[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
DISCUSSION DRAFT OF THE SECTION 115
REFORM ACT (SIRA) OF 2006
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
__________
MAY 16, 2006
__________
Serial No. 109-108
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
______
U.S. GOVERNMENT PRINTING OFFICE
27-605 WASHINGTON : 2006
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
DANIEL E. LUNGREN, California ZOE LOFGREN, California
WILLIAM L. JENKINS, Tennessee SHEILA JACKSON LEE, Texas
CHRIS CANNON, Utah MAXINE WATERS, California
SPENCER BACHUS, Alabama MARTIN T. MEEHAN, Massachusetts
BOB INGLIS, South Carolina WILLIAM D. DELAHUNT, Massachusetts
JOHN N. HOSTETTLER, Indiana ROBERT WEXLER, Florida
MARK GREEN, Wisconsin ANTHONY D. WEINER, New York
RIC KELLER, Florida ADAM B. SCHIFF, California
DARRELL ISSA, California LINDA T. SANCHEZ, California
JEFF FLAKE, Arizona CHRIS VAN HOLLEN, Maryland
MIKE PENCE, Indiana DEBBIE WASSERMAN SCHULTZ, Florida
J. RANDY FORBES, Virginia
STEVE KING, Iowa
TOM FEENEY, Florida
TRENT FRANKS, Arizona
LOUIE GOHMERT, Texas
Philip G. Kiko, General Counsel-Chief of Staff
Perry H. Apelbaum, Minority Chief Counsel
------
Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
ELTON GALLEGLY, California JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
SPENCER BACHUS, Alabama MAXINE WATERS, California
BOB INGLIS, South Carolina MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida ROBERT WEXLER, Florida
DARRELL ISSA, California ANTHONY D. WEINER, New York
CHRIS CANNON, Utah ADAM B. SCHIFF, California
MIKE PENCE, Indiana LINDA T. SANCHEZ, California
J. RANDY FORBES, Virginia
Blaine Merritt, Chief Counsel
David Whitney, Counsel
Joe Keeley, Counsel
Ryan Visco, Counsel
Shanna Winters, Minority Counsel
C O N T E N T S
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MAY 16, 2006
OPENING STATEMENT
Page
The Honorable Lamar Smith, a Representative in Congress from the
State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property............................ 1
The Honorable Howard L. Berman, a Representative in Congress from
the State of California, and Ranking Member, Subcommittee on
Courts, the Internet, and Intellectual Property................ 2
WITNESSES
Mr. David M. Israelite, President and Chief Executive Officer,
National Music Publishers' Association (NMPA)
Oral Testimony................................................. 5
Prepared Statement............................................. 7
Mr. Jonathan Potter, Executive Director, Digital Media
Association (DiMA)
Oral Testimony................................................. 15
Prepared Statement............................................. 16
Mr. Rick Carnes, President, Songwriters Guild of America (SGA)
Oral Testimony................................................. 20
Prepared Statement............................................. 22
Mr. Cary H. Sherman, President, Recording Industry Association of
America, Inc. (RIAA)
Oral Testimony................................................. 30
Prepared Statement............................................. 32
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard Berman, a
Representative in Congress from the State of California, and
Ranking Member, Subcommittee on Courts, the Internet, and
Intellectual Property.......................................... 53
Separate Statement of SESAC, Inc................................. 54
Prepared Statement of the U.S. Copyright Office.................. 55
DISCUSSION DRAFT OF THE SECTION 115 REFORM ACT (SIRA) OF 2006
----------
TUESDAY, MAY 16, 2006
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 4:05 p.m., in
Room 2141, Rayburn House Office Building, the Honorable Lamar
Smith (Chairman of the Subcommittee) presiding.
Mr. Smith. The Subcommittee on Courts, the Internet, and
Intellectual Property will come to order. It is nice to see a
nice audience out here interested in such an important subject.
I also was going to say, but maybe now don't need to say, that
I wasn't expecting any other Members to be present because
votes were canceled for tonight and there are no votes for
tomorrow. We especially appreciate the attendance of other
Members who are here, and actually, I am expecting a couple
more in addition to the ones who are already present.
I am going to recognize myself for an opening statement,
then the Ranking Member for an opening statement. Without
objection, all other Members' opening statements will be made a
part of the record, and after that, we will look forward to the
testimony of our witnesses today.
Today, the Subcommittee continues its efforts to reform
section 115 of the Copyright Act, which addresses mechanical
licensing. However, instead of identifying the problems in the
music industry, we will hear today about a possible solution
that has been jointly suggested by the music publishers and the
on-line music companies. They deserve great credit for the
overall time and energy they have spent and for the progress
that has been made to date.
The music industry has evolved from simple business models
focused around the distribution of physical items, such as
compact disks, to a dynamic digital marketplace where new
business models evolve rapidly. The laws that set out the
framework for the digital licensing of musical rights in this
industry are outdated and, some say, beyond repair.
The discussion draft before the Subcommittee today creates
a new blanket license for certain digital uses of music.
Digital music is the future of the music industry. The laws
that enable this industry to operate need to look to the
future, as well.
In addition to creating a blanket license, the discussion
draft creates competition among those who will issue such
blanket licenses to ensure that antitrust issues do not arise.
For missing copyright owners, the draft also ensures that a
license can still be issued for the use of their work and give
the owners 3 years to step forward to be paid their royalties.
The draft also enables direct licensing to occur.
When digital music services began, the lack of a legal
framework for licensing became a major obstacle to meeting
consumers' needs quickly. Online music companies made several
millions of dollars worth of escrowed payments in order to
obtain licenses for which rates had not been set. Those rates
have still not been set, thereby preventing distribution of the
royalties to the artists who, of course, deserve them.
Upon enactment of this legislation, this escrowed money and
more will finally be distributed to the artists. Outdated laws
that make artists wait years to be paid are currently not fair
to anyone involved.
Although this discussion draft reflects agreement on many
points between the Digital Music Association and the National
Music Publishers' Association, there are a few areas in which
agreement still has not been reached between the two parties.
Two of the issues that remain outstanding between DMA and the
publishers are, one, the cost of setting up and running a
modern licensing system and who should bear those costs, and
two, the proper definition of an interactive stream. The areas
of disagreement are in bracketed text in the discussion draft
that many of you all have in front of you.
There are other issues we will hear about today. For
instance, some think that the scope of this proposal should be
expanded to cover all works, digital and physical alike. With a
limit of four witnesses, the Copyright Office cannot be here in
person. However, they have provided written testimony for the
record, which I will read a statement from, and without
objection, their entire statement will be made a part of the
record, as well.
Here is a quote from the Copyright Office. ``The immediate
benefit that the SIRA,'' that is the underlying draft
legislation, ``could bring to the music industry should not be
delayed pending resolution of the other issues or bills, nor
should the fate of the SIRA be tied to that of other
legislation,'' end quote.
[The prepared statement of the Copyright Office follows in
the Appendix.]
Mr. Smith. There is no question about the need, but only
how to reform American music licensing laws. Music licensing
reform is necessary to pay artists and to make legal copies of
music available to consumers.
That concludes my opening statement and the gentleman from
California, Mr. Berman, is recognized for his.
Mr. Berman. Thank you very much, Mr. Chairman. Thank you
for scheduling this hearing on the discussion draft of the
section 115 music licensing reform.
We've come a long way from the initial piracy-laden version
of Napster released in 1999. The IFPI, sometimes known as the
International Federation of Phonogram and Videogram Producers,
digital music report of 2006 notes the growth of digitally-
delivered content in the music industry. Four-hundred-and-
twenty million single tracks downloaded in 2005 globally,
double that of 2004--more than double. Three-hundred-and-fifty-
three million single tracks downloaded in the U.S., up from 143
million. The number of subscription services, such as Rhapsody
and Napster, increased from 1.5 to 2.8 million globally in
2005. In 2005, the number of legitimate music download sites
reached 335, up from 50, 2 years ago. Digital sales in 2005
accounted for approximately 6 percent of global music sales
based on the first half of the year.
Two-thousand-and-five was a landmark year for digital
music. Just last week, The Washington Post reported that ring
tones, once dismissed as nothing more than a passing fad, have
become a $3 billion worldwide market. But the burden
surrounding licensing often delays, if not prevents, certain
music from getting to the consumer. Unfortunately, this
inability to provide music at any time, at any place, in any
format, may precipitate consumer migration back to unauthorized
peer-to-peer services.
Two years ago, the Copyright Office suggested that reform
of the 115 license should reflect a structure similar to that
which is currently available for the 114 license, a designated
agent which serves as a collector to administer a blanket
license. I am encouraged to see that the discussion draft
reflects that idea. I commend the publishers on their hard
work. They have tried diligently to resolve the problems that
the DiMA companies have illustrated, particularly the double-
dip and one-stop-shop issues.
However, I am concerned that with an impending markup less
than 2 weeks away, a number of important details of the bill
have yet to be agreed upon. I will focus on some of those
issues during the question and answer.
Furthermore, any solution can only be evaluated from a
perspective of the scope of the problem originally identified.
Two years ago at an oversight hearing on section 115, I posed
two questions which I would ask again today. Does 115
facilitate or hinder the roll-out of new legal music offerings?
