Digital Licensing: Hot Issues

Jeff Liebenson, Principal, Liebenson Law (USA)( )

Table of ContentsTable of Contents

1. Introductionoduc o2. Cloud/Locker services3. Subscription services4. Collective licensing5. Digital radio/Turntable FM6. Previously unmonetized markets6. Previously unmonetized markets7. Conclusion

1 Introduction

Digital exploitation has evolved significantly as cloud-based services and new

1. Introduction

business models emerge. As the digital market diversifies and matures, and asdigital initiatives become a means to legitimize markets that previously werevirtually unmonetizable, digital licensing models become increasingly important.

As a result, new digital licensing issues continue to arise on a frequent basis.

Here are some key digital licensing issues that bear watching in 2012, andb dbeyond:

2 Cloud/Locker services

The licensing of locker services takes place with a backdrop of unresolved legalissues regarding how music is copied on the server in the cloud, the source of

2. Cloud/Locker services

the music, and the manner in which that music is accessed by the consumer.

When a consumer copies his or her own music into a cloud-based locker, theyarguably may have a fair use defense in the US (although there is no clear courtg y y ( gruling to this effect), and the source of their files may be a factor in determiningthis. However, there is no fair use in Europe, and where fair dealing exists it canbe more narrow in its effect. Also, there is no private copying right in the UK. Sothis creates issues for the international launching of cloud services. (Apple’sg ( ppiTunes Match service just recently launched in several countries outside of theUS.)

The recent ruling regarding MP3Tunes stated that that service was not ineligibleThe recent ruling regarding MP3Tunes stated that that service was not ineligiblefor the DMCA safe harbor to insulate it from liability in the US (although it had notproperly followed procedures to do so). That ruling is under appeal, and thesituation may differ in other markets.

In a market where an individual may “space shift” a legally obtained file from one personaldevice to another, that still may be treated differently than a company that provides acommercial service that permits the widespread shifting of legal and unauthorized files.Also, if fair use or a similar defense does not apply in a market, then all tracks uploaded toa locker may constitute infringements. This may create the type of “red flag knowledge”which invalidates a service’s opportunity to operate in the safe harbor.

Uploading and copying music to the cloud involves a reproduction by the consumer, but theperformance or communication to the public right is implicated when the consumeraccesses the music from the cloud. Various locker services operate differently. Amazon’saccesses t e us c o t e c oud a ous oc e se ces ope ate d e e t y a o sand Google’s services require each consumer to upload a distinct copy (even though otherconsumers may have uploaded their own copies of the same tracks). That strengthens theargument that fair use may apply in the US to those uploads.

Moreover, if a consumer streams from his or her own file rather than from the service’smaster copy in the cloud, then that file is streamed by the service to only one consumer, notto the general public. That would not be a public performance or a communication to thepublic This could avoid the need for the service to license the public performance (orpublic. This could avoid the need for the service to license the public performance (orcommunication to the public) right and avoid royalty payments, but it would betechnologically highly inefficient.

Although Amazon initially maintained that no digital licensing was required for its lockerservice and it launched without them, Apple chose to obtain digital licenses and Googleeventually did so as well (other than with Warner).

They did so in part to gain certainty regarding the unresolved legal issues. Apple alsoavoided requiring its consumers to upload their own copies of tracks by licensing the rightsto “scan and match” each consumer’s music library to the copies already on Apple’sservers and to permit them to upgrade to Apple’s high quality copies of those tracks.

3 Subscription services

The download market shows signs of maturing and the music industry needs todevelop new sources of digital revenue. Access-based subscription models seem

3. Subscription services

poised to be the main opportunity to do this, as well as being a potential means todirect users away from piracy. So subscription services are vitally important to thefuture of the industry, and the ability of labels and artists to be paid for their works.

S b i ti i h ff d th b t l iti f ti b tSubscription services have offered the best value proposition for some time, butthey have been under-marketed, poorly understood, and faced a number of otherproblems. Now with the advent of Spotify and other freemium and low costservices, subscriptions are generating lots of buzz and surging subscriber

bnumbers.

