Moses Supposes – October 2006

Industry information that you can actually use.

-- Lawyers In Love: Diversity And Inside Information Revealed At ABA Conference In Los Angeles

-- The Eagles sing duet with Wal-Mart Executives?

-- FEATURE STORY: Feds Throw Publishers & ASCAP/BMI into The Dog House: New Ruling Could Cost Songwriters Billions

FEDS THROW PUBLISHERS & ASCAP/BMI
INTO THE DOG HOUSE WITH RINGTONE RULING
===============================================================
New Copyright Register Decision Could Radically
Cut $1 Billion A Year in Ringtone Revenue.

By Moses Avalon

www.MosesAvalon.com

Picture two grumpy old men kvetching over how to best divide a quarter they found in the street. They ask a cop to help them decide and he arrests them both for loitering. That's sort of what you have here.

For years, music publishers have been arm-wrestling with record companies with respect to mastertone revenue. (A mastertone is a ringtone that uses a sound-recording, as opposed to a mono or polyphonic melody created synthetically.) A mastertone that sells for $3.00, record companies claim only nets about 32 cents after they pay out all their high-risk overhead. Publishers net about 20 cents, with relatively little risk and far less overhead. Labels have cried "unfair!"

For a record company to deliver a recording for use as mastertone to a company like Verizon they first had to pay publishers a fee to license the underlying composition. These fees up till this month have been between 10-12% of the retail sales price of the ringtone. With a percentage-based system the record company earns only what is left over after percentages are paid out; a squeeze-play that puts them in a precarious position in an unsure market. Labels contend that their master recording is at least as important to the sale as the song itself. For years they have asked publishers to voluntarily lower their rates. Of course, publishers have refused, saying that labels are still getting the lion's share of revenue even though it's the song that is the hit, not the recording. A lack of simpatico has caused a war that is stifling growth in the still emerging $2 Billion a year ringtone industry.

Unable to get publishers to see it their way, the RIAA (on behalf of major labels) played their trump card and this month asked the Copyright Office to decide if legally, publishers had the right to charge a percentage AT ALL, or if they were bound under Section 115 of the Copyright Act to only charge the fixed, compulsory rate. (Currently 9.1 cents per copy.)

Labels won the day. The Register concluded that ringtones should be treated exactly the same way as any other mechanical reproduction. This will likely increase the record company's vig substantially (see my chart below) but will also invite more expensive litigation. Why can't everybody just open a bottle of Jack and work out a deal like we did in the Wild West days of Walter Yetnikoff ?

To understand the conflict one must look at a bit of history. In the early days of ringtones publishers managed to convince naïve, young ringtone rights aggregators (who were new to the music business) to ignore the compulsory license and instead pay them a percentage of their revenue. (This is the way mechanical licenses are done in the UK; 8-10% of retail.) But when mastertones hit the scene, aggregators now required licenses from record labels , who are not interested (or accustomed) to paying publishers in the US on a percentage of their revenue. US standard is based on a fixed, compulsory fee that increases incrementally every few years regardless of market value of the product.

With mastertones, record companies felt that publishers should back-off from their homesteaded position a bit so that both entities could comfortably share in all the new mastertone booty, the same way they often cooperate in the licensing of a song/master to TV and motion pictures. Publishers scoffed. Hostilities fermented. Rumor has it that because publishers were unrelenting, some record companies refused to make certain, in-demand sound recordings available for mastertone licensing. This killed sales for both parties, but sent the clear message to publishers that, in the end, record companies would rather go thirsty than overpay for water.

Publishers claim that this is the same type of "old-school group think" that caused a breakdown in talks between labels and high-tech companies over P2P file-sharing. But unlike the tech wars, with this ruling, the law has given labels the upper hand. Publishers will now be compelled to issue a mastertone license to record companies for a song at a set "compulsory rate." The decision will put an end to the old way of licensing all types of ringtones , not just mastertones . Although the rate has not been determined, it will probably emulate the current statutory rate (9.1 cents). If so, this will end up being far south of what publishers received off of 10-12% percent off retail .

WHINE, WHINE, WHINE

Publishers are not happy. Are record companies? You'd think, since this is what they asked for, but no, they are not. Even though this decision was in their favor, they say they will now have to comply with the daunting paperwork that comes with compulsory licensing. David Ring of Universal Music , complained about this extensively on his panel at this year's American Bar Association Conference in Los Angeles . "Relying on the [Copyright Act's] licensing process is complicated by various requirements, including monthly accountings, annual audits and other items that are administratively difficult for both publishers and [labels] alike."

