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Copyright law and the CRB: What went wrong?

Posted on: 03/16/2007

Given the ruinous rates and terms laid down by the Copyright Royalty Board last week, many RAIN readers have been asking, what are the options available to webcasters? They include negotiating, appealing to the courts, asking for legislative relief, and, perhaps in combination with some or all of those efforts, asking for help from listeners.

But before that process begins, I think it might be useful to take a few steps backward and look at how we arrived at this potentially fatal situation.

The purpose of copyright law

Stanford Law professor and copyright expert Lawrence Lessig (pictured right) writes, "Copyright has never accorded the copyright owner complete control over all possible uses of his work.  Its purpose instead is to secure a limited monopoly over certain ways in which creative work is exploited, so as to give the authors (i.e., composers and performers) an incentive to create, and thus, in turn, to ‘promote the Progress of Science‘."

In fact, it’s beyond argument today that the U.S. copyright laws recognize no absolute right in authors to prevent others from copying or exploiting their work. Rather, copyright laws grant authors limited rights in their works solely to an extent that Congress believes that creation and dissemination of their works are encouraged.  In the long term, authors’ intents and interests have always been secondary to that of the public.

Copyright law and music
Congress’ intent to encourage the creation and dissemination of musical works is based on those principles.  Congress has wanted to insure that composers have an incentive to keep composing and performers have an incentive to keep performing, but also that third parties (i.e., those individuals and companies that disseminate those works to the public in new forms (e.g., Pandora)) would have an incentive to keep innovating — in each case, remember, primarily not for those individuals’ own good, but rather for the good of the public.

So, to that end, Congress over the past decades has seen fit to grant composers and performers a certain limited number of monopoly rights. Not unlimited rights, mind you, but enough to motivate them to keep composing and performing.

For example, in the case of composers, one of the monopolies that Congress granted them was a monopoly for a certain period of time to decide who could record their compositions — specifically, they may determine the first person who may record it. However, Congress did not grant composers any additional monopoly rights in this regard thereafter; once that first performer has recorded it, any other performers are also free to record the song. The composer may get some cash compensation for it (e.g., if it’s recorded on a CD or published as sheet music) and may benefit from the promotional value of the performances of it (e.g., more sheet music will be sold), but they were absolutely not granted unlimited control of their output.

Of course, Congress could have granted composers additional monopoly rights regarding who could perform their songs. But they didn’t. Congress felt that the bundle of various monopoly rights they did give should be enough to motivate composers to keep composing.

Copyright law and sound recordings
Now let’s look at sound recordings. (We’ve covered this several times before in RAIN, but I’ll clarify here parenthetically: When Rod Stewart records Cole Porter’s "Night and Day," there are two different creative works involved — the song (lyrics and notes) and the performance of it (as captured on that recording). We’re now talking about the latter — the sound recording.)

In the early days of cylinders and 78 RPM discs and so forth, state copyright laws granted owners of the master recordings various rights to manufacture and sell them, but it was an open question as to whether radio stations had the right to play those recordings.

In fact (as I was reminded recently in the excellent book "Something in the Air" by the Washington Post‘s Marc Fisher), top crooners of the era like Bing Crosby (pictured) and Paul Whiteman stamped "Not Licensed for Radio Airplay" on their records andbing hired lawyers to try to sue the radio stations that played them.

However, a federal court ruled in 1940 that once a record was sold, the buyer had the right to use it in any manner he liked, including broadcasting it on the radio. In other words, the court determined that there were no copyright laws in effect that had granted that particular monopoly right (the right to control who plays it on the radio, sometimes called a "public performance" monopoly right) to the performer. Recording artists had been granted several rights by Congress, the court concluded, but not that one. Thereafter, radio stations knew they were free to play the records they wanted to play.

And the relationship between recording artists and radio stations turned out to be a virtuous one! When radio stations played a Bing Crosby record, its sales didn’t go down (as he was apparently afraid they might), they soared!

A healthy economy developed in which record companies and recording artists encouraged radio stations to play their records, knowing they’d mutually benefit. (In fact, record companies eventually went on to hire huge promotional staffs and establish huge budgets for things like trade publication ads and independent promotion companies to encourage more radio stations to play more of their recordings more and more often.)

Had Congress believed that record companies and performers were at risk of not being motivated enough to make enough recordings to serve the interests of the public, Congress could have granted additional monopoly rights (i.e., a "public performance" monopoly right for those sound recordings). But Congress in its wisdom realized that the performers were already adequately motivated to serve the public interest, and thus did not those grant additional rights.

