Music Publisher Concerns over Viral-Video Sites

The Internet has presented numerous challenges to the music industry. Unlicensed digital downloading has been at the top of the list for several years. More recently, the use of music on viral-video Web sites has produced a new set of challenges. Three of the four major record labels have struck content deals with mega-viral-video site YouTube, as have two of the three major TV networks. But music publishers haven't been involved in significant direct viral-video-site negotiations. In the following interview, conducted by Entertainment Law & Finance Editor-in-Chief Stan Soocher, Keith C. Hauprich, Vice President, Business & Legal Affairs for Cherry Lane Music Publishing Company, Inc., discusses music-publishing concerns in the viral-video age. As General Counsel for one of the world's largest independent music publishers, Hauprich's responsibilities include coordinating relationships with outside counsel, overseeing the due-diligence process and playing an integral role in finding new business opportunities for the company.

EL&F: Why haven't music publishers been engaged in ongoing negotiations with viral-video sites?

Hauprich: Music publishers took a wait-and-see approach and allowed sites and users to enjoy an online experience without clearing rights. Now, music publishers are having an uphill battle bringing these sites to the negotiating table. But viral-video sites are going to live and die by their content. It's important for content owners and their administrators to have a say in this revolution ' or evolution ' to protect the rights to underlying music compositions. Working through these viral-video issues is on everyone's short 'to-do' list.

EL&F: Is there a general view in the music-publishing industry view on what content deals with viral-video sites should be like?

Hauprich: There's no one-size-fits-all, cookie-cutter, content-licensing scheme that would work for all for music publishers. However, given the daily and monthly visitor numbers to viral-video Web sites, and because the content featured on these sites resonates so strongly in pop culture, there are potentially very creative ways for the parties to work together.

Many music publishers administer or co-publish a diverse range of songs and must consider the interests of the underlying copyright owners, such as the singer/songwriter or the audio-visual production entities. Singer/songwriters who rely on record sales and chart positions usually want the promotional recognition that viral-video sites can offer. Film companies that own rights to music want the viral-video buzz factor to get people into theaters and want their content in front of consumers. Other, more traditional catalog owners may want to focus on strictly financial compensation.

EL&F: What are some of the parameters the music-publishing industry might like to see in content licensing to viral-video sites?

Hauprich: First, music publishers must be made whole for the prior use of their content, meaning from inception of a site to date. Consideration must change hands for those uses. It's time. Music publishers are no longer willing to be passive.

Going forward, music publishers need to be able to directly negotiate the parameters of any prospective strategic alliances. To reach any meaningful accord, there must be parity. There must be equality in the manner in which both record companies, as owners of master recordings, and music publishers, as owners of the underlying compositions, are treated. It's unacceptable for a record company to be the middleman with viral-video sites.

Record companies have traditionally passed through the mechanical license it obtained from music publishers to online music services to allow such services to transmit downloads. In this instance, we are not dealing with mechanical licenses, but with synchronization licenses, public performance licenses and, in some cases, a license to create a derivative work. Unlike the mechanical license scenario, [with viral-video sites] music publishers should be able to issue direct licenses and have the power to audit to ensure compliance and transparency, as well as to secure quicker payment from the source.

Record companies have also traditionally included a proviso within its recording artist's agreement that grants a record company a gratis license to use the underlying musical compositions recorded by that artist in MTV-style promotional videos. A professional-grade video that is created and financed by the record company and pushed out to MTV, Fuse and the other video channels for the express purpose of selling records is covered by this provision. Here, it's unacceptable for record companies to pass through rights to viral-video sites. These aren't promotional videos.

EL&F: What financial factors would music publishers like to see in licensing music content to viral-video sites?

