The new Copyright Alert System, a voluntary arrangement announced earlier this month by Internet service providers (ISPs) and the representatives of the record and motion picture industries (RIAA and MPAA), will not have a significant impact on copyright piracy. In fact, this arrangement’s only true significance may be to demonstrate the relative strength of the ISPs compared to the music recording and movie industries, and the ISPs continuing power to evade responsibility for the grievous damage inflicted by pirate websites and file sharing.
AT&T, Verizon, Comcast, Time Warner Cable and Cablevision have agreed to implement a six-stage notification system that will electronically alert users whenever their ISP account is used for illegal downloading of music, movies or TV shows. This system will work similarly to a credit card fraud alert system, whereby an account holder will receive an email in the event their account is being used for illegal downloading. One inspiration for arrangement is the fact that many parents have no clue what their kids or the kids’ friends may be doing on their computers, and this system will help parents tame their children’s nasty habit of downloading free songs and movies. Upon instances of illegal behavior the ISP is allowed, but not required, to implement “Mitigation Measures “ which could include sending the subscriber to an “educational” webpage that explains the economic damage piracy does to copyright owners, or temporally reducing Internet speeds. The accounts of users who do not curtail their illicit use of their Internet after six notifications may have their accounts suspended, but not terminated.
If this is the best the copyright community, including Hollywood can do to get the ISPs to crack down on piracy, it’s pathetic. There is no law backing up this voluntary arrangement, and the ISPs have no obligation to terminate a subscriber’s account or provide the subscriber’s names to rights holders.
It should be pointed out that there is little incentive for ISPs to crack down on piracy. After all, free content is one of the biggest draws for high speed Internet service from which the ISP’s make a fortune in subscription fees. The ISPs have no interest in terminating paying customers even if those customers are downloading unauthorized free music and films. The power of the ISPs to block the copyright owners’ attempts to combat piracy first became manifest in the Digital Millennium Copyright Act of 1998 (DMCA) which provided them a “safe harbor.” Under the DMCA, ISPs are immune from copyright liability so long as they promptly block access or remove infringing from their systems if they receive a notification claiming infringement from a copyright holder. Many copyright holders have complained that these guidelines do not provide sufficient protection for their works because infringers quickly replace the works that have been taken down, but so far they have been unsuccessful in repealing the safe harbor, or getting courts to interpret the DMCA more strictly.
In contrast to the Copyright Alerts System, the French equivalent seems like a much more powerful weapon against piracy. As I wrote in the forthcoming third edition of the Future of the Music Business (Hal Leonard, fall 2011), under the Hadophi statute, better known as “the 3 strikes law,” ISPs are required to provide the personal contact information for IP addresses found to be file sharing, and face fines of 1500 Euros a day for failing to provide this information. After that the ISP must invite the owner to install a filter on his or her own connection. If a repeated offense is suspected by the copyright holders within 6 months following the first step, a certified letter is sent to the connection owner with similar information sent in the first mail. On failure to comply, the ISP is required to suspend the user’s Internet service for 2 months to 1 year. The connection owner is blacklisted and third party ISPs are prevented from providing him or her Internet access. And this service suspension doesn't interrupt billing. Notwithstanding the draconian nature of Hadolphi compared to the Copyright Alert System, there have been recent reports that the law isn’t helping solve the infringement problem in France because the ISPs have not been fully cooperative. The ISPs in France have only sent 470,000 “1st warnings” in response to 18 million complaints about infringement and only 10 of those users from the 470,000 received “3rd warnings.” It has also been reported that the French ISPs do not want to prosecute people and have been holding off on sending 2nd and 3rd warnings in order to avoid losing customers.
The alleged policy and objective behind The Copyright Alert System is to educate the public about the damage to the creative community and to “direct subscribers to legitimate sources of content.” But its difficult to comprehend how this will help parents or their kids’ reform their habit of file-sharing and illegal downloading. Indeed, the true educational element in the Copyright Alert System is that even when Hollywood studios join forces with the big record companies, they are still not collectively strong enough to force the ISPs to take meaningful action against copyright infringement.
The real answer to copyright infringement on the Internet is to force the ISPs to police infringing behavior or make them pay a royalty to the copyright holders to compensate for lost sales. But so far the copyright community seems unable or unwilling to make these solutions happen.
