Shermans' Statement Rife with Deception
by George Ziemann
You'd think Martha Stewart's
recent conviction for lying to the government would have persuaded
the RIAA to tone down some of its deceptive, misleading and outright
false characterizations, at least for a while. You'd also think
that, when dealing with antitrust issues, it would make the organization
even more aware of the terminology it uses. After all, that was
the focus of the issue -- Rep. Lamar and Berman's proposal to
eliminate the threat of antitrust to the RIAA.
In both cases, you'd be very
wrong. In fact, the RIAA thinks an antitrust exemption is not
enough. They want more.
Statement of Cary H. Sherman, President, Recording Industry Association
of America, Inc. before the Subcommittee on Courts, the Internet,
and Intellectual Property, Committee on the Judiciary, U.S. House
of Representatives, March 11, 2004.
"Section 115 of the Copyright
Act: In Need of Update?"
"I am Cary Sherman, President
of the Recording Industry Association of America ("RIAA"),
and I am grateful for the opportunity to present our views concerning
the operation of the mechanical compulsory license provided by
Section 115 of the Copyright Act. I would like to begin by thanking
the Subcommittee, under the leadership of Chairman Smith and
Ranking Minority Member Berman, for focusing its attention on
the arcane but important subject of mechanical licensing of musical
works."
Well I've got to interrupt
here to ask the obvious question. When did mechanical licensing
become "arcane"? The word means secret or esoteric
according to my dictionary. What's the big secret? Eight cents
per song per copy sold (8.5 for works created in and after 2004).
You want to make a thousand CDs of a cover song? It's $80 per
thousand copies pressed. There's no secret here. No mystery.
"As you probably know,
RIAA is the trade group that represents the U.S. recording industry."
As you probably also know,
but Sherman would prefer that you forget, all of the major labels
are now foreign-owned. There is no trade group which represents
the U.S. recording industry. The RIAA represents the foreign
conglomerates, with no significant purpose other than to lobby
the US government to alter our copyrights to best serve the foreign
interests. Many question whether the non-profit status currently
enjoyed by the RIAA is deserved, considering their blatantly
political purpose.
"Its member record companies
create, manufacture or distribute approximately 90% of all legitimate
sound recordings produced and sold in the United States and comprise
the most vibrant national music industry in the world."
The "most vibrant national
music industry in the world" is in a still-declining slump
that has taken 25% off its 1999 peak. For a vibrant music industry,
one may be better advised to look at the U.K., which is enjoying
growth despite being subject to the same detrimental effects
of such things as the Internet.
I'd also like to hear Mr. Sherman
define "legitimate," as his definition seems to omit
93% of the music recorded each year. But it is nice of him to
remind our representatives that, at the same time the RIAA is
asking for an antitrust exemption, its cartel has effectively
shut out all music for which it does not possess title from participation
in the commercial market.
"As such, we have somewhat
mixed feelings about Section 115. On the one hand, RIAA's members
have historically obtained the vast majority of mechanical licenses.
On the other hand, as creators, we respect the rights of songwriters
and other creators to exercise control over, and receive fair
compensation for, use of their creative works."
"... as creators"???
They may have "historically obtained the vast majority of
mechanical licenses" but that's not because they created
anything at all, except a bureaucracy to separate the artists
from their rightful earnings. The RIAA is not comprised of creators,
it is comprised of publishers which have historically been the
very entity that copyright laws are designed to protect the actual
creators from.
This is an insult to anyone
who has actually written or composed anything, as well as to
the intelligence of any body covening to dicuss "intellectual
property".
"We do not in principle
favor compulsory licensing, although after nearly a century of
compulsory mechanical licensing, it is so woven into the fabric
of the music publishing industry that it is difficult to contemplate
the music business without it."
This is the most truth-packed
sentence in Sherman's entire statement. Without compulsory mechanical
licensing, a lot of people who made their living as songwriters
would not have been able to do so. Had the individual songwriters
been forced to deal with the publishers for their fair share,
they would have been subject to the same manipulative contracts
the industry is able to force upon the artists themselves. Compulsory
mechanical licensing is the only thing that has protected the
songwriters from Mr. Sherman's organization and its individual
members.
