Madam Register, Please Don't Help Us Any More

by Chris Horsnell on December 1st, 2007

In October, the Register of Copyrights, Marybeth Peters, declared that downloads of most ringtones are digital phonorecord deliveries (“DPDs”) and, as such, are subject to the compulsory license provisions for reproducing musical compositions under Section 115 of the Copyright Act. She opined that such a decision was in furtherance of one of the main purposes of Section 115 – securing to the composer an adequate return for the value of the use of his/her composition. The cries of music publishers and songwriters could be heard up and down Music Row. If this decision does what the Register says, why all the screaming?

Just what Is Section 115? A little background may help put the Register’s decision in perspective. Under normal circumstances, a record label obtains a mechanical license from a publisher to place a song on an album. If a song has been previously released on a sound recording, the record label can obtain a statutory, compulsory license under Section 115 instead of getting a consensual license from the publisher. Under the compulsory license, the record label is required to pay the publisher the minimum compulsory license rate for each song on a record that is made and distributed. The rate is set by the Copyright Royalty Board. Although a compulsory license requires some rather tedious and burdensome paperwork (monthly accountings, annual audits, etc. ), in practical terms the ability to obtain one has converted the minimum compulsory license rate (more familiarly referred to as the “statutory rate”) into the maximum rate that a record label is willing to pay for the use of a song on a record. A DPD also qualifies for a compulsory license and the statutory rate under Section 115.

What’s all the fuss? Until the decision of the Register, monophonic (melody only) and polyphonic (melody and harmony) ringtones, which are usually created on a synthesizer, were traditionally licensed to the provider based upon a percentage of the retail price charged to the end user, often 10% to 20%. Thus, if a monophonic or polyphonic ringtone was downloaded by a cellphone user for $2.00, the songwriter and publisher would split 20 to 40 cents for the use. The right to download mastertones (portions of an existing digital master of a song) was separately licensed by the publisher to the record label for a royalty of around 10-12%. The download of a mastertone generally sells for much more (an average of $3.00) and is licensed by the record label for as much as 35-45% of the retail price (for both the master and the song), with the label paying the publisher its 10-12% (approx. , 36 cents). Now that ringtones have been held to be DPDs, the revenue of the publisher and the songwriter will be reduced to a statutory royalty (currently 9.1 cents), whether licensed by the publisher or through the record label. A reduction of at least 50%, and possibly 75%, of the publishers and songwriters revenue from the sale of ringtones.

So what are a couple of pennies? As they say in Washington, a billion here, a billion there, and pretty soon you are talking about real money. Worldwide ringtone revenue has been estimated to rise to close to $10 billion a year in 2006, with the U.S. market accounting for some $2 billion. No wonder, wading through the first 200 entries on a Yahoo!® search for “ringtone,” at least 95% of them were sites where you could download ringtones.

How did this issue come before the Register of Copyrights? The Copyright Royalty Board is conducting hearings on setting new statutory rates for Section 115 compulsory licenses. In connection with the hearings, the Recording Industry Association of America, Inc. (RIAA) requested that the Copyright Royalty Board ask the Register to determine whether the download of a ringtone, irrespective of whether the ringtone is monophonic, polyphonic or a mastertone (even though only mastertones are licensed through record labels), is a DPD and subject to the compulsory licensing provisions of Section 115. Throughout the proceedings before the Register, RIAA argued that ringtones were DPDs and subject to the lower compulsory license rate. On the other side, in favor of the historically higher consensual license percentage rates, were the National Music Publishers Association (NMPA), the Songwriters Guild of America and the Nashville Songwriters Association International. Interestingly, the traditional ringtone providers were noticeable only by their absence from the debate.

Why did RIAA push the ringtone issue? In 2004, the Harry Fox Agency, a subsidiary of NMPA and the leading musical work licensing agency, informed all licensees, including record labels, of its position that ringtones or mastertones were not subject to compulsory licensing under Section 115. In its initial brief before the Register, RIAA asserted that the dispute with the Harry Fox Agency over the interpretation of Section 115 “has cast a pall of legal uncertainty over the ringtone market. “  In less flowery terms, record labels had run up against a wall in trying to pressure publishers to license songs for the lower statutory rate.

Whose crying now? Ringtone providers? It is doubtful that the rates charged by the labels for mastertones will be decreased by this decision, so ringtone providers will not be getting a cost break for mastertones. Since it is unlikely that the providers will reduce prices for monophonic or polyphonic tones, their costs will be reduced and their coffers expanded. Cellphone users? Most likely, the cellphone user will not be getting a break on the prices that is paid for ringtones, but at least the costs of ringtones will not increase as a result of the Register’s decision. Artists? Artist royalties for mastertone downloads are typically based upon a percentage of the retail price, which will not be changing as a result of the decision. Record labels? Record companies will still get the same amount of money for mastertones, but will pay out far less for the use of the song. A direct benefit to their bottom line. Songwriters and publishers? Unfortunately, the revenue for publishers and songwriters for all types of ringtones, even monophonic and polyphonic ringtones not combined with master recordings, will be reduced, significantly. And that’s really what all the screaming is about.

First published in Music Row Magazine, www.musicrow.com.