Apple Music Podcast: Cedar Boschan on Music Royalties

Thank you to "Riches and Rhythms," for having me guest on your podcast.  It was a pleasure to speak with Stonebridge financial advisor Tyler Martin and Tristar business manager Peggy Stephens about music royalty audits, IP valuation and AI.

Link to podcast: https://apple.co/3uL14Qu

I Love My Job

There are many different aspects of royalty accounting and auditing that make it a highly rewarding profession. To start, royalty accountants and auditors get to work with some of the most creative people in the world - musicians, songwriters, and other music industry professionals - and the greatest IP attorneys of all time.

No two days are ever the same in this line of work, but when our team gets messages like the above from clients, it is a golden shining moment for the professionals at our firm, Boschan Corp.

Most Favored Nations Damages Claims

During my decades of experience, I have made thousands of audit claims in connection with so-called “MFN” (i.e., Most Favored Nations) clauses.

As examples, many mechanical reproduction licenses for musical works and film profit participation agreements with talent contain MFN clauses, as do many licensing and other agreements.  As part of certain royalty audits, it is my job to quantify damages for non-compliance with this standard agreement provision.

Although counterparties cooperate to various degrees, my approach is generally to request the information – such as agreements with third parties, rate files and accountings - in order to ascertain whether a counterparty has complied with its commitment to pay rates to our firm's client(s) that are equally favorable compared to those agreed or paid to other relevant parties. If my team and I find that a counterparty failed to comply with a most favored nations provision, we utilize actual or estimated rates to quantify reportable royalties from which we deduct royalties reported (or claimed elsewhere in our audit or expert report).

Cedar Boschan on Rising Pressure to Improve Creators' Royalties

Rolling Stone and Billboard recently interviewed me regarding Sony's "Legacy Artist Royalty Plan."  You can read about it here.

On the heels of Sony's announcement, the United Kingdom's Members of Parliament have found cause for a "'complete reset of streaming' that 'enshrines in law rights to a fair share of the earnings,'" which you can read about here.

Given concerns of inflation in the US, and the rising social pressure to fairly compensate creators, do you think the CRB will be more apt to consider our comments on the proposed mechanical rate freeze?

Are you going to comment on such settlement for the CRB to consider? (Click here for instructions on how to register to comment, although the mobile interface was a bit different for me.)

What Does Pro-Rata Mean? Especially With Reference to Streaming Royalties.

Pro rata is a Latin adverb or adjective meaning a proportionate allocation.

When services calculate streaming royalties to licensors on a pro rata basis, it usually means allocating earnings to each licensor according to its share of a pool of total earnings.

However, licensors of content that attracts the most profitable per-stream users are apt to find such standard pro-rata methodology to be unfair and may favor user-centric royalty calculations instead of those that are pool-based. In a user-centric calculation, a streaming service instead pro-rates earnings from each individual user to the relevant licensors and does not first pool earnings matched to individual users.

Pro rata calculations can be used to determine the proportionate shares of any given whole and it is often used in business finance.

So Much MMA and MLC Jargon!

When reading in the Federal Register the United States' recent interim ruling regarding the public musical works database and transparency of the mechanical licensing collective, I realized that it was so packed with jargon that it would be impossible for most people to comprehend.

Therefore, below is a mini-glossary of many terms one needs to understand in order to make sense of the new interim rule. If I missed one that you wish us to add, please request it in the comments below.