It comes as no surprise that
the RIAA does "not in principle favor compulsory licensing."
It is simple -- not arcane -- and it has worked for 100 years.
But there are deeper reasons for their position to rewrite this
section of the copyright law, as we shall soon see.
"Record companies have
had a long, broad-based business relationship with the owners
of musical work copyrights, based on Section 115. That relationship
has generally been successful for both the music industry and
consumers."
Never mind that all the artists
gotten systematically financially screwed, but it was great for
the labels and the consumers.
"However, that relationship
has not been without rough spots, and we are in a rough spot
now."
They certainly are. The consumers
who know what the RIAA is and what it stands for actively dislike
the organization. Many of us will promote any hardship, difficulty
and/or stumbling block the RIAA places before itself due to incompetence,
lack of vision, arrogant distate for the consumer, the attitude
that they are above the law and the extortion of the American
public through pointless individual lawsuits that merely feeds
the fire of the public's wrath and indignant disobedience.
And they wonder why we won't
buy their damn records.
"This afternoon I will
describe some problems that we are presently experiencing with
the operation of the mechanical licensing system that are affecting
our ability to bring consumers exciting new formats for the music
they enjoy."
After 100 years, suddenly the
system is in the way of "exciting new formats"? Is
a song not still a song?
"We're hopeful that with
your encouragement we will be able to resolve our differences
with the publishers concerning these issues, as a business matter,
in the marketplace. But presently, we are not making much progress."
So all the major record companies
and all of the major publishers -- which just happen to be the
same companies -- got together and discussed how they could control
the market by doing the same thing at the same time, in concert,
in tandem, in complete violation of the US antitrust laws. But
never mind that... because the result of such collusion was the
determination that they needed to change the law.
"Congress could facilitate
resolution of these issues by extending to physical product mechanical
license negotiations the antitrust exemption that section 115
already provides for negotiations concerning downloads
as the House has voted to do in H.R. 1417 (the CARP reform bill).
However, the antitrust exemption is not a complete solution to
the present problems in the mechanical licensing system, so we
can't rule out the possibility that it might ultimately be helpful
to do something more to address some of these issues legislatively
or through Copyright Office rulemaking."
We've seen the "benefits"
of the antitrust exemption they already have grants, as well
as the travesty that is the CARP (Copyright Arbitration Royalty
Panel) process. It has given the RIAA wholescale control over
the definitions of and the act of webcasting, having dictated
the rates to the Copyright Office by pre-negotiating with themselves
and a few outside key partners, successfully creating a financial
barrier to any smaller group or consortium to even participate,
much less have input into the CARP negotiations.
The biggest problem is that
if you're not a part of the RIAA's cartel, you do not participate
in any royalties or rates they negotiate. The other 95% of the
recording artists are put in the position that the entire process
was designed to eliminate -- the need to negotiate royalty rates
with individual webcasters.
Background
"It might be helpful if
I began with some background concerning the compulsory mechanical
license. Compulsory licensing of "mechanical" reproductions
of musical works that is, reproductions of sound recordings
of musical works has been part of U.S. copyright law since
1909, when Congress extended the rights of music publishers to
mechanical reproductions. The recorded music business was in
its infancy in 1909, so the compulsory license has provided the
framework for the relationship between the recording and music
publishing industries since the very beginning. Section 115 continues
the basic structure of the 1909 Act compulsory license."
The implication here is that
the law has remained basically unchanged since 1909. While it
is true that the structure of the law remains the same, it has
been significantly rewritten -- unless someone in 1906 had a
crystal ball and added all the sections about sound recordings
and digital delivery.
HISTORICAL AND REVISION NOTES HOUSE
REPORT NO. 94-1476
The provisions of section 1(e) and 101(e) of the present law
(sections 1(e) and 101(e) of former title 17), establishing a
system of compulsory licensing for the making and distribution
of phonorecords of copyrighted music, are retained with a number
of modifications and clarifications in section 115 of the bill.
