Music Licensing

Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Intellectual Property Practice Group, was recorded on Thursday, February 22, 2018 during a live teleforum conference call held exclusively for Federalist Society members.

 

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is on Music Licensing. My name is Wesley Hodges, and I'm the Associate Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the experts on today's call.

 

      Today we are fortunate to have with us moderating David Olson, who is a Professor at Boston College Law School. David will be introducing our speakers, and after our moderator gives those remarks and passes the baton to our speakers for their take, we will move to an audience Q&A, so please keep any questions you have in mind for that time at the end of our call. So thank you all for speaking with us today. David, the floor is now yours.

 

Prof. David Olson:  Thank you, Wes, and thank you to The Federalist Society for hosting this. I'm very excited and interested to hear from two people with real expertise as to music licensing and who are going to have very -- come from different perspectives, so we can really get a range of kind of views on things.

 

      Before I introduce in full, Mitch Glazier, who is President of the Recording Industry Association of American, and Lawrence White, who is the Robert Kavesh Professor of Economics at the New York University Lenard N. Stern School of Business, before I give a more fulsome introduction to both of them, I'd like to just take a few moments to give some groundwork, some background, on this discussion that we're going to have today.

 

      So this teleforum is about music licensing, and specifically, we're going to talk about some pending legislation to change the way that the music licensing happens in the United States. But before we get to that, I think it's helpful to have a few things in mind as to what makes up the music licensing landscape in the United States. And to do that, it's best to start with the law and the fact -- and copyright law, which governs of course musical works amongst other works.

 

      There're two types of copyrights that are relevant for music. One is the composition copyright, and that is the copyright for the written music. And by written I mean both the melody, harmony, et cetera, and the lyrics. So composition of the music itself, and then separately a recording of the music. So a sound recording of a performance of the music gets its own copyright. And both of these types of copyright then have rights that attach to them, and these rights then need to be licensed. And that's what we're going to be talking about today.

 

      But let me give a little bit of background on the complexity of this situation. When it comes to composition copyrights—so songwriters—we can have a number of people who write a song. You might have three different songwriters. Sometimes you have different people who write the music, the lyrics, and lately it's become even more, one might say, distributed sometimes in the production of music. So you have a number of people who have an interest in the composition copyright, and they have shares of any revenues from any licensing proportionate to however many people are involved on the composition.

 

      To license their work, they often give nonexclusive licenses to collecting societies, such as BMI and ASCAP, and then these collecting societies will often offer blanket licenses by which say a radio station or someone who wants to play the music will pay a license fee then play any of the music that the society has a license to. And then by kind of complex means, it's kept track what songs are played, how often, et cetera, and the revenue is distributed to the owners of the composition copyright. And that usually is divided between not only the owners but their agents, and also there's a share for the collecting society.

 

      So that's composition copyright. Composition copyrights are paid for when music is played—pretty much any time music is played. So on the radio, on TV, at a public performance, the right to play that music must be paid for in the form of a license. Now, it's not just up to the songwriter as to whether someone can perform her music or not. The U.S. has enacted a law that has a mechanical license. That mechanical license has been around since 1909 and originally had to do with player pianos. But that mechanical license allows anyone to make a recording of a musical composition without permission and simply to pay the mechanical license instead. That used to be about 9 cents per song if it was under 5 minutes, and that's been changed, and we're going to a percentage, now, of revenue. But some fee for recording that music. And a composition owner has no right to exclude people from making at least a similar sounding version of the song.

     

      So that's composition copyright. When it comes to sound recordings, when someone records a composition, the sound recording is then -- there's right to that copyright in that sound recording. So every time someone buys an album or a CD or something like that, the performer or the owner of the sound recording copyright is entitled to payment for that. When it comes to radio play of sound recordings, the law in the U.S. is that the person who composed the song, or the people who composed the song, are paid a license fee but the performers are not paid. And so this is unlike other places in the world, but it means that performers don’t get paid for radio play with the original thought being that's promotion for them, and then they'll sale concert tickets or albums or that sort of thing.

     

      To complicate matters further, with the advent of digital music, the United States Congress has changed laws to allow for a sound recording copyright in performance of digital music—so performance over the internet. These sound recording rights, licenses have to be paid if music is played digitally over the internet. There's a mechanical license for sound recordings as well. So if you listen to a song on Pandora, Pandora has the right to stream that song, just like terrestrial radio would, but has to pay a mechanical -- it's like a mechanical sound recording license.