In essence, what labels really want, is to use this ruling to leverage publishers into a voluntary license that resembles the compulsory one--sans all the paperwork--much the way they have done for songs on phonorecords for over 20 years. "This way, we believe that we will be able to get more product into the marketplace," said lawyers for Universal in an email to me.

WHAT ABOUT THE PERFOMANCE FEES FOR THE "NON-PROFIT" PROS?

And there's more. In addition to depleting publishers' direct revenue, the ruling could cost them even more via PROs like ASCAP, BMI & SESAC. How? PROs assert that a transmission of a ringtone constitutes a "performance" under the law in the same way that a broadcast on the radio is a performance. Aggregators (and consequently record companies) have been paying performances fees of 4% per transmission to Societies. But, now, a single line buried within the Register's decision could disembowel the PROs' entitlement.

"We decide that a ringtone is made and distributed for private use."

(Page 3, Summary of Decision . Read it for yourself http://www.copyright.gov/docs/ringtone-decision.pdf )

One major label executive said to me, "With the words 'private use,' the Register has confirmed that a ringtone's status is that of a sale, not a performance."

Representatives at ASCAP don't see it that way. They retorted complacently to me, "Radios are for private use but they are still considered a performance." They would not comment on any specific legal strategy but said that the NMPA (the trade organization that represents music publishers) will be appealing the Copyright Office's ruling and ASCAP might file an (Amicus) brief along with them. But since this is not a court proceeding, to whom exactly the NMPA will appeal to is currently not clear. A Federal Court trial would cost PROs and publishers millions. This is money that will likely come out of the pocket of their members and ultimately, songwriters.

One source at a major label, who would not allow me to use their name said, "What the publishing companies should keep in mind [before appealing and creating more problems] is that retail prices will be decreasing - so a fixed rate may prove better than a percentage [for them]. We are still [lowering our prices to] compete with FREE peer-to-peer networks at every turn. That is the wild card."

IS ALL THIS BICKERING GOOD FOR THE INDUSTRY?

The RIAA has had legal victories (if not financial ones) at every phase of the transition into the digital age, often at the expense of bad PR for record companies and the music business in general. Will there be a dividend for the industry in the final outcome?

The concept of a "compulsory license" as a benefit to the songwriting trade has been spun quite well by the industry; a pre-determined license of only a few pennies that composers are compelled to issue means, for an artist doing a remake of a hit, that no negotiation to acquire permission to record the song is needed. Permission is automatically granted (as long as one pays the fee and does the compliance paper-work). With an automatic license, artists will be more inclined to do covers and thus create more revenue for writers. So the pitch goes.

The other side of the argument is rarely talked about openly: that compulsory licenses may create an easy-to-manage revenue stream for publishers, but they do not exactly emulate the spirit of "fair market value." If I, as a songwriter, feel my hit songs are worth more than 9 cents a copy, I have no easy method to demand more. Because many major publishers are owned by the same companies that own major labels, the statutory rate for previously published music then becomes the industry standard that is used for licensing all pop music and a songwriter soon finds themselves in a position where they are victimized by price fixing. And this in effect is what has happened.

Since mastertones by popular artists tend to sell for more money than those by less popular artists, US publishers managed--with the percentage-based model--to circumvent collecting only a fixed statutory amount in favor of a more dynamic one that is commensurate with the retail price. With this new ruling, however, the party is over for publishers and writers; an Eminem or a Carol King song will carry the same fee for use as a mastertone as one from an artist like say, Right Said Fred .

Is this justice?

Ring-tone companies like Verizon surely benefit from fixed compulsory licensing, which will according to labels, lubricate the process to free up inventory for hungry consumers. But it could be very bad for songwriters. Their primary agents have had their power to negotiate severely truncated by the Fed this month. To make matters worse, the new ruling means publishers lost the ability to enjoy percentage-based revenue for monophonic and polyphonic ringtones, not just mastertones. Talk about shooting yourself in the foot. Where will it end?

