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(e.g., Music Choice), (b) satellite radio services (e.g., XM Sirius) and (c) webcasting and streaming on the Internet (e.g., Pandora). The public performance royalties generated by digital public performances of sound recordings is collected by Sound Exchange based in Washington, D.C. Now that we know the basis for the payment of mechanical royalties and performance income, let’s take a look at the business models used today to sell music on the Internet. A. Downloads A La Carte Model: The sale of individual masters and albums as downloads was one of the first business models developed for the sale of music online. The Apple iTunes store is the most successful example of this business model. This business model is relatively simple. The online service negotiates a license with each record label which grants the service the right to sell the labels’ recordings in a digital format. The album or individual track purchased from the Apple iTune stored is called a “permanent download” as it can be played and stored on digital devices (e.g., iPod and iPad), mobile phones, laptops, desktop computers and the “cloud”. Under the license agreement, the online service receives a percentage from the sale of each download. After deducting its share, the service remits the balance of the monies to the record labels. The record labels are then obligated to make two payments—one to the recording artist (“artist royalty”) and the other to the publisher whose song was recorded on the download (“mechanical royalty”). A mechanical royalty is owed to the music publisher because the user has downloaded the music file and copied it to his/her computer, MP3 player, tablet or mobile phone or other device. The mechanical rate for a digital download is the same as that for compact discs, vinyl and cassettes. Subscription Model: As you might suspect, the “à la carte” model is not the only digital download model. There are a number of companies that sell digital downloads as part of a monthly subscription. These downloads are called “conditional downloads” or “tethered downloads” because the consumer may only access and listen to the downloaded music so long as the consumer has paid the subscription fee. Once the consumer stops paying the subscription fee, the music is no longer available. The subscription fees can run anywhere from $10 to $15 per month for “unlimited” access to the music that the online service has been able to license from the various record labels. Companies that employ the subscription model include Yahoo! Music, Rhapsody, Microsoft and Napster. While each company is different, generally speaking the record labels and music publishers are paid royalties from a small portion of the subscription fees paid during the month based upon a variety of factors (e.g., the number of subscribers, subscription fees, and frequency the recording is downloaded or streamed, etc.). Because the copyright owners of the masters are not paid per download but rather on a pro rata basis amongst all copyright owners, the monies that are ultimately paid to artists are relatively low. While the subscription model may be the “best value” for consumers, it is not a favored business model amongst record companies and artists. The mechanical royalty rate used to calculate mechanical royalties for permanent downloads is not used to calculate mechanical royalties for “conditional” or “tethered” downloads. Instead, online services that sell music as a “conditional” or “tethered” download must pay the publisher the greater of the following: (1) 10.5% of the revenue less any performing rights organization payments (i.e., ASCAP, BMI and SESAC) (if any); (2) the lesser of (a) $0.80 per subscriber per month, or (3) $0.50 per subscriber per month. As you can see, this can become quite cumbersome and complicated. Please note that, as of the date of this article, the copyright owner of a master is not entitled to receive any public performance income. Last fall the Second Circuit Court of Appeals held that downloading a music file is not a public performance.

B. Internet Radio (Non-Interactive Webcasting) Internet radio is simply streaming music on the Internet and is often referred to as “webcasting”. The most common webcasts are those by radio stations that stream their programming on the Internet. In addition, there are a number of businesses that have only an online presence. These stations typically have a number of music genres that a consumer can select. Aside from selecting the station they want to listen to, the consumer is unable to make any other choices. This is what is meant as “non-interactive”; the consumer is limited as to how he/she interacts with the digital service. Another example of webcasting is satellite radio (e.g., XM Sirius). For a monthly fee, you are able to listen to their programming in your home or car. Other than selecting the station you want to listen to, the service is non-interactive and you have to listen to what they program and decide to play. Of course, it should come as no surprise that there are companies that have pushed the boundaries of what is “non-interactive”. For example, take the company Pandora. Using the Pandora service a user may create a “radio station” of his/her favorite artist. However, the user has no ability to decide what songs are played on the “radio station”. Nonetheless, the user has some limited ability to select what might be played in the future as he/she can select whether he likes or dislikes the song and may also skip a song. However, in order to remain compliant as a “non-interactive” digital service, the ability to skip songs is limited to a defined number of recordings during a listening period. When a song and its recording are streamed on the Internet, both the publisher and copyright owner of the master are entitled to receive public performance fees. As a refresher, the publisher’s public performance income is collected by its PRO (e.g., ASCAP, BMI or SESAC) and the master owner’s public performance income is collected by Sound Exchange. C. Streaming-On-Demand Unlike webcasting, streaming on demand is an interactive service. This means that the consumer can listen to any song in the online service’s database as many times as the consumer would like. Similar to the subscription model for “conditional” and “tethered downloads”, the consumer may only listen to the music so long as he/she pays the subscription fees. Most companies have a free version of the service that is supported by advertisements and a subscription service that is supported by subscriptions fees. These fees may be payable on a monthly or annual basis. D. Ringtones Ringtones are songs that are played when someone calls you on your cell phone. Ringbacks are songs that are played on your phone when you call someone and their line is busy. When you purchase a ringback, rather than hearing a busy signal you hear the song you purchased. Typically, the record company will be paid fifty percent (50%) of the retail price charged to the consumer. The amount paid to the recording artist will be dictated by his/her recording agreement. The purchase of a ringtone or ringback also requires the payment of a mechanical license as the song is copied to the consumer’s mobile device. However, because ringtones and ringbacks are not “phonorecords” (as that term is defined in the U.S. Copyright Act), ringtones and ringbacks have their own special mechanical rate of 24 cents. This rate will remain in effect until December 31, 2012. Todd Gascon (gascon@recordingmag.com) is a technology and entertainment attorney at ZentLaw in Sunnyvale, California. Mr. Gascon’s practice is focused in the areas of intellectual property law, including copyrights and trademarks, with a particular emphasis on digital media, music, motion pictures, visual arts and all entertainment issues relative to the Internet. For more information on Todd and ZentLaw, visit www.zentlaw.com.
RECORDING SEPTEMBER 2011

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Recording - September 2011

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