Major overhaul of all music licensing may be in the offing as Copyright Office opens far-ranging inquiry.

Congress could not have foreseen all of today’s technologies and the myriad ways consumers and others engage with creative works in the digital environment. Perhaps nowhere has the landscape been as significantly altered as in the realm of music.

With that observation nestled in the opening paragraph of a Notice of Inquiry (NOI), the Copyright Office (CO) has kicked off a wide-ranging evaluation of “the effectiveness of existing methods of licensing music”. The CO’s study could eventually have a dramatic impact on the uses and distribution of recorded music in all areas of American business and culture.

The CO’s statement quoted above is certainly accurate (although similar technological changes have transformed the delivery of video programming, too). Think about the changes in recorded music since 1976, when Congress last overhauled the Copyright Act. Where we had vinyl discs (33-1/3 LPs, 45s and maybe even 78s) in 1976, we’ve since run through eight-tracks, cassettes and CDs. And now we can obtain recorded music digitally from MP3 and Internet streaming and MP3s. Where we once received music via broadcast radio, we now have satellite and Internet radio.

Despite these wholesale changes, the process of licensing recorded music has remained largely static for decades. That’s why many music industry participants – including songwriters, recording artists, broadcasters, Internet radio services – agree that revision of the process is long overdue. 

Music licensing is complex. It includes multiple separate and distinct components that may not be immediately apparent to the casual observer. Anyone even tangentially interested in the CO’s study should read the CO’s NOI at least for background purposes. Before we look at the questions the CO has posed, let’s review the various components of music licensing.

We start with the basic notion of “copyright”. When you create a work – write a song, paint a picture, etc. – you automatically obtain a copyright in that work. The Copyright Act grants copyright holders the exclusive rights to, among others,  reproduce and publicly perform their works. So if anybody else wants to reproduce or publicly perform the work you created, they have to get your permission. When you grant such permission, you are said to be “licensing” your work.

When it comes to recorded music, two separate and distinct copyrights are generally in play: the copyright in the song itself (usually referred to as the “Musical Work”), and a separate copyright in any recorded performance (the “Sound Recording”) of the song. These separate copyrights may be – and quite often are – held by different owners: copyright in the Musical Work is initially held by the person(s) who wrote the song, and copyright in any Sound Recording of the song is initially held by the person(s) who perform in the recording. Each of these types of copyright is subject to its own licensing processes.

My standard illustration of the different copyrights involved in recorded music: Consider the song “Yesterday”. Since Lennon and McCartney were credited as the composers, they hold the copyright to the Musical Work, i.e., the musical notes and words that comprise the song itself. (Actual ownership of the copyright has been sold at least a couple of times since the song was written; for purposes of our example, we’ll still call the Musical Work copyright holder Lennon/McCartney.) Once the song was composed, anybody who wanted to record it or otherwise perform it publicly had to get a license to do so from Lennon/McCartney.

According to the Guinness Book of World Records in 2006, “Yesterday” is the most covered song in popular music history. When each different recording of the song was made – whether by the Beatles, or Ray Charles, or Placido Domingo, or any of the 2,000+ others who have reportedly recorded it – the artist responsible for each of the recordings automatically acquired a separate copyright in his/her/their particular Sound Recording of the song. Anybody interested in reproducing or publicly performing any particular version (or Sound Recording) of “Yesterday” thus must obtain a license not only from Lennon/McCartney (for the Musical Work rights), but also separately from the holder of the copyright in the particular Sound Recording.

Let’s say you want to record your own version of “Yesterday”, or perform the song live on the radio or in a concert, or make copies of others’ recorded versions available for download. You will need to obtain licenses to do so. The nature of the licenses, the way you go about obtaining them vary, and how much you’ll pay depend on what you want to use, how you want to use it, and where you want to use it. That’s where the complexities arise. The licensing process may involve up to three different sections of the Copyright Act and possibly a non-statutory blanket license administered by one of the well-know Performing Rights Organizations (ASCAP, BMI and SESAC).

Some of the main variations include those discussed in the CO’s NOI:

Reproduction/Distribution of Musical Works: If you want to make and distribute your own recorded copy of a song – by, e.g., recording yourself singing it or copying somebody else’s version – primarily for private use, you’ll need to get a license from the holder of the Musical Work copyright. The right to make and distribute recordings of Musical Works is often referred to as the “mechanical” right. The mechanical right is governed by Section 115 of the Copyright Act.

