There is a pressing need in the marketplace for legitimate digital music services, driven by the dual forces of exploding consumer demand and a proliferation of digital music services that are infringing copyrighted musical works and sound recordings. To meet this demand, record companies and third parties they have authorized to use their recordings ("Third Party Services") are aggressively preparing to launch new digital music services.
Two music delivery technologies attractive to consumers are "On-Demand Streams" and "Limited Downloads." For purposes of this petition, we use the term "On-Demand Stream" to refer to an on-demand, real-time transmission using streaming technology such as Real Audio, which permits users to listen to the music they want when they want and as it is transmitted to them. We use the term "Limited Download" to refer to an on-demand transmission of a time-limited or other use-limited (i.e. non-permanent) download to a local storage device (e.g. the hard drive of the user’s computer), using technology that causes the downloaded file to be available for listening only either during a limited time (e.g. a time certain or a time tied to ongoing subscription payments) or for a limited number of times.
Record companies are ready and willing to pay any necessary royalties to musical work copyright owners when record companies use or authorize the use of musical works in services that transmit On-Demand Streams and/or Limited Downloads. In doing so, they expect to rely, to the extent they can, upon the mechanical compulsory license in Section 115 of the Copyright Act and licensing procedures that have been agreed upon with The Harry Fox Agency, Inc. ("HFA"), the leading mechanical licensing agency.
Representatives of the Recording Industry Association of America, Inc. ("RIAA") and its members have negotiated with HFA and other representatives of music publishers concerning the licensing of services that would offer On-Demand Streams and Limited Downloads. However, those negotiations have not yet successfully resolved the matter, in large part because of uncertainty as to fundamental questions of law addressed in this petition. Among other things, representatives of music publishers have taken the position that both On-Demand Streams and Limited Downloads implicate their mechanical rights.
Treatment of On-Demand Streams as incidental digital phonorecord deliveries ("Incidental DPDs") would facilitate the launch of services that make On-Demand Streams, but there remain questions about whether this treatment is appropriate. Determination of a statutory royalty rate for Incidental DPDs has been deferred, see 37 C.F.R. § 255.6, so if this treatment is proper, it is imperative that a royalty rate for Incidental DPDs be determined promptly.
Limited Downloads would more clearly seem to implicate publishers’ mechanical rights, but the applicable royalty is unsettled. The making of Limited Downloads may constitute distribution by acts or practices in the nature of rental, lease or lending. However, it is also possible that a Limited Download is an Incidental DPD. If the former, Section 115(c)(4) of the Copyright Act provides a formula for determining the applicable royalty, but the Register of Copyrights has not issued the regulations contemplated by that provision that are necessary to carry out its purpose. If the latter, there is, as noted above, no applicable statutory royalty rate.
In any event, in addressing the application of the mechanical compulsory license to On-Demand Streams and Limited Downloads, the Copyright Office should make clear that the compulsory license extends to all the activities necessary to transmit On-Demand Streams and Limited Downloads.
Because record companies and/or Third Party Services are willing and able to launch legitimate digital music services that will meet the enormous consumer demand for such services, the lack of clarity as to these issues has become the primary obstacle to their launch. The time has come to resolve these issues. Accordingly, RIAA respectfully requests that the Copyright Office (1) commence a rulemaking pursuant to 17 U.S.C. § 702 to address the application of the mechanical compulsory license to On-Demand Streaming and Limited Downloads; (2) if it is determined that either On-Demand Streaming or Limited Downloads constitute the making and distribution of Incidental DPDs, then, pursuant to 17 U.S.C. §§ 115(c)(3)(D), 801(b)(1), 803(a)(1), (3), and 37 C.F.R. §§ 251.61(a)(4), 255.6, convene a Copyright Arbitration Royalty Panel ("CARP") to determine the applicable royalty rates and terms for the period beginning January 1, 1998 and ending on December 31, 2002; and (3) if it is determined that Limited Downloads constitute distribution by acts or practices in the nature of rental, lease or lending, issue the regulations contemplated by Section 115(c)(4).
