I've been asked to speak today about the rights of artists in our society, and to touch on what's happening to those rights on Capitol Hill. I'm very passionate about the rights of artists. I have less passion for copyright reform on Capitol Hill. Most members of Congress are well-intentioned in their reform efforts. But starting with player piano rolls ninety-seven years ago, Congress repeatedly has imposed licensing obligations on songwriters and recording artists. Those obligations are utterly failing to meet the challenges of new technologies and services in our digital, interconnected world.
Today I will illustrate some of those problems, outline the proposed remedies circulating on Capitol Hill, and put forward what some would call a radical alternative that likely could spare both this Congress and future Congresses from having to protect artists' rights. In this alternative approach, the market would ensure artists could look out for themselves.
The Blackstonian Bundle
At The Progress & Freedom Foundation, we believe in free markets, property rights and individual sovereignty. So what does that mean for our discussion today? It means that in a digital economy, intellectual property rights must be respected to enable a free market and guarantee individual sovereignty.
Our Founding Fathers understood that, and ensured intellectual property rights in our Constitution. Article I, Section 8, Clause 8 ensures these rights for a limited time to promote the "Progress of Science and useful Arts." When crafting the Constitution, the Founding Fathers were building on what was familiar to them, namely English law.
About two decades prior to the drafting of the Constitution, an Englishman named William Blackstone wrote a series of commentaries on English law. He said property rights were like a bundle of sticks; each stick represented a distinct property right for a distinct property, which could be retained, loaned, sold or given away.
What does that mean in music? Let's say you compose a song, and then you and your band members record it. At the moment you composed that song, you were granted copyright for the composition. In theory at least, any part of that bundle of sticks - the right to publish it, record it, etc. - can be sold to a publisher or label, or it can be licensed to someone, or you can sit on it and do nothing.
When you recorded the composition, someone - quite possibly you and your band, depending on the terms agreed to at the time of the recording - received an automatic copyright for the sound recording. That means a new bundle of sticks.
Restricting Artists' Rights
Now there's a wrinkle in the music business when it comes to our Blackstonian bundles. Thanks to the U.S. government, copyright holders in the music business don't have complete control over their sticks. The culprit is compulsory licensing.
U.S. law is peppered with various licenses affecting composers and artists, from performance rights to mechanical rights.
There are powerful arguments in favor of compulsory licensing in music. It is argued that it means more content for consumers. There are fewer barriers to entry for a radio station, a digital streaming service, or other digital content provider. But the societal price paid here is that copyright holders have less market power and find their actions strongly influenced by the whims of the federal government. There is an economic price as well, beginning with the resulting marketplace inefficiencies.
Our current licensing system takes those Blackstonian bundles of sticks and uses them like plywood to create a makeshift shelter for artists worse than anything that could be constructed by the Federal Emergency Management Agency. It's not even the quality of a FEMA trailer. It's a lean-to shaped like a parallelogram with an air-conditioning system that consists of half of the roof planks missing. It should be condemned, but instead Congress wants to add some rooms to the existing structure, so it takes a few more Blackstonian sticks to build walls, and when it's short of lumber it just rips off a few more roof planks.
The Copyright Modernization Act of 2006
The first addition to this shabby shelter, the first bill I'll discuss, is actually two rooms. This 100-page bill is called the Copyright Modernization Act of 2006. It essentially combines two other bills; for our purposes let's call these bills, or rooms, the Conservatory and the Lounge, which are connected by a secret passage. Hopefully Parker Brothers won't find my use of references to the board game Clue to be a violation of their trademark.
Both bills are sponsored by the chairman of the House Judiciary IP Subcommittee, Lamar Smith of Texas. We'll call him Professor Plum. One bill is the Orphan Works Act of 2006, and the other is the Section 115 Reform Act of 2006, sometimes called SIRA.
SIRA - the Conservatory - gives digital music providers a blanket compulsory license for digital phonorecord deliveries and hybrid offerings. These services have been operating now as if they had a license, and have been paying money into escrow guessing what the rate would be, but their legality hasn't been clear and the copyright holders haven?t seen any of that money. The key backers of the bill, the trade associations representing digital music services and music publishers, argue the legislation clears up ambiguities in the law and will allow copyright holders to be paid.
But a blanket license means a songwriter or publisher has absolutely no ability to prevent the use of their work on one of these services, and it goes without saying he or she can't negotiate a higher price than whatever rate will emerge from the Copyright Royalty Board, the latest rate-setting pseudo court operating out of the Library of Congress.
Regarding orphan works legislation - the Lounge - there is no question that when Congress in the 1976 Act eliminated the need to register your work with the U.S. Copyright Office, it created orphan works. The Copyright Office predicted that at the time.
Under the bill, originally drafted by the Copyright Office based on numerous comments, someone wishing to use a work must perform a "reasonably diligent search in good faith to identify and locate" the rights-holder. If that can't be done, then the work can be used. If the artist later surfaces, she can insist that further use of her work stop. She also must be paid market value for the use. She can't, however, seek additional damages. Also, she can't stop use if a derivative work has resulted from the use.
Most copyright-related organizations are okay with the legislation, including record labels. Some sound recordings aren't registered with any designated agent, and these could be considered orphan works if the copyright holder wasn't easily found. But most sound recordings are registered at a mere handful of organizations such as ASCAP, BMI and SESAC, and most compositions are with groups such as the Harry Fox agency, so it's not hard to track down the copyright holder. All you have to do is look at the urban music scene to know that artists aren't finding it impossible to get sampling or remix rights. Yes, an occasional artist or songwriter will say no, but that's their right as a copyright holder.
