In a non-precedential summary order on December 19, the Second Circuit affirmed a decision interpreting the BMI consent decree, which governs Broadcast Music International, a performance rights organization (“PRO”) that gathers music rights together to be packaged in a single blanket license. The details of the music battle and its implications are discussed in my previous posts [1, 2, 3, 4]. The affirmance means that BMI can not only fractionally license, it can do so under the consent decree as it is currently drafted. This decision will be terrible for the music industry, enabling new forms of market power that could be abused by license holders to increase prices.
Today, consumers have access to a greater selection of music than ever before. They can listen to music anywhere, anytime, on a broad range of devices. Sharing and creativity have flourished, enabling new business models for creators and the emergence of new artists, as well as ensuring that the supply side of music is more diverse and competitive than ever.
However, part of the debate over European copyright reform focuses on the idea of a “value gap”, arguing that the music industry does not benefit as it should from music streaming services. Consequently, provisions that would upend the entire European digital sector and that are not compatible with EU fundamental rights (as clearly explained by over fifty human rights and media freedoms NGOs, including Reporters without Borders) were introduced in the EU copyright proposal.
In a research paper published by the Computer and Communications Industry Association (CCIA), we expand on a previous DisCo blog post and argue that the gains in music choice, creativity, diversity and competitiveness – thanks mainly to digital services – have not been achieved at the expense of legacy music players, such as major labels and collecting societies.
Emerging artists continue to use the Internet and music streaming services to launch and sustain their careers.
According to a recent article in the Washington Post, in November 2014, country singer Luke Combs co-wrote the hit song Hurricane with two friends. He recorded and mastered the song at his own expense (the mastering cost $200) in May 2015. He then uploaded it to iTunes via TuneCore, a digital distribution service that allows anyone to sell or license music on digital media stores and streaming services. Within a week, Hurricane sold 15,000 downloads, and as of this week, it has sold over 487,000 copies. It was also the top playing song on terrestrial radio for two weeks in May.
The success of Hurricane led to an independent label deal, then a contract with Columbia Nashville. Combs attributes the success of Hurricane in part to his building a small fan base while playing shows as a college student in North Carolina. The fan base provided an initial market for Hurricane, which then grew virally.
But a traditional label deal isn’t always the goal for artists who make a name for themselves online — nor is selling music. Take for example Chicago native Chance the Rapper (born Chancelor Johnathan Bennett), a favorite of former President Obama, who distributes his music for free over the Internet. This year Chance became the first artist to win a Grammy without selling physical copies of his music, as he only releases it via streaming services. This was possible due to a change in Grammy rules last year to include albums released on “applicable streaming services.”
It is indisputable that the performing rights organizations (“PROs”) have played an important and procompetitive role in making the music industry what it is today. The benefits that PROs provide are mainly that they offer “unplanned, rapid, and indemnified” access to the songs in their catalogue. Nearly all music users, until recently, have been able to get immediate access to public performance licenses for the music they need simply by taking blanket licenses from the major PROs of the time.
The full work licensing question has never definitively been answered, but it has at the very least historically been assumed by the DOJ, Supreme Court, and music users that the PROs effectively offer full work licenses. The language the Supreme Court uses to describe the service provided by the PROs – “unplanned, rapid, and indemnified access” – implies full work licensing. However, the reason why there is still even room for debate is that it’s never really mattered. Most music users take licenses from the three major PROs (ASCAP, BMI, and SESAC) and pay these PROs based on fractional market shares. In exchange, these music users have never worried that they do not have the rights to play the songs in these PROs’ catalogues. The question only becomes relevant when music publishers wish to fragment music licensing and move rights out of the PROs.
For the purposes of this post, I will assume that – despite the findings of the DOJ – it is debatable whether the PROs have offered full work licenses to date. Even still, the historical assumption of a full work licensing environment has great implications for how the courts and the DOJ have treated the music industry under the antitrust laws.MORE »
What Do Licensing, the Rhine, and the Silk Road Have In Common?
In my last post I explained the history of the music fight, and in this post I wanted to look forward to the problems music users fear if they can no longer get full work licenses from ASCAP and BMI. The biggest issue is from what law professor Michael Heller described as the tragedy of the anticommons. This tragedy might sound complicated, but it’s actually a simple way of describing a wide range of coordination breakdowns that can come from too much ownership of a single resource.