• A2IM - The American Association of Independent Music (“A2IM”) is the U.S. trade organization of independent music labels.
• API – An application programming interface, which enables the sharing of data between different software applications.
• ARM - The Alliance for Recorded Music (“ARM”) is a nonprofit coalition of the RIAA and A2IM, which collectively represent the labels that own and/or distribute most of the sound recordings commercially produced and distributed in the United States.
• ASCAP - American Society of Composers, Authors, and Publishers (“ASCAP”) is one of the two largest PROs in the United States.
• BIEM - An international organization of mechanical rights CMOs
• BMI - Broadcast Music, Inc. (“BMI”) is one of the two largest PROs in the United States.
• CISAC - The International Confederation of Societies of Authors and Composers (“CISAC”) is an international network of authors’ societies.
• CMO – A collective management organization
• CWR – Common Works Registration (“CWR”) is a format used by publishers to provide musical works data to performing and mechanical rights organizations
• DDEX – An organization with an internationally recognized standard for information in messages exchanged between DMPs and the MLC
• DLC – In the entertainment industry this term ordinarily refers to “downloadable content,” but in the context of the MMA, it specifically means the licensee coordinator (“DLC”) designated by the Copyright Office to represent MLC licensees in proceedings before the Copyright Royalty Judges and the Office, to serve as a non-voting member of the MLC, and to carry out other functions.
• DMP – A digital music provider
• DQI – As used by the MLC, the Data Quality Initiative (“DQI”) is a way for rightsholders to compare their many musical works repertoire records to The MLC’s database and identify discrepancies that need to be resolved for both datasets to be accurate.
• DPID – The DDEX Party Identifier is a unique code assigned by DDEX to each entity that sends or receives DDEX messages. The sender and recipient of a DDEX message are each identified via their respective DPIDs.
• ERN – DDEX’s electronic release notification standard to enable record companies to inform DMPs about product releases
• Ex parte communications - An ex parte communication is an oral or written communication made without proper notice to all parties and not on the public record, from an interested person outside the agency to a member of the agency, an administrative law judge, or an employee involved in the decision-making process.
• Federal Register - The Federal Register is a daily Federal Government publication that provides a uniform system for publishing Presidential documents, all proposed and final regulations, notices of meetings, and other official documents issued by Federal departments and agencies.
• FMC – In the music industry, this refers to the Future of Music Coalition (FMC), a US-based non-profit founded by musicians, artist advocates, technologists and legal experts to futher education, research and advocacy for musicians.
• GEMA – A CMO based in Germany
• Interim rule - When an agency finds that it has good cause to issue a final rule without first publishing a proposed rule, it often characterizes the rule as an “interim final rule,” or “interim rule.” This type of rule becomes effective immediately upon publication.
• IPI - Interested Parties Information (“IPI”)  is a unique code assigned worldwide to each stakeholder of a musical work by CISAC. Such IPIs identify interested parties such as authors, composers, adaptors, administrators, arrangers, publishers, subpublishers, associated performers, and translators.
• ISNI - International Standard Name Identifier (“ISNI”) is a standardized unique code permanently assigned to a “contributor” to and distributor of creative works by an ISNI agency. Such ISNIs identify researchers, inventors, writers, artists, visual creators, performers, producers, publishers, aggregators, and others.
• ISRC - The International Standard Recording Code (“ISRC”) is a somewhat standardized unique code permanently assigned to a recording by its first owner. Such ISRCs identify recordings across different exploitations.
• ISWC - The International Standard Musical Work Code (“ISWC”) is a somewhat standardized unique code permanently assigned to a musical work by a local registration agency when a work is first registered. Such ISWCs identify songs or version thereof across different exploitations.
• LabelName – DDEX metadata field to show the name of the record label for the relevant product release
• LAD – January 1, 2021, the license availability date of the MMA’s first blanket licensing regime.
• Library of Congress - The Library of Congress is the largest library in the world, with millions of books, recordings, photographs, newspapers, maps and manuscripts in its collections. The Library is the main research arm of the U.S. Congress and the home of the U.S. Copyright Office.
