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The Magic Bubble Bursts: Did the Record Labels make their own grave?

For almost a decade now, the major labels (at the beginning there wereRIO five of them, now only four, EMI, Sony BMG, Vivendi Universal and Warner) have declared that illegal downloading is ravaging their business by destroying the sales of physical product.  One may question this declaration, however, in few of the fact that ever since the RIAA filed its 1998 litigation again the manufacturer of the Diamond Rio MP3 player and extending to its most recent lawsuits against individuals across the country, the music industry has committed more public image faux pas than Dan Quayle and George W combined, making it one of the most hated industries among high school and college students.  It should be apparent to everyone now that it is not illegal downloads that is causing the downturn in music sales, as there are many other contributing factors, including the negative image the RIAA is generating.

This marred image is evident in the facts.  According to an article in Rolling Stone magaine entitled The Record Industry’s Decline:

About 2,700 record stores have closed across the country since 2003, according to the research group Almighty Institute of Music Retail. Last year the eighty-nine-store Tower Records chain, which represented 2.5 percent of overall retail sales, went out of business, and Musicland, which operated more than 800 stores under the Sam Goody brand, among others, filed for bankruptcy. Around sixty-five percent of all music sales now take place in big-box stores such as Wal-Mart and Best Buy, which carry fewer titles than specialty stores and put less effort behind promoting new artists.

Nonetheless, a new research study on the issue, commissioned by the Canadian government to explore issues related to copyright reform, was recently released.  The study is entitled The Impact of Music Downloads and P2P File-Sharing on the Purchase of Music: A Study for Industry Canada, and was written by Birgitte Andersen and Marion Frenz, of the Department of Management at the University of London in England.  A PDF version of the study is published here.

The results of the new study affirm many of the conclusions found in an earlier study entitled, The Effect of File Sharing on Record Sales: An Empirical Analysis. This paper was published in the February 2007 issue of The Journal of Political Studies, and was written by Koleman Strumpf, professor of business economics at the University of Kansas Business School and Felix Oberholzer of the Harvard University Business School.  Both studies directly contradict the claims of the music industry that file sharing is related to revenue losses.

In fact, the new study supports an opposite assertion, i.e., that distribution of music files on P2P networks actually promotes the sale of physical product.  Andersen and Frenz found, among people who actually participate in P2P file sharing, downloading actually increases the sale of physical product by a ration of 2 to 1, in other words, on average when a P2P file sharer downloaded the equivalent of two CDs in files, he or she would purchase of one physical CD (Note:  I have extrapolated here, as the numbers set forth in the study actually say that for every 12 P2P songs downloaded, physical purchases increased by 0.44 CDs).  It is important to note that the study concluded that, when incorporating the Canadian population as a whole (i.e., including the group who participate in P2P file sharing along with those who do not), file sharing on P2P networks has neither a positive nor a negative impact on CD sales.

One fact in the report I found very intriguing is its conclusion that the owners of MP3 players are less likely to purchase physical product.  This is interesting, in my mind, because I believe it is connected to the popularity of the iPod and iTunes.  If a person purchases the iPod and uses iTunes, there is really no need to buy physical product, whereas when a person uses a different brand of MP3 player, he or she is, in my humble opinion, more likely to go out in search of alternative means of finding music, including purchasing CD’s.  I would like to see a study which compares iPod owners with owners of third party MP3 players.  It may turn out that the biggest culprit in the demise of the record industry is Apple!

One story I found really revealing is the Rolling Stones article on The Record Industry’s Decline.  In it, the author tells the story about how the major labels were unable to come to a settlement with Napster which would have given them immediate access to Napster’s 38 million users.  I don’t know the details of that meeting, but it seems to me that when the industry burst that bubble, those 38 million users disbursed into millions of subgroups on P2P networks so varied that it become virtually impossible to get the magic back.  Hindsight is, of course, always better than foresight, but this event certainly seems to me to one of the biggest turning points in our industry’s history.

Is the music industry going to survive.  Of course!  It will certainly not be in the form many traditionalists in the industry wish it to be.  CD’s eventually be ancient relics of the past, sought after by collectors much as jazz lovers currently seek out old vinyls and record players.  The radio industry will not have control over marketing and thus the role of radio consultants on the industry will be diminished.  Marketing efforst will shift to television outlets and Internet marketing.  Search engines and online communities will continue to surface new music and expose the long tail.  Major labels will no be the sole repository of the major talent, as independents will rise to fill the void, fueled by venture capital from investors.  Whatever happens, it going to be an interesting ride!

Some further reading:

The Freakonomics of Music

File Sharing:  Zero Effect on Downloads

The Record Industry’s Decline

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Music Publishing 101, Part 4: Show me the money!

Section 106 of the Copyright Act gives the owner of a copyright a bundle of rights which includes the rights to 1) reproduce the work, 2) prepare derivative works, 3) distribute copies of the works, 4) publicly perform the work and 5) publicly display the work.  All of the music publisher’s income flows from this basic bundle of rights.  It should be noted that the right to perform the work is sometimes segmented into two descriptions, one called the grand rights, or dramatic and theatrical performances of the work, and small rights, or all public performances other than theatrical, including live performances of the work and radio broadcasts.  Here is New York attorney, Peter Shukat discussing grand rights:

To exercise control over these rights, a music publisher issues licenses to authorize various uses falling into this bundle of rights.  For example, if a company wants to reproduce and distribute a copyright in a musical composition, the publisher will issue a mechanical license to a record label, for example.  Mechanical royalties are a primary source of income for music publishers.  In the United States, the U.S. Copyright Office sets the rate for mechanical royalties, which is currently 9.1 cents for songs that are 5 minutes or less, and 1.75 cents per minute for songs exceeding 5 minutes.  The current mechanical royalty and historical rates can be found at the Harry Fox Agency’s website.  The Harry Fox Agency administers licenses for, and collects and distributes royalties to its member of the National Music Publishers Association, although a music publisher can, and often does, perform this task on its own  Since the rate is always subject to increase,  a music publisher should also request language in the license that provides that payment is made at the rate in effect at the time the product is distributed.

