One of the main objectives and broader goals of Digital Renaissance is to create a platform through which a dialogue on important issues can be conducted; a place to create new ideas and to share wisdoms (both old and new) that will help move the music industry forward. It is clear to us that we in the music business can’t sort out the “crisis” we are in and explore the possibilities in front of our feet without considering the ideas of knowledgeable people in other fields. We need to talk to lawyers, economists, environmentalists, internet gurus etc., etc.

To accomplish the kind of change that is needed, we have to make progress on all structures involved in the music climate – both internally and externally. When reality is changing it isn’t enough to change just, say, the distribution issues. One of the most important fields in need of change is music licensing. We must create new contract structures for using the creative works, structures that put the rights holder and the music listener first. And, even more importantly, structures that correspond with the reality of today.

Bennett Lincoff, a New York-based intellectual property law attorney who has recently came to our attention at Digital Renaissance, has realized this and offers an idea of how a solution can be designed. He has written an article entitled Common Sense, Accommodation and Sound Policy for the Digital Music Marketplace, which was published in the winter 2008 edition of the Journal of International Media and Entertainment Law. In that article, he proposes a solution to the public policy and business model deadlock surrounding the use and protection of recorded music on the Internet. This is a comprehensive approach to rights administration specifically adapted to digital transmissions of sound recordings and the musical works embodied in them.

We have invited Mr. Lincoff to summarize his article for our readers. The summary is long but well worth the reading. We are happy to share it with you here:

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Posted by Bennett Lincoff, June 11, 2008:

The music industry is in desperate trouble. It has been in a decade-long death-spiral for which no one has yet offered a recovery plan that has worked. This predicament is largely of the industry’s own making. It results from insistence by those who benefited most from how the industry operated before the Internet arose that the established relationships upon which their past successes were based be preserved as the digital music marketplace develops. Because of this unwillingness to change, the industry has failed to undertake the transformation now needed to prosper.

Simply put, the Internet is fundamentally incompatible with a sales-based revenue model for works of popular culture that can be rendered in digital format. This is especially so for recorded music.

Every Internet user, whether or not involved in P2P file-sharing, file-streaming, or social networking, and every webcaster, podcaster, or other digital audio service provider in the world is a potential source of unauthorized mass distribution of recorded music in pristine and unprotected form. Through the Internet, the market for sale of individual recordings can be saturated in a moment’s time and without payment of any royalties to any music industry rights holders. The dollar amount at risk may well be greater for larger rights holders, but all rights holders, large and small, are impacted to the extent they share in revenue earned from the sale of recordings. Given this, the industry’s principal revenue model, based on the sale of hit recordings at thin margins, can no longer be sustained. Neither law, nor technology, nor moral suasion will change this result.

The music industry’s strategy to salvage its sales-based revenue model has had several collateral consequences. It has:

* Compelled the industry to resist consumer demand for full, unfettered, DRM-free access to music;
* Relegated consumers to black-market services where adware, spyware, malware, and privacy violations abound;
* Blocked consumer electronics makers and technology firms from offering new products with next generation capabilities or offering greater interoperablility between the many devices that are available;
* Limited the growth of webcasting and other digital audio services;
* Chilled free speech and interfered with academic freedom on university campuses;
* Caused distortions in the music licensing marketplace; and
* Exposed consumers to liability for ruinous damages in copyright infringement lawsuits regarding conduct occurring in the privacy of their homes and dormitory rooms.

And for it all, the industry’s strategy has resulted in fewer licensed transmissions of fewer works and slowed the growth of royalties that songwriters, music publishers, recording artists and record labels otherwise may have earned.

The problem does not lie with the Internet. Nor does it lie with technology run amok. Nor with consumers who cannot be made to relinquish their newly-acquired ability to enjoy music when, where and how they want. Rather, the problem lies with the music industry’s addiction to the sales-based revenue model. As long as the industry’s fortunes are tied to sales, there can be no resolution of the crisis that grips the digital music marketplace.

In my view, public policy should strongly support both the right and the opportunity of music industry rights holders to derive ample rewards from their contributions to culture and commerce. By the same token, however, the music industry should not have the right to demand that public policy support its desire to do business in a particular way.

