Neil Lopez Dissertation

DISSERTATION
1
WHY THE MUSIC
INDUSTRY NEEDS A NEW
LICENSING SCHEME
FOR MUSIC STREAMING
SERVICES

DISSERTATION
2
WHY THE MUSIC INDUSTRY
NEEDS A NEW LICENSING
SCHEME FOR MUSIC STREAMING
SERVICES
NAME: Neil Lopez
COURSE: L.L.M
ID: 20141288
YEAR: 20141288
SCHOOL: Jindal Global Law School
WORD COUNT: 14,874
I certify that the work presented in this thesis is my own unless specified
SIGNATURE..................................
DATE..............................................

DISSERTATION
3
ACKNOWLEDGEMENT
I would like to thank all the people who have helped me in writing this dissertation. First and
foremost I would like to thank my supervisor Professor Indranath Gupta for all his time and
patience in guiding me throughout this dissertation. I would also like to thank Professor
Sridhar Patnaik and the rest of the Centre for Post Graduate Legal Studies for their timeless
support and encouragement.

DISSERTATION
4
TABLE OF CONTENTS
CHAPTER I-INTRODUCTION.............................................................................6
1. Background of digitization of music....................................................................6
2. The digitization of music had come out in three waves.......................................7
2.1 Peer to Peer file sharing......................................................................................7
2.2 Digital markets....................................................................................................7
2.3 Streaming............................................................................................................8
3. Digitization is the future of delivering music.......................................................8
4. Why streaming is the new business model for distribution of music...................9
5. The problem faced by current business models...................................................11
6. Scope of paper.....................................................................................................13
CHAPTER II-THE LEGAL CONTEXT OF STREAMING.................................15
1. The basics of copyright........................................................................................15
1.1 What is a Copyright? ........................................................................................15
1.2 Rights granted under U.S copyright law..........................................................16
1.3 Music Copyrights..............................................................................................17
2. Licensing Music under the Copyright Act in the Digital Age............................17
3. Interactive vs. Non interactive distinction..........................................................19
3.1. Interactive Services..........................................................................................19
3.2. Non-Interactive Subscription Services.............................................................20
3.3. Non-Interactive Non-Subscription Services.....................................................20
4. The Arista case....................................................................................................21
4.1 Facts of the case................................................................................................21
4.2 The Arista court’s analysis................................................................................22

DISSERTATION
5
5. Terrestrial vs. Internet radio distinction .............................................................23
6. Conclusion...........................................................................................................25
CHAPTER III-AN APPRAISAL OF CURRENT STREAMING MODELS.......26
1. Spotify- an introduction......................................................................................27
1.1 How Spotify works...........................................................................................28
1.2 The Legal Environment surrounding Spotify...................................................29
1.3 Licenses with Record Labels............................................................................30
1.4 Licenses with Performing Rights Organizations..............................................30
1.5 Spotify’s Business Model and Licensing Scheme – An Evaluation.................31
2. Pandora- an introduction....................................................................................33
2.1 How Pandora works.........................................................................................34
2.2 Pandora’s Licensing Scheme............................................................................35
2.3 Pandora’s Business Model and Licensing Scheme – An Evaluation...............36
3. Comparative analysis..........................................................................................37
CHAPTER IV- SOLUTIONS TOWARDS A NEW LICENSING SCHEME...39
1) Setting a uniform compulsory rate structure for all streaming services.............39
2) Removing the interactive distinction in the statute........................................... 39
3) Eliminate Terrestrial Radio’s Exemption from Copyright Royalties.................40
4) Why this solution will work...............................................................................41
5) Limitations..........................................................................................................42
6) Conclusion..........................................................................................................42
CHAPTER V- CONCLUSION ............................................................................44

DISSERTATION
6
CHAPTER I- INTRODUCTION
1. Background of digitization of music
In November 1994, Mick Jagger and The Rolling Stones performed the first major concert
broadcasted over the Internet; Jagger opened this landmark event by stating:1
“I wanna say a special welcome to everyone that’s, uh, climbed into the Internet tonight and,
uh, has got into the Mbone. And I hope it doesn’t all collapse.”
Fortunately, Jagger’s concerns were misplaced; the Internet did not cave in on itself and has
since become a significant music broadcasting platform, with Internet-based radio services
reaching an estimated 103 million listeners per month.2
The way music has been distributed over the world has changed over decades. Initially it
started off with mass production of physical products such as vinyl records and music
cassettes and later media was optimized with technology dictating its development. The
music media became smaller, faster and gained various advantages. The internet crucially
influenced this development and offered endless opportunities in terms of media and
distribution. Music can now be purchased from home without the need of going to stores.
However, digital music allows individuals to separately acquire music without the need of
purchasing an entire music album. Music can be downloaded through legal purchases via
online digital stores such as iTunes3 store or Amazon.com4 or illegally through peer to peer
file sharing software5. Enormous amounts of music can be loaded on portable devices and
played back at any time. As the MP3 trend grew to replace the compact disc (CD) as the
preferred format, the demand for digital music has grown tremendously.
1
Adam Vukovic, '“PleaseDon’t Stopthe Music”: TheNeedfor Fairness in Digital Copyright' [2014] Hastings LawJournal (The “M-bone,”
as it was called, refers to the “multicast backbone, which functions as a network based on the Internet’s framework.”)
2
ibid
3
The Apple iTunes store provides individual trackandalbum downloads, as well as films, television shows, and podcasts. Requires client
download, content contains DRM, St. Bonaventure University, 'Illegal File Sharingis Not Worth the Risks' (my.sbu.edu June 29th 2015)
<https://my.sbu.edu/tech-assistance/online-file-sharing> accessed 29th July 2015
4
Amazon is nowofferingdigital purchases of individual songs as DRM-free MP3s. St. Bonaventure University, 'Illegal File Sharing is Not
Worth the Risks' (my.sbu.edu June 29th 2015) <https://my.sbu.edu/tech-assistance/online-file-sharing> accessed 29th July 2015
5
Peer to Peer (P2P) users store files on theircomputers and the P2P application enables other users to download those files onto their
computers. Examples ofP2P applications include BitTorrent, KaZza, Limewire, andBearShare.PaceUniversity, 'Copyright, Peer to Peer
andillegal file sharing' (pace.edu) <http://www.pace.edu/its/it-security/copyright-peer-to-peer-and-illegal-file-sharing> accessed 30th July
2015

DISSERTATION
7
2. The digitization of music had come out in three waves:
As music became freely available over the internet it was disseminated in different mediums
over time. From the launch of file sharing software such as Napster to streaming services
such as Spotify, the access to music online has multiple platforms to choose from. Below in
chronological order are the three main waves of digitization.
2.1 Peer to Peer file sharing
As internet bandwidth grew to accommodate the growing uses of the Internet, so too did the
size of transferrable files. Capitalizing upon this, on June 1, 1999, the peer-to-peer (“P2P”)
file sharing software Napster was launched and grew immediately in popularity.6 The
software which provides members to share files amongst themselves via the Internet
constituted copyright infringement as most of the material were unlicensed copies. The
creation of P2P services brought about interesting questions of contributory infringement;
however, this new phenomenon had also radically transformed music consumption and
delivery. Specifically, Napster and the ensuing transition to locally-stored, digitally
downloaded music turned the album oriented music production business model on its head.7
2.2 Digital markets
Levering its bargaining power as a result of the recently introduced iPod, and pointing out the
repeated failures of the record industry to capitalize upon digital music delivery, Steve Jobs
of Apple Computers began courting record executives, with an eye toward creating a
consolidated, digital, online delivery service for music files.8
The Apple iTunes Music Store was launched with iTunes 4.0 on April 28, 2003. Initially, the
online store offered individual song downloads for $0.99 and whole album downloads for
$9.99 in a digitized format. The royalty received by these sales were severely reduced as a
compared to earlier sale by CDs. Sale of a single track is roughly one dollar a song, the
royalty received is usually one fifth of that amount. This agreement had effectively cut the
record labels out of the distributional loop; a market that they had controlled since the
creation of the vinyl record. The iTunes Music Store was an immediate success. On April 3,
6
Spencer E. Ante, Inside Napster: How the Music Sharing Phenomenon Began, Where it Went Wrong, and What Happens Next ,
Bloomberg Business week (Aug. 14, 2000), http://www.businessweek.com/2000/00_33/b3694001.htm.
7
James H. Richardson, 'The Spotify Paradox: How the Creation of a Compulsory License Scheme for Streaming On -Demand Music
Platforms Can Save the Music Industry' (SSRN 2015) < http://dx.doi.org/10.2139/ssrn.2557709> accessed 20 March 2015
8
ibid

