What They'll Never Tell You About the Music Business

by Peter M Thall

  As part of its Friends of Active Copyright Education (FACE) initiative aiming at copyright education, the Copyright Society of the United States has established a website for teenagers that cites several examples of when a fair-use defense can be asserted and when it cannot. These are useful not only for teenagers but for corporate counsels as well, and the information can be found at www.​copyrightkids.​org.

  RIGHTS MANAGEMENT

  There are a myriad of state and federal laws, case interpretations, and customs affecting the use (commercial or otherwise) of photographs, models, film clips, etc. Corporations that face these issues must establish a management plan that invites the easy and broad sharing of information. Ironically, much of this can be exchanged through the mechanism of the Internet itself; many companies (including law firms) have established intracompany websites through which information and decision making can be opened up to the widest possible audience within the companies.

  The task of managing intellectual property and complying with copyright and associated laws consists not just of identifying the problem; it includes controlling how the intellectual property rights are used and how they can be cleared in a reasonable fashion under the particular circumstances of a given use. That is why it is necessary to establish guidelines for identifying whether a proposed use will require special counseling in the event it actually takes place. In particular, companies whose legal counsel are dispersed and decentralized throughout the world should establish an intellectual property network so that lawyers and managers who are involved can keep each other informed, possibly by selecting a central rights-management person as well as one person in each division designated as the contact person for corporate compliance.

  Another valuable means by which a company can manage its risks is to issue educational pamphlets on copyright, rights of privacy, and other intellectual property issues. Some of these will be “timeless” so that they can become a permanent part of the company’s office manual. Other pamphlets, newsletters, etc. can be issued as the circumstances, such as changes in the law and the changing needs of the company, warrant. This is a particularly useful procedure because as new managers are hired, the total level of intellectual property education of a company’s managers is necessarily diluted. The rights-management attorney can be charged with this responsibility.

  In order to accomplish the information-exchange goals alluded to above, attorneys throughout the spectrum of the company’s deal making should be informed of the availability of the rights-management attorney and the function of that office. In this way, language that appears in any contract that has intellectual property aspects can be scrutinized by an expert.

  DANGEROUS LANGUAGE ALERT

  A contract dealing with webcast distribution (including podcast distribution) may include the following language, tucked in well toward the end of the document, in the middle of other standard boilerplate language (where they hope no one will notice it—let alone understand it):

  • Customer holds all rights throughout the world [italics added] material to its obligations under this agreement and to the licenses granted hereunder [including the rights of] …, transmission, distribution, performance, display and broadcast of the event and materials…and all copying…, necessary to effectuate these activities.

  • Webcaster’s exercise of any…, rights granted…, herein, will not violate or infringe any right of privacy, personality or publicity, any Intellectual Property Right, or any other right of any party.

  • Customer has the worldwide right to license to Webcaster the right…, to publicly distribute, transmit, and perform the event…, via streaming video protocols…and to use, reproduce, and display…, the materials contained in the event…, and to maintain the archive of the event…, for on-demand access and distribution, transmission, and performance.

  Pretty inclusive language. Pretty dangerous language. Does the person negotiating the overall agreement have enough familiarity with the DMCA and the DPRSRA to sign off on language such as this? Does that person understand technically what the company is actually seeking to accomplish or to present to the public to be able to counsel the company on this language?

  Would it not be a lot more efficient and risk free to seek the counsel of someone who lives and breathes this area of the law every day? It is unwise for a corporation to parcel out its contract-negotiating responsibilities among a variety of lawyers who are not acting as mutual resources for each other. It is far better to consult outside counsel who specialize in Internet and copyright law, to create the position of rights management person, as suggested above, or to expand the job description of one inside counsel to assume this responsibility.

  The infringement issues raised above do not present insoluble problems. On the contrary, they merely require a different kind of attention and decision-making. Copyright infringement consequences can be significant, but if a company is diligently trying to do the right thing, the damages anyone will be able to recover can be significantly reduced. For example, the statutory damages for copyright infringement (which, by definition is intentional, even if “innocent”) are dramatically lower than those for willful copyright infringement (which, while also intentional, is subject to much higher damage penalties).

  Of course, the issues explored here are exacerbated when a company has many divisions and—even more so—when those divisions exist in different states and countries. The need for corporations to establish rights use and clearance guidelines is as compelling as it is to have general corporate policy and other legal guidelines that have become routine over the past decades. There is no other responsible way to manage the risks of infringement of copyright or other intellectual property rights. Among these risks in the copyright area are the attendant costs, including not only the legal fees of the company (the defendant), but also, potentially, the legal fees of the prevailing party (the plaintiff) for which the US copyright law includes specific provision, to be assessed at the discretion of the court.

