What does XM+MP3 equal? The answer is iPod. XM Satellite Radio's new MP3 players let subscribers record, store, and create their own playlists of songs. According to the major record companies, the Recording Industry Association of America (RIAA), and others in the music industry this function makes XM and its devices the equivalent of an iPod, except in one minor respect--royalties. The RIAA contends that XM and others are distributing copyrighted sound recordings without permission from copyright owners (the record companies), and without paying royalties for exercise of the owners' distribution rights. In May the major record companies sued XM in federal district court in New York for copyright infringement.
Meanwhile, the recording industry is also looking to Congress for a long-term solution, throwing its support behind the proposed Platform Equity and Remedies for Rights Holders in Music Act of 2006 (Perform).
The record companies are right to be concerned about satellite radio and other transmission services, but Perform would merely be the latest attempt to adjust an overgrown regulatory system to another technological development. Perform would just add to the cumbersome structure of digital age amendments that now make section 114 of the Copyright Act a "section" of 16 single-spaced pages. Congress should do something more fundamental, and begin restructuring that system in favor of traditional market principles.
The licensing structure put in place by the current Copyright Act contravenes these principles. Under this regime, parties are required to enter into compulsory licenses for the transmission and broadcast of copyrighted sound recordings. The members of each industry group are permitted to agree among themselves on the rates and other terms for these licenses under a shield of antitrust immunity. If the copyright owners and transmission services can't agree, a panel of copyright royalty judges is directed to step in and set rates and terms. Perform would allow the royalty panel to set rates and would apply them to all transmission services, including satellite radio and online Webcasts--everything other than conventional ("terrestrial") radio broadcasters.
Since the earliest days of the recording industry, Congress has required owners of copyrighted music to grant licenses to those who wish to make and distribute records. In 1971 Congress extended copyright protection to sound recordings. And in 1995 Congress gave the owners of copyrighted sound recordings the exclusive right to perform them publicly by digital audio transmission.
Beginning in 1992, Congress also enacted a thicket of other Copyright Act provisions, exemptions, exceptions, and procedures, as it tried to keep up with the digital revolution and balance the competing claims and interests of terrestrial radio broadcasters, satellite radio services, Webcasters, songwriters, performing artists, the record companies, and consumers.
The result: Terrestrial radio broadcasters are, for the most part, exempt from infringement liability and are not obligated to pay royalties to copyright holders on sound recordings. But subscription and satellite radio services are subject to statutory licensing of their "performance" of copyrighted works.
The major record companies, the RIAA, and many artists contend that the statutory performance royalty rates paid by satellite radio and other services are grossly inadequate. These groups claim that XM's and Sirius's new portable devices go way beyond conventional radio, and are substantially equivalent to an iPod, which is designed and marketed to play recordings for which distribution royalties have been paid. (Under the iTunes music store distribution agreements, for example, Apple keeps about one-third of each song's 99-cent download price. The rest goes to record companies, artists, and songwriters.)
XM asserts that it's in compliance with current law because it already pays the statutory performance royalty. The manufacturers of XM's licensed devices also pay a digital audio recording device royalty. XM also points out that subscribers are merely making noncommercial personal use of the devices, and that it already pays more in performance royalties than any other transmission service. Terrestrial broadcasters, on the other hand, pay no sound recording royalties.
Still, the record companies have the better of the argument. The Sirius and XM systems have at least arguably crossed the line into "distribution." And there can be little doubt that their features go beyond the "performances" for which Congress established the current statutory royalty scheme.
Since Sirius has already reached an agreement with the record companies on additional compensation for these devices, XM finds itself the lone defendant in the copyright suit filed in New York, as well as the chief target of the RIAA's push for the Perform Act.
Perform would generally extend the current structure for determining statutory license royalty rates to all transmission services. If industry groups do not reach negotiated agreements, the royalty panel would be required to set rates at "the fair market value of the rights licensed." While in economic theory this is equivalent to the current statutory language prescribing rates for some services "that would have been negotiated in the marketplace," this new language is presumably designed to jolt the panel into setting higher rates across the board.
Perform also attempts to continue a flexible approach in determining the value of "the rights licensed," according to their effect on CD and authorized online music sales, rather than automatically requiring, for example, that the royalty panel count each XM subscriber's reception of a sound recording as a distribution. This approach is apparently designed to accommodate new technologies, or, to be more precise, delegate to the panel the ultimate responsibility of figuring out what to do about them.
Rather than requiring artists and businesses to do something they would not be required to do in almost any other industry, immunizing them from the antitrust laws in order to comply, and then empowering a government-created body to step in if that doesn't work, Congress should allow each owner of sound recording copyrights, individually and without antitrust immunity, to negotiate license terms with each transmission service.
Concerns that the major record labels would use market power to exclude independent labels could be handled just as they are for other industries--under the antitrust laws. The record companies obviously have a market incentive to seek a rate that would not reduce demand. They also must consider the promotional benefits that Webcasters, satellite radio, and other services produce for their products. These constraints have been brought to bear in the case of iTunes. Even though most major record companies have said that iTunes should price songs at variable rates, they have just renewed their agreement with Apple, which will continue charging 99 cents per song.
It is time to move toward a more traditional and market-based approach, and step back from a statutory scheme that occupies page after page of the United States Code with gems like the following: "A Ônonsubscription' transmission is any transmission that is not a subscription transmission."
Christopher Norgaard is a Los AngelesÐbased partner at Ropers Majeski Kohn and Bentley.
