Have you ever wondered why the Grammy Song of the Year is often different from the Record of the Year?1 To answer that question – and to appreciate the significance of the U.S. Copyright Office’s proposed revisions to laws affecting the music industry – a basic understanding of the way in which the industry makes money is essential.

Music Copyrights and Sources of Income

Recorded Music

At the outset, there are two separate and distinct copyrights in recorded music. One is the copyright in the master recording, i.e., the fixed sound of the musical composition embodied therein – the “master”– which is usually owned by the record label.2 The other copyright is in the musical composition – the “song”– which is usually owned jointly by the writer of the words and the writer of the music and/or the music publishing company, which markets and administers the song.3

When masters are sold, whether through physical sales or by permanent music downloads, both the label and the recording artist receive royalties from the sale in accordance with the agreement between them and the distributor or Internet service. The writer and the publisher also receive royalties pursuant to a statutory scheme under the Copyright Act (the “Act”),4 which requires them to license the song for rerecording by different artists for a fee set by the Copyright Royalty Board (CRB). This process is generally referred to as compulsory mechanical licensing.5

Publicly Performed Music

The income recipients will differ when music is publicly performed live, e.g., on stage, on broadcast, satellite or Internet radio, on television, in restaurants, bars, elevators, stores and offices, or through any form of Internet streaming. Writers and publishers receive their public-performance royalties directly from the performing rights organizations (PROs) with whom they are registered.

If they are registrants with either BMI or ASCAP, the two principal PROs in the United States, royalties will be based on rates set by “Rate Courts” established by the consent decrees entered in decades-old antitrust litigation brought by the Justice Department against them. Over the years, the consent decrees have been amended numerous times.6

Labels, featured artists and non-featured artists, including musicians, also receive public-performance royalties from Internet providers whenever masters are digitally transmitted – either, pursuant to the Act, when the music is delivered without interaction, or, by way of separate agreements, when the music is delivered on demand. These royalties are collected and for the most part distributed by Sound Exchange, a nonprofit entity also authorized by statute.7 Artists performing live on tour or in bars and restaurants also receive public-performance royalties from the PROs, again based on a formula, and, in some instances, through self-reporting.

Other Sources of Income

Writers, publishers, labels, artists and performers have many other sources of income when their music is used – for example, in movie sound tracks, as ringtones, in greeting cards, during karaoke, in jukeboxes and on sheet music. The recipient(s) of that income again will depend on whether the song is used with or without a specific recording. For example, if a song is used on a movie sound track, a licensing fee is almost always paid to the writer and the publisher. However, if the film producer decides to hire his/her own musicians to record the song in timed relation with the action, i.e., in synchronization with the film, the original label will not be entitled to receive any fee.

From this discussion, you should now be able to answer the question posed at the outset of this article.  The Song of the Year will be awarded to the writers and their publishers. But the Record of the Year will be awarded to everyone involved in the actual production of the record, i.e., the master. So, while the Grammy voters may really like the words and the music of a song, they may not like the way it was produced – that is, how it sounds as a recording – and prefer another.

The Need for Change

Because new technology has vastly changed the way music – especially recorded music – is delivered to consumers, the ability to properly license and be paid royalties has become increasingly cumbersome under existing law. For example, an interactive (on demand) Internet streaming service has to contact each individual writer or publisher or their PRO, and each label, to work out an agreement to use their works. The music industry – from the labels to the artists to the performers to the writers/publishers – all claim to have suffered major financial losses due to piracy and the difficulty in monetizing the many new uses made of recorded music. As a result, to the extent they are not prohibited by the Act, many celebrity writers and artists simply are refusing to license their works because, among other things, they do not believe they are being paid fairly.

Proposed Revisions

In March 2013, Register of Copyrights Maria A. Pallante first made public her recommendation to embark on drafting the “the next great copyright act.” Shortly thereafter, she conveyed her views to Congress, which then authorized a series of hearings around the country to discuss proposed revisions.

Over the next two years, the various stakeholders, including the industry personnel described above, their respective trade associations, online music service providers, leading entertainment and intellectual property lawyers, and others expressed what they each saw as the best way to resolve the current issues facing the music industry.

In February 2015, the Copyright Offi ce (the “Office”) released its 202-page report summarizing the results of those hearings and recommendations for revisions to the Act and consent decrees, titled “Copyright and the Music Marketplace.”8

Proposed Revisions to the Act

1. The Act should be amended to grant recordings the same public performance royalties as songs, i.e., not just from digital transmission. The Office first reasoned that conventional radio no longer serves as free advertising for the purchase of recordings, as it had in the past. In addition, the United States is the only major country that still exempts recordings from that source of income and, as a consequence, other countries will not pay royalties for overseas conventional broadcasts.

2. Because recordings did not receive copyright protection until 1972, many such recordings are now being streamed without any payment whatsoever. Recent litigation has shown that these recordings may implicate a variety of conflicting state law theories. The Office proposes that the Act be amended to grant copyright protection to pre-1972 recordings, thereby preempting any state law and providing uniformity in the way protection is provided.

3. Because writers/publishers are subject to the previously described compulsory licensing for the rerecording of songs, known as “covers,” the Office proposes to allow certain “celebrity performers” to be exempt from its requirements. The Office also recommends that songs be made subject to the same compulsory licensing provisions as recordings when they are performed publicly on noninteractive services, and to create specific auditing provisions for both songs and recordings for compulsory uses. The Office  further proposes that copyright owners of songs be  permitted to directly negotiate for performance rights for interactive services, which, as more fully explained below, may be precluded by recent decisions involving the consent decrees.

Proposed Revisions to the Consent Decrees

1. Both ASCAP and BMI are governed by consent decrees regarding what they may license and what rates they may charge, requiring them to petition the United States District Court for the Southern District of New York (the “Rate Court”) for any needed changes. However, the Rate Court judges do not always agree on whether the rates should be changed, or whether copyright owners may unbundle rights granted to the PROs for any given song.

In addition, the Rate Court judges are mandated by the consent decrees to use fair market value when determining rates, while the CRB, in determining rates for compulsory licensing of recordings for noninteractive services, applies a willing seller/willing buyer standard. The Office proposes that the consent decrees be adjusted to allow for carveouts, and have all rate setting migrated to the CRB, where only one standard would be used.

2. Perhaps the most controversial of all proposals, which would also require either substantial adjustments to the consent decrees or their termination altogether, is the Office’s recommendation that certain governmental music rights organizations (MROs) be authorized where music service providers can obtain all the licenses they need to deliver music to consumers. As mentioned, online music services need to obtain mechanical licenses from the writer/publisher, public performance licenses from the applicable PRO and master-use licenses from the label. In many cases, the owners of works sought are not affiliated with a PRO or cannot be found, resulting in “orphan works.” Also, the provider, after due diligence, may request the license for orphan works from the MRO. The proposal goes on to say that any organization with a market share of at least five percent administering works, e.g., ASCAP, BMI or the Harry Fox Agency, could become an MRO. All parties would be exempt from antitrust provisions and the CRB would resolve disputes.

Conclusion

None of these proposals is a slam dunk. The stakeholders all have different perspectives and opinions. Consequently, it may take years to make any revisions at all. In the interim, private entities are doing their best to deal with the issues by making agreements and finding new ways to capture and to monetize their rights. Stay tuned!