Reasonable Balance

The wonderful and informative blog Hypebot is holding an online roundtable to address how the business of being a musician is going to change as a result of the disruptive technologies that the Digital Age has introduced.  Bruce Houghton has posted his Top 10 Issues Facing Music 2.0 which include everything from the transformation of the product musicians create to the method of delivery.  For example the issues he highlights include:

• THE DEATH OF THE ALBUM - Individual track downloads are killing the album market and the revenue that it once created. Can the album be saved? Should artists release in 1 to 3 track clusters?
• NEW REVENUE SOURCES - From YouTube to imeem and We7 to Nokia, revenue is being generated everywhere. Who will be sending big checks to labels in 5 years and how will that revenue be distributed?
• THE DEMOCRATIZATION OF MUSIC DISCOVERY - Once DJ’s told us what to like. Now our friends do or we discover it ourselves and share the news.  How does that change how music is marketed?

You should really go to Hypebot, read all ten issues AND contribute what you think the eleventh issue should be.  I suspect Mr. Houghton will compile all the ideas into a future post.

Last week, the Lebanese cabinet debated eleven hours to decide what to do about the private telecommunications network Hezbollah has installed along the borders with Israel. Declaring it illegal and a threat to security, they ordered Hezbollah to remove the landline network. Hezbollah responded to the declaration of illegality with bombs and rockets, not negotiations.

According to an article on AlJazeera.net, Naim Qassam, Hezbollah’s deputy secretary-general equated the telecommunications networks to munitions:

Hezbollah’s telecommunications network is tantamount to Hezbollah’s arms and those who are taking aim at the telecommunications network are targeting our arms. They are calling on us not to fight Israel.

A professor expounds in the Al Jazeera article that a military response to the government’s action should have been expected. Professor Ahmad Moussalli of the American University of Beirut stated that “[t]he communications system that Hezbollah has, was … instrumental in its defeat of the Israeli invasion [in 2006].” Significantly, the Israelis had blocked cellular communication but were not able to effectively interfere with landline communications. So, Hezbollah, working with Iranian contractors, has installed a complex telecommunication system along the border with Israel and other locations they have deemed strategic. (good article here–> AFP Hezbollah Phone System Sparks New Unrest)

In the first five days following the outbreak of the violence over forty people have died, and one hundred twenty injured. Fighting has extended out from Beirut so the numbers will unfortunately continue to rise…

The situation in Lebanon, where they are on the verge of a Civil War, is a stark reminder of many things, including the importance of all methods of telecommunication.

Right about now, Valence Media and its co-defendants might wish that TorrentSpy was the name of a blockbuster movie they had produced instead of the peer to peer network that served as a means for the wholesale illegal distribution of the creative works of others.

The judge in Columbia Pictures v Bunnell has ordered the defendants to compensate the plaintiffs $30,000 for each of the 3,699 infringements the plaintiffs established on the copyrights in their movies.  For $110,970,000 the defendants could have produced a major summer blockbuster. Instead they have each filed for bankruptcy protection to avoid any financial liability related to the judgment.

Much more significant than the financial judgment in the case is the injunction the judge has imposed on the Defendant, as well as its  officers, agents, servants, employees, and attorneys.  Each has been “immediately and permanently be enjoined from directly, indirectly, contributorily, or vicariously infringing in any manner any Copyrighted Works.” The judge specified the following activities from which the parties are prohibited from:

(a) encouraging, promoting, soliciting, or inducing, or knowingly materially contributing to, enabling, facilitating, or assisting, any person or entity, via any computer server, computer program, website, or online system, network or service, including without limitation any peer-to-peer or file-trading network, (i) to reproduce, download, distribute, upload, or publicly perform or display any Copyrighted Work, or (ii) to make any Copyrighted Work available for reproduction, download, distribution, upload, or public performance or display, or

(b) reproducing, downloading, distributing, uploading, or publicly performing or displaying any Copyrighted Work.

Well, I guess Jason Hughes, a former TorrentSpy employee, might consider shutting down his site movietorrents.info.  Unless, of course, he has license deals in place for all of the content available through the torrent.