And depending on the answer to the first question, what, if
anything, should Congress do to change 115?
While this proposed legislation addresses many of the
digital concerns, unresolved still are the many issues
encountered in the physical market or in the area of hybrid
services. The roll-out of new secure physical formats or high-
quality formats oftentimes require additional reproductions.
This roll-out has been sluggish. There is little resolution to
the business model which provides preloaded content on devices.
Finally, many definitional questions remain, such as whether
the license includes ring tones or if a kiosk service is a
reproduction of digital case or digital phonorecord delivery
service. Some of these questions may require a purely economic
analysis. Others may require reevaluation on the processed
level.
So we have solved some issues. We have a potential solution
to some issues. Other issues are not resolved. How we should
handle that, I think is a question for this Subcommittee and I
hope we can achieve greater clarity and further consensus as
this bill moves forward.
[The prepared statement of Mr. Berman follows in the
Appendix.]
Mr. Smith. Thank you, Mr. Berman.
Before I introduce the witnesses, I would like to ask you
all to stand and be sworn in, please. If you will raise your
right hand, do you swear to tell the truth, the whole truth and
nothing but the truth, so help you, God?
Mr. Israelite. I do.
Mr. Potter. I do.
Mr. Carnes. I do.
Mr. Sherman. I do.
Mr. Smith. Thank you. Please be seated.
Our first witness is David Israelite, the President and
Chief Executive Officer of the National Music Publishers'
Association. Founded in 1917, NMPA represents American music
publishers and their songwriter partners. From 2001 through
early 2005, Mr. Israelite served as Deputy Chief of Staff and
counselor to the Attorney General of the United States. In
March of 2004, the Attorney General appointed him Chairman of
the Department's Task Force on Intellectual Property. Mr.
Israelite earned his J.D. from the University of Missouri in
1994 and received a B.A. in a double major of political science
and communications from William Jewell College in 1990. David,
we usually don't put in all those dates, but you got special
attention today. [Laughter.]
Mr. Smith. Our second witness is Jonathan Potter, who is
the Executive Director of the Digital Media Association, DiMA,
a position that he has held since DiMA was organized in June
1998. DiMA's goal is to represent the leading companies that
provide online audio and video content to consumers. Mr. Potter
appears frequently before this Subcommittee and has worked with
David Israelite to develop the discussion draft before the
Subcommittee today. Mr. Potter is a graduate of New York
University School of Law and the University of Rochester. No
dates there, Jon.
Our third witness is Rick Carnes, the President of the
Songwriters Guild of America. Previously, Mr. Carnes has served
as SGA Vice President and has represented SGA on numerous
panels regarding contractual, technological, and legal issues
affecting songwriters. A native of Memphis, Tennessee, Mr.
Carnes and his wife, Janice, moved to Nashville in 1978. Soon
after, they signed their first record deal with RCA Records,
later recording for Warner Brothers and MCA Records. In 1983,
Mr. Carnes wrote Reba McEntire's first number one hit, ``I
Can't Even Get the Blues No More,'' and co-wrote with Janice
and Chip Harding three top ten hits for the Whites, ``You Put
the Blue in Me,'' ``Hanging Around,'' and ``Pins and Needles.''
Mr. Carnes is a graduate of Memphis State University with a
B.A. in political science and a master's in elementary
education.
Our final witness is Cary Sherman, who is the President of
the Recording Industry Association of America. The trade group
has more than 350 member companies that are responsible for
creating, manufacturing, or distributing 90 percent of all
legitimate sound recordings sold in the United States. The $14
billion U.S. sound recording industry is the largest market for
pre-recorded music in the world. Mr. Sherman graduated from
Cornell University in 1968 and Harvard Law School in 1971. An
accomplished musician and songwriter, Mr. Sherman is an officer
of the board of the Levine School of Music in Washington, D.C.
We welcome you all and look forward to your testimony, and
Mr. Israelite, we will begin with you.
TESTIMONY OF DAVID M. ISRAELITE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, NATIONAL MUSIC PUBLISHERS' ASSOCIATION (NMPA)
Mr. Israelite. Mr. Chairman, Mr. Berman, Members of the
Subcommittee, I appreciate this opportunity to appear before
the Subcommittee to address music licensing in the digital age
and the proposed Section 115 Reform Act of 2006.
Over the last year, we have been hard at work negotiating
with the organizations represented at this table and with other
music groups. The draft bill represents much progress from
those negotiations. I would like to thank you, Mr. Chairman and
Mr. Berman and your staffs for their hard work and your
leadership on this issue.
No one involved in the music industry today will tell you
that the way that the industry is structured makes sense.
Today's music business is the result of a great deal of
historical anomalies and unnatural evolution. Issues involving
music licensing can be very complicated and very confusing, but
underneath all of the legislative language and legal concepts,
there are some very simple principles.
Every piece of recorded music contains two copyrights. One
copyright belongs to the songwriter, represented by a music
publisher, for the words and notes. The second copyright
belongs to the artist, represented by a record label, for a
recorded version of that song.
This is what is known as a piano roll, used in player
pianos that were popular 100 years ago. Through the late 19th
century, the music industry was dominated by music publishers.
Their business was sheet music and later piano rolls. There was
no such industry as the recording industry. Because Congress
was concerned about a potential monopoly in the piano roll
business, in 1909, Congress imposed a compulsory license on
music publishers and songwriters.
The importance of recorded music grew in the early 20th
century, and by the end of World War I, recorded music
surpassed sheet music as the largest element of the music
business. However, Congress never imposed a similar compulsory
license on the copyrights owned by record labels. The result
was the existence of two distinct, independent copyrights, one
governed by a compulsory license and one free from Government
regulation and control.
I have had the honor of representing music publishers and
their songwriter partners for a little more than a year. I have
explained to a large number of people what a music publisher
does and how the music business is organized. When I explain
that every song contains two copyrights, one representing the
songwriters' efforts and one representing the recording
artist's efforts, the response is one of understanding. But
when I explain that what a record label charges for the
artist's copyright is determined in a free market but that the
Government tells a songwriter how much money he or she will
make on every song sold, the response is one of confusion and
bewilderment.
In the past, this system of unequal copyrights worked
because music licensing involved music publishers licensing
their copyrights to record labels. Those record labels then
sold the music containing both copyrights to the consumer in
the form of an album, an eight-track, a cassette, or a CD. But
in just the last few years, the emergence of new technologies
in the digital world has revolutionized the music industry.
Most new entrants into the music business are third
parties, like the companies that Mr. Potter represents, who do
not own either copyright but wish to sell the copyrights owned
by others. The result is that these third parties must engage
in two different licensing processes, one with record labels,
where the record labels can negotiate in a free market, and the
second with music publishers, where the Government sets the
terms and conditions.
Put simply, the current process of licensing copyrights
that are treated unequally under the law to third parties
doesn't work. NMPA supports eliminating the compulsory
licensing regime. We would prefer to bargain with third parties
in a free market, as our friends do at the record labels. But
until that is possible, music publishers are willing to help
create a new licensing system for digital uses under section
115. And again, we support these changes based on some very
simple principles.
First, we must not allow the perfect to be the enemy of the
good. Congress will never be able to address all of the
historical issues of the music industry in one piece of
legislation and it should not slow real progress on music
licensing just because consensus cannot be reached on
everything. The physical licensing process has been in effect
for close to a century and it is not broken. Physical products
are licensed on a song-by-song basis, such as CDs and albums,
and the vast majority of such products are, of course, already
licensed. Unlike digital music providers, record labels are not
in the position of suddenly needing licenses for a million
different CDs.
Second, the copyright of the songwriter and music publisher
deserves no less respect and consideration than the copyright
of the record label. Once a blanket licensing system is
created, there is no good reason why music publishers and
songwriters should not be able to license directly their
property to third parties who wish to sell their property. The
proposed legislation ends pass-through licensing and this is
critical to our support of the bill.
Third, this legislation must clarify, as it does in its
current form, what Congress intended all along with respect to
interactive streaming, that it constitutes a digital
phonorecord delivery and is licensable under section 115.
We thank you, Mr. Chairman, Mr. Berman, and the entire
Committee for your work on this important issue and for your
efforts on behalf of the songwriter and music publishing
community.
Mr. Smith. Thank you, Mr. Israelite.
[The prepared statement of Mr. Israelite follows:]
Prepared Statement of David M. Israelite
Mr. Smith. Mr. Potter.
TESTIMONY OF JONATHAN POTTER, EXECUTIVE DIRECTOR, DIGITAL MEDIA
ASSOCIATION (DiMA)
Mr. Potter. Mr. Chairman, Mr. Berman, Members of the
Subcommittee, on behalf of America's digital music innovators,
I'm pleased to testify today to announce DiMA's agreement with
NMPA in support of a new section 115 statutory reproduction
rights license that will dramatically improve the digital music
service's ability to compete against piracy and deliver more
royalties to all industry creators.
For several years, DiMA members, including AOL, MSN,
Yahoo!, Real Networks, and Napster, have sought to streamline
the licensing of musical works' reproduction rights so that the
process mirrors the licensing of performance rights. Simple,
efficient administration with assurances that infringement risk
has been eliminated if a company takes a reasonably
standardized license and pays a fair royalty.