Another major source of income for music publishers is public performance royalties.  in the United States, these royalties are almost always collected by the three major performance rights organizations, ASCAP, BMI & SESAC.  Outside the U.S., each country has its own performances rights organizations.  See the “Resources” page on my blog for a list of and links to many of these.  As discussed in Part 2 of this series, music publishers, as well as songwriters, affiliate with (i.e., enter into an agreement with) the performance rights organization to enable them to track airplay and live performances, and collect and distribute the royalties.  Performance rights organizations issues “blanket” licenses to radio stations, television stations, large nightclubs, large restaurant chains, and retail source so that these entities can play the music of their affiliated songwriters and publishers.  In exchange, these venues pay the performance rights organizations fees based on the anticipated usage.  The societies then use varying formulas based on such factors as airplay and usage to issue payment to its affiliate songwriters and publishers.

The music publisher issues a synchronization license to the producers of  television shows, movies and commercial advertisements for reproduction and distribution of the work.  The “sync fMovie Reelee” is usually a one time payment, varying from the hundreds of dollars to hundreds of thousands, dependent upon numerous factors such as the length of the segment in which the song is used, the prominence of the song in the scene (whether it is prominently featured or in the background), and whether it is the primary focus of the scene (as, for example, BTO’s old song Takin’ Care of Business as used in the Office Depot commercials).  The publisher typically splits this type of revenue equally with the songwriter.

A less generous source of income, but still significant nonetheless, is revenue generated by printing sheet music and lyrics.  This is a type of public display, but can also fall into the category of reproduction and distribution.  Print licenses are most commonly issued to publishers of individual sheet music (sometimes called “piano copies”) and so-called “folios” (a collection of sheet music by a particular artist) and sheet music collections.  Income is also generated when lyrics to musical compositions are reprinted in a publication, such as, for example, when a book is printed in connection with a movie.  How much of this income is given to the songwriter varies widely, as it is sometimes based on percentage basis, but also can be on a flat, cent rate, e.g, 15 cents per copy.  When a percentage basis is used, it is sometime based on wholesale, sometimes retail.  The general trend among publishers in past years, however, is to split everything equally on a 50/50 basiiphones.

Of course, one rapidly growing area of revenue is in the arena of  technology, i.e., computer software, multimedia products, singing greeting cards, DVD’s and particularly ringtones.  Though these usages also involve the reproduction and distribution rights, they generally require specialized licenses and the rates a very market driven. Again, it is customary for a music publishers to split these fees equally with the songwriter.

Finally, a very significant source of income for a music publisher is foreign sub-publishing.  Outside of the U.S., music publishers solicit foreign sub-publishers on a territory by territory basis.  The arrangement is generally exclusive, meaning that the foreign publisher has the rights to exploit the music publisher’s entire catalogue of songs within that territory, including the entire bundle of rights, and issue mechanical, performance, synchronization and print licenses for the usage of the music.  Typically, the U.S. publisher will receive 75% of the income generated by the foreign sub-publisher, while the sub-publisher retains 25%.  The sub-publisher does not receive any ownership interest in the copyright and usually pays the U.S. publisher a significant advance on future royalties, dependent in large part on the amount of income the catalogue has generated in the U.S.  Foreign income is often the subject of intense negotiation in writer deals, but very often a songwriter will receive half of everything the U.S. publisher receives, or 37.5 cents of the 75 cents received by the publisher.

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Music Publishing 101, Part 3: Pieces of the Publishing Pie

Once a music publisher begins to receive income from the exploitation of the copyrights it has acquired, it must begin to distribute the income to the appropriate writers.  Understanding the basic principles of copyright ownership and royalty splits is fundamental to performing the task of distribution of income.  One device image that is often used to illustrate the concepts involved is a “pie” that represents the split of income as between the publisher and the songwriter (this diagram is borrowed from the Berklee School of Music).  To fully understand this illustration, however, it is necessary to overlay the ownership of copyright which, in a typical arrangement, belongs 100% to the music publisher.

In simple terms, when a songwriter signs an exclusive songwriting agreement with a music publisher, the songwriter is agreeing to give up one hundred percent of the copyright (represented by the yellow circle in my illustration), for which the publisher agrees to pay the songwriter an equal share, usually 50%, of the royalty income stream (the dividing line in the illustration) for the duration of the copyright.   So, for every dollar the publisher receives in net income from the exploitation of the copyright (the publisher will recoup certain expenses, such a dePublisher Split copymo costs, advances and administration fees — all of course subject to negotiation), it pays the songwriter fifty cents.  The only exception to this concept is that performance royalties, paid by ASCAP, BMI & SESAC, are paid by these organizations directly to the songwriter and publisher respectively, so that this income stream does not get filtered through the publisher.  The portion of the royalty stream paid to the songwriter is often referred to in the music industry as the writer’s share, while the portion the publisher keeps is called the publisher’s share.

If a songwriter has enough clout to negotiate a partial participation in the publisher’s share of income, he will attempt to negotiate what is called a “co-Publishing” deal.  In this type of deal, the songwrimageiter actually owns half of the copyright (half of the yellow circle in the above-illustration), and is entitled to received 50% of the publisher’s 50% share of the income, or an additional 25%.  This equates to 75 cents for every dollar of publishing income received (the songwriter’s share of the royalty pie, plus half of the publisher’s half  of the pie).

