How Compulsory License For Internet Might Help Music Industry Woes
Entertainment Law & Finance, May 2003.
By Steve Gordon



Sales of recorded music in the United States and throughout the world have declined for three consecutive years. Three of the five major record companies are now reportedly for sale. Lay-offs are decimating record industry professionals.

The International Federation of the Phonographic Industry blames the situation on CD burning and unauthorized Internet file sharing. The problem can be traced in large part to the Digital Millennium Copyright Act of 1998. In negotiations for drafting the law, the record labels agreed to make the ISPs immune from copyright infringement liability for the acts of those subscribing to their services. This was part of the quid pro quo for giving owners of musical recordings the exclusive right to digitally transmit masters on the Internet. Because they could not attack the ISPs for allowing such services as Napster to exist, the record labels began attacking the file-sharing services.

In this author’s opinion, the solution to the music industry’s woes is a federal law providing for a statutory license that would legalize the sharing of music online while compensating copyright owners for lost sales. A federal law implementing a statutory license could legalize the transmission of all recorded music for purposes of sharing music over the Internet and downloading permanent, portable copies. Fees would be paid by those directly profiting from file sharing, that is, the makers of CD burners, including computer manufacturers, and the Internet service providers (ISPs) whose subscribers already pay in part for access to such services as Kazaa. As CD sales continued to decline due an ever increasing number of households acquiring computers and high speed Internet connections, the amount payable to the fund could be adjusted upwards.

The contribution of each ISP and computer manufacturer would be determined by a body designated by the U.S. Copyright Office. The payments would be delivered to a central administrator on behalf of the labels and the artists. This fund would be allocated based on downloads of each master as tabulated by digital rights management technology similar to what the performing rights societies already use to count the performances of songs on broadcast radio and TV. The fund administrator would then pay each label and artist on a 50/50 basis, just as ASCAP and BMI pay songwriters and music publishers. (There would also be a separate fund for music publishing. In fact, the rate for downloading songs is already subject to a compulsory license of eight cents per song under the Copyright Act.)

Some artist’s contracts do not allow record companies to put the artists’ music online. As a consultant for one of the major authorized online services, I had to delete approximately 80% of hip hop music because sampling agreements typically do not permit sales via the Internet or as singles of tracks on which samples are used. Third-party artists who record with other artists often include the same restrictions. And many major artists who are justifiably afraid that they will not be adequately compensated by the labels for use of their records online threaten not to record another album or with some other form of retaliation, even if they are contractually obliged to allow the labels to use their music in any media. A statutory license could cut through these knots while guaranteeing fair compensation to the artists.

The proponents of a free market would argue that the market is the best device in establishing a fair price for all private property, including music copyrights. However, the technological advances created by the Internet have led to what economists call a “market breakdown” in the recording business. Without a compromise--such as a compulsory license--between the competing economic interests (i.e., hardware versus content), everyone will lose.

Steve Gordon is an entertainment attorney and consultant based in New York City. Telephone: (212) 924-1166; website: Stevegordonlaw.com. He formerly served as director of business affairs for Sony Music Entertainment.