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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

The Changing Face & Sound of Music

Changing technology offers artists and listeners alike new opportunities to connect but the very pace of such change challenges artists, songwriters, and recording companies to find new ways to safeguard and derive income from their intellectual property.  

Music has power and is everywhere.  It accompanies us on the drive to work, in the elevator, and in department stores and keeps us company when we are waiting on the phone.  Songs can motivate, educate and inspire listeners. In the past 15 years, income earned from recorded music has dropped precipitously in the United States and around the world.  Piracy, file sharing, and CD burning together with digital music delivery have caused this decline.  We now listen to music on the internet, MP3 players, smartphones, satellite, cable, and digital radio.  The traditional music business format and delivery is being replaced primarily by downloading, subscriptions, and webcasting.

Webcasting or “internet radio” refers to the noninteractive streaming of audio that cannot be downloaded or replayed.  There are basically two types of webcasters that transmit prerecorded music on the internet: stand-alone services such as Pandora and AOL Radio and terrestrial radio stations.  Pandora is the most prominent among the stand-alone radio services because of personalization. Personalization is the feature that enables one to skip songs, has fewer commercials, and is very attractive to listeners.

Knowing how revenue is generated from music listening and from what sources is extremely important to songwriters, recording artists, music publishers, recording companies, and attorneys if they are to understand and negotiate contracts that best cover their interests.  Moreover, general practitioners, entertainment attorneys, and intellectual property lawyers must know the deal points to effectuate and consummate the best interest of their clients.

Webcasting

The proliferation of internet radio webcasting engenders an income stream for songwriters, recording artists, and record companies. Playing songs on the internet is a transmission to the public requiring the webcaster to secure a public performance license.  Section 106(6) of the Copyright Act1 gives the copyright owner of a song the exclusive right to perform the copyrighted work publicly.  A webcaster can obtain a public performance license to play recorded songs by securing a license from one of the performance rights organizations such as ASCAP, BMI or SESAC.

Licensing & Rates for Webcasters 

ASCAP offers two different types of license for internet services: noninteractive and interactive.  Unlike the interactive service, the noninteractive service does not permit users to select individual songs.  The noninteractive license provides three different rate schedules for the licensee to choose from.  At the time of this writing, the first rate schedule is the greater of 1.85 percent of a website’s revenue or .0006 percent multiplied by the number of service sessions.  A service session is defined in the ASCAP license as an individual visit or access by a user.  If a visit or access exceeds one hour in duration, individually or in combination, each visit is treated as a single service session.  Each schedule provides an alternative formula based on service sessions.  It is important to do the math for different scenarios before choosing which one is best for your situation.

BMI’sWebsite Music Performance Agreement is based on a percentage of revenues and offers the licensee two choices: 1.75 percent of gross revenues or 2.5 percent of revenues derived from music sections of the site.  The licensee is required to submit separate quarterly financial reports and quarterly music use reports under the terms of the license agreement.  BMI serves more than 6,000 different websites and digital music offerings including blanket licenses permitting use of all 4.5 million songs in its repertoire.

At this writing,SESAC’s internet license agreement requires webcasters to pay the greater of .0049 multiplied by revenues generated by the site or .001680 multiplied by aggregate tuning hours.  Aggregate tuning hours is the total number of hours of music delivered to listeners.  Keep in mind that rates change, so it is important to ascertain the current rate before you negotiate or consummate any contract.

Downloading

Downloading is the process whereby you can permanently fix or store a copy of music publically.  This can be accomplished through services such as iTunes.  A statutory license under Section 115 of the Copyright Act is provided for downloads of records embodying songs, which are referred to as digital phonorecord deliveries or DPDs. Section 115 of the Copyright Act provides, in pertinent part:

When phonorecords of a nondramatic musical work have been distributed to the public in the United States under the authority of the copyright owner, any other person, including those who make phonorecords or digital phonorecord deliveries, may, by complying with the provisions of this section, obtain a compulsory license to make and distribute phonorecords of the work.  A person may obtain a compulsory license only if his or her primary purpose in making phonorecords is to distribute them to the public for private use, including by means of a digital phonorecord delivery.2(emphasis added)

Digital phonorecord deliveries (DPDs) are subject to the same rates applying to traditional copying of music compositions on CDs or cassettes.  Currently, the rate is $.091 for songs of five minutes or less or $.0175 per minute or fraction thereof per copy for songs over five minutes.