Publishing rates and other licensing issues still remain a challenge to theirinternational expansion. When the Copyright Royalty Board in the US followed

f di ith it 2008 li it ttl d th bli hi t fyears of proceedings with its 2008 ruling, it settled the publishing rates for on-demand streaming on subscription services (as well as for certain other digitaluses). This removed great uncertainty for the digital licensing of subscriptionservices in the US.

Key issues remain regarding obtaining licensing with respect to publishing splitsand from unknown publishers. The absence of a central registry of publishing

frightsholders continues to frustrate digital services wishing to obtain thenecessary licenses. RightsFlow was a prominent company assisting distributorsin this area, but its recent acquisition by Google may take it out of themarketplace.

Meanwhile, in Europe the international licensing situation in some ways may beeven more difficult. GEMA still has not licensed Spotify so it is not available inGermany. Spotify just launched in its Nordic neighbor, Denmark, this pastO t b hi h i di t th h ll f ti th li i dOctober, which indicates the challenges of meeting the necessary licensing andrights issues to launch in multiple countries.

The industry is attempting to navigate a transition, while encouraging subscriptioni t b i t t f t f th f t di it l k t lservices to become an important feature of the future digital marketplace.

Business models are changing and royalties on a per stream basis are lower thanfor downloads.

Recently Coldplay, The Black Keys and others have pulled their repertoire fromSpotify due to the low royalty payments they receive, and the concern that theservice may cannibalize other more lucrative digital opportunities. The currentroyalty amounts for these services are low because, among other things,subscriber levels are just beginning to build, and new subscribers are justbeginning to be encouraged to upgrade to the enhanced premium paid service. Inth US i th h i d i l t thi k h S tif ’ fthe US, a six month honeymoon period expires later this week when Spotify’s freesubscribers will start experiencing usage restrictions. The unlimited Spotifyexperience will begin to shift towards limitations, until free users are required todecide whether to pay in order to maintain the same type of experience. If and

h id b ib i t ill lt twhen paid subscribers increase, so too will royalty payments.

So while some artists focus on protecting their short-term revenue opportunities,the industry has a long-term strategic need for these subscription services tod l i t i ifi t t i th f tdevelop into significant revenue generators in the future.

4 Collective licensing

The EC has been in a complex dance with the European collective rights societies ff

4. Collective licensing

to encourage more streamlined European-wide licensing. Those efforts have resulted only in increasingly complex licensing requirements.

Before the EC efforts, rights needed to be licensed from the society in each E k t U i th i ti t i b d li i hEuropean market. Urging the societies to engage in cross-border licensing has resulted in the major publishers taking greater control of their rights, withdrawing the digital rights for their Anglo-American repertoire from the European societies, and creating their own new entities from which those rights must be licensed. Thi h l f th li t d th li i i t f E di it lThis has only further complicated the licensing requirements for European digital services. The EC recently announced that it is planning to publish draft legislative proposals early this year for new rules for the cross-border licensing of digital music.

While this situation continues, a similar development occurred this past year in the US when EMI withdrew the digital performance rights for its April Music catalog from ASCAP so it could exercise those rights through direct licenses. This

t d t t l f EMI d th t it t i d b t itcreated greater control for EMI and the opportunity to require advances, but it further complicates an already complex digital licensing environment.

5 Digital radio/Turntable FM

Pandora has become the leading US digital radio company (and it has had af ff ) f f

5. Digital radio/Turntable FM

significant public offering) because it benefits from the compulsory licensingprovisions under the DMCA provisions of US copyright law. This avoids the needfor it to engage in any direct licenses with the record labels. Pandora’sprominence and intense lobbying also enabled it to negotiate a reduction in theli t f it ilicense rate for its service.

It has been hard to replicate these advantages so far in Europe, so Pandoraremains a US-only service despite its need for growth.

The US compulsory license has been a haven for many services which wish toavoid the time and expense of obtaining digital licenses from the industry.

M hil hil i ti i d b i d l ti t d lMeanwhile, while innovative services and business models continue to develop,they strain the limits of what is permitted by the compulsory licensing scheme. Towhat extent can these new services take advantage of the compulsory license?

Th US l it i b f bj ti f t hi h t b t t it thThe US law itemizes a number of objective factors which must be met to merit thecompulsory license. Their overall intent is to limit the compulsory license to non-interactive streams, and to require direct licenses to be negotiated for interactivestreaming.