These principles begin to get even more convoluted when songs are co-written by myriads of songwriters, which happens all too often in Nashville.  Take, for example,  the song More than a Memory, recorded by Garth Brooks, currently climbing the Billboard Country charts.  That particular song has three (3) co-writers and six (6) publishers listed in the credits (incidentally, if you want to gain a good understanding of music publishing, buy yourself a recent copy of Billboard magazine and study the “Singles & Tracks Song Index” that details the publisher information).  So, assuming for illustration purposes that the three writers have participation deals with their publisher (this appears to be the case since there are six publishers), then each writer would own 16.666% of the copyright and would each be entitled to 25 cents of each dollar received.  Three of the six publishing companies likely belong to the songwriters themselves (and one-third of the income just described would be paid by the entity through which they self-publish), and the remaining three publishers would split the remaining 25 cents, entitling them to about 8.5 cents each.  To further complicate matters, any portion of the royalty stream can be sold and/or encumbered, as can the publishing interests.

In addition, both music publishers and songwriter are often the party to an administration deal in which an administrator issues licenses and collects royalties for the copyright owner in exchange for a percentage of the income, usually 10-15%.  So, to continue using the example in the previous paragraph, if one of the co-writers of More than a Memory has an administration deal in which she pays 10%, then her share of the $1.00 would be 22.5 cents, because she paid her administrator 2.5 cents. 

One thing is certain, the music publishing industry most often applies the converse of Occam’s Razor, i.e., the principle that, all things being equal, the simplest solution is best! 

This article is not intended as legal advise.  Should you require advise regarding an music publishing issue, you should consult with a competent entertainment attorney.

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Music Publishing 101, Part 2: Forming a publishing company

From a legal perspective, the formation of a music publishing company is, in most respects, very similar the formation of any other type of company, except that the documentation is tailored specifically for the business of music publishing. 

The first step in the formation of any business, including a music publishing company, is to determine what type of business entity you desire to form.  There are four basic forms any business can take:

  1. Sole Proprietorship
  2. Partnership
  3. Corporation
  4. Limited Liability Company

With the exception of a sole proprietorship, these entities can take on several forms, such a a limited partnership as opposed to a general partnership, an S-Corporation as opposed to a C-Corp, and a member managed LLC as opposed to a manager managed LLC, just to illustrate a few of the iterations.  You are strongly advised to seek the counsel of a qualified entertainment attorney and a music business accountant prior to establishing your company.

The decision as to which type of entity to create impacts the liability to which the individual members of the entity can be exposed.  In a partnership, for example, each individual member of the partnership is liable for the actions 331466_pianoof the other partner or partners.  Of course, a sole proprietor is liable for his or her own actions as well.  Only corporations and limited liability companies shield the indivudal members from liability impacting their personal assets.  For this reason, when forming a music publishing company, it is most frequently advised that one of those two entities be used, as publishers are often the subject of copyright infringement actions, among other things.

The choice between a corporation and a limited liability company is frequently a personal one.  The corporation is a more formal structure than the the LLC, involving the selection of a board of directors, a president, sometimes a vice president, and a secretary and treasurer.  The limited liability company, on the other hand, can take many forms.  It can be member managed, similar to the management style of partnership or it can be manager managed, either in simple arrangement where one person acts as a manager, on in a configuration more like the corporation, where there are individuals serving in the various roles of president, vice president, secretary and treasurer.  It is this greater flexibility of management that spawns the popularity of the limited liability companies in today’s culture.  One should not be so quick to decide, however, without the input of a good tax consultant and/or attorney.

Once a decision is reached as to the type of business entity the music publishing company will take, it will be necessary to determine a name for the publishing company.  This is where forming a music publishing company differs somewhat from other businesses, because of a music publishing company’s interaction with the major performing rights organizations (PRO’s), primarily ASCAP, BMI and SESAC.  Whereas a songwriter can only affiliate with one PRO at a time, a music publisher affiliates with all three if it intends to conduct significant business.  In order to submit an application, each PRO requires, among other things, that a music publisher give three choices for names in order of priority.  So, when choosing a name for your music publishing company, bear in mind that you will need at least nine variations in order to submit applications to the PRO’s.

To illustrate this point, consider the various entities used by Sony ATV Music Publishing Nashville, a major player in the Nashville music publishing arena since its purchases of Tree Publishing and Acuff Rose Music merged two of the giants in the history of the Nashville music industry.  One recently charted song by Taylor Swift, Our Song, is owned in part by Sony ATV’s BMI publisher affiliate, Sony/ATV Tree, BMI.  Another song on Billboard’s country single chart this week is Rascal Flatt’s Take Me, which owned in part by Sony ATV’s ASCAP affiliate, Sony ATV Tunes, ASCAP.  Finally, Sony ATV also has a SESAC affiliate, which goes by the name Sony ATV Sounds, SESAC.  A closer examination reveals that each of these entities are separate entities, probably owned in whole or in part by the parent conglomerate.  As a side note, Sony ATV Music Publishing Nashville was recently name country music publisher of the year 2007 by all three PRO’s, ASCAP, BMI and SESAC, making it the first publisher in history to do so.  Read about it here.

You’ll note that Sony ATV uses a different, creative variation of the name for each PRO affiliate, a pattern often followed by other publishing houses, such as Warner Chappel Music, which has variations such as WBM Music SESAC, WB Music ASCAP, Warner-Tamerlane Publishing, BMI, and Warner Chappel SOCAN (a Canadian PRO).

Smaller publishers may not wish to follow the course of Sony ATV by maintaining separate limited liability companies for each publisher affiliate and parent LLC, as this can lead to greater expense in the formation of the company.  Rather, one option would be that one entity can be used for the parent company, and operate subsidiaries under assumed names for each of the publishing affiliates.

Once you’ve determined the names to be used and the types and numbers of entities you’ll be using, the next step is to prepare and file the appropriate documentation with the secretary of state in the state you’ll be operating your business.  Information about formation of a business entity in Tennessee is available from Tennessee’s Secretary of State.  Then, in Tennessee, you must register the entity in the Register of Deeds office for the county in which your principle place of business resides.  Next, you’ll need to obtain a Taxpayer Identification Number from the IRS by filing Form SS-4.  Finally, you’ll need to apply as an affiliate at each of the following PRO’s:  ASCAP, BMI & SESAC, assuming, of course, that you intend to contract with writers from each of these affiliates.  You’ll note that SESAC has a different process than ASCAP or BMI in that the process is more selective and requires that you initiate contact with their Publishers Relation Staff prior to being reviewed for affiliation.