Under these provisions, which represented a compromise of
the most controversial issue of the 1909 act, a musical composition
that has been reproduced in phonorecords with the permission
of the copyright owner may generally be reproduced in phonorecords
by another person, if that person notifies the copyright owner
and pays a specified royalty.
"In contrast to later
statutory licenses and the practice in many foreign markets,
Section 115 requires copyright users to license every individual
work by following cumbersome procedures. The regulations provide
even more cumbersome procedures for reporting usage information.
Because the official procedures are so cumbersome, the marketplace
long ago adopted workarounds. For example, the National Music
Publishers' Association's subsidiary The Harry Fox Agency and
others offer a simpler process for obtaining and reporting usage
under mechanical licenses of essentially statutory scope. Even
with these workarounds, record companies have borne a very large
mechanical license administrative burden, but the system has
generally worked."
The recording industry has
a long history of deceptive accounting practices, which continues
to the present day. Mechanical licenses require the verification
of manufacturing data, the one thing which they abhor the most,
especially if they are the party required to make the information
available. Just ask how many copies of any RIAA record were actually
manufactured. You might be able to find out how many they shipped
or possibly how many were sold.
If the system is cumbersome,
that's because the U.S. Copyright Office is involved. This is
simple math, not rocket science. Design a better system. Try
computers instead of 3x5 file cards.
"In addition, current
Section 115 regulations provide for a per-unit penny-rate royalty
set for long periods of time. As I describe below, that rigid
structure has not adapted well to new technologies in the current
dynamic marketplace. A percentage royalty increasingly looks
like a better way of addressing new consumer products and services,
and greater short term flexibility to respond to market conditions
would improve the mechanical licensing system."
So they're asking to change
the law for a short-term fix. Is that the purpose of the Constitution?
Short-term solutions to a decades-old, shifting "problem"?
Mechanical Licensing Issues
Are Impeding Introduction of New Products and Services
"Anyone who has read the
newspapers in the last several years has heard about the tremendous
pain that piracy has inflicted on the whole music industry."
Since the recording industry
also owns most of the major media, you can be assured that what
you read in the papers was one-sided industry-fed propaganda
filled with "piracy", "theft" and other hot-button
words to avoid saying "copyright infringement."
"Sales of recorded music
products have declined some 25% over the past three years, depriving
the public of creative new music as record companies have been
forced to slash their artist rosters and support for new artists,
as well as costing thousands of jobs due to retail store closings
and record company retrenchment. Our colleagues the music publishers
and songwriters feel this pain too, although less acutely due
to the performance and other revenue streams they receive."
This is because the publishers
have collective compulsory licensing on their side, whereas the
artists do not, especially if they have not written their own
material. The artists have to depend on their contract with the
labels.
The recording industry has
abandoned the retail store of its own volition after the Federal
Trade Commission nailed them for price-fixing, which the RIAA
members had been doing for at least a half decade, if not longer.
They've got WalMart and Best Buy. If Tower Records folds, oh
well.
"We are working hard to
lure customers back through a range of exciting new consumer
product and service offerings. These include physical discs (we
call them "multisession discs") that can be played
on computers, SACD and DVD players, as well as CD players; computers
and portable players preloaded with a broad array of music that
consumers can "unlock" on a per-tune basis or as part
of a subscription service; CDs and DVDs with extra tracks or
even albums that consumers can buy, or keys to extra content
that consumers can download from the Internet; and downloads
and physical products with digital rights management systems
that protect artists' rights while allowing users to make a limited
number of personal use copies. We're also trying to develop new
revenue streams by, for example, licensing master ring tones
for use on cellphones."
Did he say all of this with
a straight face? Where is the "exciting" and "new"
part? Is it the SACD? DVD audio? Neither of them are really new.
How many people do you know that have invested in a SACD player?
And how many people have more than two speakers hooked up to
their DVD player?
The record label's real problem
is that they embraced the fight against file sharing by claiming
it to be a form of theft, stealing an "exact copy"
of the CD. The reality is that mp3s sound audibly inferior, containing
only a fraction of the original information. The paradox of this
reality is that the majority of the consumers either can't hear
the difference or simply don't care.