 

      On the other hand, for interactive digital services like Spotify or Apple Music, there is no compulsory license. So the owners of those performances and composition copyrights actually get to negotiate with Spotify and others—although that's been subject to some lawsuits—as to their rates.

 

      So one more complication I want to mention is that the Department of Justice has for a long time been interested in overseeing music licensing because of the blanket licenses from ASCAP, BMI, et cetera, now SoundExchange, there's a worry that these blanket licenses can be used to fix prices. And so the DOJ has for many, many years had consent decrees with the collecting agencies that govern the blanket license arrangements. The DOJ recently tried to interpret this latest sound -- I'm sorry, consent decree, so as to prevent fractional licensing. So when fractional licensing, when you have multiple owners of a work, some ability to -- or, I'm sorry, when you have a catalog that has multiple works, treating the works differently rather than having one single blanket license. The Second Circuit rejected the DOJ's interpretation. And so the DOJ is trying to impose certain ideas about regulation of music licensing through the consent decree. But that has been not always successful. So we have this background of the DOJ having the right to -- or having the consent decree as a method of leverage of the system. 

 

      The one more thing that I want to say is that the landscape has changed at least somewhat in recent years, at least when it comes to production of pop music. So as I mentioned earlier, we've gotten to a point where you might say there's a more distributed version of recording some songs. So nowadays, of course, the producer, the sound engineer, these people may be -- well, they always have been quite involved, but they continue to be very involved. And occasionally in the past, if their contributions were recognized by adding them to the composition, they could have some right to the revenue from licensing. But otherwise, they didn't get any rights to revenue for the work that they contributed. One of the bills that our guests will talk about would change that and allow them to be compensated.

 

      However, these days there're also a number of ways in which just the regular songwriting has become more distributed. So these days it's not unusual, in some cases, for one person to come up with the beat, another person to come up with the hook, someone else does the chorus, another person the bridge, the lyrics are written by a number of people, the melody is done separately, and all of this is brought together. And this kind of method of producing music and then distributing it has, in addition to the other things I mentioned, has kind of put some strain as to whether the current system has been able to keep up with the needs.

 

      So that's by way of background having hopefully kind of situated us some for the discussion, let me without further ado announce our speakers, and we will have them give their perspectives on these issues.

     

      So the first person who's going to speak is Mitch Glazier. He's President of the Recording Industry Association of America. The RIAA, as it's called, has announced that in January 2019, Mr. Glazier will become Chairman and CEO of RIAA. Mr. Glazier's been with RIAA since the year 2000. During his time there, he's managed the organization's Public Policy and Industry Relation teams; he's helped to advance a variety of initiatives that help the American music business transition to a fully digital industry.

 

      Before that, Mr. Glazier served as Chief Counsel for Intellectual Property to the Judiciary Committee of the U.S. House of Representatives. During his time as Chief Counsel for IP at the Committee, he played a role in drafting the No Electronic Theft Act, the Digital Millennium Copyright Act, and the Copyright Term Extension Act, amongst others. Mr. Glazier received a B.S. in Social Policy from Northwestern University and a J.D. from Vanderbilt University Law School. He served as a Law Clerk to the Honorable Judge Wayne R. Andersen for the United States District Court for the Northern District of Illinois, and he practiced law as a commercial litigator.

 

      After Mr. Glazier speaks, next will be Lawrence White, who is Robert Kavesh Professor of Economics at NYU Stern School of Business. His primary research areas of interest include financial regulation, antitrust, network industries, international banking, and applied microeconomics. Professor White has published numerous articles in the Journal of Business, Journal of Economic Perspectives, Journal of Economic Literature, Journal of Political Economy, American Economic Review, Review of Economics and Statistics, Quarterly Journal of Economics, and other leading journals in economics, finance, and law.

 

      Of particular relevance to this teleforum, he co-authored an article with Thomas Lenard titled "Moving Music Licensing into the Digital Era: More Competition and Less Regulation." Professor White has authored a number of books, and he's the co-editor of the Sixth Edition of the Antitrust Revolution.