Friday, July 22, 2011
Thursday, July 14, 2011
Spotify launches in U.S., users can wait for an invite or pay to get inside
Spotify (finally) launched today (7/14) in the U.S. with three different options for users. The first is a free version called "Spotify Free" which requires an invitation to join. I requested an invitation and am awaiting a response. Once you get in users can listen to music on their computers, but not mobile devices, and there will be advertisements integrated into the program. The second version is a $5 a month subscription plan which allows users to listen on their computers with no advertisements. And the third and final version is a $10 a month subscription plan that allows users to listen to high quality music on their computers and mobile phones, also with no advertisements.
For more info: see http://venturebeat.com/2011/07/14/spotify-launches-in-u-s-users-can-wait-for-invite-or-pay-to-get-inside/
For more info: see http://venturebeat.com/2011/07/14/spotify-launches-in-u-s-users-can-wait-for-invite-or-pay-to-get-inside/
Tuesday, July 12, 2011
DMX vs. BMI demonstrates that digital services may use direct licensing to reduce their payments to the PROs but the decision may be reversed on appeal
The case of DMX, the digital background music service, against BMI shows that direct licensing may not be a substitute for the blanket licenses offered by ASCAP, BMI and SESAC, the three performing rights organizations (“PROs”), but it may significantly reduce the license fees they have to pay. On the other hand, BMI is appealing the decision and there are sound reasons why it may be reversed or at least modified.
DMX currently provides background music to approximately 100,000 locations including restaurants, bars, clubs, retail stores and chains. DMX and BMI failed to agree on the price for a blanket license covering its 6.5 million songs, and DMX initiated an action in “Rate” court under BMI’s consent decree asking the court to reduce the amount that BMI sought to charge.
According to Federal District Judge Louis Stanton’s opinion (July 2010), BMI sought a blanket license fee of $41.81. DMX argued that it had secured “direct licenses” from 550 different publishers for $25 per location, and that that amount should be used as a “benchmark” for the true market value of the blanket licenses offered by not only BMI, but all three performing rights organizations including ASCAP and SESAC. The court agreed, and significantly reduced the fee DMX would have otherwise had to pay BMI. The judge held that the blanket license fee for use of BMI songs should be only $18.91 per location. However, even that amount subject to further reduction. The court created a mathematical formula that reduces the amount payable to BMI in proportion to the number of BMI songs that DMX clears through direct licenses. This is referred to as an “adjustable fee blanket license“ or “AFBL”, and it is the first time the Rate court has implemented such a license.
In a subsequent action against ASCAP (December 2010), DMX was also successful in significantly reducing ASCAP’s per location rate to $13.74 (also subject to reduction depending on the number of ASCAP songs subject to the direct licenses). ASCAP wanted DMX to pay $49.50 per location! Similar to BMI, ASCAP is appealing this decision
According to DMX’s chief counsel, Christopher Harrison, these decisions provided DMX with “more than $5.5 million dollars annual savings.”
BMI is currently appealing the rate court’s decision, however. “On behalf of our songwriters, composers and music publishers, we will not allow this ruling to stand without an appeal,” said Del Bryant, BMI President & CEO. “Our writers and publishers should not be expected to lose more than half of their income from DMX based on the court’s erroneous holdings, which substantially reduce the value of their creative efforts.” BMI’s appeal has already been briefed and argued, and the Second Circuit’s decision is expected soon.
BMI’s appeal may have some success. Here’s why. In regard to BMI, among the 550 “direct licenses”, there is only one license with a major publisher, that is, Sony/ATV. The court found that the $25 per location fee was a good benchmark for the real market place value of a license for all the songs DMX plays. However, the court did not consider it relevant that DMX paid a $2.7 million dollar advance to Sony. BMI maintains that although the nominal rate Sony agreed to was $25 they would never have entered into the direct license unless they received the advance, and that DMX used the deal with Sony to persuade many of the 549 other direct licensees to accept the $25 per location rate. As BMI’s appellate brief reported, DMX never told the other direct licensee publishers about the advance to Sony, and instead assured them “they would be the same as a sophisticated major publisher who had accepted the same deal.” Moreover, the $2.7 million represented approximately 150% of all royalties Sony received from both ASCAP and BMI for one year.
