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“We stand here confronted by insurmountable opportunities.” Pogo

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The music industry is in crisis. It does not control the market for digital distribution

of its products. Revenue from the sale of recorded music has been steadily

declining. The industry’s efforts to salvage its legacy business model have not

only failed they have caused a public relations backlash. The industry is now held

in such low esteem that otherwise law-abiding consumers find it far too easy to

rationalize what is, by current legal standards, simply stealing, and nothing more.

Ironically, the music industry’s predicament is largely of its own making. It results

from the industry’s failure to respond constructively to the changed

circumstances imposed on it by emergence of the global digital communications

network.

In particular, the Internet is fundamentally incompatible with a sales-based

revenue model for works of popular culture, especially music. Prior to the

Internet, large-scale piracy of physical products, such as records, tapes and CDs,

required an organizational infrastructure, manufacturing facilities, distribution

channels and lots of capital. It was cumbersome at best and vulnerable at every

turn to the industry’s anti-piracy campaigns. Also in the past, the copying of

music by individual consumers was limited to the making of analog tape

recordings, the sound quality of which degraded significantly with each

successive generation of copy. Moreover, the means by which consumers were

able to distribute these tapes was limited to face-to-face transactions between

individuals who handed-off copies to each other. This conduct, while troubling,

never imperiled the music industry.

1

Mr. Lincoff is an intellectual property law attorney, consultant and writer with more than twenty years

experience in music licensing. The purpose of his work and of his writing is to assist creators, rights

owners, intermediaries and end users to maximize the benefit they derive from protected content.

Mr. Lincoff can be reached at BennettLincoff@aol.com or through his web site at BennettLincoff.com.

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Today, music piracy is cheap, quick and easy. Record labels have already made

nearly all recorded music lawfully available in digital format through the sale of

CDs. Practically anyone can turn these recordings into digital audio files and

make them available on the Internet. Every Internet user, whether or not involved

in peer-to-peer (“P2P”) file-sharing, and every webcaster, podcaster, or other

digital audio service provider in the world is a potential source of unauthorized

mass distribution of recorded music in pristine and unprotected form.

Through the Internet, the market for sale of individual recordings can be

saturated in a moment’s time and without payment of any royalties to

songwriters, music publishers, recording artists and record labels. The dollar

amount at risk may well be greater for larger right holders; but all rights holders,

large and small, are impacted to the extent they seek to sell their music. Given

this, the industry’s traditional revenue model, based on the sale of hit recordings

at thin margins, will soon no longer be sustainable. Neither law, nor technology,

nor moral suasion will change this result.

Music was the first killer app among consumer products on the Internet, and the

threat to the industry’s sales-based revenue model was apparent from the outset.

Unfortunately, though music has been available online for more than ten years,

the industry has failed to undertake the transformation needed to succeed in the

digital music marketplace. Instead, it has sought to preserve the established

relationships upon which its past successes were based and to extend its sales-

based revenue model well beyond what has turned out to be its effective reach.

To these ends, the industry has experimented with a variety of access

restrictions and anti-copying measures. All of these efforts have engendered

effective technological countermeasures and news of each successful hack

quickly found its way to everyone who cared. Those who create digital rights

management (“DRM”) tools for the music industry have proven to be no match

for smart kids with computers, many of whom are beyond the easy reach of the

law. Nor is it desirable that the technology used to protect recordings should be

beyond the grasp of young people. Public policy limits the nature of DRM that

can be applied to entertainment content. It is not permissible to protect music as

if it were national security information. And while it is generally illegal to

circumvent technological measures used to prevent unauthorized access to and

copying of entertainment content, there are circumstances in which

circumvention is entirely lawful. In any event, punishing kids as criminals has not

brought about the principal result that the industry seeks. The landscape is

littered with failed DRM schemes and abandoned security initiatives. There is no

reason to believe the result will be different next time, or ever.

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The industry has also used its substantial lobbying resources to persuade

lawmakers to protect music and other entertainment content according to current

and sometimes inapposite legal mechanisms that effectively chill the

development and distribution of new products and services. Specifically, the

industry has pursued legislation banning hardware and software that might

undermine the sales-based revenue model by inducing infringement. As a result,

consumer electronics makers, fearing liability, have been slow to offer greater

interoperability between the many recording, playback, and communications

devices that are available. They have also been reluctant to offer new products

with next generation capabilities, such as web-enabled home entertainment

systems or embedded device recording capabilities. In addition, as a result of

industry sponsored litigation, technology firms and their investors, also fearing

liability, have withdrawn support for certain of their own previously released

software products, or moved their operations off-shore.

The industry has also sought to ban the use of digital audio file formats that

cannot be configured to inhibit consumers from downloading music without

authorization. It proposed legislation that would prohibit the use of such file

formats -- especially the widely popular MP3 file format -- by audio service

providers who wish to avail themselves of the existing – albeit limited -- statutory

license in the United States for webcasting.

Efforts to limit the market to copyright “friendly” files, players, and other devices

and systems may raise fair use and free speech concerns depending on whether

and how they impede individuals from communicating with each other. Besides,

consumers want devices that accept all works, and recordings that play on all

devices; they want to enjoy music when, where and how they themselves decide.

The industry has steadfastly refused to authorize services – especially P2P file-

sharing networks -- that offer consumers full, unfettered, DRM-free access to

music. To be sure, the industry supports services that offer DRM-encumbered

music files; files in obscure formats, such as MPQ; files that are tethered to

particular playback devices; files that cannot be shared; files that time-out; are

only available while the consumer remains a subscriber of the service from which

the music was obtained; or that are subject to other use restrictions. These are,

at best, alternatives to the services that consumers demand, not substitutes for

them. Because these offerings fall short of responding to consumer demand,

they leave the sales-based revenue model vulnerable to widespread infringement

by consumers who refuse to accept less than they already know they can have.

By its refusal to meet consumer demand, the industry has relegated consumers

to unlicensed services where adware, spyware, and privacy violations abound. In

turn, the industry uses technological measures in an effort to disrupt these

services. It seeds them with corrupted music files that damage consumers’

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computers. It also engages in a practice known as “spoofing” by which

consumers – including, no doubt, some young children – who search P2P

networks for music files have been sent pornography instead. And, of course, the

industry has launched a campaign of infringement litigation against consumers

seeking ruinous damages and imposition of criminal penalties for conduct

occurring in the privacy of people’s homes.

Another element of the industry’s strategy is the imposition of unprecedented

program content restrictions on webcasters. The industry fears that webcasting

will allow consumers to make unauthorized digital copies of recordings if they

know -- or are reasonably able to anticipate -- when particular recordings will be

streamed. Accordingly, in the U.S. by statute, and in Europe by contract,

webcasters may not offer interactive programming by which consumers can

request that particular recordings be transmitted; may not offer programming

dedicated to particular artists, or even containing more than a few songs by the

same artist or from the same recording; may not make prior announcements of

the recordings they will stream; and may not offer archived programs shorter

than five hours duration. This interference in the programming decisions of

webcasters has no counterpart in the music industry’s relationship with non-

digital program services. It diminishes webcasting unnecessarily, rendering it less

compelling in many ways than ordinary broadcast radio.