So while the RIAA wants the
law changed for the benefit of these "exciting new formats,"
the reality is that even the labels can't agree which to support.
As a result, the market for them is small and fragmented, requiring
an additional (and substantial) investment in new equipment in
order to appreciate the potential audio benefit.
If they even care. Some people
are happy to have compressed music on an iPod.
Mysteriously, the greatest
drawback cited to the iPod is DRM, the magic key of futility
that the industry vainly clings to. The consumers hate DRM. DRM
is what has continuously caused legitimately purchased CDs NOT
to play properly across different systems. The CD format was
just fine for recorded music until DRM was added, breaking away
from the standards to inflict non-compatibility issues upon an
unsuspecting consumer. The DRM process actually introduces errors,
causing them to famously not be playable in vehicles, as has
been documented in the UK.
We also intensely dislike the
continuing focus on "pay-per-use" access to music and
other copyrighted material.
"It is important that
mechanical licenses be as available for these new offerings as
they always have been for more traditional offerings. Toward
that end, we have tried hard to work with publishers to keep
them abreast of these offerings and work out any issues. However,
disagreements concerning the application of the Section 115 license,
and the inflexibility of the per-unit statutory royalty set for
a 10 year period (in contrast to a percentage royalty) are impeding
the introduction of these offerings in the U.S. By contrast,
in other countries, mechanical royalty rates are usually based
on a percentage of the sales price."
Now please remember that a
few paragraphs earlier, Sherman's big complaint was how "cumbersome"
keeping track of mechanical royalties already was. One copy =
eight and a half cents. Half goes to the publisher, half to the
songwriter(s).
If this was cumbersome, imagine
the nightmare that would be involved determining the actual end
selling price was for every copy. They are asking for a more
difficult calculation based on retail information which the RIAA
has no way of accurately collecting.
Look through the RIAA's information.
Pick a year. Any year. You will not find one actual retail dollar
figure in any of their documentation. You will also not find
any year which is in line with the Nielsen SoundScan figures,
even though SoundScan was once a part of the RIAA.
"It is possible that mechanical
licensing issues in the U.S. could lead to a situation where
foreign markets have access to new consumer products that cannot
be released in the U.S."
Again, inferring a situation
which not only could exist but already has been in effect for
decades. It works in both directions, too. There were several
Beatles albums that weren't offered in the UK, for instance.
There are acts on the UK charts today that have not been offered
to the US. Mechanical licensing has little to do with this long-standing
practice.
"The situation concerning
multisession discs is instructive. Multisession discs can take
many forms. Record companies are currently testing DualDisc,
a format that typically contains an album encoded for traditional
CD players on one side and the same album for DVD players on
the other. Most SACD discs are also multi-session, including
stereo and surround-sound SACD sessions and CD sessions. We think
that these new consumer products are compelling for a number
of reasons they provide a single product playable on most
consumer music players, they offer a new convenience to consumers,
they reduce duplicative inventory, and they move the marketplace
to products of higher quality and greater capacity than the CD.
More importantly, we know that if we want consumers to buy our
music, we have to let them play the music in whatever players
they have. Multisession discs are the way to allow consumers
to play music on the various platforms that are available."
No, just take the DRM back
out and the problem is solved. CDs without it play perfectly
in my CD player, computer, DVD player and any other device that
conforms to the CD standard. CDs with DRM do not. Plus, consumers
can extract audio from them for their personal portability and
enjoyment, whenever, wherever they want, as many times as necessary.
They broke it. They can just
as easily fix it.
Not so easy to repair will
be the consumer's overall opinion of the industry.
"It's the "multisession"
technology putting differently-encoded renderings of the
same music for each format on a single disc that makes
this possible. Thus, one disc could have two to five renderings
of the same recordings. We believe it is clear that the Section
115 license covers multisession discs and that the required payment
is one mechanical royalty (e.g., 8.5¢) per disc. However,
the Harry Fox Agency ("HFA") has suggested that each
multisession disc is in fact two to five "phonorecords,"
requiring specific licensing (and in the case of compulsory licenses,
presumably payment at the statutory rate) for each session. But
despite the merits of multisession discs, paying more than a
single mechanical royalty would be unwarranted as a business
proposition.
