Music Licensing after the Music Modernization Act with Mitch Glazier and David Israelite

Scott: Hi, and welcome to TPI’s podcast, Two Think Minimum. Today is Tuesday, October 30th, 2018, and I’m Scott Wallsten, president and senior fellow of the Technology Policy Institute, here with Tom Lenard, senior fellow and president emeritus of TPI. We’ll be chatting with Mitch Glazier, who is president of the Recording Industry Association of America, and David Israelite, President and CEO of the National Music Publishers Association. Thanks for joining us.

It’s an exciting time for music policy with the Music Modernization Act finally becoming law and we’re going to talk a lot about that, but first, before we start, maybe each of you could take a minute to introduce yourself, explain what your organizations do, and how they differ from each other.

Mitch: I’m Mitch Glazier, president of RIAA. We represent the major global music entertainment companies on the recording side and we represent about 85 percent of all the legitimate recordings that are produced in the U.S.

David: I’m David Israelite. I run the NMPA, the National Music Publishers Association. We represent all of the music publishers and their songwriter partners in the United States. So we’re the other copyright in the music industry from the sound recording copyright that with Mitch, his organization, together, we make up the two copyrights that make up music.

Tom:  We were hoping that you would help make world of music licensing more understandable. We’re here to discuss the Music Modernization Act, which was signed by President Trump on October 11^th. I think one or both of you have called it the most significant improvement in music copyright legislation in a generation. Why’d you say that?

Mitch: Well, it’s the only music legislation in a generation, but it also is significant. This legislation tackled several different problems that exist in the music industry and we were able to come together with a formula that got buy-in from, really, all of the major stakeholders in the industry, not just the people who make the music, but also the people that license and use the music.

Mitch: I think that one of the things that is so remarkable about this bill is that it passed with unanimous support in Congress. It passed the House initially 415 to zero. Then passed the Senate 100 to zero. It went back to the House and passed unanimously again. When you’re talking about copyright policy, or even music policy, the idea that all the interest groups – the record labels, the artists, the songwriters, the publishers, the PROs, the unions, the broadcasters, the digital music companies – would all agree on these types of improvements is remarkable.

Tom:  What of the major problems in music licensing did it solve?

Mitch: On the licensing side, which David can address, it makes a licensing system that’s fit for purpose in the industry and he can give you a lot more of those details. But it also fixed a couple of loopholes that it existed in the law for a very long time, especially for legacy artists, because on the sound recording side, we didn’t even have a federal copyright until 1972. We had a bifurcated system where every sound recording made before that year was protected under a patchwork of state laws and everything made after that year was protected under federal law.

You had that combined with federal licenses where there was a mismatch, not only in the rules, but potentially in the right to be compensated. We had an odd situation where a legacy artist who was singing a recording that everybody knows, loves, and streams all the time was not getting compensated, but a contemporary artist singing the exact same song was getting compensated. Title two of the bill, the Classics Act, fixed that problem and it basically brought Pre-1972 and Post-1972 sound recordings into harmony so that they’re treated very similarly.

Tom:    It also addressed problems with terms basic licensing arrangements for streaming services, what was the problem that it solves?

Mitch: It did. I think it’s probably fair to say that if you wanted to summarize why this bill passed, it involved a trade. The trade basically was that digital services were having problems licensing the songs that they need to run their services properly. Services like Spotify, Apple, Amazon, Pandora, Google, and the music industry came together and came up with a solution to that problem. That solution was traded for several things that we wanted out of those same services.

The basic trade was that we have completely changed the way that they license music in exchange for several different things, which ultimately are designed to compensate songwriters, music publishers, legacy artists, artists, and record labels more fairly. That became the compromise that existed within the bill.