DiMA welcomes today's discussion draft as it is intended to
accomplish precisely what we have requested, to update a 1909
statute for the digital era. DiMA and NMPA have agreed on many
significant legislative goals that are reflected in the
discussion draft bill. Everyone in the music industry wins,
digital services, music publishers, songwriters, record labels,
recording artists, and retailers, if the following changes
become law and digital services can compete more effectively
against piracy.
One, legal clarify. The discussion draft ensures that
investors and innovators will know what rights are implicated
by new digital music services, and as a result, the services
will spend less money on lawyers and more on product
development and marketing.
Number two, blanket license coverage. No longer will
transaction costs and legal risk associated with song-by-song
licensing undermine investment in new digital music offerings.
Three, flexible licensing alternatives. The draft
authorizes the Copyright Royalty Board to decide the right
royalty rate and the right royalty structure for each type of
business activity that is licensed. The CRB will decide whether
substantive and economic evidence supports a penny rate, a
percentage of revenue rate, or something completely different.
Four, technologically neutral rights and licenses. The
draft does not establish or limit rights, royalty standards, or
obligations based on a services method of transmission
technology or a consumer's choice of device. Uniform standards
apply equally to cable, satellite, and internet services, as
well as to PCs, mobile phones, and portable music devices.
Five, internet radio parity with broadcast radio. The
discussion draft promotes fair competition by providing
internet radio with effective royalty-free parity with
broadcast radio with respect to server and incidental
reproductions that facilitate a stream.
There are several provisions in the discussion draft that
represent significant concessions by DiMA members. Quite
significantly, DiMA members are willing to end years of dispute
with NMPA by conceding the existence of reproduction rights in
association with streaming services. DiMA and NMPA have agreed
to split our differences, which the discussion draft reflects
in its provision of a royalty-free license for reproductions
that facilitate internet radio and a potentially royalty-
bearing license for reproductions that facilitate interactive
streaming.
We agree that the legislation should not set a value for
this or any other reproduction right, but rather that future
negotiation or arbitration will determine the royalty rate.
Moreover, we agreed that the legislation should leave open the
possibility that the value of a reproduction right in some
context might be zero.
DiMA disagrees, however, with the discussion draft's
characterization of the interactive streaming reproduction
right as a delivery or a distribution right. DiMA agrees with
the Register of Copyrights that digital bits streamed to render
a performance should not be deemed a legal distribution or
delivery.
DiMA has also conceded to share in the costs music
publishers will incur in modernizing their existing song-by-
song licensing system in order to manage the new blanket
license. This is a first, as such costs are typically covered
by or deducted from royalty payments themselves. No other
statutory or compulsory license imposes cost-sharing
obligations on licensees, but as NMPA has absolutely insisted,
we have agreed.
Finally, DiMA is caught in the decades-old battle between
record companies and publishers regarding the draft's effective
elimination of contractual controlled composition provisions as
applied to digital licensing. DiMA understands both points of
view. On one hand, the traditional sublicensing model has
worked well for licensing digital phonorecord deliveries and
legislative change is not necessary. On the other, publishers
are demanding to license DiMA services through their own
designated agents so as to remove intermediaries between their
rights and their licensees and they have called this issue a
deal breaker.
Mr. Chairman, these disagreements are meaningful and
important, but not nearly as significant as our agreements. We
believe the disagreements should be manageable in the context
of moving forward on this legislation.
Once again, I thank Chairman Smith and Representative
Berman for your leadership and for the opportunity to testify
today. We look forward to working with you and your staffs to
resolve remaining differences and to refine this discussion
draft so it can become law in this session of Congress.
Mr. Smith. Thank you, Mr. Potter. I appreciate that.
[The prepared statement of Mr. Potter follows:]
Prepared Statement of Jonathan Potter
Mr. Chairman, Mr. Berman and Members of the Subcommittee:
I am pleased to join you today and announce the Digital Media
Association's agreement with the National Music Publishers Association
in support of a new, improved Section 115 statutory reproduction rights
license that will dramatically improve the legal and business
environment for digital music services. If stakeholders and the
Subcommittee collectively can overcome some final hurdles and gain
enactment of the conceptual agreements I will discuss, the result will
be more innovation and competition among digital music providers,
expanded music choice for consumers, and fair compensation to
songwriters and music publishers.
As you know, DiMA represents America's leading digital music
service innovators. Our member companies provide Internet radio, music
download and music subscription services to millions of consumers
nationwide. Offerings from AOL Music, Yahoo! Music, MSN Music,
RealNetworks, the iTunes Music Store, MTV, Napster and many more DiMA
members are the marketplace solution to music piracy. As the new
generation of music performance, music enjoyment and music retail
services gain traction in the marketplace, our members' consumer-
friendly innovations, feature-rich offerings, attractive pricing and
passion for music will persuade American consumers that legal services
are not just safer and smarter than illegal ones--they are better.
For several years DiMA members have sought to streamline the
licensing of musical works' reproduction rights so that the process
mirrors that of licensing musical works' performance rights--efficient,
low-cost administration and assurances that infringement risk has been
eliminated if a company takes a reasonably standardized license and
pays a fair royalty. Today, I am hopeful that we are taking a giant
step toward that outcome. For nearly two years, with this
Subcommittee's encouragement and support, DiMA has negotiated with NMPA
to develop a new reproduction rights licensing structure for digital
music services. At various points, our negotiations also included
several additional organizations and industries, including RIAA, NARM,
BMI, ASCAP, SESAC, the Songwriters Guild of America, Nashville
Songwriters Association, and the Recording Artists Coalition. But DiMA
and NMPA determined that a narrower agreement among our two industries
was most attainable this year, so we focused on what was possible.
Today I am pleased to report that DiMA and NMPA have agreed jointly
to support several major amendments to the Copyright Act, including:
1. the creation of a statutory blanket license that will
enable royalty-paying digital music services to gain all
necessary musical work reproduction rights licenses from one or
a handful of collective licensing organizations;
2. the clear provision of reproduction rights associated with
digital radio services, including a royalty-free reproduction
rights license for non-interactive digital radio; and
3. flexible, technologically-neutral rights, licensing
processes, and reporting requirements.
Agreement to support this combination of amendments did not come
easily to either digital music services or music publishers. But after
years of disagreement and many difficult months of negotiations, DiMA
and NMPA recognized our prevailing common goal--developing a healthier,
stronger, broader-based and more dynamic digital music marketplace.
Legal Clarity and Simple Licensing Processes. Digital music
services offer an extraordinary array of alternatives for consumers to
enjoy: pre-programmed radio and paid downloads are most like
traditional means of enjoying music--broadcast radio, and CDs sold at
retail, respectively. In addition, digital services include:
On-demand streaming, where a consumer creates a
playlist and listens only to pre-selected songs
Subscription downloads, which are essentially all-
you-can-enjoy music rentals paid for with one monthly fee.
Unfortunately, not all these services fit neatly into the current
reproduction rights legal regime, so well-intended DiMA members that
have launched digital services have been in legal limbo for several
years.
To reduce legal uncertainty and permit new types of services to
launch, NMPA and The Harry Fox Agency, on behalf of HFA's publisher
principals, agreed in 2001 to collectively license new digital music
services to the extent legally possible, so long as the services paid
agreed-upon advances against royalties (with a rate to be agreed in the
future or determined by the Copyright Royalty Board). However,
questions were raised as to whether the agreements actually
accomplished the parties' goals and whether they could do so absent
clarifying legislation. Fortunately, today's discussion draft and
DiMA's agreement with NMPA are intended to provide the necessary
clarification and ensure the effectiveness of these agreements, and to
pave a clear path to similar agreements in the future.
By clarifying when reproduction rights apply and how those rights
must be licensed, legislation will enable digital services to seek
capital, innovate and build businesses with legal certainty. As I have
testified before, the combination of legal uncertainty and statutory
copyright damages chokes investment and innovation, which all too often
leaves piracy as the most compelling consumer alternative.
Blanket license coverage. Under current law originally enacted in
1909, the right to reproduce or distribute a composition that is
incorporated into a sound recording is compulsory, but song-by-song
approvals by copyright owners are required. In the era of digital
music, this song-by-song process has created enormous transaction costs
for parties wishing to utilize the compulsory license, as new services
require more than 1 million songs for an offering to be competitive,
and each song must be licensed again for each new service that is
introduced.
The Harry Fox Agency can play an important role in streamlining the
process, but only for publishers that authorize the agency to act on
their behalf and only on a song-by-song offering-by-offering basis.
Unfortunately HFA's well-intended effort to license compositions to new
subscription services has fallen short, as many publishers have not
signed up for the program. Highlighting this lack of uniformity,
recently a DiMA member was sued for copyright infringement with respect
to the activities and musical works that the service understood to be
licensed by HFA.