Then again Ira Rothkin will probably happily defend Mr. Hughes when the copyright holders come calling.  According to Mr. Rothkin there is no value in the outcome of the case against TorrentSpy because it “never got its day in court.”   Oh, come on… TorrentSpy had its day, in fact many days, in court.  Mr. Rothkin’s clients chose not to participate, seemingly lied to the court, and all in all appeared to act in bad faith.

The moral of the story, dear readers, of the Columbia Pictures v. Bunnell matter is that it is wise to proceed with caution when defending an illegal action because failing on a sword hurts.

Have you ever felt like you missed an opportunity to say something? Of course you have, we all have.

Recently, I missed the opportunity to participate in an essay contest for the Yale Journal of Law and Technology in which participants were asked to advise the next administration on technology and intellectual property policy. I learned of the contest just days before the deadline. I was optimistic that though I had only 4 days I could write a significant essay because I was a “blogger.”

Initially, I was going to write an essay about the need for the United States to develop a comprehensive approach to privacy of data, as well as “bill of rights” to address the government’s use of our private information. Currently privacy is regulated in a piecemeal manner that fails to adequately protect our private information. For example, the Gramm Leach Bliley Act requires that companies that provide consumer financial services protect “personally identifiable information.” However, the law does not apply to business to business services even if the services are offered to an individual proprietorship.

Significantly, I would advise the United States to consider how our approach to privacy may adversely impact American companies doing business with people in the European Union. Or how it might unnecessarily expose operators of websites based in America to liability in the European Union if the site uses cookies or other means for tracking visitors. Under the European Union Directive on Data Protection it is illegal to transfer personal data to any country that does not have adequate privacy protection measures in place. It is an understatement to say that the United States does not qualify as a country to which data may be transferred.

But as I was drafting my essay, I realized that I should in fact focus on the topic that is obviously dear and near to my heart: copyright. So I switched focus and set about writing the most magnificent essay supporting a strong copyright system I could write. I have written well over 5,000 words on the topic this past year so I should have been able to bang out the essay.

Maybe not.

The truth is I didn’t need 5,000 words to advise the next administration on copyright policy. I needed just a few.

Here is what I should have said:

Copyright is more important to creators in the Digital Age than it has been at any other time. Technologies have been developed, and continue to be developed, that allow artists to distribute and interact directly with their fans. But with these technologies the ability to control how and when a work may be used is difficult, if not impossible. However, the lack of control does not negate that a work has value. Copyright is both the means through which we can guarantee that there is an economic basis for work, and that will provide that artists are compensated for the use of the works.

In what may be a historic decision, Judge William Conner of the Southern District Court of New York (”SDNY) has set a rate for the blanket licenses of the songs in the American Society of Composers and Publishers (”ASCAP”) catalog to AOL, Yahoo, and RealNetworks (operator of Rhapsody and other music services). The companies had each individually approached ASCAP for a blanket license to cover all of their uses of music.

Sidebar: Recall that there are two distinct protected elements of a song that you hear, the underlying lyrics/composition and the sound recording. Owners of rights in each of the works have a number of exclusive rights. For example, Songwriters have the exclusive right to perform the work. Technically speaking every public space where you hear music should have a license to perform the songs. Well, it would be a bit cumbersome if the operator of the parking lot had to contact every songwriter to ask for permission to play the song much less to negotiate individual rates. In the United States, songwriters and publishers join a “performing rights organization” (a “PRO”) of which ASCAP is one, to collectively license the songs to end users.

Yahoo, AOL and RealNetworks had individually attempted to obtain a blanket performance license from ASCAP for the use of the songs in its repertory that would apply to the wide range of services/sites the companies offer. The companies each agreed that they needed a license. However, ASCAP and the parties were not able to reach mutually satisfiable agreements. While temporary licenses were put in place, ASCAP filed a request with the SDNY for it to set the final rate.