Mitch: The problem that these services were having is that they wanted to offer basically all music to their consumers, but they were required to go find the fractional owners of every single song and maybe a 50 million song database. And if they didn’t do that properly, they opened themselves up to copyright infringement claims. And quite honestly there was a conflict there because we wanted them to be able to offer a wide variety of music. We wanted this to be an attractive proposition for consumers to buy music subscriptions, but they were having a difficult time and someone suggests they weren’t trying hard enough, but they were not properly licensing the music by finding these fractional owners and making license agreements.

Mitch: What we’ve done in this bill is replaced that old system with a modern simple way for them to get access to all music. They will now get a blanket license, they will pay all of the money and give all of the information to a new not-for-profit entity and that entity is job will be to find the proper owners and distribute the money properly, but it will be done in a collaborative way that’s designed to make us business partners and not in a way that really drove us down the path of being litigants against each other.

Scott: Let’s make it more concrete. How are songwriters likely to be affected? How much will you know the streaming services, how does it affect them and what happens to consumers?

Mitch: For song writers, this is basically going to improve their lives in four different ways. And this is assuming they’re not also an artist that’s affected by the parts that Mitch was able to achieve for the artist and record labels.

Two of the ways that it helps songwriters is with regard to how they collect their public performance money. If you’re a songwriter and you join a performance rights organization or a PRO. The two largest ones in the United States are called ASCAP and BMI. Those two organizations have been regulated by consent decrees that the Justice Department since 1941. Two of the things that this bill does is strengthen the ability of ASCAP and BMI to get better rates for the songwriters and music publishers they represent.

Mitch: The other two things it does for songwriters has to do with a different type of right that they have known as a mechanical reproduction. That right has been regulated under law since 1909, when Congress thought that music publishers had a monopoly on player piano rolls, and so this will help songwriters and music publishers get fairer rates for that type of activity as well. The way that we’ve fixed the licensing system, not only benefits the digital companies, but there are significant benefits for songwriters as well. For example, the digital companies are now going to pay 100 percent of the cost involved in the licensing system. That means that unlike any other licensing collective in the world, this one will not be taking a commission out of the royalty pool before it distributes royalties to songwriters. They will get 100 percent of what the royalty is, every other type of collection method in the world, the songwriters are paying for that process and can lose anywhere between 10 to 20 percent of their money.

We also are creating a public database that will allow people to recognize when their songs aren’t being matched properly and to fix any problems that exist. It gives us an audit right to go into the digital companies and ensure they are paying us properly. All of these are things that will benefit songwriters all being given to us in exchange for building this new system that benefits the digital companies.

Scott:  If for the recording industry though, 100 percent of the royalties are going to the songwriter, where does the — ?

Mitch:   To be clear, 100 percent of the royalties owed to songwriters and music publishers.

Tom:  Relevant to that, here are a couple of questions. Is it oversimplification to say to the uninitiated, that there were two problems.  One of the songwriters and producers of content were in a significant way, not getting paid, falling through the cracks, and then, on the other side, the digital streaming services were getting sued.  Was this basically supposed to solve those two problems?

Mitch:  I would also add, that you not only have the problem of them not getting paid at all when there were mistakes being made or people were missed, but those that were getting paid, were not getting paid fairly and this addresses that as well because it addresses what the rates actually will be for the songwriters

Tom:  If you’re a digital streaming service like Spotify, how many licenses do you need?

David: If you’re a digital interactive streaming service like a Spotify or an Apple, you need three basic licenses. The first license you need is from a record label for that sound recording. That’s negotiated in a free market. There is almost always a single owner of that one sound recording and so you go and sit down and negotiate a price or terms and you get a license for that sound recording from one owner from the record label or potentially an artist representing themselves.

You then need two licenses from the songwriters and music publishers. One is a performance license and one is this mechanical reproduction license regulated by law. To get the performance license, you go in America to four different companies and get a blanket license from each of the four, but that doesn’t require that you know who owns what song on the publishing side.

