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September 23, 2002

Copyright Hurdles Confront Selling of Music on the Internet
By AMY HARMON
New York Times

hen the world's major media companies gave in to the idea of selling music over the Internet, it seemed to herald a sonic paradise, where every song ever recorded would be available to listen to and perhaps download, legally, with a few clicks and a small monthly fee.

But for the online services trying to get there — chief among them MusicNet, Pressplay and Listen.com — the road to paradise is proving to be more like an intellectual property labyrinth paved with administrative quicksand.

Even though two of the three major pay music services — MusicNet and Pressplay — are backed by recording companies, the record labels do not always seem to be sure what side they are on. Sometimes, they withhold popular new releases for fear digital distribution will harm sales of CD's. Sometimes they appear to favor their own service over the others. (Listen.com is still trying to procure Bruce Springsteen's new hit record, "The Rising," from Sony Music Entertainment. It has been in stores for almost two months.

And the recording labels are only one of several interests with a say.

Concerns over piracy, money or unrelated contract disputes have prompted artists like Madonna and Radiohead to insist that their music not be distributed digitally. And even if the artist and the label are on board, the publisher who represents the writer of a song may not be. Sometimes it takes months to figure out who the publisher is, since there are more than 30,000 of them in the United States and their names are often not included on the CD.

"It's as if Franz Kafka designed this system and employed Rube Goldberg as his architect," said Rob Glaser, the chairman of MusicNet, which is part-owned by his company, RealNetworks, along with AOL Time Warner, Bertelsmann and the EMI Group. "It's full of tripwires."

The most glaring omissions from the services are the entire catalogs of major labels that have so far declined to license to the services backed by their offline competitors. The Warner Music Group, the music division of AOL, and the BMG unit of Bertelsmann have yet to license their music to Pressplay. Likewise, Pressplay's owners, the Universal Music Group of Vivendi Universal and Sony Music Entertainment, have not licensed their recordings to MusicNet. The EMI Group, the smallest of the five major labels, has licensed to both MusicNet and Pressplay. And Listen.com, which has no record labels among its corporate parents, has licenses from all five major labels.

The recording companies have, in fact, begun coming around. Under pressure from Congress and a federal antitrust investigation — and a growing belief that a legal alternative to widespread online music swapping could actually strengthen sales — they are granting more rights. Both Pressplay and MusicNet say they will feature music from all five major labels by the end of this year.

Yet as the Internet music services approach the end of one negotiating marathon, they are discovering that they are only at the beginning of the race to stock their digital shelves.

The "B's" for instance, look pretty bare without the Beatles, Garth Brooks and the Beach Boys. Their label, EMI, has so far not reached an agreement to distribute their work over the Internet. A label may not own the sound recording rights for imported CD's, or those that they distribute for smaller labels. And a track that uses "samples" from other songs — as the majority of hip-hop recordings do — can require renegotiating royalty rates with dozens of copyright holders before it can be delivered digitally.

Larry Kenswil, the president of the eLabs division of Universal Music, said that obstacles to clearing the rights for samples will prevent the company from offering several songs when it begins selling tracks from its own catalog online this fall. "It's a nightmare," Mr. Kenswil said.

"Duets, greatest hits, compilations, soundtracks — they're all disasters," said Sean Ryan, the chief executive of Listen.com, which has only about two-thirds of the tracks approved by the labels on its Rhapsody service because of other questions of ownership. "Figuring out who can license what, what label they're on, who the publisher is consumes an inordinate amount of time here. More than I can ever explain to my investors."

The delays are partly a result of the volume of material that needs to be cleared. Because the breadth of their offerings is part of what will distinguish online music services from the limited selection on radio and in record stores, the services are asking labels and publishers to dust off tracks that have not sold in years, in addition to those hit albums listed on the Billboard 200.

But the Internet services, which are so far generating almost no revenue, are also facing a chicken-and-egg puzzle. For many music publishers and artists, even a large slice of such a tiny royalty pie is barely worth the administrative costs of issuing a license. Still, without those licenses, the pie is unlikely to grow.

"When a consumer says, `I like this but my three favorite bands are not available,' that's an issue," said Paul Vidich, an executive vice president of the Warner Music Group, which is starting a campaign to onvince influential artists that digital distribution will benefit them in the long run.

Moreover, record labels, music publishers and artists' managers all want to be sure that their slice of any digital pie, no matter how microscopic, is equal to or bigger than what it was in the world of record stores and CD's. Each blames the others for thwarting the creation of a legal digital music market by holding out for a higher price.