The discussion draft changes this song-by-song license process and
limits future risk of this type by ensuring that all copyrighted
musical works are licensable on a blanket basis through one of a small
number of collective licensing organizations referred to in the draft
as Designated Agents. Like the SoundExchange system for sound
recordings that are webcast and the ASCAP, BMI and SESAC systems for
musical works' performance rights, the Designated Agent system enables
simple, streamlined licensing processes and substantially reduces legal
risk. If this agreement becomes law, digital music services will be
able to access all necessary rights to all musical works and to thereby
offer consumers a complete catalog of copyrighted sound recordings. In
the words of NARAS President Neil Portnow, digital music services must
compete against pirate networks by offering consumers access to all the
music. This legislation will be a giant step forward in this regard.
Flexible Licensing Alternatives. As DiMA testified previously in
this Subcommittee, consumer tastes are fickle and competing against
piracy is challenging, so music pricing must be dynamic. Dynamic retail
pricing must be supported by flexible pricing of rights, and this is
permitted under the discussion draft. In this discussion draft, the
Copyright Royalty Board is not bound to set penny-rate royalties, unit-
rate royalties or percentage-of-revenue royalties, nor is the royalty
rate pre-determined. Rather the CRB has the flexibility to do whatever
seems most sensible for each business model, based on the evidence it
hears from licensors and licensees.
Internet Radio Parity with Broadcast Radio. As the Subcommittee is
aware, throughout DiMA's 8-year history we have urged Congress to
implement technologically-neutral copyright policy. Today, we are
pleased that NMPA has agreed to provide Internet radio services--or
non-interactive webcasters--with effective legal parity as compared to
our terrestrial broadcast competitors with respect to server copy
reproductions. The discussion draft provides for royalty-free
reproduction rights licenses to cover the server and incidental network
cache copies of Internet radio services, so long the radio service is
not taking affirmative steps to promote consumer recording of the radio
programming. It differs in form from the terrestrial radio ephemeral
copy exemption from copyright, but its effect is to essentially
equalize how the law treats Internet radio compared to broadcast radio.
We applaud this progress.
Technologically Neutral Rights and Licenses. DiMA is also pleased
that the discussion draft does not provide different rights, royalty
standards or obligations based on a service's method of transmission
(e.g., cable or satellite or Internet) or the device used to convert
digital bits into audible music (e.g., a PC or a mobile telephone or a
stand-alone portable device). Rather, the discussion draft
appropriately creates a set if rights and licensing processes that is
technologically agnostic, and that avoids unnecessary and problematic
attempts to classify technology by focusing instead on the proper
issue--fair payment for the exploitation of copyrighted works,
regardless of the particular medium or means of the exploitation.
DiMA Concedes Regarding Interactive Radio Rights Licensing; Though
Royalty Rates to be Negotiated or Arbitrated. NMPA for several years
has asserted that on-demand and interactive radio performances are more
likely to substitute for consumer purchases and music subscriptions
than are traditional pre-programmed radio, and thus justify a
``mechanical'' right payment which is traditionally associated with
distributions of music that are actually possessed by a consumer. DiMA
members, in contrast, hold to the principle that consumers experience
music in one of two ways--either by enjoying a performance that is
heard and then is no longer available; or by possessing music
(permanently or temporarily, through ownership or subscription
``rental'') which occurs as a result of a distribution. In simple
terms, the consumer's experience justifies either a performance right
and royalty or a distribution right and royalty, but not both.
However, to reach a compromise that will support business certainty
and growth, DiMA members have agreed that legislation should clarify
that interactive streaming implicates a reproduction right, in addition
to its implication of the performance right. DiMA and NMPA have agreed
that the legislation should not set a value for this (or any other)
reproduction right, but rather that future negotiations or perhaps
arbitration will determine the royalty rate. Moreover, we are agreed
that the legislation should leave open the possibility that the value
of the reproduction right in some contexts might well be zero, and that
the mere existence of the right should not ensure a final determination
that a royalty is due.
Licensees to Contribute Financially. Recognizing that a modern 115
license will benefit licensees, DiMA has agreed that licensees will
share with publishers the costs associated with a new General
Designated Agent though this concession violates all precedents
associated with statutory and compulsory licensing. Music publishers
insist that cost-sharing is a deal-breaker, and so DiMA members have
agreed conceptually but in the absence of a agreed formula, we support
the Discussion Draft's referral of this issue to the CRB.
It is important that the Subcommittee recognize the uniqueness of
the situation before you, and clarifies that licensee cost-sharing is
not appropriate in any other compulsory or statutory license contexts.
In other situations compulsory and statutory licenses are associated
with rights that are newly created, or licensors' collective
organizations are voluntary. Only in Section 115 has Congress
historically imposed costs on licensees, and today's Discussion Draft
merely continues that policy.
__________
DiMA disagrees with the way the discussion draft implements certain
concepts I have outlined above. Specifically, DiMA believes that the
reproduction right associated with on-demand or interactive streaming
should be characterized as a reproduction right rather than as a
``digital phonorecord delivery,'' which suggests that a distribution
has occurred. As discussed above, DiMA members do not believe that
performances implicate distribution rights.
DiMA firmly agrees with the Register of Copyrights' conclusions in
the 2001 Copyright Office Report on Section 104 of the DMCA and with
the Register's written testimony today. To accomplish enactment of
legislation our members are willing to accept the existence of a
reproduction right incidental to streaming performances, but it is
substantively and analytically incorrect to characterize a transmission
of streaming digital bits for the purpose of rendering a performance as
a ``delivery'' or ``distribution.'' Similarly, the reproductions of the
musical work that must reside on servers controlled by the music
service or within the network might technically be characterized as
reproductions, but are not reasonably characterized as either
``deliveries'' or ``distributions'' of a phonorecord. Rather, we
propose that the Subcommittee characterize this right as a
``reproduction'' right pursuant to Section 106(a) of the Copyright Act,
and create a new Section 115A to implement the compulsory license
associated with this right.
This disagreement by no means should diminish what is otherwise a
significant agreement with NMPA. DiMA members have conceded that
streaming radio services implicate a reproduction right and that our
efforts should focus on determining the economic value of that right in
context. DiMA members pledge to work to reach agreement on words that
will accurately convey our more meaningful agreement about rights.
Finally, DiMA is concerned that the discussion draft's proposed
elimination of record companies' option to sublicense musical works'
reproduction rights to digital services is causing such consternation
among our members' record company partners. As the subcommittee knows,
controlled composition clauses, which are contractually agreed to
between recording companies and recording artists, have for many years
been a flash point in relations between the recording and music
publishing industries. DiMA services are now caught in the middle of
this battle. DiMA members are ready, willing and able to pay publishers
through their own designated agents for the value of the musical works
that they own and that were created by songwriters. However, it is true
that the traditional sublicensing model for physical sound recordings
and for digital downloads is not broken, and does not require
legislative repair.
We are hopeful that our partners in the recording, publishing and
songwriting communities can reach a prompt and satisfactory resolution
of this issue, and we are available to assist if the parties or the
Subcommittee would find it helpful.
Once again, I thank Chairman Smith and Representative Berman for
your leadership and for the opportunity to testify today. We value your
continued encouragement as we iron out these remaining, albeit
significant differences, and refine this discussion draft so it can
become law in this session of Congress.
Mr. Smith. Mr. Carnes.
TESTIMONY OF RICK CARNES, PRESIDENT,
SONGWRITERS GUILD OF AMERICA (SGA)
Mr. Carnes. Chairman Smith, Ranking Member Berman, and
Members of the Subcommittee, thank you for the opportunity to
provide comments on behalf of the Songwriters Guild of America
on draft legislation entitled Section 115 Reform Act of 2006.
We greatly appreciate your invitation.
My name is Rick Carnes and I am President of the
Songwriters Guild of America. The SGA is the nation's oldest
and largest organization run exclusively by and for
songwriters. We represent approximately 5,000 songwriter
members and the estates of deceased songwriters. SGA provides
royalty collection and audit functions for its members as well
as music licensing. This year marks our 75th anniversary. We
were born in New York City the same year as the Empire State
Building. And I'm proud to say that although we're old, we're
both still standing tall.
I want to begin my comments by commending the efforts of
David Israelite of NMPA and Jonathan Potter of DiMA for their
earnest attempt to negotiate a deal. This legislation is a real
balancing act and you've got a lot of affected parties here
with a lot of conflicting interests. But this draft legislation
has some important components that songwriters can and will
support.
First, the SGA fully supports the overall objective of
simplifying the rules and procedures of section 115 to
facilitate the licensing of all digital deliveries of musical
works. We are fully committed to this process.
We also strongly support the attempt to resolve the record
company as gatekeeper problem and encourage that the bracketed
language on page 42 of the bill be included. We realize that
the record labels want to continue to interpose themselves
between the digital music distributors and the songwriters and
music publishers so they can, among other things, continue to
enforce the controlled composition clauses, which allow them to
pay songwriters and artists 75 percent of the statutory rate.
But here is what that means to songwriters. Currently,
after I divided my royalties with my publisher and my recording
artist cowriter, I only earn on average about $22,750 per song
on a million-selling CD. Then when the 75 percent controlled
composition rate is enforced by the record label, I only get
$17,000. If that is the one recording I get this year, then the
difference controlled composition makes is that it actually
places my earnings $2,000 a year below the poverty line. For
one million sales, I am eligible to receive a platinum award
from the RIAA, but it is cold comfort when I can't afford a
house to hang it in.
