Lost In Licensing? Royalty 101 Now In Session…

Lost in the licensing shuffle?

After decades of evolution, the modern-day music industry features a myriad of licenses, royalty obligations, specialized societies, and of course, lawsuits.  That makes it difficult for entrants and outsiders to understand the tricky terrain, though insiders also sometimes struggle with the complicated maze of royalty requirements.

In that light, a raft of erroneous reports surrounded the disclosure of a proposal by the RIAA, Digital Media Association (DiMA), National Association of Recording Merchandisers (NARM), and other organizations on Tuesday.  The proposed agreements surround the use of interactive (or on-demand) streams, as well as conditional downloads within the United States (often contained within subscription services, and leashed by DRM).

After the proposal was announced, a common misperception was that the agreement pertained to streaming internet radio services, including Pandora.  But most internet radio services are non-interactive, meaning that listeners cannot select specific songs in advance, similar to terrestrial radio.  Instead, internet radio listeners can narrow selections by genre or deejay only, also similar to traditional radio models.

But what about Pandora?  After all, there are certainly interactive aspects layered into the increasingly-popular recommendation service.  Pandora listeners are encouraged to vote thumbs-up or thumbs-down on dynamically-generated playlists, the basis for a narrowing station custom-tailored to the tastes of the individual.

But when it comes to the current licensing discussion, Pandora has been slotted into the non-interactive bucket.  “While their service is an unusual hybrid that interacts in a way with the listener by taking a listener’s preferences and then providing specific music, it seems to fall short of the ‘on-demand’ definition,” entertainment attorney William Hochberg told Digital Music News.

Accordingly, Pandora has been struggling under the weight of non-interactive licenses, mostly untouched by the Tuesday proposal.  “Although this agreement does not address our business, internet radio, we are encouraged to see copyright holders and digital services reach agreement on a rate structure that will enable the continued growth of those services while fairly compensating artists, labels, songwriters and publishers,” a Pandora spokeswoman told PC Magazine.

Instead, the recent proposals affect music-focused social networks like Imeem and subscription services like Rhapsody, both of whom offer on-demand, interactive streams.  But the deal only pertains to mechanical licenses for publishers, just one component of the broader royalty obligation.  Other licenses pertain to the actual performance of the track, both on the publishing and recording sides.

In total, services like Rhapsody must negotiate a suite of different licenses from both publishing owners and record labels.  According to Ben Cockerham, chief operating officer of licensing firm RightsFlow, the royalty portfolio includes (a) the performance of the sound recording; (b) the reproduction and distribution of the sound recording; (c) the performance of the underlying musical composition; and (d) the reproduction and distribution of the underlying musical composition, the focus of the recent agreement.

That gets more complicated if multiple authors are involved, and on the recording side, all licenses are negotiated independently with the labels.  “The rights to perform (playing a recording is considered a ‘performance’) and reproduce and distribute the sound recordings through on-demand streams and conditional downloads must be licensed directly from the record labels on an individual label basis,” Cockerham told Digital Music News.

The rest, specifically publishing assets, are usually licensed through various performance rights societies (ASCAP, BMI, or SESAC).  The Harry Fox Agency will handle most mechanical publishing requirements on interactive and conditional downloads, the focus of the Tuesday proposal.