The music industry’s treatment of webcasters exemplifies its approach to the

licensing of digital audio services generally. By and large, rights holders are

unwilling to offer licenses for digital uses of music that do not have an identifiable

counterpart and associated business model in the analog world with which they

are comfortably familiar. Audio service providers who wish to offer music in ways

that do not comply with the stringent music use restrictions and business model

limitations imposed on webcasters find it nearly impossible to obtain licenses for

their services. When rights holders refuse to make licenses available, compliance

is only possible by service providers who either forego the use of copyrighted

music or cease doing business altogether. This choice among equally

unappealing alternatives has fostered a culture in which many service providers

consider it the better business practice to ask forgiveness from music rights

holders for infringement rather than to seek permission from them in advance of

launching a new service.

Music industry rights holders also refuse to grant licenses that are co-extensive

with the worldwide territorial scope of Internet transmissions.

The music industry operates globally, but rights in musical works and sound

recordings are administered by local interests on a territory-by-territory basis. For

example, music publishers enter into agreements with publishers in other

countries, called subpublishers, who, in exchange for a percentage of the

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revenue collected, license rights in the publisher’s songs in the subpublisher’s

territory. Similarly, record labels enter into agreements with distributors in other

countries for the sale or other exploitation of the label’s recordings in the

distributor’s territory. For their part, musical work public performance rights

licensing organizations (“PROs”) throughout the world are linked through a

network of reciprocal administration agreements. These authorize each PRO to

license public performances in its own territory of the songs in the catalogs of all

the PROs with which it is affiliated.

This structure provides a consistent basis by which the music industry

administers rights in musical works and sound recordings for uses that begin and

end in a single territory. In those instances, a license from a local entity granting

domestic reproduction, distribution or public performance rights, as the case may

be, is sufficient to authorize the activities in question. This structure also

establishes the principle that the party who owns local rights in a work for the

territory in which the licensed use takes place is entitled to receive whatever

royalties are generated by that use.

Internet transmissions, on the other hand, are worldwide in origin and in reach.

Every Internet transmission brings with it the possibility of worldwide liability.

Under current law and industry licensing practices, these transmissions are

infringing if not authorized for the territory from which they originate. They also

may be infringing if not authorized for the territories in which they are received;

and this, despite that it is end users, not service providers, who determine the

territory in which any particular Internet transmission will be received. In the

absence of the right and ability to compel local network access providers to block

services whose transmissions originate from another territory, it is not possible to

stop digital transmissions from crossing national boundaries. Nor is it desirable to

institutionalize this form of censorship by including it as a tool for the

management of rights in entertainment content.

Audio service providers, whose transmissions traverse the global

communications network, need licenses that grant worldwide rights. These are

unavailable, however, because rights holders have been unable to resolve their

conflicting claims regarding transborder transmissions. For example, rights

holders for the territory from which an Internet transmission originates and those

for the territory where it is received both demand authority to license it. And

regardless who licenses the transmission, rights holders in the territory of origin

and those in the territory of reception both insist that the license fees prevailing in

their respective territories should be charged. Of course, if the rates of the

territories of reception are used, service providers, who are unable to control

where their transmissions are received, would be unable to develop well-

informed business strategies because unable accurately to predict their music

license fee costs. Rights holders are also unable to agree who among them

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should be entitled to receive royalties earned from transborder Internet

transmissions. A further complicating factor is the demand of many PROs that

they retain the right to license Internet transmissions of all service providers

whose economical residence is in the PRO’s territory regardless of the territory

from which the service’s transmissions originate or in which those transmissions

are received. Whatever the reason for it, the effect of the refusal of music

industry rights holders to grant worldwide rights for Internet transmissions of their

works is to compel service providers either to enter into separate agreements

with the rights holders of each work in every territory, or enter into agreements

with rights holders in their own territory for domestic transmission rights only and

risk an unknown quantum of infringement liability under foreign legal regimes.

The Internet and related technologies have rendered certain traditional rights in

music unenforceable and blurred the distinctions between others. This has

injected uncertainty into the digital music marketplace that the industry has

turned to its advantage. For example, music publishers and the public

performance and mechanical rights licensing organizations they control demand

double payments where only a single transmission of a work is involved. Both a

mechanical and a public performance license fee are charged even if the music

is transmitted only for downloading and is not audible while being sent, such as

in podcasting. Both fees are also charged even where the only “copies” made are

transitory and incidental to transmissions that are nothing more than

performances, such as in on-demand streaming or retransmissions of over-the-

air broadcast radio transmissions. Service providers have difficulty navigating this

confusing and counterintuitive paradigm, and in accepting the industry’s rationale

for the double payments it demands.

The industry has caused additional uncertainty in the marketplace by taking

inconsistent positions as to whether consumers who access music online are

purchasing that music or merely obtaining a license for its use.

On the one hand, record labels and music publishers treat these transactions as

licenses, not sales, because they want to maintain as much control as possible

over use of their works by consumers. Rights holders can limit the ways in which

licensed content may be used. Licenses can be terminated and all rights that had

been granted will revert. Those who persist in unlicensed uses are subject to

liability as copyright infringers. Moreover, application of the first sale doctrine to

the digital context remains unclear: It is not yet settled whether consumers who

lawfully acquire a digital file containing recorded music may transfer that file to

another person with the same impunity as they may give away or sell a CD, tape

or vinyl record from their collection. In any event, terms of service typically

provide that consumers only acquire a license to music that most of them no

doubt believe they purchased outright.

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On the other hand, for purposes of calculating royalties to be paid to recording

artists and songwriters, record labels and music publishers treat these same

consumer transactions as sales. When a recording is sold the recording artist

and songwriter typically receive a royalty of only a few percentage points of the

retail sale price. However, if use of the recording were subject to a license, and

not treated as a sale, the recording artist and songwriter could receive royalties

up to 50% of the revenue derived from the license.

Music’s success is also its undoing; at least as far as the industry’s sales-based

revenue model is concerned. People regard music differently than they do other

forms of cultural content. Music is portable. Music is ubiquitous. Music appears to

be free. Everyone is a music consumer, whether they buy CDs, go dancing or to

concerts, listen to radio and watch television, or network online while playing a

previously downloaded podcast. People develop an ownership interest in the

music they most like to hear. “They’re playing our song,” is a heartfelt refrain. The

psychological effect on consumers of this sense of personal entitlement to other

people’s property should not be overlooked.

The market forces at work at the intersection of the Internet and the music

industry’s sales-based revenue model are wildly asymmetrical and to the

disadvantage of music industry rights holders. The network is everywhere and

music is everywhere a part of it. Thus, despite the industry’s efforts, the

unauthorized digital distribution of recorded music continues unabated; P2P file-

sharing networks proliferate; and new means of mass distribution, such as

podcasting, blogging, and social networking services, have arisen. If anything,

the industry’s efforts have resulted in fewer licensed transmissions of fewer

recordings and slowed the growth of royalties that songwriters, music publishers,

recording artists, and record labels otherwise may have earned.

One factor that has favored the music industry has been the relatively slow

deployment of broadband connections for the consumer market in the United

States. Initially, consumers were reluctant to pay more for broadband service

because so little of the entertainment content they most wanted was lawfully

available on the Internet. Lately, however, the rate at which consumers are

subscribing to broadband has increased dramatically. The faster their connection

to the Internet the more quickly consumers can download music and pass it

along to others. The worst outcome for the music industry would be if worldwide

broadband penetration overwhelms the industry’s ability to police unauthorized

distribution of recordings before a full, fair and feasible solution for the digital

music marketplace is in place. The explosive growth of WiFi and web-enabled

mobile communications devices highlights how urgently such a solution is

needed.