You might also want to explore joining an organization such as the National Music Publisher’s Association, which owns and operates the Harry Fox Agency, an organization that serves as the clearinghouse for the collection and distribution of mechanical and digital license fees.

After this, you need to begin the process of developing agreements that will be used to sign songwriters to your various affiliate companies.  Work with a good entertainment attorney to customize and draft exclusive songwriting agreements and single songwriting agreements as an basic first step in this process.  Then, you’re ready to start scouting talent!

This article is intended as a basic outline of the steps required to form a music publishing company.  It is not intended as, and should not be substituted for, the advise of a good entertainment attorney, which should definitely be retained and consulted prior to starting this entire process.  Expect to spend somewhere in the range of $5,000-10,000 in various legal fees to complete the entire process.

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Music Publishing 101, Part 1: A brief history

This blog series will explore music publishing, giving a little bit of history and outlining the basic steps necessary to form a music  publishing company.  Part 1 looks at a brief history and background of music publishing.

Modern music publishing in the United States can trace its roots to “Tin Pan Alley,” the name given to a grou116962_come_play_my_songp of sheet music publishers who collected on West 28th Street in New York City in the late 19th, early 20th Century, when names like Irvin Berlin and John Philip Sousa were the leading composers.  This coincides roughly with the invention of introduction of Thomas Edison’s Gramophone and the phonograph cylinder.    Tin Pan Alley publishers were concerned mainly with selling sheet music and piano rolls.  The most dramatic shift in popularity from printed music to recorded music did not occur until the development of the “talkie,” when The Jazz Singer was released in 1927.

In 1914, ASCAP was formed to protect the copyrighted music compositions of its members.  The organization expanded with the introduction of the new invention called radio in the 1920’s.  Because owners of radio stations did not like paying what they considered exorbitant license fees to ASCAP for the performances of musical compositions, the broadcasters formed their own organization, BMI (Broadcast Musicians Inc.) in an effort to drive the license fees down.

Modern music publishers are in the business of engaging composers, i.e., songwriters, and obtaining ownership of their copyrights.   In exchange for the copyright, the music publisher agrees to exploit the composition to potential licensees (a process generally referred to as “song plugging”), administer the copyright, collect the mechanical royalties and license fees, and distribute a portion of the collected monies to the composer.

Most music publishers will offer promising composers what is called an “exclusive songwriter agreement” in which the composer is obligated to provide the publisher with a minimum number of commercial musical compositions within a certain period.  The composer generally receives a “salary,” which is fully recoupable from future royalties.   Again, the publisher gives up the copyright in the musical composition in this type of deal. 

Another, less common deal type, which is reserved for songwriters who have some clout in the industry, is called a “co-publishing deal”   This arrangement is usually very similar to the exclusive songwriting arrangement discussed above, except that the songwriter only gives up half of the copyright in the musical composition and retains the remaining half. 

Less often, music publishers offer “single song agreements” to composers who may have one or two compositions that interest the publisher, but not enough that it feels warrants a longer term commitment.  Most major publishing houses do not offer these type of agreements.  They are generally the purview of independent and upstart music publishers.

There are myriad gradations of these deals, and the terms in any one agreement can be as varied as an artist’s palette of colors, so if you are interested in music publishing agreements, please contact a reputable music attorney prior to obligating yourself or giving up a copyright.

Tomorrow’s installment of Music Publishing 101 will discuss the basics of forming a music publishing company.

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Return fire by the music industry – artists to testify before Senate

The Senate Judiciary Committee is holding a high-profile hearing  today on the subject of imposing additional performance royalties on so-called “over-the-air” or “terrestrial” radio stations (I’ll just call them OTA’s in this article).  Investigative hearings such as these are usually precursors to legislation being introduced on the subject.  898993_antenna_4Grammy winner, Lyle Lovett and Chicago-based singer-songwriter Alice Peacock testified before the Committee this morning at 9:30 ET.  Their testimony was broadcast live at C-SPAN.

So, what is the issue.  OTA’s and the music industry are currently engaged in one of the biggest industry and lobbying battles to hit Washington in quite some time.  The OTA’s fired a recent shot when a concurrent resolution was passed by Congress.  Now, the music industry is firing back. 

One of my recent blog entitled New concurrent resolution, H.Con.Res 244, introduced to combat performance royalties for record labels gives some background on the issue, which is basically this:  Currently, OTA’s pay performance royalties to ASCAP, BMI and SESAC in the U.S. for airplay performances of the musical composition copyright.  They do not, however, pay a performance royalty to the owners of the sound recording copyright for over the air performances of the copyright.  The sound recording copyright is distinct from the musical composition copyright.

This is because when Congress introduced new legislation in the mid-90’s to grant sound recording copyright owners a right to performance royalties, it specifically excluded OTA’s from the legislation on the basis that the artists and record labels who owned the sound recording copyrights benefited from the publicity of over the air performances, which offset the need for payment of a performance royalty.    Keep in mind, again, that this does not apply to the performance royalties paid to songwriters and music publishers.

The effect of the Digital Performance Royalty in Sound Recordings Act of 1995 is that only digital performances of the sound recording copyrights are entitled to compensation.  This applies only to Internet webcasters, Cable Radio and Satellite radio stations.  These types of services — Pandora, Sirius, XM Radio, Last.fm, for example — pay performance royalties to both the owners of the musical composition copyright and the sound recording copyright.  Many industry groups are rallying to rectify what is viewed as an unfair advantage for OTA’s.

One such group is musicFIRST, which stands for “fairness in radio starting today.”  This organization is made up of a large and impressive group of recording industry groups and well-known artists.  Unfortunately, the RIAA’s involvement in this organization has diminished its reputation on many blogs, such as this article entitled Lovett goes to bat for radio royalties, the credibility of which is call into doubt by the fact that the writer is ostensibly unaware of Lyle Lovett’s reputation and notoriety.  But don’t make the mistake of slanting your opinion against musicFIRST based on that organization’s involvement.  Check out the website and seriously consider the issues and you’ll probably understand their perspective.

