I. Introduction - The Brave New Digital World

Bob Dylan warned everyone that "the Times they are a changing" back in the early 60's, but little did anyone realize how much things would change since the days of mono and vinyl. There are some that now say the days of individually packaged albums of recordings are numbered. There are some that even predict the demise of broadcast radio, though that may take more time. But whatever the timetable, it's clear that new technology, especially the rise of the home CD burner and many music transfer capabilities offered by the Internet, has changed the economics of the recording industry. Legitimate concerns arise and the recording industry's central question needs to be answered. That question is: Are copyrighted recordings safe from piracy any longer?

Never has the recording industry felt so threatened. The rise of the Internet has radically changed how new music is heard and how copies of that music are distributed. These days, as soon as a new song is released, it gets "ripped." That was originally computer slang for processing images, but now it's short for ripped-off, the process of converting music into easy-to-share MP3 files. Artists have no control over the distribution and worse, they are not getting any revenue from it.

The industry is running so scared that they have taken drastic, almost comical, steps to prevent unauthorized CD copying. For example, most computers will happily play audio CD's, but the latest album by Sony recording artist Celine Dion, A New Day Has Come, contains special coding so that the computer won't play it. The computer won't recognize Celine's CD is even in the drive's tray and it must be manually ejected. Too bad if you try to play it on a popular machine like an iMac: the CD cannot be removed from the drive. Then the machine cannot be restarted, forcing an expensive trip to the computer repair store. Other albums by Sony artists have been similarly encoded.

Consumers won't tolerate copyright protection schemes that go to such extremes of course, and the message boards have already passed around simple ways to circumvent Sony's scheme. But in a way, you can't blame the record industry for trying. It's undeniable that unauthorized MP3s of popular music are everywhere on the Internet, and some sources say they're responsible for a general downturn in the recording industry's revenues, perhaps by as much as five percent last year and even worse this year, according to the Wall Street Journal. This has led to the music industry's full frontal attack on music sharing services, most notably Napster. It has also led to the creation of a heavy fee schedule and reporting requirements for all kinds of streaming audio on the Internet, also known as Internet Radio.

On the other hand, many argue that Internet delivery of an audio file, MP3 or otherwise, may be the wave of the future, a great thing for a record company. The customers get what they want immediately, and they get only what they want without 10 tracks of filler. A totally digital record company using the Internet for distribution has no need for mass duplication services or physical warehouses to store thousands of extra copies to stock the shelves of the retail stores. And look ma, no more returns to cut out! It's an easy digital sale that bypasses all the middle men. You're paid by a direct transfer of funds, so even bookkeeping is made faster; what could be better?

And with regular broadcast radio hopelessly in bed with the industry in collusion with programming companies like Clear Channel, the Internet offers much easier ways to end-run around the chokehold the major labels have on broadcasting. It's simple to promote a new artist by sending out a 60 or 90 second clip that lets everyone know exactly how the new artist sounds. Also, Internet Radio has the potential to reach all kinds of niche audiences that the large commercial broadcasters ignore. But so far the potential benefits have been sidelined by the music industry's all-consuming fear of piracy.

Much legislation has already been put into place, most notably the Digital Millennium Copyright Act that was signed into law in 1998 by President Clinton. The recording industry helped write the DMCA with very little public input and using it, the music industry has all but crushed Napster, which now operates as a pay-to-play subsidiary of music distributor Bertelsmann AG (BMG). Many other free peer-to-peer systems for sharing MP3s still exist and most expect the industry to deal with the bigger ones soon, but the biggest change that the DMCA heralds is in the fledgling Internet Radio industry. The DMCA not only requires high royalty rates of Internet broadcasters, it also places heavy reporting responsibilities on them, demanding information on every listener at every point in the broadcast. All without consent of the listener. The times certainly are changing.

So is the Internet really good for the recording industry or is it a terrible threat? Is the industry going to change or is it going to successfully shut down new Internet-based systems of distribution simply so that it can continue selling high-priced packaged albums through the brick-and-mortar retail channel like it always has? Are Internet Radio listeners and others going to be forced to give up their privacy?

