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ASCAP and BMI, which are the largest of the performing rights organizations - together controlling an estimated 85 or 90 per cent of the musical compositions - are subject to antitrust consent decrees.  They can't discriminate between music rights holders, and must offer the same licenses to similarly situated services, i.e. they must charge all webcasters according to set formulas - they can't cut deals with individual webcasters and offer them better deals, unless such deals are open to all that have similar qualifications.  Moreover, the rates that they charge are subject to government oversight by a "rate court" - a Federal District Court judge who can hold a trial to determine the reasonableness of any proposed rate.  This oversight is required by the antitrust consent decrees that govern both ASCAP and BMI.

As we have written before, SESAC, the smallest of the current PROs, is not subject to rate court review for its rates, nor is it restricted from "cutting deals" on the rates that it charges.  It is a private company, not subject to any antitrust consent decree.  Some music users have, from time to time, suggested that SESAC be brought under such decrees - including a group of TV stations that filed a lawsuit a year ago seeking to impose antitrust scrutiny on SESAC.  As SESAC is often able to require royalties from users that seem higher than those that would be due to it if it was paid on a strictly pro rata basis, these kinds of concerns arise from time to time.

But SESAC is still a fairly large organization, in business for a long time, and most media companies are accustomed to dealing with it.  EMI, and any other publisher that follows its lead, would seemingly be in a position similar to that of SESAC, and not be covered by the antitrust consent decrees.  Thus, any such publisher could charge what it wanted for the public performance right to the compositions that it controls, and even charge different services different amounts.  And it may be difficult for licensees to realize that they have to deal with a new organization or organizations to license music, and it will make it harder to determine which songs a music service has licensed or which ones it already has the rights to use.  Some webcasters are still are surprised that they have to pay SoundExchange, which has been around in one form or another for a decade, so how will they get the word that they now can't rely on ASCAP, BMI and SESAC for all their public performance needs for musical compositions?  While ASCAP's amended regulations (see Section 1.12 of those regulations dealing with this New Media opt-out) provide that ASCAP will must notify all New Media services when any publisher decides to avail itself of this New Media opt-out, and what songs will be licensed directly, as SoundExchange has itself found out, such notices often don't command the attention that one might think that they would. 

Collective licensing was developed to provide a one-stop shop to clear vast catalogs of music.  Many feel that it is necessary for those users - like a webcaster - who needs acceess to a broad array of music in order to operate its business.  When the sound recording performance royalty was first established in the 1990s, it came with a mandatory collective licensing approach (the "statutory license"), so that all users could easily determine how to pay for the music that they use, without needing to deal with every rights holder - perhaps having to negotiate a different deal with each one.  As we wrote here, that is why Internet radio has had the Beatles catalog for so long, even though interactive digital music services, which don't have a compulsory collective license only recently have been able to obtain such licenses.

If music publishers associated with record labels generally start to exercise their rights to withdraw their catalog from the PROs, it's possible that they could even exert more control over the use of the sound recordings.  If, for instance, they control both the publishing and the master recording (the sound recording) rights to a particular band's music, and they feel that the statutory sound recording performance royalties set by the Copyright Royalty Board are too low for a particular recording, they can effectively block the use of that sound recording by extracting a higher price for the musical composition the next time the license for that composition becomes due.  One could even see different prices being charged for the rights to different musical compositions (in fact, most Beatles compositions are held by EMI - so it is possible that every Internet radio operator will not have access to their recordings if this combined licensing scheme goes into effect).   While the efficiencies claimed by the publisher might exist in the case of some interactive services, or in cases where you are dealing with a very limited number of songs (e.g. negotiations to use the music in video productions), for traditional Internet radio services, the efficiencies seem to diminish, not increase.

Just what digital services are affected by this move?  Broadcasters do not seem to have to worry about this development, as the amendment to ASCAP's regulations allowing this partial withdrawal from its licensing system excluded them (and the definition of "broadcaster" under the antitrust conset decree (see Section II(f)), seems to exclude cable and direct broadcast satellite as well, as indicated in ASCAP's press release on the matter.  This exclusion would seemingly include broadcaster's Internet simulcast's of their over-the-air programming.  But other digital music services that are subject to Sections 114 (webcasters), 115 ("DPD", or "digital phonorecord deliveries", i.e. copies or reproductions of musical compositions made digitally) and 106(1) (other digital reproductions by audio services), are all covered. 

