4) Music Licensing Primer

4 Music Licensing Primer

4 Music Licensing Primer

Music licensing is an extremely important tool for musicians and copyright owners ( rightsholder ) to exploit the marketability of a musical work. As only authors and rightsholders may exploit a musical work, any third party that intends to use the copyrighted work for a purpose that falls under 17 U.S.C. § 106⁷²¹will need to obtain a license from rights holders to use the work.⁷²² For example, if a TV show wanted to play a certain sound recording in an episode, the company producing the TV show would need to obtain a synchronization license from the rightsholder(s) to perform the sound recording in the episode.⁷²³ In discussing the background on our research topic, we also decided to include a primer on music licensing to provide basic information on:

Types of music licenses;
Approaches to licensing;
Territorially-restrictive licensing; and
Licensing costs and issues.

Though music licensing is an important tool for rightsholders to exploit their music, it is also very difficult for rightsholders (licensors) and users (licensees) because of a lack of coordination and information.⁷²⁴ Rights holders are unlikely to have the resources to track down every use of their music, and intended users may not understand how, when, and who to contact about licensing.⁷²⁵ This is where collective management organizations (CMOs), such as the American Society of Composers, Authors, and Publishers (ASCAP), the Society of Authors, Composers and Publishers of Music (SACEM), and the Harry Fox Agency, become particularly important.⁷²⁶ CMOs play the role of intermediary between the rightsholder and user, ensuring that licenses are being followed while collecting and distributing royalties to rightsholders.⁷²⁷

4.1 Music License Typology

The most common types of music licenses are:

mechanical,
synchronization,
public performance, and
print.⁷²⁸

Mechanical licenses are licenses from the copyright owner for the right to reproduce and distribute a musical work in a recording (e.g., CDs, tapes, digital con gurations).⁷²⁹ Synchronization licenses are licenses from the copyright owner for the right to synchronize the performance of a musical work with visual images.⁷³⁰ Public

⁷²¹Assuming copyright defenses are not raised

⁷²²Do I need a music license? - Easy Song Licensing. url: https://www.easysonglicensing.com/pages/help/articles/musiclicensing/do-i-need-a-music-license.aspx (visited on 10/17/2019).

⁷²³Ibid.

⁷²⁴Bodó, Gervais, and Quintais, “Blockchain and smart contracts”; KEA European Affairs. “Licensing music works and transaction costs in Europe”. Study. KEA European Affairs, Sept. 2012, pp. 1”72. url: http://serci.org/congress_documents/2013/ranavoson.pdf.

⁷²⁵Christian Handke and Ruth Towse. “Economics of Copyright Collecting Societies”. In: IIC International Review of Intellectual Property and Competition Law 38 (July 2008). doi: 10.2139/ssrn.1159085.

⁷²⁶What is a Collective Management Organization? (CMO). en. publisher: Songtrust. url: https://help.songtrust.com/knowledge/what-is-a-collective-management-organization-cmo (visited on 10/17/2019).

⁷²⁷Ibid.

⁷²⁸Types of Music Licenses. publisher: Musicbed. url: https://www.musicbed.com/knowledge-base/types-of-music-licenses/28 (visited on 10/17/2019).

⁷²⁹Types of Music Licenses.

⁷³⁰Ibid.

performance licenses are licenses from the copyright owner for the right to perform the musical work in public settings.⁷³¹ Print licenses are licenses from the copyright owner for the right to print their musical composition in a print format such as sheet music, folio or collection.⁷³²

4.2 Licensing Approaches

In the music industry, there are two general licensing approaches:

licensing on a collective basis (collective licensing), and
licensing on an individual basis (individual licensing)⁷³³ ⁷³⁴

Collective licensing is the most popular form of licensing, wherein musicians will give certain rights to their works to a collective management organization (CMO), that will negotiate licensing fees, collect & distribute royalties, and monitor use of copyrighted works on the rightsholder’s behalf.⁷³⁵ The most popular CMOs for performance royalties are ASCAP, SACEM, and PRS for Music.⁷³⁶ In addition to CMOs for performance royalties, there are also CMOs for mechanical royalties, such as the Harry Fox Agency.⁷³⁷ In contrast to collective licensing, individual licensing is when rightsholders directly negotiate with users on the terms of use for their music.⁷³⁸

Collective licensing is the dominant approach because CMOs enable markets where rightsholder cannot directly interact with users, which is generally the case in the music industry.⁷³⁹ CMOs play such a prominent role in music licensing because they reduce the administrative costs associated with the complexity of licensing copyrighted works.⁷⁴⁰ The administrative costs for rightsholders are:

negotiating license fees,
collecting royalties,
stopping infringements, and
monitoring use of copyrighted works among multiple and different types of users.⁷⁴¹

While the administrative costs for users are:

identifying rightsholders, and
avoiding conflict with rightsholders.⁷⁴²

CMOs provide economies of scale for the administrative costs of rightsholders and users when the two following conditions are met:

licensees are identical, i.e., the same information needs to be investigated for each licensee; and
when average costs fall as the number of works increases indefinitely.⁷⁴³

⁷³¹Ibid.