Stay tuned as we look at the history of recording copyrights and the technology delivering the recordings; and for an assessment of where we stand today, especially in regard to the current crisis of Internet Radio, we speak to the webmaster of one of the country's premier Internet broadcasters, KCRW's Jason George.

II. The History of the Musical Copyright and Royalty System

     A. Intellectual Property Rights

At the heart of this controversy is the legal concept of "intellectual property." Intellectual property is an intangible that cannot be inventoried and stored like common merchandise. It is any brain work that has been encoded into written pages, audio and video recordings, photographs, computer programs or many other forms. Though its value is subjective, it is bought and sold like other products and can be the key element in a successful business. Musical works are intellectual properties of their authors the same as literary works, paintings, photography, patents, recipes, trade secrets, trademarks and other similar items.

Authors of intellectual property need the ability to license use of the work, to derive revenue from that authorized use and to protect themselves from unauthorized use of their property. These needs led to the creation of copyright law. A copyright, as the name implies, is the original author's licensing of the right to copy their work to another for a commercial venture in return for consideration.

     B. How The Present Royalty System Came About

In the beginning there was the piano roll, the earliest form of musical recording that was protected by copyright law. The term "mechanical license," for the right to reproduce music in return for paying a royalty fee, comes from the system set up for the earliest player pianos. It still survives today though the meaning has been broadened considerably. After a 1908 Supreme Court ruling that the piano rolls were not "copies" of copyrighted music, in 1909 Congress passed legislation recognizing recordings and the reproduction of them as within the rights secured to their authors in copyright law. After the piano rolls were replaced by phonograph recordings the mechanical license royalty system was extended to cover juke boxes.

This mechanical license brought the author and their publishing company a royalty of two cents per play, starting in 1909 and continuing unchanged until the 1976 Copyright Act set up the Copyright Royalty Tribunal. This tribunal oversaw royalties until 1994 when it was replaced by the Copyright Arbitration Royalty Panel, also known as CARP. Current royalty rates run from about 5 to 7 cents per play. In 1998 the CARP was given the added responsibility of setting royalty rates for Internet broadcast under the provisions of the Digital Millennium Copyright Act.

Regular commercial broadcasting pays royalties to the American Society of Composers, Authors and Publishers, or "ASCAP," and Broadcast Music Incorporated, or "BMI," for songwriters, which are based on percentage of revenue of the station and are also based on a sampling of the music that they play. They are not based on every track. Public radio is a little different from that in that it's a flat fee system, but still based on a sample of the music they put on the air.

Recording artists and songwriters long ago gave up trying to control all these areas alone, joining organizations like ASCAP which acts as a kind of copyright clearinghouse mostly for the "small rights" royalties generated by broadcast. Individual artists receive compensation set at a standard rate by their group. They retain individual control as much as possible however over the so-called "grand rights" for full theatrical productions and other things such as duplication of their original recordings, from usage of a two second sample in another artist's recording up to licensing a recording for use in movies and other media. These are left up to the musician's publisher and usually each artist's permission must also be obtained. Fees in these arrangements are negotiated in a variety of ways--per use, flat fee, percentage or other--for whatever the traffic will bear.

     C. The CROs -- ASCAP and BMI

Copyright law is ultimately enforced by the government but there also exist several types of Communal Rights Organizations (CROs) that do much of the regulation of the day-to-day needs of industry. CROs bring authors of similar intellectual property together for purposes of monitoring distribution channels, royalty collection, royalty disbursement, and advocacy (promoting their members' viewpoint with legislators). CROs also help facilitate business by setting rates and standards, especially where per-use fees involved and the number of transactions is large.

Commercial radio and television broadcasters, including those on cable, pay mechanical licensing royalties to the artists through CROs like ASCAP and BMI, even though their playback systems are far from mechanical these days. Depending on their programming content, they will obtain licenses from several organizations; in the US, ASCAP and BMI are both involved. They will pay royalties based on a percentage of their gross revenue and provide logs of their programming content, so that the CRO can distribute the appropriate amount to each member who has had a work broadcast.