An alternative to the existing rights structure and corresponding sales-based revenue model is needed for digital transmissions of musical works and sound recordings.

I suggest this
Lawmakers should aggregate the rights of songwriters, music publishers, recording artists and record labels in their respective musical works and sound recordings and create a single right for digital transmissions of recorded music. The digital transmission right would be a new right, not an additional right. It would replace the parties’ now-existing reproduction, public performance and distribution rights (and, where applicable, the communication and making available rights) for purposes of digital transmissions of sound recordings and the musical works embodied in them.

Under the digital transmission right, the determinative consideration would be whether or not recordings had been transmitted, not whether particular transmissions resulted in sales, are more or less likely to promote sales, or may cause sales of recordings to be lost. Licenses would be made available without regard to whether recordings are transmitted for streaming, or downloading, or by some other means not yet devised; whether musical programming is interactive or non-interactive, or contains this, that or another recording; or whether the service that provides the transmission accepts or does not accept user-generated content, or operates as a P2P file- or stream-sharing network. How many copies, if any, that are made in the course of transmissions (including any server copies, or ephemeral, transitory or buffer copies that are necessary to effect a transmission), the type of technology used, and the file format in which recordings are transmitted will not be of concern. The presence or absence of any of these factors will not affect the availability of a license.

Ownership of the digital transmission right in each recording will be held jointly by the songwriter(s), music publisher(s), recording artist(s) and record label who contribute to it. Each of these parties would be treated as a co-owner of the digital transmission right in the recording in question.

No one co-owner would be permitted to act as gatekeeper of the rights of all, with sole discretion to determine, by way of a veto, if, when, how and by whom this newly-established right may be exploited. Rather, regardless of the nature of their relationships to each other under pre-existing agreements, or to particular recordings under current law, under the digital transmission right each rights holder would have independent and sufficient authority to grant non-exclusive licenses for digital transmissions of those recordings on any terms that they and their licensees find to be mutually acceptable. The only limitation on the authority of individual rights holders to grant non-exclusive licenses would be the obligation to account their co-owners for royalties earned.

Rights holders of individual recordings should be free to make whatever arrangements they wish among themselves regarding the division of royalties. However, as a starting point generally, and as a default when voluntary agreement is not possible, I suggest that the interests of songwriters, music publishers, recording artists and record labels should each be allocated a 25 percent share of the total royalties earned from licensed transmissions of their recordings. In this way, singer-songwriters would receive 50 percent of all royalties earned from licensed transmissions of their recordings, and 100 percent of those royalties if they also self-publish and produce their own recordings.

Who is liable and who is not
The digital transmission right would only be enforceable against those involved in providing digital transmissions, retransmissions or further transmissions of recorded music.

Accordingly, consumers would not incur any liability merely for surfing the web, accessing streaming media, or downloading music files. Copying for personal use also would not require authorization. Consumers still may be required to pay network operators for Internet access, and to pay audio service providers for their activities in connection with particular web sites and services. But whether consumers listen to streams or download recordings; make one or many copies of a recording for personal use; or use recordings on one or several playback devices would have no effect on their obligation to music industry rights holders. None of this conduct would require consumers to obtain licenses or to pay license fees under the digital transmission right.

Similarly, software developers and distributors, technology firms, consumer electronics makers, and telecommunications and Internet service providers, as such, would have no liability under the digital transmission right.

On the other hand, audio service providers would need licenses if they operate web sites or other services that provide digital transmissions of recorded music, whether through streaming, downloading, or both. In most instances, only the service provider (or a consumer acting as a service provider in the case of a personal musical enabled web site) would be engaged in providing digital transmissions of recorded music; and only the service provider would need a license under the digital transmission right. Internet users as transmission recipients would never need licenses under the digital transmission right.

Some sites and services are configured specifically to enable users to upload recorded music and other content, as well as to access streams and download music files or programs from the service. Uploading music files would implicate the digital transmission of the recordings involved; and any consumer from whose computer or other device such uploads originate would need a license under the digital transmission right. Service providers who enable the uploading of user-generated content would be jointly liable with their users for their users’ conduct.

