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27–605 PDF








MAY 16, 2006

Serial No. 109–108

Printed for the use of the Committee on the Judiciary
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Available via the World Wide Web: http://judiciary.house.gov


F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
BOB INGLIS, South Carolina
MARK GREEN, Wisconsin
DARRELL ISSA, California
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JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California

PHILIP G. KIKO, General Counsel-Chief of Staff
PERRY H. APELBAUM, Minority Chief Counsel

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Subcommittee on Courts, the Internet, and Intellectual Property

LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois
BOB INGLIS, South Carolina
DARRELL ISSA, California

HOWARD L. BERMAN, California
JOHN CONYERS, Jr., Michigan
ZOE LOFGREN, California
MARTIN T. MEEHAN, Massachusetts
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
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SHANNA WINTERS, Minority Counsel


MAY 16, 2006

    The Honorable Lamar Smith, a Representative in Congress from the State of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property

    The Honorable Howard L. Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property


Mr. David M. Israelite, President and Chief Executive Officer, National Music Publishers' Association (NMPA)
Oral Testimony
Prepared Statement
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Mr. Jonathan Potter, Executive Director, Digital Media Association (DiMA)
Oral Testimony
Prepared Statement

Mr. Rick Carnes, President, Songwriters Guild of America (SGA)
Oral Testimony
Prepared Statement

Mr. Cary H. Sherman, President, Recording Industry Association of America, Inc. (RIAA)
Oral Testimony
Prepared Statement


Material Submitted for the Hearing Record

    Prepared Statement of the Honorable Howard Berman, a Representative in Congress from the State of California, and Ranking Member, Subcommittee on Courts, the Internet, and Intellectual Property

    Separate Statement of SESAC, Inc.

    Prepared Statement of the U.S. Copyright Office

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TUESDAY, MAY 16, 2006

House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.

    The Subcommittee met, pursuant to notice, at 4:05 p.m., in Room 2141, Rayburn House Office Building, the Honorable Lamar Smith (Chairman of the Subcommittee) presiding.

    Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order. It is nice to see a nice audience out here interested in such an important subject. I also was going to say, but maybe now don't need to say, that I wasn't expecting any other Members to be present because votes were canceled for tonight and there are no votes for tomorrow. We especially appreciate the attendance of other Members who are here, and actually, I am expecting a couple more in addition to the ones who are already present.

    I am going to recognize myself for an opening statement, then the Ranking Member for an opening statement. Without objection, all other Members' opening statements will be made a part of the record, and after that, we will look forward to the testimony of our witnesses today.

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    Today, the Subcommittee continues its efforts to reform section 115 of the Copyright Act, which addresses mechanical licensing. However, instead of identifying the problems in the music industry, we will hear today about a possible solution that has been jointly suggested by the music publishers and the on-line music companies. They deserve great credit for the overall time and energy they have spent and for the progress that has been made to date.

    The music industry has evolved from simple business models focused around the distribution of physical items, such as compact disks, to a dynamic digital marketplace where new business models evolve rapidly. The laws that set out the framework for the digital licensing of musical rights in this industry are outdated and, some say, beyond repair.

    The discussion draft before the Subcommittee today creates a new blanket license for certain digital uses of music. Digital music is the future of the music industry. The laws that enable this industry to operate need to look to the future, as well.

    In addition to creating a blanket license, the discussion draft creates competition among those who will issue such blanket licenses to ensure that antitrust issues do not arise. For missing copyright owners, the draft also ensures that a license can still be issued for the use of their work and give the owners 3 years to step forward to be paid their royalties. The draft also enables direct licensing to occur.

    When digital music services began, the lack of a legal framework for licensing became a major obstacle to meeting consumers' needs quickly. Online music companies made several millions of dollars worth of escrowed payments in order to obtain licenses for which rates had not been set. Those rates have still not been set, thereby preventing distribution of the royalties to the artists who, of course, deserve them.
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    Upon enactment of this legislation, this escrowed money and more will finally be distributed to the artists. Outdated laws that make artists wait years to be paid are currently not fair to anyone involved.

    Although this discussion draft reflects agreement on many points between the Digital Music Association and the National Music Publishers' Association, there are a few areas in which agreement still has not been reached between the two parties. Two of the issues that remain outstanding between DMA and the publishers are, one, the cost of setting up and running a modern licensing system and who should bear those costs, and two, the proper definition of an interactive stream. The areas of disagreement are in bracketed text in the discussion draft that many of you all have in front of you.

    There are other issues we will hear about today. For instance, some think that the scope of this proposal should be expanded to cover all works, digital and physical alike. With a limit of four witnesses, the Copyright Office cannot be here in person. However, they have provided written testimony for the record, which I will read a statement from, and without objection, their entire statement will be made a part of the record, as well.

    Here is a quote from the Copyright Office. ''The immediate benefit that the SIRA,'' that is the underlying draft legislation, ''could bring to the music industry should not be delayed pending resolution of the other issues or bills, nor should the fate of the SIRA be tied to that of other legislation,'' end quote.

    [The prepared statement of the Copyright Office follows in the Appendix.]
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    Mr. SMITH. There is no question about the need, but only how to reform American music licensing laws. Music licensing reform is necessary to pay artists and to make legal copies of music available to consumers.

    That concludes my opening statement and the gentleman from California, Mr. Berman, is recognized for his.

    Mr. BERMAN. Thank you very much, Mr. Chairman. Thank you for scheduling this hearing on the discussion draft of the section 115 music licensing reform.

    We've come a long way from the initial piracy-laden version of Napster released in 1999. The IFPI, sometimes known as the International Federation of Phonogram and Videogram Producers, digital music report of 2006 notes the growth of digitally-delivered content in the music industry. Four-hundred-and-twenty million single tracks downloaded in 2005 globally, double that of 2004—more than double. Three-hundred-and-fifty-three million single tracks downloaded in the U.S., up from 143 million. The number of subscription services, such as Rhapsody and Napster, increased from 1.5 to 2.8 million globally in 2005. In 2005, the number of legitimate music download sites reached 335, up from 50, 2 years ago. Digital sales in 2005 accounted for approximately 6 percent of global music sales based on the first half of the year.

    Two-thousand-and-five was a landmark year for digital music. Just last week, The Washington Post reported that ring tones, once dismissed as nothing more than a passing fad, have become a $3 billion worldwide market. But the burden surrounding licensing often delays, if not prevents, certain music from getting to the consumer. Unfortunately, this inability to provide music at any time, at any place, in any format, may precipitate consumer migration back to unauthorized peer-to-peer services.
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    Two years ago, the Copyright Office suggested that reform of the 115 license should reflect a structure similar to that which is currently available for the 114 license, a designated agent which serves as a collector to administer a blanket license. I am encouraged to see that the discussion draft reflects that idea. I commend the publishers on their hard work. They have tried diligently to resolve the problems that the DiMA companies have illustrated, particularly the double-dip and one-stop-shop issues.

    However, I am concerned that with an impending markup less than 2 weeks away, a number of important details of the bill have yet to be agreed upon. I will focus on some of those issues during the question and answer.

    Furthermore, any solution can only be evaluated from a perspective of the scope of the problem originally identified. Two years ago at an oversight hearing on section 115, I posed two questions which I would ask again today. Does 115 facilitate or hinder the roll-out of new legal music offerings? And depending on the answer to the first question, what, if anything, should Congress do to change 115?

    While this proposed legislation addresses many of the digital concerns, unresolved still are the many issues encountered in the physical market or in the area of hybrid services. The roll-out of new secure physical formats or high-quality formats oftentimes require additional reproductions. This roll-out has been sluggish. There is little resolution to the business model which provides preloaded content on devices. Finally, many definitional questions remain, such as whether the license includes ring tones or if a kiosk service is a reproduction of digital case or digital phonorecord delivery service. Some of these questions may require a purely economic analysis. Others may require reevaluation on the processed level.
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    So we have solved some issues. We have a potential solution to some issues. Other issues are not resolved. How we should handle that, I think is a question for this Subcommittee and I hope we can achieve greater clarity and further consensus as this bill moves forward.

    [The prepared statement of Mr. Berman follows in the Appendix.]

    Mr. SMITH. Thank you, Mr. Berman.

    Before I introduce the witnesses, I would like to ask you all to stand and be sworn in, please. If you will raise your right hand, do you swear to tell the truth, the whole truth and nothing but the truth, so help you, God?

    Mr. ISRAELITE. I do.

    Mr. POTTER. I do.

    Mr. CARNES. I do.

    Mr. SHERMAN. I do.

    Mr. SMITH. Thank you. Please be seated.