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Public policy should strongly support the opportunity of music industry rights

holders to derive ample rewards from their contributions to culture and

commerce. By the same token, however, the music industry has no right to

demand that public policy support its desire to do business in a particular way.

The problem lies with the industry’s addiction to the sales-based revenue model.

As long as its fortunes are tied to sales, it must continue punitive litigation against

consumers, and interference in the free markets for technology, consumer

electronics, and telecommunications and digital audio services.

What is needed is an alternative to the sales-based revenue model for musical

works and sound recordings; a comprehensive approach to rights licensing and

rights management that does not depend on the efficacy of exclusionary

technologies for its success; a solution that simultaneously protects the integrity

of copyright, promotes technological innovation, facilitates the growth of all

manner of digital audio services, and meets consumer demand.

I would like to suggest a specific means by which to bring about these salutary

results. My proposal relies on free market mechanisms and voluntary collective

rights administration, and, if implemented, would maximize the lawful and

licensed availability of recorded music for digital transmissions.

I suggest this: The rights of songwriters, music publishers, recording artists and

record labels in their respective musical works and sound recordings should be

aggregated so as to create a single right for digital transmissions of recorded

music. I call this right the “digital transmission right.” It could just as well be called

the “X” right.

The digital transmission right would be a new right, not an additional right. It

would replace the parties’ now-existing reproduction, public performance and

distribution rights (and, in those territories where it applies, the communication

right). These would no longer have separate or independent existence for

purposes of digital transmissions of sound recordings or of the musical works

embodied in them.

Under the digital transmission right the only act that would require a license, or

payment of a license fee, would be the digital transmission of a recording. Every

such transmission that is not subject to exemption would require authorization in

order to be lawful. This does not mean that separate payment would necessarily

be due for each transmission of each recording; only that, regardless how license

fees may be calculated, all non-exempt transmissions would require

authorization.

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Licenses under the digital transmission right could be made available

unconstrained by the concerns that have driven the music industry’s campaign to

salvage the sales-based revenue model. The determinative consideration would

be whether or not recordings had been digitally transmitted, not whether

particular transmissions are more or less likely to result in sales, or may cause

sales of recordings to be lost. When digital transmissions occur, licenses will be

needed; and when licenses are needed, they should be made available free of

the limitations and restrictions that have characterized the industry’s licensing

efforts to date. All that will matter is the rate of compliance and the price of a

license.

Accordingly, licenses under the digital transmission right should be made

available without regard to whether recordings are transmitted by streaming, or

downloading, or by some other means not yet devised; whether music

programming is interactive or non-interactive, or contains this, that or another

recording; whether the service that provides the transmissions is advertiser

supported, employs a subscription model, charges users on a per-listen or per-

download basis, or has no revenue at all. How many copies, if any, that are

made in the course of transmissions (including any server copies, or ephemeral,

transitory or buffer copies that are necessary to effect a transmission), the type of

transmission technology used, and the file format in which recordings are

transmitted would not be of concern. Certain of these factors, such as those

relating to revenue, may be relevant to calculation of license fees, but their

presence or absence should not affect the availability of a license.

Ownership of the digital transmission right in individual recordings would be held

jointly by the songwriters, music publishers, recording artists and record labels

who contribute to the recording. Each of these parties would be treated as a co-

owner of the digital transmission right whether their contribution to the recording

was made intentionally and voluntarily (such as where the recording artist is also

the writer of the song being recorded) or without purposeful intent and

involuntarily (such as where the songwriter and music publisher are compelled by

application of the compulsory mechanical license to allow recordings of their

works by others).

The interests of all co-owners of the digital transmission right in a recording

would be implicated by every digital transmission of that recording. No one co-

owner would be permitted to act as gatekeeper of the rights of all, with sole

discretion to determine by way of a veto if, when, how, and by whom this newly-

established right may be exploited. Rather, regardless of the nature of their

relationships to each other under pre-existing agreements, or to particular

recordings under current law, under the digital transmission right each rights

holder would have full and independent authority to grant non-exclusive licenses

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for digital transmissions of those recordings on any terms that they and their

licensees find to be mutually acceptable.

By way of example, a record label, acting without the consent or even prior

knowledge of the songwriters, music publishers and recoding artists involved,

could license its entire catalog of recordings, or any part of it, on a non-exclusive

basis to a digital audio service provider who offers subscription streaming.

Recording artists could authorize fan sites to promote an upcoming concert by

offering downloads of the artist’s latest recording in exchange for voluntary

contributions from consumers. And songwriters could offer Creative Commons

licenses for digital transmissions of every cover recording of one of their

compositions. The only limitation on the authority of individual rights holders to

grant non-exclusive licenses would be the obligation to account to co-owners

pursuant to whatever arrangements they make among themselves for the

division of royalties earned from this newly-established right.

The Internet will influence the dynamics of these royalty negotiations. Recently,

and for the first time, unsigned artists who produce their own recordings have

been able to obtain widespread early recognition of their work – though little, if

any, direct financial benefit -- through P2P file-sharing and the use of viral

marketing. These efforts at self promotion may result in drawing more fans to

concerts. In the mean time, however, CDs sales will certainly have been lost. I

doubt that many of these early adopters expect to build their careers through the

use of P2P file-sharing in its current debased form. More likely their hope is that

this exposure will bring them to the attention of a major record label and result in

a recording contract. This strategy correctly recognizes the continuing market

dominance by the majors in the context of the sales-based revenue model

through their control of traditional distribution channels. However, the exigencies

of a hit-driven market have already made the notion that record labels nurture

artists’ careers an anachronism. Moreover, new businesses may arise to

displace record labels as the source of funds to underwrite concert tours but

without acquiring ownership of the artists’ creative output in exchange. And, as

the digital music marketplace matures, the network itself will become the primary

channel of “distribution,” and licensed transmissions will displace sales as the

principal source of music industry revenues. These circumstances suggest that

the relative importance of the roles played by the major record labels -- and

music publishers for that matter -- may diminish over time. One would expect that

any such change would be reflected in the division of royalties among the rights

holders involved.

In any event, there will be circumstances in which rights holders will not be able

to reach voluntary agreement on the division of royalties; and others in which

negotiations themselves may not be possible (e.g., with older works where rights

holders have lost contact with each other, or in the case of cover recordings

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where, because of the compulsory mechanical license, the recording artist and

record label involved will not necessarily ever have had direct contact with those

who own rights in the underlying musical work that was recorded). Therefore, as

both a starting point for negotiations generally, and as a default when voluntary

agreement is not possible, I suggest that the interests of songwriters, music

publishers, recording artists and record labels should each be allocated a 25%

share of the total royalty earned from licensed digital transmissions of their

recordings. In this way, singer-songwriters would receive 50% of all royalties

earned from licensed transmissions of those recordings to which they will have

made the overwhelmingly greatest contribution.