Sidebar: ASCAP, and its competitor Broadcast Music, Inc. (”BMI”) are collectives that negotiate for many as one. Technically speaking they exercise a monopolistic power through their collective representation of rightsholders. Since the beginning of time, okay not really but close, ASCAP and BMI each operate with the consent of the Department of Justice of the United States. An element of the ASCAP consent decree is that the Southern District Court of New York serves as “rate court” in situations where ASCAP is unable to negotiate a license fee with a potential customer. Either ASCAP or the licensee has the right to go to the court after a period of time has passed to request that the court determine a “reasonable” fee for the requested license.

Rate setting proceedings at the SDNY are handled in the same manner as day to day litigation. The parties engage in discovery, present evidence and testimony, on which the judge bases his/her decision. Oh, and of course the lawyers get paid.

Here, ASCAP had originally proposed that AOL and Yahoo pay a 3% royalty based on music related revenues defined to mean the “total amount of time users of AOL and Yahoo!, respectively, spent streaming [music and music videos], as tracked internally by the companies.” For RealNetworks and AOL Music Now, ASCAP proposed that the 3% royalty would be based on all domestic revenue.

The licensees proposed paying ASCAP a license rate specific to 5 different revenue categories, or “buckets.” The blended rate would include: 2.5% of net revenue directly attributable to on demand audio streaming content; 1.615% of net revenue of directly attributable to audio webcasting services; 0.9% of revenue directly attributable to streaming music videos; and 0.1375% of revenue directly attributable to non-entertainment programming.

According to the licensees “directly attributable” revenue would be limited to “revenue generated from the sale of advertising and sponsorships that appear on the music player through which the music is streamed, as well as a pro rata share of revenue from subscription services that include music performance.” The licensees specifically exclude “all revenue from advertising placed off the player, including ads on webpages behind the player or anywhere else on the [licensees'] websites, and it excludes the value of any house ads and promotions of the [licensees'] sites and services.”

To determine the reasonableness of the proposed rates, the court considered other licenses and agreements the parties had entered. The court reviewed the licenses ASCAP has granted to radio, television and cable companies. It noted that the agreements the licensees had with the major labels were of particular interest as the agreements were entered in the free market (i.e. they can negotiate with 4 companies easily while negotiating with thousands of songwriters/publishers not so much). Also, the court reviewed agreements BMI had entered with some of the licensees but limited their relevance since the licenses were not blanket licenses.

In fact, Judge Conner noted “[i]n this novel proceeding, there are no perfect comparables. No other ASCAP licensee offers the full panoply of music uses and options available to each of the Applicants or the myriad ways in which they use music to generate revenue.” The Judge continued that “[t]his unprecedented capability to make millions of songs available to the entire nation all at once far outstrips the music distribution capabilities of all other, passive media such as radio and television.”

In the end, Judge Conner settled on a flat royalty rate of 2.5% of the applicant’s music related revenue. The closest license structure the court could find that was similar, and negotiated at arms-length between the parties, was the blanket license between ASCAP and Music Choice at a 2.5% royalty rate. Remember that each of the companies has a temporary license in place under which they have to pay ASCAP retroactively for any royalties due. According to press reports the difference between the amounts the Applicants proposed to pay and the amount the court has set as the rate are multi-millions per year. For example, AOL would have paid $872,000 in 2006 under its proposal, but now will pay ASCAP $7.8 million.

The moral of the story is fairly simple, judges recognize the value of music even if technology and new media companies do not.

Ingrid Michaelson is a very talented singer/songwriter as is evident on her two indie releases, Girls & Boys and Slow the Rain. Like other artists she set up a MySpace account to share her music and build an audience. One day in the fall of 2006, Lynn Grossman, a music supervisor/artist manager, stumbled on her page and history was made. (okay, according to this article it was an assistant at Ms. Grossman’s newly launched company but that detracts from the fairy tale nature of the story.)

As a music supervisor, Ms. Grossman seemed to recognize something unique in Ingrid Michaelson’s songs. While other professionals in the industry would have started pushing the music on labels, and even publishers, Ms. Grossman shopped Ingrid Michaelson’s songs to other music supervisors. It worked. Grey’s Anatomy has been a particular fan of her sound, using three of her songs and having her sing an original for the 2007 finale. Additionally, one of her songs served as the theme for Old Navy’s sweater commercials for the Fall of 2007.