⁷³²Ibid.

⁷³³Also known as direct licensing or transactional licensing.

⁷³⁴The New Paradigm in Music Licensing. url: http://www.nprex.com/FAQ.aspx#question-2 (visited on 10/17/2019).

⁷³⁵Frederic Haber. The Evolution of Collective Licensing. en-US. url: https : / / www . copyright . com / blog / evolution -collective-licensing/ (visited on 10/17/2019).

⁷³⁶Liane Bonin Starr. ASCAP, BMI, SESAC: The Guide to PROs. en. url: https://blog.songtrust.com/songwritingtips/pros-whats-the-difference (visited on 10/17/2019).

⁷³⁷Rosenblatt, Watermarking Technology and Blockchains in the Music Industry.

⁷³⁸The New Paradigm in Music Licensing.

⁷³⁹Handke and Towse, “Economics of Copyright Collecting Societies”.

⁷⁴⁰Ibid.

⁷⁴¹Ibid.

⁷⁴²Handke and Towse, “Economics of Copyright Collecting Societies”.

⁷⁴³Ibid.

4.2.1 Blanket Licensing Model

The primary licensing model employed by CMOs is a blanket license.⁷⁴⁴ A blanket license is a license that bundl[es] the entire repertoire and then charges users a price depending on the intensity of their use. ⁷⁴⁵ Blanket licensing is administratively e cient because it spares market participants the costs of negotiating the exact size of the bundle of rights and its price for every transaction. ⁷⁴⁶

Ruth Towse identi ed the main di erences between transactional licensing and blanket licensing in The Economic E ects of Digitization on the Administration of Musical Copyrights. In transactional licensing, every transaction is itemized and valued, which gives greater transparency and clearer market signals that users are interested in the work.⁷⁴⁷ In blanket licensing, the user pays set rates for the whole repertoire and revenue is distributed to members based on the quantity of a work’s (within their repertoire) usage.⁷⁴⁸

4.2.2 Compulsory Licensing Model

Under the US Copyright Act of 1976 and amendments thereto, compulsory licenses are pre-negotiated, statutorily created licenses that allow specific uses of a copyrighted work if certain conditions are met, without the permission of the rightsholder.⁷⁴⁹ Statutory exemptions to rights under copyright in 17 U.S.C. § 106 can be found in multiple sections in the U.S. Copyright Act, including 17 U.S.C. 110, 112, 114, and 115. For example, under Section 115 of the US Copyright Act, after a songwriter has released the first sound recording of their song, a compulsory mechanical license is automatically granted for subsequent sound recordings, thus allowing for the creation of cover songs.⁷⁵⁰

Under Sections 112 and 114, an organization may obtain a compulsory license to digitally transmit a sound recording to the public, under the limitation on exclusive rights specified by Section 114(d)(1)(C)(iv) or under a statutory license in accordance with Section 114(f). ⁷⁵¹ Under Section 112, an organization may obtain a compulsory license to make one ephemeral recording (i.e., make and keep a copy of the sound recording) of a sound recording, if a Section 114 compulsory license has been met.⁷⁵²

To obtain a compulsory license, a user needs to (1) serve a timely Notice of Intention to Obtain a Compulsory License (NOI), either on the copyright owner or on the Copyright Office if the identity or address of the copyright owner is unknown; and (2) when the copyright owner is known, make monthly royalty payments and provide monthly statements of account to the copyright owner. ⁷⁵³ The traditional NOI for compulsory mechanical licensing was recently amended with the passage of the Music Modernization Act (MMA).⁷⁵⁴

4.2.3 Creative Commons Licensing Model

Creative Commons (CC) licenses are a suite of public copyright licenses developed by the Creative Commons, a U.S. nonprofit, that are geared towards rightsholders who desire to make their works accessible, easily distributed, and usable by members of the general public.⁷⁵⁵ CC licenses are generally applicable to any copyrighted work, but

⁷⁴⁴Ibid.