• MAC – The Music Artists Coalition (MAC) is a digital rights advocacy organization for musical artists.
• Marginal Cost – The cost for the supplier to produce one more unit of a good or service.
• Metadata – Information about information or accompanying files
• MIC – An American coalition of associations whose members use and perform music over airwaves, through the internet and in retailers, theaters, hotels, restaurants, and bars.
• MLC – In the music industry, this refers to a mechanical licensing collective (“MLC”) established by the MMA (defined below) to administer the blanket license, receive notices and reports from digital music providers, create and maintain a publicly accessible database containing information relating to musical works, collect and distribute royalties, and identify musical works and their owners for payment. The U.S. Copyright Office (defined below) designated Mechanical Licensing Collective, Inc. as such MLC.
• MMA – In the music industry, this refers to the United States’ Musical Works Modernization Act, title I of the Orrin G. Hatch-Bob Goodlatte Music Modernization Act, H.R. 1551. The law establishes a new blanket compulsory license that will be administered by a mechanical licensing collective, which will make available a public musical works database as part of its statutory duties.
• NOI – Usually in the music industry, NOI refers to “notice of intent” to use a copyright. However, in other instances, including the recent Interim Rule that inspired this post, it refers to a “notification of inquiry” from the U.S. Copyright Office, which is basically a notice of The Office’s quest for information and/or commentary from stakeholders.
• NPRM – A notice of proposed rulemaking or NPRM is the official document that announces and explains the agency’s plan to address a problem or accomplish a goal. All proposed rules must be published in the Federal Register to notify the public and to give them an opportunity to submit comments.  The proposed rule and the public comments received on it form the basis of the final rule.
• The Office – In the context of the MMA, this refers to Copyright Office.
• PII - Personally identifiable information
• PLine – DDEX metadata field to indicate the year of first
• release of an audio-only sound recording followed by the name of the entity that owns the phonographic copyright thereto.
• PRO – In the music industry, this refers to a copyright performance rights organization or society, which licenses rights to publicly perform musical works.
• Public Musical Works Database – Under the MMA, The MLC must establish and maintain a free-of-charge public database of musical work ownership information that also identifies the sound recordings in which the musical works are embodied, a function expected to provide transparency across the music industry.
• Recording Academy – A U.S.-based society of music professionals including performers, songwriters, producers, and engineers.
• Register of Copyrights - The Register of Copyrights is the Director of the U.S. Copyright Office and a recognized leader and lawyer within the U.S. government. By statute, the Register works under the general direction of the Librarian of Congress and carries out a variety of legal and policy functions that are enumerated throughout Title 17.
• RIAA - The Recording Industry Association of America (“RIAA”) is the U.S. trade organization of major music labels.
• U.S. Copyright Office - The Copyright Office administers the national copyright system and provides advice on copyright law to congress, federal agencies, the courts and the public.
• SCL - Society of Composers & Lyricists (“SCL”) seeks to advance the interests of composers and lyricists working in the visual arts (e.g., film, TV, video games).
• SFTP – Secure file transfer protocol
• SGA - Songwriters Guild of America (and its predecessor-in-interest the Songwriters Protective Association (“SPA”)) have represented the rights of songwriters since 1931.
• SNBL – A DMP that is a significant non-MMA blanket licensee because it obtained one or more voluntary, or direct, licenses from copyright owners and is therefore subject to earnings and usage reporting obligations which are separate from those under the MMA.
• SoundExchange – The agent designated by the Librarian of Congress to administer sound recording performance rights in the United States, the organization collects and distributes royalties on behalf of recording artists and master rights owners.
• SRCO – A sound recording copyright owner.
• Statute – a law
• UPC – A Universal Product Code is a unique code assigned to physical products in the United States by the GS1 global standards organization, which is headquartered in Belgium. Such UPCs convey data when scanned by retailers and marketplaces.