DISSERTATION
8
2008, less than five years after its inception, iTunes became the largest music retailer in the
United States.9 For almost a decade, iTunes and its consumer ownership rights model have
been the industry standard.
2.3 Streaming
Streaming is listening to a song via the Internet in ‘real time’ without downloading. Some
famous streaming sites are YouTube, Spotify, Rhapsody and Beats to name a few. YouTube
is a free webcasting10 site while others such as Spotify usually require a subscription fee. An
individual can select songs from the site’s libraries and listen to them for as long as they want
without having to download the track. Some platforms provide access to original material,
whereas others distribute copyrighted content. However, this model is complicated by
variable licensing negotiations. Spotify, much like other streaming content providers, is
constantly engaged in licensing negotiations with content owners, across numerous labels, in
multiple countries.11An argument in favour of streaming is that it dissuades piracy and
prevents individual having to resort to illegal downloads. However the royalty rates are much
less in comparison to digital store rates.12 It is for this reason that artists such as Taylor Swift,
Prince and the Beatles have refused to license their music to web streaming sites.13
3. Digitization is the future of delivering music
Digital revenues rose 6.9 per cent to US$6.9 billion, representing 46 per cent of all global
music sales of US$14.97 billion in the year 2014.14 Consumers have access to a wide range of
download stores, music streaming services, and Internet radio websites. Music streaming
services in particular have attracted considerable attention. In Sweden, two of the world’s
largest record labels generate more revenue from Spotify, than they do from any other
9
Apple Press Info, 'iTunes Store Top Music Retailer in the US' (Apple.com ) <http://www.apple.com/pr/library/2008/04/03iTunes-Store-
Top-Music-Retailer-in-the-US.html> accessed 24 June 2015
10
Webcastingis the method of broadcasting live audio and video in real-time, to audiences all over the world via the Internet. Using
streamingmedia,thereis no needtodownloadthe content before viewing.,' Webcast Media' (The Thompson Conference Centre at The
University of Texas at Austin ) <http://www.utexas.edu/ce/tcc/plan/webcast -media/> accessed 30th July 2015
11
James H. Richardson, 'The Spotify Paradox: How the Creation of a Compulsory License Scheme for Streaming On -Demand Music
12
Royalty rates are calculated by format. Digital downloads and physical product share the same rates which are calculated by song
duration. These rates are set by theCopyright RoyaltyBoardPhysical Product (CDs, vinyl,tapes) and Digital Downloads (i.e. MP 3s): For
recordings under 5 minutes in length:$0.091persong. Interactive Streaming: $0.01 per stream, regardless of song duration, 'Mechanical
license pricing' (songclearance.com ) <https://songclearance.com/pricing> accessed 30th July 2015
13
Steve Knopper, 'Islands in the Stream: The 10 Biggest Holdouts in Digital Music (Rollingstone.com 2015)
<http://www.rollingstone.com/music/news/artists-refuse-stream-music-20150102> accessed 24 June 2015
14
'IFPI publishes Digital Music Report 2015' (ifpi.org14thApril 2015)<http://www.ifpi.org/news/Global-digital-music-revenues-match-
physical-format-sales-for-first-time> accessed 30th July 2015

DISSERTATION
9
source15. The IFPI 2014 report shows an industry in continuing transition, with consumers
embracing the music access models of streaming and subscription.16 Another steep increase
in subscription revenues (+39.0%) offset declining download sales (-8.0%) to drive overall
digital revenues, while the number of paying users of subscription services rose 46.4 per cent
to an estimated 41 million.17 Subscription services are now at the heart of the music
industry’s portfolio of businesses, representing 23 per cent of the digital market and
generating US$1.6 billion in trade revenues.18 The industry sees substantial further growth
potential in the subscription sector, with new services advancing in 2015 led by three major
global players: YouTube’s Music Key, Jay Z’s TIDAL and Apple’s expected subscription
service.19
This surge in popularity is believed that the digital music market represents the recording
industry’s next sustainable business model along with diversification into live events and
merchandise20.The Internet's influence on the music industry is significant because it has the
potential to change an industry where distribution of music was solely controlled by a few
record labels a couple of years ago.
4. Why streaming is the new business model for distribution of music
Listening habits have changed over the years. With an internet connection you have at your
disposal a digital jukebox with an infinite playlist of songs. In 2014, according to the RIAA,
single tracks made up 95 percent of digital music revenue. Psy’s ‘Gangnam Style’ has had
over a billion views on YouTube.21 “Gangnam Style” had generated $8 million from
YouTube, where it had been watched 1.2 billion times, yielding a royalty of about 0.6 cent a
viewing”.22
15
Adam Vukovic, '“PleaseDon’t Stopthe Music”: TheNeedfor Fairness in Digital Copyright' [2014] Hastings Law Journal (The “M-
bone,” as it was called, refers to the “multicast backbone, which functions as a network based on the Internet’s framework.”)
16
'IFPI publishes Digital Music Report 2015' (ifpi.org14thApril 2015)<http://www.ifpi.org/news/Global-digital-music-revenues-match-
physical-format-sales-for-first-time> accessed 30th July 2015
17
ibid
18
ibid
19
ibid
20
Theodore Giletti,, 'Whypayif it’s free? Streaming, downloading, and digital music consumption in the “iTunes era”' [August 2011]
Dissertation submitted to the Department of Media and Communications, London School of Economics and Political Science
21
AnthonyWingKosner, 'PSY's Gangnam Style Tops Bieber's Baby ToBecome Most Viewed YouTube Video Ever' (Forbes.com 24th
November 2012) <http://www.forbes.com/sites/anthonykosner/2012/11/24/psys-gangam-style-tops-biebers-baby-to-become-most-viewed-
youtube-video-ever/> accessed 25th July 2015
22
B. Sisario, 'Role of digital music underpins senate hearings on Universal-EMIDeal. Media decoderroleof digital music underpins senate
hearings on UniversalEMIdeal comments' (nytimes.com21st June 2012) <http://mediadecoder.blogs.nytimes.com/2012/06/21 /role-of-
digital-music-underpins-senate-hearings-on-universal-emi-deal/> accessed 25th July 2015