It’s the mechanical license that’s been the problem because in that licensing exercise you need to know every fractional owner of every song. That’s where the system was really breaking down. But for a Spotify, they need three licenses. One negotiated in a free market with record labels, one that’s taken from four different PROs, but two of them are under consent decrees that make up the vast majority of the market. Then there’s the mechanical license where the price is set by law. The publishers don’t have a right to say “no” to the license, but there was a broken down system as to how you achieve getting the license and that’s what we have fixed within this bill.

Mitch:  There’s one more piece on the recording side. If you are not an interactive service, if you’re not a Spotify – but you’re what we call a radio-like service or a non-interactive service a Pandora or Sirius XM – you don’t negotiate in the free market. Instead you get to take advantage of a compulsory license that is administered by a Copyright Royalty Board at the Copyright Office and there was a lot of friction within that system because Congress enacted laws that reflected snapshots in time based on technology that existed at the time that Congress enacted the law. Different radio-like services were paying under different rate standards and those rates standards were inconsistent with the rights standard that is used for the mechanical license that David was referring to.

Mitch:  One very significant piece of the Music Modernization Act is that it made the rate standard under all of the government licenses. A willing buyer, willing seller rate standard what a willing buyer would pay the willing seller in the marketplace based on real data from the market place for services that do have to negotiate in the marketplace. That was very important for music publishers, for record labels, for artists, for songwriters, that they’re finally guaranteed fair market rates regardless of the platform. Regardless of whether or not someone is negotiating in the free market or using a government license. That simplicity and fairness across the board was an incredible achievement that’s been around for years.

Tom: David, you started talking about the music collective and the database, which is at the heart of the provisions that are supposed to address this problem. The music collective is supposed to collect the royalties and distribute them. Talk a little bit about the process of setting up a music collective, and who’s going to do it.

David: It’s important to understand how it worked in the old world to understand what the new world’s going to be. The way that it was working is that if you were a digital streaming company, like a Spotify or an Apple, you would hire a vendor that would be responsible for helping you find the owners of the songs. If you were a Spotify, you would get the sound recording from a record label. You’d put it up in your library and then your vendor was supposed to help you identify who you owed the money to because the rate was set by statute and it was a compulsory license, but you had to know who to pay because if you didn’t, you technically we’re a copyright infringer. The vendors that were being hired, each had their own databases to try to help the digital services.

David: Spotify and Apple, for example, used one vendor. Amazon and Pandora used a different vendor. Google use a third vendor and then just bought that vendor and it became part of their company.  And so you have this patchwork of different databases held by private companies that were considered proprietary, they were considered confidential, and were being used to try to do this matching function.

We know that despite best efforts, they weren’t doing a great job at it because the information wasn’t readily available. What the new system will look like is that this will be done now in a collectivized single place of this MLC and what is really groundbreaking about it, it will be done and a very open and transparent way. The new MLC will still be using vendors to do the same types of things. The difference is that when you solve one of the puzzle pieces for a particular song, you’re going to solve it for all the services at the same time, not have potentially the situation where one service knows the right answer, but in another service does it because they use a different database.

Tom: The database that the music collective is going to oversee or put together will be open to everyone?

David:  They will be open to everyone, it will be transparent and we are going so far as to say that anyone can have a copy of it if they want to. We are going to try to fundamentally change the nature of how we treat data in the music industry. It will be, to my knowledge, the only one of its kind in the world where we are not going to treat the ownership information as proprietary or confidential, but rather as public information that is designed to get proper payment. If in fact the MLC is unable to find the proper owner, what they will do is they will publicize the particular sound recording, the fact that they couldn’t find the right owner, and that will then start a 3 year open window where anyone can look into this database and try to help correct the information or improve the data.

David: Every music publisher will be incentivized to do a direct feed into the MLC with their own data because they’re going to want to get paid properly and then through this process of also crowdsourcing in effect the information we’re hoping that we can change the culture in the music industry because everyone has a responsibility to get this right. From songwriters and producers and artists in the studio, to their record labels and music publishers, to the digital services, that use it, we all have a responsibility to try to get this right. We think the best way to do that is to put sunlight on the entire process and have everyone helped solve the problems that exist.