Definition of Royalties

"Royalties" are earnings in exchange for the right to use intellectual property. 

2015 Year-In-Review: Interactive

Below are some of the news items with which our readers engaged in 2015:

Year-In-Review | The Auditrix:

• Apple
• Crowdfunding
• Netflix
• YouTube

More (uncurated):

• Physical Game Sales Hit 24-Year Low in Japan
• Revenue up big for casino apps as gamers go wild for digital gambling
• Potential #audit claim for developers?  Sony Begins Free Games Compensation Over 2011 PSN Hack - GameSpot
• Former NFL players score again against EA re: #publicity #right #videogames #litigation
• 20 Percent Of Mobile Gamers Are Mobile-Only | alistdaily
• GameMaker Studio creator acquired for $16.4 million
• Sony to Buy Assets of Streaming-Game Pioneer OnLive

AIMP Members Click Here to View "The Evolution Of Music In Video Games" Video for Free

• Carianne Marshall @Songs talking #videogame #music @AIMPorg with panelists from @Disney @Activision and @EA: Original #songs for video #games are not typically works for hire but instead long term licenses per @AIMPorg @Disney @Activision @EA @Songs

• Brandon T. from @Activision talking about #microtransaction model for new #GuitarHero #game @AIMPorg (Click for video - free to all AIMP members)
• Top 25 game companies generate 65% of revenue, as industry grows 10%
• Kabam restructures to focus only on the biggest mobile game hits
• Chart shows which public companies are making the most money from games
• In-app purchases for indie mobile games: A smart freemium strategy
• Gamasutra: Burak Tezateser's Blog - #Funding your #game #startup

• NetEase's (NTES) CEO William Ding on Q1 2015 Results - #Games Earnings Call Transcript:
• #Mobile #games "driving considerable growth in China's online games industry" per NetEase CFO
• NetEase CFO: "Compared with the same quarter in 2014, we saw revenue increases of 64.8% from online games..."
• NetEase CFO: "Our gross profit margins for the online games business for the second quarter of 2015 was 69.3%"

• Starting up a game business: Contemplating processes
• Composing adaptive music for video games using Elias
• Skills-based video game playing, gambling coming to Vegas casinos

• At #E3 Game Law Bar Association cocktail reception sponsored by @lathamwatkins 
• Japan's game market hits record high as consoles decline and mobile grows
• E3 2015's Highs, Lows, and Biggest Games
• Gamasutra - Report: 24% of games in Steam's Summer Sale generated 94% of revenue
• Survey: Devs remain unsatisfied with European #game dev #tax breaks
• VICE Vs Video Games: PewDiePie Made Over $7 Million in 2014 Playing Video Games
• Report: Gameloft lays off staff, shutters New York studio
• "15 #metrics all #game #developers should know by heart"
• Buyer's market, as game biz deals drop 89% in 2015 so far

• Blog: The end of video games
• Industry must adapt to gamers as performers, not consumers - Outpost
• Australia to place 10% tax on all imported goods including games
• GameStop sees sales dip for new games, hardware, digital
• Gamestop (GME) Earnings Report: Q2 2015 Conference Call Transcript
• Investors pour over $11M into mobile game livestreaming firm Mobcrush
• Game developers team up to aid children in warzones
• Marty O'Donnell attorney Tom Buscaglia blasts Bungie for betraying its founding composer
• Using people's names and likenesses in video games

• 'Disappointing' revenues account for Gameloft shuttering 7 studios
• Epic Games releases $3 million in art and sound assets for free
• Sony launches PlayStation Now game streaming in Japan
• #China doesn't want your games
• Playboy and Gamblit Gaming partner to make real-money betting mobile games
• Unionized video game voice actors are considering a strike
• Crunching the numbers behind the indie game boom
• Kanye West is pissed about in-app purchases in kids games
• Unionised video game voice actors overwhelmingly approve strike vote | Ars Technica UK

• See the top 100 countries for game revenue, ranked
• Global games market 2015
• Europe's game biz is world champ at creating value, says Supercell investor
• Report: Casino game players pay nearly twice as fast on mobile vs. web
• Zoe Quinn publishing #Gamergate memoir
• #Microtransactions could feature in all of Nintendo's smartphone #games (Wired UK) 
• Survival and success in India's budding games industry

• GameStop report sinks video game stocks, sparks debate 
• Is GameStop's Future Played Out?
• GameStop Fires Warning Shot at EA - Fortune
• Sega invests millions in fledgling mobile publisher, GoGame
• Sustainable practices for indie success in today's game market
• The Game of Life: Hasbro fights back against #suit over #royalties

2015 Year-In-Review: Netflix

• Every second cord cutter has a Netflix subscription  
• Amazon Prime subscribers prefer Netflix to stream video  
• HBO To Netflix: Bring It On
• Netflix 'will have to raise its subscription prices'

• WPP's Martin Sorrell Says Netflix Needs Ads to Pay for Original Content
• To Take On HBO And Netflix, YouTube Had To Rewire Itself
• Fans Petition Netflix About #Fair #Pay For Grace & Frankie's Leading Ladies  
• Netflix will be watched more than all the major TV networks within a year, analysts say

