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A New Business Model For The Music Industry Explained

by Intellectual Property Watch 9 Comments

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By Bennett Lincoff

The music industry has been in a decade-long death-spiral. This predicament results primarily from insistence by those who benefited most from how the industry operated before the internet arose that the established relationships upon which their past successes were based be preserved as the digital music marketplace develops.

The major record labels have set the industry’s internet agenda overall. They are single-mindedly committed to making the internet safe for sale of recordings on terms and conditions that they alone decide. They risked everything on the false hope that through a combination of DRM [digital rights management] and the force of law they could contain unauthorised internet distribution of recordings.

Simply put, the internet is fundamentally incompatible with the music industry’s sales-based revenue model. Every internet user, whether or not involved in P2P or social networking, and every webcaster, podcaster, or other audio service provider in the world is a potential source of unauthorised 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. The actual amount at risk may be greater for larger rights holders; but all rights holders, large and small, are impacted to the extent they derive revenue from sales of recordings.

The industry’s efforts to salvage its sales-based revenue model have compelled it to resist consumer demand for full, unfettered, DRM-free access to music; blocked consumer electronics makers and technology firms from offering new products with next generation capabilities; limited the growth of webcasting and other digital audio services; chilled free speech and interfered with academic freedom on university campuses; caused distortions in the music licensing marketplace; relegated consumers to black-market services where adware, spyware, and privacy violations abound; and exposed consumers to ruinous infringement liability damages for conduct occurring in the privacy of their homes.

And for it all, the industry’s efforts have resulted in fewer licensed transmissions of fewer works and slowed the growth of royalties that songwriters, music publishers, recording artists and record labels otherwise may have earned.

In my view, public policy should strongly support the right and opportunity of rights holders to derive ample financial rewards from their contributions to culture and commerce. By the same token, however, the music industry should not have the right to demand that public policy support its desire to do business in a particular way.

An alternative to the sales-based revenue model is needed for digital transmissions of sound recordings and the musical works they embody. I recently proposed such an alternative in an article entitled Common Sense, Accommodation and Sound Policy for the Digital Music Marketplace, published by the Journal of International Media and Entertainment Law. A summary of that proposal follows here:

I suggest that lawmakers aggregate the rights of songwriters, music publishers, recording artists and record labels in their respective musical works and sound recordings and create a single right for digital transmissions of recorded music. The digital transmission right would replace the parties’ now-existing reproduction, public performance and distribution rights (and, where applicable, the communication and making available rights) for purposes of digital transmissions.

Going forward, the determinative consideration will be whether transmissions of recorded music have occurred, not whether transmissions result in sales, promote sales, or may cause sales to be lost. Licences will be made available without regard to whether recordings are streamed, downloaded, or transmitted by some means not yet devised; whether programming is interactive or non-interactive, or contains this, that or another recording; or whether the service that provides the transmission accepts user-generated content or operates as a P2P network. The number of copies made in the course of transmissions (including server copies, and ephemeral, transitory and buffer copies), the type of transmission technology used, and the file format in which recordings are transmitted will not be of concern.

Ownership of the digital transmission right in each recording will be held jointly by the songwriter(s), music publisher(s), recording artist(s) and record label who contribute to it. Each party will be a co-owner of the right in the recording in question. Moreover, 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 will have independent and sufficient authority to grant non-exclusive licences on any terms to which they and their licensees agree. The only limitation on this authority will be the obligation to account to co-owners for royalties earned.

Rights holders of individual recordings may make whatever arrangements they wish among themselves for division of royalties. However, when voluntary agreement is not possible, I suggest that the interests of the songwriter(s), music publisher(s), recording artist(s) and record label should each be allocated 25 percent of royalties earned from licensed transmissions of their recordings.

The digital transmission right would only be enforceable against those who provide digital transmissions, retransmissions or further transmissions of recorded music.

Accordingly, consumers would not incur any liability to rights holders for accessing streams, downloading music, or making copies of recordings for personal use. Similarly, software distributors, technology firms, consumer electronics makers, and telecommunications and internet service providers, as such, would have no liability.

