Music on the Web

Any attorney practicing Internet law probably has plenty of clients that offer music to their users ' from background music for a site feature or page to television and movie programming, advertising, Webcasting, play-on-demand music and music videos. Those clients may think that all they need to play music on their service is a license from the record company that released it. Those clients would be wrong.

Don't Forget Publishers

As smaller and startup sites ' which often are less sophisticated about the labyrinthine legalities of music licensing ' start adding music to their services, they and their attorneys run the risk of missing at least one license they need: for the public-performance rights held by composers and publishers. Even more mature Internet companies may be mystified by the options for licensing performance rights online.

A recent case in the district court with jurisdiction over half the music performance rights in the United States confirmed the need to obtain broad performance licenses for online music in the course of setting performance license fees for Internet giants AOL LLC, Yahoo! Inc. and RealNetworks Inc. In doing so, the court offered a road map for negotiating online performance rights in the future. See, U.S. v. American Soc'y of Composers, Authors and Publishers (ASCAP) (Applications of America Online Inc., RealNetworks Inc. and Yahoo! Inc.), 562 F. Supp. 2d 413 (S.D.N.Y. 2008).

The music performance right generally is administered in the United States by the voluntary licensing groups ASCAP and Broadcast Music Inc. (“BMI”), also known as performing rights organizations (“PROs”). Together, ASCAP and BMI manage performance rights for more than 90% of the music played online, each in roughly equal proportions. The European organization SESAC (formerly Society of European Stage Authors & Composers) represents the rest of the repertory, other than public domain works and music by composers who don't belong to a PRO. The Southern District of New York is ASCAP's official rate court, established decades ago by an antitrust consent decree, and is charged with determining “reasonable” rates when ASCAP and the license applicant can't agree. See, U.S. v. American Soc'y of Composers, Authors and Publishers (Applications of Capitol Cities/ABC Inc. and CBS Inc.), No. 41-1395 (S.D.N.Y., June 11, 2001). It was such a disagreement that brought AOL, Yahoo and RealNetworks to court.

Time for a Showdown

The ASCAP case set some ground rules in the Wild West of Internet music. It's a long opinion that traces the history of the Internet, broadband transmission and Internet advertising, apparently signaling that this is a question whose time for resolution has come.

First, ASCAP takes an expansive view of which played music an Internet company needs to license from the PROs: all of it. This includes not just pure music offerings on the company's main Web site, but all other content containing music, such as:

• Artist music videos;
• User-generated videos set to music;
• Movie and television trailers;
• Clips and full-length content;
• Music that plays on the company's offsite widgets, such as an AOL widget appearing on a user's Facebook profile;
• Other off-site distribution of the company content, such as via a partner Internet connection service or mobile phone application; and
• Search results powered by the company.

Feature, theme and background music all are fair game. Faced with a plethora of online music play on the applicant companies' services, the ASCAP court reached the reasonable conclusion that the most effective way to account for it all was with a blanket license that covers both the PRO's complete repertory and the licensee's complete operations.

Second, the ASCAP opinion said that the blanket license needs to “account for the value” of all those music performances. The court reasoned that the performance fees should be roughly the same as what Web sites pay record labels for the sound recording rights in music videos. This statement turned out to be a red herring, since the court's final rate came in substantially less than the applicants' music video license fees, but the idea may linger in the rate court's memory. (In an antitrust fillip of the Copyright Act, courts are prohibited from looking at the license fees paid to record labels for the digital audio performance right in order to gauge appropriate performance fees for PROs, but they may look at rates paid to labels for music video rights. See, 17 U.S.C. 114(i).)

Third, the ASCAP court concluded that the lower rates that ASCAP charges for non-interactive music play ' when a user has no control over the music, such as Webcasting or background music ' would not apply when any of the Internet company's music play is interactive; that is, when a user can select and play a particular track.

In sum, ASCAP says that Internet companies should seek blanket performance licenses covering all their on- and off-site music play, at a rate that (theoretically) at least matches record labels' music video license fees and falls somewhere between the price for interactive and non-interactive play.

