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The question of what is and what is not interactive is not an easy one, as we wrote in connection with the recent court decision determining that the Yahoo! Launchcast service was not interactive within the meaning of the statute, despite having some degree of user influence.  But some services are clearly interactive - where a user can designate the song or artist that is to be played, or set up his or her own playlist, or otherwise specify what they want to hear when they want to hear it.  Services that allow this kind of on-demand listening, including many of the so-called "subscription services" where you can effectively order up the music that you want to hear, must directly negotiate with the copyright holders for the rights to use the music that they play.  And because they must get specific permission from the copyright holder, they may not necessarily get all the access to all the music that a user might want to hear.  Sometimes a label will restrict access, sometimes a band will require in their label agreements that no digital access be provided.  That's one of the reasons that some of these services don't feature all the music that a user might want to hear - no Beatles, no Metallica, and other gaps in the music that they provide.  Thus, if Warner or any other record company decided that they didn't want to provide access to the music to which they have the rights, they could do so.

So, while non-interactive Internet radio services would not, in the US, be affected by such a decision, some on-demand services may well be affected, if the press reports about this decision are true (and applicable world-wide).  And we'll leave the debate about the wisdom of any such decision to others to debate.

After an exhaustive analysis of the process that Launchcast goes through to create a stream for a listener, the Court focused on several facts.  First, the Court found that much of the music in any stream delivered by Launchcast was not music selected by the user in their list of preferred artists and songs, but was instead picked by Launchcast from its vast library of songs using a number of factors. The Court also made clear that listeners had no ability to game the system to make it play more favorites of the listener.  While a listener could skip some songs, and pause a song in the middle of its play, it could not go backwards to replay songs or otherwise make particular songs play more frequently. In short, the Court found that the system was set up so that it would not substitute for the purchase of music as listeners could not get songs or even particular artists when they wanted. The Court used the term “predictability” – and found that the user had no predictability in determining whether or when any specific song would play during any listening session, and thus the service was not a substitute for a purchase of a song.

This was important in the Court’s analysis. First, the Court determined that the phrase in the statute defining an interactive stream to be “a transmission specially created for the recipient” was not a model of clarity, and was capable of many interpretations. While the record companies argued that any stream that was created specifically for a user based on the user’s preferences was, by definition, “specially created for the recipient”, the Court found that such a simplistic view could not be sustained.  Instead, the language of the statute has to be interpreted in light of the intent of Congress in the adoption of the statute. The Court went through a thorough analysis of the history of the sound recording royalty and how the DMCA provision at issue here came to be in the 1998 Act. The Court noted that the sound recording performance right was first adopted in the US in 1995 and was intended to be a narrow right, initially being applied only to subscription services. After its adoption, upon fears of piracy on the Internet, the right was expanded three years later to include noninteractive streams. In enacting the broader performance royalty, the DMCA broadened the definition of an interactive stream to include the phrase at issue here, focusing primarily on the issue of digital piracy and the fear that a predictable stream of music would allow digital copying. The Court cites specific language of the House of Representatives report on the DMCA where the House stated that you have an interactive stream “if a transmission recipient is permitted to select particular sound recordings in a prerecorded or predetermined program.”

After looking at the history and the way the service functioned, the Court focused on the language of the statute that said that there had to be a “transmission of a program” that was specially created for the user before the program was deemed to be interactive. The definition of a "transmission of a program" looked at the transmission of a program as a whole – to find that there was an interactive transmission of a program one has to look at the entire transmission to see if the entire transmission was created specially for the user. The Court determined that, given the way the Launchcast system was set up, the user was really able to specifically influence only a small number of songs that were played in his or her stream. The vast majority of the songs were selected by Launchcast and would be of the same genre as the listener's preferences, but what the songs would be was not at all predictable. Finding that the user thus had no predictability in the entirety of the program that was transmitted, the Court found that the streams would not significantly substitute for the purchase of specific music, and thus should not be considered interactive in the meaning that Congress intended.

The decision is very interesting in the depth of its specific analysis of the methodology for the formation of a playlist by Launchcast, and in its examples of music references sprinkled throughout (references to U2's Joshua Tree CD, to Gordon Lightfoot and the Beatles, and to “‘special requests’ [on AM radio which] represented love-struck adolescents’ attempts to communicate their feelings to that ‘special friend.’” The judges also candidly acknowledge that they are “appointed for life” and thus have varying degrees of familiarity with the technology which they are discussing.

What is the impact of the case? It undoubtedly helps solidify the position long taken by webcasters that some degree of user influence is permissible by a service that relies on the statutory license for noninteractive webcasting.  However, the decision was very fact dependent, with few clear boundaries as to what percentage of a stream can be user influenced and what degree that influence can be exercised to remain within the statutory license. Moreover, this is the decision of a single Court of Appeals – albeit an important one sitting in New York, covering the Northeast, and very active on copyright issues. But other cases in other circuits would not be bound by this decision, though they will no doubt find it to be instructive.  But, with other facts, any court might not reach the same decision. Thus, the question of which streams are interactive requiring that a service get a negotiated license from each copyright holder to perform the sound recordings, and which are noninteractive and can be streamed simply by paying SoundExchange the statutory royalty (and I say “simply” with a grain of salt given the multiplicity of options for paying the statutory royalty), will no doubt not be put to rest by this one decision. 

As we wrote, the royalty waiver only confers a benefit in the on-line world, especially in on-demand services such as downloads and podcasts, not subject to the statutory royalty set by the Copyright Royalty Board.  Over these services, the FCC has no jurisdiction.  Moreover, the impact of any proposal to limit these waivers, as suggested by the Future of Music petition and by a letter written to the parties to the payola settlement by Senator Russ Feingold investigating how the settlement was being implemented, presents some real issues in for services such as Internet Radio that are looking to these waivers as a possible means of reducing their royalties.

Since the decision of the Copyright Royalty Board on Internet Radio, it has always been assumed that one way some services could reduce their royalties was to get direct licenses from musicians.  SoundExchange has made much of the fact that artists were free to waive the collection of royalties if they felt that this was in their best interest by encouraging Internet Radio stations to play their music.  There have even been discussions by several parties of setting up  clearinghouses for music that could be played royalty-free as a way of encouraging the use of that music - and allowing Internet Radio stations to reduce their obligations and survive under the new royalties.  For instance, see a report, here, that Polka musicians are setting up their own system for giving Internet Radio stations rights to play their music without royalties.  If providing royalty-free music to Internet Radio stations constitutes some sort of legal issue, such exchanges could be imperiled.

While the Future of Music Coalition has suggested that the FCC petition continue even though Clear Channel has withdrawn their waiver, some consideration should be given as to whether the waiver policy is really contrary to the public interest  - or if such waivers may actually promote the widespread use of new and otherwise underexposed new music.  And for more than just polka music....