On the other hand, audio service providers will need licences if they operate websites or other services that provide digital transmissions, retransmissions or further transmissions of recorded music.

Some sites enable users to upload recorded music, as well as to access streams and download music. Uploading constitutes a digital transmission of the recording involved; and consumers who initiate uploads will need authorisation under the digital transmission right. Service providers who enable user-uploading would be jointly liable with their users for that conduct. For these services, a single “through-to-the-user” licence held by the service provider would authorise both user-uploading to the service as well as streaming and downloading from the service; and would eliminate the need for individual users who wish to upload music to obtain licences in their own right.

A similar analysis applies to P2P.

P2P participants who only download music will not need licences. Those who facilitate transmissions by sharing recordings with others will need authorisation.

Operators of centralised P2P networks would be jointly liable with their users who share music. These operators would also be liable for further transmissions or retransmissions through their servers of transmissions of recordings initiated by their users. A through-to-the-user licence would authorise all transmissions of licensed recordings through an operator’s centralised network; and individual users would be free to share those recordings through that network without the need to obtain licences themselves.

Decentralised P2P networks do not operate centralised servers through which file-sharing transmissions pass. Moreover, software for these networks that already has been downloaded is likely beyond the control of the distributors who released it. Under the digital transmission right, distributors who do not exercise control over the decentralised networks that their software spawns would not incur liability for use of that software by file-sharers. Because of this, however, there would be no single entity through whom to issue a network-wide through-to-the-user licence. Accordingly, each participant in such a decentralised network would be responsible for securing authorisation for their own conduct.

On the other hand, licences would be available to software distributors for decentralised networks who configure future releases of their software to allow for filtering to prohibit the sharing of certain recordings (which, as discussed in my article, will likely only rarely be necessary under the digital transmission right), and to monitor which recordings have been shared so that rights holders can receive royalties. A through-to-the-user licence held by the software distributor would authorise the activities of network participants who use the enhanced software.

It stands to reason that the vast majority of those who are interested in P2P will seek out centralised and decentralised networks that secure licences authorising their activities; especially if the sharing that is permitted offers consumers what they really want from P2P. More generally, if the music industry makes licences available on reasonable terms, the vast majority of those whose conduct will require authorisation – audio service providers of all stripes and, where applicable, individuals alike – will pay the licence fees that are due. No doubt, no matter what is done, a “Darknet” will continue to operate. However, unlike the market for sale of recordings, for all intents and purposes, the digital transmission right is impervious to copyright infringement.

The digital transmission right would be implemented through a combination of voluntary collective rights management and licence agreements directly negotiated by individual rights holders and audio service providers. In my view, the ideal marketplace would contain at least one collective in each territory whose catalogue encompassed all or nearly all recordings and which was authorised to grant worldwide rights at its local rates for all digital transmissions of recorded music that originate in its territory.

Accordingly, in the article, I elaborate on the advantages of voluntary collective rights management; offer suggestions regarding governance, transparency, accountability and regulation of collectives; discuss the relationship of collectives to their rights holder members; the relationship to each other of collectives in different territories; the basis upon which collectives might licence digital transmissions, including transmissions that originate in one territory and end in another; the role of licensing by individual rights holders in the context of collective management; the conduct of music use monitoring to support royalty distribution; and the allocation and payment of royalties, including those for transborder transmissions.

Licence fees under the digital transmission right would reflect the benefit realised by service providers from their transmissions of recorded music. In the article I suggest a structure for calculating this benefit in various circumstances including for those site operators who charge users to receive transmissions; those who transmit recordings in connection with advertising; those who transmit recordings in connection with the sale of goods or services other than access to music; and those who do not charge for transmissions, carry ads, or sell goods or services. I also suggest licence fee structures for P2P and social networks and for those instances when individual internet users must pay licence fees.