• Netflix has hemorrhaged 20% of its value in the last 3 days of trading
• Netflix Is Losing a Ton of Movies to Hulu  
• The Real Reason Netflix Won't Offer Offline Downloads
• Leslie Moonves on Battling Netflix, the Coming Original-Content Bubble, and 20 Years in the Network-TV Trenches  

• Online #DVD #Rental #Settlement: Why @Walmart Is Sending @Netflix Customers $12 Gift Cards 
• Netflix to double original content next year, will produce 31 new scripted shows  
• Netflix is re-encoding its entire library to save data  
• Here's how much Netflix will pay its CEO next year 
• One graph shows how the likes of Netflix and Spotify are eating the DVD and CD businesses

#Apple

If you are in interactive development, the below headlines about Apple may be of interest:

• App Analytics
• Apple may reduce its 30% subscription commission
• #Brands: Step up your game
• Apple's App Store passes 100B downloads and $30B paid to developers

Maximize Future Marital Settlement Agreement (MSA) Royalty Earnings with these Drafting Tips from Cheryl Hodgson, Esq.

Trademark, copyright, music law & digital media attorney Cheryl Hodgson of Hodgson Legal

The best family law attorneys know when to include outside experts on their team.  When it comes to intellectual property assets, family lawyers turn to attorney Cheryl Hodgson of Hodgson Legal for her expert advice.

As part of our collaboration geared towards helping family lawyers and their clients navigate the arcane world of intellectual property assets, we invited Ms. Hodgson to share three key drafting tips for family lawyers to consider in cases when the marital assets include royalties:

1.     Audit rights.  Audit rights are a vital component to any agreement that includes payment of royalties, whether or not a dissolution is involved. Without the direct audit rights as well as the right to participate in an audit of the source of the income stream, there is no means by which to verify the accuracy of accountings from an ex-spouse, or payments received by the ex-spouse. Moreover, without an audit to identify an ex-spouse’s non-compliance with the marital settlement agreement (“MSA”), it can be difficult or impossible to identify evidence to support legal action and hold the ex-spouse accountable for failing to properly pay. Therefore, one should always include a thoughtful audit clause in the MSA that grants access to the contracts that create the income stream. Moreover, rights to piggyback on direct audit rights are imperative.  (See this post for more audit clause drafting tips.)

2.     Earnings Periods.  The MSA should address dates governing receipts and payments prior to the date of dissolution since payments may be earned long before they are received. For example, in the case of foreign performance royalties from the broadcast of music on television and in film, earnings during the term of the marriage may not be received or paid in the United States for a year or even longer.

3.     Transfers of Title.   A court order detailing rights in the divided assets should be drafted in a manner that is both clear, detailed, and binding upon third party payees of royalties. Entertainment related companies are often loathe to make changes in existing payment instructions without clear agreements, letters of directions, and in many cases, a court order that clearly identifies the assets and the parties covered.

# # # 

Don’t wait for the next post in our ongoing collaboration – read more from Ms. Hodgson today on her own website.  Better yet, for a personalized consultation, call Ms. Hodgson today at 310-623-3515 and follow her on Twitter @CherylHodgson.

March 2015 Music Business Top Ten

Here are the top ten music industry highlights from our Auditrix twitter feed:

1. Cheryl Hodgson moderated a fantastic panel discussion about brands and music at the California Copyright Conference:

   

   Pictured L-R: Navine Karim - Legal Counsel, Red Bull Media House; Kyle Hermans - Brand Innovation, Gap Brands; Cheryl Hodgson - Music Attorney and Founder of Brandaide; Marshall Eskowitz - Marketing Executive, Creative Artist Agency

2. By David Oxenford, who represents #broadcasters: Songwriter' Equity Act Reintroduced - What Does It Propose?
3. Hollywood Reporter: We nominated our favorite power lawyers! 
4. Daily Mail Online: Jay-Z to pay Swiss jazz musician 50% of royalties after 'stealing' his instrumental for 'Versus'
5. Fast Company: Spotify Unveils A Bold New Brand Identity
6. New York Post: Spotify to spend $1B on renewal deal with Universal Music
   
   
   