The exposure she has received from having her music featured on television shows and commercials has elevated her music sales. She has, according to this article, sold 160,000 units of her two records plus a number of her songs have been heavily downloaded as singles on iTunes (i.e. top sellers). Additionally, she is headlining sold out dates across the country in significant markets.

Oh, Ingrid Michaelson has never signed a deal with a record label. She is free to capitalize on her success with licensing, music sales and touring. In fact, she has invested her money into her career through hiring independent publicists and others to help expand her fan base in the same manner that a major label would. In fact, she has really done what Radiohead and Trent Reznor purport to be doing though Ingrid Michaelson is doing the hard part of an artist’s career without major label support: building a substantial fan base.

So enough of Radiohead and Trent Reznor, Ingrid Michaelson is setting an example of how an artist can leverage Web 2.0 resources and traditional opportunities (licensing for film and television) to build a fan base that might sustain her through a career. As an indie she already has a career that rivals many major label artists, even though she is a relative newcomer. It will be interesting to see how she and Lynn Grossman continue to leverage her opportunities.

Generally I have been fairly ambivalent about Network Neutrality. The response to my blog post about Damian Kulash’s editorial in the New York Times has caused me to reconsider the issue. Friends and colleagues reached out to explain why I should support the concept of Network Neutrality: arguments were made, economic analysis provided and references to sources given.

Lo and behold my reasons for being ambiguous about supporting Network Neutrality did not seem so solid anymore. The term Network Neutrality has been used to describe many open network policies, some which go far beyond traffic and user non-discrimination. Additionally, many of the organizations and companies advocating for Network Neutrality also advocate for reform of the copyright laws which could be detrimental to the rights of creators.

Rhetoric has muddied the waters, and made the issue much more complicated than it probably should be. The fundamental element of Network Neutrality is that the infrastructure of the Internet needs to be managed in a non-discriminatory manner in the same way the telephone system operates. Per the Communications Act of 1934, as amended, (the “Act”) telephone companies are “common carriers who may not implement any

unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service, directly or indirectly, by any means or device, or to make or give any undue or unreasonable preference or advantage to any particular person, class of persons, or locality, or to subject any particular person, class of persons, or locality to any undue or unreasonable prejudice or disadvantage.

That is, a telephone company must allow third parties access to its infrastructure to provide services to consumers, even if those services compete with those of the telephone company (i.e. calling cards for long distance).

Unfortunately, the Federal Communications Commission (the “FCC”) does not agree that the companies who provide the “tubes” of the Internet are “common carriers.” Specifically, the FCC has classified the Internet as an “information service” which are not subject to the “common carrier” laws and regulations. Therefore, internet access providers could discriminate against potential competitors to limit access to the network. For example, a cable provided network may limit new television over the Internet services because of potential competition.

Of course there was litigation over the FCC’s classification of the Internet as an “information service”. In 2005, the Supreme Court held in Brand X that the classification of cable offered Internet service as an information service was within the authority of the FCC because it was a reasonable interpretation to an ambiguous statute. The Court did not, however, address the underlying classification just that it was a reasonable decision for the FCC to make.

While it was within the regulatory authority of the FCC to classify the cable offered internet service as an information service, the FCC made the classification because the Act was not explicit on how to treat such networks. Even in 1996, the last time the Act was substantially amended, there was no way to predict how ubiquitous the Internet would become or how important access on a non-discriminatory basis had been to the development of the Web.

As of 1996 internet service was being offered by telephone companies on a non-discriminatory basis under the common carrier laws and regulations. It may not have seemed necessary to specifically state that internet service was subject to such laws.

Times change, and so do laws and regulation. While many elements of proposed Network Neutrality solutions are unnecessary, the non-discrimination limits applied to common carriers (i.e. telephone service providers) should be explicitly applied to internet service providers, regardless of the communication platform on which the service is offered (telephone, cable, satellite, cellular, digital…).

