Copyright, Consolidation, and the Music Licensing Marketplace

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The Commerce Department's Internet Policy Task Force (IPTF) is right to delve into the complexity of music licensing in its recent paper on copyright, but we also need to understand how consolidation and business practices shape the licensing landscape if we want to create a more robust and fair music marketplace.


Among many other important issues, the Department of Commerce's recent paper on copyright discusses how copyright is shaping the current state of online music licensing (starting on page 77). To be fair, the paper doesn't purport to be a completely comprehensive examination of what's helping and hindering a healthy music licensing market, but without at least mentioning some of the biggest issues facing the marketplace today our policies might be misguided and ineffective.

First of all, the paper rightly recognizes that the best defense is a good offense, and notes studies crediting the development of legal music services as a leading force in decreasing infringement online. This is a good reminder that everyone--artists, intermediaries, and listeners alike--stand to benefit from a well-designed music licensing system that encourages a robust marketplace.

But despite the success we have seen with some online music services, our current music licensing system leaves a lot of room for improvement. The paper lists the complexity of music licensing as one of the main impediments to an optimal licensing system, both for compositions and for sound recordings. For example, users can pay a statutory license fee to reproduce and distribute compositions, but not to publicly perform them, and the rights are traditionally licensed through different entities.There are some good reasons for this (antitrust law, for example, keeps the performing rights organizations like ASCAP from controlling mechanical licensing in addition to their already substantial market leverage for the public performance right). Meanwhile, sound recordings are licensed separately, and many uses require negotiating directly with the rightsholders (most prominently the major record labels).

The complexity and sometimes arbitrariness of our music licensing mechanisms are indeed important problems to improve on, but the IPTF paper leaves gives an incomplete picture by leaving out other obstacles to licensing. Perhaps the biggest elephant in the room that doesn't get any attention in the IPTF is the impact of consolidation among the biggest corporate rightsholders on the development of new platforms that give more options for independent artists and music fans alike.

Consolidation and Music Licensing

Oddly enough, at some points the IPTF paper even seems to imply industry consolidation is a good thing. The paper refers to sound recording licensing as "generally less complex," and seems to note approvingly that platforms seeking to offer interactive music services need only negotiate with a few sound recording licensors--namely, the three major record labels and a couple aggregators for independent labels for good measure. But this consolidation of leverage among the biggest content companies actually creates problems that the paper fails to address.

A marketplace with a small number of "must have" licensors may be less complex but actually makes life more difficult for new services and independent artists. When the top three record labels control so much of the market they're considered indispensable to a new service, they have an effective veto power and can use their leverage to impose a tax on innovation in the marketplace.

We've already seen major labels use this leverage to demand ownership stakes in the new company, huge advances that hobble start-ups, and a disproportionate share of the service's ongoing revenue. Meanwhile, independent artists have increasingly less power to negotiate a fair rate for themselves from whatever is left over from the major label demands, making it harder to build a sustainable independent music career.

On a more practical level, the IPTF paper cites researcher David Touve's finding that a licensee need only deal with 10-15 licensors for sound recording rights and seems to take that to mean the negotiation process with therefore be easier. In fact, Touve also found that major labels take an average of 15 months of negotiations compared to 3 months for independent rights aggregators and collectives, and substantial waves of consolidation among the major labels in the past decade have only shaved 3 months off the average time it takes to negotiate license for a new service.

The implication is clear: having fewer licensors to deal with doesn't make it easier to license rights directly if those rightsholders have the power to delay or veto your service. The IPTF paper even mentions later that there is untapped potential for interactive services, citing services that delayed entering the US or still aren't available here, like Deezer. These are the services that don't have the option of paying a statutory license fee and must get permission from each major label directly in order to operate, and we can see today how those services have trouble entering the US market or are increasingly considering consolidating among themselves to survive. As a result, musicians and listeners have fewer options to connect and conduct business.

Potential Tools for Solutions

The IPTF paper emphasizes the potential for blanket licensing to improve the music licensing marketplace, but blanket licensing isn't without its own drawbacks, like the risk of anticompetitive practices by the entity licensing on everyone's behalf, and the risk that fees belonging to smaller artists will fall through the cracks or end up going to the biggest rightsholders instead.

Happily, there are other tools we can use alongside or instead of blanket licensing to create a more fair, efficient licensing system. Compulsory licenses have the benefit of giving certainty to services while rewarding artists fairly and proportionately. And as the IPTF paper notes, we already have tools like Creative Commons licensing that give artists a way to publicly promote the sharing of their works (which is not inconsistent with monetizing them too).

The IPTF paper gives a solid overview of mechanisms of music licensing from a legal perspective, but to really move forward we must combine that legal knowledge with an understanding of how music licensing works (or doesn't work) in the actual marketplace today, and how the realities of the industry impact artists and consumers alike. Hopefully as the discussion about music licensing continues we can keep both perspectives in mind to arrive at the best solution for everyone.

Image by Flickr user p_a_h.

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