There is tremendous validity to the argument that radio broadcasts no longer hold the same sway over consumers that they did in 1995.  One research study conducted by Dr. Stan Leibowitz, an economics professor at the University of Texas, compared record sales and music radio listening habits in nearly 100 cities across the United States and found that exposure for a song on the radio was a substitute for purchasing the music and, therefore, actually had a negative impact on sales of music.  Critics point out that the study was funded, at least in part, by the musicFIRST coalition and say that there are studies which indicate the opposite, that is that radio airplay stimulates interests in new music and therefore encourages sales.  Think about your own habits – when was the last time you heard a song on the car radio and rushed to buy it?

Another argument propounded by the OTA’s in opposition to payment of royalties to the owners of sound recording copyrights is that it would put them out of business.  They simply can’t afford to pay more royalties for the music they use.  Of course, Internet webcasters and Satellite and Cable radio providers are saying “talk to the hand . . . call waiting!”   But the truth is that OTA’s get the bulk of their revenue from advertisers and their revenue increases if they attract larger audience by playing the latest music.  Furthermore, stock analysts are predicting that advertising revenues, in general, are on the increase for the foreseeable future.  One researcher, George Williams, reportedly found that the annual growth of radio advertising rates from 1996 to March 2007 was 10% a year, outpacing the Consumer Price Index by more than three times its 3% a year rate.  It is very doubtful that OTA’s revenues would be seriously altered by this legislation, in fact, the OTA’s would more than likely simply pass the additional costs on to advertisers.

The bottom line, in my view, is that the legislation, when it is finally proposed, will create a level playing field for the broadcasting industry, providing that both digital and OTA’s pay the same royalties.  This seems fair, doesn’t it?  Now, whether the powerful OTA lobby will prevent the passage of such legislation is a blog for another day. 

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Copyright: it’s the end of the world as we know it.

Abraham Maslow’s famous “hierarchy of needs” places self-actualization as the pinnacle of human behavior.  To illustrate what the phrase “self-actualization” meant , Maslow said:

“a musician must make music, an artist must paint, a poet must write, if they are to be ultimately at peace with themselves.” 

Of course, the thing that is important to note about Maslow’s hierarchy is that physiological needs are at its base, i.e., a person’s basic needs must be met before Maslow's Self-Acutalization hierarchythat person can reach self-actualization.  In other words, “a guy’s gotta eat”!

Maslow’s theories shed some light on the ongoing social debate on the Internet regarding whether musicians would continue to produce quality music if copyright as we know it were to be abolished.  A different argument, though very related, is whether money motivates one to be creative. 

One movement advocating such ideas is the “Free Culture Movement.”  Another less extremist movement is Stanford professor, Lawrence Lessig’s “Creative Commons” group, which advocates modified forms of traditional license agreements as a social compromise to “reconcile creative freedom with marketplace competition.”  Watch Lessig’s video, released today on TED, entitled “How creativity is being strangled by the law.”   For another this interesting discussion, see the site Against Monopoly.

The underlying assumption of some of the parties involved in the debate, which is ostensibly grounded in the record and movie industry’s recent campaigns against infringers, is that all intellectual property should be free for the public to use without payment and that the antiquated copyright laws should be modified or abolished.   In my opinion, this extremism  ignores the foundation principle of Maslow’s hierarchy of needs, that in order to achieve self-actualization, an artist’s or musician’s base needs must be satisfied.

Proponents of the free culture movement observe that creativity survived many years without the structural form which copyright superimposed upon it.  Indeed,  it is often observed that the great works of Mozart were created without the existence of copyright laws.  Don’t forget, however, that Mozart wrote many of his works while being employed by benefactors such as the Prince Archbishop of Salzburg, Heironymus Colloredo  and Emperor Joseph II of Vienna, names that are certainly not as prominent as Mozart’s.   In fact, where would the world of the arts be without the billions of dollars that have been donated by benefactors such as J.P. Morgan, James Smithson, Bill & Melinda Gates, Andrew Carnegie, Henry Ford, John D. Rockefellar, just to name a select, if not elite, few.  So, while it is true that “a musician must create music,” it is also true that a musician has to eat. 

Long before the existence of copyright laws, there was a strong relationship between money and the creation of arts and music, and it will be that way until we abolish our system of currency as we now know it.   Walk around any great city and witness the existence of hundreds of pieces of commissioned artwork.  Listen to the commissioned works of Mozart, Beethoven and other great composers, who existed at the hand of benefactors.  Walk through the Museum of Modern Art and look at the works of art generously donated by J. P. Morgan and other benefactors.  Whether it be a king or a record label, money benefits art.  Creativity, like it or not, is often inspired by the almighty dollar, whether that is represented by paper currency or some other bartered for compensation which meets our base needs as human beings.  

That’s not to say that people would not continue to make music or art if they were not compensated for it – they would.  That is an entirely different question in my mind.  People’s hobbies and past time activities are in a slightly different class than, say, the copyrighted works of Don Henley.  If great singer-songwriters such as Henley could not make a living at playing music and writing songs, I would venture to bet that most of us would never had heard of The Eagles.  Again, even a great musician has to eat.  If the musician cannot meet his base needs doing what he loves to do, a musician will meet those needs some other way and, therefore, there would be less time to do what he loves to do.   So don’t confuse the musings of the masses with the creations of the geniuses.

The only legitimate question remaining, then, is how should a musician get paid for the music he or she creates?  How should the songwriter get paid for the songs he or she writes?  The answer, in the United States, is by virtue of the rights created in the Constitution, Article 1, Section 8, Clause 8, which gives Congress the right:

To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Investors the exclusive Right to their respective Writings and Discoveries.