Music publishers, for instance, get approximately 8 cents for each track on a CD sold in retail stores. Most of them want no less for each download from a subscription service, even if those songs disappear from the subscriber's computer hard drive at the end of each month, or after a consumer drops the service. If the service allows consumers to make two additional copies of the song, publishers want 8 cents for each copy..

"Our feeling is a download is a download is a download," said Eric Polin, a partner at Wixen Music Publishing, an independent publisher for artists including the Doors, the Beach Boys and Weezer, who is declining all requests for licenses from online subscription services. "Sometimes you buy a CD and only listen to it 10 times, but you still had to pay the full price."

Music services question whether they have to heed the requests of publishers to keep certain tracks off-line. In what is known as a "mechanical" license — an irony not lost on the digital services — anyone can make a reproduction of a music composition so long as he or she notifies the music publisher and pays a royalty set by the United States Copyright Office.

Dating to a 1909 statute designed to balance the rights of composers and the makers of player piano rolls, that law has been applied to phonographs, L.P.'s, cassette tapes, CD's and, with a 1995 legislative amendment, permanent digital downloads.

But what happens when a download is designed to expire after a month? What about when consumers pay to listen to music of their choice over the Internet, but not to make a copy of it? The Copyright Office, unsure how to stretch old law around new technology, collected public comments on the subject, but has yet to make a ruling or set a rate.

Last year, the Harry Fox Agency, which represents the majority of the nation's music publishers, agreed to license whatever the online music services asked for in exchange for a $1 million payment up front and the promise that the services would account for every use of their work and pay for it after the Copyright Office sets a rate.

But the Fox agency, accustomed to licensing a few tracks at a time for a movie or a commercial, has been inundated with requests for hundreds of thousands of clearances.

MusicNet, which offers subscribers access to its music catalog for $10 a month, got the go-ahead from EMI Music to put up "Come Away With Me," the debut album of Norah Jones, on the day it came out in February. After a routine exchange with Harry Fox, whose own computer database is still under construction and often cannot immediately show which songs it has a right to license, the tracks finally were made available online earlier this month.

The recording industry's deal with Harry Fox, the licensing affiliate of the National Music Publishers' Association, does not cover thousands of independent publishers, including those of many major artists, who tend to control their own publishing rights.

Linda Komorsky, who handles publishing for the Steve Miller Band, said she asked MusicNet for a payment in advance, just like the Fox agency got.

"No matter what the rate is at this point and for the next five years, none of it would buy you or I a pair of shoes," Ms. Komorsky said. "We're happy to license but we want to get paid something."

Since revenue from television and movie licensing is substantial — Mr. Miller received over a million dollars for use of "Jungle Love" in a movie trailer — there is no burning need for Ms. Komorsky to license to Internet services. But at least she responded to the request. Pressplay has simply decided not to pursue music whose publishing rights are not represented by Harry Fox because of the time and labor involved in negotiating with publishers.

"You try to tell the publishers, `look what's happening with the pirate services,' and they're oblivious," said a record executive who insisted on anonymity. "There's no particular motivation for them to spend money on overhead or learning about the business. We call them up, they say `put it in writing,' so we put it in writing and we never hear back."

Publishers in turn say that the chief culprit for holding up the digital future lies elsewhere.

"The reason why the Beatles are not up there is not because Michael Jackson and Sony, who own the publishing rights, have not authorized it — they have," said Carey Ramos, a lawyer for the National Music Publishers' Association. "The reason is the surviving Beatles will not authorize the use of their recordings. The same is true with regard to Neil Diamond or Madonna. It's the artists who are really holding this up."

Artists, through their managers and lawyers, point to the labels.

"You don't have to manufacture anything, ship it anyplace, put it in a warehouse, take it back, scrap it or salvage it and you don't have to wait as long as you normally wait to get paid," said L. Lee Phillips, the chief of the music department at Manatt, Phelps & Phillips, a Los Angeles law firm whose clients include the Eagles and Aimee Mann. "So there's a lot of added profit to the record label which they don't want to share."

Meanwhile, at the online music services, which are trying to fashion a business based on respecting the copyrights of all of the constituencies, some progress is being made.

"When we cleared David Bowie and Pink Floyd I was turning cartwheels," John Jones, the chief of content acquisition for MusicNet, said one recent morning as he reviewed a list of 1,700 tracks that were set to go up on the service. It was an eclectic mix of songs from Al Green, Blind Melon, Crowded House, Roxy Music, the O'Jays and Kiri Te Kanawa, the soprano, performing "Greensleeves."

"You can't rest until everything is cleared," Mr. Jones said. "They're all fantastic to have. You want every recorded song."

Then he turned his attention to what he calls Quarantine Land. It was a longer list.