    Our first witness is David Israelite, the President and Chief Executive Officer of the National Music Publishers' Association. Founded in 1917, NMPA represents American music publishers and their songwriter partners. From 2001 through early 2005, Mr. Israelite served as Deputy Chief of Staff and counselor to the Attorney General of the United States. In March of 2004, the Attorney General appointed him Chairman of the Department's Task Force on Intellectual Property. Mr. Israelite earned his J.D. from the University of Missouri in 1994 and received a B.A. in a double major of political science and communications from William Jewell College in 1990. David, we usually don't put in all those dates, but you got special attention today. [Laughter.]
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    Mr. SMITH. Our second witness is Jonathan Potter, who is the Executive Director of the Digital Media Association, DiMA, a position that he has held since DiMA was organized in June 1998. DiMA's goal is to represent the leading companies that provide online audio and video content to consumers. Mr. Potter appears frequently before this Subcommittee and has worked with David Israelite to develop the discussion draft before the Subcommittee today. Mr. Potter is a graduate of New York University School of Law and the University of Rochester. No dates there, Jon.

    Our third witness is Rick Carnes, the President of the Songwriters Guild of America. Previously, Mr. Carnes has served as SGA Vice President and has represented SGA on numerous panels regarding contractual, technological, and legal issues affecting songwriters. A native of Memphis, Tennessee, Mr. Carnes and his wife, Janice, moved to Nashville in 1978. Soon after, they signed their first record deal with RCA Records, later recording for Warner Brothers and MCA Records. In 1983, Mr. Carnes wrote Reba McEntire's first number one hit, ''I Can't Even Get the Blues No More,'' and co-wrote with Janice and Chip Harding three top ten hits for the Whites, ''You Put the Blue in Me,'' ''Hanging Around,'' and ''Pins and Needles.'' Mr. Carnes is a graduate of Memphis State University with a B.A. in political science and a master's in elementary education.

    Our final witness is Cary Sherman, who is the President of the Recording Industry Association of America. The trade group has more than 350 member companies that are responsible for creating, manufacturing, or distributing 90 percent of all legitimate sound recordings sold in the United States. The $14 billion U.S. sound recording industry is the largest market for pre-recorded music in the world. Mr. Sherman graduated from Cornell University in 1968 and Harvard Law School in 1971. An accomplished musician and songwriter, Mr. Sherman is an officer of the board of the Levine School of Music in Washington, D.C.
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    We welcome you all and look forward to your testimony, and Mr. Israelite, we will begin with you.


    Mr. ISRAELITE. Mr. Chairman, Mr. Berman, Members of the Subcommittee, I appreciate this opportunity to appear before the Subcommittee to address music licensing in the digital age and the proposed Section 115 Reform Act of 2006.

    Over the last year, we have been hard at work negotiating with the organizations represented at this table and with other music groups. The draft bill represents much progress from those negotiations. I would like to thank you, Mr. Chairman and Mr. Berman and your staffs for their hard work and your leadership on this issue.

    No one involved in the music industry today will tell you that the way that the industry is structured makes sense. Today's music business is the result of a great deal of historical anomalies and unnatural evolution. Issues involving music licensing can be very complicated and very confusing, but underneath all of the legislative language and legal concepts, there are some very simple principles.

    Every piece of recorded music contains two copyrights. One copyright belongs to the songwriter, represented by a music publisher, for the words and notes. The second copyright belongs to the artist, represented by a record label, for a recorded version of that song.
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    This is what is known as a piano roll, used in player pianos that were popular 100 years ago. Through the late 19th century, the music industry was dominated by music publishers. Their business was sheet music and later piano rolls. There was no such industry as the recording industry. Because Congress was concerned about a potential monopoly in the piano roll business, in 1909, Congress imposed a compulsory license on music publishers and songwriters.

    The importance of recorded music grew in the early 20th century, and by the end of World War I, recorded music surpassed sheet music as the largest element of the music business. However, Congress never imposed a similar compulsory license on the copyrights owned by record labels. The result was the existence of two distinct, independent copyrights, one governed by a compulsory license and one free from Government regulation and control.

    I have had the honor of representing music publishers and their songwriter partners for a little more than a year. I have explained to a large number of people what a music publisher does and how the music business is organized. When I explain that every song contains two copyrights, one representing the songwriters' efforts and one representing the recording artist's efforts, the response is one of understanding. But when I explain that what a record label charges for the artist's copyright is determined in a free market but that the Government tells a songwriter how much money he or she will make on every song sold, the response is one of confusion and bewilderment.

    In the past, this system of unequal copyrights worked because music licensing involved music publishers licensing their copyrights to record labels. Those record labels then sold the music containing both copyrights to the consumer in the form of an album, an eight-track, a cassette, or a CD. But in just the last few years, the emergence of new technologies in the digital world has revolutionized the music industry.
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    Most new entrants into the music business are third parties, like the companies that Mr. Potter represents, who do not own either copyright but wish to sell the copyrights owned by others. The result is that these third parties must engage in two different licensing processes, one with record labels, where the record labels can negotiate in a free market, and the second with music publishers, where the Government sets the terms and conditions.

    Put simply, the current process of licensing copyrights that are treated unequally under the law to third parties doesn't work. NMPA supports eliminating the compulsory licensing regime. We would prefer to bargain with third parties in a free market, as our friends do at the record labels. But until that is possible, music publishers are willing to help create a new licensing system for digital uses under section 115. And again, we support these changes based on some very simple principles.

    First, we must not allow the perfect to be the enemy of the good. Congress will never be able to address all of the historical issues of the music industry in one piece of legislation and it should not slow real progress on music licensing just because consensus cannot be reached on everything. The physical licensing process has been in effect for close to a century and it is not broken. Physical products are licensed on a song-by-song basis, such as CDs and albums, and the vast majority of such products are, of course, already licensed. Unlike digital music providers, record labels are not in the position of suddenly needing licenses for a million different CDs.

    Second, the copyright of the songwriter and music publisher deserves no less respect and consideration than the copyright of the record label. Once a blanket licensing system is created, there is no good reason why music publishers and songwriters should not be able to license directly their property to third parties who wish to sell their property. The proposed legislation ends pass-through licensing and this is critical to our support of the bill.
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    Third, this legislation must clarify, as it does in its current form, what Congress intended all along with respect to interactive streaming, that it constitutes a digital phonorecord delivery and is licensable under section 115.

    We thank you, Mr. Chairman, Mr. Berman, and the entire Committee for your work on this important issue and for your efforts on behalf of the songwriter and music publishing community.

    Mr. SMITH. Thank you, Mr. Israelite.

    [The prepared statement of Mr. Israelite follows:]


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]

    Mr. SMITH. Mr. Potter.


    Mr. POTTER. Mr. Chairman, Mr. Berman, Members of the Subcommittee, on behalf of America's digital music innovators, I'm pleased to testify today to announce DiMA's agreement with NMPA in support of a new section 115 statutory reproduction rights license that will dramatically improve the digital music service's ability to compete against piracy and deliver more royalties to all industry creators.
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    For several years, DiMA members, including AOL, MSN, Yahoo!, Real Networks, and Napster, have sought to streamline the licensing of musical works' reproduction rights so that the process mirrors the licensing of performance rights. Simple, efficient administration with assurances that infringement risk has been eliminated if a company takes a reasonably standardized license and pays a fair royalty.

    DiMA welcomes today's discussion draft as it is intended to accomplish precisely what we have requested, to update a 1909 statute for the digital era. DiMA and NMPA have agreed on many significant legislative goals that are reflected in the discussion draft bill. Everyone in the music industry wins, digital services, music publishers, songwriters, record labels, recording artists, and retailers, if the following changes become law and digital services can compete more effectively against piracy.

    One, legal clarify. The discussion draft ensures that investors and innovators will know what rights are implicated by new digital music services, and as a result, the services will spend less money on lawyers and more on product development and marketing.

    Number two, blanket license coverage. No longer will transaction costs and legal risk associated with song-by-song licensing undermine investment in new digital music offerings.

    Three, flexible licensing alternatives. The draft authorizes the Copyright Royalty Board to decide the right royalty rate and the right royalty structure for each type of business activity that is licensed. The CRB will decide whether substantive and economic evidence supports a penny rate, a percentage of revenue rate, or something completely different.
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    Four, technologically neutral rights and licenses. The draft does not establish or limit rights, royalty standards, or obligations based on a services method of transmission technology or a consumer's choice of device. Uniform standards apply equally to cable, satellite, and internet services, as well as to PCs, mobile phones, and portable music devices.