In fact, it wasn’t until 1972 that Congress, for the first time, offered any kind of federal copyright protection for sound recordings at all. (Prior to that, as noted above, the right to sell reproductions were covered by a patchwork of state copyright laws.)

Four years later, the Copyright Law of 1976 (also here) established that there was a monopoly right to "public performance" for certain types of copyrighted material, but not for sound recordings. Why not? Not to keep hammering this home, but it was because Congress apparently believed that record companies and recording artists were already sufficiently motivated to keep creating enough sound recordings to satisfy the public good.

(Note: Somewhere in this section of this article, I’ve jumped from talking about the copyright owner of a performance being the performer to being the record label, since record labels deals with performers generally establish the label as the copyright owner.)

From the record company’s perspective
If you’re Clive Davis or Andrew Lack
running a record label, though, you might instinctively view this whole situation from a different perspective. You might think, "I paid for the making of these recordings. They’re my property! They should be mine to do with as I please!"

But that’s not historically correct. Historically, you started out with no rights at all. Anyone could copy or use anything you created for any purpose whatsoever that they desired. But government eventually realized that the public would benefit if the government granted you certain monopoly rights for a limited period of time. You’d be motivated to produce more art. And the public would benefit.

So government, using the mechanism called copyright law, gave you certain rights: For example, the government gave you a monopoly right, for a limited period of time, to determine who could use your recordings in TV commercials or in films, or put your best songs on a compilation disc and sell them, or use your album cover art on t-shirts. Those are all specific monopoly rights that legislators decided to grant you.

But they didn’t grant you monopoly rights over radio airplay! The government felt it was unnecessary. Copyright law is designed to balance rights and freedoms for both copyright owners and copyright users, in such balance to maximize the benefit to the public. Congress felt that they had given you, Clive or Andrew, a sufficient number of rights to keep you motivated to keep making recorded music.

If you’re Clive or Andrew, you may know this intellectually, but nonetheless, you may not be happy about it. You still have that "It’s mine, I should be able to do anything I want with it " feeling.

Enter digital
Now let’s jump forward to 1995. Technology is changing. Music is now being delivered to consumers in digital, as opposed to analog, form (i.e., on CDs) and is about to be transmitted in digital form on cable TV systems (DMX, MusicChoice, and Muzak) and via satellite radio (XM and Sirius).

Having had this "It’s mine, I should be able control it" feeling bugging you for years (remember, as far back as the 1930s!), the RIAA (Recording Industry Association of America) lobbied Congress to pass a law called the "Digital Performance Right in Sound Recordings Act (DPRA)."

Here was the RIAA’s argument: Digital transmissions of music were about to allow consumers to make a "perfect digital copy" of the music being transmitted. Those perfect copies were going impact revenues for recording artists horribly — so horribly, in fact, that they might lack sufficient motivation to record music thereafter. Given that nightmare scenario, the RIAA asked Congress for an additional monopoly right regarding the "public performance" of sound recordings when a digital transmission was involved.

Congress bought it. (In defense of legislators, the RIAA was very early on the curve here, and there was no organized "other side" to raise any effective objections.)

However, Congress did somewhat limit the new monopoly they granted the copyright owners by adding a "statutory" license, so that the music services wouldn’t have to negotiate on a song-by-song basis for each song they wanted to play. As for compensation to the copyright owner, Congress instructed the copyright owners and the copyright users to negotiate a royalty rate among themselves, but, if that failed, Congress instructed the Copyright Office to set up an arbitration panel called a CARP that would hold hearing to determine a royalty rate.

Congress also established the four criteria ("policy objectives") the CARP should use, if a CARP was needed at all, to set the royalty rate —

(A) To maximize the availability of creative works to the public;

(B) To afford the copyright owner a fair return for his creative work and the copyright user a fair income under existing economic conditions;

© To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication;

(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

These four criteria are spelled out in Section 801(b)(1) of the Copyright Act, by the way. You may in upcoming weeks hear people talking about "the 801(b)(1) standard" and now you’ll know what they’re talking about.

Note that those four criteria are perfectly in keeping with the general concept of copyright law — motivating both creators of artistic works (performers) and users of those works (music services) to keep doing what they do, with the ultimate beneficiary being the public.


Enter the DMCA
The Digital Millennium Copyright Act of 1998
(the "DMCA") (also here) contained a whole bundle of new provisions to add new protections and rights for various copyright owners, including the RIAA, the MPAA, vessel hull designers, and computer software firms.