ASCAP was formed in 1914 as one of the first CROs. Today ASCAP has nearly 68,000 members. Originally it allowed musicians to pool their resources to fight legal battles, in particular nine prominent musicians of the era who were fighting restaurants and nightclubs playing their work without compensation. Over the years ASCAP pursued copyright issues in a number of public mediums, most notably in the new broadcast industry in 1926.

A very similar CRO, BMI, was started in 1941 as a competitor to ASCAP. BMI has grown to include some 160,000 songwriters, composers and publishers, and administers small right royalties on some 3,000,000 works. Both not-for-profit, ASCAP and BMI are now vigorously involved in the development of new regulation for protecting musicians' copyrighted work on the new far reaching medium of the Internet.

There are many other CROs for musicians such as SESAC for the European market and RIAA for the record companies who publish the musicians' work. The area of music performance regulation on the Internet is being pursued most vigorously by ASCAP and BMI however.

     D. Home Recording Equipment and Personal Use

Over the years technology has rapidly evolved from the poor fidelity monaural radios of the 20's to the home theater systems of today. In the 1950's and 60's reel-to-reel taping systems became available for home audio recording that allowed consumers to make high quality copies of copyrighted recordings. This was considered "fair use" as long as the copies were for personal use and not distributed to others. However this potential for copyright infringement became more controversial for authors and publishers as technology advanced. Fair use is defined as personal use copies, such as making a cassette copy of an album purchased on vinyl or compact disc for an individual's listening in the car or another system. Selling such a copy is always a breach of copyright.

The advent of the VCR in the late 70's eventually precipitated Universal Studios v. Sony Corp. of America (1981), a case concerned with the recording of copyrighted television programs by consumers who had purchased Sony's Betamax machines. The court's decision held that consumer's use of the equipment primarily for "time shifting" (recording and watching a show at a more convenient time) constituted "substantial noninfringing use."

     E. Digital Recording - The Demise of DAT and The Rise of the CD Burner

The digital tape machine ("DAT") that was launched in the late 80's was considered a big threat to copyright holders. CROs like ASCAP, BMI and the RIAA held that CD quality tape recordings would undercut the market for new music recordings. Without court decisions or legislation they were able to build a royalty structure into the price of the DAT blank tapes and the recorders that made the cost of using the system very high. The DAT machines died a quick death in the consumer market due to this economic pressure. DAT survives today mostly in the pro audio market for musicians making demo recordings of performances.

Unlike the DAT format, the writable CD drive, the "burner," which first appeared on the market in the early 1990s, had no royalty fees built into the cost of the blank media. Early on burners cost as much as $1000 but even so they gained quick acceptance. Enthusiasts quickly found that they could copy a regular audio CD for around $2, a price which quickly fell as the popularity of these machines soared. Then the MP3 format hit the scene, making acceptable quality music available with drastically reduced download times over the Internet and allowing roughly six times more music to reside on each CD.

In concert with the Internet, the writable CD-ROM poses a major copyright threat. Unlike the older analogue tape systems, the technology has no loss of fidelity no matter how many generations of copies are made. The industry fears regarding DAT tape have been realized in the CD burner.

     F. Internet Radio

The Internet delivers music for casual listening to consumers in several different ways. On the Internet currently there are two major ways of delivering music, by actually downloading a file, or "streaming" which is usually just used for listening like a regular broadcast. The new streaming technology has risen to challenge the public's traditional need to first listen to new music on local radio stations and then go to record stores and buy packaged albums for $18 or $19 a pop when they hear something they like.

Streaming audio, sometimes known as "netcasting," is still at a relatively primitive stage, especially real-time netcasting. Due to the data transmission rates available, especially on most telephone lines, signal quality is low when compared to CD sound. Even on high speed connections like cable modems there can be momentary drop-outs of sound. Usually there is no charge for listening on this type of website.

Netcasting is most analogous to broadcast. It may be an audio or a video signal which is digitally transmitted to the listeners who access an ISP's website. This may be a "real time" signal simulcasting the programming of a radio station or it may be a pre-recorded show stored as a digital file that can be selected for listening, making archived programs available for re-broadcast, usually in the Real Audio or the Windows Media Player format. Many traditional broadcast stations were doing online streaming as early as 1995 and continue to provide the service, though for most stations it comprises a tiny fraction of their listening audience.