Hauprich: A good-faith advance to rights holders is essential. Viral-video isn't a perfect system, but while viral-video sites work on fixing their system (and collect revenue), content owners shouldn't be forced to sit and wait. When you look at Google's purchase of YouTube for $1.6 billion, you see that the market has inherent value. But it may not be possible yet to come up with an exact figure. It would instead have to be a good-faith number that the parties believe is reasonable. This would allow viral sites the opportunity to improve their systems, allow users to continue using those sites and allow music publishers to sleep at night.

There also needs to be royalties paid to publishers. The royalties should be based on a viral site's gross revenues from advertising income, subscription fees or per-use fees, taking into account the number of copyright interests involved. For example, when you take a close look at a video, there are, in most cases, at least two distinct copyrights: the master recording and the underlying musical composition. It would be reasonable for each copyright owner to argue that from between 33% to 50% of a site's revenues from using such copyrights should go to each copyright owner. Each copyright owner might have to compromise, however, and settle for less than 50% as the viral video site will need to cover its overhead, pay any other third-party rights-holders and turn a profit.

In addition, it's been reported that three major labels negotiated an equity stake with YouTube. As an industry, we're tapping into new streams of revenue from non-traditional sources. That certainly piques the interest of music publishers as they would also like to acquire equity stakes in viral-video sites.

EL&F: How long might an initial term be for licensing musical compositions to a viral-video site?

Hauprich: They need to be short-term deals. Any term beyond three years wouldn't be prudent as the market is far too fluid. A one-year term would be ideal. A short-term deal would allow all concerned parties to walk away from the deal rather quickly in the event their expectations weren't well grounded. If the agreement turned out to bear fruit, the parties could always exercise an option to renew. Given the novelty of this type of agreement, this may be the rare instance where a mutual option (or an option to extend the term by mutual consent) makes sense.

A business reality to be aware of is that a music publisher could guarantee that certain songs would be available to the viral-video site. It could not guarantee, however, that all songs across the board would be available due to contractual limitations the publisher may have with the clients it administers or co-publishes. Therefore, the music publisher's clients should be able to opt in or opt out of the deal.

EL&F: What about provisions for tracking use of content on a viral-video site?

Hauprich: From the music-publisher's perspective, there needs to be viable content identification and tracking systems implemented. The first prong is that viral-video sites must agree to serve a gate-keeping function. There must be consistent use of metadata to allow for identifying and tracking of user-generated content uploaded to a site. The second prong is viable and robust audio fingerprinting that would allow files to be uploaded or blocked, based on whether the master recording and underlying musical composition were properly licensed to the site. Music publishers are looking to strike deals with viral-video sites, not users who we want to have rich online experiences.

EL&F: User-created content may constitute derivative works of copyright material. How might this be addressed in a content license with a viral-video site?

Hauprich: A publisher would want to retain ownership of any works based on the underlying song copyrights. If someone takes a song and adds new lyrics and there's enough creative authorship to create a derivative work, the music publisher should own that. The viral-video site would then have to work that issue out with its users.

EL&F: The viral-video world is full of parodies or odd content uses. How might this issue work into a negotiation between a music publisher and a viral-video site?

Hauprich: In any strategic alliance, a music publisher would want certain use exclusions. For example, a music publisher won't want to get into whether something is a fair use or a parody. The music publisher would rather not rely on grey areas of law or on litigation, but instead have the contractual ability to give a viral site notice of content that needs to be taken down due to the sensitivities of a music-publishing client. There could be a morality-type clause, too. Some clients won't want what may appear as endorsement of certain products or to be directly associated with content of ill repute. If a viral-video site viewed itself as cutting edge and/or pushing the limits of pop culture, a music publisher would have an obligation to bring that back to the underlying composition owners to decide if they want to enter into the overall deal at that time.

EL&F: Would a music publisher's content licenses with viral-video sites affect a due-diligence review by a prospective buyer for that publisher's catalog?

Hauprich: Not at the present time, simply because you can't attach any hard and fast numbers to a content-licensing deal with a viral-video site, despite the large viewership and user numbers for those sites. How to convert those numbers into an actual currency figure has yet to be determined.