The court rejected the complex rate calculations proposed by the applicants, which varied according to the many different types of music play on the applicants' services and the associated revenue models. Instead, the court adopted a simpler formula: the Internet company's total revenues, less advertising costs, multiplied by a music-use fraction composed of the company's total music streaming hours, excluding “incidental” music such as background music in television and movies, divided by the total hours users spend on the company's site ' that is, the fraction of the time visitors to the Web site are actually streaming non-incidental music. The resulting number is multiplied by a royalty rate of 2.5%. The court did not apply a music-use fraction to RealNetworks, since RealNetworks' primary business is streaming music.

Utility of Decision Still Unknown

Although the ASCAP formula may be easier to apply than the licensees' multilevel scheme, or than the byzantine agreement Yahoo had struck with BMI that the court used for comparison, its practicality and fairness remain largely unknown. The calculation captures revenues from all sources, but allows cost deductions only for advertising. It does not require, as the applicants advocated, that the fees be based only on revenue “directly attributable” to music play ' that is, from advertising appearing in the music player, or from music subscriptions. In saying no to this idea, the court noted that direct attribution is easy to game.

The court's formula also presumes that the licensee can track its total music streaming hours, even while the opinion acknowledged that a company as savvy as Yahoo didn't currently gather that data. And in excluding from the music-use fraction all the incidental music play that the court previously said invokes the performance right, the formula must presume that music streaming time somehow correlates with incidental music performance in order to be fair.

The total license fees from the ASCAP court calculations amounted to about half of what the fees would be under ASCAP's standard online license that applies a 3% royalty to total site revenue, without cost deductions or a music-use adjustment. The court adopted the 2.5% rate from a negotiated agreement between ASCAP and online music rights aggregator Music Choice, noting that only a small group of licensees, generally small in scale, have adopted ASCAP's standard licenses.

In an emerging market where music license agreements from record labels and their partners increasingly can be executed with an online click, attorneys should take a proactive approach with Internet clients to keep their music licensing needs covered. To the uninitiated, these agreements may appear to authorize the licensee to perform the music of the artists the label represents even when they don't. And sales reps at the labels might not know any better.

Helping Internet Clients

Here are some ideas to help Internet clients get the music performance rights they need as painlessly as possible.

• Negotiate with content providers. The attorney should ask if the content provider is willing to cover the performance rights under its own PRO license. The ASCAP court appeared to bless this arrangement by subtracting the music supplied to Yahoo by MusicNet from its fee calculations, because the agreement between Yahoo and MusicNet required MusicNet to make all licensing payments for Yahoo's performance of the music. If a content provider streams music to a client's site from its own servers, the lawyer can buttress his or her request with the premise that the performance takes place on the provider's server. No one has litigated this issue yet, so presuming that the license responsibility falls on the provider without a contractual commitment is not a risk-free strategy.
• Spell it out. If a content provider agrees to cover the performance rights, the attorney should make the contract explicit on this point. The ASCAP court held RealNetworks responsible for its performance of music that was provided by Verizon Wireless but streamed by RealNetworks to Verizon Wireless subscribers. In their agreement, Verizon Wireless indemnified RealNetworks for liabilities arising from streaming Verizon Wireless-supplied music, but did not explicitly agree to license the performance rights.
• Cover all the company's online operations where music plays. This includes widgets, “snags,” Facebook applications, mobile applications, ringtones and other off-site services. Attorneys may need to have detailed discussions with the client to identify all the relevant features beyond the obvious music-based areas.
• Know the difference between a blanket license and a per-segment license. A blanket license covers unlimited performances of the PRO's total repertory. A per-segment license covers certain segments of the licensee's business based on actual music use, which requires detailed tracking and reporting, and comes with additional administrative costs passed through to the licensee. The ASCAP court rejected the applicants' attempt to essentially get blanket licenses at lower per-segment rates with their proposal to segment the royalty rate structure and limit its application to “directly attributable” revenue. The blanket approach may be better suited to online services with multiple music uses.