The portion of this Clause dealing with the arts is further codified in the various Copyright Acts and amendments thereto.  In a nutshell, the Copyright Act creates a legal fiction, called intellectual property rights, which gives creators certain exclusive rights in their works, including the rights to produce copies, create derivative works, perform or display the work, and to sell and assign the works, among other things. 

The laws in the U.S. are based loosely on English concepts and laws that date back to the 17th and 18th century, which were a direct result of the invention of the printing press.  The first actual copyright law was the Statute of Anne, or the Copyright Act 1709.  Thus, the concept of “copyright” is a three-hundred-year-old concept that has survived the evolution from printing press to piano rolls to digital media, and I have little doubt that it will continue to survive through the technological age, despite the rumblings of these groups. 

As the law often does, it must evolve, albeit it ever so slowly, to encompass these new technologies. The good news is that the debate that is ongoing in the new virtual marketplace of idea will help us formulate new and improved amendments to the laws that will hopefully address the perceived dichotomy between the rights of free speech and free culture and those of the creators and owners of intellectual properties to receive just compensation for their efforts and investments.

In the end, this blog is my response to viewing Larry Lessig’s video, as I said, posted today on the TED website, entitled How creativity is being strangled by the law (See the link above).  In it, Lessig harkens back to the days of Sousa when children sat on the porch and sang the songs of the day.  Lessig told of how Sousa decried the advent of the phonorecord machine as the demise of creativity.   He points out that in our current state ot technological advance, copyrights should be “democratized” because the new generation of children use copyrights to create something uniquely different, that is to say they use the copyrights of others as “tools of creativity” and “tools of speech.”  Since every such usage requires a copy, the arguement continues, every such usage is presummed by the establishment to be an infringement of someone’s copyright.  Lessig’s solution is that the creator should simply license the use of their creation for free in the instance of “non-commercial” usages, and retain the rights to exploit it commercially.  He refers to this as the “Sousa Revival.”

My question to Professor Lessig is this:  why does the fact that an entire generation of Internet downloaders who are using copyrighted material to create derivative works mean that the rights of copyright holders have to be abolished or even diminished?  Why do the creative whims and urges of those who utilize other people’s copyrights to create different, derivative works supercede those of the people who created the original works?  Why should they?  Are the audiovisual images of a actor portraying Jesus Christ lipsyncing to an infringed copy of “I Will Survive” so creatively valuable as to supercede to the rights of Gloria Gaynor to distribute the original? (This creation is one of the examples in Lessig’s video presentation).  Consider this carefully before you answer, as it is a slippery slope.

This brings me to another relevant observation: people would generally not want pay money to hear most children sitting on the porch singing their songs, unless that child happens to be a Don Henley protegee.  That is the difference between most of the music ony MySpace, for example, and the music that is generally downloaded on iTunes.  There is a tremendous difference in the value of the spontaneous, albeit creative, songs of a child and the intricate lyrics and melodies which are the product of a genius the likes of Don Henley.  That is precisely why almost 100% of the product downloaded from Napster in the early days was product that had been recorded and marketed by major record labels.   It had intrinsic value.

Let me illustrate these principles with an example from the world of physical property.  Person A has a piece of property populated with a lot of trees.  Person B, owns the lot next door, which is flat and has a nice stream of water running around its perimeter.  Person C comes along, see this situation and, overwhelmed with creativity, cuts down Person A’s trees and builds himself a house on Person B’s lot and claims it as his own.  When Persons A and B confront him, stating that the law says he cannot do what he did, Person C responds that his creativity is being strangled by the law and, therefore, the law should be abolished.  Is Person C making a good argument?  Is Person C likely to prevail in court?  No.  Yet, this is the argument of the Free Culture Movement and, in some ways, of the Creative Commons.

Just as the law creates real and enforceable property rights for a person who owns a plot of real estate, the law creates intellectual property rights so that person can own an intellectual creation and enforce his rights to the exclusion of those who usurp it.  Abolishing the one makes no more sense than abolishing the other.   Abolishing the intellectual property right a person has in a copyright, therefore, devalues the creation.

Now, imagine that Person A’s lot was, instead, full of reeds and twigs and Person B’s lot was full of ravines, rocks and arid soil.  Person C would never stop to take a second look!  The barron options now before Person C would NOT inspire creativity in most people.

As further illustration of this principle of intrinsic value, ask yourself whether the Jesus video referred to earlier would be nearly as popular, nearly as creative, if the actor’s own singing voice had been used in place of Gloria Gaynor.  The answer is probably no, because the reason that the video of Jesus Christ singing Gloria Gaynor’s “I Will Survive” is so popular is because it incorporates a copyright that already has intrinsic value and, therefore, adds additonal value to the video.  The arguments of the free culture movements omit or overlook this concept of intrinsic value. 

What I do like about Lawrence Lessig’s movement, Creative Commons, is that it is, in the final analysis, based on the principles of the Copyright Act, i.e., that the copyright has value and that its owner has certain exclusive rights, which he can assign to others.  Lessig’s solution is essentially using existing copyright laws to create a unique license that attempts to strike a balance between fair use and full copyright reservation.  In the end, however, the license are based on the rights already granted in The Copyright Act, proving that the copyright laws as they currently exist allow for the very thing that these groups seek.  I cannot agree with him more in that respect.

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New concurrent resolution, H.Con.Res. 244 introduced to combat performance fees for record labels

For years now, a huge battle has been brewing between proponents of performance royalties for the owners of sound recording copyrights to be paid by terrestrial radio stations (those broadcasting through the air) and it has been gathering steam in the last several months.

The battle is being waged between the giants of industry,  the RIAA, representing the four major record labels, aRep. Michael Conawaynd organizations like the National Association of Broadcasters and the Free Radio Alliance, representing the broadcast radio industry.  The latest round of fire was shot on Oct ober 31, 2007 on behalf of the broadcasters when two Texas lawmakers, Michael Conaway, a Republican, and Gene Green, a Democrat, co-sponsored concurrent resolution H. Con. Res 244, the “Local Radio FRep. Gene Greenree Act.”