Scott:  Who actually running this?

David:  The law calls for an MLC to be blessed by the Copyright Office. There will be applications to be this MLC and an NMPA will lead in industry application on behalf of the music publishing and songwriting industry. It will be a not-for-profit entity. It will be a new organization and it will be governed by 14 music publishers, 10 of whom are traditional music publishers and 4 of whom have been defined as self-published songwriters. This was an agreement made within the song writing and music publishing community about the best way to establish governance of this new entity.

This new board of 14 music publishers, 4 of whom by definition will be songwriters, will then hire staff, they will hire vendors and they will be funded 100 percent by the digital companies that are going to use the blanket license

Scott:  How will the fees be set for how much they have to pay?

David:  The way that we’ve worked that out is that we are currently hoping to negotiate by agreement, a launch budget for this new entity, and so we and the digital companies have hired a joint consultant. They actually are sitting in my office right now a block away and we are working through trying to come to an agreement of what the budget should be to get it off the ground. The legislation however, has worked in, obviously, that if we are unable to come to an agreement, then we go to the same Copyright Royalty Board that sets the rates for record labels for performances or the mechanicals for publishers and that three judge panel, will set the budget for the MLC.

Tom: The MLC gets established and approved by the copyright office itself. It’s a big task. It’s not an easy task, right?

David:  A herculean task.

Tom: How many songs are there? Pieces of music?

David: You take a typical streaming company and you’re looking at somewhere potentially of 40 to 50 million songs with thousands being uploaded on a daily basis and so it is a growing problem have thus far.

Tom:  Is it fair to say there has never really been a successful database put together for the music industry?

David: I would agree that there’s never been a successful database and I think it’s important to how you define success. I don’t want to pretend that the MLC database is going to be perfect, it won’t. There will be songs for which we failed to find the proper owners and they go into what’s known as the “pending and unmatched category.” That then starts the 3 year public window of trying to figure out the answer and one of the things the legislation does that’s a massive improvement over the status quo is that ultimately all of the royalties will make their way into the songwriters and music publishers pockets. Whereas under the old system, if a digital company couldn’t find the owner, the money was stuck at the digital company, which not only made the digital company an infringer, but it meant that there were loyalties not flowing into the industry.

Mitch:  It’s important to set some context too for the music. It’s not like the insurance industry where you’re dealing with a whole bunch of decentralized companies and you’re wondering why each company can’t get together, share their data, agree on a form, and then come up with a master database. It’s very different when you have two songwriters who might be sitting in someone’s living room, and it’s not like they are sending in a form somewhere about their creative process. Or a hip-hop artist walks in with a song, mostly complete or with an idea into a studio, where a producer is contributing and is now a co-writer on that song. There may be 12 writers and copywriters on that particular song. It’s not like when you walk out of the studio after finishing the creative process, you know, you have a time punch card that you log in and it goes to some magic place.

It’s not that the music industry sort of failed, to some have some database, but one great thing, and I think that David hinted at this about this new MLC, is that it’s important that it be of and with the music industry, so that over time, as David said, with transparency, people understand that when that window is left open, they have an incentive to try and get the right data to the MLC so that it will keep improving and people will start to understand that this is going to help them get their royalties. So hopefully this is the start of a cooperative music ecosystem, as David said, where people are in business together with incentives instead of litigating against each other so that it starts propelling us towards that ultimate goal of a real database that not just connects musical works, but also sound recordings

Tom:  What if I’m an artist, a big deal type of artist, and I’m managing my rights, can I keep that arrangement?

Mitch: Absolutely. In fact, I suspect that there’s going to be even more direct licensing between copyright owners and representatives, the publishers and the digital services that don’t use this MLC.  We encourage direct licensing. We think it’s more efficient. The benefit of this new system is number one, even if you want to still be eligible for the CRB determined, it’s a statutory right. In the music publishing industry, there are no negotiations over the price. When you’re talking about interactive screening, that’s under Section 1.15 to the Copyright Act. Now there may be other parts of a service that do require negotiation over price, but for purely interactive streaming, it’s going to be statutory. The difference with direct licensing under the new system is that first of all, if you have the blanket license as an insurance policy, that as a digital company, you don’t have to worry that you missed something, which is often the case.