Finally, I suggest that a levy be imposed on consumer electronics and technology products to help sustain the music industry financially during its transition. The levy would be adjusted downward in response to increases in licence fee collections under the digital transmission right and would be subject to sunset not more than four years from implementation. After that, the music industry would be expected to thrive in the digital music marketplace without subsidies.

* * * * *

Implementation of the digital transmission right would not depend on access restrictions or anti-copying measures for its success. Its monetization would not involve the imposition of a statutory licence or an internet access tax. And it would not require the enlistment of internet service providers or colleges and universities as enforcers on behalf of music industry rights holders.

Nevertheless, the digital transmission right would allow transmissions of recorded music to be made available through the largest number and widest array of licensed sources, anytime, anywhere, to anyone with network access. Such a result would provide music industry rights holders with their best opportunity to do as well financially, if not better than they have done under the system that my proposal would replace. In addition, the digital transmission right would promote technological innovation, enhance the free market for consumer electronics and technology products, and facilitate the unrestricted growth of all manner of licensed digital audio services (including streaming and download services, and P2P and social networks). And, perhaps most importantly, it would meet consumer demand for full, unfettered, DRM-free, and lawful access to music when, where and how consumers want.

The digital transmission right is the means by which to bring about change that meets the needs of all the many competing stakeholders in the digital music marketplace.

Bennett Lincoff

Bennett Lincoff is an intellectual property law attorney, consultant and writer with more than twenty-five years experience. He has been involved since 1994 in the worldwide effort to create new legal structures and business models for the use and protection of copyrighted content in the digital electronic environment. The purpose of his work has been to assist creators, rights owners, intermediaries and end users to maximize their benefit from intellectual property.

Bennett Lincoff may be reached at bennettlincoff@gmail.com.

Creative Commons License"A New Business Model For The Music Industry Explained" by Intellectual Property Watch is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.

Comments

  1. John says

    The only complaint I have with your thesis is the declaration of a “making available” right. As you are very likely aware, there is no “making available” right. The erroneous assertion on this fact has led the RIAA and the MPAA to the state of the industry that now exists. Having said that, it appears that your arguments take into account the “distribution rights” that rights holders have and compensates those rights holders for the “distribution rights” that they possess.

    Reply

  2. Corey K says

    You are absolutely correct about the need for an alternative source of revenue for artists. However, you are absolutely incorrect about having our government manage this process. You have missed the point of P2P sharing if you think this way. People engage in P2P sharing because they feel like they are finally getting back at the labels. It has nothing to do with the artists, which is a problem with P2P sharing. The same people who have the FU attitude towards labels will have the same inclination, if not worst, towards the government. Creating more restrictive/controlling ways is only going to worsen the situation.

    For years labels over charged fans for music…case in point, the reason why Trent Reznor severed ties with his label and released his music for free. Additionally, Reznor has proven that you can still make a lot of money by selling music (his first week sales exceeded $1.6 MM) online.

    What needs to happen is for labels to take on a different roll in the music industry…music will be free in the near future. So the questions is how will artists, not labels, make money? Companies, such as ours, are doing a lot of research in this area. First thing that needs to go are the social network sites (SNS). They have raked in millions of dollars through the artists hard work, not a penny of which is shared with the artists. But artists can’t blame the SNS for this because they feed right into the trap. They tell their fans to visit them on MySpace…but, why? If you are a serious artist you can build a very nice website for about $1000 and tell your fans to go to your website in order follow you online. This will increase traffic on you site, which you can then leverage to sell advertisement.

    This is what our area of focus is…we want to give artists the technological backbone to run a successful internet business. We think this model will, partially, compensate for the loss of revenue from music sales. However, as this model gains momentum there will more innovative ways that artists can generate a healthy revenue from their own websites.

    We believe in this model because we think that people are less likely to steal from artists as opposed to corporations, i.e. record labels. This model will once again empower the artists and puts them on the forefront of music business where they belong.