 A concurrent resolution is a legislative measure passed by both the House and the Senate generally used to address the sentiments of both chambers with regard to certain matters.  Since they do not have the force of law, concurrent resolutions are generally used to provide for adjournments, recess, use of the Rotunda, and other such matters.  The “Local Radio Free Act” is essentially a policy statement supporting free local broadcast radio and opposing any new performance fees, taxes or royalties for the public performance of sound recordings over the airways.  Ever wonder what is behind all of this noise?

When a company wants to use a sound recording of a musical composition, there are two copyright owners with whom it must deal:  the owner of the musical composition copyright and the owner of the sound recording copyright.  For example, Dolly Parton (or her publishing company) owns the copyright to I will always love you, but two different record companies own the copyright in the sound recordings performed independently by Dolly Parton and, later, by Whitney Houston.  And, of course, one of the rights granted by the Copyright Act to the owner of a copyright is the right to publicly perform the work.

For years, ASCAP, BMI and SESAC have collected the performance royalties on behalf of the composers and writers of the music compositions.  All radio stations, whether terrestrial or digital (over the Internet or Satellite), pay performance royalties for the musical compositions they play over their broadcasts — to the tune of around 500 million dollars per year.  It wasn’t until 1995 and the passage of The Digital Performance Right in Sound Recordings Acts that the public performance right was created in the sound recording of a musical composition.  At that point in time, the digital broadcasters of music, including Satellite and Internet stations, were required to start paying a performance fee to the owners of the sound recording copyright, i.e., the record labels and artists who perform the song.  The Act specifically exempts, however, the local radio stations that broadcast the music over the airways, ostensibly on the grounds that the recording artists and labels were receiving free publicity from the broadcast radio stations in exchange for the use of their sound recording.

Now, with the demise of the CD and the rise of illicit downloading, the record industry is pressing Congress hard to extend the Digital Performance royalty to the local broadcasters and, of course, those broadcasters, with their extremely old and strong political ties, are fighting hard against it. 

The RIAA, for its part, is sending CEO Mitch Bainwol onMitch Bainwol, CEO of RIAA the interview circuit.  Bainwol is consistently hailed by many Washington publications as one of the most powerful and influential lobbyist in Washington.  In an L.A. Times article in which he discussed the performance fee, Bainwol is quoted as saying that “the creation of music is suffering because of declining sales.”  This group has the formidable support of the U.S. Copyright Office, which has support the removal of the exemption for terrestrial stations for many years, and the chair of the House subcommittee on intellectual property, California representative Howard Berman, who is actively pursuing legislation to remove the exemption.

The National Association of Broadcasters is fighting the RIAA with a barrage of print ads and radio ads in support of their position.  They use the word “tax” as an emotive term to sway people to their side.  The NBA stress that it is the major label conglomerates that would get the bulk of any new performance fees.  The radio broadcasters are a formidable force themselves with corporate entities such as Cox Radio, Citadel, Cumulus, Clear Channel, just to name a few, in opposition to the expansion of the digital performance fee. This new legislation is a result of this group’s hard fought efforts against any new measures, claiming that with profit margins already in the single digits in some instances, a performance tax would obliterate their business.  

In the grand scheme of events, the concurrent resolution is probably a non-event.  It is the efforts of one group’s successful lobbying finding a materialization.  Don’t expect this to be the last word on the subject, however.

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Last Man Standing – collaborating with other songwriters

See Jane.

See Jane write lyrics.

See Dick.5237697662_f8e465b716

See Dick write melodies.

See Dick meet Jane.

See Dick and Jane combine their efforts and collaborate together to write a song.

This is one frequent story among Nashville’s songwriting community.  On any given afternoon in Nashville, there will be innumerable co-writing sessions occurring at any given moment.  Those collaborative efforts certainly produce most of the top hits on the country charts.  The odds are, however, that at least 9 out of 10 of those songwriters will not know the implications of collaborating with another songwriter on the creation of a copyright.

Rarely do songwriters consult an attorney or enter into any form of collaboration agreement prior to co-writing.  Rarer still is the songwriter that fully understands the important consequences that flow from co-writing with another songwriter.

If a songwriter does happen to consult about this issue, the first thing I tell them is that it is very much like entering into a marriage relationship.  When two songwriters get together and collaborate on the creation of musical composition, each songwriter is a co-owner of and equal and undivided interest in the whole copyright, i.e. each songwriter co-owns 100% of the copyright – regardless of the relative extent of their respective contributions.   Ownership is not equally divided, as is commonly thought — i.e. split 50/50 (that confusion comes from the fact that the royalties derived from the copyright are usually divided equally).

In the Dick and Jane analogy above, for example, Jane does not separately own the lyrics and Dick separately own the melodies.  Dick effectively owns 100% of the song, including both the lyrics and music and Jane effectively owns 100% of the song, including both the lyrics and the music.  The concept is very similar to the legal principle of tenancy in common. Unless they agree to the contrary in writing, each songwriter has the right to administer the entire copyright without consulting with the other songwriter, i.e., each songwriter may issue nonexclusive licenses to the entire copyright or issue first use licenses.  The only obligation each co-owner has to the other is to account for any profits earned by the exploitation.  A co-owner may not, however, without the permission of the other co-owner, transfer exclusive rights to use the work or transfer the entire copyright to a third party.

To be absolutely clear, the Copyright Act does not really define “joint authors,” but rather defines a “joint work” as a “work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole.”  17 U.S.C. 101.   The key here is intention — i.e., the parties must intend that their work be integrated or merged to form a united whole at the time the work is created.  The legislative history that accompanied the act specifically states that a work is “joint” if the authors collaborated on its creation.  See H.R. Rep. No. 1476, 94th Cong., 2d Sess. 120 (1976); S. Rep. No. 473, 94th Cong., 1st Sess. 103-104 (1975).

