A New Business Model For The Music Industry Explained 01/07/2008 by Intellectual Property Watch 9 Comments Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) The views expressed in this article are solely those of the authors and are not associated with Intellectual Property Watch. IP-Watch expressly disclaims and refuses any responsibility or liability for the content, style or form of any posts made to this forum, which remain solely the responsibility of their authors. 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 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 email@example.com. Share this:Click to share on Twitter (Opens in new window)Click to share on LinkedIn (Opens in new window)Click to share on Facebook (Opens in new window)Click to email this to a friend (Opens in new window)Click to print (Opens in new window) Related "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.