Copyright Office Holds a Roundtable Discussion of the Mechanical Royalty - Another Confusing Royalty for the Use of Music on the Internet
Just when Internet music companies were starting to understand one set of royalties applicable to the use of music on the Internet through the controversy over the Copyright Royalty board decision on royalties for the public performance of sound recordings in a digital delivery system, the Copyright Office held a hearing on Friday to discuss an entirely different royalty - the "mechanical" royalty for the use of the "musical work" in making a "phonorecord." In plain English, the copyright holder in the publishing rights in a musical composition (the underlying words and music in a song) is entitled to a royalty when a copy of a song using that composition is made. While that doesn't sound too complicated, when copies are made in the digital transmission of music over the Internet (and even in other digital media), all sorts of questions arise. And in the conversations on Friday, questions were raised as to whether the obligation to pay a royalty for making a digital copy even applied to the streaming of a song on the Internet or possibly even the playing of a song on an HD Radio station. These stations already pay (to ASCAP, BMI and SESAC) for the public performance of a musical composition, but the mechanical royalty is for a different right, and is collected by a different group, and the question being raised was whether a different royalty is also due when music is used a digital context. This is also different than the SoundExchange royalty that is paid for the public performance of a sound recording (a particular song as recorded by a particular artist).
The Copyright Office held this Roundtable to update the record in a proceeding begun by a Notice of Inquiry issued in 2001 to try to determine how to apply in a digital world the mechanical royalty and the compulsory license for that royalty under Section 115 of the Copyright Act. That section applies to the use of a composition in the making of a record or CD. The artist or record company would have to pay the publishing company a flat fee per copy to obtain the rights to use the underlying song. That fee is currently about 9 cents per copy, though the Copyright Royalty Board is is in the midst of a proceeding that is to determine whether that royalty should be changed. When applied to the making of a physical copy, that concept is not hard to understand (though, as set forth below, it is not easy to administer). But, in a digital world, questions arise as to when the obligation to pay a royalty arises.
The Copyright Office had recently issued a determination that ringtones and digital downloads were covered by this royalty, and could rely on the Section 115 compulsory copyright. Again, in those contexts, copies were fairly easy to understand, as a copy is made when a ringtone or download is copied onto a phone or a computer, and when that happens, a specific fee is charged for the copy that is made. The more difficult questions arise in cases of subscription services, limited time downloads, on-demand streaming, and even streaming done by a non-interactive service like an Internet radio station. When is a "phonorecord" - a specifically identifiable copy of a recording that contains the musical work - made? In the digital transmission process, multiple copies are made - on the servers of the music services, in transitory copies made by servers and routers on the Internet, and in the RAM and on the hard drive of the listener's computer. Are these copies "specifically identifiable" such that a royalty should be paid? In its Public Notice of this Roundtable, the Copyright Office raised many of these issues that formed the basis of the discussion on Friday.
In 2003, the Recording Industry and the representatives of the music publishers entered into a settlement agreement that concluded that the non-interactive streaming did not involve copies that would give rise to a mechanical royalty, while interactive streaming and conditional downloads did. However, as discussed at the Roundtable, the Harry Fox agency, the principal collection agent for the music publishing companies, represents less than 70% of the music publishers, so the agreement is not binding on all publishers. Moreover, the Copyright Office representatives themselves asked at the Roundtable how they could draw a legal distinction between on-demand streaming and non-interactive streaming, when the technology involved was the same. While the making of a copy in the streaming process may currently have no real value independent from the public performance (for which ASCAP, BMI and SESAC collect royalties for the musical composition), the Copyright Office asked if there should not at least be a recognition that a copy is made. Questions even arose as to whether specifically identifiable copies are made in other digital transmissions that include buffer copies.
The question arose as to whether any copy made in a streaming process is specifically identifiable, and also whether the payment of such a royalty would be "double-dipping" - paying the composers twice for the use of their music. In a recent decision in a Federal Court, a decision was rendered that ASCAP (and by implication BMI and SESAC) were not entitled to public performance royalties in connection with downloads, as no public performance was involved. The question discussed on Friday was whether the reverse shouldn't also be true - that there is no mechanical royalty where there is a clear public performance.
Issues also exist as to the efficient operation of the statutory license. The license requires notice to the copyright holder before it can be used, and as many of the copyright holders are difficult to find, and as there is no central database where the music publishers are identified, that is difficult. In addition, as the Harry Fox agency, the one central licensing agency that exits, represents less than 70% of the copyright holders, a company that has a business model that doesn't allow for the per copy statutory royalty (e.g. a subscription service), doesn't have any group or groups with which it can negotiate to get blanket licenses for virtually the entire musical universe. Thus, licensing is difficult.
Everyone at the Roundtable agreed that the statutory language was ambiguous and did not cover all of the issues that arise in a digital world. The Copyright Office itself has asked for legislative reform of the statutory license many times, to clarify these ambiguities. In fact, at one point, the Register of Copyrights testified that she thought that one agency should collect all royalties for musical compositions, so that there would not be the issue of double dipping, and so that there would be organizations that would represent virtually all of the copyright holders for all purposes. With the various entrenched stakeholders, that proposal didn't fly, thus we continue to have different groups representing composers for the public performance of music and for the mechanical royalty. And, while we have had proposals for Section 115 reform floated in Congress for the last several years, the discussion on Friday was that Congressional action did not look imminent. But all companies providing digital transmissions of musical compositions should continue to monitor these efforts, as the potential for problems arising from interpretations of who needs to get paid for digital services remains very high, and with the potential liabilities for copyright infringement being so great, the stakes are high.