  MUSIC CLEARANCE: THE MUSIC INDUSTRY’S REVENGE

  People who want quick solutions have no idea how complicated it is to clear music rights. First of all, there are multiple rights involved. Even in a live-performance webcast of any sort, one must deal with the mechanical and performance rights emanating from the webcast; in-store uses of footage from the webcast (for example, a CD or a videogram, that is, cassette or DVD); and perhaps a TV special, perhaps more than one (one for the United States and one for Europe, one for South America, and one for Asia). And don’t forget pay per view. Oh yes. One more thing to add to the “don’t forget” list: the moral rights of authors and their heirs outside of the United States. This is a wild card courtesy of foreign intellectual property laws that will allow the heirs of their John Philip Sousas (whose music in this country is in the public domain) to stop cold any use of their ancestor’s music that they believe is inimical to the ancestor’s moral heritage. The concern is particularly relevant in the area of commercial advertising. Thus a Mercedes Benz commercial using a French song long out of copyright protection might offend the heirs of the writer of the song, while a Citroën commercial using the same song might not.

  For a company whose principal function has nothing to do with music, it is virtually impossible to understand how difficult it is to clear the necessary rights for something as seemingly straightforward as a webcast—or even the simple use of a song on a website. What’s more, the rights have to be cleared both for the song and the master. And if the song is a particularly current “edgy” one, the likelihood is that there are multiple writers and copublishers on the music publishing side who will have to be dealt with. For a five-song presentation, there are upward of fifty to two hundred rights that have to be cleared. For example, if, for one song, three writers and unaffiliated publishing companies are involved together with one master rights owner, seven rights would have to be cleared for one work, but if all three writers and their publishing companies were in partnershi
p with third-party music publishers (like Sony/ATV or Warner/Chappell), then there would actually be six publishing companies to deal with—for a new total of ten rights. Multiply this by five songs and you get fifty different rights to clear. And that’s just the song. To clear the master recording can be even more daunting, especially if samples are incorporated into the recording. Obtaining these rights can be so expensive as to be practically prohibitive for the average marketing budget—or they can be managed efficiently and cost effectively.

  INTERNATIONAL ISSUES: ONE-STOP SHOPPING

  One-stop shopping is impossible in the current global environment. Even the collection societies have not figured out what to do.

  Slow responses are the norm. No response is, unfortunately, not rare. Yet decisions must customarily be made on very short notice. And even where the responses are quick and satisfying, the process of drafting and negotiating the formal licenses is enormously burdensome. Every music company would prefer to use its own form, none of which really fits the imaginative uses that the licensee comes up with (at least someone is being creative!). The staffs of the music companies are simply too small to deal with the avalanche of paperwork generated by the multiple uses and clearances involved, neither the music companies nor their prospective licensees have a clue as to what to charge, and both legal fees and clearance company fees multiply to unconscionable levels. Further complicating the issue is the fact that most, if not all, of the rights owners will undoubtedly insist on most-favored-nation treatment—which can put a real crimp not only in one’s budget, but in determining whether it is even worth proceeding with the project. The concept of “most favored nation” (MFN) originated in the world of international trade: an agreement between nations would stipulate that the receiving nation had to be granted terms at least as good as any other nation with respect to the same deal. Here’s an example from the world of music: A client of mine cleared fifty-three of fifty-five songs in a documentary film for $5,000 each, but one publisher demanded $30,000. The difference, dictated by the MFN clauses in the agreements, amounted to more than the cost of the film—$25,000 × 53 = $1,325,000! Needless to say, the film remains in the can, never to see the light of day.

  Some adventurous lawyers think they have found a way around the strictures of the most-favored-nations agreement. They suggest optioning another song and never using it, obtaining rights they never need and will never use and therefore never pay for, and paying extra for rights they will never use. Needless to say, those who make their living licensing rights are tuned in to these tricks and they won’t often be fooled.

  There is some question whether MFN provisions constitute antitrust behavior and are therefore illegal. But do you want to take on the fight for everyone else and make new law? I don’t think so.

  For a more detailed discussion of the trials and tribulations of the copyright industry’s attempts to make things easier and cheaper rather than harder and more expensive, see chapter 23, this page.

  SO YOUR CORPORATION HAS ALSO DECIDED TO BECOME ADVENTUROUS?

  Times have changed. Corporate counsels are dealing with matters formerly left to rock and roll attorneys and their offspring (hip hop lawyers?). Corporations are using music as never before. Gone are the days that IBM looked only to its advertising agencies to clear rights to music used in their commercials. All major and minor corporations in the world today are utilizing music on their websites, on phone lines, and in their offices, lobbies, and meeting rooms. Holiday parties feature “Do You Hear What I Hear?” and “Little Drummer Boy” not to mention “I Saw Mommy Kissing Santa Claus” and “Silver Bells.” Websites include music clips to bring down the age of their visitors and potential customers and to characterize them as more hip than their competitors. All are copyrighted and require permission to be used.