Turntable.fm launched this year to great public interest, but some of its featuresraise issues about whether it is entitled, as it hoped, to avail itself of thecompulsory license and its rates.

These issues arise when the technology and functions of the Turntable.fm serviceare carefully analyzed in light of the statutory standards for the compulsorylicense. Users who listen to Turntable.fm hear streams of music programmed byDJs, like in a DMCA-compliant radio service that qualifies for compulsory, p q p ylicensing. But the service also permits its users to become the DJs who select themusic that will be streamed.

Even if the service is non-interactive as viewed from the perspective of the usersp pwho merely listen to the DJs’ selections, do the DJs who pick the songs that arestreamed operate within the terms of the compulsory license? If the DJs’selection and listening to tracks is interactive, then that would require the serviceto obtain direct licenses (and probably to pay advances).( p y p y )

The Launch Media case addressed whether a service was interactive by focusingon whether it permits “a degree of predictability—based on choices made by theuser—that approximates the predictability the music listener seeks whenpp p ypurchasing music.” The service in that case was held to be non-interactive.However, Turntable.fm differs in many respects from that situation in which theusers could not select specific songs to be streamed, as do the DJs onTurntable.fm.

There are a number of other possible issues to consider including whether thetracks that users upload are properly obtained, since the DMCA provides that thecompulsory license applies only if the tracks are “lawfully made.” If the users’tracks are not “lawfully made,” would Turntable.fm have a safe harbor defense?

The Pandora and Turntable.fm situations illustrate that services would like toavoid licensing, but not all will be able to do so. As more innovative services aredeveloped, whether licenses are required or not may become increasinglyimportant.

6 Previously unmonetized markets

China has long been a tantalizing, but frustrating, market. Recognizing itsf ff f f

6. Previously unmonetized markets

challenges of widespread piracy and the difficulty of enforcing IP rights, theindustry has been extremely flexible in structuring a model specifically designedfor this market.

B id (b i ll th G l f Chi ith i t l 80% f th hBaidu (basically, the Google of China with approximately 80% of the searchmarket) has been providing its users with deep linking to pirate content, while thewidespread consumer perception has developed that music is meant to be freelyavailable. Pressure was applied by the major labels through lawsuits againstB id Th b kth h it t d th h th US Chi J i tBaidu. Then a breakthrough commitment was made through the US–China JointCommission on Commerce and Trade that China’s judiciary would pursue the in-depth study of internet intermediary liability. These events combined to lead Baiduto enter into an innovative deal with the major labels this past summer under

hi h th l b l di i d th i l it d B id d t li th l b l ’which the labels dismissed their lawsuits, and Baidu agreed to license the labels’rights from One-Stop China--a joint venture of Universal, Warner and Sony--toprovide free licensed music. Baidu will pay the labels per performance and perdownload, and they will exploit the music in a new social music service, Ting!

It is hoped that this may be the approach that will develop a legitimate market inChina. As technology spreads around the world, this type of open-mindedapproach may enable other markets to be developed as well.

7 Conclusion

The nature and scope of digital licensing issues varies by market, and it takes place in the context of business and governmental developments. How these

f

7. Conclusion

digital licencing issues develop and are resolved will impact on the future shape of the digital marketplace.

And as that digital marketplace continues to evolve, new digital licensing issues t iare sure to arise.

About the author

This exclusive white paper was written by Jeff Liebenson, Principal of Liebenson Law in New York City and President of the International Association of Entertainment Lawyers (the IAEL). The IAEL will discuss the above issues at several of its sessions at Midemdiscuss the above issues at several of its sessions at Midem, January 28-31, 2012.

The schedule of the IAEL’s sessions at midem can be found here: http://www.iael.org/news/49

This report is brought to you by midemmidem is the place where music makers, cutting-edge technologies, Contact us: info.midem@reedmidem.combrands & talent come together to enrich the passionate relationshipbetween people & music, transform audience engagement & formnew business connections.

midem takes place every 3rd week of January and brings together6 850 f i l f 77 t i

Visit midem’s website - www.midem.com

Follow us

6,850 professionals from 77 countries.

SHARE THIS REPORT ON AND TWITTER

Download midem iPhone App

http://road.ie/midem

16