Within that law, the RIAA got webcasting added as a form of digital transmission that would be covered by a "public performance" copyright. (However, somewhere in this process, the NAB (National Association of Broadcasters) got an exception inserted for HD Radio; although it’s a digital transmission of music, it was specifically excluded from this monopoly right.)

The DMCA also changed the standard under which a webcasting CARP, if one proved necessary, was supposed to determine the appropriate royalty rate.

The new standard was simpler:

The copyright arbitration royalty panel shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.

There were some additional factors the CARP was instructed to look at, but only to help determine the appropriate "willing buyer / willing seller" rate.

Additional language in the law permitted the sellers — i.e., the major record labels — to license their songs as a group without running afoul of antitrust laws.

Since the "willing buyer / willing seller" rule requires a willing seller, and the sellers can operate as a cartel (I’m using the term colloquially here) but the buyers can’t, this effectively, I believe, means "whatever the labels feel like."

Which is a quite different standard than the 801(b)(1) standard, which cared about balancing the opportunities for both copyright owners and copyright users, etc.

(Incidentally, Congress, unhappy with the outcome of the CARP processes, in 2004 enacted a law called the "Reform Act" that replaced the trio of arbitrators with a trio of judges (the "Copyright Royalty Board" (CRB), photo above). But pretty much everything else stayed the same.)


Where we stand today
So here’s where we stand today based on the specific bundle of monopoly rights that Congress has granted the various factions:
  • Copyright owners of sound recordings have not been granted any rights to control which AM, FM, or HD radio stations play their recordings, because Congress felt that the copyright owners had enough other rights to keep them motivated to keep making records.

However, because of an alleged nascent threat of consumers being able to make "perfect digital copies" of songs transmitted digitally, Congress granted record labels a new monopoly right to control who plays their recordings, meaning effectively that…

  • Satellite radio has to pay a royalty for the use of sound recordings, with a rate being set by an arbitration panel based on several criteria that are designed to be balanced to benefit, overall, the public. (That rate is not public knowledge, but is estimated by stock analysts to be about 3.5% of industry revenues.)

  • Internet radio also has to pay a royalty for the use of sound recordings, but its rate is set by a trio of judges based on a single criterion that can, in my reading, anyway, be interpreted as "almost whatever the labels feel like."

And thus we end up with a situation in we’re in right now, in which a trio of judges granted the copyright owners a royalty rate from Internet radio that is effectively, I believe, more than 100% of the total industry’s revenues!

(I think this proves my point that the "willing buyer / willing seller" rule, when the sellers can operate as a group, works out to "whatever the sellerse feel like." It turns out that what the sellers feel like is "every penny you have…and more.")

So what do we do next?
Clearly the process
has spun off the rails. Particularly if the CRB decision drives Internet radio off the air, the public clearly doesn’t benefit, meaning that the purpose of copyright law is not being served.

The purpose of Congress granting copyright protections is supposed to be to maximize the availability of creative output to the public. In other words, from the copyright owner’s side, it’s supposed to encourage bands like Clap Your Hands Say Yeah to keep recording music, and from the copyright user’s side, it’s supposed to encourage the development of new services like radio station’s Internet simulcasts and "B" channels and LAUNCHcast and AccuRadio and Live365 and Radio Paradise and Pandora. When both sides are doing what they do, the public benefits. Copyright law is not supposed to shut down an entire industry.

There were two moments, historically, where things went wrong:

First, the logic that the RIAA gave Congress as the rationale for getting a performance royalty for sound recordings in the DPRA was faulty from the start. The lobbyists used a deceptive term — they said a "perfect digital copy" was going to be available to consumers. In fact there’s nothing "perfect" about the audio quality of an Internet radio stream at all.

For streaming to work, webcasters stream music at much lower than CD quality. The term lobbyists should have used was "exact" copy, but it would have been a hard sell to Congress to claim that the potential availability of "exact" copies of mediocre-quality streams of music was going to seriously jeopardize music sales — particularly to the point where there was a risk that recording artists were going to quit recording. "Perfect digital copies" sounded a lot more threatening.

Second, the change in instructions to the CARP in 1998’s DMCA — from the four public policy-based criteria used for the other services’ CARPs (the "801(b)(1)" standard) to the "willing buyer / willing seller" standard for the webcasters’ CARP — has led to decisions, two out of two times (!), that may be potentially enriching for one of the sides but that clearly aren’t in the public interest.

In the words of the great composer and lyricist Johnny Mercer, "Something’s gotta give, something’s gotta give, something’s gotta give!"

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I welcome your comments about this article or on this topic in general. Use the feedback form that you’ll find lower on this page or write me at kurt@kurthanson.com



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