    Five, internet radio parity with broadcast radio. The discussion draft promotes fair competition by providing internet radio with effective royalty-free parity with broadcast radio with respect to server and incidental reproductions that facilitate a stream.

    There are several provisions in the discussion draft that represent significant concessions by DiMA members. Quite significantly, DiMA members are willing to end years of dispute with NMPA by conceding the existence of reproduction rights in association with streaming services. DiMA and NMPA have agreed to split our differences, which the discussion draft reflects in its provision of a royalty-free license for reproductions that facilitate internet radio and a potentially royalty-bearing license for reproductions that facilitate interactive streaming.

    We agree that the legislation should not set a value for this or any other reproduction right, but rather that future negotiation or arbitration will determine the royalty rate. Moreover, we agreed that the legislation should leave open the possibility that the value of a reproduction right in some context might be zero.

    DiMA disagrees, however, with the discussion draft's characterization of the interactive streaming reproduction right as a delivery or a distribution right. DiMA agrees with the Register of Copyrights that digital bits streamed to render a performance should not be deemed a legal distribution or delivery.
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    DiMA has also conceded to share in the costs music publishers will incur in modernizing their existing song-by-song licensing system in order to manage the new blanket license. This is a first, as such costs are typically covered by or deducted from royalty payments themselves. No other statutory or compulsory license imposes cost-sharing obligations on licensees, but as NMPA has absolutely insisted, we have agreed.

    Finally, DiMA is caught in the decades-old battle between record companies and publishers regarding the draft's effective elimination of contractual controlled composition provisions as applied to digital licensing. DiMA understands both points of view. On one hand, the traditional sublicensing model has worked well for licensing digital phonorecord deliveries and legislative change is not necessary. On the other, publishers are demanding to license DiMA services through their own designated agents so as to remove intermediaries between their rights and their licensees and they have called this issue a deal breaker.

    Mr. Chairman, these disagreements are meaningful and important, but not nearly as significant as our agreements. We believe the disagreements should be manageable in the context of moving forward on this legislation.

    Once again, I thank Chairman Smith and Representative Berman for your leadership and for the opportunity to testify today. We look forward to working with you and your staffs to resolve remaining differences and to refine this discussion draft so it can become law in this session of Congress.

    Mr. SMITH. Thank you, Mr. Potter. I appreciate that.
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    [The prepared statement of Mr. Potter follows:]


    Mr. Chairman, Mr. Berman and Members of the Subcommittee:

    I am pleased to join you today and announce the Digital Media Association's agreement with the National Music Publishers Association in support of a new, improved Section 115 statutory reproduction rights license that will dramatically improve the legal and business environment for digital music services. If stakeholders and the Subcommittee collectively can overcome some final hurdles and gain enactment of the conceptual agreements I will discuss, the result will be more innovation and competition among digital music providers, expanded music choice for consumers, and fair compensation to songwriters and music publishers.

    As you know, DiMA represents America's leading digital music service innovators. Our member companies provide Internet radio, music download and music subscription services to millions of consumers nationwide. Offerings from AOL Music, Yahoo! Music, MSN Music, RealNetworks, the iTunes Music Store, MTV, Napster and many more DiMA members are the marketplace solution to music piracy. As the new generation of music performance, music enjoyment and music retail services gain traction in the marketplace, our members' consumer-friendly innovations, feature-rich offerings, attractive pricing and passion for music will persuade American consumers that legal services are not just safer and smarter than illegal ones—they are better.

    For several years DiMA members have sought to streamline the licensing of musical works' reproduction rights so that the process mirrors that of licensing musical works' performance rights—efficient, low-cost administration and assurances that infringement risk has been eliminated if a company takes a reasonably standardized license and pays a fair royalty. Today, I am hopeful that we are taking a giant step toward that outcome. For nearly two years, with this Subcommittee's encouragement and support, DiMA has negotiated with NMPA to develop a new reproduction rights licensing structure for digital music services. At various points, our negotiations also included several additional organizations and industries, including RIAA, NARM, BMI, ASCAP, SESAC, the Songwriters Guild of America, Nashville Songwriters Association, and the Recording Artists Coalition. But DiMA and NMPA determined that a narrower agreement among our two industries was most attainable this year, so we focused on what was possible.
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    Today I am pleased to report that DiMA and NMPA have agreed jointly to support several major amendments to the Copyright Act, including:

1. the creation of a statutory blanket license that will enable royalty-paying digital music services to gain all necessary musical work reproduction rights licenses from one or a handful of collective licensing organizations;

2. the clear provision of reproduction rights associated with digital radio services, including a royalty-free reproduction rights license for non-interactive digital radio; and

3. flexible, technologically-neutral rights, licensing processes, and reporting requirements.

    Agreement to support this combination of amendments did not come easily to either digital music services or music publishers. But after years of disagreement and many difficult months of negotiations, DiMA and NMPA recognized our prevailing common goal—developing a healthier, stronger, broader-based and more dynamic digital music marketplace.

    Legal Clarity and Simple Licensing Processes. Digital music services offer an extraordinary array of alternatives for consumers to enjoy: pre-programmed radio and paid downloads are most like traditional means of enjoying music—broadcast radio, and CDs sold at retail, respectively. In addition, digital services include:

 On-demand streaming, where a consumer creates a playlist and listens only to pre-selected songs
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 Subscription downloads, which are essentially all-you-can-enjoy music rentals paid for with one monthly fee.

    Unfortunately, not all these services fit neatly into the current reproduction rights legal regime, so well-intended DiMA members that have launched digital services have been in legal limbo for several years.

    To reduce legal uncertainty and permit new types of services to launch, NMPA and The Harry Fox Agency, on behalf of HFA's publisher principals, agreed in 2001 to collectively license new digital music services to the extent legally possible, so long as the services paid agreed-upon advances against royalties (with a rate to be agreed in the future or determined by the Copyright Royalty Board). However, questions were raised as to whether the agreements actually accomplished the parties' goals and whether they could do so absent clarifying legislation. Fortunately, today's discussion draft and DiMA's agreement with NMPA are intended to provide the necessary clarification and ensure the effectiveness of these agreements, and to pave a clear path to similar agreements in the future.

    By clarifying when reproduction rights apply and how those rights must be licensed, legislation will enable digital services to seek capital, innovate and build businesses with legal certainty. As I have testified before, the combination of legal uncertainty and statutory copyright damages chokes investment and innovation, which all too often leaves piracy as the most compelling consumer alternative.

    Blanket license coverage. Under current law originally enacted in 1909, the right to reproduce or distribute a composition that is incorporated into a sound recording is compulsory, but song-by-song approvals by copyright owners are required. In the era of digital music, this song-by-song process has created enormous transaction costs for parties wishing to utilize the compulsory license, as new services require more than 1 million songs for an offering to be competitive, and each song must be licensed again for each new service that is introduced.
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    The Harry Fox Agency can play an important role in streamlining the process, but only for publishers that authorize the agency to act on their behalf and only on a song-by-song offering-by-offering basis. Unfortunately HFA's well-intended effort to license compositions to new subscription services has fallen short, as many publishers have not signed up for the program. Highlighting this lack of uniformity, recently a DiMA member was sued for copyright infringement with respect to the activities and musical works that the service understood to be licensed by HFA.

    The discussion draft changes this song-by-song license process and limits future risk of this type by ensuring that all copyrighted musical works are licensable on a blanket basis through one of a small number of collective licensing organizations referred to in the draft as Designated Agents. Like the SoundExchange system for sound recordings that are webcast and the ASCAP, BMI and SESAC systems for musical works' performance rights, the Designated Agent system enables simple, streamlined licensing processes and substantially reduces legal risk. If this agreement becomes law, digital music services will be able to access all necessary rights to all musical works and to thereby offer consumers a complete catalog of copyrighted sound recordings. In the words of NARAS President Neil Portnow, digital music services must compete against pirate networks by offering consumers access to all the music. This legislation will be a giant step forward in this regard.

    Flexible Licensing Alternatives. As DiMA testified previously in this Subcommittee, consumer tastes are fickle and competing against piracy is challenging, so music pricing must be dynamic. Dynamic retail pricing must be supported by flexible pricing of rights, and this is permitted under the discussion draft. In this discussion draft, the Copyright Royalty Board is not bound to set penny-rate royalties, unit-rate royalties or percentage-of-revenue royalties, nor is the royalty rate pre-determined. Rather the CRB has the flexibility to do whatever seems most sensible for each business model, based on the evidence it hears from licensors and licensees.
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    Internet Radio Parity with Broadcast Radio. As the Subcommittee is aware, throughout DiMA's 8-year history we have urged Congress to implement technologically-neutral copyright policy. Today, we are pleased that NMPA has agreed to provide Internet radio services—or non-interactive webcasters—with effective legal parity as compared to our terrestrial broadcast competitors with respect to server copy reproductions. The discussion draft provides for royalty-free reproduction rights licenses to cover the server and incidental network cache copies of Internet radio services, so long the radio service is not taking affirmative steps to promote consumer recording of the radio programming. It differs in form from the terrestrial radio ephemeral copy exemption from copyright, but its effect is to essentially equalize how the law treats Internet radio compared to broadcast radio. We applaud this progress.