Take for example the circumstance that arises when a person creates a poem, which is registered as a copyright.  Then, later on, a second person takes the poem and modifies the words, adding music to create a song.  The situation described is different from the collaborative effort in that there was no intent, at the time the poem was created, to merge it with the second creative effort.  The second work, the song, is a derivative work, and its writer needs permission from the creator of the poem to create the derivative work.

While we’re on the subject of derivative works, each co-owner of a joint work may create derivative works independently of each other and without the permission of the other, and, without any obligation to share the royalties derived from the exploitation of the derivative work.

Songwriters3 Now, not to further confuse the issue but, in the eyes of the law, there is a difference between co-ownership in the copyright and split of the royalties.  To get back to the Dick and Jane analysis, the typical understanding is that Dick and Jane would split any royalties received from the exploitation of the copyright on a 50/50 basis.  It is important to understand once again, however, that this understanding can be modified with a written agreement between the co-writers.  A songwriter whose reputation is strong enough can certainly request that he or she receive a greater percentage from the royalties, and even ask for a greater percentage ownership interest in the copyright.  These types of exceptions, however, must be expressed in writing between the parties in order to be enforceable.

Another complication arises in circumstances where a party merely contributes an “idea” to the collaborative effort.  Is that person entitled to be a co-owner?   I’ve had this issue arise in litigation.  Two parties are collaborating on a song and have most of the song written.  In walks a friend who is also a songwriter.  He listens to the song and contributes an idea that is incorporated into one line of the song.  He leaves, the song is finished, and becomes a hit.  Does the third songwriter have an interest in the song?  The answer to the question is inevitably determined by the particular facts and hinges on whether the third party merely contributed an idea, or actually contributed the expression of an idea.

As a final observation, let’s overlay the life of the copyright over the co-ownership of a collaborative work to give our brains a final flash fry if you will.  Assuming the work to have been created after January 1, 1976, the life of the copyright is life of the author plus 70 years.  In the event of a joint work, however, it is the life of the surviving author plus 70 years.    What this means in realty is that one of the co-writers in a successful hit song, i.e., the last man standing, will eventually become co-owners with the heirs of the deceased songwriter, either in the form of a wife or a child.

Most songwriters, of course, are not thinking this far down the road when they make their daily co-writing appointments.  But that’s the real thrust of this article.  If you’re a songwriter, you should consider the possibility of a collaboration agreement.  Most songwriters, I admit, do not think about this sort of thing because it cramps the creative vibe that needs to be created in a collaborative effort.  This, in my opinion, is not a wise idea.  At the very least — and this is not my recommendation — the writers should have some conversation about the consequences of their efforts.  Considering the consequences, the best course of action would be to consult with qualified legal counsel and get a collaborative agreement drawn up and signed — or at least have a written statement of intent signed by both writers  — at some agreeable point before the co-writing session begins, so as not to interfere with the creative efforts.

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Courts taking a stricter look at evidence in RIAA downloading cases

There appears to be a slight ripple of a trend among courts to take a stricter look at the evidence being presented by the RIAA in its crusade against digital downloads, based primarily on the evidriaa2ence of user names and IP addresses assembled by their expert consultants, MediaSentry. 

In the RIAA’s case against Jeff Dangler, filed in the U. S. District Court for the Western District of New York in Rochester, Dangler failed to file a response to the Complaint, and the Clerk entered the default against him.  Pursuant to Federal Rule of Civil Procedure 55(b)(2), the Plaintiff can then apply to the judge for a judgment based on the default.  In addition, Fed.R.Civ.P 55(b)(2) gives the judge the option to conduct hearings and hear evidence in order to determine if the damages requested are justified.  This gives the judge the opportunity to evaluate the merits of the underlying claim and, if he finds it to be deficient, deny a judgment on the default.

On October 23, 2007, U.S. District Judge David G. Larimer denied a 55(b)(2) request by the RIAA for a default judgment of $6,420 in Atlantic v. Dangler.   Judge Larimer specifically ruled that there were “significant issues of fact” in the record “as to the identification of the defendant from his alleged ‘online media distribution system’ username” heavyjeffinc@KaZaA.  The court points out that there is no evidence presented that established a time period of the alleged distribution and/or infringement nor are there details sufficient to determine whether, in fact, the defendant is the user so identified. 

Because of these deficiencies, Judge Larimer determined that he would hold a hearing to allow the Plaintiffs to establish additional evidence that a copyright violation was committed by the defendant.  You can read the full text of the judge’s order here.

Previously, in August 2007, a similar 55(b)(2) request was denied by Judge Rudi Brewster in Interscope v. Rodriguez in the U.S. District Court for the Southern District of California.  In that case, Judge Brewster held that “Plaintiffs . . . must present at least some facts to show the plausibility of the allegations of copyright infringement against on th[is specific] defendant,” citing the recent U.S. Supreme Court decision in Bell Atlantic Corp. v. Twombly, 127 S. Ct. 1955 (2007) that more than a mere recitation of the elements of a claim are necessary to find relief.   Basing his decision on facts similar in nature to Dangler, Brewster concluded that the RIAA’s complaint failed to state a claim upon which relief could be granted.

These decisions arise in districts where the judges are, generally speaking, more technically saavy than some other districts where these types of issues do not arise as often.  In a somewhat related case, the Ninth Circuit, the appeals court that has jurisdiction over the California district courts, one bankruptcy court has already established stricter standards of proof for establishing the veracity of computer records.  For more information, see the informative article entitled Admitting Computer Record Evidence after In Re Vinhnee:  A Stricter Standard for the Future?, by Cooper Offenbecher.  In short, this article discusses the interplay between Rules 901 and 803(6) of the Federal Rules of Evidence and their application to digital business records.  Essentially, without getting into the details, there is a hearsay exception for business records allowing their admission as evidence in a trial if they are maintained in the regular course of business and are relied upon by the business.   It is these sorts of dialogues that must inform the judges as they scrutinize the evidence presented by the RIAA in support of infringement claims, whether they be in the course of a default judgment or in the course of a trial.

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