By Jeff Price

At first glance, one would not think it would be that complex to get the three licenses necessary to sell or stream music on-line, the reality is it’s not only one of the most confusing things to get a handle on but it is also the bottleneck stopping the music industry from reaching its full potential.

Before music went digital, people used to buy it by walking into a physical retail store.

The business model for a physical retail store like Tower Records was:

–       give us your stuff,
–       we’ll put it on our shelves,
–       we’ll pay for it when it sells or send it back for a refund if it doesn’t.

The complexities that existed for Tower Records and other physical stores stemmed from the infrastructure needed to:

–       Have shelves
–       Decide what things to place on them
–       Have a shipping department to receive new albums and return unsold albums
–       Have a finance/billing department to pay people and keep track of: what sold, what was returned, and  how  much money was owed
–       Hire people to place the stuff on the shelves and ring up sales at the cash register.

As simple as it may sound, this is a hard to scale, clunky system that limits what is available to buy based on needing tangible “things” like stores, trucks, CD manufacturing plants, inventory control, and so on. The model limited consumer choice and denied well over 99% of artists on the planet the ability to have their music sit on a shelf in a store where people go to buy music.

The new digital music “stores” and services like iTunes, Amazon, Spotify, etc bypass all of these problems. Everything can be in “stock” on their servers with unlimited inventory that replicates on demand as soon as it is bought or streamed.  There is no shipping department and no need to guesstimate how many copies of a CD to bring in.  Sales are one way and there are no returns. As music can only be found if searched for, the inventory causes no “clutter” stopping other music from selling. In addition, unlike the physical world, it is known exactly how many units sold as opposed to only knowing how many were shipped.  Despite these innovations, the industry is still bottlenecked, only this time it stems not from the inefficiencies and costs found in the physical world but from the clash of technology, the value of a song and copyright law.

In the old school physical model, record labels pre-cleared all licenses and made all the copyright royalty payments; Tower Records’ job was to simply pay distributors for each CD sold, not pay copyright owners. In the new digital music world, on-line stores need to negotiate multiple licenses and directly administer payments to copyright holders. With this need, stores traded hiring people to work in sales and shipping to hiring teams of lawyers, financial administrators, software engineers and database administrators.  Despite the, hundreds of millions, if not billions of dollars, being invested into this new model, one cannot circumvent the basic notion of the value of the copyright to a song and the recording of that song.

To get your head around the issues, some background is needed on copyright.

Here are the quick basics: There are two copyrights to every recorded song – a © and a ℗.  As an example, Dolly Parton wrote the song “I Will Always Love You”. Columbia Records hires Whitney Houston to sing Dolly’s song “I Will Always Love You.”  When they are done, there is a recording of Dolly’s song that Columbia Records hired Whitney to sing. The actual recording of Whitney singing Dolly’s song is controlled by Columbia Records – this is the ℗ – it stands for “Phonogram.” The song itself is owned by Dolly, this is the © – it stands for “Copyright.”

If you are both the songwriter and the performer, it’s important to imagine yourself split in two; one of you controls the © (the “you” that wrote the song) and the other “you” controls the ℗ (the “you” that owns the recording of the song).  As the owner of these copyrights there are a whole bunch of laws in place that allow you to make money.  These laws also set the rules that others must follow in order to distribute, stream and sell your song(s) or recordings of your song(s). These are the six legal copyrights that state that your song has monetary value and these rights drive the entire music industry. You can read more about these six rights here.

For a digital store to sell music, it must have the song files on its own hard drives/servers – this allows the store to control the customer experience, provide customer support and control the shopping cart and check out process.  When a song is bought or played on-line, it is the digital store that is fulfilling the download or stream; this is where the problem is. For a digital store to legally fulfill a stream or download it must get global licenses and make direct payments to copyright holders or the entities that represent them.

As an example, a “download music store” like AmazonMP3 or iTunes, sells a song file.  This song replicates itself onto your hard drive where it sits for you to access and play whenever you want.  It is a one-time sale. The digital store only needs a license to the recording of the song, the ℗, to sell it (this is not always the case outside of the US, but let’s table that for now).  For the digital store to get the right to this copyright, it must negotiate directly with the record label that controls it. There are no pre-existing laws or rules in place that dictate how much the digital store must pay the label for each sale, this is a one to one negotiation with each side jockeying for the best deal terms – the label wants as much money as possible, the store wants to pay out as little as possible.  This is what a contract between a record label and iTunes, Amazon etc is all about.

Once this license is in place, and a song is sold via download from the digital store, the digital store pays the record label for sale of the recording, the ℗.  The record label then handles paying and administering any other money owed to copyright holders.  This includes money owed to the person(s) that owns the song, the ©, or in the case above, Dolly Parton.   The laws around the world state that each time a song is “reproduced.” (a download is legally considered to be a “reproduction”) the person(s) who wrote the song must get paid something called a “mechanical royalty.”