For services such as these, a license held either by the Internet user or the service provider would suffice to authorize uploading to that service by that user of the recordings covered by the license. Alternatively, a single license held by the service provider (known as a “through to the user license”) could authorize all transmissions for which both the service provider and users of the service would be liable (e.g., user-generated uploading to the service), as well as all transmissions for which the service provider alone would be liable (e.g., streaming and downloading from the service to its users). A license held by the service provider would eliminate the need for individual users of that service who wish to upload recorded music to obtain licenses in their own right.

A similar analysis applies to the P2P file- and stream-sharing context. P2P participants who only download music files or access streams through the network but who do not offer works to others would not need a license under the digital transmission right. On the other hand, individuals who facilitate transmissions of recordings to others through the network would need authorization.

Operators of centralized P2P networks would be jointly liable with their network participants who share recorded music with others through the network. These operators would also be liable for the further transmission or retransmission through their centralized servers of the transmissions of recorded music initiated by users of their networks. For centralized P2P networks, a single through-to-the-user license held by the network operator would suffice to authorize all transmissions of licensed recordings through the network in question. In such circumstances, individual network participants would not need to obtain licenses in their own right, and yet would be free to share the licensed recordings through the network whenever they wished.

The situation is different for decentralized P2P networks; these do not have centralized servers through which file-sharing transmissions must pass. Moreover, by and large, the tens of millions of copies of file-sharing software for decentralized networks that already have been downloaded by Internet users are beyond the control of the distributors who released the software in the first place. Under the digital transmission right, developers and distributors who do not exercise control over the decentralized P2P networks that their software spawns would not incur any infringement liability by reason of the use of that software on those networks. Because of this, however, there would be no single entity through whom a network-wide through-to-the-user license could be made available. Accordingly, each participant in such a decentralized P2P file- or stream-sharing network would be responsible for securing authorization for his or her own conduct on that network.

On the other hand, distributors of software for decentralized networks who wish to secure licenses for their services could do so if they configure future releases of their software to allow them to exercise certain key measures of control over the sharing that the network enables. For example, they would be required to employ filtering to prohibit the sharing of certain recordings (which, as discussed in the article, will likely only rarely be necessary under the digital transmission right), and would be required to monitor which recordings had been shared so that rights holders could receive royalties. If the software distributor obtains a license, the authorization thereby granted would benefit those network participants who accept and use the software that enables the needed filtering and music use monitoring to be conducted.

This approach favors users of licensed P2P networks (both centralized and decentralized), but also provides an opportunity for individuals who participate in otherwise unlicensed networks to act lawfully. Licensed networks, being lawful, would be able to operate openly, attract investment capital (without exposing investors to copyright infringement liability), and offer consumers the sophisticated functionalities they desire. And there being no reason remaining for music industry rights holders to undermine them, licensed P2P networks would be free from many of the security, privacy and related concerns that plague their black market counterparts. Moreover, it stands to reason that the vast majority of Internet users who are interested in P2P would likely seek out networks that had secured licenses that authorize their file- and stream-sharing activities; especially if the sharing that is permitted actually offers consumers whatever it is that they want from the P2P experience at any given moment.

The digital transmission right would be all but impervious to copyright infringement. Unlike the reproduction and distribution rights, but like the public performance right, the digital transmission right cannot be subverted by one or more unlicensed digital audio services, P2P networks, social networking services, or the like. Whether or not particular transmissions are licensed would not significantly affect the market for the digital transmission right over all.

If music industry rights holders made licenses available on reasonable terms that authorize the uses of recorded music that people want to make the overwhelming majority of those whose digital transmissions would require authorization – audio service providers and, where applicable, individuals alike – would pay the license fees that are due. If this is not the case, then all is surely lost for the music industry. No doubt, no matter what is done, a “Darknet” of unauthorized uses of recorded music disguised by encryption will continue to operate. However, if licenses are made readily available to those who wish to comply with their obligations under the digital transmission right, there would likely be little, if any, public outcry over the industry’s litigation campaign against those who continue to infringe.

The digital transmission right would be implemented through a combination of license agreements freely negotiated by individual rights holders and audio service providers (known as “direct licenses”) and voluntary collective rights management. Rights holder should be permitted to establish as many collective rights management organizations as they wish. However, in my view, the ideal marketplace would contain at least one collective in each territory whose catalog encompassed all or nearly all recordings and which was authorized to grant worldwide rights at its local rates for all digital transmissions of recorded music that originate in its territory.

