by Cary Sherman, David Israelite, Lee Knife
Five new licenses could make it easier to launch online music companies.
Say you have a great idea for a new kind of digital music service. You need some funding, so you pitch the idea to investors. All investors worth their salt will ask, “How much will the content cost?” Until now, it might have been difficult for such a digital music service to estimate the cost of licensing music from thousands of labels and publishers directly. And what are your chances of acquiring funding if you cannot estimate costs? Low.
In the coming weeks, federal royalty judges will consider and likely approve one of the more important advances in digital music licensing we have seen in many years. Representatives of songwriters, music publishers, record companies, and digital music services have struck an agreement, pending federal approval, that will simplify the licensing burdens for digital music and enable a series of new and exciting business models. This agreement would write into regulations a standard licensing rate that the operators of these new business models could take advantage of without having to negotiate with every publisher individually. (And considering that there are many thousands of publishers, that’s a big benefit.) Digital music services always have the option of pursuing private negotiations if they prefer; the choice is theirs.
Five new licenses
For any new music distribution service, it’s necessary to obtain the appropriate licenses from both the music publisher and from the music label, both of whom own separate rights within each recording of a song. The process isn’t always easy, and it’s one we are continually working to simplify and expedite, all while ensuring that the creators and distributors of the musical works are fairly compensated. The modern music marketplace is evolving at an ever-accelerating pace. We believe licensing regimes should keep pace with innovative business models that connect fans with the music they want. This agreement moves us another step closer to that ideal.
Under the agreement we have painstakingly crafted, we are proposing a “mechanical” royalty rate structure for five new business model categories. To put this in perspective, for the first 95 years such licenses existed, only three basic formats qualified for a mechanical license. But as digital music services have developed, important new royalty rate models have been created—including the five developed under this agreement—to keep pace with music technology. The five new models include categories you’ve heard of and some that may not be familiar yet, but which anticipate soon-to-come music offerings. One familiar category, for example, is for paid locker services, which are subscription-based lockers like iTunes Match. Another category allows locker functionality without a subscription for music that is purchased.
We also created categories that expand on the ability of digital services to offer music bundled together with other music or non-music products in response to consumer demand. Want a service that bundles music with your broadband? How about bundling music with a device like a mobile phone? A music download bundled with a CD? Industry-wide mechanical rates for all of these are now a reality.
The rates also include a new category for subscription-streaming services that offer more than radio, but less than full catalog, on-demand listening. We agreed that many people might want a bite or two but not the full meal—for example, on-demand streaming for certain genres or playlists. The new rate agreement permits development of these more limited offerings at lower price points to the consumer.
A step forward
We can’t predict every new idea for using music in the next five years—nor would the owners of the rights want to guess about things completely untested in the market. And this agreement doesn’t solve every complaint, legitimate or not, about music licensing. Sometimes there are simply honest, good-faith disagreements about the value of the music licensed and its impact on other business models. That’s the marketplace at work.
But this agreement represents a major step forward. It reflects a commitment of our respective communities—the recording artists and their record labels, the songwriters and their music publishers, and the digital media distributors—to work together for the greater good more than ever before. For music fans and music entrepreneurs alike, it’s a good day.