RIAA is the trade association that represents the U.S. recording industry. Its mission is to foster a business and legal climate that supports and promotes its members’ creative and financial vitality. Its members are the record companies that comprise the most vibrant national music industry in the world. RIAA members create, manufacture and/or distribute approximately 90% of all legitimate sound recordings produced and sold in the United States.
It is well known that consumers want to listen to and obtain music online. The recording industry is acutely aware of this desire and understands the benefits to artists, record companies, songwriters, music publishers and consumers alike of electronic delivery of music. The industry is excited about, and eagerly embracing, the opportunities for such delivery offered by the Internet. The success of the recording industry always has depended upon bringing consumers the music they love, and the recording business is all about finding new ways to make music available to more people. Thus, for decades, the industry has been an innovator of means to combine new technology with the creative process to deliver music in new ways.
Services that will transmit On-Demand Streams and/or Limited Downloads are currently under development by record companies and Third Party Services, and in some cases ready for imminent launch. For example, Unsurface, which will be unveiled first quarter 2001, will allow users to access music and other content from a digital storage locker, where it will be available for On-Demand Streaming. See Bruce Haring, In a First, Sony Prepares for Launch of Multimedia ‘Jukebox’ for Digital Content, Inside (Oct. 5, 2000) available at http://www.inside.com/story/Story_Cached/0,2770,10639_9_16_1,00.html. Universal Music Group also is beta testing a service. See Universal Offers Test of Subscription Plan, DigitalMusicWeekly.com (Oct. 27, 2000) available at http://www.digitalmusicweekly.com/issues/dmw10272000.html#Headline310. Others that have announced their intention to launch services that will transmit On-Demand Streams and/or Limited Downloads include Emusic.com, Inc., MP3.com, Inc. musicbank, Incorporated and Streamwaves.com, Inc.
Some services may make On-Demand Streams and Limited Downloads available on a peer-to-peer basis. Some may make them available on a subscription basis, while others may rely upon other revenue sources. However, while there may be variations in the business models of services that offer On-Demand Streams and Limited Downloads, these modes of music delivery themselves are straightforward, and the fundamental legal questions concerning the application of Section 115 to these technologies can be resolved irrespective of any variations in the businesses in which these technologies may be used.
RIAA believes that it should be possible to launch services that make On-Demand Streams and Limited Downloads under the existing statutory framework while respecting the copyright protection that ensures the continuation of the creative process. However, record companies take very seriously their obligations under copyright law, and it is simply not clear what licenses are required to operate these services. This ambiguity is of grave concern to record companies and Third Party Services that are poised to launch services. To the extent that On-Demand Streams and Limited Downloads make use of musical works, it is right and proper that songwriters and music publishers receive a reasonable royalty, as appropriate and as provided under existing law. RIAA’s member companies are ready and willing to pay reasonable applicable royalties for the services they operate or authorize.
The mechanical compulsory license of Section 115(a)(1) of the Copyright Act provides that when phonorecords of a nondramatic musical work have been distributed to the public in the U.S., anyone may obtain a compulsory license to make and distribute phonorecords of the work, including by DPD and by acts or practices in the nature of rental, lease or lending. See 17 U.S.C. §§ 115(a)(1), (c)(4). It is not clear, however, whether Section 115 authorizes the full range of activities necessary to make On-Demand Streams or Limited Downloads, and if it does, it is not clear what royalty applies. Thus, to provide the ground rules for services providing On-Demand Streams and Limited Downloads, it is necessary (1) to resolve whether On-Demand Streams are Incidental DPDs covered by the mechanical compulsory licensing provisions, (2) to confirm that the mechanical compulsory license includes the right to make the server copies or other copies necessary to transmit On-Demand Streams and Limited Downloads, and (3) to determine the royalty rate applicable to On-Demand Streams (if they are covered by the mechanical compulsory license) and Limited Downloads.
Representatives of music publishers have taken the position that On-Demand Streams implicate their mechanical rights. Treatment of On-Demand Streams as Incidental DPDs would facilitate the launch of services that make On-Demand Streams. To be compelling to consumers, it is believed that a service must offer tens or hundreds of thousands of songs, in which rights may be owned by hundreds or thousands of publishers. No service provider is eager to embark on individual negotiations with all those publishers unless it is necessary.
