Congress Hits the Right Note with the Music Modernization Act

Alan McQuinn May 16, 2018
May 16, 2018

(Ed. Note: The “Innovation Fact of the Week” appears as a regular feature in each edition of ITIF’s weekly email newsletter. Sign up today.)

The purpose of copyright law is to incentivize the creation and dissemination of creative works by providing fair compensation. However, the current music licensing system is labyrinthine, often failing to pay artists and publishers fair rates for all their works while also limiting how the digital media platforms that license this music can innovate. Congress is trying to fix that.

Yesterday, the Senate Judiciary Committee took up the Music Modernization Act (MMA), legislation that addresses some of the long-standing issues in the U.S. music licensing system with three fixes: a centralized clearinghouse for mechanical licenses, recording rights for pre-1972 song recordings, and a more modern way to set royalty rates. (Music licensing can get confusing, so here is a handy diagram to help parse how it works in the United States.)

A Centralized Clearinghouse for Mechanical Licenses

The first problem this bill solves is ensuring artists get paid for their work. Under current law, if a streaming service cannot determine the owner of a song to pay its reproduction and distribution licensing fees (also called its mechanical license), they send a notice of intent (NOI) to the U.S. Copyright Office. Normally, digital media platforms must pay a mechanical royalty each time they reproduce a sound recording. However, some services have avoided paying royalties by sending millions of NOIs to the Copyright Office claiming that many artists cannot be found, even when they are found on other databases, like those of Performance Rights Organizations (PROs)—groups that collect and distribute royalties for copyright holders.

To ensure that artists can get paid, the MMA authorizes an industry nonprofit for mechanical licenses. The MMA tackles this by creating a centralized clearinghouse, called the Mechanical Licensing Collective (MLC), that provides a publicly accessible database for song ownership information. Digital services that agree to fund the MLC—such as Pandora, Google, Amazon, and Spotify—are granted blanket mechanical licenses for all songs in the catalogue to offer interactive streaming and digital downloads. These services are shielded from liability for past infringements.

Recording Rights for Pre-1972 Song Recordings

According to the Copyright Act of 1976, when an author composes a song there are two separate copyrightable works: a music composition and a sound recording. The music composition is the arrangement of notes and lyrics that make up the song, while the sound recording is the recording of the performance by the artist. These rights are often controlled by different persons or entities. For example, in the song “Smooth Criminal” by Michael Jackson there are two separate copyrightable materials: one owned by Michael Jackson for writing the song and one owned by his record company for the original recording of the song.

One of the weirder quirks in the U.S. music licensing system is the fact that there are no federal copyright protections for sound recordings that were created prior to 1972. In practice, this means that many hits, such as Aretha Franklin’s 1967 hit “Respect,” only get royalties for music composition. This loophole has allowed many streaming services to use recordings without paying royalties. While several major law suits have sought to sue streaming services that did not pay royalties on the grounds that state laws guarantee performance royalties, many courts have rejected this argument.

The lack of recording rights for pre-1972 recordings also has international effects for U.S. artists. For example, Canada reciprocates the U.S. regime by allowing radio stations to play older American music without paying royalties. Because Canada is the 6th largest global music market, this tit-for-tat regime hurts U.S. musicians, costing U.S. rights holders up to $12.5 million each year, according to the Recording Industry Association of America (RIAA).

The MMA solves all these problems by extending full copyright protections to pre-1972 recordings, which would allow artists to get paid for their works and help ensure reciprocal protections from U.S. trading partners.

A Modern System for Royalty Rate Setting

The MMA attempts to modernize how royalty rates are set for music with three policy changes. First, it allows the Copyright Royalty Board (CRB)—the permanent legal body that sets royalty rates of statutory licenses for sound recordings—to determine rates that reflect market value. Currently, the CRB does not need to take into account either the price a seller is asking or what the buyer is willing to pay when setting the statutory rate. The MMA changes this to better allow a competitive market for compulsory licensing. Second, the MMA allows for a fairer rate-setting system between performers and writers. The Copyright Act currently forbids the CRB from considering royalty rates for sound recordings as a benchmark. The MMA lifts this prohibition. Finally, the MMA creates a pool of judges on the CRB who are randomly assigned to each rate case to ensure fresh decisions for songwriting royalties. Currently, a single judge is assigned to each PRO for every case; the change would ensure there is a variety of perspectives on rate disputes.

Beyond the Music Modernization Act

Eventually, after the Senate hopefully passes the MMA and President Trump signs it, Congress should expand upon it to make the U.S. music licensing system more dynamic, competitive, and innovation-friendly.

First, if the MMA is enacted, the MLC should ensure that its open database holds all the information relevant to licensing a song for all potential licensees, from digital and satellite radio to interactive web players and central download services like iTunes, to streamline the licensing process and ensure all parties to a work receive just compensation. This information could include, but not be limited to: the songwriter, the composer, the publisher, the PRO that holds the performance rights, the sound recording rights holder, and the cost to obtain each license.

Second, beyond just establishing a clearinghouse for mechanical licenses, Congress should mandate the MLC, the PROs, and other music licensing organizations combine all their disparate databases into a single open database for all music licensing rights. While the two largest U.S. PROs recently made similar steps to combine their catalogues, this change is not enough. With a one-stop-shop database, potential licensees would be able to more easily find and pick which licenses they wish to purchase, and third-party developers could build applications on top of the PROs’ databases to facilitate music licensing.

Third, Congress should ensure royalty rates are uniformly applied to all types of broadcasts. For example, although Internet radio and terrestrial radio are competing technologies, Internet radio is forced to pay for additional royalties on sound recordings that terrestrial radio is not subject to pay. This is not technology neutral, and disproportionately harms the digital economy. In an ideal world, everyone would pay for these royalties and no one would be exempt, including terrestrial radio.

Finally, Congress should allow copyright owners to set individual rates for particular musical works, rather than use a single rate, and to adjust those rates over time. Even with these changes, the U.S. system still fails to produce competitive rates for compulsory licenses by assigning a single rate for every song, devaluing some songs to the benefit of others. This made sense in a pre-digital age where managing so many different rates was not feasible. However, the rationale for a single rate no longer makes sense and Congress should move to implement a dynamic rate-setting system for all music licensing. This change, in conjunction with the comprehensive licensing database discussed above, would allow copyright owners to specify separate royalty rates for different music services—as some may choose lower rates to maximize plays and exposures, while others may choose higher rates if they are more popular.

~ ~ ~

With the Music Modernization Act, Congress can begin the transition to a more competitive, open music copyright system. While bills concerning music royalties are often controversial, this bipartisan legislation has won support from 20 music organizations and many technology companies, such as Pandora, Spotify, and others. And it has already passed in the House of Representatives.

While the legislation does not tackle every issue confronting innovation in this space, it is a strong first step. The Senate should move quickly on this legislation and send it to the president, who should sign it.