Co-owners of the digital transmission right in individual recordings would also be

free to coordinate their licensing efforts. If all agree, they may license their jointly

owned recordings to a single audio service provider for all purposes on an

exclusive basis, or to multiple service providers, each on a different exclusive

basis (e.g., time, territory, or type of service). Exclusive licenses, however,

depend for their value on the ability to exclude others from using the work in the

same manner and during the period of exclusivity. The music industry’s

experience to date demonstrates the futility of efforts to restrict uses of recorded

music on the Internet. In the digital music marketplace, the useful lifespan of

exclusive rights will be short; their value uncertain. Service providers will do

better being the first source of particular content rather than trying to maintain

their status as the only source of it.

For all purposes other than digital transmissions, current law relating to the

ownership of rights in musical works and sound recordings would continue in

effect without change. For example, the compulsory mechanical license for the

making of cover recordings would continue in force; although the digital

transmission right would govern the relations of the parties for purposes of digital

transmissions of those recordings. Moreover, nothing in this proposal is intended

to grant songwriters or music publishers any right in any recording other than an

interest in the digital transmission right in recordings embodying their own

musical works. And nothing is intended to grant recording artists or record labels

any right in any musical work other than an interest in the digital transmission

right in their own recordings of particular songs. It is also not intended that the

division of ownership of rights in musical works and sound recordings under this

proposal should be used as precedent when songs or recordings are

incorporated into other works, such as motion pictures, or for treatment of any

other categories or types of works that incorporate contributions from more than

a single rights holder.

The digital transmission right would be enforceable only against those directly

involved in providing digital transmissions of recorded music.

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Accordingly, consumers would not incur any liability merely for surfing the web,

accessing streaming media, or downloading music files. Copying for personal

use also should not require authorization. To be sure, consumers still would be

required to pay network operators for Internet access, and they may be required

to pay audio service providers for their activities on particular web sites or

services. But whether consumers listen to streams or download recordings; make

one or many copies of a recording for personal use; or use recordings on one or

several playback devices would have no effect on their obligation to music

industry rights holders. None of this conduct would require consumers to obtain

licenses or pay license fees under the digital transmission right; and should not

otherwise.

Similarly, software developers, technology firms, consumer electronics makers,

and telecommunications and Internet access providers, as such, would have no

liability under the digital transmission right.

On the other hand, audio service providers would need licenses if they operate

web sites or other services that provide digital transmissions of recorded music.

Consumers, too, would need licenses whenever they act as digital audio service

providers in their own right; that is, whenever they are responsible for the digital

transmissions at issue. By way of example, consumers would need authorization

if they operate personal music-enabled or hobby web sites; or if they upload

music files to a web site or service that does not have its own license under the

digital transmission right authorizing this activity by users of its service (known as

a “through-to-the-user licnese”); or, if they offer recordings to others through

participation in a P2P file-sharing network, or similar service, that does not have

such a through-to-the-user license.

Most web sites and other services that offer musical programming only allow

users to access music, either through streaming, downloading, or both. They do

not allow users to upload content. In these circumstances, only the service

provider (or a consumer acting as a service provider in the case of a personal

web site) would be engaged in providing digital transmissions of recorded music;

and only the service provider would need authorization under the digital

transmission right. Consumers, as transmission recipients, would not have any

liability for these transmissions.

Other services are configured specifically to enable users to upload recorded

music and other content to the service, as well as to access streams or download

content from the service. Examples include social networking and other online

communities, music locker services, and those sites and services that allow

users to upload content but which do not otherwise offer opportunities for user-to-

user interaction that characterize social networks. Uploading to services such as

these would constitute the digital transmission of the recordings involved; and the

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user from whose computer or other device such uploads originate would need a

license under the digital transmission right. The service provider who enables the

uploading would also be liable for its users’ conduct. (Implementation of the

digital transmission right may require reexamination of the circumstances under

which statutory safe harbors from infringement liability will be available to service

providers; as well as reexamination of application of the fair use doctrine to digital

transmissions of recorded music initiated by individual consumers.)

For services such as these, a license held either by the user or by the service

provider would suffice to authorize uploading to that service by that user of the

recordings covered by the license. Alternatively, a single through-to-the-user

license held by the service provider could authorize all uploads of licensed

recordings to the service by any and all of its users. This would eliminate the

need for individual users who wish to upload recorded music to that service to

obtain licenses in their own right. However, the most efficient and effective way to

license such a service would be to issue a single license to the service provider

authorizing all transmissions for which the service provider alone would be liable

(e.g., streaming and downloading from the service to its users) as well as all

tansmissions for which the service provider and users of the service would be

jointly and severally liable (e.g., user-initiated uploading to the service).

It stands to reason that consumers would seek out services that obtain licenses

that authorize their activities in connection with the service. Licensed services,

being lawful, would be able to operate openly, attract investment capital (without

exposing investors to copyright infringement liability), and offer users the most

sophisticated functionalities. Moreover, there being no reason remaining for

music industry rights holders to undermine them, licensed services would be free

of many of the security and related concerns that plague users of their black

market counterparts. Service providers who obtain through-to-the-user licenses

would have a competitive advantage over those who do not even though they

would be required to pay license fees. The availability of through-to-the-user

licenses under the digital transmission right would provide a positive economic

incentive for service providers to secure the authorization they need.

A similar analysis applies to the P2P file-sharing context. P2P participants who

download music files through the network but do not offer works to others would

not need a license under the digital transmission right. Individual P2P participants

who configure their computers to enable transmissions of recordings to others

through the network would need authorization. Operators of centralized P2P

networks would be jointly and severally liable with their network participants who

share recorded music with others on the network. For centralized P2P networks,

a license held by each participant who makes recordings available to others

would suffice to authorize all sharing of licensed recordings on that network by

each such participant. Alternatively, a single license held by the operator of the

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network could authorize all digital transmissions of the licensed recordings

through the network. In such circumstances, individual network participants

would not need to obtain licenses in their own right, and yet would be free to

share the licensed recordings through the network whenever they wished.

Decentralized P2P file-sharing networks, on the other hand, do not have network

operators, as such, through whom a network-wide license could be made

available. Accordingly, each participant in a decentralized P2P file-sharing

network would be responsible for securing authorization for their own conduct on

that network. Licenses for these individual file-sharers should also be made

readily available.

This approach favors licensed centralized P2P file-sharing networks. And again,

it stands to reason that the vast majority of consumers who are interested in P2P

would likely seek out networks that had secured licenses that authorize their file-

sharing activities; especially if the file-sharing that is permitted actually offers

consumers whatever it is that they want from the P2P experience at any given

moment.

The digital transmission right would be impervious to copyright infringement.

Unlike the reproduction and distribution rights that underlie the sales-based

revenue model, but like the public performance right, the digital transmission right

cannot be subverted by one or more unlicensed digital audio services,

webcasters, P2P file-sharing networks, social networking services, or the like.

Whether or not particular transmissions are licensed would not affect the market

for the digital transmission right over all.

This is proven by the experience of ASCAP and BMI, in the United States, and

their sister PROs around the world, with the licensing of over-the-air broadcast

radio stations to publicly perform the copyrighted musical works that these PROs

represent. The license fees collected from U.S. broadcasters constitute a major

portion of ASCAP’s and BMI’s annual revenue. However, even if the largest radio

station or group of stations were not licensed at a particular time, the rights

organizations’ ability to license the thousands of other broadcasters would not be

impaired. Despite infringement by the few, the overwhelming majority of

broadcasters continue to operate lawfully by securing the public performance

licenses they need. Those who act outside the law can, and should be sued for

copyright infringement.