The PERFORM Act of 2006
Our next addition to our lean-to - the Billiard room - is The PERFORM Act, sponsored by Senator Dianne Feinstein of California, or Mrs. Peacock. A key portion of this bill is actually being contested in court right now.
XM Satellite Radio has licensed some players, like the Pioneer Inno, that can store 50 or more hours of music and allow the user to record and archive full songs, with metadata, from the radio. XM pays for a performance license, in other words, a license that allows them to play music. RIAA contends that if Inno owners are recording libraries of music with complete metadata, that is in fact a download service, which is covered by a different license. It sued XM to get them to purchase an additional license.
Sirius, by the way, decided to avoid trouble by negotiating a license with the labels for a storage player. The PERFORM Act would require a license in these cases. I should note that this licensing distinction is also addressed somewhat in the SIRA portion of the Copyright Modernization Act.
PERFORM also aims to harmonize rates set for various digital music licenses under one standard based on a fair market value, and requires that certain digital services adopt reasonable protection mechanisms for the content, but doesn't specify what type of protective technology should be used.
The Audio Broadcast Flag Licensing Act of 2006
Digital Rights Management also is a major part of the Audio Broadcast Flag Licensing Act of 2006, which we'll call the Study in our growing shanty. It is a stand-alone bill in the House, sponsored by Michael Ferguson of New Jersey - let's say he's Mr. Green - that hasn't moved but was folded in to a major telecom reform bill in the Senate that's currently awaiting a floor vote. It was inserted by Senate Commerce Committee Chairman Ted Stevens of Alaska; we?ll call him Colonel Mustard.
This bill would authorize the Federal Communications Commission to write rules requiring manufacturers of music devices to accommodate a "flag" in a digital music transmission, either over-the-air or through a satellite service. The flag, in theory, would allow the consumer to use the song, but blocks the transfer of the song elsewhere, say to a peer-to-peer network.
Proponents argue the audio flag isn't noticeable to consumers and doesn't interfere with their use of the music. Pure digital content needs to be protected from getting onto, say, P2P networks. Opponents say the audio flag is less benign than the broadcast one, and the language in the Senate bill gives the FCC authority not just over digital retransmission, but "transmission," essentially making the FCC a regulatory agency overseeing digital radio and Internet services.
They also claim it opens the door to the FCC mandating encryption at the source, thus rendering obsolete a great deal of existing consumer electronics devices. The recording industry, however, has testified that it's not seeking encryption at the source.
Capitol Hill, Tear Down this Shanty!
There's a lot of he-said-she-said going on with all of these pieces of legislation - accusations of Miss White in the Kitchen with the Candlestick or Colonel Mustard in the Hall with the Revolver. Some of the arguments - and portions of some of the legislation - have merit. But there is very little recognition that we wouldn't be having most of these legislative skirmishes if Washington hadn't so aggressively inserted itself into the music business in the first place, beyond its natural role as an enforcer of property rights.
Every party to these licenses agrees the system is flawed, but every party fears how they would fare given the alternative - no compulsory licenses. But let's try to imagine what that world would look like.
The biggest specter raised by various industries is that dramatic transaction costs that would arise. It is certainly true that, at least in the short run, there would be massive market disruptions. Radio stations wouldn't know which songs they were allowed to play. Online services from downloaders to streamers would have to pull back massive libraries of music and seek to renegotiate. Because there has been a complete absence of a free market in world of music for a century, no one could be expected to know what to charge or what to pay.
Consumers would be furious.
But note I said in the short run. Markets hate transaction costs, and they hate inefficiencies. Songwriters and recording artists would still have every incentive to have their works aired, streamed and downloaded. The alternative would be to not get paid. Music providers, from radio stations to digital download services, would have incentives to obtain rights to as much content as possible to please consumers. All parties would have incentives to see agreements were reached to avoid allowing unauthorized distribution systems such as peer-to-peer networks to fill the void.
With such strong incentives to reach accommodation, it's not difficult to imagine intermediaries filling the gap, creating voluntary licensing arrangements. We see such intermediaries today in the forms of ASCAP, BMI, SESAC, the Harry Fox agency and SoundExchange. These and other entities could emerge and compete to offer the most efficient licensing at the lowest terms.
We see market negotiations along these lines every day. The key is, there shouldn't be any governmental compulsion to these negotiations, and rates should emerge organically from supply and demand. For example, in a free market, not every composition or every sound recording would be licensed at the same price, yet government rate courts ignore that reality.
True and lasting copyright modernization would abolish all compulsory licenses in music. Ideally there would be a transition period to allow market negotiations to occur, and minimize the period of disruption. In addition, language might be needed to ensure that intermediaries utilizing economies of scale to reduce transaction costs in licensing don't face antitrust concerns.
In such a world consumers would still have access to a nearly unlimited array of music. Some works might be priced out of reach of some consumers, and some artists might choose to withhold their works entirely. That would be disappointing, but it would also be a reflection of those artists'rights; in a free market they can withhold sticks, even though it means a financial loss to them and a cultural loss for us. There is no government role in "correcting" that situation, because there is no shortage of recorded music available to consumers today, and it must be emphasized that we as consumers have no "right" to the work of an artist who declines to share.
There are other compulsory licenses in our modern world, including in the cable and satellite industries. They also have negative characteristics, such as thwarting competition and innovation and suppressing property rights. Perhaps if modernization in the music industry is successful, Congress could then turn its attention to other compulsory licenses it has created and see about abolishing those as well.
*Patrick Ross is a senior fellow and vice president for communications and external affairs at The Progress & Freedom Foundation. The views expressed here are his own, and are not necessarily the views of the PFF board, fellows or staff. This paper is derived from a speech given by the author at the Vegas Music Conference in Las Vegas, Nevada, on September 21st, 2006, to an audience consisting primarily of songwriters and music producers.
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