7. Billboard: 'Blurred Lines' Trial Verdict: Jury Rules Against Pharrell Williams & Robin Thicke
8. Disruptive Competition Project: Transparency at the Intersection of Music Licensing and Antitrust
9. Sonicbids: 5 Not-So-Obvious Revenue Streams for Musicians
10. Digital Music News: 12 Reasons to Fire Your Bandmates

Top Tweets YTD from the Auditrix 2015 Twitter Feed

Below are the popular tweets from the Auditrix twitter feed, which focuses on music economics and royalties, during 2015 YTD:

• Duff McKagan on royalty audit of Geffen: "Well, they didn't pay us on something like 6 million records."
• YouTube Music Key Drew Criticism from Indies
• Apple spent up to $50 million for a music data company 
• Swedish songwriters called for more clarity and fairness over digital royalty distribution
• Sly Stone testified in royalties lawsuit against his former manager and won   
• Katy Perry's lawyers demanded takedown of 3D printable Left Shark and filed a trademark claim for Left Shark
• Federal District Courts "have been improperly applying a quantitative and not qualitative #copyright analysis... "
• Elvis Presley Turns 80: What Is the King's Legacy Worth?
• Sony's Lynton said: No Plans to Sell Music Publishing Business
• The Best Time to Release Your Album: A Month by Month Guide
• The U.S. Copyright Office Embraced Big Shake-Up to Music Licensing Regime 

Best Unfinished Twitter Conversation with Glenn Peoples @ Billboard and John Strohm @ Loeb

• Jas Prince Sued Birdman For Drake Royalties
• Tony Braxton's Ex-Husband Auctioned Off Royalties To Pay Back Child Support
• Kiplingers: Shouldn't Music Streaming Sites Pay Higher Royalties?
• Medium: Why Do All Records Sound the Same? 

Listen Here

The Auditrix on music and game royalties:

Music Royalties - Audio Interview of Cedar Boschan by Kelly Castor - #Free on MusicBizCast

Royalty Audits: What You Need to Know - International Game Developers' Association (IGDA) Webinar: Distinguished Lawyer Tom Buscaglia Interviews Cedar Boschan - #Free on YouTube

Video Game Dealmaking: Playing to Win (DVD): The Beverly Hills Bar Association Panel Discussion with International Legal and Business Professionals (Receive 1 Hour CLE Credit, $179).  Cedar Boschan Moderates:

• Enrico D’Angelo, VP Product Management at Activision
• Gerard Fox, Law Offices of Gerard Fox, Inc.
• Wayne Kazan, Weintraub, Tobin, Chediak, Coleman, Grodin Law Corporation
• Vincent Scheurer, Owner, Sarassin LLP

Royalty Income Meets Marital Dissolution: Dividing, Managing & Accounting (DVD) @ The Beverly Hills Bar Association (Receive 1 Hour CLE Credit, $179), Featuring Presenters:

• Cheryl Hodgson, Hodson Legal
• Kristin Edmonds, Morgan Stanley
• Cedar Boschan, Green Hasson Janks

Business Managers Brainstorm on Royalties - SXSW and Association of Independent Music Publishers Panel Discussions (@AIMPorg video #free for #membersonly) Featuring:

• Laura Merry, Nigro Karlin Segal Feldstein & Bolno
• Lynise Levine, GSO Group
• Gerri Leonard, Leonard Business Management
• Zach Best, Provident Business Management

Highlights from The California Copyright Conference's October 2014 Music Royalties Dinner

Last week, the California Copyright Conference presented a panel discussion entitled, "Are You Getting Paid? Best Practices for Unmatched Royalties"

October 2014 California Copyright Conference: L-R: Scott Berenson – Director, Claims Department at SoundExchange; Jake Wisely - President The Bicycle Music Company; Diane Snyder Ramirez – Vice President Royalty Accounting & Administration, Royalty Review Council; Chris Castle – Founder, Christian L. Castle, Attorneys, Austin; Anne Cecere – BMI, California Copyright Conference President; Not Pictured: Eric Palmquist - Vice President, Audit & Income Tracking, BMG Chrysalis

I tweeted a few insights from the panelists, such as:

One highlight was when panelist Chris Castle called on Henry Gradstein to speak on state copyright protection of pre-1972 sound recordings:

Henry Gradstein at the California Copyright Conference: Section 980 in California was amended to allow for common law (c) protection

But, a few tweets can't impart all of the valuable information that the panelists shared. To view the complete discussion, click here to join the California Copyright Conference.