    Technologically Neutral Rights and Licenses. DiMA is also pleased that the discussion draft does not provide different rights, royalty standards or obligations based on a service's method of transmission (e.g., cable or satellite or Internet) or the device used to convert digital bits into audible music (e.g., a PC or a mobile telephone or a stand-alone portable device). Rather, the discussion draft appropriately creates a set if rights and licensing processes that is technologically agnostic, and that avoids unnecessary and problematic attempts to classify technology by focusing instead on the proper issue—fair payment for the exploitation of copyrighted works, regardless of the particular medium or means of the exploitation.

    DiMA Concedes Regarding Interactive Radio Rights Licensing; Though Royalty Rates to be Negotiated or Arbitrated. NMPA for several years has asserted that on-demand and interactive radio performances are more likely to substitute for consumer purchases and music subscriptions than are traditional pre-programmed radio, and thus justify a ''mechanical'' right payment which is traditionally associated with distributions of music that are actually possessed by a consumer. DiMA members, in contrast, hold to the principle that consumers experience music in one of two ways—either by enjoying a performance that is heard and then is no longer available; or by possessing music (permanently or temporarily, through ownership or subscription ''rental'') which occurs as a result of a distribution. In simple terms, the consumer's experience justifies either a performance right and royalty or a distribution right and royalty, but not both.
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    However, to reach a compromise that will support business certainty and growth, DiMA members have agreed that legislation should clarify that interactive streaming implicates a reproduction right, in addition to its implication of the performance right. DiMA and NMPA have agreed that the legislation should not set a value for this (or any other) reproduction right, but rather that future negotiations or perhaps arbitration will determine the royalty rate. Moreover, we are agreed that the legislation should leave open the possibility that the value of the reproduction right in some contexts might well be zero, and that the mere existence of the right should not ensure a final determination that a royalty is due.

    Licensees to Contribute Financially. Recognizing that a modern 115 license will benefit licensees, DiMA has agreed that licensees will share with publishers the costs associated with a new General Designated Agent though this concession violates all precedents associated with statutory and compulsory licensing. Music publishers insist that cost-sharing is a deal-breaker, and so DiMA members have agreed conceptually but in the absence of a agreed formula, we support the Discussion Draft's referral of this issue to the CRB.

    It is important that the Subcommittee recognize the uniqueness of the situation before you, and clarifies that licensee cost-sharing is not appropriate in any other compulsory or statutory license contexts. In other situations compulsory and statutory licenses are associated with rights that are newly created, or licensors' collective organizations are voluntary. Only in Section 115 has Congress historically imposed costs on licensees, and today's Discussion Draft merely continues that policy.

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    DiMA disagrees with the way the discussion draft implements certain concepts I have outlined above. Specifically, DiMA believes that the reproduction right associated with on-demand or interactive streaming should be characterized as a reproduction right rather than as a ''digital phonorecord delivery,'' which suggests that a distribution has occurred. As discussed above, DiMA members do not believe that performances implicate distribution rights.

    DiMA firmly agrees with the Register of Copyrights' conclusions in the 2001 Copyright Office Report on Section 104 of the DMCA and with the Register's written testimony today. To accomplish enactment of legislation our members are willing to accept the existence of a reproduction right incidental to streaming performances, but it is substantively and analytically incorrect to characterize a transmission of streaming digital bits for the purpose of rendering a performance as a ''delivery'' or ''distribution.'' Similarly, the reproductions of the musical work that must reside on servers controlled by the music service or within the network might technically be characterized as reproductions, but are not reasonably characterized as either ''deliveries'' or ''distributions'' of a phonorecord. Rather, we propose that the Subcommittee characterize this right as a ''reproduction'' right pursuant to Section 106(a) of the Copyright Act, and create a new Section 115A to implement the compulsory license associated with this right.

    This disagreement by no means should diminish what is otherwise a significant agreement with NMPA. DiMA members have conceded that streaming radio services implicate a reproduction right and that our efforts should focus on determining the economic value of that right in context. DiMA members pledge to work to reach agreement on words that will accurately convey our more meaningful agreement about rights.

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    Finally, DiMA is concerned that the discussion draft's proposed elimination of record companies' option to sublicense musical works' reproduction rights to digital services is causing such consternation among our members' record company partners. As the subcommittee knows, controlled composition clauses, which are contractually agreed to between recording companies and recording artists, have for many years been a flash point in relations between the recording and music publishing industries. DiMA services are now caught in the middle of this battle. DiMA members are ready, willing and able to pay publishers through their own designated agents for the value of the musical works that they own and that were created by songwriters. However, it is true that the traditional sublicensing model for physical sound recordings and for digital downloads is not broken, and does not require legislative repair.

    We are hopeful that our partners in the recording, publishing and songwriting communities can reach a prompt and satisfactory resolution of this issue, and we are available to assist if the parties or the Subcommittee would find it helpful.

    Once again, I thank Chairman Smith and Representative Berman for your leadership and for the opportunity to testify today. We value your continued encouragement as we iron out these remaining, albeit significant differences, and refine this discussion draft so it can become law in this session of Congress.

    Mr. SMITH. Mr. Carnes.


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    Mr. CARNES. Chairman Smith, Ranking Member Berman, and Members of the Subcommittee, thank you for the opportunity to provide comments on behalf of the Songwriters Guild of America on draft legislation entitled Section 115 Reform Act of 2006. We greatly appreciate your invitation.

    My name is Rick Carnes and I am President of the Songwriters Guild of America. The SGA is the nation's oldest and largest organization run exclusively by and for songwriters. We represent approximately 5,000 songwriter members and the estates of deceased songwriters. SGA provides royalty collection and audit functions for its members as well as music licensing. This year marks our 75th anniversary. We were born in New York City the same year as the Empire State Building. And I'm proud to say that although we're old, we're both still standing tall.

    I want to begin my comments by commending the efforts of David Israelite of NMPA and Jonathan Potter of DiMA for their earnest attempt to negotiate a deal. This legislation is a real balancing act and you've got a lot of affected parties here with a lot of conflicting interests. But this draft legislation has some important components that songwriters can and will support.

    First, the SGA fully supports the overall objective of simplifying the rules and procedures of section 115 to facilitate the licensing of all digital deliveries of musical works. We are fully committed to this process.

    We also strongly support the attempt to resolve the record company as gatekeeper problem and encourage that the bracketed language on page 42 of the bill be included. We realize that the record labels want to continue to interpose themselves between the digital music distributors and the songwriters and music publishers so they can, among other things, continue to enforce the controlled composition clauses, which allow them to pay songwriters and artists 75 percent of the statutory rate.
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    But here is what that means to songwriters. Currently, after I divided my royalties with my publisher and my recording artist cowriter, I only earn on average about $22,750 per song on a million-selling CD. Then when the 75 percent controlled composition rate is enforced by the record label, I only get $17,000. If that is the one recording I get this year, then the difference controlled composition makes is that it actually places my earnings $2,000 a year below the poverty line. For one million sales, I am eligible to receive a platinum award from the RIAA, but it is cold comfort when I can't afford a house to hang it in.

    Controlled composition clauses are unfair and need to be ended. The record labels should no longer be the gatekeepers and we applaud the idea of direct payments from digital music services to music publishers and songwriters.

    We are also pleased to see that the draft legislation confirms that interactive streams of music are recognized as digital phonorecord deliveries, as this clarification is essential to any legislative effort on this topic.

    The tradeoff here is the requirement to provide royalty-free licenses for server copies of musical works for the purpose of facilitating non-interactive streaming. The elimination of rights for all server copies clearly reduces the rights of music copyright owners and under current law would reduce the economic returns for songwriters and music publishers. While this will mean convenience and higher profits for the DiMA companies, it also might mean that I can't afford to send my daughter to college. We hope to hear more about the ways this bill can strike the proper balance in this area.

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    We do not oppose the principle of establishing a general designated agent to collect digital royalties. However, if songwriters are to lose some of their rights by having them bound by the licensing decisions of a statutory agency, this loss of rights should be balanced by gaining the right to meaningful participation in the governance of these entities.