    Reply

  3. Bennett Lincoff says

    Responding to Corey K: I agree with you that artists should be “on the forefront of [the] music business where they belong.” I also join you in supporting the right of individual artists to build and operate web sites through which they can offer fans access to their own music on whatever basis they wish. Of course, without some change in the law, the only artists who could do this would be those who own 100% of the rights in their recordings, that is, singer/songwriters who self publish and record their own music.

    I have proposed to expand the rights of artists generally. In particular, ownership of the digital transmission right in each recording would be held jointly by the songwriter(s), music publisher(s), recording artist(s) and record label who contribute to it. And 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 be authorized to grant non-exclusive licences on any terms that they wish. (By the way, this change in law would directly facilitate your own company’s proposed business model by authorizing artists to use their music on their own web sites without the consent of the music publisher or record label involved.)

    I also proposed that the interests of songwriter(s), music publisher(s), recording artist(s) and record label(s) should each be allocated 25 percent of royalties earned from licensed transmissions of their recordings. Under this structure a singer/songwriter would receive 50% of all royalties earned from digital transmissions of their works, and 100% of those royalties if they also self publish and make their own recordings.

    From your description of your company it sounds like you seek to provide important assistance to artists in reaching out directly to their fans. It remains to be seen, however, whether new artists can launch and build successful careers through use of the Internet alone. The example you offer of Trent Reznor’s success in generating online revenues may not be applicable to new artists because Reznor was already hugely famous before “he severed ties with his label and released his music for free.”

    I also agree with you that social networking sites have made a great deal of money on the backs of music industry rights holders but without compensating those rights holders for use of their creative works. I disagree with you, however, that merely because they have failed to pay license fees in the past, social networks “need[ ] to go.” (By the way, you criticize my proposal (mistakenly, I think) for “having our government manage this process.” But how exactly would you “do away” with social networks if not through the government managed processes of legislation and litigation?) Anyway, rather than shutting down the social networks (or any other sites, services or networks), I have proposed a structure through which they would be licensed and would likely pay substantial license fees to music industry rights holders (to be divided among those rights holders in the manner suggested above).

    In my mind, the best way to maximize the benefit to music industry rights holders generally, and to artists in particular, from use of record music in the digital music marketplace is to maximize compliance with licensing requirements. The digital transmission right would allow transmissions of recorded music to be made available through the largest number and widest array of licensed sources, anytime, anywhere, to anyone with network access; and this, in turn, would provide music industry rights holders with their best opportunity to do as well financially, if not better than they have done under the system that my proposal would replace.

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  4. wyly says

    Yes, a more streamlined licensing process is needed. But no, a new business model is not needed nor is one possible. There are two ways to compensate rights holders – pay for use or advertising. Both models are being tried valiantly by many company’s in the face of a disfunctional legal environment in which Congress and almost every other authority shirks the responsibility of stopping illegal file stealing. It would be very east to stop, but there are too many vocal greedy consumers who haven’t the faintest idea about business or economics who are scaring the spineless authorities.

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  5. Paul Jakma says

    Based on this feature (I’ve yet to read the full paper), this sounds pie-in-the-sky, because it’s vested in technological details, i.e. whether transmission occurs.

    There are two easily discernable problems here:

    a) The lesser problem that digital transmission does not align with what we (today) perceive as being worthy of ownership. E.g. the transmission model would judge making a backup or media-shuffling (e.g. changing the songs on a limited, portable MP3 player from one’s large, PC-based collection) to be worthy of remunerating a rights-holder. These are rights people expect to have today, and it might be a tough sell to persuade people to move to a model without these rights.

    Further, there is no one-to-one correspondence between the performance/playing of digital media and transmission, because of hierarchical caching. Ordinary members of the public will perceive value as being in the performance of some media – not the transmission. I wonder how an ordinary person would react when, on some occassions they could play a downloaded work several times without extra charge (caching), on other times they would have to pay for each performance.