"Nonetheless, HFA has
notified its licensees that it will not issue licenses on any
other basis without specific publisher consent. From what I have
heard, many individual publishers seem to have embraced HFA's
view that payment of 2 to 5 mechanical royalties per disc is
required, so individual company agreements have been few and
far between."
Here is, of course, the crux
of the biscuit. In order to avoid continuing to abide by the
single per-copy price method which has been in existence, oh,
almost half of forever (in terms of US Copyright law), the RIAA
wants to tie songwriter payments to the retail value, based on
what is certainly the most arcane art still practised today --
record industry accounting.
"I am not hopeful that
individual negotiations will meet market demand within a time
that might help reverse the bite of piracy."
Hot-button word from left field.
It was the cumbersome recordkeeping and exciting new formats
that the law stood in the way of at the beginning of this discussion.
What does this have to do with so-called "piracy"?
And I'm going to let him go
through a few more paragraphs without interrupting just to make
sure you get this whole spiel.
"Because this issue arises
under a compulsory license and affects all of both industries,
we have sought to discuss the issue with HFA on an industry basis.
Citing antitrust concerns, the publishers have declined. As you
probably know, later compulsory licenses in the Copyright Act
contain language granting authority for collective negotiation
of matters relevant to the operation of the compulsory license
"notwithstanding any provisions of the antitrust laws."
As a result of an amendment in 1995, Section 115 contains an
antitrust exemption for mechanical license negotiations concerning
downloads. For historical reasons that exemption does not apply
to physical products. We are grateful that in H.R. 1417 (the
CARP reform bill), the House voted unanimously to remedy this
historic anomaly and extend the Section 115 antitrust exemption
to physical products.
"While we believe that
extension of the antitrust exemption to physical products is
important to help us bring consumers exciting new formats for
the music they enjoy, the antitrust exemption is not a complete
solution. Among other things, it would only allow us to do a
private deal with HFA, not to obtain access to the 30-40% of
works not licensable through HFA. Thus, it is possible that there
may need to be a change in the Section 115 regime itself.
"It is likely that the
section 115 regime ultimately will need to move toward a percentage
royalty to give it the flexibility to adapt and retain its vitality
in the face of technological innovation. When record companies
sold only a few types of physical products, the cents rate worked
well. But record companies are now selling, licensing or contemplating
a great variety of products, including not only multisession
discs but preloaded offerings that consumers can "unlock"
through online transactions; offerings with bonus material; products
with digital rights management systems that allow limited personal
use copying, and subscription devices that offer both streams
and limited downloads for a single monthly fee. These products
are distributed through different channels and have different
economics. Applying the cents rate to some of the models is often
impossible and economically infeasible. A percentage royalty
rate, by contrast, would enable these products to launch and
find an appropriate price point in a dynamic marketplace. The
amount of the royalty would also adjust automatically as market
conditions varied. The Section 115 regime also would benefit
from the flexibility to adjust rates more frequently, and if
necessary to open up rates between scheduled CARP proceedings
to address new consumer product offerings."
Songwriters should be up in
arms to prevent this, as their future is at stake. A lesson is
to be learned from the CD manufacturers themselves.
When CDs first came out, blanks
were selling for about $10 each. Sony and Philips based their
manufacturing licenses on a percentage of the wholesale price.
When advances in manufacturing dropped the price of a blank CD
down into the 30-cent range, Sony and Philips saw themselves
sharing a much smaller piece of the pie than they had envisioned.
In retrospect, they would have been better off to initially ask
for a penny per CD.
