Law in the Internet Society
"Introduction of new technology is always disruptive to old markets, and particularly to those copyright owners whose works are sold through well-established distribution mechanisms." Metro-Goldwyn-Mayer Studios, Inc. v. Grokster Ltd., 380 F.3d 1154, 1167 (9th Cir. 2004), rev'd, 545 U.S. 913 (2005)

INTRODUCTION

The exclusive rights and legal compensation mechanisms that drive revenues to authors and producers follow technological advancements creating new forms of consumption. As technology changes, the content industries must advocate new legislation to preserve traditional business models and maintain exclusive rights that monetize content. For example, prior to 1995, there was no digital performance right for sound recordings transmitted over the Internet (streaming). The music industry soon recognized that sites could digitally "webcast" entire albums online without paying any royalties for the sound recording, threatening the lucrative market for CD's as more consumers began listening to music online. Under intense industry pressure, Congress enacted the Digital Performance Right in Sound Recording Act in 1995, thereby preventing a major disruption in the industry's existing business model and preserving the market for CD's.

Digital music opened up an entirely new distribution channel previously unconsidered by both musicians and labels, whereby listeners accessed music online through a "license" rather than through the "sale" of a physical commodity. The standard recording contract through the end of the 1990's usually included two separate royalty provisions. The first described the royalty rates for "full price records sold in the United States", normally between 12-20% of net revenues depending on the past and future success of the artist. These were royalties from CD's and other phonograms and made up the bulk of artist and label revenue. The second provision concerned royalties for the "licensing" of the Master copy to third parties for any use, and usually split net revenues 50/50 between artist and label.

Licensing to third parties was historically an ancillary business to physical record production, benefiting both artists and labels as their songs were used in commercials, movies, TV shows and other outlets. The traditional business model relied on national physical distribution channels that included record and CD pressing plants, storage warehouses, cargo delivery vehicles and promotional expenses, justifying a lower royalty to the musician. However, since licensing entailed a minimal sunk cost, there was little excuse for paying artists the lower royalty rate from CD sales. The licensee (such as a TV producer) bears the costs of mixing, synching and promoting the show while the licensor merely provides a master copy and the necessary permission .

When music began shifting towards digital distribution, record labels had already structured most of their artist contracts to rely on revenues from physical sales. The labels were undercapitalized and unprepared for a shift in revenue sharing to the licensing royalty, but eventually realized that the future of music would rely almost exclusively on licensing master copies to digital distributors. In the early 2000's the labels finally recognized that many of their artist contracts would require higher royalties for licensed copies and moved to carve out specific rates for digital downloads or licenses; however, older artists were still potentially able to take advantage of the previously unseen business model and the higher royalty split.

FBT Productions LLC v. Aftermath Records

In May 2007, the rapper Eminem's original record label, FBT, filed a breach of contract suit against Universal Music Group (UMG), which had acquired a direct contractual relationship with the artist through a novation contract in 2000. Through the novation, FBT became a passive income recipient retaining the right to receive royalties from Eminem's recordings. FBT claimed that downloads through iTunes and sales of "mastertones" to wireless carriers were licensed uses rather than record sales, but that UMG had accounted for them under the "records sold" provision of the contract instead of the "Masters Licensed" provision, resulting in a substantial underpayment of royalties. Aftermath argued in response that the Records Sold provision applied because permanent downloads and mastertones are recordings, and because iTunes and other digital music providers are normal retail channels in the United States not unlike brick and mortar stores.

In March 2009, a jury found such uses were sales, and therefore FBT was not entitled to royalties under the Masters Licensed provision for permanent downloads and mastertones. FBT appealed, and in September 2010 the Ninth Circuit reversed, holding that such uses were licenses, not sales, and the royalties due from downloads and mastertones fell, as a matter of law, under the Masters Licensed provision of the agreements. See F.B.T. Prods., LLC v. Aftermath Records, 621 F.3d 958, 967 (9th Cir.2010). The Supreme Court denied Aftermath’s petition for certiorari.

THE 50/50 ROYALTY SPLIT WILL APPLY TO MANY ARTISTS IN THE LONG TAIL CREATING NEW REVENUES THROUGH DIGITAL DISTRIBUTION

According to the Motown Alumni Association, "The 'Masters Licensed' clause and the usage of standard terms parallel the terms in a great many recording agreements." Up to the onset of the digital revolution, most artists and labels signed boilerplate recording contracts without contemplating the license/sale distinction and the demise of the physical record. While labels have for the most part amended the recording agreements with successful artists that continue to sell digital downloads or mastertones, the musicians in back catalogs are unlikely to have settled the "Masters Licensed" dispute as applied to digital distribution.