 

      So I'm very pleased to be joined by two people with what should be very interesting perspectives and expertise on this issues. And without further ado, I will ask Mitch Glazier to begin his remarks.

 

Mitch Glazier:  Thank you, David, and thank you to The Federalist Society for having us. You know, as you were giving that introduction and background, even for those of us who are in it every day, it's reminder of how mind boggling this music landscape is. And it seems to be getting more and more complicated, especially as efforts get underway to try to simplify it. And as you mentioned, on the sound recording side, in 1995 there was the first digital performance right in the sound recording. And so there were no performance rights for terrestrial or digital play of sound recordings in the United States up until that point. Everything was left up to state law, which is the reason for one of the provisions that we'll discuss.

 

      But who knew in 1995 that we would be moving into an all-streaming world within 20 or so years. And at the time, if you go back and actually read the hearing transcripts in the House of Representatives at the hearings, members of Congress back then were talking about a quote/unquote "celestial jukebox;" that one day what if we listened to all of our music, and we didn't keep copies of it. What if you could just push a button and listen to any song you want at any time? And it sounded like a fantasy.

 

      But thank goodness that rights were put in place with mechanisms for ease of licensing on the sound recording side in 1995 and 1998 because anybody who has a smart phone knows that that's exactly what we do today. My kids barely know what a CD is. They subscribe to Spotify, and we also have Apple Music. They compare with their friends; they share playlists. It is a world of listening on-demand without retaining a copy, which means that that right of performance rather than the right of distribution that we have focused on since the 1930s and '40s is the right that is the most important going forward for the way that the market has evolved.

 

      On the composition side, the law that we're operating under is the law that was established in 1909 to create a license for those mechanical recordings which were written for piano rolls on player pianos. That's how old the law is. And so when you move into a streaming world where a streaming service has to license 40 million tracks to launch on the same day, and they have to get a license for the composition as well as the sound recording, you can imagine what it must be like to operate under a system that was created in 1909 on one side and 1995 on the other side.

 

      And so there has been a great deal of focus, mainly brought on by lawsuits, in the last several years between the technology and digital distribution community and the creative community—the producers and owners of the content—to try to figure out how to reach three goals: the protection of creative rights and fair compensation—that's the first. The second is the ease of licensing in a marketplace, as you mentioned, that is very broad. And then the third is business certainty—how do you limit liability to make sure that you can move forward knowing that if you follow the rules, you can operate a service efficiently.

 

      And as you just laid out, there are these three bills—one affecting a category of artists, one affecting services and composers and their publishers, and the third, music producers—that over a review by the House Judiciary Committee of about two and a half years and lots of reports from the Copyright Office, including stakeholder negotiations, have finally sort of risen to the surface. Together, they don’t solve all the problems, especially problems moving forward on data, which I think Larry will probably talk about. But it is a giant step forward in achieving each of those three goals.

 

      And so on January 8th, all parts of the music community came together. The unions for the performers, the musicians and the background vocalists, music producers and engineers, music publishers and songwriters, genre associations, everybody that you can imagine came together and decided that they would support putting together these different provisions for the different pieces of the community to try to move forward. And we did so in conjunction with our technology partners, including the digital music services and the members of the Internet Association and others because everybody now has a stake in resolving litigation, ease of licensing moving forward, preventing massive liability, but most importantly for us, protecting our rights and making sure that fair compensation can come.

 

      You mentioned one issue, David, that is not in this package, which is that the U.S. does not have a performance right for sound recordings for over-the-air broadcasts. That's an issue that we've been fighting for over 90 years now, and there are negotiations going on with broadcasters who are facing a future where less people will reach radio programming with an FM antenna. And as you mentioned, they do have to pay when the access to their programing is by digital means. And so we are having constructive negotiations with the broadcasters. It's on a separate track. But I just want to clarify that that issue is not part of these provisions that are moving forward that complement each other.

 

      The biggest piece is what's called the Music Modernization Act, which is making sure that on the composition side, a new collective can be formed so that those digital services that want to license all of those compositions, that have all of those joint songwriters that you mentioned can easily license all of them through one collective at a fair price so that they don’t have to go out and market every single owner separately, which would be a gargantuan task for the number of songs and the number of writers per song and the number of platforms per writer per song that they would have to license in the marketplace.