Under existing copyright law, traditional over-the-air AM/FM radio stations are exempt from paying royalties to recording artists when broadcasting sound recordings.  Traditional radio stations compensate only the composer of the underlying musical work.  Thus, recording artists receive no royalties for traditional radio play.3  However, internet radio stations that transmit music digitally must pay a royalty fee for both the musical composition and the sound recording copyright.4

Webcasters are obligated to pay two types of royalty fees for playing music and have statutory restrictions on the content and arrangement of their play-lists.  Webcasters within a three-hour period may not play more than two songs in a row from the same album, play more than three songs in a row from the same artist, and may not play more than four songs by the same artist.  These numerical limitations are called the “Sound Recording Performance Complement.”5

In addition to complying with the Sound Recording Performance Complement, webcasters have a bevy of cumbersome additional statutory conditions that must be satisfied to enjoy the benefits of the compulsory license.6 Music transmissions that fail to satisfy all these conditions are ineligible for a statutory license and must be licensed through negotiations with the owners of the sound recording copyright.  Thus, it is critical for webcasters to obtain this compulsory license.

In March 2011, the Copyright Royalty Board (CRB) issued on a performance basis, rather than on a percentage of
webcaster revenue, a  graduated statutory royalty on rates for commercial webcasters: a per-performance rate of $0.0019 for 2011; a per-performance rate of $0.0021 for 2012, a per-performance rate of $0.0021 for 2013, a per-performance rate of $0.0023 for 2014 and a per-performance rate of $0.0023 for 2015.7   The CRB retained the $500 annual flat fee for noncommercial webcasters who transmit fewer than 159,140 aggregate tuning hours (ATH) per month.8     

Record companies receive compensation for the commercial use of their songs from downloading stores such as Amazon MP3, iTunes, and subscription services such as Rhapsody.  The recording artist should insist that his or her contract with the recording company require the label to pay them 50 percent of the income when the label licenses their recordings.  Do not be misled in believing that there is no distinction between a license and a sale. The typical artist royalty for a sale is 10-20 percent of retail and not 50 percent of what the recording company receives from downloads.  A record company permitting third parties to use its sound recordings to produce and sell permanent downloads is licensing rather than selling.  See F.B.T. Productions LLC v. Aftermath Records,9 setting out the important critical distinction between a license and a sale involving hip-hop artist Eminem.

Standard contracts currently state that the recording artist will receive the equivalent of his royalty for normal sales with respect to any income from electronic consumption of music. Thus, this language provides only 10 to 20 percent from income derived from subscriptions. Through negotiation, astute counsel should set out in the contract for the artist the definition of license and that the artist shall receive 50 percent from all downloads, subject to deductions for production and marketing costs.

Notwithstanding the above, the artist’s share will be further reduced when the record company prorates the income they receive for the subscription service in proportion to the number of times the artist’s music is streamed.  If a recording company received $1 million from a subscription service and there were 100,000 streams of downloads of the recording company’s music, the recording company will pay each of their artists in proportion to the number of downloads of that artist’s music. For example, the artist would receive 10 percent of the $1 million earned multiplied by the royalty rate of 15 percent, which is $15,000.

Additional Income Sources

The following are additional sources of income generated by the use of licensing music for advertisements, websites, ringtones, videos, and video games.
Marketing and promoting your product, song, artist, band and, video can be enhanced by use of blogs.  Bloggers cover a plethora of music genres, topics, and artists.  Your trick is to contact appropriate bloggers by email and get them to write about you and/or post your music.  This is a wonderful, exciting and effective way to promote your music and create an online presence.  Or, you can establish your own social network site using Facebook and Twitter.