#IRespectMusic

Eventually materials from the program will be uploaded here for anyone to access free-of-charge.

Is China Ready to Hold Accountable Infringers of Foreign Copyrights?

China's Ministry of Culture ("MoC") implemented on August 26, 2009 new regulations for online music. In what might be the first in a series of MoC rule changes, online music ventures are now required to obtain MoC approval in order to legally distribute imported online music products in China, including audiovisual files and mobile distributions.

Such new regulations may impact China's 338 million Internet users, as well as search engine and music services in China, including Sohu's SoGou, Alibaba/Yahoo! China, Google and Baidu, which was described in IFPI's 2009 Digital Music Report as "the biggest single violator of music copyrights and by far the greatest obstacle to legitimate digital commerce in China."

Barron's Tech Trader Daily blogger Eric Savitz says analysts disagree on the impact of China's new set of rules on "deep-linking" search engines such as Baidu. Savitz and other bloggers such as Caitlin Cimpanu of Softpedia cite Pali Research analyst Tian Hou's blog report that music searches represent 80% of Baidu’s traffic. Therefore, the new regulations may obligate Baidu to drastically change its business practices by linking only to licensed music services.

On the other hand, Savitz observed:

"UBS analyst Wenlin Ly... says Baidu believes the worst case scenario would be to remove the MP3 search button from its main page ... [and] MP3 search is now under 10% of query traffic."

The true Baidu music search traffic figures may fall between Hou and Ly's estimates. Leena Rao of Tech Crunch reported:

"According to comScore, Baidu had 145 million unique visitors in July of 2009 worldwide (with more than 95 percent of those coming from Asia), while its MP3 search engine attracted 47 million uniques, which is only 32 percent but still significant. For July, Baidu was ranking fifth amongst most visited search engines worldwide, behind Google, Yahoo, Bing and Ask.com."

Whatever the figures, music search and "deep links" compelled Baidu to become a licensed online music service when it obtained from the MoC a newly required "Internet culture license," according to spolkspeople for both the MOC (see the JLM Pacific Epoch blog) and Baidu (see the Wall Street Journal).

We must wait to see whether search engines such as Baidu comply voluntarily with other new MoC regulations, and whether China enforces such regulations in 2010. As The Wall Street Journal pointed out, the MoC is not responsible for enforcing copyright protection.

In the meantime, I endeavored to analyze Google's English translation of the MoC's Chinese language document dated September 4, 2009. [Is there an English language statement from the MoC of which I have failed to locate a copy?] According to my haphazard analysis of the Google-translated MoC document, online music services - including Baidu's deep linking service - must:

(a) Subject content to MoC "Internet Literary Review" with the goal of "purifying the online music market in China" by "strengthening the ban on obscenity, pornography, violence, superstition, and undermining national customs and other harmful social morality music"

(b) Submit "signed import contracts (agreements)" for MoC verification of compliance with "strict requirements" (e.g., "the authorization period of imported network music should be more than one year"). Such contracts which are not directly signed by Mainland China businesses are invalid.

(c) Deem online music from Hong Kong China, Macao Special Administrative Region and Taiwan to be imported

(d) Submit for MOC review by December 31, 2009 imported music that was previously distributed online in China

The MoC is now ambitiously obliged to review during the next four months untold multitudes of content including lyric translations for hundreds of thousands of songs, as well as license agreements and other documents. Is this possible? As one who analyzes music licenses professionally, I suspect China may underestimate the tasks at hand: censoring content and vetting worldwide copyright ownership and license agreements. Therefore, the process will continue well beyond 2010 and/or it will be unthorough.

In addition to announcing the new regulations described above, the MoC saught to:

1. Further clarify the definition of "online music" as:
   (a) "music products" that are "not material entities..." and are "...digitally transmitted through the information network..." which includes "...the Internet, mobile communications network, the fixed communications network can be achieved via a variety of interactive, real-time communication, sharing of common information network."
   
