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A Necessary Shift of Focus: Moving Digital Music Rights Away from Efficiency and Towards Fair Compensation

Posted By Mark Peterson, Jan 29, 2016

Digital Music Licensing: Efficiency vs. Fair Compensation

Internet based digital music streaming services are the new face of the music industry. Pandora and Spotify represent some of the most successful companies voyaging into this new frontier. In part, what makes these companies successful is extensive libraries of music. It is unlikely that users will be willing to pay a subscription fee if their favorite music is not included with the service. As such, services such of Spotify have libraries containing as many as 30 million songs (https://press.spotify.com/us/information/). The daunting task that Spotify faced in creating this library was to license each and every song individually, where each song typically has several distinct rights-holders. So it goes without saying that efficient licensing is a must if digital streaming services are to thrive. However, we should be weary that the need for efficiency does not blind us from recognition of the competing need for fair, free market negotiation.

Two inversely related policy objectives in the digital music field are efficient licensing and fair compensation. Streaming services lobby for more efficient licensing, while the effected rights-holders lobby for better and fairer compensation. A song encompasses two major legal rights: a sound recording and a musical composition. For the most part, sound recordings have centralized ownership by the four major labels. Whereas musical compositions have more diffuse ownership. In light of this diffuse ownership, the lobbying for efficient music licensing has generated a compulsory license for musical compositions. 17 U.S.C. § 115. This combats the inherent challenges of having to obtain a license with so many different, diffuse rights-holders. Whereas sound recordings are governed under 17 U.S.C. § 114, which does not have a compulsory licensing scheme, but rather allows license negotiation to occur on the open market. This difference between sound recording and musical composition rights has created drastic differences in licensing rates. For instance, Pandora pays sound recording owners 50% of revenues, while the publishers only receive 4% of market share for the use of their musical composition. In re Pandora Media, Inc., 6 F. Supp. 3d 317, 353-54, 372 (S.D.N.Y. 2014). Compounding this inequity is the existence of a digital music audit right for sound recordings under section 114, and a lack of one for musical compositions under section 115. 17 U.S.C. § 114-115. Accountability is afforded to the sound recording holders, but owners of the musical composition have no such right for digital music licenses. This latter observation showcases the problem of the current music rights laws. They are outdated and desperately need revising. During their inevitable revision, we can only hope that proponents for fair compensation are heard.

Additional issues are present, and shared, by both sound recordings and musical composition rights-holders. One major issue that plagues digital streaming services is that of unmatched, and thus unpaid, royalties. For instance, Spotify has amassed between $17 and $25 million in unpaid royalties for unmatched song use. Jon Blistein, Musicians Sue Spotify for $150 Million Over Unpaid Royalties. Even nonprofit organizations such as SoundExchange have unpaid royalties ranging as high as $31 million. Glenn Peoples, SoundExchange Finally Releases Old, Unclaimed Royalties. Again, the issue is that compensation is not being justly distributed for the use of people’s property; all in the name of efficiency.

The most recent trends in lobbying have continued to be towards greater efficiency in licensing. With bills such as the 2006 SIRA Act aimed at establishing a blanket-licensing regime, to presumptively cover all digital use rights (http://copyright.gov/docs/regstat051606.html). Perhaps what is instead needed is less of a focus on efficiency and more of a focus on fair compensation, a focus on ameliorating the inequities that exist between musical composition and sound recording rights-holders, and a focus on identifying ownership, and dispersing the unpaid, orphan royalties to the rightful owners. This should be the new trend of digital music rights lobbying.