These artists make up the bulk of the "long tail", the obscure and relatively unknown musicians from the past few decades that never gained the necessary traction to become superstar hits. If listeners move towards a universal access model and begin to explore new artists and sounds (including artists from past decades), the old recording contracts will begin producing revenue streams and the labels will have to decide how to account for their royalties. To be sure, the distinction only applies to certain contracts with specific wording, but the commonality of the terms across contracts suggests a substantial number of artists with a right to a 50/50 split from digital distribution.

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In 1964, Marshall McLuhan published Understanding Media: The Extensions of Man and popularized the quote "the medium is the message." McLuhan recognized an ever-present symbiotic relationship between creative content and technology, noting that the medium of delivery to the consumer often defines the content itself. In this vein, the medium of consumption, rather than the content, is most important in developing and studying business models and the legal compensation mechanisms in the media industry.

McLuhan added nothing here but a toney quotation: it's exactly the point Woody Allen was making in the movie. Why not drop it and use the space for something of your own?

I might have set myself up for the Annie Hall reference, but I think it's a good top level perspective to take and then move down towards how it applies to modern legal IP systems. As I re-read my post, I realize I need more focus on some sort of issue or point, so instead I'll focus on the "sale" "license" distinction embodied in the recent FBT Productions v. Aftermath and how the changing technology has come back to bite some of the record labels who gave different royalty rates based on the type of transaction

With the invention of the sound recording, music changed from an experience that could only be heard live (or on the radio) to a commodity that could be owned. Consider that in 1910, prior to the creation of sound recordings, 374,000 pianos were manufactured in the US for use in the home—by 1984, the number was 206,000 (pianos were the only way to create music "on demand").

No, not the only way. It would be correct to say that there were many cheaper substitutes for pianos in both the 19th and 20th centuries. People didn't buy pianos because they couldn't afford pennywhistles. The piano was precisely the wasteful sign of middle-class existence. Once again, Thorstein Veblen is the economist you need here.

Not the only way, I agree. Will change it. But it's a useful example (when not paired with hyperbolic qualifiers) to show how the experience of "music" changes based on the technology to consume it

The commoditization of sound recordings provided a limited amount of content to the purchaser, who could then listen to it at his or her convenience. Since records were relatively expensive and entailed a high marginal cost for those with limited resources, consumers selected small amounts of music to own based on personal taste and the promotional reach of each artist.

That's a pretty crabbed view of how people consumed recordings in the 20th century. It's not either right or wrong, just completely reductive and riddled with exceptions. If anything in the argument depends on the completeness of that account, let alone the whole of the argument, you made it up.

Instead of small I should use a word such as "limited". The point is that you can't buy everything, so you must make a choice based on available options. Unfortunately our choice menu is often limited, so we must rely on things like word of mouth, personal knowledge or promotion

The "record" defined the business model of the music industry, which consolidated to form four major multinational profit-maximizing corporate record labels that collectively owned over 80% of sound recording copyrights and accounted for more than 77% of all retail music sales by 1998. These labels also owned ancillary businesses such as the distribution network to reap huge profits. The music industry thrived under this system until the late 1990's, when technology destroyed institutional control and made established revenue streams obsolete (practically overnight).

You're forgetting the previous technology transfers (from single to LP, from mono to stereo, from vinyl to tape) which had previously destroyed institutional control and made established revenue streams obsolete practically overnight.

These changed weren't "transformative" but "incremental". I'm looking at a similar change from sheet music to recordings that essentially destroyed Tin Pan Alley. See Steve Lawson, Transformative Vs Incremental Change, MUSIC THINK TANK (Nov. 14, 2009), http://www.musicthinktank.com/blog/transformative-vs-incremental-change.html

These three technologies, 1) p2p file sharing (distribution); 2) MP3 compression; and 3) increased storage capacity (the iPod and other similar devices) had a profound impact on the way consumers interacted with music. Previous generations had viewed music as a commodity to be bought at a store, as one would buy a car or furniture.

Well, 1.5 generations more or less. Previous generations (probably several thousand of them at least, back to before the development of modern spoken language) had regarded music as something people make together. Would you regard that as a point worth commenting on, or is only the experience of the previous 1.46+/-0.27 generations relevant?