Even when you do all direct licenses, if you consider the current companies doing this, many people think Apple is best in class in terms of their efforts to license. They do all direct licenses. They pay above the statutory rate. Yet they have a class action lawsuit pending against them because of this problem. Even if you do direct licensing, that has to be reported to the MLC, so the direct licensing system will still feed the database even though the money may not flow through the MLC entity itself.

Tom: In terms of the blanket license, you can’t just say you don’t want the MLC, I’m going to withdraw.  Can you withdraw from the compulsory license?

Mitch: This may sound counterintuitive to you. I wish you could, but no, you can’t. You cannot withdraw from the compulsory license. I would like to live in a world without a compulsory license, but if forced to live with one, I want it to work and so you know, you can’t withdraw your rights. But you are free to do direct licenses, direct deals around the MLC if both parties want to do that and that quite honestly is a very common occurrence and will be even more so after the MLC has established. Right.

Tom: There are a variety of efforts, to form databases, what’s going to happen to those?

Mitch: First of all they’ll have the benefit of the MLC database, which as a public concern that they can use to try to use to improve any database they want to make for themselves. Secondly, I think a lot of those efforts will become less valuable because the information will be at the MLC in public. The beauty of the MLC database is that it’s not dependent on a particular technology. It’s not dependent on really even participation necessarily. It’s a growing living database that will constantly try to improve. But anyone is free to take it and do with it and build onto it, anything they’d like to do

Tom:  We have these things in the music licensing, the compulsory license, the blanket license, which we don’t have elsewhere, even in the world of intellectual property rights. Is music different that it needs this or has this licensing framework, or is it just a matter of history and trajectory?

David: I would give two answers to that. First, it’s unique and different. No question about it, but it’s unique and different for a couple of reasons. First of all, it wouldn’t matter to a music publisher or a songwriter, what you call their type of license – “mechanical,” “performance,” “synchronization” – if the music publisher and songwriter were just in a free market.

The only reason these distinctions matter is because what you call it changes then how the price is set and how it’s regulated by the government. Whether it’s a compulsory license under law, a consent decree license at the Justice Department. If it were all just a music license for a song, we’d love to get rid of all these distinctions.

Part of this is the historical building upon, block upon block, of things that don’t make a lot of sense today, but we are forced to live with. The second part of this, which I think is a fair question, is why do you have to deal with music publishers at all? Why can’t you just take a record label license and have the publishing license embedded in it like other types of intellectual property are? I think for that, it’s because of the uniqueness of songwriters.

Songwriters have always had a unique copyright. In fact, it existed before there were sound recordings and it’s important that their intellectual property be licensed directly and not embedded in someone else’s product, which is why you have two different licenses in the music industry, but you don’t see that in other areas of intellectual property.

Mitch:  You do have a long history, different rights and a lack of rights between them which has contributed to this and which had to be taken into context to try to fix it. As David said, you had a copyright in a song before recordings ever even existed and then when recording did exist, they were not given rights by Congress because broadcasters didn’t want to pay for those rights, so they were never given a federal right, which led to the Pre-1972 dilemma.

So you had this system, for years and years and years, where a songwriter negotiated directly with a distributor, because the sound recording owner didn’t have any rights to negotiate. They had to have their rights compensated. You can’t have a contractual relationship with somebody who doesn’t have the rights to negotiate. They had to negotiate for their own rights. Once that was established, we had to figure out a way in the streaming world for all of it to be accommodated where everybody got paid fairly, where both rights, which does make it unique among other types of copyright are recognized, and where the gaps are filled. I think the MMA did a pretty good job of trying to fill holes where we could come together and there are still holes out there. It’s not perfect yet, there’s still work to do, but we got together as a community and we identified the pieces where we could bring the parties together and we could be moved forward and we did.