So too would it be under the digital transmission right. If music industry rights

holders made licenses available on reasonable terms that authorize the uses of

recordings that people want to make, the overwhelming majority of those whose

digital transmissions would require authorization – audio service providers and

individuals alike – would pay the license fees that are due. Under these

15

circumstances there would be no justification for public outcry over the industry’s

litigation campaign against those who continue to infringe.

Through the digital transmission right, licensed transmissions of recorded music

could be made available from the largest number and widest array of sources,

anytime, anywhere, to anyone with network access. Whether, and to what extent,

rights holders will be able to convert this vast base of potentially licensed

transmissions into royalty payments will depend on how the digital music

marketplace is organized.

As I suggested earlier, the digital transmission right should be implemented

through a combination of free market transactions between individual rights

holders and audio service providers (known as “direct licenses”) and voluntary

collective rights administration. The best results for rights holders and service

providers alike will flow from a marketplace in which collective licensing is the

norm and direct licensing the exception. In this context, over all success will

depend on the presence in each territory of at least one collective whose catalog

encompasses all or nearly all recordings and which is authorized to grant

worldwide rights at its local rates for all digital transmissions of recorded music

that originate in its territory.

In principle, free market direct licenses are to be preferred. Therefore, subject to

the co-ownership rules discussed above, individual rights holders and service

providers must be free to agree upon whatever terms they wish for digital

transmissions of recordings in which the rights holder has an interest. In practice,

however, a free market for the digital transmission right will produce little more

than a free-for-all. Some rights holders and service providers will benefit greatly;

and others, perhaps most, will be all but excluded from participating in the lawful

market for digital transmissions. The intermediation of collective rights licensing

organizations is needed to avoid this undesirable result.

Collective licensing has been standard practice in the music industry since 1851,

when the Societe des Auteurs, Compositeurs et Editores de Musique (“SACEM”),

the French musical works rights society, was established. Of the rights that the

digital transmission right would replace, only the record labels’ right to sell

recordings (the distribution right, which would no longer have separate or

independent existence for purposes of digital transmissions) is not already

administered to one degree or another by a collective. Collectives represent

songwriters and music publishers for public performance and mechanical rights

(or communication rights) licensing of their musical works. Collectives also

represent record labels for webcasting and, in those territories where it applies,

public performance rights licensing of their sound recordings. Each collective

serves as a clearinghouse, making markets between the rights holders it

16

represents and the multitude of those whose various uses of music or recordings

require the owner’s authorization.

The Copyright Law requires those who wish to use protected content to secure

authorization for the use in advance of undertaking the conduct in question.

Accordingly, under the digital transmission right, audio service providers would

need to secure authorization to digitally transmit recordings prior to transmitting

them. Failure to secure advance authorization would expose those responsible

for the transmission to liability for copyright infringement.

There are hundreds of thousands of copyrighted songs and recordings. New

works are created every day. Many different songs can share a common title;

and popular songs often are recorded many times by different artists. There are

also tens of thousands of music industry rights holders. Many of these are

individual songwriters or recording artists. Others are small music publishing

firms or record labels. Still others are larger independents. And, setting the

industry’s agenda, is a scant handful of multinational entertainment

conglomerates.

There is no quick and reliable way to determine who owns rights in which works.

The identity of the music publisher or record label owning an interest in any

particular song or recording will change as rights are assigned, publishing

catalogs are bought and sold, and record labels come and go. So-called “label

copy,” information printed on a recording’s label, jacket or liner notes identifying

the rights holders, and its recent manifestation as metadata encoded in digital

audio files, even if accurate on the day it was created, becomes unreliable as

time goes by. And while the identity of the songwriter and recording artist of a

particular recording cannot change once the recording has been completed,

these people may not wish to be contacted by service providers or individuals

seeking licenses. The privacy concerns of songwriters and recording artists must

take precedence over the licensing needs of service providers.

In the absence of collective licensing, each service provider would be required to

identify, locate and successfully negotiate a digital transmission right license with

at least one rights holder of each recording that they wish to transmit. Some right

holders will make it easy to obtain licenses. However, depending on who is

involved, the time and effort necessary to clear rights in even a single recording

may be beyond the capacity of most of those who will need a license. It would be

especially burdensome to clear rights in more than a few recordings, or in new

works by emerging artists, or older works, or works of foreign ownership. By and

large, service providers would not be able to obtain prior authorization for

transmissions of recordings that they do not directly select and cannot identify in

advance, such as those contained in retransmissions of over-the-air broadcast

17

radio transmissions, or instances in which users upload recordings to the service,

or for transmissions through P2P file-sharing networks.

In addition, in the absence of collective licensing, different rights holders will likely

demand different terms and conditions for licenses to digitally transmit their

recordings. These may include different start and ending dates for the licensed

term; different periods for financial reporting and payment obligations; different

data fields and formatting requirements for music use reports; different metrics

for calculating license fees owed; and the obligation to employ possibly

incompatible DRM regimes. Some rights holders will require most-favored-

nations treatment; others will not. The administration of inconsistent license

agreements with multiple rights holders is a complicated and costly undertaking.

Service providers with the most resources to devote to rights clearance activities

will have an advantage; though it will by no means be an easy matter even for

them. The task will be more difficult for those with fewer resources, and most

difficult for individual consumers when they, too, need licenses under the digital

transmission right.

A market that operated wholly without the intermediation of collective licensing

organizations would not necessarily be a boon to music industry rights holders

either. In the absence of collective licensing, each rights holder would need to

undertake its own licensing efforts and establish its own rights administration

infrastructure. Given the multitude of far-flung service providers and individuals

who will need authorization under the digital transmission right, success at

licensing will require a systematic and comprehensive approach. This will be

beyond the means of many rights holders. Moreover, the effort needed to

effectively monitor licensed transmissions so as to determine which recordings

were transmitted and, therefore, who among rights holders is entitled to payment

of royalties, will be no less daunting. Many larger rights holders are already

unable to process the tremendous amounts of music use data generated by their

limited Internet and mobile licensing successes to date. In addition, because

many digital transmissions will originate outside of a rights holder’s home

territory, it will be necessary to establish and maintain a means by which to

license digital transmissions and monitor music uses in foreign territories. This

may involve regulation under foreign legal regimes.

In the absence of collective licensing, licenses for digital transmissions of many

recordings may – by default - not be made widely available. Moreover, few audio

service providers will be able to obtain licenses for all or even most of the

recordings that they transmit. This does not mean that digital transmissions of

recorded music will not occur in great abundance; only that a large portion of

them will not be authorized. And, of course, transmissions that are not licensed

cannot generate any royalty payments for rights holders; they can only enrich

attorneys who litigate copyright infringement claims.

18

Even though, as a matter of law, the burden is on service providers to secure

advance authorization for their transmissions, the rate of compliance will be low

unless rights holders actively seek to license digital transmissions of their

recordings. In order to maximize compliance, rights holders must make it as easy

as reasonably possible for audio service providers to obtain and to administer the

licenses they need. The over all burden of compliance, including the cost of

license fees and the effort needed to fulfill music use reporting requirements,

must be light enough so that knowing non-compliance can only come from a

willful and unjustifiable refusal.