 

      So this provides a convenient mechanism for them to do so, but because it's a collective and because the rate is set by a copyright royalty board, which is a government entity, importantly—and this will apply across all of the licenses on the recording side and on the composition side as well—they want to make sure that in setting that rate, they have to look to the marketplace and use marketplace deals as a benchmark to provide that fair compensation element. So it was a balance. Let's make sure that we provide ease of licensing for the technology company and limit their liability, but let's also make sure that they have to pay a market-based rate to ensure fair compensation to the owners of the work. And that was sort of the balance that was part of the negotiation over the past three years that's now finally taken shape in the Music Modernization Act.

 

      And in the Classics Act that you mentioned, it's another quirk in the law where, because sound recordings were never even protected at all—even for distribution under federal law until 1972—and it's been left to the states before then, all of these older artists, especially Motown artists, are subject to protecting themselves under state law even when it comes to payment under a federal compulsory license. And so the Classics Act simply treats the pre-'72 works in the same manner that post-'72 works are treated. It really doesn't make sense that Pandora should stream a song and they would pay Taylor Swift for her performance but not Aretha Franklin for her performance. It's not as if they're not receiving value from each of those.

 

      And then, finally, you mentioned the AMP Act. This act sort of codifies a practice that's already occurring where a producer can more easily get paid from the sound recording collective called SoundExchange. If there's a contract between the artist and the producer and the artist gives a letter of direction saying, "I would like the producer paid from the royalties I would receive from these services," that producer can be paid directly, making it easier for the artist and for the collective, and it ensures fast transparent payment.

 

      So that's sort of the outline of the provisions on which there is this unprecedented coalition of groups supporting -- I can't remember the last time that technology companies, internet and music contribution companies, songwriters, artists, producers, record companies, publishers, unions, free-market groups, where this type of a coalition marched together asking for Congress to update the laws. So we're pretty excited about it. It certainly doesn't solve all the problems. But if the expectations are to make improvements and move forward and create incremental change, this really is a giant step forward.

 

Prof. David Olson:  Thank you, Mitch. Now we'll hear the perspective from Professor Lawrence White.

 

Prof. Lawrence J. White:  All right. Thank you, thank you, David. I was truly impressed by your overview, both in its comprehensiveness, although you did technically leave out the publishers on the creation side and the record labels on the performance side. But at the same time, the complexity, the arcaneness of everything that's going on, and a lot of it, as Mitch indicated, goes back to at least 1909. This is truly phenomenal.

 

      I liked Mitch's laying out of the goals, the protection of rights, the ease of licensing, the creation of business certainty. What I'm going to do, however, is propose I think a better way of getting there, and I will come back and talk a little bit about the Music Modernization Act. But let me -- David, you mentioned that I'm the co-author of this article on music licensing. It was published by the UCLA Entertainment Law Review. It's also available as a working paper on the NYU Stern site, where I am, and also on the Technology Policy Institute website, where my co-author, Thomas Lenard, is located. So anybody who wants to see in more detail the way Tom Lenard and I think about these problems, I encourage you to go find the paper.

 

      I think the right place to start, and when I first, with Tom, approached this area, I was truly surprised to discover there is not a comprehensive database that would tell anybody who was interested like somebody who wants to distribute music and needs to obtain the appropriate rights, there's not a comprehensive database to tell that distributor who owns what, whether it's on the composition side or on the performance side, and really there ought to be the comprehensive that encompasses both. That doesn't exist.

 

      Well, suppose you wanted to encourage more market transactions. Mitch mentioned a little bit about market transactions, but I'm going to go in farther. Suppose you wanted to encourage more market transactions, and be moving, trying to move away from regulatory actions that, in essence, take the place of and/or distort market transactions. The first place—and having just said that and since this is an event that's being sponsored by the federalists under the auspices of Federalist Society, I think what I just said ought to be -- oh, sorry I can't avoid it: music to the ears of the people who are tuning in.

 

      The first place you would need to start is a database that would have a listing of who owns what, essentially the music licensing equivalent of the local property records office that exists in real estate that would allow people to figure out who owns what. And so the place to start is trying to establish a database. Tom Lenard and I have some ideas about how to go forward with that. The Music Modernization Act sort of takes a little bit of a step in that direction because it only, as I understand it, only mentions mechanical rights rather than having more comprehensive, you know, all kinds of rights that relate to music.