    Mr. Chairman, to paraphrase a real estate broker, the three essential features of an effective designated agent bill are transparency, transparency, and transparency. We believe there is no reason for this bill to limit distribution of audit data solely to music publishers, even though publishers collect such payments on behalf of songwriters. In fact, newer music publishing contracts often provide songwriters up to 75 percent of the royalty payments. In this instance, there is no doubt that the songwriter is an interested party entitled to information from the designated agent on the extent and amount of payments received from the digital music providers. To this end, we have included in our written testimony some suggested language that would help address this issue as well as the crucial issue of meaningful participation.

    As we stated at the beginning, SGA supports the objectives of this legislation and desires to take a constructive role going forward. We seek to understand the benefits better so that we can balance them against the negative aspects of the bill to our members.

    Mr. Chairman and Members of the Subcommittee, we seek to work with you to ensure that the legislation strikes that proper balance and will be beneficial to the songwriters upon whom the entire music industry relies. Thank you for your attention and consideration of these views.
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    Mr. SMITH. Thank you, Mr. Carnes.

    [The prepared statement of Mr. Carnes follows:]


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    Mr. SMITH. Mr. Sherman.


    Mr. SHERMAN. Thank you, Chairman Smith, Ranking Member Berman, and other Members of the Subcommittee for giving me an opportunity to testify on music licensing reform. As you know, new technology, new formats, and new business models have presented new opportunities to offer consumers new products and services and lure them away from the illegal services with which we must compete. But we've been frustrated by an antiquated mechanical licensing system that makes it difficult for us to respond to marketplace demands.

    As new formats and business models have proliferated, uncertainty and disagreements have paralyzed the licensing process and the existing one-size-fits-all licensing system is ill-suited to the many new business models we're trying, like digital music services, ring tones, multi-session disks, locked content, preloaded content, music videos, and hybrid offerings, such as in-store kiosks. Each has presented new mechanical licensing challenges and there is no process for resolving them.
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    Believe me, we understand the complexities of resolving these issues, and Mr. Chairman, we are especially grateful to you as well as to Mr. Berman for continuing to focus on this issue and trying to find a way through the morass.

    Unfortunately, the current draft of SIRA, which represents a deal between the music publishers and digital music services, does not resolve most of the problems we face. While we are heartened by the efforts that have been made to arrive at a reform package and we congratulate NMPA and DiMA for their earnest efforts to arrive at a solution, SIRA addresses only about 5 percent of the market's recorded music. What about the remaining 95 percent? Are we to ignore the pressing need for reform for the overwhelming majority of the existing marketplace?

    In our view, SIRA represents a missed opportunity. We're also concerned that it introduces new inefficiencies, requiring digital music services to replicate the royalty payment infrastructure that record companies have built up over decades. But more troubling still is that the few changes it does make are at the expense of record companies.

    SIRA nullifies thousands of contractual agreements negotiated by record companies with artist songwriters over many decades and will cost record companies and services many millions of dollars each year in additional royalties to the benefit of the music publishing companies. This is unfair because it undoes a principle that we, the publishers, committed to in 1995, that changes in contracts, such as controlled composition provisions, should be prospective only. SIRA would retroactively eviscerate a key provision on which the overall economic terms of contracts with artist songwriters were premised.

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    I am confident that music publishers would be very upset if key economic terms of their contracts with their songwriters were simply abrogated by Congress, fundamentally rewriting the deals on which they based their decisions about advances, royalty rates, royalty splits, and the like. We simply want our contracts with our artist songwriters to be honored, just the way music publishers want their contracts with their songwriters to be honored.

    Importantly, the effect would be to transfer millions of dollars from record companies, whose revenues have been decreasing, to music publishers whose revenues have been increasing. This makes no sense.

    SIRA also requires that record companies pay administrative costs as both licensors and licensees. In an unprecedented change, SIRA would shift costs of distributing section 115 royalties from music publishers to their licensees. We are not opposed to cost sharing, but if that is going to be the rule when record companies are licensees, it ought to be the rule under sections 112 and 114 when record companies are licensors.

    There are several other problems we see with the discussion draft and I refer you to my prepared statement for details on those.

    To improve SIRA and achieve real reform, we propose that the blanket license be extended to all products and services covered by the mechanical compulsory license, including physical products and hybrid physical online offerings. This would go a long way toward solving the problems I have just highlighted and we would be happy to work with the Committee to bring about that reform in a manner that is fair to all the parties.

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    Failing that, we urge you to limit the blanket license to subscription services. We think that this would represent incremental progress and something that can be achieved quickly. That way, you can achieve reform in an area where it would do some good and where the Copyright Office identified a specific need without hurting record companies and digital music services. Downloads are one of the few bright spots in the bleak mechanical licensing picture. It would be terrible to jeopardize a business that is working well and add new costs and confusion. If comprehensive reform is not to be, we should experiment with limited reform for subscription services. If a line is to be drawn, it is important to draw it in the right place.

    Should you go forward with legislation on subscription services, there are a few modest improvements that you can make in the current system that would help address our problems. These are detailed in my written statement, but the most important is to create a dispute resolution mechanism. Every new format and business model has raised questions concerning the interpretation of section 115. A fair and expeditious mechanism to resolve these questions would facilitate licensing and entry into the marketplace.

    We wish we could be more supportive of SIRA, but at this point, we worry that it would cause more harm than good, at least for us, and we don't feel like record companies should bear the financial and business burdens of very limited reforms that do not address our needs. But we are certainly prepared to work with the Committee, the Copyright Office, NMPA, DiMA, and any others to improve the proposal to the point where it provides the real benefit that is so badly needed.

    Let me thank you again for your efforts on this. We think this really is important and we are very grateful for your efforts on our behalf.
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    Mr. SMITH. Thank you, Mr. Sherman.

    [The prepared statement of Mr. Sherman follows:]


[Note: Image(s) not available in this format. See PDF version of this file for complete hearing record.]

    Mr. SMITH. Let me say to you all, I think this is the first panel I can ever remember where all witnesses have stayed within the time limit. Maybe that has to do with your sense of rhythm, I don't know, but nevertheless, it's appreciated.

    Mr. Israelite, let me start off with my questions directed toward you, but also let me say we're probably going to have a couple of rounds of questions because I know all the Members here have much they want to discuss.

    One initial question, just to get this on the record, you favor keeping the legislation like it is, limiting it to digital music, not expanding it to include physical copies of music. Why is that?

    Mr. ISRAELITE. Yes, Mr. Chairman, that's true. We believe that the method by which we license physical product isn't broken. It's been in existence for nearly 100 years, and as I explained in my opening statement, it's a transfer with our copyright to the label's copyright to the consumer. That seems to work. The problems have arisen with regard to when third parties want to come in and obtain a massive amount of licenses and that's why we think we're best focused in the digital arena. We're talking about a third party that doesn't own either copyright, doesn't have a background in the music industry, and is looking to obtain millions of copyrights in a very short period of time, and that's why we've proposed it for just the digital space.
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    We think that if it's going to be in the digital space, however, it ought to be in all of the digital space and not just limited to subscription services. I think one of the reasons you'll hear a desire by some to limit this to just subscription services is because record labels do not pass through our licenses currently in subscription services. They pass through our licenses in other digital services, like Apple iTunes.

    And so we've tried to make this very broad to include things like kiosks, like cell phone delivery, like all the products that Jon's clients want to offer, and we think that that's probably the best first step. It is still a small part of the market, about 6 percent of the worldwide market, but in the last year, it's grown 300 percent, and I think most people think that the future of the music business is going to be digital, and therefore, if we can fix licensing for that new type of service, we think it'll fix the music industry licensing process for a long time to come.

    Mr. SMITH. Thank you, Mr. Israelite.

    Let me go to one of the concerns that I mentioned a minute ago and I'm going to be addressing the same type of question to Mr. Potter, as well, and this goes to the definition of interactive stream as a DPD. Number one, why is that so important to you? Number two, how do you explain the Copyright Office taking a different view?

    Mr. ISRAELITE. It's important to us for a couple of reasons, Mr. Chairman. First of all, it's important to us for its practical effect. Part of the beauty of this agreement, in my opinion, is that we agreed that we would leave fights that didn't need to be fought in this arena to other arenas. So, for example, when it comes to the value of the section 115 right for on-demand streaming or interactive streaming, we have agreed that we will have that fight during the Copyright Royalty Board proceeding, not as a part of this bill. It's important to us, therefore, on a practical level, that when we argue about the value of the rate in the CRB, we are arguing the value over a DPD, something that everyone understands.
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    It's also important to us, very important to us, in terms of the policy reasons. We believe that these interactive streams constitute a DPD under section 115. We believe that the legislative history supports that. We believe that our current contracts with several of Mr. Potter's members support that. And we believe it was part of the deal that we made when we agreed to offer a gratis license for server copies for pure streaming services. We thought that that was an exchange we made as a business arrangement. So we believe the law supports it, but even if the law didn't, we think it was part of a business arrangement that we came to a conclusion about.