Controlled composition clauses are unfair and need to be
ended. The record labels should no longer be the gatekeepers
and we applaud the idea of direct payments from digital music
services to music publishers and songwriters.
We are also pleased to see that the draft legislation
confirms that interactive streams of music are recognized as
digital phonorecord deliveries, as this clarification is
essential to any legislative effort on this topic.
The tradeoff here is the requirement to provide royalty-
free licenses for server copies of musical works for the
purpose of facilitating non-interactive streaming. The
elimination of rights for all server copies clearly reduces the
rights of music copyright owners and under current law would
reduce the economic returns for songwriters and music
publishers. While this will mean convenience and higher profits
for the DiMA companies, it also might mean that I can't afford
to send my daughter to college. We hope to hear more about the
ways this bill can strike the proper balance in this area.
We do not oppose the principle of establishing a general
designated agent to collect digital royalties. However, if
songwriters are to lose some of their rights by having them
bound by the licensing decisions of a statutory agency, this
loss of rights should be balanced by gaining the right to
meaningful participation in the governance of these entities.
Mr. Chairman, to paraphrase a real estate broker, the three
essential features of an effective designated agent bill are
transparency, transparency, and transparency. We believe there
is no reason for this bill to limit distribution of audit data
solely to music publishers, even though publishers collect such
payments on behalf of songwriters. In fact, newer music
publishing contracts often provide songwriters up to 75 percent
of the royalty payments. In this instance, there is no doubt
that the songwriter is an interested party entitled to
information from the designated agent on the extent and amount
of payments received from the digital music providers. To this
end, we have included in our written testimony some suggested
language that would help address this issue as well as the
crucial issue of meaningful participation.
As we stated at the beginning, SGA supports the objectives
of this legislation and desires to take a constructive role
going forward. We seek to understand the benefits better so
that we can balance them against the negative aspects of the
bill to our members.
Mr. Chairman and Members of the Subcommittee, we seek to
work with you to ensure that the legislation strikes that
proper balance and will be beneficial to the songwriters upon
whom the entire music industry relies. Thank you for your
attention and consideration of these views.
Mr. Smith. Thank you, Mr. Carnes.
[The prepared statement of Mr. Carnes follows:]
Prepared Statement of Rick Carnes
Mr. Smith. Mr. Sherman.
TESTIMONY OF CARY H. SHERMAN, PRESIDENT, RECORDING INDUSTRY
ASSOCIATION OF AMERICA, INC. (RIAA)
Mr. Sherman. Thank you, Chairman Smith, Ranking Member
Berman, and other Members of the Subcommittee for giving me an
opportunity to testify on music licensing reform. As you know,
new technology, new formats, and new business models have
presented new opportunities to offer consumers new products and
services and lure them away from the illegal services with
which we must compete. But we've been frustrated by an
antiquated mechanical licensing system that makes it difficult
for us to respond to marketplace demands.
As new formats and business models have proliferated,
uncertainty and disagreements have paralyzed the licensing
process and the existing one-size-fits-all licensing system is
ill-suited to the many new business models we're trying, like
digital music services, ring tones, multi-session disks, locked
content, preloaded content, music videos, and hybrid offerings,
such as in-store kiosks. Each has presented new mechanical
licensing challenges and there is no process for resolving
them.
Believe me, we understand the complexities of resolving
these issues, and Mr. Chairman, we are especially grateful to
you as well as to Mr. Berman for continuing to focus on this
issue and trying to find a way through the morass.
Unfortunately, the current draft of SIRA, which represents
a deal between the music publishers and digital music services,
does not resolve most of the problems we face. While we are
heartened by the efforts that have been made to arrive at a
reform package and we congratulate NMPA and DiMA for their
earnest efforts to arrive at a solution, SIRA addresses only
about 5 percent of the market's recorded music. What about the
remaining 95 percent? Are we to ignore the pressing need for
reform for the overwhelming majority of the existing
marketplace?
In our view, SIRA represents a missed opportunity. We're
also concerned that it introduces new inefficiencies, requiring
digital music services to replicate the royalty payment
infrastructure that record companies have built up over
decades. But more troubling still is that the few changes it
does make are at the expense of record companies.
SIRA nullifies thousands of contractual agreements
negotiated by record companies with artist songwriters over
many decades and will cost record companies and services many
millions of dollars each year in additional royalties to the
benefit of the music publishing companies. This is unfair
because it undoes a principle that we, the publishers,
committed to in 1995, that changes in contracts, such as
controlled composition provisions, should be prospective only.
SIRA would retroactively eviscerate a key provision on which
the overall economic terms of contracts with artist songwriters
were premised.
I am confident that music publishers would be very upset if
key economic terms of their contracts with their songwriters
were simply abrogated by Congress, fundamentally rewriting the
deals on which they based their decisions about advances,
royalty rates, royalty splits, and the like. We simply want our
contracts with our artist songwriters to be honored, just the
way music publishers want their contracts with their
songwriters to be honored.
Importantly, the effect would be to transfer millions of
dollars from record companies, whose revenues have been
decreasing, to music publishers whose revenues have been
increasing. This makes no sense.
SIRA also requires that record companies pay administrative
costs as both licensors and licensees. In an unprecedented
change, SIRA would shift costs of distributing section 115
royalties from music publishers to their licensees. We are not
opposed to cost sharing, but if that is going to be the rule
when record companies are licensees, it ought to be the rule
under sections 112 and 114 when record companies are licensors.
There are several other problems we see with the discussion
draft and I refer you to my prepared statement for details on
those.
To improve SIRA and achieve real reform, we propose that
the blanket license be extended to all products and services
covered by the mechanical compulsory license, including
physical products and hybrid physical online offerings. This
would go a long way toward solving the problems I have just
highlighted and we would be happy to work with the Committee to
bring about that reform in a manner that is fair to all the
parties.
Failing that, we urge you to limit the blanket license to
subscription services. We think that this would represent
incremental progress and something that can be achieved
quickly. That way, you can achieve reform in an area where it
would do some good and where the Copyright Office identified a
specific need without hurting record companies and digital
music services. Downloads are one of the few bright spots in
the bleak mechanical licensing picture. It would be terrible to
jeopardize a business that is working well and add new costs
and confusion. If comprehensive reform is not to be, we should
experiment with limited reform for subscription services. If a
line is to be drawn, it is important to draw it in the right
place.
Should you go forward with legislation on subscription
services, there are a few modest improvements that you can make
in the current system that would help address our problems.
These are detailed in my written statement, but the most
important is to create a dispute resolution mechanism. Every
new format and business model has raised questions concerning
the interpretation of section 115. A fair and expeditious
mechanism to resolve these questions would facilitate licensing
and entry into the marketplace.
We wish we could be more supportive of SIRA, but at this
point, we worry that it would cause more harm than good, at
least for us, and we don't feel like record companies should
bear the financial and business burdens of very limited reforms
that do not address our needs. But we are certainly prepared to
work with the Committee, the Copyright Office, NMPA, DiMA, and
any others to improve the proposal to the point where it
provides the real benefit that is so badly needed.
Let me thank you again for your efforts on this. We think
this really is important and we are very grateful for your
efforts on our behalf.
Mr. Smith. Thank you, Mr. Sherman.
[The prepared statement of Mr. Sherman follows:]
Prepared Statement of Cary H. Sherman
Mr. Smith. Let me say to you all, I think this is the first
panel I can ever remember where all witnesses have stayed
within the time limit. Maybe that has to do with your sense of
rhythm, I don't know, but nevertheless, it's appreciated.
Mr. Israelite, let me start off with my questions directed
toward you, but also let me say we're probably going to have a
couple of rounds of questions because I know all the Members
here have much they want to discuss.
One initial question, just to get this on the record, you
favor keeping the legislation like it is, limiting it to
digital music, not expanding it to include physical copies of
music. Why is that?
Mr. Israelite. Yes, Mr. Chairman, that's true. We believe
that the method by which we license physical product isn't
broken. It's been in existence for nearly 100 years, and as I
explained in my opening statement, it's a transfer with our
copyright to the label's copyright to the consumer. That seems
to work. The problems have arisen with regard to when third
parties want to come in and obtain a massive amount of licenses
and that's why we think we're best focused in the digital
arena. We're talking about a third party that doesn't own
either copyright, doesn't have a background in the music
industry, and is looking to obtain millions of copyrights in a
very short period of time, and that's why we've proposed it for
just the digital space.
We think that if it's going to be in the digital space,
however, it ought to be in all of the digital space and not
just limited to subscription services. I think one of the
reasons you'll hear a desire by some to limit this to just
subscription services is because record labels do not pass
through our licenses currently in subscription services. They
pass through our licenses in other digital services, like Apple
iTunes.
And so we've tried to make this very broad to include
things like kiosks, like cell phone delivery, like all the
products that Jon's clients want to offer, and we think that
that's probably the best first step. It is still a small part
of the market, about 6 percent of the worldwide market, but in
the last year, it's grown 300 percent, and I think most people
think that the future of the music business is going to be
digital, and therefore, if we can fix licensing for that new
type of service, we think it'll fix the music industry
licensing process for a long time to come.