DISSERTATION
10
Streaming services took over as the leading revenue growth engine for the music industry in
2012, generating an extra $311 million - $8 million more than downloads at $303 million.23
Streaming music is clearly here to stay and it’s perfectly legal. Why steal music when you
can easily stream it at no risk of breaking the law?
“I believe that Spotify is the company that will make it succeed.”24 said Mr. Parker, who is
also a former president of Facebook. “It’s the right model if you want to build the pot of
money back up to where it was in the late ’90s, when the industry was at its peak. This is the
only model that’s going to get you there” 25
Lyor Cohen, CEO of Warner Music said in a Billboard.com interview, "We should be fully
embracing and engaging in what these new companies are doing. In Sweden the people have
been living in a growing music economy because of Spotify".26 For the first time in 14 years,
the music industry saw an increase in its global revenues in 2013.27
Record companies have adapted their business to a model increasingly based on access to
music, and not only ownership of music. This is reflected in the growing share of
subscription and streaming revenues as a percentage of digital revenues globally. The
industry now derives 32 percent of its digital revenues from subscription and ad-supported
streaming services, up from 27 percent in 2013.28 Global brands, such as Deezer and Spotify,
continued to reap the benefits of geographical expansion and there were some notable new
entrants into the streaming market: YouTube launched its subscription service Music Key in
late 2014 and Apple made its US$3billion acquisition of Beats in preparation for its own
streaming service roll out.29 The subscription model is leading to more payment for music by
consumers, many of whom appear to be shifting from pirate services to a licensed music
environment that pays artists and rights holders. 30
23
EdBarton, ' Strategy Analytics: Press Releases.' (Strategyanalytics.com2012)
<https://www.strategyanalytics.com/default.aspx?mod=pressreleaseviewer> accessed25thJuly 2015
24
Ben Sisario, 'As Music Streaming Grows, Royalties Slow to a Trickle' (nytimes.com Jan. 28, 2013)
<http://www.nytimes.com/2013/01/29/business/media/streaming-shakes-up-music-industrys-model-for-royalties.html?_r=0> accessed 30th
July 2015
25
ibid
26
William Gruger , 'Lyor Cohen onMusic's Future: 'I Hate WhenA&R Guys Tell Me RockIs Dead'. Billboard. Retrievedfrommusics-
future-i-hate-when-ar-guys-tell-me-rock-is-dead' (billboard.com19th June 2012)
<https://www.billboard.com/biz/articles/news/1093148/lyor-cohen-on-musics-future-i-hate-when-ar-guys-tell-me-rock-is-dead> accessed
25th July 2015
27
A Young, 'Music Industry Revenues Increase for the First Time in 13 Years' (ConsequenceofSound .com 26th February 2013)
<http://consequenceofsound.net/2013/02/music-industry-revenues-increase-for-the-first-time-in-13-years/> accessed 25th July 2015
28
'Digital music in figures' (ifpi.org 2014) <http://www.ifpi.org/facts-and-stats.php> accessed 25th July 2015
29
ibid
30
ibid

DISSERTATION
11
5. The problem faced by current business models
What do YouTube, Pandora and Spotify have in common? Yes, they are all streaming
services, but what links them together is that they have never earned an annual profit in all
the years they have been in business.31
According to a report published by Generator Research, the current business model for
streaming music is “inherently unprofitable.”32 Andrew Sheehy, the main author of the
report, concluded: “Our analysis is that no current music subscription service—including
marquee brands like Pandora, Spotify, and Rhapsody—can ever be profitable, even if they
execute perfectly.”33 Another report from Generator Research concludes that streaming
services as currently structured have no hope of achieving profitability.34 Generator largely
blames major recording labels for that bleak future: instead of fostering long-term growth,
labels are squeezing roughly 70% of royalties from streaming services, not to mention
massive upfront millions and generous ownership shares.35 That unsustainable structure
could spell the near-term collapse and consolidation of an overcrowded streaming sector,
according to the report.36
Google purchased YouTube in 2006 for $1.6 billion dollars.37 Despite having one of the
world’s most cash rich businesses as their owner, and despite $4 billion in revenue, YouTube
in the nine years since its purchase has never turned a profit. 38And then there’s Pandora. In
2011, it lost $9 million. In 2012, it lost $36 million, and in 2013, it lost $41 million.39Not to
be outdone by its main competitor, Spotify is going back to its investors and asking for
another $400 million in funding.40 This is the seventh time it has had to ask investors for
31
Stephen Carlisle, 'MoreMoney, No Profit: Is the “Free ForAll” Ethos of the Internet KillingStreaming?' (copyright.nova.edu April 16,
2015) <http://copyright.nova.edu/free-streaming/> accessed 25th July 2015
32
Joshua Brustein, 'Spotify Hits 10 Million Paid Users. Now Can It Make Money?' (bloomberg.com May 21, 2014)
<http://www.bloomberg.com/bw/articles/2014-05-21/why-spotify-and-the-streaming-music-industry-cant-make-money#p1> accessed 30th
July 2015
33
ibid
34
Paul Resnikoff, 'Streaming Services Will Never Become Profitable, Study Finds' (digitalmusicnews.com February 18, 2014 )
<http://www.digitalmusicnews.com/permalink/2014/02/18/profitless> accessed 30th July 2015
35
ibid
36
ibid
37
Rolfe Winkler, 'YouTube: 1 Billion Viewers, No Profit' (wallstreetjournal.com 25th Feb 2015) <http://www.wsj.com/articles/viewers-
dont-add-up-to-profit-for-youtube-1424897967> accessed 25th July 2015
38
ibid
39
Daniel Kline, 'Will Pandora and Spotify Ever Make Money?' (fool.com May 24, 2014 )
<http://www.fool.com/investing/general/2014/05/24/will-pandora-and-spotify-ever-make-money.aspx> accessed 25th July 2015
40
Douglas Macmillan andTelis Demos, 'Spotify Nears Deal toRaise $400 Millionat $8.4BillionValuation' (wallstreetjournal.com April
10, 2015) <http://www.wsj.com/articles/spotify-nears-deal-to-raise-400-million-at-8-4-billion-valuation-1428700668?tesla=y> accessed
25th July 2015

DISSERTATION
12
more money. 41 In 2010, Spotify lost $38 million. In 2011, it lost $59 million. In 2012, it lost
$78 million.42
Spotify and Pandora license music differently, but both end up paying a majority of their
revenue to music companies.43 Pandora does not negotiate with record labels to use their
songs. Instead, it operates under the compulsory licensing provision of federal copyright law,
which allows it to use any song with some restrictions and sets royalty rates by federal
statute.44 Rates are set by three judges on the federal Copyright Royalty Board, but they
apply a different standard to Internet radio services like Pandora than they do to satellite and
cable radio outlets like Sirius XM and Music Choice.45
For its revenue, Pandora, which has free and paid tiers, relies almost entirely on advertising.
Yet it has been unable to sell enough advertising to offset its royalty costs. Sirius, for
example, pays 8 percent of its revenue to record companies and artists. 46Pandora pays a
fraction of a cent each time a song is streamed, which last year amounted to about 54 percent
of its revenue, or $149 million.47
Spotify, on the other hand negotiates with record companies and music publishers directly, a
process that can be arduous and costly discussions with labels delayed its arrival in the
United States by nearly two years.48 That means that its royalty rates vary from label to label,
and are private: Spotify has never said how much it pays labels for its streams.49 Financial
documents for Spotify Ltd indicate that while the company has dramatically grown its
revenues, it nonetheless posted a substantial loss in each of the first two years since its
introduction to the United States.50 In 2010, the company reported a net operating loss of
approximately $37.5 Million, and in 2011, this loss grew 57% to $59 Million.51Spotify’s
chief executive, Daniel Ek, has said that the company had paid in its history about 70 percent
41
ibid
42
Daniel Kline, 'Will Pandora and Spotify Ever Make Money?' (fool.com May 24, 2014 )
<http://www.fool.com/investing/general/2014/05/24/will-pandora-and-spotify-ever-make-money.aspx> accessed 25th July 2015
43
Ben Sisario, 'PandoraandSpotify Rake In theMoneyandThenSendIt Off in Royalties' (mediadecoder.blogs.nytimes.comAUGUST 24,
2012) <http://mediadecoder.blogs.nytimes.com/2012/08/24/pandora-and-spotify-rake-in-the-money-and-then-send-it-off-in-royalties/?_r=0>
accessed 25th July 2015
44
ibid
45
Ben Sisario, 'Fight Builds Over Online Royalties' (nytimes.com NOV. 4, 2012)
<http://www.nytimes.com/2012/11/05/business/media/fight-growing-over-online-royalties.html> accessed 25th July 2015
46
ibid
47
ibid
48
49
ibid
50
Private Company Financial Report: Spotify, Ltd., Privco, 8 (2012) available at http://www.privco.com/privatecompany/
spotify-ltd (providing balance sheet, financial information, funding history, prior litigation and other
business related information for Spotify Ltd.).
51
ibid

