Internet Radio

The ways of listening to music have been changing rapidly since the beginning of the Digial Age.

Music and software industries have experimented with different models and programs that have enabled the public to get access to music more efficiently through their own desktop computers, and later through their mobile devices. Some of these experiments have failed, and have been declared to be infringing ways of distributing and performing copyrighted music.

However, innovation has not ceased, and the future of listening to music has started to take its shape. Some of the big players in the current market in the U.S. are internet radio broadcasters, such as Spotify and Pandora. Apple and Google also released their own music streaming services in the U.S. in 2013. However, as the market for these types of services is only still emerging, there are currently several legal issues the broadcasters have to tackle. This article touches upon a few of them.

Music streaming enables mass consumption of music

Internet radio broadcasters offer an alternative for typical online, pay-per-song music stores. They generally allow users to stream music for free, in exchange for advertisement interruptions in the stream. They also typically offer an option to purchase ad-free subscriptions. The way in which the broadcasters are required to license the content for their service depends on how much control they give to their users in choosing which songs to listen.

Spotify, for example, is an “interactive” service within the meaning of the United States Copyright Act, since its users can search the content of the service and click on the exact songs they wish to hear, and listen to those particular songs multiple times. Pandora’s services, on the other hand, are closer to those offered by traditional, terrestrial radio stations. Pandora only allows its users to enter a track, an artist name or a music genre onto the service, based on which it generates a playlist of several different artists for the user. Compared to Spotify, the users have a lot less control over which songs they hear. Pandora is thus a “non-interactive” service.

Benefits and problems in non-interactive services

The interactiveness distinction is crucial, as non-interactive services are able to benefit from the statutory licensing scheme that was established for sound recordings in 1995. The scheme makes the licensing of sound recording performance rights more efficient than having to negotiate with hundreds of record labels separately. Royalty rates under the scheme are either agreed on by the broadcaster and SoundExchange (the representative for sound recording copyright holders in the scheme), or – in the absence of an agreement – determined by the Copyright Royalty Board.

The scheme has, however, received a lot of criticism from Pandora and other internet radio broadcasters. The royalty rates payable by those eligible for the scheme are significantly higher than the rates of terrestrial and satellite radio. This is because the rates for different types of radio are determined on different standards. The standard of the statutory licensing scheme is “willing buyer, willing seller”, which attempts to simulate free market conditions, whereas the standard for satellite and terrestrial radio – the “801(b)” standard – takes also into consideration factors such as increasing the availability of copyrighted material to the public, thus producing more broadcaster-friendly rates.

Pandora was actively lobbying for the Internet Radio Fairness Act in Congress in late 2012. The main goal of the bill was to lower non-interactive broadcasters’ sound recording royalty rate standard to that of terrestrial and satellite radio. The much-debated bill did not pass. However, the bill was introduced late in the term of the Congress, and therefore commentators think that it was rather “killed by the calendar” than forgotten for good. As the market for internet radio broadcasters is constantly expanding, the Congress may feel pressure to reintroduce the bill in the near future.

Problems with collective licensing may prove costly

As an interactive service, Spotify cannot benefit from the statutory licensing of sound recording performance rights. However, as for the underlying musical works, it and other internet radio broadcasters can license them from performing rights organizations (PROs), thus avoiding having to negotiate for these licenses with individual songwriters and music publishers.

Broadcasters negotiate with the three PROs – ASCAP, BMI and SESAC – for blanket licenses of their content, and then pay the royalties to the PROs, which in turn distribute them to the music publishers and songwriters that they represent. However, music publishers are allowed to withdraw their performance rights from the PROs and negotiate independently for their royalty rates.

In fact, many big publishers have done so in the past year. Because ASCAP and BMI are subject to antitrust consent decrees, their ability to negotiate freely is rather restricted. Publishers are therefore able to negotiate better deals on their own, and due to the advances in technology, it is easier and cheaper for them to keep track of their licenses, and to ensure that royalties are paid as they should. The costs that the negotiations bring for the publishers are outweighed by the increases in royalty rates. According to Billboard Magazine, Sony/ATV, for example, was able to get a 25% increase in its royalty rates by negotiating independently and directly with Pandora.

This, of course, means an increase in broadcasters’ costs, since they do not only have to pay more out in royalties, but they also spend a significant amount of time negotiating with individual publishers, instead of the three PROs. Furthermore, ASCAP for instance has been unwilling to grant carve-outs from its blanket licenses for the licenses that Pandora has already obtained directly from publishers. Pandora has not been pleased with paying for the same content essentially twice, and has sued ASCAP on the basis that its actions are violating the consent decree regulating it.

Future for internet radio broadcasters

Neither Pandora nor Spotify is doing well financially. Pandora’s approach in fixing this has consisted of vigorous lobbying for legislative changes, whereas Spotify claims that its current losses are mainly due to the fact that it has been expanding.

The current legal framework for music licensing is less than ideal for these services. For the lawful streaming of music, various copyright holders have to be negotiated with in order to secure the appropriate rights. Collective licensing structures make the negotiation processes more efficient and cheaper for broadcasters, but these structures seem to be destabilizing, as music publishers are withdrawing their rights from the PROs. In addition to licensing costs, this may increase uncertainty in the licensing market.

Any legislative proposals to better facilitate internet radio broadcasters’ content acquisition are likely to cause a stir. The purpose of copyright law in the United States is not to protect the rights of authors per se, but to promote the progress of “useful arts” (as dictated by the Constitution), which may be achieved by granting creators certain rights, and thus incentivizing the creation of socially valuable works.

In order to reach the balance that produces the most socially beneficial outcome, two policy considerations should be addressed. First, artists and songwriters should receive an adequate compensation for their works, in order to further incentivize them to invest in creating musical works in the future. Second, new inventions that give the public better access to music should be encouraged. Balancing these two considerations is difficult, as they are often perceived as mutually exclusive, especially by the music industry.

However, it should be noted that streaming services might have a significant impact on reducing piracy, as has been the case in for example Norway. The numbers speak for themselves: there has been an 82.5% decrease in illegal downloads, while nearly half of those interviewed in the study have begun to use legal streaming services for music. Perhaps the American music industry should begin to think internet radio broadcasters as the new weapon to fight piracy, rather than a threat.

Sofia Ritala, LL.B. candidate
University of Edinburgh 2010–2014
University of Texas 2012–2013

The writer of this article worked as a trainee at IPR University Center in summer 2013.

The article is based on the author’s paper, Pandora & Spotify: Legal Issues And Licensing Requirements For Interactive And Non-Interactive Internet Radio Broadcasters, which can be found  at: http://law.unh.edu/ip-law-review. The author won the 2013 IDEA Student IP Writing Competition, and the paper was originally published in 54 IDEA 23 (2013).

Music listening 101

For copyright purposes, a music track consists of two distinct “works”:

– The underlying “musical work”: the lyrics and notes that make up the song. This copyright is usually owned by the songwriter(s) or the music publisher.

– The sound recording: the specific, recorded performance of the musical work, i.e. the sounds affixed to the phonorecord. This copyright is generally owned by the record label of the recording artist.

Both of these works have to be licensed.

– The performance of musical works is usually licensed by collective rights organizations, namely ASCAP, BMI and SESAC in the United States

– Mechanical licenses are required for interactive streaming of musical works

– The performance of a sound recording is licensed by SoundExchange (for non-interactive broadcasters) or by record labels themselves (for interactive broadcasters).

– Interactive broadcasters also have to get a license for the copying and distribution of sound recordings. These are, in practice, negotiated for together with the negotiations for the performance license of sound recordings.

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