Keep It Simple When Possible

• Consider transaction costs. Attorneys representing smaller Internet companies will probably not curry client favor by trying to negotiate complex, costly deals with PROs. If the ASCAP formula makes sense for a client, the attorney should put it on the table with confidence that it's been blessed by the authoritative court. Attorneys and clients also should consider the cost of accurate tracking and reporting of music play, whether by the hour or the session, which can significantly affect selection of a rate schedule or negotiation of a license. The attorney should discuss the client's current capabilities and the costs and benefits of different tracking models, including whether the data provide value in addition to PRO reporting requirements. The ASCAP court relied on the licensees' own server data for total music streaming hours, and on comScore estimates for total site use hours.
• Assess the scale of the client's current and projected music play. The greater the scale, the more likely the transaction costs of negotiating a custom license and tracking music hours or sessions will pay off.
• Investigate indie artists. If PRO licenses are beyond a client's licensing or legal budget, the client can license the sound recording, mechanical and performance rights all directly from many independent artists who retain their publishing rights. In this case, the music license agreement should cover the artist's compositions as well as the sound recordings, and give the company all the rights it needs to offer the music online, such as the right to digitize, encode, reproduce, store, archive, publicly perform, digitally perform, publicly display, broadcast, transmit and distribute the music, and in some cases synch, or incorporate the music into visual content in timed relation to images.
• Remember mechanicals. The performance right isn't the only hot ticket in online music licensing at the moment. The Copyright Office is now considering how a “digital phonorecord delivery (DPD)” should be defined for purposes of the compulsory license granted ' for a fee ' by '115 of the Copyright Act. If a music performance constitutes a digital phonorecord delivery, it implicates the composer's mechanical right and is subject to the compulsory license. Under the Copyright Office's proposed rule, not just music downloads, but every reproduction of a musical work on a network, including temporary and intermediate copies, would be a DPD. If the proposed rule takes effect, much, if not all, music play on the Internet may become subject to mechanical license fees.

The tenor of the ASCAP opinion is that Internet companies use music as a powerful asset to attract users and the ad dollars that come with them, and that companies should pay accordingly. “According to what?” may remain the question. “In this novel proceeding, there are no perfect comparables,” wrote the court. ASCAP, 562 F. Supp. 2d at 482.

For now, imperfect comparables will have to do.

Any attorney practicing Internet law probably has plenty of clients that offer music to their users ' from background music for a site feature or page to television and movie programming, advertising, Webcasting, play-on-demand music and music videos. Those clients may think that all they need to play music on their service is a license from the record company that released it. Those clients would be wrong.

Don't Forget Publishers

As smaller and startup sites ' which often are less sophisticated about the labyrinthine legalities of music licensing ' start adding music to their services, they and their attorneys run the risk of missing at least one license they need: for the public-performance rights held by composers and publishers. Even more mature Internet companies may be mystified by the options for licensing performance rights online.

A recent case in the district court with jurisdiction over half the music performance rights in the United States confirmed the need to obtain broad performance licenses for online music in the course of setting performance license fees for Internet giants AOL LLC, Yahoo! Inc. and RealNetworks Inc. In doing so, the court offered a road map for negotiating online performance rights in the future. See, U.S. v. American Soc'y of Composers, Authors and Publishers (ASCAP) (Applications of America Online Inc., RealNetworks Inc. and Yahoo! Inc.), 562 F. Supp. 2d 413 (S.D.N.Y. 2008).

The music performance right generally is administered in the United States by the voluntary licensing groups ASCAP and Broadcast Music Inc. (“BMI”), also known as performing rights organizations (“PROs”). Together, ASCAP and BMI manage performance rights for more than 90% of the music played online, each in roughly equal proportions. The European organization SESAC (formerly Society of European Stage Authors & Composers) represents the rest of the repertory, other than public domain works and music by composers who don't belong to a PRO. The Southern District of New York is ASCAP's official rate court, established decades ago by an antitrust consent decree, and is charged with determining “reasonable” rates when ASCAP and the license applicant can't agree. See, U.S. v. American Soc'y of Composers, Authors and Publishers (Applications of Capitol Cities/ABC Inc. and CBS Inc.), No. 41-1395 (S.D.N.Y., June 11, 2001). It was such a disagreement that brought AOL, Yahoo and RealNetworks to court.