In the US, the government pre-sets the “mechanical royalty” rate.  Right now, for songs under five minutes it’s a little less than a dime – $0.091.

However, the music industry is moving to a streaming model, where people pay a recurring fee to listen to music on demand – for example, stores like Rhapsody, MOG, Napster and Spotify provide this type of “on-demand” streaming service. A customer just needs to be connected to the Net or, when they are not connected to the Net, be pre-approved to listen to what music they want when they want. There are also “free” services like YouTube and Spotify that have ads in them in place of charging consumers a fee.

Streams for music services add a whole new complexity to the situation as every single time a song is streamed not only does the record label have to be paid but so must the person who wrote the song – i.e. Dolly Parton.

Therefore, for a music service to offer on demand streams, it needs not one but three separate licenses. These three licenses are:

–       One license for the Recording of the song (the ℗)

–       One license for the Reproduction of the song (part of the ©), a mechanical royalty (the legal definition of mechanical royalty was expanded and states a stream is also a “reproduction”).

–       And one license for something called the Public Performance of the song.

Let me take a moment to explain a public performance.

A public performance is when a song is played on the radio, in a bar, in a restaurant, live in a venue, on TV, in an elevator or anywhere else that falls under the legal definition of “public performance”.  It’s actually kind of cool. Songs are valued so much around the world that if any company or person wants to play your song in public (you can read the definition of “public performance” here) they actually have to get a license from you and pay you. Remember, this license is for the song, not for the recording of the song.

As technology creates more ways for songs to be publicly performed, the definition of public performance is updated and expanded.  It now states that a song streamed on the Internet is also a public performance of that song. Therefore, if someone wants to stream a song on the Net, there must be a license in place with the person who wrote it. As an example, for each every stream of a song on YouTube, the person who wrote the song must be paid.

Returning to our example, Columbia Records controls the right to the recording of the song (the ℗), but Dolly Parton controls the copyright to the song itself (the ©).

Under the laws around the world, Dolly is granted the exclusive right to publicly perform her song. This means that no one else can “publicly” play (either her recording of it or someone else’s recording of it) without negotiating a license with Dolly to do so. Therefore, if Dolly’s song is streamed on the Net via Apple, YouTube, Napster, Rhapsody, Spotify, MySpace, Google etc, a license must be negotiated with Dolly for the public performance of her song.  If a license is not negotiated with Dolly, or with someone representing Dolly for her public performance, like BMI, then Dolly can sue for copyright infringement.

To make things even more confusing, if Dolly chooses to become a member of ASCAP or BMI, the two largest U.S. based Performing Rights Organization that negotiate public performance licenses (called PROs) on behalf of their members, the digital store must negotiate “one to one” with the PRO for this license. However, the US government has determined that ASCAP and BMI basically have a monopoly on the songwriter public performance market in the US and have too much power.  Therefore, ASCAP and BMI  have to operate under “consent decree” – this basically means that if the digital music store, radio station, restaurant etc, do not like the royalty rate that BMI and/or ASCAP are demanding to publicly perform Dolly’s song, they can turn to the US government to argue their case and the US government can rule on the rate.

Yeah, my head hurts too, and so do the heads of the digital music stores.

Unfortunately for the digital stores, the three licenses are split between three separate entities.  Using the Dolly Parton example above, the record label for the recording of the song is Columbia Records (the ℗), the publisher, for the reproduction (mechanical royalty) of the song is Velvet Apple Music (a part of the ©) and the organization representing Dolly Parton as songwriter for the public performance of her song is BMI (also part of the ©). In order for a digital store to stream Dolly’s song, it needs to negotiate and get licenses for all three. The tension and disagreements between the three entities representing these rights usually stall or stop negotiations.

The Traditional Music Industry

But here’s the upside, the shift in the music industry allows artists/songwriters to have access to marketing, promotion and distribution without having to give up or assign ownership of their copyrights to other entities.  This means that in the new music industry these three licenses can be done with just one person, or an entity that represents all three of these licenses, as opposed to three separate competing entities.

The New Music Industry

This will make life a lot simpler for digital stores while generating even more money for the artist/songwriter.  It will also bring more efficiency to the market.  For example, the artist, or entity representing them, can send information to the digital store and the digital store uses this information to send back money and accounting statements (this is basically what EMI Publishing just announced – you can read more on that here).  This differs from the current system where the digital store sends information to a third party – like a PRO – and then the PRO has to figure out how to match things up and where things go. With this efficiency in place, it would reduce the percentage a PRO has to take off the top to cover its costs of hiring people and systems to track down whom to give the money to. All we need now is an infrastructure to be put in place and laws to be updated to allow the potential growth.  I’ve heard people say that the music industry is a $100 billion dollar industry trapped in a $35 billion body. I think I finally believe it.

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