As a starting point, rights holders should be free to establish as many collective

licensing organizations as they wish; and, as a general matter, collectives should

be permitted to operate in any manner that they chose. For example, they should

be permitted to restrict their membership on any lawful basis; treat some

members one way and other members another; use any basis that they wish to

determine how to divide royalties among those they represent; license service

providers on whatever terms and conditions the market will bear; offer different

terms and conditions to services that otherwise operate on the same bases; and

refuse to license certain service providers altogether. However, depending on the

number of collectives that operate in any given territory, it may be necessary for

policy makers to establish criteria by which to determine whether, by reason of

their market position, certain collectives should be subject to some degree of

regulation. In this regard, consideration might be given to the number of rights

holders a collective represents, the number of recordings in its catalog, or the

proportion of all digital transmissions attributable to those recordings. Collectives

that meet the threshold criteria for regulation – which, I think, should be low --

should be required to accept into membership all songwriters, music publishers,

recording artists and record labels who wish to join and who own an interest in at

least one protected recording; to treat all members on an equal and non-

discriminatory basis, especially with respect to the manner in which royalties are

calculated and paid; and to offer the same terms and conditions of licensure to all

similarly situated service providers. In order to further protect the interests of

individual rights holders, service providers, and the public at large, regulated

collectives should be required to operate in all respects on a transparent basis

and should be subject to government agency oversight.

Within this general framework, individual songwriters, music publishers,

recording artists and record labels must be free to affiliate with a collective, or not

to join any collective at all. It would not be necessary for all rights holders with an

interest in the same recording to belong to the same collective. They may each

belong to a different organization. However, no individual rights holder should be

permitted to belong to more than a single collective at any one time. Moreover,

inasmuch as digital transmissions of their works can originate from any territory,

19

rights holders should be free to join a collective in any territory that they wish.

They should not be limited in this regard either by their nationality or by the

territory in which they reside. In addition, existing collectives to which rights

holders may belong for the administration of rights in their works under current

law should not be permitted to interfere, either directly or indirectly, with their

members’ affiliation decisions for the newly-established digital transmission right.

Each rights holder who joins a collective would grant it the non-exclusive

worldwide right to license digital transmissions of all recordings in which the

rights holder has an ownership interest under the digital transmission right. This

would include all recordings of songs written by a songwriter, or owned by a

music publisher; all recordings made by a recording artist; or all recordings in the

catalog of a record label. The grant would extend to all works in existence at the

time the rights holder joins the collective. The only exception would be those

recordings, if any, for which the digital transmission right was subject to a pre-

existing grant of exclusive rights made by all of the rights holders-in-interest in

the recording in question. The non-exclusive grant to the collective would also

include any additional recordings which are newly-created or in which the rights

holder otherwise acquires an interest while a member of the collective. These

would automatically become part of the collective’s catalog upon their creation or

upon the rights holder’s acquisition of its interest in them, as applicable.

Each collective’s catalog would be composed of all recordings in which any

songwriter, music publisher, recording artist, or record label that is a member of

the collective has an ownership interest. This would include recordings in which

one or more co-owners had granted non-exclusive rights to whichever other

collective(s) they belong. If a collective in one territory has reciprocal

administration agreements with collectives in other territories, then the catalog of

the local collective would also include the recordings in the catalogs of those

affiliated foreign collectives; and the local collective would represent the interests

of the songwriters, music publishers, recording artists and record labels who are

members of the affiliated foreign collectives when their recordings are contained

in digital transmissions that originate in the local collective’s territory.

If all rights holders of a particular recording belong to the same collective, then

that collective would be the only organization in its territory with authority to

license digital transmissions of that recording. If they belong to different

collectives, then each of those collectives would have non-exclusive rights with

respect to the recording in question. A license from any collective whose catalog

contains a particular recording would be sufficient – standing alone - to authorize

digital transmissions of that recording. In such instances, there would not be a

need for a license from any of the other collectives to which other rights holders

of the work may belong. In all circumstances, however, the opportunity for direct

licensing must be preserved: Individual rights holders must retain the right to

20

directly license digital transmissions of their recordings on any terms that they

and the service providers with whom they do business find to be mutually

acceptable.

Each collective would be authorized to issue licenses under the digital

transmission right that grant worldwide rights for all transmissions that originate

from its own territory. The license fees charged, including those for transborder

transmissions, would be based on the rates prevailing in the territory of the

collective issuing the license. In this way, each collective would offer those

whose digital transmissions require authorization a single source, a “one-stop-

shop,” for their licensing needs with respect to the recordings in the collective’s

catalog. Licenses would contain uniform terms and conditions applicable to

digital transmissions of all such recordings. These would include uniform

provisions relating to license fee calculation, and financial reporting and payment

procedures, as well as standardization of the technology to be employed for

identifying recordings, tracking how often they are transmitted, and reporting this

music use data to the collective.

Each collective would pay royalties only to those rights holders whose interests it

represents. Thus, if the rights holders of a particular recording belong to different

collectives, they would each look only to their own collective for payment of

royalties earned from that collective’s licensing efforts on their behalf. Thereafter,

and unless they have agreed otherwise among themselves, each rights holder

would have the obligation to account to their co-owners for royalties received. On

the other hand, if all rights holders of a particular recording belong to the same

collective, they would each receive their full share of royalties directly from that

collective and there would be no need for later accounting and reconciliation

among them.

The rules that govern royalty distribution under the digital transmission right must

take into account that the catalog of the collective that licensed the transmission

that gave rise to the royalty in question (the “local collective”) will contain both

recordings of “local origin” (that is, recordings regarding which one or more rights

holders is a member of the local collective) as well as recordings of “foreign

origin” (that is, recordings that are in the local collective’s catalog because one or

more rights holders with an interest in them is a member of an affiliated foreign

collective). In addition, the rules must also take into account that some licensed

transmissions will begin and end entirely within the territory of the local collective,

while others will begin in the territory of the local collective and end in another

territory. For royalty distribution purposes only, I suggest that such transborder

transmissions should be treated as if they were composed of two legally

cognizable and equal acts, one occurring in the territory from which the

transmission originates, and the other in the territory where the transmission is

received.

21

Accordingly, royalties under the digital transmission right would be distributed as

follows:

 If the recording is of local origin and the transmission giving rise to the

royalty in question begins and ends entirely within the territory of the local

collective, then the local collective would pay all the royalties available to

those of its own members who have an interest in the recording. For

example, if only the music publisher were a member of the local collective,

then the music publisher would receive all such royalties payable by the

local collective. On the other hand, if the songwriter, music publisher and

recording artists were all members of the local collective, but the record

label was a member of some other collective, or was not affiliated with any

collective at all, then the local collective would pay the songwriter, music

publisher and recording artists each one-third of the royalty payable for the

digital transmission in question.

 If the recording is of foreign origin and the transmission begins and ends

entirely within the territory of the local collective, then the local collective

would pay the songwriter’s share and the recording artist’s share to the

affiliated foreign collective to which they belong for subsequent distribution

to them, and would pay the music publisher’s share and the record label’s

share to those of its own members who have been granted local rights to

the recording. If no local music publisher (subpublisher) and/or record

label (distributor) has been designated, then the local collective would pay

the music publisher’s share and the record label’s share to the affiliated

foreign collective to which they belong for subsequent distribution to them.