The listening, discovery, and purchasing decisions of millions of consumers have moved online and the pace of this transition is accelerating.  Enter the Next Big Sound (www.nextbigsound.com). Launched in 2009, Next Big Sound is the leading provider of online music analytics and insights and tracks more data for more bands online than anyone else in the world.  Alex White is cofounder and CEO along with cofounders Samir Rayani and David Hoffman.  They arm artists and labels with data that will help them spend their resources more efficiently.

An organization that independent artists should consider joining is A2IM (www.a2im.org).  A2IM is a nonprofit trade association that protects the rights of the independent music label community.  It promotes business opportunity, provides advocacy and networking opportunities.  A true “indie” is one who controls or owns music masters, not who distributes the music.  A single artist can become a “label” by making a record on its own and thus become eligible for membership.  Independents have approximately 35 per cent market share of digital recorded music sales.

Another interesting website is Magnatune (http://magnatune.com) that offers subscriptions for interactive streaming and downloads in a bevy of music genres.  Magnatune offers artists a nonexclusive license and the contract extends only to music the artist submits.  Moreover, they share with the artists 50 percent of what they receive, without deductions.  The royalty is calculated by taking 50 percent of the money they collect for the artist’s music regardless of the source.

If you like Indian tunes check out Saavn (www.Saavn.com) a music-streaming service that debuted in May 2010.  Saavn is run by CEO Vinodh Bhat who cofounded the company with four others and is headquartered on Park Avenure in New York City.  Two-thirds of Saavn’s listeners come from India and the remainder from Indian communities in the U.S., U.K., and the Middle East.  Saavn intends to introduce this year a subscription service offering subscribers ad-free streaming, access to high definition audio, and offline downloads.

Conclusion

The music business has changed dramatically with the advent of modern technology such as the internet.  Songwriters, recording artists, labels, publishers, and attorneys must utilize current technology to promote their business, music, band, and message.  Ancillary revenue sources set out in this article are essential to maximize total revenue.  Online music stores, internet music broadcasts, websites, and blogs are the things of the present and the future.   Today’s artists and attorneys must be more creative than in the past in promoting themselves and their music.  New technology and legislative developments require the practitioner to fine-tune his or her knowledge and acumen. Webcaster compliance with the Sound Recording Performance Complement is a condition precedent to eligibility for the statutory royalty rate.  Noncompliance requires webcasters to engage in private negotiations with copyright holders who may deny permission or charge any royalty fee they desire. Astute counsel must know the deal points and should not surrender to the record company’s standard contracts that take a share of the artist’s merchandising, live performances, and other ancillary revenues.  Investigating and researching the information contained herein are your first steps to success and a sustainable music presence.

Websites for Music Licensing, Posting, and Blogging

ASCAP.com  Am. Soc. of Composers, Authors & Publishers
BMI.com Broadcast Mutual International
NMPA.org National Music Publishers Assoc/Harry Fox
SESAC.com SESAC
RIAA.com Recoding Industry of America
USPTO.gov U.S. Patent and Trademark Office
Songwriters.org Songwriters Guild of America
governor.state.tx.us/music Texas Music Office
bandcamp.com Helps artists to sell their music directly to fans
cdbaby.com  Buy indie music directly from the artists
nextbigsound.com Monitors activity for artists online and off
iTunes.com Downloading of music
SoundCloud.com Create, record & share sounds to the world
TuneCore.com An online distribution service for music
eMusic.com An online music & audiobook store by subscription
Rhapsody.com Music streaming & downloads
GreatIndieMusic.com Indie music download store
magnatune.com  Subscriptions for interactive streaming & downloads
last.fm Personalized radio stations, concerts & connect with musical people
music-favourites.blogspot.com Blog for music lovers
bloggersmusic.com Bloggers music
myspace.com A social networking service
A2IM.org Protects the rights of the independent music label community

James A. Johnson, of James A. Johnson, Esq. in Southfield, Michigan, is a trial lawyer and transactional attorney.  Mr. Johnson is an active member of the Michigan, Massachusetts, Texas and federal court bars. He can be reached through his website: www.JamesAJohnsonEsq.com

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