The Internet has presented numerous challenges to the music industry. Unlicensed digital downloading has been at the top of the list for several years. More recently, the use of music on viral-video Web sites has produced a new set of challenges. Three of the four major record labels have struck content deals with mega-viral-video site YouTube, as have two of the three major TV networks. But music publishers haven't been involved in significant direct viral-video-site negotiations. In the following interview, conducted by Entertainment Law & Finance Editor-in-Chief Stan Soocher, Keith C. Hauprich, Vice President, Business & Legal Affairs for Cherry Lane Music Publishing Company, Inc., discusses music-publishing concerns in the viral-video age. As General Counsel for one of the world's largest independent music publishers, Hauprich's responsibilities include coordinating relationships with outside counsel, overseeing the due-diligence process and playing an integral role in finding new business opportunities for the company.

EL&F: Why haven't music publishers been engaged in ongoing negotiations with viral-video sites?

Hauprich: Music publishers took a wait-and-see approach and allowed sites and users to enjoy an online experience without clearing rights. Now, music publishers are having an uphill battle bringing these sites to the negotiating table. But viral-video sites are going to live and die by their content. It's important for content owners and their administrators to have a say in this revolution ' or evolution ' to protect the rights to underlying music compositions. Working through these viral-video issues is on everyone's short 'to-do' list.

EL&F: Is there a general view in the music-publishing industry view on what content deals with viral-video sites should be like?

Hauprich: There's no one-size-fits-all, cookie-cutter, content-licensing scheme that would work for all for music publishers. However, given the daily and monthly visitor numbers to viral-video Web sites, and because the content featured on these sites resonates so strongly in pop culture, there are potentially very creative ways for the parties to work together.

Many music publishers administer or co-publish a diverse range of songs and must consider the interests of the underlying copyright owners, such as the singer/songwriter or the audio-visual production entities. Singer/songwriters who rely on record sales and chart positions usually want the promotional recognition that viral-video sites can offer. Film companies that own rights to music want the viral-video buzz factor to get people into theaters and want their content in front of consumers. Other, more traditional catalog owners may want to focus on strictly financial compensation.

EL&F: What are some of the parameters the music-publishing industry might like to see in content licensing to viral-video sites?

Hauprich: First, music publishers must be made whole for the prior use of their content, meaning from inception of a site to date. Consideration must change hands for those uses. It's time. Music publishers are no longer willing to be passive.

Going forward, music publishers need to be able to directly negotiate the parameters of any prospective strategic alliances. To reach any meaningful accord, there must be parity. There must be equality in the manner in which both record companies, as owners of master recordings, and music publishers, as owners of the underlying compositions, are treated. It's unacceptable for a record company to be the middleman with viral-video sites.

Record companies have traditionally passed through the mechanical license it obtained from music publishers to online music services to allow such services to transmit downloads. In this instance, we are not dealing with mechanical licenses, but with synchronization licenses, public performance licenses and, in some cases, a license to create a derivative work. Unlike the mechanical license scenario, [with viral-video sites] music publishers should be able to issue direct licenses and have the power to audit to ensure compliance and transparency, as well as to secure quicker payment from the source.

Record companies have also traditionally included a proviso within its recording artist's agreement that grants a record company a gratis license to use the underlying musical compositions recorded by that artist in MTV-style promotional videos. A professional-grade video that is created and financed by the record company and pushed out to MTV, Fuse and the other video channels for the express purpose of selling records is covered by this provision. Here, it's unacceptable for record companies to pass through rights to viral-video sites. These aren't promotional videos.

EL&F: What financial factors would music publishers like to see in licensing music content to viral-video sites?