 If the work is of local origin and the transmission begins in the territory of

the local collective and ends in another territory, then the local collective

would pay one-half of the music publisher’s share and one-half of the

record label’s share to those of its own members who have an interest in

the recording, and the other half of the music publisher’s share and the

other half of the record label’s share to the affiliated foreign collective in

the territory in which the transmission was received (assuming that that

collective has members who have been designated to represent the music

publisher’s interest and the record label’s interest in its territory). The local

collective would pay the songwriter’s share and the recording artist’s share

directly to the songwriter and the recording artist, but only if they were

members of the local collective.

 If the work is of foreign origin and the transmission begins in the territory

of the local collective and ends in another territory, then the local collective

would pay one-half of the music publisher’s share and one-half of the

record label’s share to those of its own members who have been granted

22

local rights to the recording. If no local music publisher (subpublisher)

and/or record label (distributor) has been designated, then the local

collective would pay the one-half shares in question to the affiliated foreign

collective to which the music publisher and the record label belong for

subsequent distribution to them. The local collective would pay the other

half of the music publisher’s share and the other half of the record label’s

share to the affiliated foreign collective in the territory in which the

transmission was received (assuming that that collective has members

who have been designated to represent the music publisher’s interest and

the record label’s interest in its territory). And finally, the local collective

would pay the songwriter’s share and the recording artist’s share to

whichever affiliated foreign collective they belong for subsequent

distribution to them.

For their part, service providers should be free to operate their services from any

territory that they wish. The license fees charged for licenses under the digital

transmission right by local collectives in different territories may well be a factor

that service providers consider in determining where to locate their services. So,

too, might the nature of the hosting services and the telecommunications

infrastructure available in a given territory. On the other hand, by locating its

service in a foreign territory, a service provider may be subject to the local law of

that territory for all purposes. Nevertheless, service providers should not be

limited to locating their service in the territory in which they are incorporated or in

which they have their economic residence; or, if an individual, the territory where

they reside.

The central question for service providers is with how many sources they must

deal in order to obtain the digital transmission rights they need on reasonably

acceptable terms. The presence of a single collective from which to obtain a

single license agreement granting worldwide digital transmission rights to nearly

all recordings will be key to service provider compliance. In the absence of such

a collective, service providers would be required either to enter into agreements

with all collectives operating in their territory or to devote the time and resources

necessary to scrutinize the recordings they transmit to assure that all are

included in the catalog(s) of the collective(s) whose recordings they are

authorized to digitally transmit. A license from a collective with an all-inclusive

catalog would effectively eliminate the need for service providers to engage in

such close scrutiny of their musical programming. If there were only two or three

collectives in operation whose catalogs, taken together, included all recordings,

service providers may well take licenses – albeit begrudgingly -- will all of them

rather incur the additional cost necessary to avoid even unintentionally infringing

conduct. It is problematic however if there are ten or twenty or two hundred

collectives in operation but no single collective with an all-inclusive catalog.

23

The structure I am proposing would allow service providers who transmit many

different recordings, or who do not select or control the recordings they transmit,

to obtain licensed access to what is, essentially, a worldwide catalog of

recordings through an agreement with a single collective operating in the territory

from which the service’s transmissions originate. It also would allow those who

transmit fewer recordings and who control their programming lineup, to deal

either with specialty collectives, if any, for the recordings that the service provider

wishes to transmit, or to avoid collectives altogether, relying instead on direct

license from the music industry rights holders-in-interest.

Collective management of digital rights begins and ends with the ability to

monitor transmissions of the protected works in question. Knowing which

recordings have been digitally transmitted and by whom underlies licensing,

enforcement, contract administration, and royalty distribution. Initially, it is

necessary to determine which web sites, services, P2P file-sharing networks and

individuals are engaged in digital transmissions of protected recordings in order

to know who may need a license. If a license is refused, identification of

recordings transmitted without authorization is necessary for an infringement

action. Once licensed, transmission data may be needed to calculate license

fees due. And, knowing specifically which recordings were transmitted by each

licensed service, and how often, is necessary in order to know which rights

holders are entitled to receive royalty payments.

Internet transmissions are digital and occur in a networked environment.

Therefore, at least in theory, it should be possible to identify every recording

each time it is transmitted. A census-based royalty distribution system would

allow license fees earned from each licensed service to be distributed as

royalties to those rights holders – and only those rights holders -- whose

recordings were transmitted by the licensed service in question. Only in this way

is it possible to assure that all rights holders, large and small, receive that share

of royalties that is proportionate to the license fees earned from digital

transmissions of their recordings.

The alternative is to base royalty distribution on sampling. Sample surveys,

sophisticated as they may be, credit only a fraction of the transmissions that

occur. Royalties generated from transmissions of recordings that fall within the

sample would be paid to the owners of those recordings. However, royalties for

licensed transmissions of recordings that do not fall within the sample would not

be paid to the owners of those works; rather, they would be paid to owners of

recordings that do fall within the sample. A royalty distribution system based on

sampling necessarily results in no rights holders receiving royalties for all

licensed transmissions of their recordings; some rights holders – particularly

those in the long-tail – possibly never receiving royalties for any licensed

transmissions of their recordings; and some rights holders receiving royalties for

24

licensed transmissions of recordings in which they have no ownership interest

whatsoever.

Currently, music industry rights holders require service providers to shoulder the

entire burden of music use monitoring for purposes of royalty distribution. One of

the PROs, for example, requires service providers to report, for each work

transmitted, the title of the work, the featured artist who recorded it, the record

label involved, a unique identifier for the work (such as an ISWC or ISRC

number), the length of the work, and the number of times the work was

transmitted during the relevant reporting period. Under the statutory license for

webcasting in the United States, the burden is on service providers to identify

with particularity every sound recording that they transmit, including those

embodied in retransmissions of over-the-air broadcast radio transmissions.

However, as between rights holders and service providers, only rights holders

have a need to know how many times any particular recording has been

transmitted. This information may be useful to some service providers in planning

future programming, but it is entirely irrelevant to most, and the obligation to

gather and report it is an obtrusive and costly burden. Moreover, if license fees

are linked to the number of times a recording is transmitted, service providers will

have even less incentive to provide accurate data. Rights holders must find a

way to increase the depth and accuracy of monitoring while reducing the burden

of it on service providers.

The digital transmission right would not depend on access restrictions and anti-

copying measures for its success. Rather than limiting access to their music,

rights holders would have the incentive to encourage the most extensive uses

possible. This would free the industry from pursuit of unbreakable technological

measures, allowing it to focus instead on development of effective monitoring

techniques to support royalty distribution. Tools to track digital transmissions will

likely be far easier to create, use and maintain, and will cost less than those

needed to exclude people from accessing, copying and further distributing

protected works. Nevertheless, a means to conduct a survey of licensed digital

transmissions will take time to develop and to deploy. The implementing

technology must work on all systems and across platforms. It also must be as

nearly ubiquitous as possible.

One possible solution involves encoding recordings with copyright management

information and using complementary software that would allow licensed service

providers to automatically track the encoded files when they are transmitted.