DISSERTATION
13
of its income “back to the industry.” 52But a closer look at its recent financial statements
shows that the ratio may be even higher. Last year its “cost of sales,” which includes
licensing fees and distribution expenses, was $229 million, or 97 percent of revenue.53
In short we can summarize the problem as mainly due to the disparity in licensing schemes
available to a number of streaming services. The sheer burden of licensing costs are draining
the streaming companies of their life blood while others such as satellite radio companies are
allowed to pay less even though they offer more or less the same services of broadcasting
music. A new compulsory license scheme is needed due to the rate setting paradox discussed
above, as well as the fact that streaming music platforms continue to experience substantial
losses, there is a need for a solution that brings both the content owners and content
distributors to engage in good faith negotiations. The future of this market turns on the
licensing scheme that providers and record labels are able to agree upon. U.S. law provides
for compulsory licensing fees, determined in accordance with various factors54
6. SCOPE OF PAPER
The objective of this dissertation is to look into the current licensing requirements and legal
issues that the two different Internet radio broadcasters are facing through streaming in the
United States of America. I shall also review certain business models as to how they have
functioned in this era of digital piracy. I shall also explore the possibility of creating a
standardized licensing and royalty computation process for digital content with an emphasis
on music streaming services by introducing compulsory or blanket music licensing not just
for "non interactive" transmission online, but extended to fully interactive music subscription
services. Intellectual Property laws aim at striking the balance between providing incentives
to create and innovate while at the same time promoting the diffusion of the results of
creation and innovation.
Chapter II of this dissertation explains the fundamentals of copyright law. The basics of
music copyright are explained with reference to the right of digital transmission and the
relation of the law that attempts to control online use such as relevant cases and acts.
52
53
ibid
54
James H. Richardson, 'The Spotify Paradox: How the Creation of a Compulsory License Scheme for Streaming On-Demand Music

DISSERTATION
14
Chapter III is a critical appraisal of current streaming services such as Spotify and Pandora
and their position in the current legal context.
Chapter IV are the solutions I shall propose regarding a uniform royalty rate and creation of a
new compulsory licensing scheme.
Chapter V is my conclusion to this dissertation focusing on the need of a new licensing
scheme to protect streaming of music as the new frontier for distributing music.

DISSERTATION
15
CHAPTER II- THE LEGAL CONTEXT OF STREAMING
The U.S. Copyright Act of 1976 enunciates the exclusive rights granted to copyright owners.
With respect to music, the Act draws a distinction between “musical works” and “sound
recordings.”55 These two rights receive differential treatment in law. Sections 114 and 115 of
the Act establish compulsory licensing exceptions to the exclusive rights granted to copyright
holders. These compulsory licenses have evolved and adapted to changes in technology; first
with the Digital Performance Right in Sound Recording Act of 1995, and then with the
Digital Millennium Copyright Act of 1998.In this chapter I shall explain the basics of
copyright in music. I shall explore the United State’s Copyright Act’s application in the
digital age as well as providing an overview of the statutory framework of music licensing
and copyright royalties in the digital age with reference to acts such as The Digital
Performance Right in Sound Recordings Act (DPRA) and The Digital Millennium Copyright
Act (DMCA).
1. The basics of copyright
The following sub sections shall explain what a copyright is and what rights are granted to
owners of such copyrighted works.
1.1 What is a Copyright?
Copyright is a form of legal protection given to many kinds of created works such as musical
compositions or songs, lyrics, records (CDs, LPs, cassettes, etc.) poems, books, films, TV
shows, computer software and even commercials. For a work to be protected under copyright,
it must be “original” which means that it was not copied from any other source; “fixed in a
tangible medium of expression” which means that it exists in some reasonably permanent or
stable form so that a person can perceive it and reproduce it; and have a minimum degree of
creativity.56
55
Copyright Act of 1976, 17 U.S.C. §§102(a)(2)
56
Bitlaw.com, 'ObtainingCopyright Protection (Bitlaw)' (2015) <http://www.bitlaw.com/copyright/obtaining.html> accessed14July 2015.

DISSERTATION
16
1.2 Rights granted under U.S copyright law
The U.S. Copyright Act of 1976 grants certain exclusive rights to the owner of a
copyright in a work. These exclusive rights are different from the rights given to a
person who merely owns a copy of the work. Some of these rights are:
Right to reproduce the work: The reproduction right is perhaps the most important right
granted by the Copyright Act. Under this right, no one other than the copyright owner may
make any reproductions or copies of the work. It is not necessary that the entire original work
be copied for an infringement of the reproduction right to occur. All that is necessary is that
the copying be "substantial and material." The rights to make copies of the work, such as the
right to manufacture compact discs containing copyrighted sound recordings; Distribute
Copies of the Work: The distribution right grants to the copyright holder the exclusive right
to make a work available to the public by sale, rental, lease, or lending. This right allows the
copyright holder to prevent the distribution of unauthorized copies of a work. In addition, the
right allows the copyright holder to control the first distribution of a particular authorized
copy; Perform Works Publicly: Under the public performance right, a copyright holder is
allowed to control when the work is performed "publicly." A performance is considered
"public" when the work is performed in a "place open to the public or at a place where a
substantial number of persons outside of a normal circle of a family and its social
acquaintances are gathered." Copyright owners of songs (but not owners of sound recording
copyrights) control the rights to have their song performed publicly. Performance of a song
generally means playing it in a nightclub or live venue, on the radio, on television, in
commercial establishments, elevators or anywhere else where music is publicly heard; Make
Derivative Works: According to the Copyright Act, a derivative work is “a work based upon
one or more pre existing works, such as a translation, musical arrangement, dramatization,
fictionalization, motion picture version, sound recording, art reproduction, abridgment,
condensation, or any other form in which a work may be recast, transformed, or adapted.”57
A derivative work is a work that is based on another work such as a remix of a previous song
or a parody lyric set to a well-known song (a classic example being Weird Al Yankovic’s
song “Eat It” which combines Michael Jackson’s copyrighted original work “Beat It” with a
parody lyric “Eat It”); Display the Work: The definition of when a work is displayed
"publicly" is the same as that described above in connection with the right of public
57
17 U.S. Code § 106

DISSERTATION
17
performance. Although this right is rarely applicable to music, one example would be
displaying the lyrics and musical notation to a song on a karaoke machine; Perform
Copyrighted Sound Recordings by Means of a Digital Audio Transmission: The United
States Digital Performance Right Act had created a sixth right under 17 U.S.C. § 106,
providing the copyright owner of a sound recording with protection from unauthorized
performance over a digital transmission.58 This is a right recently added by Congress that
gives copyright owners in sound recordings the rights to perform a work publicly by means
of a digital audio transmission. Examples of digital audio transmissions include the
performance of a song on Internet or satellite radio stations (such as XM or Sirius);
1.3 Music Copyrights
The U.S Copyright Act draws a distinction between “musical works” and “sound
recordings.”59 There are two types of federal music copyrights: a composition copyright
whish are both the music and the lyrics to a song, or each of them separately, can constitute a
copyrightable musical work which belongs to the songwriter (who might assign the copyright
to a music publisher), and a sound recording copyright which is simply a work comprised of
recorded sounds for example, the recorded performance of a song that appears on a compact
disc is a sound recording which belongs to the performer who recorded the song (this
copyright is later transferred to the record label). Different rights require different licenses for
selling music commercially. To sell music downloads a license is required to compensate the
artist for exploiting the artist’s right of reproduction and distribution whereas for streaming
music a license is required for compensating the artist’s right of public performance.
2. Licensing Music under the Copyright Act in the Digital Age
Webcasters pay for the licenses to use music commercially. The Copyright Act created the
Copyright Royalty Board (“CRB”) to set the royalty rates for these licenses.60 The CRB is
comprised of three Copyright Royalty Judges, appointed by the Librarian of Congress.63
Copyright royalty rates are set once every five years for the next five-year period.61
58
17 U.S.C. § 106(6).
59
Copyright Act of 1976, 17 U.S.C. §102(a)
60
17 U.S.C. § 801
61
ibid

