Net Music Services in Royal Bind

Online upstart Echo Networks has an Internet radio service unlike anything consumers have ever heard, one that--for a monthly fee--would let them collect digital copies of the songs played on Echo’s online stations.

That service won’t reach a single subscriber, however, until Echo satisfies the record labels’ and songwriters’ demands for royalties. The problem for Echo--and every other online music service--is that the songwriters’ collection agencies want to be paid twice for every tune.

“What’s holding these services up,” said Echo’s Tuhin Roy, “is the [music] publishers’ attempt to double-dip.”

In addition to Echo’s service, new subscription-music offerings from America Online, RealNetworks, Yahoo and all five of the major record labels could be delayed by problems with the music publishers.

That’s why online companies large and small are fomenting a revolution against the established music-publishing order. Instead of going to middlemen such as the American Society of Composers, Authors and Publishers (ASCAP), Broadcast Music Inc. (BMI) and the Harry Fox Agency, which grant licenses and collect royalties, they’re trying to strike deals directly with the biggest music publishers.

The flap is the latest in a series of disputes over intellectual-property rights on the Internet, particularly as they relate to entertainment. Although the record companies’ court victories over Napster Inc. and MP3.com have ended some of the confusion, they left fundamental questions unanswered about how royalties will be triggered on the Net.

The Internet also opened the door to selling music as a monthly service, rather than a shrink-wrapped product, disrupting the relationships that songwriters, artists, labels and publishers have long based on per-unit sales. Those subscription services could entice consumers to spend much more per year on music, but they threaten to yield far less money per song.

“I think the issue is: When a subscription service charges $10 per month, how does that $10 get divided up?” said Martin Bandier, chief executive of EMI Music Publishing, the world’s largest music publisher.

No Overlap Between Royalties

The uncertainty over which royalties to pay, and how much, is keeping a number of would-be innovators on the sidelines while the courts, federal copyright officials and Congress search for solutions. The House Judiciary Subcommittee on Courts, the Internet and Intellectual Property held a hearing last week on the music-publishing dispute and other online music issues.

By law, songwriters have exclusive control over the rights to copy or publicly perform their works. Most songwriters delegate those rights to a music publisher, which relies on ASCAP, Fox and others to negotiate licenses, collect many of the royalties due and enforce copyrights.

Three U.S. performing-rights societies collect performance royalties, which typically amount to a fraction of a cent per song played: ASCAP, BMI and Sesac Inc. Most publishers collect reproduction royalties through the Harry Fox Agency, which charges a government-mandated rate of up to 7.55 cents per copy per song.

Those pennies add up in a hurry--more than $1.6 billion in royalty payments is collected each year. The performing-rights societies keep 15% or more of the $1.1 billion in royalties they collect, Harry Fox keeps a 4.5% commission on about $500 million in reproduction royalties each year, and the songwriters and music publishers typically split the remainder down the middle.

In the world of retailers and over-the-air broadcasters, there’s no overlap between those two kinds of royalties. Harry Fox collects reproduction royalties when CDs or tapes are sold; ASCAP, BMI and Sesac take in performance royalties when music is played on the radio or in public spaces.

Online companies and record labels argue that the same dividing lines should apply in the world of virtual music services. When a consumer downloads a song, they say, that’s a reproduction. And when a consumer listens to a song from an online jukebox without saving a copy, that’s a performance.

The publishers’ agencies, and at least some of the major publishers themselves, disagree. They contend that any commercial transmission over the Internet, even if it’s a download that cannot be listened to as it’s being transmitted, constitutes a performance. They also argue that when users listen to songs from online jukeboxes, they’re entitled to reproduction royalties because the song must be copied by computers at several points along the way.

“In my mind, it’s far less an issue whether there’s a mechanical or a performance [royalty],” said Bandier of EMI Music Publishing. “I think we all think there’s both.”

More than 30 online companies that let consumers listen to music, rather than copy it, have agreed to pay Harry Fox 10 cents per song in their databases, plus one-fourth of a cent each time any of those songs is played. And when Universal Music Group tried out an online jukebox for its own tunes without paying reproduction royalties, a group of music publishers slapped it with a lawsuit.

That case is still in preliminary stages. Meanwhile, the Recording Industry Assn. of America has asked the U.S. Copyright Office to decide when an online service amounts to a reproduction and when it’s a performance. And several members of Congress could introduce legislation to end the confusion.

The courts and the federal government don’t move at Internet speed, however. That’s why the online companies’ Arlington, Va.-based trade group, the Digital Media Assn., is trying to negotiate a precedent-setting batch of licenses directly with music publishers.

“We could spend the next 10 years litigating this. What’s the point?” said Ron Gertz, an attorney for DiMA. “What we ought to do is go to the party that has all the rights necessary. . . . The whole goal is to create licensing models that fit the business activities, rather than the one-size-fits-all currently promulgated by the rights societies.”

DiMA’s efforts are focused on the five largest publishers, which are owned by the same conglomerates that control the five largest record companies: EMI, AOL Time Warner, Vivendi Universal, Bertelsmann and Sony. Together, those publishers control about 50% of popular music.

The potential beneficiaries of DiMA’s efforts include some of the most powerful companies on the Net, such as AOL. So even though online music services are still in their infancy, DiMA’s efforts threaten to siphon off a major future source of revenue from Harry Fox and the performing-rights societies.

The carrot DiMA is offering publishers is eliminating the long delays and administrative costs associated with the agencies, said Jonathan Potter, DiMA’s executive director. In return, DiMA wants the publishers to accept the same percentage of the online companies’ sales that they take from record labels and radio stations.

“We have . . . publishers with a chip on their shoulder saying, ‘The record labels get $11 per CD and we only get 75 cents. We should try to do something about that now on the Internet,’ ” Potter said.

The major record labels and the publishers have been negotiating over online royalties for more than a year but have yet to reach an agreement. Bandier and Edward P. Murphy, president and chief executive of the National Music Publishers Assn., suggested a possible compromise: The publishers grant licenses for online services but leave the rates to be settled later, after both sides have a better idea how lucrative the new businesses might be.

The key, Murphy said, is for the two sides to agree that royalties are due. “If you don’t acknowledge that there’s going to be a right, there’s no point in talking about rates. . . . The rights issue first has to be clarified,” he said.

Potter said DiMA members agree that publishers should be paid. But what they’re not willing to do, he said, is pay multiple royalties on a single service.

“The publishers want to get paid too many times, in comparison to the way they got paid before.”

Cary Churgin, president and chief executive of the Harry Fox Agency, said the online world is fundamentally different from the offline world. Reproductions and performances that happen sequentially in the offline world happen simultaneously online, triggering multiple simultaneous royalties.

“We don’t see that it is, in fact, double-dipping,” he said. “Our point of view is that each one of those rights needs to be respected and fulfilled.”

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Royalty Cross Fire

Online music companies are being hit for two kinds of royalties on their interactive services, whether they offer downloadable songs or music on demand. Here’s how the royalty system works in both real and virtual worlds. The Harry Fox Agency collects royalties for a music publisher on CD sales, and ASCAP, BMI and Sesac collect them on broadcasts and other public performances.

Source: Times research