Mr. Smith. Thank you, Mr. Israelite.
Let me go to one of the concerns that I mentioned a minute
ago and I'm going to be addressing the same type of question to
Mr. Potter, as well, and this goes to the definition of
interactive stream as a DPD. Number one, why is that so
important to you? Number two, how do you explain the Copyright
Office taking a different view?
Mr. Israelite. It's important to us for a couple of
reasons, Mr. Chairman. First of all, it's important to us for
its practical effect. Part of the beauty of this agreement, in
my opinion, is that we agreed that we would leave fights that
didn't need to be fought in this arena to other arenas. So, for
example, when it comes to the value of the section 115 right
for on-demand streaming or interactive streaming, we have
agreed that we will have that fight during the Copyright
Royalty Board proceeding, not as a part of this bill. It's
important to us, therefore, on a practical level, that when we
argue about the value of the rate in the CRB, we are arguing
the value over a DPD, something that everyone understands.
It's also important to us, very important to us, in terms
of the policy reasons. We believe that these interactive
streams constitute a DPD under section 115. We believe that the
legislative history supports that. We believe that our current
contracts with several of Mr. Potter's members support that.
And we believe it was part of the deal that we made when we
agreed to offer a gratis license for server copies for pure
streaming services. We thought that that was an exchange we
made as a business arrangement. So we believe the law supports
it, but even if the law didn't, we think it was part of a
business arrangement that we came to a conclusion about.
Mr. Smith. Okay. Thank you, Mr. Israelite.
Mr. Potter, let's go back to that definition of interactive
stream. It's my understanding that in the existing contracts
with the publishers, interactive streams--under the definition
of an interactive stream as a DPD already is in writing in
those contracts. Why shouldn't that continue in the current
legislation as we go forward since it already exists in the
current contracts?
Mr. Potter. Mr. Chairman, we have testified about those
agreements several times in this Subcommittee as well as before
the Copyright Office. We have some member companies that signed
licenses that were essentially take it or leave it licenses
under the threat of litigation or essentially not entering into
this business. Candidly, they could have made some of those
choices back then and they chose to engage in a license, to
sign that license.
So the fact that they were willing to concede a point of
legal principle that suggested an interactive performance was
actually a delivery or a distribution should not reflect public
policy, and I think that the Register has also testified
several times that she does not endorse and the Copyright
Office does not endorse the comment--the interpretation that
was in that license.
We believe it's fairly simple. There are reproductions that
are associated with the delivery of a performance, but it is a
performance that is being delivered, not a reproduction that is
being delivered, and therefore, we would--it is plain and
simple terms in the Copyright Office what is a reproduction and
we don't see a reproduction ultimately being distributed here.
We see a performance being delivered, a performance being
distributed.
Mr. Smith. My time is up, but nevertheless, that's the
clear language of the current contracts that you have with
publishers.
Mr. Potter. That's the clear language of--and the precedent
has been set, has it not? I would--there is precedent in a few
contracts signed by a few companies. There is legal precedent
here that is arguably more important both domestically and
internationally about the Congress deciding what is and is not
a distribution.
Mr. Smith. Congress can decide that and contracts can
change. I recognize that. I was simply going to the existing
language, but thank you for your answer to that question.
Mr. Berman, you are recognized for your questions.
Mr. Berman. Thank you very much, Mr. Chairman.
Let me just jump to that issue for a second. Why isn't an
interactive stream the 21st century functional equivalent of a
delivery of a phonorecord? I mean, in other words, if I can
press a button and hear anything I want at any time, that's
easier than sticking the CD in the machine or getting that
record to go down over that thing. I mean, I get it whenever I
want it. It's like, why would I ever want to buy a record?
Mr. Potter. I am not taking a position that an on-demand
stream might be substitutional and, in fact, entirely
substitutional for sales of CDs. If we have on-demand access to
our music collection or a music collection at any time, any
place, then it may be the case that that activity is entirely
substitutional. The question is whether that activity is an on-
demand performance or whether it is a distribution and we
already pay, ASCAP and BMI----
Mr. Berman. Everything is both. I listen to a CD at home
and I hear somebody performing some music. Now we're talking
about an individualized on-demand ability to get the music out
of one essentially instantaneously with my desire to have it.
Mr. Potter. There were several months of negotiations, as
you're aware, that included the PROs and the Harry Fox Agency
and the NMPA and the Songwriters about whether we should have a
uni-license that would recognize the integration or convergence
of the performance and distribution rights and would set up a
single system for licensing all of the rights in the bundle.
Mr. Berman. I'm not sure I'd go back there.
Mr. Potter. Those negotiations did not succeed. In this
context, we have conceded to the idea of a reproduction right
that supports the delivery. The question is whether the
reproduction is or is not what is actually delivered or what is
actually distributed and we take a position that the
performance is what is delivered. It is the reproduction that
facilitates the delivery of that performance.
Mr. Berman. That sounds like 20th century.
Mr. Potter. Actually, I think it's quite 21st century.
Mr. Berman. This is to the entire panel. These guys want a
revision of the physical, the mechanical, in the context of a
physical. Your proposal restricts it to digital. Is that a
bright line these days? Is it clear that we would always know
whether something was physical or digital? What are kiosk
services? What are ring tones?
Mr. Sherman. Is that for the panel, because----
Mr. Berman. Yes.
Mr. Sherman. I'm very glad you raised that question because
when we refer to physical, we're not just referring to old-
fashioned CDs. We're referring to the fact that nobody knows
what the distinction is between physical and digital anymore.
When we sell a CD that has locked content on it that can only
be unlocked by going to a website and then downloaded, what is
the licensing system for that CD? Is it partly the old-
fashioned license and then a new blanket license for just
locked content? What about if we put pre-loaded content onto an
iPod or the hard drive of a computer, 2,000 songs? It's a
physical disk that is being sold, a physical portable device.
Is that physical or is that digital?
We don't have the answers to any of those questions and I
didn't see anything in SIRA that would help us resolve those
issues, yet that is key to how these things have to be
licensed. So I think you've put your finger on a very important
problem.
Mr. Berman. So this could be both, metaphysical and meta-
digital? [Laughter.]
Mr. Sherman. Exactly.
Mr. Berman. Anybody else?
Mr. Israelite. First of all, if there's a question about
whether something is covered by section 115 or not, which I
think some of your examples, that's the debate where it falls,
that's a debate to be held in the Copyright Royalty Board, not
as a part of this bill.
If it is something covered by section 115, then I think the
bill does a very good job----
Mr. Berman. What are the tools the Copyright Royalty Board
has? What are the standards they use to make a decision?
Mr. Israelite. We're in a CRB process right now, and when
we get to the actual proceeding, I have no doubt that all of
the parties here at this table will make arguments about
whether something is or isn't covered by section 115. There are
procedures for that. There are processes for that.
One of the things about this bill that I think was very
wise is it leaves those fights for that forum. Instead, in this
forum, it's just a licensing process, and I think the bill does
a very good job of defining what digital delivery means. It
does mean kiosks. It does mean a lot of the new products where,
in effect, the consumer gets it from a digital delivery. It
pretty much leaves out the traditional CD, record, eight-track,
cassette, because that's a process that, number one, is
declining, but number two, we have a working licensing system
that's been in place for 100 years.
Mr. Berman. Mr. Chairman, my time is up. I see we've worn
out the other Members of the Subcommittee, so--we will have
more rounds.
Mr. Smith. Let me go to the second concern that I raised in
my opening statement, Mr. Israelite, and that has to do with
overhead costs and who should pay for them. Mr. Potter, this
question will be going your way, as well.
I don't expect you all to negotiate in open court, but
could you at least give me a range of--an acceptable range that
you all might consider, either a percentage or dollar amount,
whatever it might be? I do think it's resolvable by all the
parties involved, but I'd like to hear your take on it now.
Mr. Israelite. Sure. Mr. Chairman, as I referenced in my
opening statement, we still continue to believe we'd like to
get rid of section 115. But part of the problem is that along
with a compulsory licensing system, there are pros and cons.
One of the things about the current compulsory licensing system
is that anyone who chooses to use it must pay 100 percent of
the administrative fees. So if you are a user that wants to
invoke section 115, you have a choice. You can pay directly the
copyright owner the full amount every month, or you can go to
the Copyright Office if you can't find the person and drop $12
per title for them to do it. If we are going to fix the
compulsory licensing system instead of going to a free market
system that we favor, we've asked that we go back to the intent
of compulsory licensing, which is the user help pay the
administrative fees.
In terms of a dollar amount, I don't have a number to give
you, but I would hope that it would be something based on a
percentage system where we believe it would be a shared cost.
We're not asking for a 100 percent contribution. We're just
wanting to make sure that publishers and songwriters aren't
asked to finance a new system that really is designed for the
users, and if we're not able to resolve this issue among
ourselves, the bill, I think, wisely sends it to a process to
be resolved, which is the CRB, and we've accepted that as a
compromise.