   (b) including "not only the usual sense of the songs, music and other forms of digital music products, but also ... the content of the performance of music accompanied by images of the MV [music videos], Flash and so on."
   


2. Set forth innovative and clear review procedures and requirements
   
   (a) The MoC introduced an online music registration system through which online music ventures may request MoC approvals
   
   (b) The MoC offers a "rapid 'review of access' system" to provide expedited 3-day approvals in certain cases
   
   (c) The MoC has adopted certain procedures to eliminate duplicate reviews of music content
   
   
3. Clarify the responsibilities of online music ventures:
   (a) "The enterprise must establish a system of self-examination"
   
   [As an auditor, I caution the MoC against relying solely on music service ventures like Baidu to comply voluntarily with MoC regulations.]
   
   (b) "Users [who]... upload their own innovations of the network and performing music is not" subject to content review... "Domestic online music business units, especially in providing Internet users create their own compilation and performing services such as online music upload business units should be strictly in accordance with 'Interim Provisions on Administration of Internet Culture,' the provisions of Article XVII of the online music content to enhance the review, ensure that the provision of the legality of online music content." [sic]

This leaves me with dozens of questions, such as:

• How do you think China's new rules will change the music market?
• Will reportedly legal Chinese music services like Orca Digital and Google's Top100.cn become profitable?
• Will Google China increase its search market share dramatically?
• Will foreign territorries such as Hong Kong, Taiwan and the USA collect billions of dollars in copyright royalty payments from China?
• Will Baidu and other reported purveyors of unlicensed music find a way around the new regulations?
• If you are a music copyright holder, have you any deals directly with China?
• Does anyone disagree with this on grounds of censorship?
• Is this a "tax" or "disincentive" for music services to import music?
• Will fewer regulations stimulate demand for domestic Chinese music?
• What is popular in China's music markets?

The posts on this blog confer no rights or warranties. The opinions expressed on this site are my own and may not represent those of my firm. © 2009, Cedar Boschan. To request permission to reproduce, please contact boschan@royaltyauditors.com.

LAUNCHcast Wins - Service Deemed Noninteractive by US 2nd Circuit Court of Appeals

Those who are calculating CRB royalties may be interested to read this decision published August 21, 2009 in the Federal Register.

The US Court of Appeals' Second Circuit upheld a 1997 jury decision that Yahoo's LAUNCHcast - a webcasting service now operated by CBS that provides Internet radio stations customized for individual users – is not an "interactive service" as defined in 17 U.S.C. §114(j)(7):

An “interactive service” is one that enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording, whether or not as part of a program, which is selected by or on behalf of the recipient. The ability of individuals to request that particular sound recordings be performed for reception by the public at large, or in the case of a subscription service, by all subscribers of the service, does not make a service interactive, if the programming on each channel of the service does not substantially consist of sound recordings that are performed within 1 hour of the request or at a time designated by either the transmitting entity or the individual making such request. If an entity offers both interactive and noninteractive services (either concurrently or at different times), the noninteractive component shall not be treated as part of an interactive service.

Specifically, the US Court of Appeals found that LAUNCHcast's

1. Users could not request specific musical works through LAUNCHcast
2. Transmissions were not specially created for the user within the meaning of §114(j)(7)

Nobody disputes point #1 above, but point #2 is debatable. At least I found BMG's argument that "...Any service that reflects user input is specially created for and by the user and therefore qualifies as an interactive service" to be compelling. But the court did not "read the statute so broadly." Ultimately, the intent of §114(j)(7), as revised, guided the court to its decision.

The decision means that LAUNCHcast may pay statutory master performance royalties to SoundExchange instead of negotiating fees for each master with various record companies. The designation of a music service as "non-interactive" impacts royalties reportable to music publishers as well.

According to The Broadcast Law Blog:

"Other cases in other circuits would not be bound by this decision, though they will no doubt find it to be instructive."

Do you agree with the Second Circuit?

The posts on this blog confer no rights or warranties. The opinions expressed on this site are my own and may not represent those of my firm. © 2009, Cedar Boschan. To request permission to reproduce, please contact boschan@royaltyauditors.com.