DISSERTATION
18
The largest music publisher is The Harry Fox Agency (“HFA”).62 HFA licenses the musical
works for reproduction and distribution, collects licensing fees and royalties, and distributes
the proceeds to the appropriate parties.63 To compensate the composer of the underlying
musical work for the right to reproduce or distribute the work, potential licensees contact
HFA, or the publisher holding the copyright.64
Additionally, to compensate copyright holders for the right to publicly perform the work,
potential licensees contact a performance rights organization (“PRO”). Three major PROs
manage licensing and fee collection for over 90% of commercially available music: ASCAP
(American Society Of Songwriters, Composers And Publishers), BMI (Broadcast Music, Inc)
and SESAC (Society Of European Stage Authors And Composers).
Section 114 of the Copyright Act governs licensing sound recordings for performance.65 To
be eligible for the Section 114 statutory license, the Copyright Act requires that the service be
“non-interactive”; interactive services are not able to obtain the compulsory license.66 Thus,
Spotify and other services classified as interactive under the statutory definition must
negotiate directly with the sound recording copyright holders in order to license public
performances of the copyrighted work via digital transmission.67 Terrestrial radio stations
have long been exempted from paying the sound recording copyright holder under this
section of the statute.68 As a result of the exclusive public performance right by digital audio
transmission granted to sound recording copyright holders, all internet broadcasts require a
digital performance license and pay royalties to the copyright holders of the sound recording
as well as the copyright holder to the underlying musical work.69
Section 115 of the Copyright Act regulates the issuance of licenses to perform musical works
and sound recordings.70 Each of the PROs manages the royalty collection for several major
labels, and they issue blanket licenses for their entire catalogues.71 The licenses are
62
The Harry Fox Agency, Inc., <https://www.harryfox.com/public/LicenseMusiclic.jsp> accessed 25th July 2015
63
ibid
64
ibid
65
17 U.S.C. § 114
66
17 U.S.C. § 114(j)(7)
67
PatrickKoncel, DidCopyright Kill the Radio Star?Why the RecordedMusic Industry andCopyright Act Should Welcome Webcasters
Into the Fold, 14J. Marshall Rev. Intell. Prop. L. 292 (2015).< http://repository.jmls.edu/cgi/viewcontent.cgi?article=1353&context=ripl>
68
ibid
69
ibid
70
17 U.S.C. § 115
71

DISSERTATION
19
compulsory, meaning that all correctly made requests for licenses must be granted. The
licensee is then able to perform the work publicly without infringing on the copyright of the
underlying musical work. Because terrestrial radio, internet radio, non-interactive and fully
interactive webcasting implicate the public performance right, all forms of broadcast pay
royalties to the PRO for the license to play the music.72
Statutory performance royalties for digital music are paid to the non profit organization
SoundExchange, which collects the royalties and disperses them back out to artists and record
companies.73
3. Interactive vs. Non interactive distinction
Interactive services under the act reflect transmissions of sound recordings selected directly
by or on behalf of the consumer rather than the limited and controlled genres of terrestrial and
satellite radio. Interactive services are not subject to a compulsory license; they require direct
negotiations with the copyright owners themselves or any representative organization on their
behalf.74 The Digital Performance Right in Sound Recordings Act (DPRA) created a
categorization criterion for the types of services that would and would not be eligible to
license works compulsorily. Each of these different types of service was accompanied by a
different licensing requirement in correspondence with their likelihood and tendency to
supplant traditional content distribution.75
3.1. Interactive Services
Interactive services receive little benefit from the Copyright Act due to the DPRA. After the
DPRA’s enactment, providers of interactive services were required to obtain authorization
from the owner of the sound recording in order to provide access to digital music. The DPRA
did not provide a compulsory licensing provision for these services. Given the substitutability
of on-demand music recordings, interactive service providers must contract directly with
72
ibid
73
Adam Vukovic, '“Please Don’t Stop the Music”: The Need for Fairness in Digital Copyright' [2014] Hastings Law Journal<
https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=http%3A%2F%2Fw
ww.hastingslawjournal.org%2Fwp-content%2Fuploads%2FVukovic
65.5.pdf&ei=t9yTVae3ENK7uASjv4KYDw&usg=AFQjCNHIfxW3c2xSfBv7dcx6AEAyRPj7OA&sig2=fgXhlEwkoxnEuoV4ItASDA&bv
m=bv.96952980,d.c2E> accessed 20 March 2015
74
75
James H. Richardson, 'The Spotify Paradox: How the Creation of a Compulsory License Scheme for Streaming On-Demand Music

DISSERTATION
20
record labels. “Interactive music” was defined by the DPRA as a service that “…enables a
member of the public to receive, on request, a transmission of a particular sound recording
chosen by … the recipient.”76 Spotify allows users to preselect the songs that will played to
them in advance. These services are classified as interactive and are therefore ineligible for
compulsory licenses.
3.2. Non-Interactive Subscription Services
Non-interactive subscription services must also pay a royalty to the owner of the sound
recording copyright (in contrast to terrestrial radio, which pays only the owner of the musical
work copyright). However, the DPRA allowed non-interactive subscription services access to
a compulsory license fee structure for the copyright of the sound recording. This royalty rate
was to be set by a Copyright Arbitration Royalty Panel of judges.77
3.3. Non-Interactive Non-Subscription Services
Lastly, digital transmissions by non-interactive non-subscription based services fell outside of
the scope of control of the owner of the sound performance copyright under the DPRA.78
Thus, just as with terrestrial radio, sound recording copyright owners were not compensated
for the use of their music by these types of services.
Interactive webcasters should be allowed to participate in the statutory licensing scheme.
interactive webcasting promotes music as much as traditional radio broadcasts do.79 The
copyright act does recognize the importance of regulating webcasters by including non-
interactive webcasters in the statutory licensing scheme, but this does not go far enough.80
76
DPRA § 3(j)(4)
77
DPRA § 5(d)
78
DPRA § 3(d)
79
News and Notes on RIAA Industry Shipment and Revenue Statistics, Recording Industry Association Of America,
<http://76.74.24.142/4A176523-8B2C-DA09-EA23-B811189D3A21.pdf> accessed 25th July 2015
80

DISSERTATION
21
4. The Arista case
The Arista case dealt with the issue of distinction between interactive and non interactive
music streaming services. Interactive and non interactive streaming services have to pay a
different licensing scheme depending on this distinction and hence the decision in this case
was of paramount importance in setting guidelines as to how a music streaming service
would be would be categorized.
4.1 Facts of the case
The Second Circuit Court of Appeals scrutinized the applicability of interactive and non
interactive website distinctions to internet radio in Arista Records, LLC v. Launch Media,
Inc.81 Arista Records and a collection of similarly situated record companies brought suit
against Launch Media, Inc. for its webcasting service LAUNCHcast.82 LAUNCHcast
allowed users to create stations that were customizable by genre, artist, or song.83 Arista
argued that the customizable service violated its exclusive right to the sound recordings
played because Launch had failed to pay an individual licensing fee for its service.84 Launch
rebutted that the service was non interactive, thus subject to the statutory fee set by the
Copyright Royalty Board ("CRB").85 The Second Circuit looked to the statutory definition of
"interactive" and "non interactive" to categorize the LAUNCHcast program and establish any
liability. According to 17 U.S.C. § 114(j) (7), an interactive service is a one that "enables a
member of the public to receive a transmission of a program specially created for the
recipient, or on request."86 Otherwise, if a digital audio transmission is not interactive, its
primary purpose is to "provide to the public such audio or other entertainment programming,"
subject to a compulsory or statutory licensing fee.87Thus, the court had to determine if a
webcasting service such as LAUNCHcast was interactive based on whether the user could
receive a transmission specially created for him or her.88 Assessing the format of the
LAUNCHcast song selection process, the court declared that the system was non interactive
according to the statute. Although users could input various factors to determine the type of
81
Arista Records LLC v. Launch Media, Inc., 578 F. 3d 148, 152 (2d Cir. 2009).
82
ibid
83
ibid
84
ibid
85
ibid
86
ibid
87
ibid
88
ibid