Whatever software is developed for these purposes should be provided free of

charge to licensed service providers. In addition, each collective should also

provide encoded digital files of all recordings in its catalog free of charge to all

service providers with whom it has a license agreement. Clearly, a single

collective in each territory with an all-inclusive catalog would be in the best

25

position to implement such a solution. In any event, service providers must not

be required to use either the encoded files or the industry-standard tracking

software. Rather, they should be offered a reduction in license fees as an

incentive for their cooperation in music use monitoring through use of these

preferred tools. Service providers who elect not to use these tools would not be

offered a reduction in license fees but would still be required to meet the

monitoring and reporting requirements of their license agreements.

Finally, regarding license fees under the digital transmission right and how they

might be determined: I do not have a specific license fee proposal, though I do

have some general suggestions regarding structure and process.

In my view, music industry rights holders in the aggregate should do no less well

financially under the digital transmission right than they do now under the system

that the digital transmission right would replace. Therefore, as a near-term

objective, industry revenues over all should equal the sum of total current net

profits for record labels and music publishers and total current royalty income for

songwriters and recording artists derived from sales and licensed public

performances of their works. My sense is, however, that there will be a short-

term short-fall between this amount and the amount that rights holders can

reasonably expect the existing base of audio service providers (and, when

required, individuals) to pay in license fees under the digital transmission right.

Though the industry has not been successful in its efforts to make the digital

music marketplace safe for the sales-based revenue model, its strategy and

tactics to date have kept many from launching music-enabled services. To

charge too high a license fee would only further suppress the market.

Steps should be taken to make up this shortfall during the industry’s transition to

the digital transmission right. I suggest that, for this limited purpose, a temporary

levy should be imposed on consumer electronics and technology products, and

telecommunications and Internet access services. Under the digital transmission

right, the businesses that provide these products and services would have no

liability, as such. Yet, because of the digital transmission right, they will be free to

innovate in whatever ways and to whatever extent necessary to satisfy the

ongoing demand of music consumers for new products and services. It is

appropriate, therefore, that they alone should bear the burden of the levy. They

must not be permitted to pass the levy through to consumers. The levy should be

adjusted downward periodically in response to increases in music industry

license fee collections under the digital transmission right. It should also be

subject to sunset; a definite date by which the music industry will be expected to

thrive in the digital music marketplace without subsidies.

26

Less generally, wherever possible, license fees should be based on a

percentage of revenue attributable to digital transmissions of recordings covered

by the license in question. A revenue-based fee would allow music industry rights

holders to share proportionately in the growing dollar value of the bounty created

by digital transmissions of their works. In this regard, it will be necessary to

establish criteria by which to determine which revenue earned by a licensed web

site or other audio service will be deemed attributable to its transmissions of

licensed recordings and which will be deemed too indirectly connected to those

transmissions to be fairly included in the base against which the license fee is

calculated. And, of course, it will also be necessary to settle upon a rate to be

applied to the base in order to calculate the license fee in each instance.

Many music enabled sites and services will operate without revenue of any kind,

let alone any revenue fairly attributable to licensed transmissions of recorded

music. In these instances, an alternate means of calculating license fees will be

needed. One such alternative would be to base license fees either on the number

of transmissions of licensed recordings, or on the aggregate tuning hours

occupied by transmissions of music through the service during the reporting

period in question. This approach is straight forward and easily applied. It also

reflects the notion that one should only use as much of a thing as one can afford.

However, it is regressive. It discriminates against smaller service providers and

individuals. It also discourages the use of music. Moreover, if license fees are

driven by music usage, service providers would have a strong disincentive to

accurately report which works they transmit, and how often. This, in turn, would

undermine royalty distribution. A second alternative would be to establish criteria

by which to measure the economic value to a business (or to an individual, for

that matter) of the self-promotion it obtains through operation of a music-enabled

site or service. To be sure, establishing such a measure would be more difficult

than simply applying either a pay-per-play or similar usage-based model, but it

would avoid interference with royalty distribution. A third alternative would be to

base license fees on the number of users of each licensed service. This would be

most useful in the case of services that require their users to register or

otherwise identify themselves.

Provision must also be made for determining how much will be paid in license

fees by individuals who operate music-enabled personal web sites for non-

commercial purposes, and by those who, without the benefit of a through-to-the-

user license, either upload recordings to services operated by others or offer

recordings through P2P file-sharing networks. I suggest that a flat dollar license

fee should be paid by such individuals, although the amount of the fee may vary

depending on the activities involved. The fee should be paid directly to the

collective or to the individual rights holders who issued the license in question.

Again, however, I do not have a specific proposal regarding the amount of the

license fee that should be charged in any of these instances.

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Other commentators have already proposed a levy structure to offset music

industry losses due to unauthorized downloading, particularly those losses

attributable to unauthorized P2P file-sharing. That levy is modeled on the levy

imposed on owners of television sets in the UK for support of the BBC. In the

present context, it is proposed that a universal flat-fee levy should be imposed on

all Internet users. The levy would be collected by Internet access providers and

later distributed as royalty payments to music industry rights holders. The levy

would be a permanent element of the license fee structure for the digital music

marketplace.

I do not support this approach. Whether or not a compulsory universal levy is

appropriate for the support of public television, it is not appropriate, in my view, if

the revenues generated will go to the support of private business interests. In

addition, as I indicated earlier, consumers, as transmission recipients, should not

have any payment obligations to music industry rights holders under the digital

transmission right. A universal levy would impose a license fee on all Internet

users whether or not they ever access music online. Requiring people to

subsidize other people’s entertainment – especially with respect to content that

many may find offensive – is anathema. Moreover, a universal levy to be

collected through Internet access providers would unnecessarily inject an

element of competition in the marketplace for Internet access services. Some

access providers will absorb their customers’ levy payment obligations and

others will pass them through. And finally, if a universal levy were imposed for

the benefit of music industry rights holders, rights holders of other types of

content including, for example, movies, text, graphics and broadcast archives

each would have an equal claim to a universal levy of their own. Invariably, as

the interests of other rights holders are added to the universal levy, rights holders

of different types of content will be pitched against each other in a contest for

their respective shares of a limited fund.

License fee rates should be set through voluntary free market negotiations

between service provider representatives and the collectives that operate in each

territory. Failing voluntary agreement, rates should be established through

government-supervised arbitration proceedings.

*

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*

*

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The music industry is marked by long-standing divisions, particularly between

music publishers and record labels regarding ownership, valuation and

administration of the different rights each group controls. Songwriters and

recording artists also have deep concerns regarding their relationships with the

music publishers and record labels that control the works they create. The digital

transmission right, administered as I have suggested, would represent a major

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shift in leverage and economics within the music industry; and it almost goes

without saying that those rights holders – and the organizations that represent

them – who have enjoyed the strongest position historically, will likely be

reluctant to embrace such a change. However, more than ten years has already

been largely wasted pursuing failed solutions. There can be no justification for

further delay in the implementation of needed change in the consumer-facing

side of the music industry.

The Internet directly links every constituency that is important to the music

industry’s success in the digital age. In this global network, no issue stands

alone, nothing can be treated in isolation, and stop-gap measures will not work.

By implementing the changes suggested in this paper, the music industry would

bring a measure of predictability, rationality and fairness to the digital music

marketplace. And only in so doing, will the industry be able to assure that it will

flourish as that marketplace develops.

Bennett Lincoff

New York, New York

January 21, 2007