Tom: We have one or two minutes left, why don’t we switch subjects. We’ve talked about the consent decrees. We have an Assistant Attorney General for antitrust who says he doesn’t like consent decrees like that, long-lived consent decrees. Do you expect him to reopen that issue?

David: Well, I think it’s an issue that needs to be looked at. Since 1979, the Justice Department has had a policy that any new consent decree must sunset within 10 years. Unfortunately, for songwriters, they didn’t apply that 1979 policy retroactively to the 2 consent decrees from 1941 that never ends.

At the time they were put in place, they were put in place to protect a fledgling broadcast industry against the power of the songwriters. If you think about it today, Google, Facebook, Amazon, Netflix, the antitrust laws are being used to protect those companies against songwriters – it’s absurd.  I think that many people that want the consent decrees to continue want that, not for any antitrust case and they want that because it allows them to pay songwriters less than they deserve. I’m very glad that the Justice Department is willing to take a look at these issues.

David: I think they’re complicated and I think they’re contentious, but ultimately I think that songwriters, like any other type of small business owners, should have a right to negotiate the price of what they create in a free market and the consent decrees prevent them.

Scott:  I’d like to conclude by asking a question that doesn’t really have anything to do with policy. This is an industry where everybody observed some part of it because everybody listens to music. I wonder for most of us when we interact with other people for various things we do, you know, we’re not going to put their pictures on our walls because nobody wants to see that. The question is how often do you interact with not just the small business type musicians have, who’ve obviously that’s the vast majority of them, but the more famous musicians? The real question is, are they interested in this stuff? Will they sit there and talk to you about intellectual property?

David:  You know before the MMA, I would say that most artists, at least, found it a little distasteful frankly, to try to lobby for their own rights and for their own benefits. They would rather lobby about something else that’s important to them for other reasons. But what was so interesting about the MMA was how engaged artists and songwriters around the country became, not just for themselves, but on the recording side for their mentors who were not getting compensated. For a lot of artists who appreciate and understand the contributions that songwriters contribute and how they benefit from that contribution to fight for those songwriters. Regardless of which piece of the MMA you were interested in, there was more direct engagement by artists, including famous artists, in this fight than I had ever seen on any piece of intellectual property legislation ever.

Mitch: I think that the creative input and engagement and direct impact lobbying where you literally had recording artists calling up senators and saying, “this is important to me and here’s why,” was, at the end of the day, what helped to push this over the line.

David:  I think that’s absolutely true. We had an army of creators that got engaged in this process and there was a role for whether you were a brand new unknown, small song writer up to a mega superstar artist. They all played a role. Mitch knows well some very high profile creators personally got involved in this effort. That made a huge difference. I mean, it was a nightly occurrence that Mitch or I were on the phone with Ryan Tedder who was personally lobbying senators.  Steven Tyler was writing personal letters. John Rich was calling senators. Maren Morris was on social media talking about this stuff. They were spending a significant amount of their personal time engaging in this and it was something I had not seen in my 14 years in the industry, the type of organic uprising from the creative class on the MMA, and I do believe that had a large role in getting us across the finish line.

Tom: Do you guys expect any more copyright legislation in the next few years?

David: I hope not. I do think that what we saw here as a formula for success was identifying areas where we can bring parties together with incentives on both sides. There are always going to be outliers, but if you find you that issue, that becomes ripe (and Jupiter has to align with Mars a little bit, the right heroes have to exist in Congress), sometimes litigation brings people together because the risks of a winner or loser for the entire ecosystem is worse than if you try to come together on a legislative solution. I think that this formula will be looked at in the future as one that can work. I think that there is hope for achieving policy in copyright in general that probably was lost before this was achieved.

Scott:   All right. Thanks very much. That was a fun conversation.

Mitch, David:  Thank you. Thank you guys.