Mr. Smith. Okay. Mr. Potter, what is your solution to the
problem of who pays the overhead costs? Are you happy to go to
the Royalty Board, as well?
Mr. Potter. Mr. Chairman, this is something that we have
agreed to share the burden in. We have agreed if we are unable
to agree how to share the burden, I think we are comfortable
sending it to the CRB. I should share with you that Mr.
Israelite's staff, or the staff of the Harry Fox Agency, the
technology staff, and several technology folks from my
companies have spent many hours over the course of several
weeks sitting in a room trying to determine what type of system
needs to be put in place so that we can report music usage
accurately and they can distribute royalties accurately on an
ongoing basis.
Mr. Smith. Are you closer now than you were several weeks
ago?
Mr. Potter. The answer is, yes, we are closer. There have
been fits and starts, as there always are with multi-party
negotiations. But the answer is, yes, we're closer to answers.
We still don't have firm price tags, but we are closer to
answers.
Let me share one point that is responsive to one of Mr.
Sherman's points. We don't think that setting up this
designated agent system will duplicate our company's
administration costs for license reporting or music reporting.
We have worked out, and we think we will work out in a final
form a music reporting system with the publishers that
essentially is almost redundant. We will be providing to the
publishers almost the exact same data, if not the exact same
data, that we provide to the record companies, and therefore,
in fact, we don't think the costs of the ongoing reporting
process will be significantly different than the costs that we
already have reporting to the record companies.
Mr. Smith. Okay, good. Thank you, Mr. Potter.
Mr. Carnes, I want to go back to the point that you made or
the triple point you made, transparency, transparency,
transparency. That seems to make sense. However, you can
understand that someone else might not want to reveal all of
their business model, how their profit is always determined.
They may not want competitors to know all their privileged
information. So what kind of a compromise can we have there
whereby you could be satisfied that no one was trying to take
advantage of you, at the same time, protecting the proprietary
interest of other parties?
Mr. Carnes. Well, first, we're very early on in this
process. I mean, I just got this bill Friday at 4:30, so I
really can't--I don't want to say more than I know. I probably
already have. But basically, what I would like to say is, for
instance, with the case of the administration fees, we would
like to have some input on that or at least see what's going
on. We're not asking for a seat on the Harry Fox Board or
something, but if there's going to be a designated agent set up
by statute, we feel like that's a rights-taking thing and a
blanket license where they take our rights. The general
designated agent, of course, gets to take everybody's rights
and I think the tradeoff for that is some sort of transparency
for us, some ability on the front end to have input on what the
rights might be.
Mr. Smith. Mr. Israelite, what do you think about that?
Mr. Israelite. Well, I certainly appreciate what Rick is
trying to do and I think it's a shared goal of making sure that
writers and publishers are comfortable with the transparency of
the system. There are a lot of what are called singer
songwriters that do their own publishing, and for those people,
they, in effect, are their own publishers. They can run for our
board. In fact, we have them on our board.
Other writers choose to assign their copyrights to a
publisher, and when they do that, that is a private contractual
arrangement. They're not forced to do it. They can administer
it themselves. But those who choose to assign their copyright
to a publisher have entered into a business relationship, and
one of the principles we've tried to keep intact in this bill
is to not have more Government interference into the private
contractual arrangements among parties.
And so we've proposed, for example, establishing a dispute
resolution committee as a part of the DA that would be made up
of half songwriters, half publishers. We've been in very
productive negotiations with Rick's group and other songwriter
groups about how to make this work. But I think as a principle,
publishers believe that when songwriters assign their
copyrights and enter into private contractual arrangements,
those truly are not the proper place for Government to
interfere, and so we hope we can work this out without there
being more Government mandates on how publishers do their job.
Mr. Smith. Okay. Thank you, Mr. Israelite.
Mr. Berman?
Mr. Berman. Two sort of whimsical comments. The first is
you don't want your contracts with the publishers providing for
controlled compositions to be abrogated. You don't want your
contracts with the songwriters to be abrogated. And I'm a
Democrat and I live to abrogate contracts. [Laughter.]
Mr. Berman. The other one that comes to mind is that old
thing of, I've got friends on one side and friends on the other
and I'm with my friends. [Laughter.]
Mr. Berman. So, as you try to work through this, because
unfortunately in this business we can't always indulge all our
friendships, and shouldn't, the Songwriters Guild, Mr. Carnes,
talks about what happens to him under controlled compositions.
It reminds me that underlying this somewhat, this may be a
fight about money. So I start to think, what if we could
deploy, as they finish with the border, we deploy the National
Guard to deal with the piracy problem, make the pie much
bigger, and you don't need controlled compositions and
percentages are an easier substitute. I'm trying to find a
dynamic.
The RIAA would like a much broader coverage. If you're
going to reform 115, notwithstanding when Mr. Israelite says it
works, I've heard record company executives tell me it impedes
their ability to put new technologies on the market because of
the way the existing 115 operates and their ability to do that.
What's the dynamic by which record companies' traditional
role in conveying publisher rights along with sound recording
rights can be given up in the context of a new system, and at
the same time, we deal with the broader issue of how to reform
and modernize 115? And what is the dynamic that turns this into
a broader conversation? I know there's a lot of conversations,
but a broader effort? So that's one question. I have one more.
Mr. Sherman. Well, our feeling really is to the extent it's
not broken, we shouldn't be fixing it. And the one thing in the
digital area that is not broken is the download market. The
system has worked efficiently and well.
Mr. Potter said that we wouldn't be duplicating the music
reporting system and there wouldn't be any additional burden on
the music services, and perhaps I'm wrong about that, but I'm
under the impression that when there are multiple designated
agents, it'll be up to the licensee to figure out to whom to
send those royalty checks for publishing. That is not the
information that they currently have in their database. They're
going to have to figure out year by year who gets what
fractional share of what copyrighted musical work, depending on
what use was made that year, and that is going to be a very
intensive administrative process which we already do for free
for the digital music services because we have an
infrastructure built up for it.
So if we're going to experiment with something and we want
to try moving into a new world, let's start with subscription
services and move from there. But I don't think that if we move
to the entire digital market that we're going to do much good
because the next thing we're going to be arguing about is
what's digital and what's physical and where do multi-session
disks fit in and everything else and we're just going to have a
new set of issues to resolve and not even know how to license
them.
Mr. Berman. So you're basically saying, go all the way or
take just a very small step?
Mr. Sherman. Precisely.
Mr. Berman. And your reaction?
Mr. Israelite. I think it's a difficult position to take to
say that the DPD market of licensing works just fine, but we
ought to fix physical. The truth of the matter is is that if
you can put out a CD in a physical format, you can license
through a DPD store. The truth of the matter is, licensing
works just fine with physical formats, and the truth is,
licensing works pretty well with DPDs, too. The reason why if
we create a new blanket licensing structure it should be
applied to all digital is because it doesn't make any sense to
build us a brand new Cadillac but tell us we can't drive it out
of the driveway.
This new system will give DiMA what it wants. They've asked
for blanket licensing. They've asked for one-stop shopping. And
so we think it makes perfect sense to cover all digital
products.
Mr. Sherman. If I can just respond----
Mr. Smith. Let me yield the gentlemen a couple additional
minutes because this is a question I was going to ask, as well,
so we're getting double-dancer here.
Mr. Sherman. It isn't that our feeling is simply that we
ought to have one system, that we're creating artificial
boundaries, drawing artificial lines in a world of convergence
where next week, we're going to have a new product and we're
not going to know whether it's physical or digital. We
shouldn't be having parallel systems for licensing when we
could have one system, and we'd love for it to be a blanket
licensing system, but this isn't a question of whether physical
is working well enough. It's creating a new blanket licensing
system for all of us for everything.
Mr. Berman. I'd like to hear Mr. Potter and Mr. Carnes get
into this issue, and let me just also interrupt. Is there a
phase-in process, you do one thing right away and one thing in
a couple of years? Is there a way of sort of creating that kind
of a transition period that makes sense?
Mr. Potter. We clearly have partners in business on both
sides of me, even on all three sides of me, if we were sitting
at a square table.
Mr. Berman. And you're with your partners.
Mr. Potter. I'm with my partners, because we don't own
anything. We just license it from everyone. It's a tough
business to be in.
As I said in my testimony, there's a fair amount of
righteousness that the DPD system works, but Mr. Israelite
acknowledges the DPD system works. There's a need for
modernizing the entire system, both for certain physical
products and hybrid products. There's a need for modernizing
the entire system so it takes care of the innovative digital
products. We certainly went into this in the, I guess it was 2
years ago in the intensive negotiations, thinking we were going
to take care of subscription service products and that would
cover the hybrid products and things have changed. There's a
lot of ways we can support progress. Transition provisions are
certainly something we would be willing to talk about.
I will say, however, that it is intriguing for us to hear
Mr. Sherman's concern about what is digital and what is
physical. Particularly if somebody hands you an iPod with
preloaded songs, there's a whole lot of ways to define what's
digital and what's physical, what's inside a license or what's
outside of the license. When Mr. Sherman's group in the
interactivity debate is trying to figure out what's inside or
outside the box, they look for infringement litigation and sue
our companies and deal with that in the court of law. When they
are on the licensee side of the misunderstanding or the box
that they're not sure whether they're inside or outside of,
they look for a dispute resolution mechanism inside the
statutory license to keep them out of court as defendants.