An ancillary issue is how can 550 direct licenses be a benchmark for the true value of the PROs’ blanket licenses when those 550 licenses represent, in probability, only a tiny fraction of songs represented by the PROs. Judge Stanton in his decision stated that the 550 direct licenses included 5500 different “catalogues“, but he never indicated how many songs were included in those catalogues. BMI as noted above, represents 6.5 million songs, ASCAP represents even more. It is doubtful that the 550 licenses add up to more than a small fraction of the number of songs in the PROs’ catalogues. And if that’s the case, how did the Rate court find that direct licenses presented an accurate benchmark for the true market value for the PROs’ blanket licenses? In its brief, BMI made the argument this way: “The direct license do not reflect a willing buyer/willing-seller price because they do not include those publishers who valued their music at a higher rate and those chose not to sign.”
Another fact that the rate court did not focus on is the consequence of its decision on writers and composers. As I noted in my previous blog about EMI withdrawing digital rights from ASCAP (7/2/11), all three PROs pay writers, as well as publishers, directly. That is, for each dollar paid, they pay 50 cents to the publishers and 50 cents directly to the writers. For that reason publishers are unable to deduct advances paid to the writers. Since many writers are “unrecouped” they may never see any money under “direct” licenses.
Note: the formal citation for the case and appeal: Broadcast Music, Inc. v. DMX, Inc., 08 Civ. 216 (LLS), 2010 U.S. Dist. LEXIS 78417, (S.D.N.Y. July 26, 2010); on appeal at 10-3429-cv (Second Circuit).
DMX currently provides background music to approximately 100,000 locations including restaurants, bars, clubs, retail stores and chains. DMX and BMI failed to agree on the price for a blanket license covering its 6.5 million songs, and DMX initiated an action in “Rate” court under BMI’s consent decree asking the court to reduce the amount that BMI sought to charge.
According to Federal District Judge Louis Stanton’s opinion (July 2010), BMI sought a blanket license fee of $41.81. DMX argued that it had secured “direct licenses” from 550 different publishers for $25 per location, and that that amount should be used as a “benchmark” for the true market value of the blanket licenses offered by not only BMI, but all three performing rights organizations including ASCAP and SESAC. The court agreed, and significantly reduced the fee DMX would have otherwise had to pay BMI. The judge held that the blanket license fee for use of BMI songs should be only $18.91 per location. However, even that amount subject to further reduction. The court created a mathematical formula that reduces the amount payable to BMI in proportion to the number of BMI songs that DMX clears through direct licenses. This is referred to as an “adjustable fee blanket license“ or “AFBL”, and it is the first time the Rate court has implemented such a license.
In a subsequent action against ASCAP (December 2010), DMX was also successful in significantly reducing ASCAP’s per location rate to $13.74 (also subject to reduction depending on the number of ASCAP songs subject to the direct licenses). ASCAP wanted DMX to pay $49.50 per location! Similar to BMI, ASCAP is appealing this decision
According to DMX’s chief counsel, Christopher Harrison, these decisions provided DMX with “more than $5.5 million dollars annual savings.”
BMI is currently appealing the rate court’s decision, however. “On behalf of our songwriters, composers and music publishers, we will not allow this ruling to stand without an appeal,” said Del Bryant, BMI President & CEO. “Our writers and publishers should not be expected to lose more than half of their income from DMX based on the court’s erroneous holdings, which substantially reduce the value of their creative efforts.” BMI’s appeal has already been briefed and argued, and the Second Circuit’s decision is expected soon.
BMI’s appeal may have some success. Here’s why. In regard to BMI, among the 550 “direct licenses”, there is only one license with a major publisher, that is, Sony/ATV. The court found that the $25 per location fee was a good benchmark for the real market place value of a license for all the songs DMX plays. However, the court did not consider it relevant that DMX paid a $2.7 million dollar advance to Sony. BMI maintains that although the nominal rate Sony agreed to was $25 they would never have entered into the direct license unless they received the advance, and that DMX used the deal with Sony to persuade many of the 549 other direct licensees to accept the $25 per location rate. As BMI’s appellate brief reported, DMX never told the other direct licensee publishers about the advance to Sony, and instead assured them “they would be the same as a sophisticated major publisher who had accepted the same deal.” Moreover, the $2.7 million represented approximately 150% of all royalties Sony received from both ASCAP and BMI for one year.