DISSERTATION
22
song that would play, they never had the ability to choose certain songs.89 Instead,
LAUNCHcast had algorithms in place that would select which songs to play from its finite
set, based on user ratings of similar songs.90 The user was not allowed to restart any song that
was playing, nor repeat any of the previously played songs in the playlist.91 LAUNCHcast
also limited the number of songs played from one artist in order to increase variety beyond
the user's initial preferences.92 Therefore, since LAUNCHcast users could not expect to hear
songs on demand, nor specially craft each song on the playlist, the court held that the system
did not meet the interactive definition.93 Since the Arista decision, several internet radio and
music subscription services have been developed and categorized as either interactive or non
interactive.
4.2 The Arista court’s analysis
The DMCA provided little guidance in helping to define what constituted a program
“specially created” for the listener.94 The opinion began by looking at dictionary definitions
of “specially” and “created,” but found the definitions were largely composed of mere
synonyms.95 Thus, the statutory language itself was of little help to the court.96 In its
discussion, the court began by examining the history of copyright protection in sound
recordings.97 The appellate panel noted owners of copyright in sound recordings do not have
the exclusive right to broadcast the recordings over the airwaves because of the relationship
which exists between the recording industry and broadcasters.98 Essentially, as the court
points out, over-the-air broadcasts are free advertising for the record companies.99 Thus, there
is a mutual benefit bestowed upon record companies and radio broadcasters.100 Listeners
learn about music for sale from record companies, while radio broadcasters profit from their
ability to broadcast these recordings.101There was no sense of unfairness which necessitated
89
ibid
90
ibid
91
ibid
92
ibid
93
ibid
94
ibid
95
ibid
96
ibid
97
ibid
98
ibid
99
ibid
100
ibid
101
ibid

DISSERTATION
23
giving record companies the right to collect licensing fees for analogue broadcasts of the
sound recordings in which they owned a copyright.102
5. Terrestrial vs. Internet radio distinction
Terrestrial or satellite radio pays a much different license for broadcasting music than internet
radio. The license paid by terrestrial radio companies is comparatively cheaper than the ones
paid by internet radio companies. The Digital Millennium Copyright Act ("DMCA"), 17
U.S.C. § 114 created a statutory basis for performance royalties to be paid for satellite and
internet radio broadcasts in addition to publishing royalties.103 A typical over-the-air radio
broadcast must pay the musician or composer to perform the underlying musical work, but
there is no royalty fee due to the sound recording copyright owner.104 Under section 114,
sound recording royalties are distributed as follows: fifty percent to the holder of the
copyright (usually the record label), forty-five percent to the featured artists, and the
remaining five percent for any non-featured artists (back up vocalists and musicians).105
Within the fee structure for compulsory licenses, the DMCA established two standards for
assessment of these royalty rates:
(i) the old 801 (b) standard which included four factors, leading to a standard designed to
achieve a “reasonable estimate of the marketplace derived benchmark” and
(ii) the new “willing buyer/willing seller” standard which is meant to mimic the price that a
free market would produce. The Copyright Royalty Board, a group of three judges appointed
by the Library of Congress, sets rates that a willing buyer and willing seller would agree to in
a regular market transaction. 106
102
ibid
103
Jasmine A. Braxton, 'Lost in Translation: The Obstacles ofStreamingDigital Media andthe Futureof Transnational Licensing' [2013-
2014] 36 Hastings Comm. & Ent. L.J.193
<https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=https%3A%2F%2Fl
itigation-
essentials.lexisnexis.com%2Fwebcd%2Fapp%3Faction%3DDocumentDisplay%26crawlid%3D1%26doctype%3Dcite%26docid%3D36%2
BHastings%2BComm.%2B%2526%2BEnt.%2BL.J.%2B193%26srctype%3Dsmi%26srcid%3D3B15%26key%3D821a35b4ac9ad9523959
0e589b2c1403&ei=ft2TVd34EMLhuQTp24BQ&usg=AFQjCNH0fFJPJOeGff9p4KM_RsNubo8PKg&sig2=a7O92l13z6hCCjLR5CZX6w
&bvm=bv.96952980,d.c2E> accessed 25th July 2015
104
PatrickKoncel, DidCopyright Kill the Radio Star?Why the RecordedMusic Industry andCopyright Act ShouldWelcome Webcasters
105
17 U.S.C. § 114(g)(2).
106
Glenn Peoples, 'HowtheUpcomingChange in Digital RoyaltyRates Will Alter HowWe All Listen' (billboard.com October 31, 2014)
<http://www.billboard.com/articles/business/6304253/war-over-digital-royalty-rates-2015> accessed 25th July 2015

DISSERTATION
24
The former more broadcaster-friendly standard was applied to satellite radio broadcasters and
any “pre-existing subscription services whereas, the latter standard is applied to subscription
services created after the passage of the DMCA and certain “eligible non-subscription
transmissions.”107The new “willing buyer/willing seller” standard creates higher royalty rates
to be paid out by content distributors. For example, Pandora is eligible for compulsory
licensing under the willing buyer/willing seller standard. Sirius XM, however is under the old
801(b) standard.108 The implications of these differing rates on the two companies’
profitability are quite substantial.
A non interactive webcaster like Pandora pays two types of performance royalties: statutory
royalties for the sound recording and performance royalties for the underlying
composition.109 Statutory performance royalties for digital music are paid to the non profit
organization SoundExchange, which collects the royalties and disperses them back out to
artists and record companies.110 Unlike satellite radio providers like Sirius, which pay a
percentage of its revenue as performance royalties, Pandora pays a per-stream fee every time
a song is played.111 This “willing buyer, willing seller" model is still based on the statutory
rate, but does not account for the internal performance of the company." As a result, Pandora
paid out royalties of sixty percent, fifty percent, and fifty four percent of its revenue in fiscal
years 2010, 2011, and 2012 respectively.112 Pandora and a handful of other internet radio
providers are looking to alter the "willing buyer, willing seller" model with the Internet Radio
Fairness Act which was introduced in the House of Representatives in September 2012, the
bill would shift non interactive webcast services to the satellite radio model.113 While AM,
FM, cable and satellite radio, and Internet radio services like Pandora can all opt for
compulsory licenses, they each pay different royalty rates. The rates are set by a panel of
107
James H. Richardson, 'The SpotifyParadox: How the Creation of a Compulsory License Scheme for Streaming On-Demand Music
108
ibid
109
Joey Flores, The Downfall of Pandora, Consumer Choice and Emerging Music, Hypebot (Nov. 7,
2012)<http://www.hypebot.com/hypebot/2012/1 1/the-downfall-of-pandoraconsumer- choice-and-emerging-music.html>. accessed 25th
July 2015
110
ibid
111
Geoff Morris, Pandora Versus Musicians - Internet Radio Fairness Act, AsuSports AndEntertainment LawJournal Blog(Oct. 15, 2012),
<http://www.sportsandentertainmentlawblog.com/2012/10/pandora-musicians-internet-radio -fairness-act/> accessed 25th July 2015
112
ibid
113
2014] 36Hastings Comm. & Ent. L.J.193
<https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0CB4QFjAA&url=https%3A%2F%2Fl
itigationessentials.lexisnexis.com%2Fwebcd%2Fapp%3Faction%3DDocumentDisplay%26crawlid%3D1%26doctype%3Dcite%26docid%3
D36%2BHastings%2BComm.%2B%2526%2BEnt.%2BL.J.%2B193%26srctype%3Dsmi%26srcid%3D3B15%26key%3D821a35b4ac9ad9
5239590e589b2c1403&ei=ft2TVd34EMLhuQTp24BQ&usg=AFQjCNH0fFJPJOeGff9p4KM_RsNubo8PKg&sig2=a7O92l13z6hCCjLR5C
ZX6w&bvm=bv.96952980,d.c2E> accessed25th July 2015