The bad news is that mechanical rights in Musical Works are licensed on a song-by-song basis, which creates a considerable administrative hassle for folks interested in offering a library of downloads. (Many Musical Works copyright holders have designated the Harry Fox Agency as their agent for such licensing – so would-be users of Musical Works generally need only contact the Fox Agency.)  

The good news is that, under Section 115, once a Musical Work has been legally distributed to the public once, anybody can obtain a license to make and distribute copies. The terms and costs for a Section 115 license are determined by the Copyright Royalty Board (CRB) based on four general statutory factors set out in Section 801(d) of the Act:  (1) the availability of creative works to the public; (2) the economic return to the owners and users of musical works; (3) the respective contributions of owners and users in making works available; and (4) the industry impact of the rates. 

That good news is not for everybody, though. If you want to synchronize musical works for use in audiovisual media (television shows or films) or advertising, or for “sampling”, you’ll have to get a license directly from the copyright owner.

Public Performance of Musical Works: Let’s say you want to do something more than simply record and distribute a song. Maybe you want to sing it in a concert or broadcast it on your radio station or stream it on the Internet – in other words, “publicly perform” the Musical Work. No statutory license covers such public performance. Instead, that right is usually obtained through blanket licenses administered by ASCAP, BMI and SESAC. Such licenses are available to terrestrial broadcasters, satellite and Internet radio services, on-demand services, music streaming services, bars, restaurants, other commercial establishments – even companies who want to provide “music-on-hold” on their phone systems.

The absence of a statutory license doesn’t mean the absence of legal controls. ASCAP and BMI are overseen by courts through an antitrust consent decree dating back to 1941. (Our readers know that the Radio Music Licensing Committee is seeking to have similar judicial constraints imposed on SESAC as well.) A prospective licensee unable to agree on a royalty rate with ASCAP or BMI can seek determination of a reasonable fee in federal court. These consent decrees haven’t been revised in over a decade, although they have been the subject of occasional litigation.

Reproduction/Distribution of Sound Recordings. The copyright owner of the Sound Recording (as distinct from the underlying Musical Work) has an exclusive right to make and distribute mechanical reproductions of the recording, BUT as far as federal copyright law is concerned, that right extends only to Sound Recordings made after February 14, 1972,. (All states except Vermont provide some protection for Sound Recordings made prior to that date.) There is, however, no governmentally-mandated mechanism (e.g., a mandatory license similar to that accorded to Musical Works) governing the licensing of reproduction/distribution of Sound Recordings. Rather, such licenses must be negotiated directly with the Sound Recording copyright holder (typically the record company). Since the extent of statutory rights held by any such holder depends on when the particular Sound Recording was made, the precise rates and terms that may apply to each such license can vary significantly. In any event, unlike the situation with Musical Works, the licensing of Sound Recordings takes places largely without governmental supervision.

Public Performance of Sound Recordings. There’s a dichotomy here as well, but it’s media-based rather than calendar-based. Broadcasters are currently under no obligation to get a license from the Sound Recording copyright holder in order to broadcast (i.e., publicly perform) a Sound Recording. Not so on the digital side. Those engaged in satellite radio, subscription services and non-interactive webcasting (streaming) are required by Sections 112 and 114 of the Copyright Act to obtain a license for the transmission (i.e., public performance) of a Sound Recording. The rates set by those sections vary: rates for satellite radio and music subscription services are set by the CRB according to the four factors found in Section 801(d); rates for non-interactive webcasters are also set by the CRB, but are based instead on a “willing buyer/willing seller” standard.

(With respect to the broadcaster exemption from Sound Recording performance licensing, we note that the CO is on record as supporting the elimination of that exemption. According to the CO, only a handful of countries provide such an exemption; in addition to the U.S., they include China, North Korea and Iran. And, again according to the CO, the exemption deprives U.S. artists of millions in royalties internationally because most foreign countries that do provide for Sound Recording performance rights require reciprocity before they’ll pay out to artists from another country.).

So you’ve got all that, right? And bear in mind that many of the licensing scenarios described above are not mutually exclusive. In order to obtain all the rights necessary to broadcast a Sound Recording of a Musical Work, and simultaneously stream that same Sound Recording, you would be subject to multiple different statutory and non-statutory licensing obligations with rates determined by statutorily-mandated considerations, private companies subject to judicial oversight, and the unregulated miracle of the marketplace.