Accordingly, in the article, I discuss the advantages of voluntary collective rights management; offer suggestions regarding governance, transparency, accountability and regulation of collectives; discuss the relationship of collectives to the individual rights holders who are their members; the relationship to each other of collectives in different territories; the relationship of collectives to digital audio service providers; the basis upon which collectives might license digital transmissions, including transmissions that begin in one territory and end in another; the role of direct licensing by individual rights holders in the context of collective management; the conduct of music use monitoring to support royalty distribution; and the allocation and payment of royalties to rights holders, including royalties payable for transborder transmissions.

I also suggest a basis for calculating license fees under the digital transmission right; though I do not suggest specifically how much license fees should be. That later function is, quintessentially, the proper subject of negotiations between the interested parties.

Nevertheless, in my view, license fees under the digital transmission right should reflect the benefit realized by service providers from their transmissions of recorded music. To this end, I suggest a structure for calculating this benefit in different circumstances, including, for service providers who charge consumers to receive transmissions of recorded music; those who transmit recorded music in connection with advertising; those who transmit recorded music in connection with the sale of goods or services other than access to music itself; and those who do not charge consumers to receive transmissions of music, do not carry ads, and do not sell goods or services. I also suggest license fee structures for P2P networks and for those instances in which it may be necessary for individual end users to pay license fees to music industry rights holders.

Sustaining the industry during a brief period of transition
It is my intention that music industry revenues under the digital transmission right should equal the sum of total net profits for record labels and music publishers and total royalty income for songwriters and recording artists previously derived from sales and licensed public performances of their musical works and sound recordings. Of course, there may well be a short-term short-fall between the base revenue amount (however much that turns out to be) and the amount that rights holders will collect in license fees under the digital transmission right.

I expect that service providers, who are eager to meet consumer demand by lawful means, will rush to enter into license agreements under the digital transmission right. To increase the likelihood of this favorable result, the overall burden of compliance, including the cost of license fees and the effort needed to fulfill music use reporting requirements, should be light enough so that knowing non-compliance can only result from a willful and unjustifiable refusal. If these conditions are met, the duration of any revenue short-fall likely will depend on how quickly and how well music industry rights holders organize and roll-out the structures needed to implement their new right.

In the meantime, steps should be taken to make up any short-fall that may occur. For this limited purpose, I suggest that a temporary levy should be imposed on consumer electronics and technology products.

Consumer electronic makers and technology firms, as such, would have no liability under the digital transmission right. Nevertheless, because of the digital transmission right, they will be free to innovate in whatever ways and to whatever extent necessary to satisfy ongoing consumer demand for new music-related products and services. I think it is appropriate, therefore, that these businesses should bear the burden of the levy; they should not be permitted to pass the levy through to consumers.

It is not intended that the levy result in a windfall for music industry rights holders; it is only meant to make them whole during transition to the digital transmission right. Therefore, the levy should be adjusted downward in response to increases in music industry license fee collections. In addition, the levy should be subject to sunset; a definite date (I suggest two to four years from implementation) by which the music industry would be expected to thrive in the digital music marketplace without subsidies.

Implementation of the digital transmission right would not depend on access restrictions or anti-copying measures for its success. Its monetization would not involve the imposition of a statutory license or an Internet access tax. And it would not require the enlistment of Internet service providers or colleges and universities as enforcers on behalf of music industry rights holders.

Nevertheless, the digital transmission right would allow transmissions of recorded music to be made available through the largest number and widest array of licensed sources, anytime, anywhere, to anyone with network access. Such a result would provide music industry rights holders with their best opportunity to do as well financially as they have done under the system that my proposal would replace. In addition, the digital transmission right would promote technological innovation, enhance the free market for consumer electronics and technology products, and facilitate the growth of all manner of licensed digital audio services (including P2P). And, perhaps most importantly, it will meet consumer demand for full, unfettered, DRM-free, and lawful access to music when, where and how consumers want.

The digital transmission right is the means by which to bring about change that meets the needs of all the many competing stakeholders in the digital music marketplace.