50 years ago the Beatles invaded America, stacking up Number 1 hit records by the dozens, and creating music that, even today, remains incredibly popular with many Americans. But go to many of the interactive or on-demand music services, like Spotify, and search for Beatles music, and what will you find? Mostly cover tunes by sound-alike bands rather than the original hits. But yet, on services where you can’t designate your next song, like Pandora, you can hear the original songs. Why the difference?
As we wrote two years ago, when the Beatles first announced that their catalog would be licensed to iTunes as the first interactive service to get access to their music, such services need to get licenses from the copyright holder of the sound recordings (or “master recording” – a song as recorded by a particular artist) in order to play those songs. By contrast, the non-interactive services operate under a statutory license, where a digital music service pays a royalty set by the Copyright Royalty Board (or a negotiated rate agreed to in lieu of litigation before the CRB see our article here about the various rates that are currently available to webcasters, and our article here about the start of a new proceeding to determine what those rates will be from 2016-2020). If the service pays that royalty, and observes the requirements of the license (like the “performance complement” that limits the number of songs from the same artist that can be played in a given time period, the prior promotion of the playing of a song, and certain other matters – see our article on the performance complement here) – they can play any legally available sound recording available in the US, and the sound recording copyright holder can’t object.
But, for interactive services, the story is different. No compulsory license applies. Sound recordings are available only if a deal can be cut with the copyright holder of the recorded song – usually the record label. Some bands (or their copyright holders) make it difficult or expensive for interactive services to license their music, and some will license it only to services that use that music in a certain way (e.g. they don’t allow the streaming of full albums or individual songs completely on demand). Others will limit the availability of their songs, withholding new releases for months after they are they are available in stores, in theory so as to not cannibalize the sale of their music (though others seem to think that the withholding of music may in some cases decrease the demand for new works). Thus, interactive services may find themselves without a full complement of songs that listeners want to hear. Certainly, they have a wide diversity of music, but often there are holes in their offerings.
By contrast, the copyright holder in the musical composition (or “musical work”) – the words and music of the song – are also covered by a compulsory license in allowing their compositions to be used for the recording of “covers” of their songs. Thus, there are many covers of Beatles tunes on interactive services, and few of the originals. For making a physical copy of the song or a digital download, the compulsory license rate is about 9 cents per copy. For an on-demand stream, the rate is about 10% of revenue to be shared by the publishing company and the performing rights organization (ASCAP, BMI or SESAC). (See our article here on a settlement as to the rates for the “mechanical royalty” under Section 115 of the Copyright Act which covers the rate payable for the reproduction rights implicated by these compulsory licenses, a settlement recently approved by the CRB). Because these rights are available by compulsory license, they are more widely available, as evidenced by the number of cover tunes by Beatles tribute bands on various interactive services.
I moderated a panel on the differences in the music licensing applicable to various services at the recent RAIN Summits Pureplay and Podcasts Day in New York City last week (a video of the conference is available here, with our panel starting at minute 123 of the RAIN Summits video at the bottom of the page, so it may take a while to load to get to the royalty discussion). The panelists represented various groups that license music to digital music services, including publishers and sound recording copyright holders. The discussion brings out the differences in the royalty obligations for different types of services, and for the rights to the musical compositions and the sound recording copyrights, topics that we have written about many times on this blog, and will no doubt continue to address as issues arise.