Time for a Showdown

The ASCAP case set some ground rules in the Wild West of Internet music. It's a long opinion that traces the history of the Internet, broadband transmission and Internet advertising, apparently signaling that this is a question whose time for resolution has come.

First, ASCAP takes an expansive view of which played music an Internet company needs to license from the PROs: all of it. This includes not just pure music offerings on the company's main Web site, but all other content containing music, such as:

• Artist music videos;
• User-generated videos set to music;
• Movie and television trailers;
• Clips and full-length content;
• Music that plays on the company's offsite widgets, such as an AOL widget appearing on a user's Facebook profile;
• Other off-site distribution of the company content, such as via a partner Internet connection service or mobile phone application; and
• Search results powered by the company.

Feature, theme and background music all are fair game. Faced with a plethora of online music play on the applicant companies' services, the ASCAP court reached the reasonable conclusion that the most effective way to account for it all was with a blanket license that covers both the PRO's complete repertory and the licensee's complete operations.

Second, the ASCAP opinion said that the blanket license needs to “account for the value” of all those music performances. The court reasoned that the performance fees should be roughly the same as what Web sites pay record labels for the sound recording rights in music videos. This statement turned out to be a red herring, since the court's final rate came in substantially less than the applicants' music video license fees, but the idea may linger in the rate court's memory. (In an antitrust fillip of the Copyright Act, courts are prohibited from looking at the license fees paid to record labels for the digital audio performance right in order to gauge appropriate performance fees for PROs, but they may look at rates paid to labels for music video rights. See, 17 U.S.C. 114(i).)

Third, the ASCAP court concluded that the lower rates that ASCAP charges for non-interactive music play ' when a user has no control over the music, such as Webcasting or background music ' would not apply when any of the Internet company's music play is interactive; that is, when a user can select and play a particular track.

In sum, ASCAP says that Internet companies should seek blanket performance licenses covering all their on- and off-site music play, at a rate that (theoretically) at least matches record labels' music video license fees and falls somewhere between the price for interactive and non-interactive play.

The court rejected the complex rate calculations proposed by the applicants, which varied according to the many different types of music play on the applicants' services and the associated revenue models. Instead, the court adopted a simpler formula: the Internet company's total revenues, less advertising costs, multiplied by a music-use fraction composed of the company's total music streaming hours, excluding “incidental” music such as background music in television and movies, divided by the total hours users spend on the company's site ' that is, the fraction of the time visitors to the Web site are actually streaming non-incidental music. The resulting number is multiplied by a royalty rate of 2.5%. The court did not apply a music-use fraction to RealNetworks, since RealNetworks' primary business is streaming music.

Utility of Decision Still Unknown

Although the ASCAP formula may be easier to apply than the licensees' multilevel scheme, or than the byzantine agreement Yahoo had struck with BMI that the court used for comparison, its practicality and fairness remain largely unknown. The calculation captures revenues from all sources, but allows cost deductions only for advertising. It does not require, as the applicants advocated, that the fees be based only on revenue “directly attributable” to music play ' that is, from advertising appearing in the music player, or from music subscriptions. In saying no to this idea, the court noted that direct attribution is easy to game.

The court's formula also presumes that the licensee can track its total music streaming hours, even while the opinion acknowledged that a company as savvy as Yahoo didn't currently gather that data. And in excluding from the music-use fraction all the incidental music play that the court previously said invokes the performance right, the formula must presume that music streaming time somehow correlates with incidental music performance in order to be fair.

The total license fees from the ASCAP court calculations amounted to about half of what the fees would be under ASCAP's standard online license that applies a 3% royalty to total site revenue, without cost deductions or a music-use adjustment. The court adopted the 2.5% rate from a negotiated agreement between ASCAP and online music rights aggregator Music Choice, noting that only a small group of licensees, generally small in scale, have adopted ASCAP's standard licenses.

In an emerging market where music license agreements from record labels and their partners increasingly can be executed with an online click, attorneys should take a proactive approach with Internet clients to keep their music licensing needs covered. To the uninitiated, these agreements may appear to authorize the licensee to perform the music of the artists the label represents even when they don't. And sales reps at the labels might not know any better.