DISSERTATION
25
government lawyers called the Copyright Royalty Board, and they have the effect of
favouring some business models over others. Internet radio services pay over 60 percent of
their revenue in royalties, while Sirius XM, the only satellite radio company, pays only 8
percent.114 Instead of paying half of its revenue to SoundExchange, Pandora could actually
adopt Sirius's eight percent rate instead. The first change to be made is the elimination of
terrestrial radio’s exemption from paying royalties. Broadcast radio is a $20 billion industry
who without justification should be forced to pay royalties the same way that other services
who are publicly performing sound recordings do.115 To do this, § 114(d)(1) would have to be
stricken from the Copyright Act, and the word “digital” stricken from § 106(6).116
6. Conclusion
Copyright protection for creative works aims to stimulate artistic creativity for the general
public good. Copyright policy demands that recent technological advances in music
streaming technology be construed in light of promoting this essential purpose.117 Eliminating
exemptions and exceptions and establishing predictable rates across technological platforms
will encourage innovation, which in turn will better serve copyright’s purpose of making
creative works widely available to the public.118 Introducing a statutory framework whereby
interactive webcasters can predict their expenses will promote innovation within this sphere
of technological development, the result of which will be further dissemination of musical
works.
114
Jerry Brito,'A Free-Market Fixfor Music Copyrights' (reason.comMarch 8,2013) <http://reason.com/archives/2013/03/08/compulsory-
licensing-title-tk> accessed 25th July 2015
115
PatrickKoncel, DidCopyright Kill the Radio Star?Why the RecordedMusic Industry andCopyright Act ShouldWelcome Webcasters
116
ibid
117
ibid
118
Kimberly L. Craft, The WebcastingMusic Revolutionis Ready to Begin, as Soon as we Figure Out the Copyright Law: TheStoryof the
Music Industry at War with Itself, 24 Hastings Comm. & Ent. L.J. 1, 5–6 (2001)

DISSERTATION
26
CHAPTER III- AN APPRAISAL OF CURRENT STREAMING MODELS
The ways of listening to music has changed rapidly since the beginning of the Digital Age.
Music and software industries have experimented with various models that have enabled the
public to get access to songs more efficiently through their own computers, and mobile
devices. Some of these experiments have failed and have been declared to infringe exclusive
distribution and performance rights within the meaning of the Copyright Act such as the
illegal peer to peer file sharing software Napster. However, innovation has not ceased, and the
future of listening to music has started to take its shape. Some of the big players in the current
market are internet radio broadcasters, such as Spotify and Pandora, which fund their services
by selling advertisements and offering paid subscriptions, thus enabling their users to mass
consume music at a lower cost than pay-per-download services, such as the iTunes Store.119
Pandora and Spotify acquire specific licenses and pay royalties for the music they include
according to the different services they provide. While Pandora is a so-called “non
interactive” service and has to deal with fewer licenses, Spotify’s on-demand streaming
qualities make it an “interactive” service, which means it also has to take into consideration
other licensing rights in addition to the mere performance of a song, such as distribution and
reproduction rights.120
However, acquiring these different types of licenses has its own complications. Neither of the
companies is doing well financially and Pandora, especially, is shifting the blame to the
asymmetrical licensing structure that allegedly puts non-interactive Internet radio
broadcasters at a much worse position compared to traditional and satellite radio in terms of
royalty rates.121 Spotify on the other hand has not been able to benefit from the statutory
licensing scheme for sound recordings and has had to face the costs of negotiating with
thousands of individual record labels for sound recording licenses.
119
Pandora & Spotify: Legal Issues andLicensingRequirements forInteractive AndNon-Interactive Internet Radio Broadcasters, 'Sofia
Ritala' [2013] Idea — The Intellectual Property Law Review Volume 54 ,
120
ibid
121
Ben Sisario, 'Fight Builds Over Online Royalties' (nytimes.com NOV. 4, 2012)
<http://www.nytimes.com/2012/11/05/business/media/fight-growing-over-online-royalties.html> accessed 25th July 2015

DISSERTATION
27
1. Spotify – an introduction
In 2008, the Swedish streaming music service Spotify was launched in Europe as a "good
quality, legal" alternative for users craving music online. By 2009, Spotify had rapidly made
its way through most of Europe-including the UK, Finland, Sweden, Norway, France, Italy,
and Spain It quickly gained popularity, and in 2010, the service expanded to the United
States. However the company met the most difficulty when trying to enter the United States
market. By 2010 Spotify had attempted to launch in the United States twice. The company
struggled to secure licensing rights from the four (now three) major record labels: Universal
Music Group, Sony Music Entertainment, Warner Music Group, and EMI Music.122 The
labels were unsure about Spotify's ability to adequately pay for music; Apple also quipped
that the free service would undercut its download sales.123 Therefore, the labels initially
required prohibitively high licensing fees upfront to mitigate the risk of losing downloading
users.124 Spotify has now amassed over 24 million active users (of whom 6 million are
paying),125 a global library of 20 million songs126 (compared to the 26 million songs licensed
globally by iTunes),127 and a valuation of $3 billion.128 Due to the variety of the services it
provides, Spotify pays royalties to several different entities, including PROs,
SoundExchange, the Harry Fox Agency (HFA), individual labels, and other copyright holders
from whom it has to secure certain licenses in order to stream music on demand.129 Although
royalties are still only pennies on the dollar, due to the large volume of streaming traffic
Spotify is able to bring in $71 million from its subscribers and $28 million in advertising to
pay out to artists.130 The Spotify model is now heralded as the leading digital music service,
with the average band's revenue increasing steadily over the past year and a half.131
However, this model is complicated due to variable licensing costs. Spotify, much like other
streaming content providers is constantly engaged in licensing negotiations with content
122
Greg Sandoval, SpotifyCrashes intoApple on the Way to US., Cnet News (Oct. 7, 2010), <http://news.cnet.com/8301-31001_3-
20018971-261.html.> accessed 25th July 2015
123
ibid
124
ibid
125
Spotify Fast Facts, Spotify.Com, (Dec. 6, 2012),< https://spotify.box.com/s/73srj5dsycxhmraspbb1; > accessed 25th July 2015
126
ibid
127
Press Release, Apple, Inc., Apple Unveils NewiTunes (Sept. 12, 2012)<http://www.apple.com/pr/library/2012/09/12Apple-Unveils-
New-iTunes.html> accessed 25th July 2015
128
Tim Bradshaw & Andrew Edgecliffe-Johnson, Spotify in Top League with $3bn Valuation, Fin.
Times<,http://www.ft.com/intl/cms/s/0/e11c1344-2e98-11e2-9b98 00144feabdc0.html#axzz2K4NCQBny> accessed 25th July 2015
129
Ritala' [2013] Idea — The Intellectual Property Law Review Volume 54
130
Ben Sisario, Spotify Loss Widens DespiteHigher Revenue, N.Y. Times (Oct.10,2011)<, http://mediadecoder.blogs.nytimes.com/201
1/10/10/spotify-loss-widens-despite-higher-revenue/> accessed 25th July 2015
131
Glenn Peoples, Business Matters: A Brief History of Spotify Royalties, Billboard Magazine, Aug. 30, 2012,
<www.billboard.com/biz/articles/news/1083980/ business-matters-abrief- history-of-spotify-royalties.> accessed 25th July 2015

DISSERTATION
28
owners of numerous record labels situated in multiple countries. Unlike services like
Pandora, Spotify is an interactive service because it provides on-demand streaming of any
song and at any time. As a result of its interactive nature, Spotify is unable to use the
compulsory music licenses provided to services like Pandora, and instead is forced to
negotiate directly with record labels to gain access to their master sound recordings.132
Spotify has successfully negotiated licenses with every major record label, in part by selling
these labels stock in its company.133 by removing the interactive/non-interactive distinction
for streaming services in the Copyright Act it will increase payouts to performers. The
compulsory license that applies to non-interactive services provides that 45% of the per-
stream revenue should go to the performer. In Spotify’s licenses, however, artists are paid
based on the rate determined in their contracts with the record labels, which almost always
have the superior bargaining power.134 In contrast, non-interactive services pay songwriters
via performing rights organizations.
1.1 How Spotify works
Spotify users can choose from three types of service when subscribing. The lowest type is a
free version (the freemium model) which gives users access to all songs in the Spotify
catalogue through a highly desktop application. After downloading the application, users are
able to pull music into the application from their iTunes library and other libraries on their
computer.135 A user simply types the name of an artist, track, or album into a search box to
search for music. Audio advertisements appear every few tracks, and banner advertisements
are displayed.136
Users who wish to forego the advertisements and avoid any streaming limitations may choose
an unlimited or a premium subscription. The unlimited subscription is five dollars per month,
and, as the name suggests, provides an unlimited amount of advertisement-free streaming.137
The premium subscription is ten dollars per month, and offers the additional features of
132
DavidVon Wiegandt, Spotify: IncentivizingAlbum CreationThrough "TheFacebook"ofMusic, 2 Berkeley J. Ent.& Sports L. (2013)<:
http://scholarship.law.berkeley.edu/bjesl/vol2/iss1/9> accessed 25th July 2015
133
Seth Fiegerman Spotify Launches in U.S.: Should You Care?, The Street, July 15, 2011,
<http://www.thestreet.com/story/11186953/1/spotify-launches-in-us-should-you-care.html.> accessed 25th July 2015
134
John Eric Seay, LegislativeStrategies forEnablingthe Success of Online Music Purveyors, 17 UCLA Ent. L. Rev. 163, 175 (2010).
135
Jason Kincaid, Live Blog: TheSpotifySpecial Event, Tech Crunch, Nov.30,2011,< http://techcrunch.com/2011/11/30/live-blog-the-
spotify-special-event/> accessed 25th July 2015
136
Charlie Sorrel, Spotify Launches in the U.S at Last, Wired, July 14, 2011,
<http://www.wired.com/epicenter/2011/07/spotify-launches-in-the-u-s-at-last/.> accessed 25th July 2015
137
ibid