 

      So getting a database. And then making sure the owners have the incentive to contribute their information to that database and trying to avoid the "gotcha" problem, which is a user, a distributor of the music, looks at the database, can't find a particular listing for a particular song, and then what does the distributor do? If the distributor goes forward and distributes the music anyway, the owner could then come forward and say, "Aha! You didn't get my permission." Well, Tom and I came up with the idea of basically a safe harbor, which would basically say if the distributor made a good faith effort to examine the database and a particular owner's rights weren't listed there, then the distributor could not subsequently be sued by the owner of the rights. That would provide I think a robust incentive for owners of rights to get their information into the database.

 

      All right. Once we got the database, then there's a question of we would otherwise expect to see now market-type transactions to start arising since now both sides—and especially the distributors—would know, "all right, who owns what?" But then there is the compulsory license. And once you have compulsory licensing regime where the owner basically can't refuse the licensing to the distributor, then there's got be a regulatory intervention because how else are rates going to be set in a world where the owner can't refuse. And so I would say we need to move away from compulsory licensing regimes and that is going to open up more market-oriented transactions. And unfortunately, the Music Modernization Act doesn't move in that direction. If anything, it is endorsing the compulsory licensing and the regulatory regime of the Copyright Rate [Royalty] Board, the CRB, as the way that those rates get determined.

 

      So if the Music Modernization Act does reduce the amount of litigation that's going on in related to the mechanical rights, that's progress. The idea that there's going to be some database, at least for mechanical rights, I guess that's progress. But it really worries me that we're not having a more comprehensive database. The legislation endorses the compulsory licensing and the CRB process that must then arise. Also, the question of whether this new collective that's being created, is that really the right way to go? We already have organizations, like the Harry Fox Agency, that handles mechanical rights. Do we need to see them pushed aside? I would say the MMA is possibly a modest step forward, but I worry that there may be some steps back as well.

 

      So let me stop there so we can have some more conversation and open up for Q&A.

 

Prof. David Olson:  Thank you very much, Larry. Those was very interesting points you raise. So I'm going to invite Mitch to give any responses he might have to that. And also as part of that, I'd be interested to know whether there've been discussions among the stakeholders during this process of some sort database approach or something. So, Mitch, we'd love to hear your thoughts on that.

 

Mitch Glazier:  Thanks. And this is one of those areas where finding the perfect is very difficult, which is why the Act is only amended every 100 years, I guess. And I find myself agreeing with Larry on many, many things, especially philosophically. And the Music Modernization Act is a very practical approach that I agree is not perfect but makes improvements even if it is not philosophically pure.

 

      I completely agree that in the best of worlds, you would not have any compulsory licenses, and you would not have any consent decrees. You would enforce the antitrust laws as they need to be enforced by bringing an antitrust case. But in the music world, it is not very practical because it would be very, very difficult for any businesses to be able to actually operate in that environment. Forget the sort of reason for the consent decrees, which I believe David mentioned, and the market power on a collective for songwriters, just in a pure marketplace where a Spotify or an Apple Music or a TIDAL or Amazon Prime or any of those are trying to operate actually going out and getting licenses from every copyright owner or joint copyright owner on the composition side. It's obviously much easier on the recording side, where you're dealing with companies instead of, many times, very small businesses or individuals. When you need to launch 40 million tracks because you don’t know what people are going to request and you wants lots of catalog available has proved to be a very, very difficult task.

 

      And so the compromise in this bill and on the recording side in current practice, although I admit it is not philosophically pure, is to combine those principles. The practical is that there will be a blanket license and ease of licensing so that you can go to one place and get everything you need without fearing litigation for violating people's rights. And then the balance for that to try to get towards that philosophical purity is that even though you then have to have a rate set for you, you have to make the benchmark for that rate—licensing deals that are done for on-demand services—which are done in the free marketplace, for example. And so it is not perfect. But I do think that it is a step in the right direction.

 

      The database issue is a very, very important one. And the hard part is to be a true, global, interoperable, transparent and accessible database with current content in it, it has to be dynamic and it cannot be done by the government. The government could never and should never try to create a database. It doesn't have a good history with databases. It could never be as dynamic and current as this database would need to be. And the regulations that would then surround that database and the access to that database, in our view, would make it quickly fail.

