes playing music at a public place such as a concert hall or a nightclub. But it also refers to the playing of music in a manner that is accessible to the general public such as playing a song on the radio or on television. Performing a song by electronic transmission via a computer is also a public performance. Webcasting, for example, is using the computer like a radio, and therefore a public performance license is required. Similarly, interactive streaming is also a public performance because the music is being made available for performance by the public. Whether the content is a sound recording or an audiovisual work such as a music video, a public performance will be required.

Payments
The ASCAP website license provides three different rate schedules. The licensee may choose any one of the three schedules. Each schedule is based on a percentage of revenues. The first is approximately 1.615 % of a website's gross revenues or $264, which ever is greater. The second and third schedules are alternatives designed to give some flexibility depending on how much music is used on the site. For instance, under the second schedule the percentage is 2.42%, but the amount against which this percentage is multiplied is adjusted to reflect income derived directly from the use of music on the site. BMI's website agreement is also based on a percentage of revenues and offers two choices at the licensee's option: 1.75% of gross revenues or 2.5% of revenues derived from music sections of the site. The minimum payment is $259. SESAC's license works somewhat differently by charging .0075 multiplied by the average number of page requests or hits per month. The minimum license for any six-month period is $75.

Downloading
It is not clear that performance licenses are required for downloading music (DPDs) if no sound is heard during the downloading process. When you buy a record and listen to it at home, there is no public performance of music. When you play the music at home, it is considered to be a private performance. Some argue that downloading for later playback is the same as buying a record. Others take the position, however, that merely making the music available over the Internet necessarily involves the public performance of music even if the consumer does not listen at the time he or she is downloading the music. At the current time, this issue had not been definitively determined. However, the issue does not arise often because websites that offer music for download usually also offer streaming or at least the capacity to listen to samples, and such websites will be subject to the obligation of obtaining a public performance whether or not DPDs constitute a public performance.

Webcasting
Webcasting generally refers to the non-interactive streaming of audio on the Internet. It is sometimes called "Internet radio." Webcasters may consist of: retransmissions on the Net of over-the-air broadcasts (AM/FM webcasts); Internet-only services that transmit several different channels of highly-themed genres (e.g., 80's Pop Hits, Latin Jazz, All Blues, etc.); or services that syndicate music programming as background music on web sites.

There are two licenses required for webcasting. The first is the underlying musical composition, comprised of the written notes and lyrics, embodied in each recording. The second copyrighted work is the actual sound recording itself--the sounds, including the recording artist's interpretation of the musical composition, and the creative efforts of the producer, sound engineers and background musicians. Performance licenses may be secured from ASCAP, BMI and SESAC at the rates outlined above. Unlike downloading or inter-active streaming, no "mechanical" licenses generally are required for the use of songs in webcasting because webcasting does not entail making "copies."

But unlike traditional radio broadcasts, webcasting does require a license to use sound recordings. The lack of a broad sound-recording performance right that applies to U.S. terrestrial broadcasts is the result of an historical compromise. In almost every other country broadcasters pay for their use of the sound recordings upon which their business is based. For decades, the U.S. recording industry fought unsuccessfully to change this anomaly while broadcasters built very profitable businesses on the creative works of artists and record companies. The broadcasters were simply too strong on Capitol Hill.

However, with the birth of digital transmission technology, Congress understood the importance of establishing a sound recording performance right for digital transmissions, and did so in 1995 with the Digital Performance Right in Sound Recordings Act (DPRSRA). In doing so, Congress "grandfathered" the old world of terrestrial broadcasting, but required everyone, including broadcasters, operating in the new world of digital transmissions to pay their fair share for using copyrighted sound recordings in their business.

Statutory License
Webcasters can secure licenses for use of records from the copyright owner or through a license created by the Digital Millennium Copyright Act (DMCA). This "statutory license" is an efficient way for webcasters to obtain a license because it permits a webcaster to perform all of the sound recordings it wishes to perform without obtaining separate licenses from each copyright owner. And unlike downloading or interactive streaming services, a webcaster who qualifies for this statutory license cannot be denied the right to use sound recordings. However, to qualify for the statutory license the webcaster must abide by certain strict restrictions in addition to operating a non-interactive (i.e., not on-demand or personalized programming) service. These restrictions, which are spelled out in the statute, are intended to avoid displacement of record sales.

Principal Restrictions
A webcaster may not play in any three-hour period more than three songs from a particular album, including no more than two consecutively, or four songs by a particular artist or from a boxed set, including no more than three consecutively. These restrictions contemplate that a listener will not use the webcasting service to create his own custom designed loops featuring a single artist or album. In addition, advance song or artist playlists generally may not be published. However, a webcaster may name one or two artists to illustrate the type of music on a particular channel (such as DJ "teaser" announcements using artists' names but that do not specify the time a song will be played).