Who can say? With billions of future revenue on the line we can be sure that this month's ruling is a mere cease fire in a long expensive war. A war that is bottlenecking the market, costing songwriters millions, inviting government regulation into our beloved industry and showing the Fed that the three major parties in the music business: publishers, PROs and record companies just can not play well in the sandbox together.

Can't we all just get a song?

Reporting from the front,

Moses Avalon
October 27th , 2006
www.MosesAvalon.com

SIDEBAR: BREAKDOWN OF MASTERTONE FEES ======================================== There is sobriety in math. This is a very likely scenario of how the finances will play out. Although prices for ringtones may go down--making a fixed fee more desirable--there is no guarantee that they will not go up. (All amounts below are rounded) Prior To New Ruling: $3.00 – typical (high-side) cost to consumer. ($1.99 to $3.99 per mastertone) X 45% (total typical bundled license paid to labels by phone companies.             Percentage may vary +/- 5%) ------------- $1.35 (Gross to labels) - 36 cents (12% Publisher's share) - 12 cents (4% PROs) - 45 cents (Artist's share @ 15% of SRLP) - 10 cents (aggregator and other delivery charges) -------------------------------- Net to labels: 32 cents. Net to top-line artists under most recording contracts: 45 cents. Net to publishers: 20 cents. Net to writers under most publishing contracts: 16 cents.* Plus any additional income filtered through PRO collections to writers & publishers—maybe another 1 penny each. Under New Ruling: (If The Current Statuary Rates Apply and PROs are Excluded) Net to labels: 71 cents. ($1.35 minus payments only to artist and aggregators                      and 9 cents to publishers) Net to top-line artists under most recording contracts: 45 cents. Net to publishers: 5.5 cents. Net to writers under most publishing contracts: 3.5 cents.* * Publishers typically deduct 10% for administrative fees and then split revenue 50/50 with writers.

LAWYERS IN LOVE:
DIVERSITY AND INSIDE INFORMATION AT
ABA CONFERENCE IN LOS ANGELES
==================================
By Moses Avalon

This October, the American Bar Association's Sports & Entertainment Division held its annual conference in Los Angeles. For me, a non-attorney who navigates a lot in music-business legal circles, the ABA was a chance to get some face-time with many of the best music lawyers that I interact with during the year. For the lawyers it's far more than that.

This year's panels drew packed rooms with many of the usual suspects but also a plenary of new faces including a large number of younger attorneys (some still in law school) and an infusion of ethnic diversity and women whose proportions have tilted noticeably from my last ABA coverage about four years ago.

It was great to see some of the stars in this universe, lawyers like Jeff and Todd Brabec (who were switching name tags just to screw with us), Ken Abdo, Peter Strand, and Gary Watson, not only on panels but attending each other's talks. Proving that half of being smart is knowing where you can learn some more. Plus, with so many legislative issues confronting us in the last quarter of 2006 and the first quarter of 2007, the ABA forums served as both a briefing and a preview of important things to come.

Panels of particular note included Marcelino Ford-Livene's panel on New Technology Megatrends. This panel suggested that total home-media integration with our appliances is right around the corner. Soon you will be able to have your refrigerator download MP3s so you can listen to them on your microwave.

The most alarming information came from the panel called Clearing Music Rights, moderated by Robert Rosenbloum and starring two rivals, Jacqueline Charlesworth of the NMPA (Harry Fox ) and David King who represented Universal 's record division. The two sparred on the all-important decision that was before the Copyright Office this month on whether master ring-tone licensing will carry with it a compulsory license.

King seemed to be on the defensive from Charlesworth's throws, accusing Universal of having a callous attitude towards the publishing trade. But King, delivered the knock-out punch suggesting that compulsory licensing will mean a lot more complications than it eliminates. (See more on this above.)

FEED ME PLEASE

Forget legal junk. Food was the king of the show this year. Social events at the Century Mall's French 75 served up some the best cuisine I've seen at one of these events. There was some friction about allowing, me, an independent journalist into the conference as there was a finite amount of resources to accommodate freeloaders like myself. So, I made sure to exploit my press credentials and consume as much filet mignon and tuna tartar as I could.

All kidding aside, Watson and his team, Christien Lepera, Janine Small and Todd Brabec, really pulled off one of the warmest ABA events in entertainment law that I can recall in recent history. Next year the Chair will be held by veteran law professor and mega-music lawyer Lon Sobel whose term begins in February of 2007.

 

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