    Mr. SMITH. Okay. Thank you, Mr. Israelite.

    Mr. Potter, let's go back to that definition of interactive stream. It's my understanding that in the existing contracts with the publishers, interactive streams—under the definition of an interactive stream as a DPD already is in writing in those contracts. Why shouldn't that continue in the current legislation as we go forward since it already exists in the current contracts?

    Mr. POTTER. Mr. Chairman, we have testified about those agreements several times in this Subcommittee as well as before the Copyright Office. We have some member companies that signed licenses that were essentially take it or leave it licenses under the threat of litigation or essentially not entering into this business. Candidly, they could have made some of those choices back then and they chose to engage in a license, to sign that license.

    So the fact that they were willing to concede a point of legal principle that suggested an interactive performance was actually a delivery or a distribution should not reflect public policy, and I think that the Register has also testified several times that she does not endorse and the Copyright Office does not endorse the comment—the interpretation that was in that license.
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    We believe it's fairly simple. There are reproductions that are associated with the delivery of a performance, but it is a performance that is being delivered, not a reproduction that is being delivered, and therefore, we would—it is plain and simple terms in the Copyright Office what is a reproduction and we don't see a reproduction ultimately being distributed here. We see a performance being delivered, a performance being distributed.

    Mr. SMITH. My time is up, but nevertheless, that's the clear language of the current contracts that you have with publishers.

    Mr. POTTER. That's the clear language of—and the precedent has been set, has it not? I would—there is precedent in a few contracts signed by a few companies. There is legal precedent here that is arguably more important both domestically and internationally about the Congress deciding what is and is not a distribution.

    Mr. SMITH. Congress can decide that and contracts can change. I recognize that. I was simply going to the existing language, but thank you for your answer to that question.

    Mr. Berman, you are recognized for your questions.

    Mr. BERMAN. Thank you very much, Mr. Chairman.

    Let me just jump to that issue for a second. Why isn't an interactive stream the 21st century functional equivalent of a delivery of a phonorecord? I mean, in other words, if I can press a button and hear anything I want at any time, that's easier than sticking the CD in the machine or getting that record to go down over that thing. I mean, I get it whenever I want it. It's like, why would I ever want to buy a record?
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    Mr. POTTER. I am not taking a position that an on-demand stream might be substitutional and, in fact, entirely substitutional for sales of CDs. If we have on-demand access to our music collection or a music collection at any time, any place, then it may be the case that that activity is entirely substitutional. The question is whether that activity is an on-demand performance or whether it is a distribution and we already pay, ASCAP and BMI——

    Mr. BERMAN. Everything is both. I listen to a CD at home and I hear somebody performing some music. Now we're talking about an individualized on-demand ability to get the music out of one essentially instantaneously with my desire to have it.

    Mr. POTTER. There were several months of negotiations, as you're aware, that included the PROs and the Harry Fox Agency and the NMPA and the Songwriters about whether we should have a uni-license that would recognize the integration or convergence of the performance and distribution rights and would set up a single system for licensing all of the rights in the bundle.

    Mr. BERMAN. I'm not sure I'd go back there.

    Mr. POTTER. Those negotiations did not succeed. In this context, we have conceded to the idea of a reproduction right that supports the delivery. The question is whether the reproduction is or is not what is actually delivered or what is actually distributed and we take a position that the performance is what is delivered. It is the reproduction that facilitates the delivery of that performance.
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    Mr. BERMAN. That sounds like 20th century.

    Mr. POTTER. Actually, I think it's quite 21st century.

    Mr. BERMAN. This is to the entire panel. These guys want a revision of the physical, the mechanical, in the context of a physical. Your proposal restricts it to digital. Is that a bright line these days? Is it clear that we would always know whether something was physical or digital? What are kiosk services? What are ring tones?

    Mr. SHERMAN. Is that for the panel, because——

    Mr. BERMAN. Yes.

    Mr. SHERMAN. I'm very glad you raised that question because when we refer to physical, we're not just referring to old-fashioned CDs. We're referring to the fact that nobody knows what the distinction is between physical and digital anymore. When we sell a CD that has locked content on it that can only be unlocked by going to a website and then downloaded, what is the licensing system for that CD? Is it partly the old-fashioned license and then a new blanket license for just locked content? What about if we put pre-loaded content onto an iPod or the hard drive of a computer, 2,000 songs? It's a physical disk that is being sold, a physical portable device. Is that physical or is that digital?

    We don't have the answers to any of those questions and I didn't see anything in SIRA that would help us resolve those issues, yet that is key to how these things have to be licensed. So I think you've put your finger on a very important problem.
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    Mr. BERMAN. So this could be both, metaphysical and meta-digital? [Laughter.]

    Mr. SHERMAN. Exactly.

    Mr. BERMAN. Anybody else?

    Mr. ISRAELITE. First of all, if there's a question about whether something is covered by section 115 or not, which I think some of your examples, that's the debate where it falls, that's a debate to be held in the Copyright Royalty Board, not as a part of this bill.

    If it is something covered by section 115, then I think the bill does a very good job——

    Mr. BERMAN. What are the tools the Copyright Royalty Board has? What are the standards they use to make a decision?

    Mr. ISRAELITE. We're in a CRB process right now, and when we get to the actual proceeding, I have no doubt that all of the parties here at this table will make arguments about whether something is or isn't covered by section 115. There are procedures for that. There are processes for that.

    One of the things about this bill that I think was very wise is it leaves those fights for that forum. Instead, in this forum, it's just a licensing process, and I think the bill does a very good job of defining what digital delivery means. It does mean kiosks. It does mean a lot of the new products where, in effect, the consumer gets it from a digital delivery. It pretty much leaves out the traditional CD, record, eight-track, cassette, because that's a process that, number one, is declining, but number two, we have a working licensing system that's been in place for 100 years.
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    Mr. BERMAN. Mr. Chairman, my time is up. I see we've worn out the other Members of the Subcommittee, so—we will have more rounds.

    Mr. SMITH. Let me go to the second concern that I raised in my opening statement, Mr. Israelite, and that has to do with overhead costs and who should pay for them. Mr. Potter, this question will be going your way, as well.

    I don't expect you all to negotiate in open court, but could you at least give me a range of—an acceptable range that you all might consider, either a percentage or dollar amount, whatever it might be? I do think it's resolvable by all the parties involved, but I'd like to hear your take on it now.

    Mr. ISRAELITE. Sure. Mr. Chairman, as I referenced in my opening statement, we still continue to believe we'd like to get rid of section 115. But part of the problem is that along with a compulsory licensing system, there are pros and cons. One of the things about the current compulsory licensing system is that anyone who chooses to use it must pay 100 percent of the administrative fees. So if you are a user that wants to invoke section 115, you have a choice. You can pay directly the copyright owner the full amount every month, or you can go to the Copyright Office if you can't find the person and drop $12 per title for them to do it. If we are going to fix the compulsory licensing system instead of going to a free market system that we favor, we've asked that we go back to the intent of compulsory licensing, which is the user help pay the administrative fees.

    In terms of a dollar amount, I don't have a number to give you, but I would hope that it would be something based on a percentage system where we believe it would be a shared cost. We're not asking for a 100 percent contribution. We're just wanting to make sure that publishers and songwriters aren't asked to finance a new system that really is designed for the users, and if we're not able to resolve this issue among ourselves, the bill, I think, wisely sends it to a process to be resolved, which is the CRB, and we've accepted that as a compromise.
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    Mr. SMITH. Okay. Mr. Potter, what is your solution to the problem of who pays the overhead costs? Are you happy to go to the Royalty Board, as well?

    Mr. POTTER. Mr. Chairman, this is something that we have agreed to share the burden in. We have agreed if we are unable to agree how to share the burden, I think we are comfortable sending it to the CRB. I should share with you that Mr. Israelite's staff, or the staff of the Harry Fox Agency, the technology staff, and several technology folks from my companies have spent many hours over the course of several weeks sitting in a room trying to determine what type of system needs to be put in place so that we can report music usage accurately and they can distribute royalties accurately on an ongoing basis.