We're looking at music in its modern conception, as well as analysis of the next few generations (but possibly before we get to universally free content)

With "free", albeit illegal, access to an infinite digital library, modern consumers began to accumulate huge collections of previously inaccessible or prohibitively expensive music from a wide variety of artists. Importantly, consumers would have never bought the music from many of these artists in the form of a CD.

How do you know this? Market survey data repeatedly showed that people who shared music online also bought more CDs than non-sharers. No doubt there were many people (certainly I was one) who expanded very much my purchasing of CDs once I could rip my own and increase the utility of the music I purchased, and then expanded purchasing further once the catalogs of the companies began to be more broadly available at lower prices. I never acquired music without paying the license charges, whatever I then did with the music I had licensed as well as purchased fixed in a tangible medium. Music collectors have never disappeared, and I can't imagine why collectors would suddenly stop paying to encourage the production of what they love. Their collections are more useful to humanity than they used to be. I at least don't see how that either corresponds to your account of the situation, or to a problem requiring solution.

That is true, but you're missing my point. I may be myopic in limiting my research to my own generation, but through personal experience with college campuses and other young people, I know that many individuals who amassed collections of +10,000 songs (and I don't think that's unusual). This is simply not feasible with physical mediums, think of how much space it would take to store 1,000 CD's! I know people who share are more likely to buy CD's-- but the amount of music owned or pirated is now enormous compared to previous generations

As sociological expectations changed and consumers began to expect to hear any song on demand, music shifted from something acquired to something accessed. No longer were consumers forced to savor an unowned song as one would savor a sunset without a camera—-new technology (especially the advances in mobile telephony and storage capacity) fundamentally changed the entire business model, but record labels stubbornly refused to accept the new media landscape, especially facing the diminishing importance of their control over the business. As noted by the EU Commission, "The failed music industry business model causes online piracy."

Not noted by the European Commission. Said by one commissioner, Viviane Reding, once. It isn't true because she said it, and I see no reason given here to agree that it is true at all. "Piracy" here might mean all sorts of things, but if the proposition is supposed to mean that sharing occurs because capitalists haven't figured out how to replace it with inexpensive nonsharable property the sharers don't own, I think it's total nonsense for which no evidence whatever is available.

Ownership doesn't always translate to exclusive right to share at a price. If there is unlimited access but not cache availability, thee are still ways to monetize the product without charging consumers directly. The fact of the matter is I can't get what I want for a reasonable price or in a reasonable manner, and that is why I'm more likely to pirate music.

While online piracy ran rampant through the 2000's, the record labels frantically tried to retain their control over all aspects of music from studio to (digital) shelf. They created their own online stores; licensed catalogs with incredibly burdensome DRM technology; and viciously prosecuted their former consumers for file sharing, but ultimately none of these strategies sated the growing consumer thirst for (illegal) universal music access.

Recently, the growth of "streaming" technologies has provided a new monetizable distribution mechanism for the universal access business model. Consumers are now able to access any song wherever their phone has a wireless connection, making the "celestial jukebox" a reality, but labels continue to exert unnecessary control over music consumption.

Besides, those services are totally irrelevant, because the bulk of music is now shared by people directly, without the slightest control of any kind, and the whole "streaming service" market represents the tiniest sliver of nothing compared to the music industry the music industry was going to build, in which the goods cost nothing and they were paid for every time they were consumed, which was their idea of the future until reality set in. That's the actual story. Why are you trying to tell this one, which is almost 99.44% pure bullshit promotion for streaming companies who have no future offering very low speed downloads of unprotected data files people can get quickly from thousands of other places?

I take it you don't think streaming is the future, but I'm arguing streaming is the present

The labels' "control" is a function of the IP protection schemes that have evolved over the years. Most copyright legislation is not the result of some well thought out plan, but instead a sort of compromise with the content industries. "Streaming" IP rights, found in 114 of the copyright act, provide an illustrative example of how the record labels abuse their market position in a concentrated industry.