Hauprich: A good-faith advance to rights holders is essential. Viral-video isn't a perfect system, but while viral-video sites work on fixing their system (and collect revenue), content owners shouldn't be forced to sit and wait. When you look at Google's purchase of YouTube for $1.6 billion, you see that the market has inherent value. But it may not be possible yet to come up with an exact figure. It would instead have to be a good-faith number that the parties believe is reasonable. This would allow viral sites the opportunity to improve their systems, allow users to continue using those sites and allow music publishers to sleep at night.

There also needs to be royalties paid to publishers. The royalties should be based on a viral site's gross revenues from advertising income, subscription fees or per-use fees, taking into account the number of copyright interests involved. For example, when you take a close look at a video, there are, in most cases, at least two distinct copyrights: the master recording and the underlying musical composition. It would be reasonable for each copyright owner to argue that from between 33% to 50% of a site's revenues from using such copyrights should go to each copyright owner. Each copyright owner might have to compromise, however, and settle for less than 50% as the viral video site will need to cover its overhead, pay any other third-party rights-holders and turn a profit.

In addition, it's been reported that three major labels negotiated an equity stake with YouTube. As an industry, we're tapping into new streams of revenue from non-traditional sources. That certainly piques the interest of music publishers as they would also like to acquire equity stakes in viral-video sites.

EL&F: How long might an initial term be for licensing musical compositions to a viral-video site?

Hauprich: They need to be short-term deals. Any term beyond three years wouldn't be prudent as the market is far too fluid. A one-year term would be ideal. A short-term deal would allow all concerned parties to walk away from the deal rather quickly in the event their expectations weren't well grounded. If the agreement turned out to bear fruit, the parties could always exercise an option to renew. Given the novelty of this type of agreement, this may be the rare instance where a mutual option (or an option to extend the term by mutual consent) makes sense.

A business reality to be aware of is that a music publisher could guarantee that certain songs would be available to the viral-video site. It could not guarantee, however, that all songs across the board would be available due to contractual limitations the publisher may have with the clients it administers or co-publishes. Therefore, the music publisher's clients should be able to opt in or opt out of the deal.

EL&F: What about provisions for tracking use of content on a viral-video site?

Hauprich: From the music-publisher's perspective, there needs to be viable content identification and tracking systems implemented. The first prong is that viral-video sites must agree to serve a gate-keeping function. There must be consistent use of metadata to allow for identifying and tracking of user-generated content uploaded to a site. The second prong is viable and robust audio fingerprinting that would allow files to be uploaded or blocked, based on whether the master recording and underlying musical composition were properly licensed to the site. Music publishers are looking to strike deals with viral-video sites, not users who we want to have rich online experiences.

EL&F: User-created content may constitute derivative works of copyright material. How might this be addressed in a content license with a viral-video site?

Hauprich: A publisher would want to retain ownership of any works based on the underlying song copyrights. If someone takes a song and adds new lyrics and there's enough creative authorship to create a derivative work, the music publisher should own that. The viral-video site would then have to work that issue out with its users.

EL&F: The viral-video world is full of parodies or odd content uses. How might this issue work into a negotiation between a music publisher and a viral-video site?

Hauprich: In any strategic alliance, a music publisher would want certain use exclusions. For example, a music publisher won't want to get into whether something is a fair use or a parody. The music publisher would rather not rely on grey areas of law or on litigation, but instead have the contractual ability to give a viral site notice of content that needs to be taken down due to the sensitivities of a music-publishing client. There could be a morality-type clause, too. Some clients won't want what may appear as endorsement of certain products or to be directly associated with content of ill repute. If a viral-video site viewed itself as cutting edge and/or pushing the limits of pop culture, a music publisher would have an obligation to bring that back to the underlying composition owners to decide if they want to enter into the overall deal at that time.

EL&F: Would a music publisher's content licenses with viral-video sites affect a due-diligence review by a prospective buyer for that publisher's catalog?

Hauprich: Not at the present time, simply because you can't attach any hard and fast numbers to a content-licensing deal with a viral-video site, despite the large viewership and user numbers for those sites. How to convert those numbers into an actual currency figure has yet to be determined.