    Mr. SMITH. Are you closer now than you were several weeks ago?

    Mr. POTTER. The answer is, yes, we are closer. There have been fits and starts, as there always are with multi-party negotiations. But the answer is, yes, we're closer to answers. We still don't have firm price tags, but we are closer to answers.

    Let me share one point that is responsive to one of Mr. Sherman's points. We don't think that setting up this designated agent system will duplicate our company's administration costs for license reporting or music reporting. We have worked out, and we think we will work out in a final form a music reporting system with the publishers that essentially is almost redundant. We will be providing to the publishers almost the exact same data, if not the exact same data, that we provide to the record companies, and therefore, in fact, we don't think the costs of the ongoing reporting process will be significantly different than the costs that we already have reporting to the record companies.
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    Mr. SMITH. Okay, good. Thank you, Mr. Potter.

    Mr. Carnes, I want to go back to the point that you made or the triple point you made, transparency, transparency, transparency. That seems to make sense. However, you can understand that someone else might not want to reveal all of their business model, how their profit is always determined. They may not want competitors to know all their privileged information. So what kind of a compromise can we have there whereby you could be satisfied that no one was trying to take advantage of you, at the same time, protecting the proprietary interest of other parties?

    Mr. CARNES. Well, first, we're very early on in this process. I mean, I just got this bill Friday at 4:30, so I really can't—I don't want to say more than I know. I probably already have. But basically, what I would like to say is, for instance, with the case of the administration fees, we would like to have some input on that or at least see what's going on. We're not asking for a seat on the Harry Fox Board or something, but if there's going to be a designated agent set up by statute, we feel like that's a rights-taking thing and a blanket license where they take our rights. The general designated agent, of course, gets to take everybody's rights and I think the tradeoff for that is some sort of transparency for us, some ability on the front end to have input on what the rights might be.

    Mr. SMITH. Mr. Israelite, what do you think about that?

    Mr. ISRAELITE. Well, I certainly appreciate what Rick is trying to do and I think it's a shared goal of making sure that writers and publishers are comfortable with the transparency of the system. There are a lot of what are called singer songwriters that do their own publishing, and for those people, they, in effect, are their own publishers. They can run for our board. In fact, we have them on our board.
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    Other writers choose to assign their copyrights to a publisher, and when they do that, that is a private contractual arrangement. They're not forced to do it. They can administer it themselves. But those who choose to assign their copyright to a publisher have entered into a business relationship, and one of the principles we've tried to keep intact in this bill is to not have more Government interference into the private contractual arrangements among parties.

    And so we've proposed, for example, establishing a dispute resolution committee as a part of the DA that would be made up of half songwriters, half publishers. We've been in very productive negotiations with Rick's group and other songwriter groups about how to make this work. But I think as a principle, publishers believe that when songwriters assign their copyrights and enter into private contractual arrangements, those truly are not the proper place for Government to interfere, and so we hope we can work this out without there being more Government mandates on how publishers do their job.

    Mr. SMITH. Okay. Thank you, Mr. Israelite.

    Mr. Berman?

    Mr. BERMAN. Two sort of whimsical comments. The first is you don't want your contracts with the publishers providing for controlled compositions to be abrogated. You don't want your contracts with the songwriters to be abrogated. And I'm a Democrat and I live to abrogate contracts. [Laughter.]

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    Mr. BERMAN. The other one that comes to mind is that old thing of, I've got friends on one side and friends on the other and I'm with my friends. [Laughter.]

    Mr. BERMAN. So, as you try to work through this, because unfortunately in this business we can't always indulge all our friendships, and shouldn't, the Songwriters Guild, Mr. Carnes, talks about what happens to him under controlled compositions. It reminds me that underlying this somewhat, this may be a fight about money. So I start to think, what if we could deploy, as they finish with the border, we deploy the National Guard to deal with the piracy problem, make the pie much bigger, and you don't need controlled compositions and percentages are an easier substitute. I'm trying to find a dynamic.

    The RIAA would like a much broader coverage. If you're going to reform 115, notwithstanding when Mr. Israelite says it works, I've heard record company executives tell me it impedes their ability to put new technologies on the market because of the way the existing 115 operates and their ability to do that.

    What's the dynamic by which record companies' traditional role in conveying publisher rights along with sound recording rights can be given up in the context of a new system, and at the same time, we deal with the broader issue of how to reform and modernize 115? And what is the dynamic that turns this into a broader conversation? I know there's a lot of conversations, but a broader effort? So that's one question. I have one more.

    Mr. SHERMAN. Well, our feeling really is to the extent it's not broken, we shouldn't be fixing it. And the one thing in the digital area that is not broken is the download market. The system has worked efficiently and well.
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    Mr. Potter said that we wouldn't be duplicating the music reporting system and there wouldn't be any additional burden on the music services, and perhaps I'm wrong about that, but I'm under the impression that when there are multiple designated agents, it'll be up to the licensee to figure out to whom to send those royalty checks for publishing. That is not the information that they currently have in their database. They're going to have to figure out year by year who gets what fractional share of what copyrighted musical work, depending on what use was made that year, and that is going to be a very intensive administrative process which we already do for free for the digital music services because we have an infrastructure built up for it.

    So if we're going to experiment with something and we want to try moving into a new world, let's start with subscription services and move from there. But I don't think that if we move to the entire digital market that we're going to do much good because the next thing we're going to be arguing about is what's digital and what's physical and where do multi-session disks fit in and everything else and we're just going to have a new set of issues to resolve and not even know how to license them.

    Mr. BERMAN. So you're basically saying, go all the way or take just a very small step?

    Mr. SHERMAN. Precisely.

    Mr. BERMAN. And your reaction?

    Mr. ISRAELITE. I think it's a difficult position to take to say that the DPD market of licensing works just fine, but we ought to fix physical. The truth of the matter is is that if you can put out a CD in a physical format, you can license through a DPD store. The truth of the matter is, licensing works just fine with physical formats, and the truth is, licensing works pretty well with DPDs, too. The reason why if we create a new blanket licensing structure it should be applied to all digital is because it doesn't make any sense to build us a brand new Cadillac but tell us we can't drive it out of the driveway.
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    This new system will give DiMA what it wants. They've asked for blanket licensing. They've asked for one-stop shopping. And so we think it makes perfect sense to cover all digital products.

    Mr. SHERMAN. If I can just respond——

    Mr. SMITH. Let me yield the gentlemen a couple additional minutes because this is a question I was going to ask, as well, so we're getting double-dancer here.

    Mr. SHERMAN. It isn't that our feeling is simply that we ought to have one system, that we're creating artificial boundaries, drawing artificial lines in a world of convergence where next week, we're going to have a new product and we're not going to know whether it's physical or digital. We shouldn't be having parallel systems for licensing when we could have one system, and we'd love for it to be a blanket licensing system, but this isn't a question of whether physical is working well enough. It's creating a new blanket licensing system for all of us for everything.

    Mr. BERMAN. I'd like to hear Mr. Potter and Mr. Carnes get into this issue, and let me just also interrupt. Is there a phase-in process, you do one thing right away and one thing in a couple of years? Is there a way of sort of creating that kind of a transition period that makes sense?

    Mr. POTTER. We clearly have partners in business on both sides of me, even on all three sides of me, if we were sitting at a square table.
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    Mr. BERMAN. And you're with your partners.

    Mr. POTTER. I'm with my partners, because we don't own anything. We just license it from everyone. It's a tough business to be in.

    As I said in my testimony, there's a fair amount of righteousness that the DPD system works, but Mr. Israelite acknowledges the DPD system works. There's a need for modernizing the entire system, both for certain physical products and hybrid products. There's a need for modernizing the entire system so it takes care of the innovative digital products. We certainly went into this in the, I guess it was 2 years ago in the intensive negotiations, thinking we were going to take care of subscription service products and that would cover the hybrid products and things have changed. There's a lot of ways we can support progress. Transition provisions are certainly something we would be willing to talk about.

    I will say, however, that it is intriguing for us to hear Mr. Sherman's concern about what is digital and what is physical. Particularly if somebody hands you an iPod with preloaded songs, there's a whole lot of ways to define what's digital and what's physical, what's inside a license or what's outside of the license. When Mr. Sherman's group in the interactivity debate is trying to figure out what's inside or outside the box, they look for infringement litigation and sue our companies and deal with that in the court of law. When they are on the licensee side of the misunderstanding or the box that they're not sure whether they're inside or outside of, they look for a dispute resolution mechanism inside the statutory license to keep them out of court as defendants.

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    So I would only say if we're going to create a dispute resolution mechanism to figure out if we're inside or outside the box, we'd like to do that for 114 as well as 115.