⁷⁴⁵Ibid.

⁷⁴⁶Ibid.

⁷⁴⁷Ruth Towse. “The Economic Effects of Digitization on the Administration of Musical Copyrights”. In: Review of Economic Research on Copyright Issues 10(2) (2013), pp. 55”67. url: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2381882.

⁷⁴⁸Ibid.

⁷⁴⁹Compulsory License. en. url: https://www.law.cornell.edu/wex/compulsory_license (visited on 10/17/2019).

⁷⁵⁰Compulsory Mechanical Licensing Law - Easy Song Licensing. url: https://www.easysonglicensing.com/pages/help/articles/copyright-law/compulsory-law.aspx (visited on 10/17/2019); Circular 73 Compulsory License for Making and Distributing Phonorecords. url: https://www.copyright.gov/circs/circ73.pdf.

⁷⁵¹U. S. Copyright Office. Section 112 and 114 - Notice of Use of Sound Recordings | U.S. Copyright Office. eng. Web page. url: https://www.copyright.gov/licensing/sec_112.html (visited on 12/19/2019).

⁷⁵²Ibid.

⁷⁵³Compulsory Mechanical Licensing Law - Easy Song Licensing; Circular 73 Compulsory License for Making and Distributing Phonorecords.

⁷⁵⁴Supra Section 3.2.1.

⁷⁵⁵About The Licenses - Creative Commons. url: https://creativecommons.org/licenses/ (visited on 10/17/2019); What We Do. en-US. url: https://creativecommons.org/about/ (visited on 10/17/2019).

are preferred for creative works (art, books, etc.), and are drafted to be amenable to any copyright framework.⁷⁵⁶ CC licenses can be commercial or noncommercial, and generally deal with three types of permissions:

attribution,
adaption, and
redistribution.⁷⁵⁷

CC licenses present advantages for those who want to make their works accessible to the public because CC licenses, specifically the CC Attribution-ShareAlike license, offers the option of controlling future licensees down the road to the same terms as the original licensee for derivative works.⁷⁵⁸

The current CC license suite is comprised of six licenses, with varying degrees of openness:

Attribution (CC BY),
Attribution-ShareAlike (CC BY-SA),
Attribution No-Derivs (CC BY-ND),
Attribution Non-commercial (CC BY-NC),
Attribution-NonCommercial-ShareAlike (CC BY-NC-SA), and
Attribution-NonCommercial-NoDerivs (CC BY-NC-ND).⁷⁵⁹

Attribution (BY) requires that licensees credit the licensor for all uses of the copyrighted work.⁷⁶⁰ShareAlike (SA) requires that the licensees distribute derivative works under identical terms to the license governing the copyrighted work.⁷⁶¹ Non-commercial (NC) requires that licensees do not use the copyrighted work for any non-commercial purposes.⁷⁶² NoDerivs (ND) requires that the licensee does not make a derivative work from the copyrighted work.⁷⁶³

CC licenses are comprised of three layers:

legal code,
human readable, and
machine readable .⁷⁶⁴

The legal code is the traditional legal language involved in licensing.⁷⁶⁵ The human readable layer is a summary of the legal code intended for non-legal audiences.⁷⁶⁶ The machine readable code is a summary of the legal code formatted for software (primarily web services) to know that a work is licensed under a CC license under the standardized CC Rights Expression Language (ccREL).⁷⁶⁷ ccREL is a means of expressing copyright licensing metadata based on the WorldWideWeb Consortium’s (W3C) resource description framework (RDF) and eXtensible Markup Language (XML), and can be embedded in various le types.⁷⁶⁸

⁷⁵⁶About The Licenses - Creative Commons.

⁷⁵⁷Ibid.

⁷⁵⁸Ibid.

⁷⁵⁹Ibid.

⁷⁶⁰Ibid.

⁷⁶¹Ibid.

⁷⁶²Ibid.

⁷⁶³Ibid.

⁷⁶⁴Ibid.

⁷⁶⁵Ibid.

⁷⁶⁶Ibid.

⁷⁶⁷About The Licenses - Creative Commons.

⁷⁶⁸Hal Abelson et al. ccREL: The Creative Commons Rights Expression Language. Tech. rep. Creative Commons, Mar. 2008. url: https://wiki.creativecommons.org/images/d/d6/Ccrel-1.0.pdf.