The Subscription Services
Agreement Is A Model of How Such Issues Can Be Resolved
We have previously hit bumps
in the road of our relationship with the publishers when questions
have arisen concerning the application of the compulsory license
to new technologies. But we have been able to resolve them. For
example, several years ago, questions concerning the application
of the compulsory license to subscription services, and our consequent
inability to obtain licenses for those services promptly, became
an impediment to the launch of services. We resolved those issues
through a Subscription Services Agreement between RIAA, NMPA
and HFA that provided a framework for licensing services. That
agreement had its desired effect of allowing new services to
enter the marketplace. In late 2001, RIAA and NMPA asked the
Copyright Office to adopt regulations implementing the same framework
as the agreement, to make clear that services can rely upon the
compulsory license as to all musical works, and not just those
licensable through HFA. We hope that the Copyright Office will
act in the near future upon our joint request to adopt regulations
implementing the agreement.
Conclusion
We're hopeful that with your
encouragement we will be able to resolve our differences with
the publishers concerning the current generation of new formats
as a business matter, just as we did in the case of the Subscription
Services Agreement. This is a critical time for everyone in the
music industry. Without new products to excite consumers, we
risk losing an entire generation of music lovers to piracy. Record
companies are working hard to meet that challenge, but we need
the help of others in the industry to achieve that goal."
Conclusion of What?
Well, that's the end of Sherman's
statement, and I'll start my summation with the observation that
the greatest piracy seems to take place within the confines of
the industry itself, but much like their reference to the same,
that really has no bearing on the subject at hand.
Ignoring that, consider the
impact that this change would have on the entire landscape.
First of all, peer-to-peer
file sharing would essentially be legalized. It would certainly
end the discussion of legitimate and illegitimate sites. If the
mechanical royalty is based on a percentage of the retail price
and I give copies away for free... then for 1000 copies, I would
owe somebody exactly... nothing. Much better than the $85 per
song it would otherwise cost.
The retail price is zero. Whatever
the percentage is, the license fee still adds up to zero. Even
99 percent of nothing is still nothing.
If you must pay a royalty on
the basis of a percentage of the retail price, by definition
you would not incur the necessity to pay the licensing fee until
the copies were sold, much like businesses deal with state and
local sales tax.
This will make it even more
difficult to prosecute actual counterfeiters unless the RIAA
intends on auditing them after the fact. They are trying to move
the point of licensing from the manufacture to the point of sale;
redefine the licensing as after-the-fact instead of requiring
pre-manufacturing payments.
For the songwriters, the Sony/Phillips
story must once again be referred to. The industry has continuously
kept raising prices for its physical product, even in the face
of declining sales, cheaper technology and the massive amounts
of money spent on ineffective DRM schemes. Can they keep this
up forever?
To accept a percentage as a
royalty assumes that the price will not be significantly dropping
anytime soon when we know for a fact that the industry initially
releases products at a prohibitively high price before adopting
a price the consumer will embrace. The CD itself is a perfect
example, born at a "value" (according to the RIAA)
of more than $20 and dropping to less than $15 before anyone
really started buying them.
The RIAA believes that the
price of a digital song is currently 99 cents. Two years ago,
they thought it was $2.49. The dominant, prevailing "suggested
list price" for most CDs on Amazon.com during the Christmas
week was $18.98. Same physical CD from 1993, except for the DRM.
Less music. Less desireable content.
What kind of percentage do
the songwriters ask for that will still get them the same eight
cents per copy in another five years? How long can the record
companies continue to push higher prices before they realize
that this is one of the reasons we stopped buying CDs and started
accepting compressed digital information as acceptable listening?
After all, it's still better than FM.
So pick a number, any number.
And pray the price never drops, as it has in each and every other
technologically-based industry in the last 10 years.
And here's a final what-if
for the songwriters -- I'm not the only person criticizing the
recording industry right now. My same complaints are repeated
elsewhere by countless others. There was even talk this past
holiday season of lower-priced releases -- the famed $9.99 CDs
which never materialized anywhere within my sight.
So they make a percentage royalty
law, then cut prices. Whatever deal you make thinking CDs are
worth $20 suddenly turns into something else entirely (and significantly
smaller) if the price drops to $10.
This is all about setting up
the songwriters for more bureaucracy and a smaller cut. Once
again, the needs of the few are perceived to outweigh the needs
of the many.
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