    Alternatively, perhaps the proposal intends that every performance of a work be considered a transmission. Though, it seems to state transmissions of ephemeral copies would not be transmissions, but how would a system discern between transmissions of ‘new’ copies and re-transmissions of the same copy?

    b) The greater problem that this model has no natural transaction point. In the sales based model, it was easy to levy royalties at a point of sale. In fact, so natural most people didn’t notice. There were clear transactions, recorded in the accounts of retailers, from which to calculate the royalties.

    In this transmission model however, there are no clear transaction points. Certainly none who are contractually obliged to keep account and report back to rights-holders. Instead, for this model to work, we will need to either rely on P2P nodes to honestly keep account of transmissions or alternatively we will need to legislate for some kind of mandatory digital controls (i.e. DRM) to be installed on all computers.

    I.e. this proposal appears equivalent to DRM, and it has all the same weaknesses as DRM, and more.

    Reply

  6. Bodó Balázs says

    Interesting concept. I very well agree with radically simplifying the licensing process. I have two observations. The first is that based on the model of transmissions rights it would be worthwhile to consider a similar, so called modifications right to align fair uses of music especially in the case of UGC.

    My other observation is more of a question. If songwriters, publishers, recording artists and record labels all have the right to grant licenses on the market by the price they feel right, I wonder who will be the cheapest to turn to for licenses. ‘greedy’ labels? Attention hungry authors? session musicians who have the weakest rights in the current system? These actors have different bargaining power and the cost of coordination amongst them about the highest price they can extract from a wannabe licensee is prohibitively high, i would guess. If I was iTunes, I would try to find the licensor with the weakest bargaining power, i.e musicians with home forclosure in sight and et a cheap deal through them, leaving him/her and everyone else quite in a bad position. On the other hand the upside of such a system is clear: it minimizes the chance of a piece left unlicensed due to the ‘tragedy of anti-commons’.

    Reply

  7. Bennett Lincoff says

    Responding to the comments of Bodo Balazs:

    As to your question of whether I should have included in my proposal for a digital transmission right consideration of fair use as it might relate to modifications of recordings made by individual Internet users in the case of UGC – I believe that a comprehensive review of fair use is needed so that it will more closely fit the newly arising circumstances presented by the Internet. However, before the parameters of fair use can be specified, it is necessary, preliminarily, to clearly define the rights against which fair use will be applied. Therefore, I specifically chose not to get into the question of the limits of fair use in the context of proposing a new digital transmission right. Of course, if the digital transmission right were to become law, it would be necessary to define the scope of fair use in that new context.

    As to your question regarding the likelihood that some rights holders might under-sell the market – Of course, that is possible. And, for music users who intend only to use one or two (or some other small number) of recordings, it is quite reasonable (from the perspective of over all transaction costs) to seek out direct licenses with individual rights holders for individual works. However, those who will need licenses for larger numbers of works (as iTunes does) will, by necessity, have to turn to collectives through which large volume blanket licenses will be made available. Moreover, by giving songwriters, music publishers, recording artists and record labels each a 25% stake in the royalties earned from licensed digital transmissions of their recordings, I have provided a disincentive for songwriters and recording artists in particular to under-sell the market. (Under the now prevailing and highly unfavorable splits that the industry doles out to songwriters and recording artists, they would have no particular incentive (even if they had the right) to do anything other than offer direct licenses on the cheap.)

    Reply

  8. Andrei Mincov says

    Critics of today’s copyright laws often contend that instead of trying to control the use of their works through copyright, “old industries” must adopt “new business models” that would address the public’s desire to have unlimited access to content and impracticality of copyright enforcement in the context of the Internet. Usually adoption of such new business models is offered as a remedy for the growing number of copyright infringements.

    In my new article, Failed Business Models of the Past, Eh?, at http://mincov.com/articles/index.php/fullarticle/business_models/ (http://bit.ly/b2TceK), I explain why adoption of new business models has nothing to do with abandonment of the underlying principle that the owner of copyright should be allowed to decide how its content is used. If a business decides to use their property in an inefficient manner, it is perfectly OK to let such a business fail. We should not “save” this business by stealing from it the property that we think it uses inefficiently.

    Reply

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