Archived programs--those that are posted on a web site for listeners to hear repeatedly on-demand--may not be less than five hours in duration. Those that are five hours or more may reside on a web site for no more than a total of two weeks. Merely changing one or two songs does not meet this condition. Looped or continuous programs--those that are performed continuously, automatically starting over when finished--may not be less than three hours in duration. Again, merely changing one or two songs does not meet this condition. Programs under one hour in duration that are performed at scheduled times may be performed only three times in a two-week period, four times if one hour or more in duration. When performing a sound recording, a webcaster must identify the sound recording, the album and the featured artist, if receivers of the service are capable of displaying this information. This requirement took effect October 1999.

A webcaster must disable copying by a transmission recipient if in possession of the technology to do so, and must also take care not to induce or encourage copying by transmission recipients. A webcaster must accommodate the transmission of measures widely used by sound recording copyright owners to identify or protect copyrighted works, if it is technically feasible to transmit them without imposing substantial burdens on the transmitting entity. A webcaster must cooperate with copyright owners to prevent recipients from using devices that scan transmissions for particular recordings or artists.

The statutory license is limited to transmissions made from lawful copies of sound recordings. It does not cover transmissions made from bootlegs or pre-released recordings (unless the performance of a pre-released recording is otherwise authorized by the copyright owner). The webcaster must not automatically and intentionally cause a device receiving the transmission to switch from one program channel to another. If technically feasible, transmissions by the webcaster must be accompanied by the information encoded in the sound recording by the copyright owner that identifies the title of the song, the featured artist and other related information, if any.

If a webcaster does not qualify for the performance or ephemeral statutory license, it must obtain licenses from each of the copyright owners of the sound recordings that it wants to transmit or reproduce. For example, interactive services that permit a listener to choose a particular song and those that create a personalized program for the listener must obtain individual licenses. Unfortunately, there is no group or organization that grants licenses on behalf of copyright owners to webcasting services that do not qualify for the statutory license. Therefore, the webcaster must contact each copyright owner individually. Webcasters who do not qualify for the statutory license and who fail to obtain licenses directly from sound recording copyright owners risk infringement liability.

It is important to note that statutory licenses are limited in nature so as not to limit too drastically the rights of copyright owners. That is why the statutory license for webcasters is limited to certain types of programming. In other words, the copyright owner is unable to refuse to license, but the licensees must abide by certain conditions in order to avail themselves of its benefit. This is the essence of a statutory license.

Signing up For a Statutory Webcasting License Webcasters wishing to operate under the statutory license must first notify sound recording copyright owners by filing an "Initial Notice" with the Copyright Office. The Copyright Office has published a suggested form of the Initial Notice at http://www.loc.gov/copyright/licensing/format.html.

Fees/CARP Recommendations
Since the implementation of the DMCA, a webcaster has had two options: (1) negotiate a royalty rate with sound recording copyright owners, either with individual copyright owners or with SoundExchange (a division of Recording Industry Association of America which represents more than two thousand record labels), or (2) wait for an industry-wide rate to be set which would be retroactive to October 28, 1998 when the DMCA was enacted. Sound Exchange has actually negotiated over 25 separate agreements with various webcasters including Yahoo. Although the terms of those deals remain confidential, SoundExhange was seeking .4 cents (four-tenths of one cent) per performance (e.g., if 10 people listen to a recording, then there would be 10 performances) or 15% of the service's gross revenues from such transmissions, plus a separate royalty fee for the making of "ephemeral recordings" (e.g., server copies) that would be equal to 10% of the above royalty. However, many organizations that broadcast music and other radio content over the Net complained that such rates were exorbitant.

On February 20, 2002, the Copyright Arbitration Royalty Panel ("CARP"), a three-member copyright arbitration royalty panel, delivered its Report recommending rates and terms for the statutory license for Webcasting. The CARP recommended the following rates: .07 cents (that is, seven hundredths of one cent) per consumer per recording if the webcasts are simulcast with commercial radio shows. For example, if 1,000 people use their computers to tune into a song broadcast online by a radio station, the broadcaster would have to pay for each listener, or 70 cents. Webcasters who delivered their programming specifically for the Internet would have to pay .14 cents per consumer per recording. Nonprofit groups broadcasting online, however, would be charged a lower rate of .02 for simulcast recordings and .05 for archived music. In addition, a 9% royalty on top of the penny royalties would be charged for the ephemeral copies of each recording (on the server of the webcaster) required to webcast music. The recommendations do not become final until they are approved by the Librarian of Congress. The Report can be found at www.loc.gov/copyright/carp/webcasting_rates.pdf.

Although the non-interactive webcasting business has been estimated to amount to less than $10 million a year at present, the money, which is to be spilt 50-50 between performers and record companies, could eventually become a lucrative source of income for the record companies and artists.

Steve Gordon is an entertainment attorney and consultant based in New York. Telephone: (917) 912-3400; e-mail: steve@stevegordonlaw.com. He formerly served as director of business affairs for Sony Music Entertainment.