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.