The music industry is unique among owners and users of copyrighted works in that reproduction and distribution of musical works has been subject to a compulsory license since 1909. In the nearly a century that the mechanical compulsory license has existed, it has become the foundation of business practices that are deeply ingrained in the industry and have been embraced by the copyright owners whose works are subject to it. When the Chairman of the House Judiciary Subcommittee on Intellectual Property and Judicial Administration proposed eliminating the compulsory license some years ago, RIAA agreed, but the National Music Publishers Association ("NMPA") insisted on retaining it. Indeed, it is NMPA that proposed the extension of the compulsory license to DPDs in the Digital Performance Right in Sound Recordings Act of 1995 ("DPRA").
While record companies historically have invoked the compulsory license only rarely, the availability of a compulsory license has ensured that necessary rights can be obtained, when needed, at a known price, and pursuant to established procedures. Recognizing that the business practices founded upon the compulsory license extend to On-Demand Streams would avoid the need for individual negotiations on a scale that is unprecedented in the industry and thus facilitate the launch of On-Demand Streaming services.
However, there remain questions about whether this treatment is appropriate. A DPD is an "individual delivery of a phonorecord by digital transmission of a sound recording, which results in a specifically identifiable reproduction by or for any transmission recipient of a phonorecord of that sound recording . . . ." 17 U.S.C. § 115(d) (emphasis added). When an On-Demand Stream is received, small portions of the On-Demand Stream are buffered for a short time on a revolving basis, but it is not clear that any "specifically identifiable" "phonorecord" ever is reproduced or delivered. Thus, whether On-Demand Streams are Incidental DPDs is unsettled, and the answer to this fundamental question will affect numerous service providers.
In addressing the application of the mechanical compulsory license to On-Demand Streams and Limited Downloads, the Copyright Office should make clear that the compulsory license extends to all the activities necessary to transmit On-Demand Streams and Limited Downloads. Specifically, in order to make either On-Demand Streams or Limited Downloads, the operator of a service generally must make multiple phonorecords of musical works on its servers, and those works may be further reproduced, at least in part and for periods of short duration, as part of the transmission process. While some of these reproductions may be exempt under Section 112(a), it is likely that certain reproductions necessary for the operation of commercial services are not exempt under Section 112(a). RIAA believes that a mechanical compulsory license must be understood to cover these activities in toto. Thus, a mechanical license covering either Limited Downloads or On-Demand Streams (if an On-Demand Stream is an Incidental DPD) must be understood to encompass the reproductions made on the service’s servers and as part of the transmission process, just as a mechanical license for the reproduction and physical distribution of phonorecords always has been understood to encompass the masters and stampers from which are made the physical phonorecords ultimately distributed to the public. A contrary result would render the amendments made to Section 115 by the DPRA a nullity by always allowing the exclusive rights of the musical work copyright owner to prevent the making and distribution of the DPDs that the Act was intended to authorize.
It is not clear what royalty rate applies to either On-Demand Streams or Limited Downloads. In the case of On-Demand Streams, the issue is the uncertainty described above concerning the application of Section 115 to On-Demand Streams. If it is concluded that On-Demand Streams are Incidental DPDs, Section 115 provides a relevant rate category, but determination of a statutory royalty rate for Incidental DPDs has been deferred, 37 C.F.R § 255.6.
It simply is not clear how Limited Downloads should be treated for purposes of Section 115. Section 115 and its implementing regulations identify four rate categories that apply to phonorecords made and distributed under the mechanical compulsory license, depending on the nature of the phonorecords made and/or the means by which they are distributed: (1) phonorecords with which the compulsory licensee has voluntarily and permanently parted possession by physical distribution, see 17 U.S.C. § 115(c)(2); 37 C.F.R. § 255.3; (2) Incidental DPDs, see 17 U.S.C. § 115(c)(3)(C) and (D); 37 C.F.R. § 255.6; (3) DPDs in general ("General DPDs"), see 17 U.S.C. § 115(c)(3)(C) and (D); 37 C.F.R. § 255.5; and (4) phonorecords distributed "by rental, lease, or lending (or by acts or practices in the nature of rental, lease, or lending)," 17 U.S.C. § 115(c)(4).