 

      But on the other hand, there is a need in the private marketplace, and lots of organizations are attempting it, and lots of tech contortions are working on it, to have a comprehensive database. The only thing that I would suggest other than I do think it's, as Larry said, an improvement in the Music Modernization Act that they have to establish, at least on the mechanical side, a database. The only other hope I would offer is that the light regulatory touch in the establishment of that database does allow them to start incorporating information that will be helpful on the performance side.

 

      So to the extent that the organizations, who are paying for that database, are willing to put in the name of the composers and which performing rights organization they are affiliated with, that could go a long way in establishing a marketplace and transparent and accessible database that contains all the information that you would need to relate to both the mechanical an performance side. It's not promised in the bill, but there is hope in the bill.

 

      And the only other thing that I would say is that in David's -- I'm sorry, in Larry's structure, I would never advocate that the incentive for owner, for the creator, in order to participate in any database be that they lose their rights if they don’t participate. I think that's not an incentive; that's punitive and it takes away from rights. If we were going to have some sort of database where we're actually trying to offer an incentive, it would be better to say if you do put your information into a database, and it's somewhere where the infringer could have seen it and ignored it and infringed anyway, then you have an automatic prima facie case for infringement, and the burden shifts. That would be an incentive to put it in the database not a punishment if you don’t put it in the database.

 

      So that's sort of my only quibble if you were going to talk about that particular structure. But I think a government structure is the wrong way to go anyway, and putting our hope into the market development with the incentive created by this Act, which again, has no guarantees, I think is a much better step forward.

 

Prof. Lawrence J. White:  Okay. David, can I say a few things?

 

Prof. David Olson:  Yes, of course. I thought you might.

 

Prof. Lawrence J. White:  First, Tom and I didn't advocate a government operator and creator of the database. The analogy to the local property records office, you know, has some attraction, and if we were having this conversation 40 years ago, the Copyright Office being a logical case for the database to be maintained. This was a time of greater confidence in government and more assured funding. It was a different world. We understand the world is different and so our vision would be that it would be a special non-profit organization with representations from the various aspects of music creation, recording, distribution. And at least one model is the organization that runs the barcode. They've been around now for about 40 plus years. They represent the manufacturing side as well as the distribution side. It seems to work pretty well. There are some analogies that could carry over. So it needn't be government, and there could well be some kind of non-profit organization.

 

      As far as the safe harbor, I think the importance -- that we need to provide some kind of incentive for owners of rights to get their information into that database, otherwise there's a "gotcha" problem. And Tom and I thought in terms of some kind of safe harbor for a distributor who's made a good faith effort to search the database and that particular set of rights weren't listed in the database. Now, maybe it's too harsh. Maybe there's an alternative that will provide enough of an incentive. The important thing is you can't let people stand back in the weeds and then jump out and yell, "gotcha!"

 

      The only other point I would make is, and Mitch was silent on this, we need to get away from the compulsory licensing because compulsory licensing, perforce, means there's going to have to be a regulatory body. And so we just -- if you believe in markets, then you've got to—and you believe in property rights—then having market determinations, not the forced regulatory determination that comes along with this compulsory licensing, that the distributor can of right license anything that the distributor wants. And the rights owner of the composition or the recording right must go along with that. For somebody who believes in markets, that's a world that we should be trying to move away from.

 

      The last point: you can still have blanket licensing in a markets-oriented world. How big your blanket is would depend on the size of your organization, et cetera, et cetera, but the idea of a markets-oriented world and to reduce transactions costs, an organization says, "For a specified fee, you have access to all of my rights, or we can negotiate a smaller package…" In a digital world, the possibilities I think are expanded as compared with the non-digital world of 40 or 50 years ago let alone 1909, where it would've been harder to have a markets orientation that didn't rely on the collectives, the ASCAP, being formed, and then BMI afterward, then by legislation SoundExchange coming into existence to deal with the recording rights. Yes, of course those organizations reduce transactions costs. But so does digitization, and we ought to be thinking more creatively about how markets can become more important in this space.

 

Prof. David Olson:  Thank you, Larry. This is definitely -- interesting things to follow up on as far as differences of opinion and perspective on the kind of extended transactions cost, how they can be solved. But before I ask a follow-up question, although I am tempted to do that, I want to make sure that we give enough time for people who've called in to be able to ask questions. So, Wes, I'll turn it over to you so that you can open the floor up for questions.