Unlike MP3s which are usually downloaded as a repeatable file of a single song, streaming is used like other broadcast systems, that is, for real-time listening only. The content is listened to as it happens and almost always no permanent copy is made by the consumer. However, the average computer geek can always figure a way to get a recording if he really wants to, even if it means sending the analogue speaker signal to a cassette recorder, but the quality of most streams is far below CDs and it's usually not a source of piracy.

III. Current Challenges of the Recording Industry

     A. Is Piracy To Blame Or Is The Music Industry Just Moribund?

Who's to blame for the Record Industry's drop in revenue?

They have noone to blame but themselves, according to a recent LA Times article by Patrick Goldstein. On the one hand, they are not allowing new groups enough airtime in commercial radio to allow new musical bands to grow along with new musical styles. By promoting manufactured sound-alike groups so much, new music is stifled. Worse, they are now finding themselves in competition with other entertainment systems for the consumer's dollar.

DVDs are the hot ticket in the current retail entertainment market, generating $11 Billion last year. For $19.95 you get a complete two hour movie, plus all kinds of behind the scenes extras. When you buy the soundtrack to the same film, you often get only 45 to 60 minutes of music and no extra. The puzzling thing is that usually the price of the soundtrack album is exactly the same as the DVD of the whole movie. Music fans are disgruntled and are voting with their feet. They just aren't buying CDs like they used to. "When the Internet offers so much for free, [people think] it's kind of like an equalizer," says Goldstein. He further cites the subversive thrill factor users report when getting MP3s for free.

Instead of lowering prices and offering more, the recording industry blames their woes all on the MP3 subculture, not realizing that it can also be their all-important minor league system for developing new talent. There are many new artists that are independently gaining public awareness and fame because of a presence on the Web, and some major labels are seeking ways to distribute over the net also. Universal Music Group licensed their library to Listen.com and Warner Brothers is making a deal to sell tracks online for a dollar a track in MP3 form. But the rest of the industry, instead of working with the MP3 services and using them as the all important farm for new music, is going to fight. The Wall Street Journal in a recent article says to expect a full legal attack by the industry on Napster-like services such as Kazaa and Morpheus.

"The record industry as a whole has not known what to do with the Internet," says Jason George, Webmaster for KCRW in Santa Monica, California. "They have kind of a split personality for the Internet: being kind of a detriment to music publishing and a huge promotional tool." Patrick Goldstein in his article states it more bluntly, that the Industry feels the Internet is "the enemy." George agrees, "All the law was based on the assumption that music on the Internet was a source of piracy, irregardless of whether it was streamed or downloaded."

     B. The Internet Radio Crisis

The music industry treats Internet Radio as if it's equivalent to the much grosser piracy of the MP3 world. Their reporting and royalty demands as put into law by the DMCA stand a very good chance of choking the new medium to death. Already broadcast programmer Clear Channel stopped streaming last year because they weren't making any money, and didn't expect to under the DCMA.

So far the listeners on Internet Radio are still measured in the thousands, not the millions. Bob Bellin in a recent Radio and Internet Newsletter guest editorial gives an estimate that with current listenership, 50,000 to 100,000 in peak hours, royalties to the industry will amount only a few million dollars per year.

KCRW, with a simulcast channel on the net plus a side channel with a couple of web-only shows, is in the top 20 for Internet Radio sites, yet according to George their web presence accounts for only 1% of their total listenership. Cumulative listeners on a given day, he says, are "about 4000 listeners over the net but for our terrestrial signal we have about 400,000 across a day listening in at some point."

Royalties for a commercial broadcaster on the net are slated to be $.007 per song per listener. "We did the math and it comes out to $500 or $600 per person per year," for a regular I-broadcaster to pay the Internet royalty, says George. Fortunately KCRW has the advantage of a separate royalty deal that NPR negotiated, so this financial obligation wouldn't apply. But there's more than financial obligation.