It is clear that transmitting Limited Downloads does not involve the permanent physical distribution of phonorecords (category 1). Since the enactment of the DPRA, General DPDs (category 3) have borne the same rate as physical phonorecords. That result can be justified only on the basis that permanent downloads give consumers the benefits of ownership of a phonorecord. Limited Downloads stand in sharp contrast to the permanent downloads that clearly constitute General DPDs, so that too would seem to be the wrong rate category. If Limited Downloads are neither physical phonorecords nor General DPDs, it follows that there are only two options: that the transmission of Limited Downloads either constitutes (1) distribution by acts or practices in the nature of rental, lease or lending (because transmitting a Limited Download is the functional equivalent of renting, leasing or lending a phonorecord by means of physical delivery for the same limited period) or (2) the making of Incidental DPDs (because the reproduction or distribution of a phonorecord for a limited time is incidental to the limited number of listens that are permitted).
In either case, action by the Copyright Office is required. If the Incidental DPD rate applies, determination of a statutory royalty rate has been deferred, 37 CFR § 255.6. If the rental rate applies, Section 115(c)(4) of the Copyright Act provides a formula for determining the applicable royalty, but the details of calculating the royalty are unclear, and the Register of Copyrights has not issued the regulations contemplated by that provision that are necessary to carry out its purpose. Action by the Copyright Office is, therefore, imperative so that RIAA’s members and Third Party Services can meet the marketplace demand for On-Demand Streams and Limited Downloads by offering the public legitimate access to recorded music. In the meantime, RIAA members may elect to obtain compulsory licenses or licenses through agreed-upon licensing procedures, and they are committed to pay applicable royalties (including on a retroactive basis as determined), and maintain records sufficient to ensure that proper payments are made upon determination of such royalties.
The lack of clarity as to the issues described above has become the primary obstacle to the launch of digital services designed to meet ever-increasing consumer demand. Thus, a determination by the Copyright Office with respect to the application of Section 115 to On-Demand Streams and Limited Downloads, and a determination of the relevant rate(s), is essential.
Representatives of RIAA and its members have negotiated with representatives of music publishers concerning the licensing of services that would offer On-Demand Streams and Limited Downloads. However, in large part because of uncertainty as to the fundamental questions of law addressed above, those negotiations have not yet successfully resolved the matter. These questions affect even the structure of such negotiations. If the mechanical compulsory license is available to cover in toto services offering On-Demand Streams and Limited Downloads, then voluntary mechanical licenses can be offered by HFA, and it is appropriate that royalty rates be negotiated on an industry basis by RIAA and HFA as has been the case for decades. If, however, the mechanical compulsory license does not cover in toto services offering On-Demand Streams and Limited Downloads, then it is necessary that thousands of individual publishers make individual decisions about whether, and on what terms, to license their songs. It would be very burdensome for those seeking to launch services to negotiate licenses with thousands of individual publishers, but it is important that these issues be resolved promptly so that such negotiations can begin if necessary.
Moreover, the current uncertainty surrounding the applicable royalty rate presents a serious risk to those seeking to create a legitimate business. Although the compulsory license permits the launch of services offering On-Demand Streams and Limited Downloads without infringement liability for the activities covered by the license, the risk associated with an uncertain royalty rate remains substantial.
Record companies are excited at the prospect of consumers having access to On-Demand Streams and Limited Downloads and are committed to operating or authorizing such services in compliance with copyright law. The record companies that elect to obtain compulsory licenses are committed to pay applicable royalties once determined and maintain records sufficient to ensure that proper payments are made upon determination of such royalties.
Section 702 of the Copyright Act authorizes the Copyright Office "to establish regulations not inconsistent with law for the administration of the functions and duties made the responsibility of the Register under this title." As the Copyright Office has recognized, Section 702 "makes it plain that the Copyright Office is vested with authority to interpret provisions of the Act . . . ." Cable Compulsory License; Definition of Cable System, 57 Fed. Reg. 3284, 3290 (Jan. 29, 1992) (citing 17 U.S.C. § 702); see also id. at 3292 ("[T]he Office is charged with the duty to interpret the statute in accordance with Congress’ intentions and framework and, where Congress is silent, to provide reasonable and permissible interpretations of the statute").