 

Wesley Hodges:  Wonderful. Well then, in a moment you'll hear a prompt indicating that the floor mode has been turned on for questions. After that, to request the floor, please enter the star key and then the pound key on your telephone.

 

Prof. David Olson:  Okay. Thank you, Wes. Why don't you just tell me if, at any point, when we have a question and we can go to that. If you have one immediately, we can start there. Otherwise, I'll ask a follow-up question now.

 

Wesley Hodges:  Sounds good, David. It looks like we do have one question in the queue. Would you like me to --

 

Prof. David Olson:  All right. Why don’t we start with that?

 

Wesley Hodges:  Wonderful. Moving to the first caller.

 

Tom Lenard:  Hi. This is Tom Lenard, Larry's co-author. Presumably, one of the motivations behind the Music Modernization Act is kind of dissatisfaction with the way things are currently operating, and particularly with the way the Harry Fox Agency and other similar organizations are doing their job. So, actually, my question is what reason do we really have to believe that the music collectives kind of certified by the government is going to do -- and operating essentially without competition. I mean, I understand there's an opportunity to change every five years, but that might prove to be cumbersome. What reason do we have to believe that that collective is going to do better?

 

Prof. David Olson:  Let me turn that over to Mitch, and maybe just offer that it might be interesting to talk a little bit more about how the benchmarking will work because I think for someone coming at it from a market perspective, there would be some concern about how do you make sure these rates remain market based if they're -- after almost all the transactions are going to go through the collective. So I think saying a little bit about the benchmarking might be helpful.

 

Mitch Glazier:  Sure. Hey, Tom. So Harry Fox operated not to administer the compulsory license, the mechanical compulsory license, but because rather the compulsory license didn't work and couldn’t work, since it was written in 1909, it actually created sort of a workaround where you could -- where it only represented 60 percent or so of the market. And you could, through Harry Fox, take care of a certain amount of mechanicals, and then potentially rely on the use of the compulsory license, which really didn't work for the others, which has produced all of these lawsuits, which proliferated once we got into the digital streaming world and people stopped doing what they used to do, which was an all-in license, where you would go to a record company and you would get a license, and the record company would do a pass-through, and that would cover the compositions as well. Once the digital streaming services came and didn't do pass-through licenses and negotiated directly with the musical work owners, those composition owners, the ensuing lawsuits really made it incredibly difficult for them to be able to make plans to go public or issue stock or to grow.

 

      And so the frustration, I think, grew with the uncertainty on one side and then the non-payment on the other side because under that compulsory license, what the services did was they filed what are called NOIs under Section 115 of the Copyright Act that basically said I can't find who all of these owners are of all of these works in the marketplace, and therefore I'm potentially not going to pay them at all. So under the system, which was this sort of Frankenstein mix of market and workaround and compulsory license all jumbled together in in a puzzle that didn't fit very well, you ended up having both litigation on one side, which increased vulnerability for the companies, and potential non-payment because you couldn’t find the writers on the other side, which meant not only would they not get a compulsory license rate, they wouldn’t get any compensation at all. And that produced the incentive for them to come together and work on this compromise, which, again, admittedly is not philosophically perfect.

 

      And it's hard to take the other side from Larry because I agree with him. I believe that in a perfect world there would be no compulsory licenses, and you could have hundreds of collectives that people would license and none of them would have so many that they would violate the antitrust laws. But I don’t think that on the performance side with restaurants, bars, small business, venues, et cetera, nor on the broadcasting side or on the mechanical side—so the digital services—I don't think that that posed a viable solution for that.

 

      So this compromise was created to basically get away from the Frankenstein element and to put in the design, a new collective, that would have a competitive process and could learn from organizations like SoundExchange that were built in the digital age that actually do have good comprehensive databases where people can access them and move forward.

 

      So, again, it's more practical than perfect, but I do think it's a vast improvement.

 

Prof. Lawrence J. White:  To me, the force of what you just said is yes, of course we need -- it could help to provide a little bit of a nudge towards the construction and building of this database. But getting some form of, I call it the safe harbor—and again, it's in the Lenard and White article—ought to solve much of the Frankenstein problem that you described. Get a database out there and get the incentive for the owners to be contributing their information into the database, and much of what you described goes away. Much of that litigation goes away. To me, that's what I get from what you just described.

