Music piracy and diminishing revenues: how compulsory licensing for interactive webcasters can lead the recording industry back to prominence.

AuthorTyler, Neil S.

INTRODUCTION I. THE MUSIC PIRACY EPIDEMIC A. Failed Efforts to Combat Piracy B. New and Innovative Ways to Combat Piracy II. THE MODERNIZATION OF MUSIC A. The Rise of Streaming Technology B. The Current Potential of Streaming Services III. THE HISTORY OF THE SOUND RECORDING PUBLIC PERFORMANCE RIGHT A. Early History of Sound Recording Rights B. Digital Performance Right in Sound Recordings Act C. DMCA Amendments 1. Effects of the DMCA 2. The Uncertainty and Dangers Facing Webcasters IV. THE DEVELOPMENT OF THE NONINTERACTIVE WEBCASTING ROYALTY RATE A. Copyright Arbitration Royalty Panel Proceedings B. The CRB Proceedings V. ESTABLISHING COMPULSORY ROYALTIES FOR INTERACTIVE WEBCASTERS A. The Need for Revenue-Based Compulsory License Rates for All Webcasters B. Proposed Compulsory License Rate for Interactive Webcasters C. The Benefits of Amending [section] 114 as Compared to Other Proposals VI. BENEFITS OF COMPULSORY LICENSING FOR INTERACTIVE WEBCASTING A. Short-Term Benefits B. Long-Term Benefits CONCLUSION INTRODUCTION

Since the late 1990s, record labels have suffered from consistently decreasing annual revenues as a result of the rampant music piracy characterizing the digital age. The traditional business model that music promoters and distributors have utilized for the past century no longer seems efficient in the age of the Internet. In 1999, overall music sales reached a peak of $14.6 billion in total revenue) By 2009, that number had fallen to only $6.3 billion. (2) CD sales in the United States exceeded 785 million albums in 2000; but by 2008, total album sales had decreased by almost a third. (3) The year 2011 proved to be promising for record labels, as total album sales increased by 1.3 %, but the music industry's struggles are likely to continue as album sales dropped 4% in 2012. (4)

Despite the increased connectivity and access to information that digital technology provides us, the Internet has created a world where illegally shared, copied, and distributed music dominates the marketplace. The recording industry, however, continues to fail to adequately address the most significant problem facing the music industry--music piracy--and the resulting widespread harm to most music industry participants today. (5)

Record labels suffer the most devastating effects of music piracy as their profits continue to decline. (6) But decreasing annual revenues have also led to less funding and more one-sided record contracts for aspiring musicians. (7) Additionally, music consumers have been unable to experience and enjoy new and progressive forms of music delivery as Internet-based businesses and webcasters are stifled by rising costs and are forced to operate under a legal structure designed more for the mid-1900s than the 21st century.

Some reports estimate that as much as 95 % of music is downloaded illegally, for free, on a yearly basis. (8) The digital transmission of music, including peer-to-peer (PUP) file sharing services, most of which developed following the creation of the infamous Napster service, (9) allows infringers to create and distribute illegal copies of copyrighted music to the general public in a matter of seconds. (10) Illegal downloading of pirated music continues to escalate despite the variety of legal downloading sites available today. (11)

In response, the major labels and recording industry executives have consistently clamored for legislative assistance to combat diminishing yearly revenues due to music piracy. (12) However, rather than adapt to new consumer preferences that are focused upon individualized customization and capitalize on the opportunities digital technology can provide, record labels have for the most part chosen to continue fighting to protect their outdated business models. (13) Instead of overhauling their traditional practices to establish modernized approaches that properly respond to new technologies and consumer habits, record labels continue to demand more oppressive royalty rates and higher shares of revenue from less powerful market participants. (14) Most recently, record labels have proposed legislation that primarily benefits their economic interests, without considering the rights or needs of other music industry participants. (15)

This Comment suggests that Congress should amend the Copyright Act to ensure that promising new music-based technologies are able to survive. The establishment of a compulsory license (16) for interactive webcasters (17) will help ensure that sound recording copyright owners are properly compensated for their recordings and performances, while also guaranteeing that the public will be able to utilize these copyrighted works to their greatest benefit. As a result of the recording industry's failed efforts to combat music piracy over the past two decades, Congress must concern itself with the interests and future viability of the entire music industry. By expanding compulsory licensing to cover both noninteractive and interactive webcasters, the dual purposes (18) of copyright law envisioned in the Constitution (19) can best be achieved.