Given that crazy-quilt jumble of licensing considerations, many might agree that a comprehensive study of the situation by the most expert government office should be a good thing, right? 

Maybe, maybe not. 

Historically, the CO has tended to favor the interests of copyright owners over the interests of people using copyright works. Because of that, my guess is that the CO’s eventual conclusions will likely be unfavorable for broadcasters, who tend to fall in the latter category.

And CO conclusions adverse to broadcasters could be bad news in the not-too-long run. As the very first sentence of the CO’s NOI observes, “Congress is currently engaged in a

comprehensive review of the U.S. Copyright Act.” Congress has already demonstrated a preference for copyright holders: in the Digital Performance Right in Sound Recordings Act of 1995, it spawned SoundExchange and the obligation of webcasters to pay for publicly performing Sound Recordings. A copyright-owner-friendly report from the CO could give Congress even greater impetus to continue to move in that direction.

The various questions posed in the NOI suggest that the CO’s study may indeed be a set up for a possible push for copyright owner-friendly legislation. Sure, Congress has considered various changes in recent years – the Songwriter Equity Act, the Performance Rights Act, the Internet Radio Freedom Act – but it has yet to take action. Could the CO be building a record for legislation that addresses all of these topics?

The NOI certainly covers all this ground. It poses 24 questions ranging across seven general areas. Those areas, and some of the questions asked, include:

Musical works. Is the statutory license for the reproduction/distribution of Musical Works necessary? Is it effective? Same questions about both the process and standards used in Section 115 royalty ratesetting.  Would establishment of a blanket license, as opposed to song-by-song coverage, benefit the music industry? With respect to Musical Works performance rights, is the current system – with ASCAP and BMI operating under the constraints of judicially-imposed consent decrees – effective? Given “modern market conditions and legal developments”, is that system still necessary?

Sound Recordings. Is the Section 112/Section 114 statutory licensing process effective? How about the royalty and ratesetting process and standards for Section 114 licensing? Should federal copyright protection be extended to pre-1972 Sound Recordings? Has the distinction between interactive and non-interactive services been adequately defined?

Platform Parity. Do the multiple ratesetting standards – standards that vary across different music delivery platforms – make any sense? How do the platform-based differences affect music licensing?

Changes in Music Licensing Processes. How prevalent is direct licensing by Musical Work owners – as opposed to licensing through Performing Rights Organizations like ASCAP and BMI? How does direct licensing affect the music marketplace? Could the government encourage alternative licensing models (such as “micro-licensing platforms”) and if so, how and for what uses? What technological innovations have been or are being developed to make the licensing process more effective? Would the marketplace benefit by modifying the scope of existing licenses?

Revenues and Investment. Here the CO is looking for input on the overall financial fairness produced by the music licensing process. How have marketplace developments affected the income of composers, songwriters and recording artists? Are revenues from the performance and sale of music “fairly divided” between creators and distributors? How are decisions made by creators, publishers, distributors and labels, including new talent development, affected by music licensing issues? How does licensing affect the ability to invest in new distribution models?

Data Standards. To “facilitate” the licensing process, could the federal government encourage the use of universal standards for identifying Musical Works and Sound Recordings?

Other Issues. Are there any data or economic studies that measure the effect of technological or other developments on the marketplace, including “the revenues attributable to the consumption of music in different formats and through different distribution channels, and the income earned by copyright owners.”

Beyond those, of course, there is the ever popular catch-all question, i.e., “Is there anything else that might help us?”

Comments in response to any or all of these questions are due by May 16, 2014. They can be submitted electronically at this CO website. Limits: Comments should be submitted as a single file no bigger than six megabytes in either searchable PDF, MS-Word, WordPerfect, Rich Text Format or ASCII. Once comments have been received, the CO will convene one or more “public meetings” to address the various issues on the table.

We expect that major broadcasting companies – the NAB, possibly some state associations, maybe some major broadcasting companies – will be filing comments in this proceeding. But the right to comment isn’t limited to the big boys. We’re confident that the CO will benefit from hearing from the broadest possible spectrum of interested parties, regardless of their size.

We hear smaller broadcasters all the time venting about the music licensing process: from “we simply can’t take on another royalty obligation” to “the process of figuring out all our royalty calculations and reporting obligations is burdensome and time consuming” to “we’d like to start podcasting” (which requires a special “mechanical” license). The NOI provides an excellent, and possibly productive, opportunity to share the same sentiments with the CO.