The Bloody History of the Anticommons
The tragedy of the anticommons is not merely academic: it actually has a very interesting and sometimes bloody history. The tragedy has been developed by a number of economists and scholars to describe a wide range of modern problems, like hold-up, double marginalization, patent thickets, and submarine patents. However, one of the clearest examples of the tragedy comes from toll collectors along the Rhine River in medieval Germany.
The Rhine River was the commercial superhighway of Western Europe from around 800 AD. As such, the Holy Roman Empire closely guarded the tolling rights along the river and kept tolls low to promote trade. However, local German leaders, usually low-ranking nobility, erected unsanctioned castles along the Rhine River to collect tolls without permission. These “robber barons” would stretch chains across the river to prevent passage without payment. As the total cost for traveling the Rhine went up, merchants started to avoid the Rhine entirely. Each baron was acting in their own self-interest by taxing a resource common to all stakeholders: the commerce along the river. In the aggregate, however, these individually rational decisions turned out working to everyone’s disadvantage. It actually became cheaper for merchants to take much more difficult land routes to their destinations. This of course had a disastrous effect on trade and the income from sanctioned toll collection.
The solution came in the form of the Rhine League, which actually led military campaigns against the robber barons and destroyed their castles. Today, the oldest surviving international organization – Central Commission for Navigation on the Rhine – was actually formed in part to coordinate fees and duties among the countries along the Rhine River.
The Rhine is not the only place in history where the tragedy appears. It seems that the prosperity that came from the trade of goods and culture between Europe and China starting in the early 1300s was due to the consolidation of lands by Genghis Khan under the Mongolian Empire. Prior to Genghis Khan, the route from Europe to China went through many countries that were unsafe and demanded tribute from merchants transporting goods. These taxes and dangers cut into the profits of traders and the trip was not especially attractive. Genghis Khan’s conquest greatly diminished the amount of tribute gatherers and, along with the prioritization of safety, led to the rise of the Silk Road. The trade that resulted introduced Europeans to a wide variety of goods, spices, and gunpowder. Important ideas were also exchanged, leading to the introduction of bills of exchange, deposit banking, and insurance to Europe.
Latest record industry figures confirm 4 years of consistent revenue growth – if you look at the right numbers.
Tales of the music industry’s demise appear to have been vastly exaggerated. Last week the Recording Industry Association of America (RIAA), an industry group of major record labels, published its revenue figures for 2016. So how do they look? Quite different from the “value gap” the music industry is allegedly experiencing. Instead, RIAA data shows that the cost savings of digital distribution are passed on to consumers and labels alike, and labels are seeing increasing growth as a result.
In the RIAA’s own words, the wholesale value of music is the “better metric of the revenues that are going to music labels for sales and listening” (Josh Friedlander Sr. VP Strategic Data Analysis for the RIAA, here). In other terms, wholesale value takes into account all revenues paid to record labels – from physical sales, streaming and other sources.
Yesterday several hundred musicians filed an amicus brief with the Ninth Circuit in support of plaintiff-appellants Pharrell Williams, Robin Thicke, and T.I. in the Blurred Lines appeal, Williams et al. v. Gaye et al. (They were initially plaintiffs because they had filed a declaratory judgment, as I explained in this post.)
This brief was noteworthy, in that it’s an important—and somewhat rare—example of rightsholder constituencies pointing out the costs of overbroad rights. While scholars say this frequently, it is not as commonly heard from artists. (Prof. Peter Jaszi has often said that with intellectual property, sometimes “you can have too much of a good thing.”   ) On Twitter, Brandon Butler characterized the filing as saying “everything is a remix,” alluding to an ongoing video series from Kirby Ferguson about creativity, originality, and copyright. As the brief put it:
From time immemorial, every songwriter, composer, and musician has been inspired by music that came before him or her. . . . Virtually no music can be said to be 100% new and original.