This is an evolving story.  There are many questions that remain.  One unanswered question is exactly which songs are covered by this opt-out.  Another is how it will affect the rates charged by ASCAP.  Finally, the practical effect remains to be seen.  It may well be that this new system will in fact prove more efficient, or will provide benefits to users and composers - or it may impose some of the burdens that I describe above.  Until this is all sorted out, music companies will need to watch carefully to ensure that they license the music they need - from the proper places.  More on some of the other issues involved in digital music licensing can be found in our advisory - The Basics of Music Licensing in a Digital World. 

NOTE:  Corrected 5/10/2011 to note that ASCAP, and not the music publishing company, sends out the notices to the services of a New Media opt out when a publisher decides to exercise it right to opt out of the normal ASCAP licensing scheme. 

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. 

If and when the settlement is reached, the next major question will be how the Internet radio service will be monetized.  A recent New York Times article asks that question, interviewing a number of operators about the difficulties in attracting advertisers to the service.  A new blog, Audio4cast, covering the business side of the Internet radio and digital music industry, looks at the question of how the industry can benefit from the current economic crisis.  The New York Post has run an article highlighting the fact that, more and more, Internet-only webcasters are cutting back on their services due to the high royalties, while broadcasters are able to grow their on-line listeners by subsidization from their over-the-air business.  Recognizing that the industry still has not figured out how to make money from their operations is an important issue in any discussion of royalties, as royalties have to be realistic in light of the real-world business conditions for a vital Internet radio business to exist.  We will all have to see if any settlements which do result from the Webcaster Settlement Act recognize these realities and set rates that allow the Internet radio industry to survive and thrive.

As the Notice sets out, the statutory rights held by cable and by satellite are different in many ways. Cable systems pay certain minimum fees which vary depending on the revenue of the cable system, and increase when a system carries a “distant signal,” i.e., a television signal from outside of its market area. However, the definitions of a distant signal for purposes of these rules is based  on byzantine FCC rules in existence back in 1977, which long ago were eliminated except for purposes of these copyright calculations. Satellite carriers also pay fees to the Copyright Office, but these fees are based on a per subscriber fee, and the importation of distant signals by satellite carriers remains heavily regulated. At the same time, while cable operators pay a “minimum fee” to carry any broadcast signals, satellite carriers are able to carry local broadcast signals at no cost. 

The Notice requests comment on whether these different licensing schemes, and the different royalties that they entail, continue to make sense. Should the systems be modified to provide greater parity between the platforms? Do royalties that are paid approximate the royalties that would be received by copyright holders if there were negotiations for rights in an open market, unfettered by the statutory license? Should these licenses even continue to exist, or should the parties simply negotiate for the rights to the programs they retransmit (perhaps by shifting the burden to broadcasters to obtain the underlying rights, which the broadcaster would then grant as part of the retransmission consent negotiation process)? Obviously, these are fundamental questions about the manner in which the statutory license operates – and recommendations from the Copyright Office could have an impact on virtually every aspect of the video marketplace – from the course of retransmission consent negotiations between broadcasters and multichannel video providers, to the prices and terms that burden those providers under their statutory license, to the competition that broadcasters face in their marketplace (if, for instance, the higher rates for cable importation of distant signals were reduced, or if the limits  on such importation by satellite carriers were relaxed, more competition to the local broadcaster could result).

Finally, in its discussion of the future of statutory licenses, the Copyright Office asks if the existing statutory licenses should be modified, or new licenses adopted, to facilitate the emergence of new video technologies. For instance, the Notice asks if such licenses would hasten the inclusion of local television programs on video mobile phones. The Copyright Office also asks whether new IPTV systems using Internet technologies to retransmit broadcast programs are covered by the existing cable statutory license or must a new license be adopted.  The Copyright Office simultaneously asks whether the on-demand availability of much broadcast programming through the Internet, by the programming networks and by services like You Tube, undercut the need for the statutory licenses. As the statutory license was designed to foster the distribution of programming by making it easier to obtain the necessary copyright rights, if that programming is already available on-line, has the underlying purpose of the license been met?

The Notice also specifically mentions several discrete issues affecting the existing cable statutory license.  For example, it specifically asks how the ongoing digital transition should impact cable royalty calculations. The Copyright Office also appears prepared to address how a “network” should be defined for purposes of the cable royalty calculations, as FOX broadcast affiliates historically received different treatment than ABC, CBS, and NBC broadcast affiliates. The Notice also raises longstanding concerns regarding system consolidation and the relationship between subscriber groups, the signals they receive, and the resulting royalty calculation. The Copyright Office suggests that a reform to the statutory license might remove the troubling “phantom signal” issue, under which cable systems pay royalties for signals that are not actually delivered to certain subscriber groups. 

In addition to comments and reply comments, the Copyright Office plans a hearing on these important issues. It is clear that this proceeding, and the ultimate recommendations of the Copyright Office, should be closely monitored by all video industry participants.