An ancillary issue is how can 550 direct licenses be a benchmark for the true value of the PROs’ blanket licenses when those 550 licenses represent, in probability, only a tiny fraction of songs represented by the PROs. Judge Stanton in his decision stated that the 550 direct licenses included 5500 different “catalogues“, but he never indicated how many songs were included in those catalogues. BMI as noted above, represents 6.5 million songs, ASCAP represents even more. It is doubtful that the 550 licenses add up to more than a small fraction of the number of songs in the PROs’ catalogues. And if that’s the case, how did the Rate court find that direct licenses presented an accurate benchmark for the true market value for the PROs’ blanket licenses? In its brief, BMI made the argument this way: “The direct license do not reflect a willing buyer/willing-seller price because they do not include those publishers who valued their music at a higher rate and those chose not to sign.”
Another fact that the rate court did not focus on is the consequence of its decision on writers and composers. As I noted in my previous blog about EMI withdrawing digital rights from ASCAP (7/2/11), all three PROs pay writers, as well as publishers, directly. That is, for each dollar paid, they pay 50 cents to the publishers and 50 cents directly to the writers. For that reason publishers are unable to deduct advances paid to the writers. Since many writers are “unrecouped” they may never see any money under “direct” licenses.
Note: the formal citation for the case and appeal: Broadcast Music, Inc. v. DMX, Inc., 08 Civ. 216 (LLS), 2010 U.S. Dist. LEXIS 78417, (S.D.N.Y. July 26, 2010); on appeal at 10-3429-cv (Second Circuit).
Saturday, July 2, 2011
Will EMI's withdrawal of digital music rights from ASCAP help streamline licensing or further damage the music business?
EMI Music Publishing recently announced that it was withdrawing the right to license digital public performance rights in its April Music catalogue (which holds the rights to over 200,000 songs including works written and performed by Jay-Z, Mos Def and Beyonce) from ASCAP, one of the three U.S. performing rights organizations or "PROs.” "The digital world demands a new way of licensing rights in musical compositions," said EMI Music Publishing Chairman & CEO Roger Faxon, who also serves as EMI Group CEO. "By bringing these rights back together our aim is to reduce the burden of licensing, to create greater efficiency and importantly to reduce the barriers to the development of innovative new services. That absolutely has to be in the interest of everybody involved in the process -- songwriters, licensees and consumers alike." I strongly disagree.
The reason d’être of the PRO's is to provide "blanket licenses" to those who publicly perform music. In exchange for paying a small percentage of revenues, physical venues such as clubs and restaurants, radio and TV stations, and digital users such as webcasters like Pandora or subscription services that stream music like Rhapsody, are assured of legally using any commercially distributed song because SESAC, ASCAP and BMI collectively represent virtually all commercially released music and each one offers a license that allows the performance of their entire repertoire.
If other publishers follow EMI's lead, and start exclusively offering direct licenses to digital services, a nightmare could befall those services. There are literally thousands of music publishers. Although the majors, EMI, Warner Chappell, Universal and Sony/ATV represent a great deal of commercially released music (approximately 50 percent), they hardly represent all of it. So instead of dealing with 3 entities, webcasters and other digital services that stream music would potentially have to deal with thousands of licensors. And this would go for "mom and pop" operations as well as major digital services such as Pandora. But most small webcasters and subscription services which stream music would not have the resources to deal with all those licensors. This could potentially mean closing shop, or at least curtailing their choice of music to songs represented by the major publishers so as to limit the time they spend on negotiating licenses; a result that EMI probably would not mind at all, but which would hurt many digital services and thereby hurt music fans.
Another catastrophic consequence of publishers withdrawing digital rights from the PRO's would be the price of licensing public performance rights. Collectively the PRO's collect approximately 7 per cent of ad revenues from webcasters and other websites performing digital music. ASCAP and BMI charge approximately 3 percent each and SESAC, the smallest PRO, collects approximately one percent. The total tab is affordable. Moreover, ASCAP and BMI operate under consent decrees. As a result, they must be careful about upping their rates because under those consent decrees the licensees can challenge any increase in fees in what is known as the "Rate" court. But if the publishers unhinged from the PROs they could charge whatever rate they liked or refuse to license their music altogether. The result could be disastrous with many digital services unable to afford to perform music and either closing if they were exclusively music based, or discontinuing their use of music.