The Copyright Office has frequently exercised its authority to interpret provisions in the Copyright Act relating to statutory licenses, and its decisions to do so have been affirmed by the courts. See, e.g., Satellite Broad. and Communications Ass’n v. Oman, 17 F.3d 344, 347 (11th Cir. 1994) ("The Copyright Office is a federal agency with authority to promulgate rules concerning the meaning and applicability of" statutory license provisions) (citing Cablevision Sys. Dev. Co. v. MPAA, Inc., 836 F.2d 599, 608-9 (D.C. Cir. 1988)). The Copyright Office recently reaffirmed this authority. See Satellite Carrier Compulsory License; Definition of Unserved Household, 63 Fed. Reg. 3685 (Jan. 26, 1998).
The application of Section 115 to On-Demand Streams and Limited Downloads is particularly apt for a rulemaking proceeding, where all interested parties can file comments on the issue and a rule can be issued after consideration of these comments. Cf. Kappelmann v. Delta Air Lines, Inc., 539 F.2d 165, 171 (D.C. Cir. 1976) (decisions "involv[ing] both technical and policy questions which have industry-wide application … are better made on an industry-wide basis in an agency rulemaking proceeding.") (citations omitted). Because this case does not involve the legal rights of only two individual parties, but implicates the interests of multiple industry groups and thousands of companies, it is not suitable for resolution, in the first instance, by the courts. Indeed, absent a clear rule from the Copyright Office, various parties could end up engaging in multiple lawsuits in different forums throughout the country, since no single district court may be able to render an interpretation of the Act, and to enter a judgment, that would bind all of the hundreds of record companies, thousands of music publishers and many others affected by Section 115’s application to On-Demand Streams and Limited Downloads.
While, as described above, it may well be necessary to convene a CARP to determine a mechanical royalty rate for Incidental DPDs, the full range of issues described in this Petition cannot and should not be resolved by CARP. A CARP has authority only "[t]o make determinations concerning the adjustment of reasonable copyright royalty payments" as provided in various statutory licenses, including Section 115. 17 U.S.C. § 801(b)(1) (emphasis added). Section 115 provides that the Librarian of Congress shall convene a CARP "to determine a schedule of rates and terms. . . ." 17 U.S.C. § 115(c)(3)(D) (emphasis added). Nothing in the Copyright Act authorizes a CARP to address the application of a compulsory license to a particular type of service.
Entrusting this issue of statutory interpretation to a CARP also makes little practical sense. It is the Copyright Office and not the CARP that has the relevant expertise to interpret the Copyright Act. The Copyright Office should not be relegated to reviewing CARP interpretations of the Copyright Act pursuant to the deferential standard in Section 802(f). It is the CARP that should defer to the Copyright Office’s interpretations and not vice versa. See SBCA v. Oman, supra, 17 F.3d at 347 ("Copyright Office’s interpretation of the Copyright Act should ordinarily receive deference") (citing DeSylva v. Ballentine, 351 U.S. 570, 577-78 (1956)).
For the foregoing reasons, RIAA respectfully requests that the Copyright Office (1) commence a rulemaking pursuant to 17 U.S.C. § 702 to address the application of the mechanical compulsory license to On-Demand Streaming and Limited Downloads; (2) if it is determined that either On-Demand Streaming or Limited Downloads constitute the making and distribution of Incidental DPDs, then, pursuant to 17 U.S.C. §§ 115(c)(3)(D), 801(b)(1), 803(a)(1), (3), and 37 C.F.R. §§ 251.61(a)(4), 255.6, convene a Copyright Arbitration Royalty Panel ("CARP") to determine the applicable royalty rates and terms for the period beginning January 1, 1998 and ending on December 31, 2002; and (3) if it is determined that Limited Downloads constitute distribution by acts or practices in the nature of rental, lease or lending, issue the regulations contemplated by Section 115(c)(4).
November 22, 2000
Cary H. Sherman