As I sat in the bar watching the end of the 2008 NCAA Championship Game, my mind wandered back to the days I used to watch the Tigers play at the Mid-South Coliseum and Pyramid. I was never one to sit in the seat for the whole game, I would walk around to visit with friends while still watching the game. Even in Washington, D.C., I felt all of Memphis rooting for the team the same way the attendees did when I went to games.

The pundits had Memphis losing early in the tournament. They did not. Most predicted UCLA to proceed to the championship. They did not.

Memphis did. Memphis won 38 games this season, the most of any college basketball team ever. They lost two games, one to Tennessee, which had a great season, and the other to Kansas, the National Champions in the National Championship game.

Congratulations Memphis on a season well played.

You probably remember seeing the video of four guys singing and dancing while keeping perfect time to a catchy song. At least one person must have sent you a link to the video on YouTube. Well the band was OK Go, and the song “Here it Goes Again.” Even some Legos pay homage to the extremely popular video.

OK Go has emerged as a band willing to stand up for causes for which they believe. For example, they have been very involved with the reconstruction of New Orleans and supporting the city’s musicians through fundraising and hands on work.

They have also been outspoken activists for Net Neutrality because of the importance the Internet has played in developing their brand. Just this weekend, the New York Times has published the band’s lead singer Damian Kulash’s editorial Beware the New New Thing on Net Neutrality. Specifically, he argues against the telecommunication companies, and other network providers, being allowed to offer tiered services.

Significantly, one copy of the video for Here it Goes Again on YouTube has been viewed over thirty two million times since being posted. Plus there are multiple versions of the video, as well as alternative versions like the Lego video, on YouTube that have also been viewed a huge number of times.

Yet, as of the fall of 2007, OK Go received no compensation from YouTube or any other online service for the use of the video. Of course, the terms and conditions for the use of the YouTube site provide that people upload their content on a gratis basis. However, the viral success of the Here it Goes Again video seems to have expanded YouTube’s base as much, if not more, than it did the band’s audience.

A fundamental element of Network Neutrality according to Mr. Kulash is that people should be able to upload, as well as access, content onto sites like YouTube, MySpace, Bebo, iMeem, etc. Of course Network Neutrality would prevent limits on network resources dedicated to file sharing and peer to peer traffic, but that does not seem to be Mr. Kulash’s argument.

Companies do not offer sites like YouTube, MySpace, Bebo and iMeem out of the goodness of their hearts. No, they want to make money. Currently, advertising is the base for the revenue models of the sites but who knows what the future holds. The companies have been able to limit their costs, and thus increase their profit margins, by not paying for the use of the creative content that draws people to the sites.

Net Neutrality is a tricky debate because it technically is a question of network management, and cost allocation. It seems to me that the question being posed is who is going to pay for the bandwidth required to support high quality access. Telecommunication companies do not seem to want to subsidize the growth of online companies that essentially compete with them. The online companies do not want to pay for the additional bandwidth because that would decrease their revenue. And, thus, as Mr. Kulash points out, consumers are potentially going to pay for the access.

coming soon… after some interesting conversations, and a bit of research, I will be clarifying my position on Network Neutrality.  Yes, I know…

Okay, it is April 1 but this is not a joke, though I fear we may be fools…

TDC, a Danish telecommunication provider has launched an unlimited music download service for their customers. 30 record labels, including three of the majors, have licensed music to TDC. Subscribers will be able to download any songs they want as part of the subscription. Of course, some on the copyleft are still complaining that the music is “wrapped in DRM” so the music really isn’t free for the users to use in any way they want.

Many people have been toying with a fee attached to internet service that would allow users to consume music in any fashion without having to pay for each individual song, or worrying about being sued for infringement. Warner Music has hired one of the most determined of the group, Jim Griffin, to continue to develop, and then implement, a blanket licensing scheme where subscribers would pay a monthly fee and that fee would be distributed to rights holders through existing collective rights organizations.

The only thing that seems certain in these new paradigms is that the major labels will be paid. The open question is will anybody else?