Another deeply troubling consequence of EMI's action is the negative impact on its own writers. ASCAP, BMI and SESAC all pay writers directly. For every dollar paid, 50 cents goes to the publisher and 50 cents is paid directly to the writer. But if EMI collects the licensing revenues, many of its writers may never see a dime. The reason is that many of their writers are "unrecouped." This means that the writers have not earned back the advance they originally received. Therefore EMI may "credit" many of their writers' accounts, instead of actually paying them.
Some have contended EMI's move is primarily meant to boost its bottom line since they could charge more than what ASCAP is currently paying them, avoid the modest administrative fees charged by ASCAP (approximately 5 percent), and retain a great deal of the monies that would otherwise be paid directly to their own writers. In light of EMI's impending sale by its owner Citibank, some argue that EMI’s plan is to enhance their bottom line and thereby up the price that a potential buyer would be willing to pay.
Whatever its motives, EMI's action could have a disastrous effect on the music business and music fans by killing or at least stunting the growth of digital music services which represent a key element in the potential recovery of the music business in the wake of the dramatic decrease of CD sales, as well as depriving their own writers of income that they currently receive.
The reason d’être of the PRO's is to provide "blanket licenses" to those who publicly perform music. In exchange for paying a small percentage of revenues, physical venues such as clubs and restaurants, radio and TV stations, and digital users such as webcasters like Pandora or subscription services that stream music like Rhapsody, are assured of legally using any commercially distributed song because SESAC, ASCAP and BMI collectively represent virtually all commercially released music and each one offers a license that allows the performance of their entire repertoire.
If other publishers follow EMI's lead, and start exclusively offering direct licenses to digital services, a nightmare could befall those services. There are literally thousands of music publishers. Although the majors, EMI, Warner Chappell, Universal and Sony/ATV represent a great deal of commercially released music (approximately 50 percent), they hardly represent all of it. So instead of dealing with 3 entities, webcasters and other digital services that stream music would potentially have to deal with thousands of licensors. And this would go for "mom and pop" operations as well as major digital services such as Pandora. But most small webcasters and subscription services which stream music would not have the resources to deal with all those licensors. This could potentially mean closing shop, or at least curtailing their choice of music to songs represented by the major publishers so as to limit the time they spend on negotiating licenses; a result that EMI probably would not mind at all, but which would hurt many digital services and thereby hurt music fans.
Another catastrophic consequence of publishers withdrawing digital rights from the PRO's would be the price of licensing public performance rights. Collectively the PRO's collect approximately 7 per cent of ad revenues from webcasters and other websites performing digital music. ASCAP and BMI charge approximately 3 percent each and SESAC, the smallest PRO, collects approximately one percent. The total tab is affordable. Moreover, ASCAP and BMI operate under consent decrees. As a result, they must be careful about upping their rates because under those consent decrees the licensees can challenge any increase in fees in what is known as the "Rate" court. But if the publishers unhinged from the PROs they could charge whatever rate they liked or refuse to license their music altogether. The result could be disastrous with many digital services unable to afford to perform music and either closing if they were exclusively music based, or discontinuing their use of music.
Another deeply troubling consequence of EMI's action is the negative impact on its own writers. ASCAP, BMI and SESAC all pay writers directly. For every dollar paid, 50 cents goes to the publisher and 50 cents is paid directly to the writer. But if EMI collects the licensing revenues, many of its writers may never see a dime. The reason is that many of their writers are "unrecouped." This means that the writers have not earned back the advance they originally received. Therefore EMI may "credit" many of their writers' accounts, instead of actually paying them.
Some have contended EMI's move is primarily meant to boost its bottom line since they could charge more than what ASCAP is currently paying them, avoid the modest administrative fees charged by ASCAP (approximately 5 percent), and retain a great deal of the monies that would otherwise be paid directly to their own writers. In light of EMI's impending sale by its owner Citibank, some argue that EMI’s plan is to enhance their bottom line and thereby up the price that a potential buyer would be willing to pay.
Whatever its motives, EMI's action could have a disastrous effect on the music business and music fans by killing or at least stunting the growth of digital music services which represent a key element in the potential recovery of the music business in the wake of the dramatic decrease of CD sales, as well as depriving their own writers of income that they currently receive.
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