    Mr. BERMAN. On the discussion draft bill, the Chairman and I got into an area that the partners seemed to going in different directions on and that's how to turn this interactive delivery, and I guess the question I have is whether—I mean, if this draft were a bill and it were coming up for a vote, do you support this draft, Mr. Potter, given how that issue is framed in this discussion draft?

    Mr. POTTER. I think these issues are manageable. I'm not prepared to negotiate these issues out in public, but I think these issues are manageable.

    Mr. BERMAN. Do you?

    Mr. ISRAELITE. I would support the current draft bill.

    Mr. BERMAN. But do you think the issues are manageable?

    Mr. ISRAELITE. As long as Jon would support the current bill, I think the issues are manageable. [Laughter.]

    Mr. ISRAELITE. That is as far as you are going to get right now, I think.

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    Mr. BERMAN. Mr. Carnes, are you suggesting we actually legislate in the area of this transparency at this point, or are you saying there's a process——

    Mr. CARNES. Well, there's a process——

    Mr. BERMAN.—to work with the publishers on to try and——

    Mr. CARNES. There's a process going on right now with the publishers where we discuss this. The reason why in my written statement we gave you the language and everything was because we wanted to put a marker down that we feel that this principle is correct. But I certainly would rather solve this in negotiations with——

    Mr. BERMAN. So you want to at least threaten to legislate.

    Mr. CARNES. Absolutely. [Laughter.]

    Mr. BERMAN. All right. Thank you, Mr. Chairman.

    Mr. SMITH. Thank you, Mr. Berman. That was a good ending, and it's frankly encouraging for me to hear that you all are still trying to iron out the last couple of remaining wrinkles. We have a deadline and we're trying to get this done in the next few days and you all know that, but I do think progress is being made and that's good to hear. It's good for the industry, it's good for the future of music, and it's good for us, as well.
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    So I appreciate all your contributions and hope that you all will continue working together. Make sure that all parties are involved, if you all will, and we can get to a successful conclusion. Thank you again. We appreciate your testimony.

    The Subcommittee is adjourned.

    [Whereupon, at 5:09 p.m., the Subcommittee was adjourned.]


Material Submitted for the Hearing Record


    Mr. Chairman,

    Thank you for scheduling this hearing on the discussion draft of Section 115 music licensing reform.

    Over the past couple of years, this Subcommittee has analyzed the compulsory licensing scheme for mechanical rights both as described in the statute and the alternative provided for by the Harry Fox Agency. With the development of new technologies for music distribution, we recognize that neither model is sufficient to meet consumer's demand for music.
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    And this demand is rising: We have come a long way from the initial piracy-laden version of Napster released in 1999. IFPI's (International Federation of Phonogram and Videogram Producers) Digital Music Report of 2006 notes the growth of digitally delivered content in the music industry.

 420 million single tracks were downloaded in 2005 globally - more than double the number downloaded in 2004 (156 million).

 US: 353 million single tracks downloaded (up from 143 million) [Nielsen SoundScan]

 The number of users of subscription services, such as Rhapsody and Napster, increased from 1.5 to 2.8 million globally in 2005.

 In 2005, the number of legitimate music download sites reached 335, up from 50 two years ago.

 Digital sales in 2005 accounted for approximately 6% of global music sales based on the first half of the year. 2005 was a landmark year for digital music.

 Just last week the Washington Post reported that ''Ringtones, once dismissed as nothing more then a passing fad, have become a $3 billion worldwide market.''

    However, the burden surrounding licensing often delays, if not prevents certain music from getting to the consumer. Unfortunately, this inability to provide music at anytime, any place, in any format may precipitate consumer migration back to unauthorized Peer-to-Peer services.
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    Two years ago, the Copyright Office suggested that reform of the 115 license should reflect a structure similar to what is currently available for the 114 license—a designated agent which serves as a collective to administer a blanket license. I am encouraged to see that the discussion draft reflects that idea. I commend the publishers on their hard work. They have tried diligently to resolve the problems that the DiMA companies have illustrated - particularly the ''double dip'' and ''one-stop-shop'' issue. However, I am concerned that with an impending mark-up less then two weeks away, many important details of the bill have yet to be agreed upon. I will focus on some of those issues during the Q &A.

    Furthermore, any solution can only be evaluated from the perspective of the scope of the problem originally identified. Two years ago at an oversight hearing on Section 115, I posed two questions which I will once again ask today: 1) Does 115 facilitate or hinder the roll-out of new legal music offerings? and 2) depending on the answer to the first question, what if anything should Congress do to change 115?

    While this proposed legislation addresses many of the digital concerns—unresolved, are the many issues encountered in the physical market or in the area of hybrid services. The roll-out of new secure physical formats, or higher quality formats, often times require additional reproductions, has been sluggish. Furthermore, there is little resolution to the business model which provides pre-loaded content on devices. Finally, many definitional questions remain such as whether the license includes ringtones, or if a kiosk service is a reproduction in the physical sense or digital phonorecord delivery service. Some of these questions may require a purely economic analysis—others may require a re-evaluation on the process level.
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    I hope though that we can achieve greater clarity and further consensus as this bill moves forward.



    SESAC, Inc. (''SESAC'') appreciates the opportunity to submit this statement to the Subcommittee regarding the discussion draft of the Section 115 Reform Act of 2006 (''SIRA''). In addition the comments contained in the contemporaneously submitted joint written comments of the three performing rights societies, SESAC submits these additional comments:

1. SESAC understands that, as a compromise solution between the NMPA/HFA, on the one hand, and DiMA, on the other hand, those parties propose that, in exchange for DiMA's acknowledgment that the reproduction right is implicated in interactive streaming, NMPA/HFA is willing to grant digital music services a royalty-free compulsory mechanical license for ''the making of server and incidental reproduction to facilitate non-interactive streaming.'' Although SESAC understands the motivation for this compromise to accomplish the broader purpose of formulating a bill acceptable to DiMA and NMPA/HFA, it is concerned that music services might at some time incorrectly deduce from this provision that, by the same token, SESAC should be willing to grant royalty-free public performance licenses for so-called ''full'' or ''limited'' downloads. SESAC's position on this topic has remained constant: Under the Copyright Act, all digital transmissions, including such downloads, constitute performances justifying royalty payments. In light of DiMA's continued insistence, as reflected in Mr. Potter's testimony at this hearing, that a given digital transmission implicates ''either a performance right and royalty or a distribution right and royalty, but not both,'' DiMA should not be heard to argue in the future that SESAC's support of this compromise solution concerning mechanical rights in any way suggests that SESAC has acquiesced in DiMA's position. In short, NMPA/HFA has the right to make such decisions on behalf of its own members, and SESAC maintains its positions on behalf of its affiliates.
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2. SESAC understands that the 15 percent of market share requirement was included in SIRA to address DiMA's concerns that, if it were required to deal with too many designated agents having small market share, the efficiency benefits of blanket licensing would be lessened or lost. And, SESAC acknowledges that this is a proposed compromise solution between NMPA/HFA and DiMA only for licensing the mechanical right in digital media and to facilitate and maintain efficiency under this new proposed Amendment to Section 115 relevant to mechanical licensing. SESAC believes the record should be clear that this 15 percent market share criteria is relevant only to mechanical licensing and not to public performance licensing, where over the course of history one or more of the three performing rights organizations mentioned in the copyright law (ASCAP, BMI and SESAC) have not enjoyed a 15 percent market share. Although SESAC acknowledges that it does not control a 15 percent share, the public performance market place as divided among the three performing rights organizations has served as the gold standard of music licensing for over seven decades. As stated by Mr. Potter of DiMA in his testimony at the hearing, ''the ASCAP, BMI and SESAC systems for musical works' performance rights'' enable ''simple, streamlined licensing processes'' that substantially reduce legal risk.'' In short, SESAC's agreement with the 15 percent threshold is limited to mechanical licensing as embodied in this proposed legislation.

    Finally, like NMPA/HFA, SESAC believes as a matter of general principal that, in a perfect world, the licensing of all musical rights be accomplished solely by fair marketplace dynamics. Nevertheless, SESAC understands the particular historic problems attendant to the present compulsory mechanical licensing scheme, particularly in the digital realm, and supports the efforts of NMPA/HFA and DiMA to craft a blanket mechanical licensing system that will facilitate greater legitimate music uses to the benefit of music publishers and songwriters, who are also SESAC's constituents. SESAC would be happy to expand on these comments, answer any questions raised, and otherwise be of assistance to the Subcommittee in its consideration of this proposed licensing reform.
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