So I would only say if we're going to create a dispute
resolution mechanism to figure out if we're inside or outside
the box, we'd like to do that for 114 as well as 115.
Mr. Berman. On the discussion draft bill, the Chairman and
I got into an area that the partners seemed to going in
different directions on and that's how to turn this interactive
delivery, and I guess the question I have is whether--I mean,
if this draft were a bill and it were coming up for a vote, do
you support this draft, Mr. Potter, given how that issue is
framed in this discussion draft?
Mr. Potter. I think these issues are manageable. I'm not
prepared to negotiate these issues out in public, but I think
these issues are manageable.
Mr. Berman. Do you?
Mr. Israelite. I would support the current draft bill.
Mr. Berman. But do you think the issues are manageable?
Mr. Israelite. As long as Jon would support the current
bill, I think the issues are manageable. [Laughter.]
Mr. Israelite. That is as far as you are going to get right
now, I think.
Mr. Berman. Mr. Carnes, are you suggesting we actually
legislate in the area of this transparency at this point, or
are you saying there's a process----
Mr. Carnes. Well, there's a process----
Mr. Berman.--to work with the publishers on to try and----
Mr. Carnes. There's a process going on right now with the
publishers where we discuss this. The reason why in my written
statement we gave you the language and everything was because
we wanted to put a marker down that we feel that this principle
is correct. But I certainly would rather solve this in
negotiations with----
Mr. Berman. So you want to at least threaten to legislate.
Mr. Carnes. Absolutely. [Laughter.]
Mr. Berman. All right. Thank you, Mr. Chairman.
Mr. Smith. Thank you, Mr. Berman. That was a good ending,
and it's frankly encouraging for me to hear that you all are
still trying to iron out the last couple of remaining wrinkles.
We have a deadline and we're trying to get this done in the
next few days and you all know that, but I do think progress is
being made and that's good to hear. It's good for the industry,
it's good for the future of music, and it's good for us, as
well.
So I appreciate all your contributions and hope that you
all will continue working together. Make sure that all parties
are involved, if you all will, and we can get to a successful
conclusion. Thank you again. We appreciate your testimony.
The Subcommittee is adjourned.
[Whereupon, at 5:09 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard Berman, a Representative in
Congress from the State of California, and Ranking Member, Subcommittee
on Courts, the Internet, and Intellectual Property
Mr. Chairman,
Thank you for scheduling this hearing on the discussion draft of
Section 115 music licensing reform.
Over the past couple of years, this Subcommittee has analyzed the
compulsory licensing scheme for mechanical rights both as described in
the statute and the alternative provided for by the Harry Fox Agency.
With the development of new technologies for music distribution, we
recognize that neither model is sufficient to meet consumer's demand
for music.
And this demand is rising: We have come a long way from the initial
piracy-laden version of Napster released in 1999. IFPI's (International
Federation of Phonogram and Videogram Producers) Digital Music Report
of 2006 notes the growth of digitally delivered content in the music
industry.
420 million single tracks were downloaded in 2005
globally - more than double the number downloaded in 2004 (156
million).
US: 353 million single tracks downloaded (up from 143
million) [Nielsen SoundScan]
The number of users of subscription services, such as
Rhapsody and Napster, increased from 1.5 to 2.8 million
globally in 2005.
In 2005, the number of legitimate music download
sites reached 335, up from 50 two years ago.
Digital sales in 2005 accounted for approximately 6%
of global music sales based on the first half of the year. 2005
was a landmark year for digital music.
Just last week the Washington Post reported that
``Ringtones, once dismissed as nothing more then a passing fad,
have become a $3 billion worldwide market.''
However, the burden surrounding licensing often delays, if not
prevents certain music from getting to the consumer. Unfortunately,
this inability to provide music at anytime, any place, in any format
may precipitate consumer migration back to unauthorized Peer-to-Peer
services.
Two years ago, the Copyright Office suggested that reform of the
115 license should reflect a structure similar to what is currently
available for the 114 license--a designated agent which serves as a
collective to administer a blanket license. I am encouraged to see that
the discussion draft reflects that idea. I commend the publishers on
their hard work. They have tried diligently to resolve the problems
that the DiMA companies have illustrated - particularly the ``double
dip'' and ``one-stop-shop'' issue. However, I am concerned that with an
impending mark-up less then two weeks away, many important details of
the bill have yet to be agreed upon. I will focus on some of those
issues during the Q &A.
Furthermore, any solution can only be evaluated from the
perspective of the scope of the problem originally identified. Two
years ago at an oversight hearing on Section 115, I posed two questions
which I will once again ask today: 1) Does 115 facilitate or hinder the
roll-out of new legal music offerings? and 2) depending on the answer
to the first question, what if anything should Congress do to change
115?
While this proposed legislation addresses many of the digital
concerns--unresolved, are the many issues encountered in the physical
market or in the area of hybrid services. The roll-out of new secure
physical formats, or higher quality formats, often times require
additional reproductions, has been sluggish. Furthermore, there is
little resolution to the business model which provides pre-loaded
content on devices. Finally, many definitional questions remain such as
whether the license includes ringtones, or if a kiosk service is a
reproduction in the physical sense or digital phonorecord delivery
service. Some of these questions may require a purely economic
analysis--others may require a re-evaluation on the process level.
I hope though that we can achieve greater clarity and further
consensus as this bill moves forward.
__________
Separate Statement of SESAC, Inc.
SESAC, Inc. (``SESAC'') appreciates the opportunity to submit this
statement to the Subcommittee regarding the discussion draft of the
Section 115 Reform Act of 2006 (``SIRA''). In addition the comments
contained in the contemporaneously submitted joint written comments of
the three performing rights societies, SESAC submits these additional
comments:
1. SESAC understands that, as a compromise solution between
the NMPA/HFA, on the one hand, and DiMA, on the other hand,
those parties propose that, in exchange for DiMA's
acknowledgment that the reproduction right is implicated in
interactive streaming, NMPA/HFA is willing to grant digital
music services a royalty-free compulsory mechanical license for
``the making of server and incidental reproduction to
facilitate non-interactive streaming.'' Although SESAC
understands the motivation for this compromise to accomplish
the broader purpose of formulating a bill acceptable to DiMA
and NMPA/HFA, it is concerned that music services might at some
time incorrectly deduce from this provision that, by the same
token, SESAC should be willing to grant royalty-free public
performance licenses for so-called ``full'' or ``limited''
downloads. SESAC's position on this topic has remained
constant: Under the Copyright Act, all digital transmissions,
including such downloads, constitute performances justifying
royalty payments. In light of DiMA's continued insistence, as
reflected in Mr. Potter's testimony at this hearing, that a
given digital transmission implicates ``either a performance
right and royalty or a distribution right and royalty, but not
both,'' DiMA should not be heard to argue in the future that
SESAC's support of this compromise solution concerning
mechanical rights in any way suggests that SESAC has acquiesced
in DiMA's position. In short, NMPA/HFA has the right to make
such decisions on behalf of its own members, and SESAC
maintains its positions on behalf of its affiliates.
2. SESAC understands that the 15 percent of market share
requirement was included in SIRA to address DiMA's concerns
that, if it were required to deal with too many designated
agents having small market share, the efficiency benefits of
blanket licensing would be lessened or lost. And, SESAC
acknowledges that this is a proposed compromise solution
between NMPA/HFA and DiMA only for licensing the mechanical
right in digital media and to facilitate and maintain
efficiency under this new proposed Amendment to Section 115
relevant to mechanical licensing. SESAC believes the record
should be clear that this 15 percent market share criteria is
relevant only to mechanical licensing and not to public
performance licensing, where over the course of history one or
more of the three performing rights organizations mentioned in
the copyright law (ASCAP, BMI and SESAC) have not enjoyed a 15
percent market share. Although SESAC acknowledges that it does
not control a 15 percent share, the public performance market
place as divided among the three performing rights
organizations has served as the gold standard of music
licensing for over seven decades. As stated by Mr. Potter of
DiMA in his testimony at the hearing, ``the ASCAP, BMI and
SESAC systems for musical works' performance rights'' enable
``simple, streamlined licensing processes'' that substantially
reduce legal risk.'' In short, SESAC's agreement with the 15
percent threshold is limited to mechanical licensing as
embodied in this proposed legislation.
Finally, like NMPA/HFA, SESAC believes as a matter of general
principal that, in a perfect world, the licensing of all musical rights
be accomplished solely by fair marketplace dynamics. Nevertheless,
SESAC understands the particular historic problems attendant to the
present compulsory mechanical licensing scheme, particularly in the
digital realm, and supports the efforts of NMPA/HFA and DiMA to craft a
blanket mechanical licensing system that will facilitate greater
legitimate music uses to the benefit of music publishers and
songwriters, who are also SESAC's constituents. SESAC would be happy to
expand on these comments, answer any questions raised, and otherwise be
of assistance to the Subcommittee in its consideration of this proposed
licensing reform.
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Prepared Statement of the U.S. Copyright Office