Any OnDemand? service such as Grooveshark or Spotify needs to attain blanket licenses to each major label's entire catalog to make their service competitive. Without one of the major labels' permission, the service will not be able to offer "universal" access and faces a competitive disadvantage. Recognizing their superior bargaining power, the labels have abused their position to the detriment of new, innovative companies. When the interactive service Sonific closed in 2008, CEO and co-founder Gerd Leonherd blamed the intransigence of the record labels in licensing their catalogs as the main reason for the company's failure:

Which really meant, of course, that he thought that they should be forced to distribute through him at a government-guaranteed price so that he could pretend to consumers that they couldn't reshare the music they were getting from him, thus apparently opening yet another hole in the companies' balloon for the benefit of every conman other than themselves. Now he's the apostle of compulsory licensing in France as HADOPI proves itself to be the unworkable piece of shit the Free World said it was, as the industry's last bulwark before the transition to freedom, so he can get his piece of the garbage as it decays. None of this means absolutely anything. Music is reverting to freedom, over a period lasting in total less than fifty years, of which we are now about twenty in. The recording business is playing out time, trying to look lively, but it is walking dead now. I know there has to be a course for one hopelessly lost law professor and one hopelessly lost business school professor to spend time on the short-term oscillations before it falls over: from a B-school perspective that's even a useful activity. But it's an absolute guarantee of intellectual aridity to be spending too much time worrying about the particular convulsions in the death throes.

I take it you're referring to the joint course next semester with TW and the B School Professor? I don't think I should ignore current conditions because you think there is an inevitability of it all falling apart. You say it's an "absolute guarantee of intellectual aridity" but you don't explain why

There are countless startups providing access to any and all music streams without any license whatsoever. However, when we approached the major record label decision makers in order to obtain licenses for some of the music in their catalogs we have routinely faced demands for very large cash advances and fixed per-stream minimum payments, pressure to give them 'free' company equity, and requirements of utterly bizarre usage restrictions. It seems that the industry's major stakeholders still prefer this turf to remain unlicensed rather than to allow real-life, workable and market-based solutions to emerge by working with new companies such as Sonific.

For the companies that have managed to secure licenses, the terms are far from fair. Not only have the labels reportedly taken an equity stake in these companies, the compensation paid to non-major (independent) labels is substantially less, meaning an artist will make less money if they are not signed to a major. In addition, many artists are hugely undercompensated for their popularity on these services, while the labels get paid twice (royalties in addition to their equity stakes). Not until the labels are forced to provide their catalogs at a reasonable price will consumers truly benefit.

-- MikeAbend - 18 Oct 2011

The essay is coherent as long as it doesn't have to be more than a complaint that the industry isn't surrendering. I would like it to be more than that, particularly inasmuch as I don't think their surrender is even slightly necessary, the completion of their ruin being already evident. But even were I to believe, as you seem to be trying feebly to convince me, that there is something happening that can be compared meaningfully to the sharing economy in music all around us that could rescue "ownership" as a basis for distribution, I still wouldn't be inclined to accept the notion that someone has discretion or reason to require the so-called owners to give away their supposed property at state-created prices to a new class of favored middlemen. If the supposed owners own anything, there's no basis whatever to make them surrender their ownership to a younger class of thugs. If they don't own anything, no one else does either, and we are free to share, thus achieving everybody's supposedly desired result immediately, without need for another bunch of corrupt and disgusting bottleneckers.

 

You say that "until labels are forced to provide their catalogs at a reasonable price," consumers won't really be able to benefit from innovations in accessibility/distribution. What--or who--do you envision forcing the the labels to license at reasonable prices?

Congress could step in and devise some formula for compulsory licensing that seems both fair to the copyright holder and users, but that seems unlikely--whereas the labels are few in number, organized, highly motivated, well-funded and familiar w/ the political process, music consumers (as a group) are just the opposite.

Maybe artists can play a role in pressuring the labels. You mention that labels are effectively paid twice under the current system (although, presumably, taking equity in a company also comes with financial risks). Thus, if popular artists feel that they're getting screwed under the current system, perhaps they could exert pressure on the labels to alter their (the labels') behavior. Once the popular artists are mobilized, it wouldn't be difficult to get non-mainstream or relatively unknown musicians on board--indeed, these are the artists who, as you mention, suffer the most under current conditions and would greatly by having their music more easily accessible.

Finally, maybe innovation in distribution is the only way to force the labels to act reasonably. Perhaps the labels will get tired of playing a constant game of cat and mouse, with consumers developing "illegal" distribution systems and the labels scrambling to restrict access. If consumers can consistently innovate around access restrictions faster than labels can build/maintain them, labels may eventually have to accept reality and accommodate consumers' demands.

-- MatthewLadner - 27 Oct 2011+++

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