The filing is also reminiscent of Judge Kozinski’s famous dissent in White v. Samsung, also in the Ninth Circuit:
Overprotecting intellectual property is as harmful as underprotecting it. Creativity is impossible without a rich public domain. Nothing today, likely nothing since we tamed fire, is genuinely new: Culture, like science and technology, grows by accretion, each new creator building on the works of those who came before. Overprotection stifles the very creative forces it’s supposed to nurture. . . . All creators draw in part on the work of those who came before, referring to it, building on it, poking fun at it; we call this creativity, not piracy.
This morning Google released an updated “How Google Fights Piracy” report, an extensive survey of how assorted Google products, including YouTube, fight intellectual property rights infringement. Building on a previous report in 2014, the 60-page document details how rightsholders can use tools to control or monetize unauthorized activities online in relation to search, YouTube, Google’s Play Store, and advertising.
Initial coverage focused on the report having revealed that YouTube has paid over $3 billion dollars to music industry stakeholders, labeling this a “rapid, significant increase” over payments in 2014.
This comes at a time when the video hosting platform is under pressure to pay out more in licensing negotiations. The report also notes that YouTube’s Content ID system alone has produced $2 billion for partners. In addition to framing the debate over private licensing arrangements, these data points highlight the absurdity of misrepresentations earlier this summer that musicians were receiving more money from vinyl records than streaming. These data points also underscore the scope of opportunity as players in the highly competitive video platform industry jockey for a growing pool of industrially-financed and individual creator content.
The impressive returns from Content ID reflect the economic significance of so-called “DMCA-Plus” systems like Content ID. While most online platforms comply with the 1998 Digital Millennium Copyright Act (DMCA) “notice-and-takedown” system, some more sophisticated platforms have gone above and beyond what the DMCA requires. These approaches are sometimes referred to as “DMCA-Plus” to indicate that online services perform additional services for rightsholders, beyond simple DMCA compliance.
These contractual “super-structures” built on top of DMCA compliance programs can provide new licensing opportunities for rightsholders. Today’s report points out that some 90% of copyright claims on YouTube result in monetization, such that half of the music industry’s YouTube revenues derive from claimed content. In short, as DMCA-Plus systems expand across the economy, rightsholders may be poised to receive billions in royalties.
As this market grows, so too does the incentive to misuse these DMCA-Plus tools. Pages 45-46 of the report note several egregious examples of DMCA abuse by those seeking to suppress information or competitors. As previous DisCo coverage has noted, such problems have already been extensively documented. With more and more money on the table from DMCA-Plus systems like Content ID, the need for meaningful penalties for abusive takedown claims will only grow.
Nevertheless, the challenges posed by abusive takedowns are one discrete challenge in the broader context of an entirely new revenue stream for creative industries, one which could not exist but for the DMCA.
Less than a week after agreeing to pay $1.75 million to the Department of Justice to settle an investigation into antitrust misconduct, the American Society of Composers, Authors and Publishers (ASCAP) was on Capitol Hill yesterday, asking lawmakers to roll back the consent decree to which the performing rights organization is bound.
On May 12, DOJ had asked a federal court to hold ASCAP in contempt, stating that the PRO had “undermined a critical protection of competition” and violated its federal commitments. Concurrently, DOJ and ASCAP filed a settlement relating to the alleged misconduct.
As DisCo has previously covered, two federal courts found “troubling coordination” among ostensible competitors in the music publishing industry, which contributed to Justice’s recently concluded investigation. The 7-figure settlement is a stark reminder of the continuing need for antitrust protections, even as Congress is being asked to relax those commitments.
Today the new Copyright Royalty Board (CRB) ruling was released, announcing royalty rates that will impact music streaming services and the broader music ecosystem. Given how complicated all of this is, we thought an explainer would be useful.
What is the CRB?
The CRB is an administrative body at the Copyright Office comprised of three Copyright Royalty Judges who set statutory license rates for certain music services. If the rights-holders and music distributors that wish to publicly perform sound recordings are unable to negotiate a settlement agreement about royalty rates within three months, then the CRB process begins.
How does the CRB process work?
The process is similar to an administrative trial, with written statements and testimony, discovery, and hearings. It results in a ruling that sets rates for the next five years. Depending on the kind of music service being offered, the CRB applies different legal standards to set rates.
How are the rates set?
The two main standards are the “willing buyer/willing seller” standard and the “801(b) factors.”