 

Prof. David Olson:  All right. Thank you, both. Thanks to both of you. Wes, I just want to check if there's another question in the pipeline?

 

Wesley Hodges:  The queue is currently open so if anyone would like to ask a question before we end today, just enter the star key then the pound key.

 

Prof. David Olson:  Yeah, well, I'd just like to follow-up on one thing then. Very interesting discussion of a very complex topic, where one could do a two-day symposium on it that we're trying to cover some --

 

Prof. Lawrence J. White:  Hey, hey. Let's, you know, take it on the road and see how it plays in Topeka.

 

Prof. David Olson:  There we go. I'm from Kansas, so that's actually close to home for me.

 

Mitch Glazier:  There you go.

 

Prof. David Olson:  But I just -- you were taking on one aspect -- or taking on Larry's -- Tom's question, rather, I wonder if we could circle back and I'll just ask about the benchmarking because I find that particularly interesting, and I'd be interested in your perspective of how well you think that'll work.

 

Mitch Glazier:  I can tell you how it's worked on the recording side, which is a good analogy even though there is a compulsory license for non-interactive services, like SiriusXM or Music Choice or Pandora, iHeartRadio, those types of radio-like services that are on the internet --

 

Prof. Lawrence J. White:  But remember, even -- sorry, Mitch -- even there, there are two regulatory structures that apply even for those non-interactive services. So already we have regulatory complexity in there.

 

Mitch Glazier:  We do. We have a government-set rate for those non-interactive services, and the interactive services, the on-demand services, are in the marketplace. So on the sound recording side, the Copyright Royalty Board has to look to what deals were done in the marketplace on that interactive side, and then try to apply them to the non-interactive side, which was a little bit more difficult before the services started evolving and the marketplace started mixing them up.

 

      So today, Pandora has an on-demand service; it has a radio service; and it has a service in the middle. Spotify has a complete interactive on-demand service, but it also has a radio service. It has one that's ad supported; it has one that is subscription. So the marketplace deals that are done today for mixed services are usually done not through the compulsory license. They're done through direct deals in the marketplace. So despite the fact that Pandora could use the compulsory license for its radio service, because it's licensing an entire service that has different components, the entire service is licensed in the marketplace. The CRB can then look to that, and then it can use those rates to inform how it will set the rate for everybody else that is using the compulsory license.

 

      So I have to say that the marketplace has evolved to a point where the services have become complicated enough that the marketplace, and licensing in the marketplace, has become easier than trying to get different types of licenses for different components of their service. And so naturally and oddly, we have this compulsory license structure which provides the business certainty and the lack of liability. But most of the licensing itself, even for services that could use the compulsory license, are actually done in the marketplace.

 

Prof. David Olson:  I'm afraid that, well, I think that this conversation could go on in a very interesting way, we are at four o'clock. So, Wes, I believe that we could add Tom and Larry's paper to the webpage and as this becomes listed as a podcast on The Federalist Society page so that listeners are able to access that paper easily, and I may send you along one of my papers on the topic as well. So I'd invite you to do that, and I'll turn it over to you to close. But I'd just like to thank very much, Mitch Glazier and Larry White and his co-author calling in, Tom Lenard, for this really interesting discussion. I know your time, you're both very busy, but we've really benefited from the expertise and experience that you brought to this teleforum.

 

Prof. Lawrence J. White:  Well, thank you for moderating, David. Thank you very much.

 

Mitch Glazier:  Thank you for having us.

 

Wesley Hodges:  Thank you, David. We will certainly promote those papers on our website. Just want to inform everyone this has been recorded as a podcast and you'll see it posted very soon. You'll also see a repository of all of our previously recorded teleforum. I highly encourage you to check those out.

 

      So on behalf of The Federalist Society, I'd like to thank our speakers for the benefit of their valuable time and expertise today. We welcome all listener feedback by email at [email protected]. Thank you all for joining us. This call is now adjourned.

 

Operator:  Thank you for listening. We hope you enjoyed this practice group podcast. For materials related to this podcast and other Federalist Society multimedia, please visit The Federalist Society's website at fedsoc.org/multimedia.