  Many fairly mainstream companies have begun to introduce, via their websites and links with other websites, creative and contemporary marketing ideas into their general approach to sell their products and image to the public. Whether they are offering downloads, streams, or podcasts, music rights are implicated to one degree or another. Downloads require mechanical licenses, streams require synchronization licenses and probably performance licenses, and who knows what is required to offer podcasts legally. I say the latter because these on-demand programs clearly require mechanical licenses, yet one won’t know what is owed until the podcast offering has ended. There may have been a thousand recipients who have accessed the podcast or 1 million. No one can control this, and budgets don’t accommodate uncertainty. Sound recording owners similarly don’t know how to allow the use of their masters pursuant to any rational basis for compensation. So, all I can say about a company which wishes to offer podcasts with music is “Be careful” and try to make a flat-fee deal with both rights owners, or you are opening up your company to unknown risk. See chapter 16, this page for more detailed discussion on podcasts.

  22 • CATALOGUE VALUATION

  How to Improve Your Odds at Winning Big

  Price is what you pay. Value is what you get.

  —WARREN BUFFETT

  Music publishing is widely regarded as both an excellent profit-making venture and a good long-term investment. Hardly a day goes by without my having (or hearing) a conversation that ends by someone asking, “Do you know of any catalogues that are for sale?” This view derives partly from fact and partly from myth.

  In the early 1980s, Boston Ventures purchased Chappell Music from PolyGram Music for about $100 million. They sold it to Time Warner a mere four years later for $275 million. Of course, this incredible increment in value occurred before the historic rise in publishing income derived from legal digital downloads and other technological advances that have coursed through the music business in the years after the millennium. It is too early to evaluate how “historic” this rise will be given that copyright rates for streams are in flux, and there are as yet insubstantial returns on the mechanical side from full downloads. The estimated cumulative mechanical revenue from the more than 1 billion iTunes downloads that have accrued from inception through the date of publication of this book amounts to about $500 million. While this may seem like a lot, it is roughly equivalent to about 100 million album sales—what just fifteen or twenty top artists would, until a few years ago, cumulatively sell on a regular basis annually.

  Not the least of the reasons for the increased value in copyrights is the fact that artists have begun to withdraw their resistance to licensing their works for commercials—something that was anathema to them for decades—at least in the United States. It didn’t hurt to change the overall attitude for such icons as Lou Reed (Honda motorcycles), Sting (Jaguar), Bob Dylan (Victoria’s Secret), and Ric Ocasek and The Cars (Circuit City) to support such practices. Ringtones (most often note sequences that emit chords and melodies alerting a cell phone holder that a call is coming in), which did not even exist a few years ago, are now a multibillion dollar business worldwide. (For 2007, the market has been estimated at 2 to 3 billion dollars, less than 2% of the US music business, and down 50 percent from just a few years earlier due to record labels offering actual “master” ring tones, the ability to create one’s own ringtones, and the availability via digital music stores when coupled with the sale of downloads). Yet video ringtones are now available in advanced economies, so the growth and expansion of the use of music continues. Whatever their future, ringtones are just one of a myriad of heretofore unknown exploitation opportunities in which the Internet is serving the music publishing community in ways the music publishers and writers never imagined (and still do not comprehend in many cases).

  Many factors go into the valuation of a music catalogue. Many that seem to be self-explanatory are not. Where they are not, I have added some clarification or example. All of them serve one goal only: the ability to project future cash flow. If one can value a catalogue at a specific point in time, one can evaluate the catalogue’s potential earnings at various points in the future.
But it is not enough to determine what is driving the revenue. One must also be able to figure out how to increase future revenue. This is about money, not music; interest rates and inflation, not market share; projections, not dreams.

  FACTORS IN VALUING CATALOGUES: AN OVERVIEW

  Earning Trends

  Is the income going up or down? (Five years’ history is the norm for such evaluations, but depending on the nature and the extent of the peaks and valleys, five years’ history may not be enough.). Did a spike in income result from the death of an artist? A tour? A film? How enduring, then, might the income be? (Note that, depending on the catalogue, synchronization income may spike, but the likelihood of repetitive spikes is usually quite small—particularly with respect to the same song—and particularly if the synchronization is for an advertising use. United Airlines has utilized “Rhapsody in Blue” for years. On the one hand, if United stops using this song, upward of $1 million per year will be lost. At the same time, it is unlikely that any other company would want to associate that song with another product for some time to come.