Through the establishment of compulsory licensing for interactive webcasters, music listeners will be able to consume copyrighted sound recordings in the most beneficial and preferred manner. A greater variety of music, in more easily consumable formats and through more accessible services, will then be made available to the public at affordable rates. Meanwhile, copyright owners will be better compensated as a result of the proliferation of personalized digital music services, and the resulting decrease in music piracy, as consumers recognize the value in the legal streaming of music. Market participants will no longer have to waste valuable resources on high-stakes litigation and lobbying efforts that often harm the reputation and public perception of the music industry. In the process, consumers will recognize the benefits and low costs of interactive webcasting, and the consumer base of these webcasting companies will grow under a more balanced statutory scheme. Copyright owners, webcasters, and consumers will all benefit from an increased demand for legally accessible music and the proliferation of more affordable services that are personalized and individually tailored to consumer preferences.

Part I of this Comment provides a discussion of the severe problems music piracy has generated for the recording industry over the past two decades and the many ways in which the recording industry has failed to combat the piracy epidemic. Part II outlines the advancement of music in the digital age, with a particular focus on the importance of streaming technology in the future. Part III chronicles the history of copyright protection for sound recordings, from the initial structure of the digital performance right to the current tripartite framework of the public performance right in sound recordings. Part IV provides further details of the noninteractive webcasting royalty proceedings, detailing the key shortcomings of the current rate structure and the issues that industry participants have been grappling with for the past two decades. Part V argues that compulsory licensing should be congressionally established for interactive webcasters and outlines the general structure that should be adopted. Lastly, Part VI provides a detailed discussion of the economic benefits an interactive webcasting compulsory license rate will have for the recording industry so long as Congress and the major record labels fully embrace streaming technology and interactive webcasting.

  1. THE MUSIC PIRACY EPIDEMIC

    The vast majority of U.S. copyrights in sound recordings are owned by three major record companies. (20) This concentration stems from the common industry practice of sound recording artists assigning their intellectual property interests to these record labels through recording contract agreements. In exchange, the sound recording artists receive distribution services, guaranteed compensation, and other benefits that they might not otherwise receive. (21) Because most of the profits received from album and song sales accrue to record labels after the assigning of such rights, music piracy primarily diminishes the annual revenues garnered by these large record labels. By diminishing the operating budgets of record labels, however, music piracy also limits the opportunities available to recording artists; consequently, the supply and diversity of music that can be made available to consumers diminishes as well. (22)

    1. Failed Efforts to Combat Piracy

      In the late 1990s and early 2000s, sound recording copyright owners attempted to combat the rise of P2P networks and the proliferation of illegal copying and distribution of digital music files through litigation efforts. The threat of Napster (23) in the late 1990s led to a series of copyright infringement suits against many of the large file sharing services that were created in Napster's wake. Sound recording copyright owners initially experienced great success in high-profile lawsuits during the early 2000s. (24) As a result, many of the largest and most successful P2P networks offering permanent download services were shut down. (25) But over time, young entrepreneurs and software developers recognized the shortcomings of prior centralized P2P services and created new file sharing services that are more streamlined for the user but more problematic for record labels and copyright owners. (26) It soon became apparent to sound recording copyright owners that obtaining a verdict against such companies for secondary copyright infringement was now much more uncertain and costly than ever before. (27)

      As a result, record labels and other copyright owners used individual lawsuits to enforce their rights against the actual illegal downloaders and end users of these P2P services. The Recording Industry Association of America (RIAA), on behalf of sound...

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