Helping Internet Clients

Here are some ideas to help Internet clients get the music performance rights they need as painlessly as possible.

• Negotiate with content providers. The attorney should ask if the content provider is willing to cover the performance rights under its own PRO license. The ASCAP court appeared to bless this arrangement by subtracting the music supplied to Yahoo by MusicNet from its fee calculations, because the agreement between Yahoo and MusicNet required MusicNet to make all licensing payments for Yahoo's performance of the music. If a content provider streams music to a client's site from its own servers, the lawyer can buttress his or her request with the premise that the performance takes place on the provider's server. No one has litigated this issue yet, so presuming that the license responsibility falls on the provider without a contractual commitment is not a risk-free strategy.
• Spell it out. If a content provider agrees to cover the performance rights, the attorney should make the contract explicit on this point. The ASCAP court held RealNetworks responsible for its performance of music that was provided by Verizon Wireless but streamed by RealNetworks to Verizon Wireless subscribers. In their agreement, Verizon Wireless indemnified RealNetworks for liabilities arising from streaming Verizon Wireless-supplied music, but did not explicitly agree to license the performance rights.
• Cover all the company's online operations where music plays. This includes widgets, “snags,” Facebook applications, mobile applications, ringtones and other off-site services. Attorneys may need to have detailed discussions with the client to identify all the relevant features beyond the obvious music-based areas.
• Know the difference between a blanket license and a per-segment license. A blanket license covers unlimited performances of the PRO's total repertory. A per-segment license covers certain segments of the licensee's business based on actual music use, which requires detailed tracking and reporting, and comes with additional administrative costs passed through to the licensee. The ASCAP court rejected the applicants' attempt to essentially get blanket licenses at lower per-segment rates with their proposal to segment the royalty rate structure and limit its application to “directly attributable” revenue. The blanket approach may be better suited to online services with multiple music uses.

Keep It Simple When Possible

• Consider transaction costs. Attorneys representing smaller Internet companies will probably not curry client favor by trying to negotiate complex, costly deals with PROs. If the ASCAP formula makes sense for a client, the attorney should put it on the table with confidence that it's been blessed by the authoritative court. Attorneys and clients also should consider the cost of accurate tracking and reporting of music play, whether by the hour or the session, which can significantly affect selection of a rate schedule or negotiation of a license. The attorney should discuss the client's current capabilities and the costs and benefits of different tracking models, including whether the data provide value in addition to PRO reporting requirements. The ASCAP court relied on the licensees' own server data for total music streaming hours, and on comScore estimates for total site use hours.
• Assess the scale of the client's current and projected music play. The greater the scale, the more likely the transaction costs of negotiating a custom license and tracking music hours or sessions will pay off.
• Investigate indie artists. If PRO licenses are beyond a client's licensing or legal budget, the client can license the sound recording, mechanical and performance rights all directly from many independent artists who retain their publishing rights. In this case, the music license agreement should cover the artist's compositions as well as the sound recordings, and give the company all the rights it needs to offer the music online, such as the right to digitize, encode, reproduce, store, archive, publicly perform, digitally perform, publicly display, broadcast, transmit and distribute the music, and in some cases synch, or incorporate the music into visual content in timed relation to images.
• Remember mechanicals. The performance right isn't the only hot ticket in online music licensing at the moment. The Copyright Office is now considering how a “digital phonorecord delivery (DPD)” should be defined for purposes of the compulsory license granted ' for a fee ' by '115 of the Copyright Act. If a music performance constitutes a digital phonorecord delivery, it implicates the composer's mechanical right and is subject to the compulsory license. Under the Copyright Office's proposed rule, not just music downloads, but every reproduction of a musical work on a network, including temporary and intermediate copies, would be a DPD. If the proposed rule takes effect, much, if not all, music play on the Internet may become subject to mechanical license fees.

The tenor of the ASCAP opinion is that Internet companies use music as a powerful asset to attract users and the ad dollars that come with them, and that companies should pay accordingly. “According to what?” may remain the question. “In this novel proceeding, there are no perfect comparables,” wrote the court. ASCAP, 562 F. Supp. 2d at 482.

For now, imperfect comparables will have to do.