The DMCA also requires records on who listened to the stream, and to what songs they listened. George states, "It's a quantum leap forward for an Internet station to not only track every piece of music you play but track it to every person that's listening, and when they are listening. Just from a technical standpoint, it's driving me crazy to try to figure out how we're going to do this. We are starting to put mechanisms in place to link listeners to songs that have been streamed, but we're nowhere close." According to George even if someone has their cookies turned off there are ways to pick up the data of who is listening, but there are also certain kinds of peer-to-peer streaming scenarios where only a dozen connections are made, but several hundred people might be connected downline, so the reporting may never be that accurate. The other question regarding all this information required about a station's stream is: who sees it ands exactly how do they intend to use it?

Historically, anyone who buys a full package copy of a CD in a store has no information sent to a record company. The record companies do not know who is buying or listening to any particular album, likewise they do not know who is listening in to a broadcast over the air, yet through the DMCA they are demanding it now. "The other crazy thing is that as of this point there have been no standards set for reporting the information," says George. Is it to be entered on government forms, spreadsheets, tab-delimited files, or hand written on toilet paper? No one knows.

Still, "CARP had no choice but to do what they did based on the DMCA. The Library of Congress was bound by the 1998 law also," maintains George. Commercial Internet Radio may never be able to pay such high rates to maintain the reporting for such a small portion of its audience. This could well mean the death of Internet Radio before it really gets off the ground. In his view this possibility also creates another strange liability, that of being perhaps the only I-broadcaster left standing if the others go away. Groove Radio used to play similar fare to KCRW and when they went out of business, KCRW's traffic went up, requiring a new investment in hardware. "If independent Internet radio goes away because of CARP or the DMCA, we're going to be the only people left standing," broods George. "Are we going to be able to handle serving that many more people?"

Internet Radio may not be with us much longer if the high royalties and reporting requirements of the DCMA as applied by CARP are upheld. The first deadline is this September for everyone to pay their back dues. That's right, on top of everything else, the DMCA was put into effect in 1998 without deciding the rate structure. According to George everybody got a no-interest loan to cover the royalties on a rate to be determined, and now the bill's coming due, but nobody expected it to be this big.

"People who are running the radio stations on the Internet are saying this is crazy," says George, adding that KCRW went to their representatives in Washington only to find them all very pro-industry. "It was very discouraging. [They told us] we were wrong, the law was already in place." He further observes, "I don't know of anyone that is actually going to go along with this. It's ultimately going to come to court cases."

Stay tuned, there will be more.

SOME SOURCES AND SUGGESTED READING:

Telephone interview with Jason George of KCRW conducted by the author 7/1/02.

Save Internet Radio: saveinternetradio.org

Radio and Internet Newsletter: www.kurthanson.com

KCRW's website: www.kcrw.org

Book: Jessica Litman, Digital Copyright New York: Prometheus Books, 2001.

Patrick Goldstein article: www.latimes.com

Wall Street Journal article: www.msnbc.com

The Mac Curmudgeon: www.macopinion.com
 (Matthew Rubin on the Celine Dion-iMac problem)

ASCAP Website: www.ascap.com

BMI Website: www.bmi.com

President Clinton's 1995 White Paper on Intellectual Property: www.uspto.gov

William O. Ferron Jr., Christopher J. Daley-Watson and Michael L. Kilkis, On-Line Copyright Issues: Recent Case Law and Legislative Changes (Parts I and II). The Computer Lawyer, January and February, 1997.

Jane C. Ginsburg, Putting Cars on the Information Superhighway: Authors, Exploiters and Copyright in Cyberspace. Columbia Law Review, October, 1995.

James M. Kendrick, The Effects of Digitalization on Music in the United States. Intellectual Property Today, November 1997.

Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations. California Law Review, October, 1996.


[Disclaimer: The opinions expressed in this article are those of the author and do not necessarily reflect those of the publisher and editors of Cosmik Debris Magazine. This is also not to be taken to mean Cosmik Debris is not in agreement. This very same disclaimer will run with every article and interview in this series, no matter what view is being presented.]

(C) 2002 - Rusty Pipes