4.3 Territorially-restrictive Licensing

Neil Conley in The Future of Licensing Music Online: The Role of Collective Rights Organizations and the Effect of Territoriality discussed the inefficiencies of CMO reciprocal agreements that include territorially-restrictive clauses, stating that such licenses are inefficient in an online music marketplace because transactions over the internet are inherently cross-border.⁷⁶⁹

CMOs enter into reciprocal agreements with foreign CMOs to collect royalties, and distribute their repertoire, on the CMO’s behalf in the foreign CMOs territory.⁷⁷⁰ Additionally, Conley highlighted four major issues with territorially-restrictive licenses imposed by CMOs⁷⁷¹ that lead to inefficiencies, summarized in the list below:

online music providers can infringe CMO’s reciprocal agreement with a foreign CMO by foreign users accessing music in a foreign territory subject to the foreign CMOs control;
online music providers can infringe copyright holder’s public performance right in a foreign jurisdiction by allowing a foreign person access to the music in the foreign jurisdiction without obtaining permission from the copyright holder to perform songs in the foreign jurisdiction;
online music provider infringes foreign CMO right to collect royalties and distribute repertoire in foreign jurisdiction on behalf of native CMO; and
online music provider breaches their blanket license with CMO when music is accessed in a foreign territory.⁷⁷²

Conley proposed many reasons why territorially-restrictive clauses remain in reciprocal agreements, in particular, that CMOs receive a large portion of their revenue from licensing their repertoire, and charge administrative fees⁷⁷³.

4.4 Licensing Costs and Issues

For our research topic, we organized the licensing costs and issues into four categories, some of which were described in the Literature Review.⁷⁷⁴ The four categories of issues are:

transactional costs,
membership costs,
multi-territorial issues, and
contract management issues.

The first category of issues can be categorized as transactional costs. Transactional costs identified by Bodo et al. were:

“identifying and matching rights holders and users,
the high costs of monitoring use,
the costs of enforcement, and

⁷⁶⁹Neil Conley. “The Future of Licensing Music Online: The Role of Collective Rights Organizations and the Effect of Territoriality”. In: John Marshall Journal of Computer & Information Law 25.3 (2008), pp. 40986. url: https://repository.jmls.edu/cgi/viewcontent.cgi?article=1013&context=jitpl.

⁷⁷⁰Ibid.

⁷⁷¹Named Collective Rights Organizations (CROs) in the paper.

⁷⁷²Conley, “The Future of Licensing Music Online: The Role of Collective Rights Organizations and the Effect of Territoriality”.

⁷⁷³lbid. (There is uncertainty over what kinds of administrative services are actually being performed).

⁷⁷⁴Supra Section 1.

the complexities of setting the price and negotiating the terms of use.”⁷⁷⁵

Ex ante transaction costs (costs before a transaction is concluded) identified by KEA for online music service providers includes:

“[i]dentification costs, which correspond to all the costs incurred to identify and find the rights owners”; and
[n]egotiation costs, which correspond to all the costs incurred between identification and the actual agreement.”⁷⁷⁶

Ex post transaction costs (costs after a transaction is concluded) identied by KEA for online music service providers include identifying repertoire and uses for reporting and invoicing purposes.⁷⁷⁷

The second category of issues can be categorized as collective management organization (CMO) issues, which we define as membership costs. Handke and Towse identified the three following membership costs:

membership fee,
revenue distribution, and
few if any alternatives to joining a CMO.⁷⁷⁸

The third category of issues can be categorized as multi-territorial issues. Multi-territorial issues include:

multiple copyright frameworks, and
territorially-restrictive licenses in a digital market context.⁷⁷⁹

The fourth category of issues can be categorized as contract management issues. Contract management issues include:

how contracts should be stored and audited;
parties not fulfilling obligations under the agreement;
poor communication between the parties;
hidden risks in a contract; and
hard to find the important information in the contract.⁷⁸⁰

⁷⁷⁵Bodó, Gervais, and Quintais, “Blockchain and smart contracts”.

⁷⁷⁶Affairs, “Licensing music works and transaction costs in Europe”.

⁷⁷⁷Ibid.

⁷⁷⁸Handke and Towse, “Economics of Copyright Collecting Societies”.

⁷⁷⁹Handke and Towse, “Economics of Copyright Collecting Societies”.

⁷⁸⁰Top 8 Challenges in Contract Management. en-us. Mar. 2018. url: https://www.intelligentcontract.com (visited on03/19/2018).