DISSERTATION
29
streaming music from your mobile device and playing tracks without an Internet
connection.138 As a result, premium users are able to listen to music on their mobile devices
without worrying about having a weak network signal. With the premium subscription, a
limit of 3,333 songs can be stored offline, and those tracks may only be played on up to three
devices.139
One of the features of Spotify is its integration with social networking, and the ability for
users to “share” music via social networks. User’s link their Spotify account to Facebook
which connects them to their friends to see what they are playing or adding to their playlists.
Users can share playlists, recommend individual tracks, and even comment on a particular
song or playlist. The comment is then immediately posted on Facebook which allows friends
to then listen to the song or playlist commented upon.
A final point to reemphasize is that Spotify involves streaming, not downloading. With
downloading, a file containing a copy of the original song is transmitted over the Internet
from a server computer, which hosts the original file, to the user’s computer.140 That file is
stored on the user’s hard drive, which allows the user to make infringing copies of the file
and to play them on various portable devices.141 However, streaming does not result in having
a permanent copy that signifies ownership. Instead, streaming allows the real-time playing of
a song by establishing a constant link between the server and client computers until the song
is finished playing.142 If users wish to listen to the song again, they must stream the song
again, because they do not have a copy of the song on their hard drive, except, as explained
above, for the limited exception available on Spotify’s premium subscription.143 Hence this
mechanism prevents users from distributing illegal copies.
1.2 The Legal Environment surrounding Spotify
The music-licensing environment is very complex. When a service like Spotify wishes to
provide music multiple licenses are required. Separate copyright licenses for both for the
138
ibid
139
Casey Johnston, Eager to Share, but Doesn’t Quite Know How: Hands on With Spotify, Ars Technica, July 19, 2011,
<http://arstechnica.com/gadgets/reviews/2011/07/nothingwrong- with-free-hands-on-with-spotify.ars.> accessed 25th July 2015
140
UnitedStates v. Am. Soc’yof Composers,Authors & Publishers, 485F. Supp. 2d438, 441 (S.D.N.Y. 2007) aff’dsubnom. UnitedStates
v. Am. Soc. of Composers, Authors, Publishers, 627 F.3d 64 (2d Cir. 2010)
141
ibid
142
ibid
143
ibid

DISSERTATION
30
underlying musical work and the sound recording containing a performance of that musical
work should be obtained. Generally, a songwriter and the songwriter’s publisher own the
copyright in the underlying musical composition while the record label owns the copyright in
the sound recording. For its interactive streaming services, Spotify has to consider not only
performance rights, but also copyright holders’ exclusive distribution and reproduction rights,
as provided for in §§ 106(1) and (3) of the Copyright Act, respectively.144 Because streaming
is considered a performance, and because 17 U.S.C. § 106(4) affords the owner of a
copyright in a musical work the exclusive right to perform the copyrighted work publicly,
Spotify must acquire multiple licenses in order to satisfy these legal requirements in order to
function in accordance with the U.S Copyright Act.145
1.3 Licenses with Record Labels
Licenses with record labels are required because 17 U.S.C. § 106(6) grants the copyright
owner of the sound recording a performance right by means of a digital transmission, and the
record labels are the copyright owners for the vast majority of sound recordings.146 Since the
license for the digital performance is not compulsory, the services need permission from the
owner of the copyright in the sound recording which is stated in the Copyright Act. In
practice, these negotiations are likely to occur with the negotiations for performance licenses,
and there is likely to be a single contract for the payment of royalties for performance,
copying, and distribution. Since the details of these licensing deals are kept secret, it is not
known what type of royalties Spotify pays to copyright holders of sound recordings.147 The
royalty rates are likely to vary from one record label to another.
1.4 Licenses with Performing Rights Organizations
Spotify obtained licenses from performing rights organizations to retain the performance
right in the musical works. Music publishers and songwriters grant PROs such as ASCAP,
BMI, and SESAC the right to license the songs that they own.148 The PROs then monitor the
144
17 U.S.C. §§ 106(1)-106(3) (2006).
145
DavidVon Wiegandt, Spotify: IncentivizingAlbum CreationThrough "TheFacebook"ofMusic, 2 Berkeley J. Ent.& Sports L. (2013).
<http://scholarship.law.berkeley.edu/bjesl/vol2/iss1/9>
146
ibid
147
Nigel Godrich: major labels did “secret deals with Spotify”, leaving small labels with “pittance”, Musicweek
<http://www.musicweek.com/news/read/nigel-godrich-major-labels-did-secret-dealswith- spotify-giving-small-labels-pittance/055395.>
148
Steven Masur, Collective Rights LicensingforInternet Downloads andStreams:WouldIt ProperlyCompensate Rights Holders?, 18Vill.
Sports & Ent. L.J. 39, 48 (2011).

DISSERTATION
31
performances of the music through radio, streaming and other methods, and accordingly pay
royalties. The PROs pay 50% to the publisher and 50% to the songwriter. The royalties come
from radio stations, live performance venues, and services like Spotify, which pay the PRO a
fee for a license to publicly perform any or all of the songs in each organization’s
repertoire.149
1.5 Spotify’s Business Model and Licensing Scheme – An Evaluation
The extensive period of time it took Spotify to enter the U.S. market evidences the
complexity of its licensing structure. Spotify wishes to include “all the music in the world” in
its service150, and achieving this will be extremely burdensome. First of all, all sound
recording copyright holders would have to be reached and negotiated with individually.
Secondly, artists get paid very little through Spotify.151 Artists receive less than one-tenth of a
cent per stream, which means one million streams would add up to less than one-thousand
dollars.152 The payouts that have been reported are actually much less. Lady Gaga’s track
“Poker Face” was streamed more than a million times in a five month period, and she
received only $167.153 According to a report by David McCandless, an independent artist on
Spotify would need over four million streams per month to earn $1,160.154 Spotify has
defended its payout structure, stating that: Spotify does not sell streams, but access to music.
Users pay for this via a subscription fee or with their ear time via the ad supported service.
They do not pay per stream. In other words, Spotify is not a unit based business and it does
not make sense to look at revenues from Spotify from a per stream or other music unit-based
point of view, instead, one must look at the overall revenues that Spotify is generating, and
how these revenues grow over time.155 Further, one major reason that artist compensation
may not be adequate is that Spotify is currently losing money as a business. The company’s
accounts for 2009 showed a net loss of £16 million ($26 million) on revenues of £11.3
million ($17.7 million), and the company’s auditors, Ernst & Young, cautioned Spotify on its
149
ibid
150
Labels, Spotify,< https://www.spotify.com/us/> accessed 25th July 2015
151
Ritala' [2013] Idea — The Intellectual Property Law Review Volume 54
152
Jeff Ward-Bailey, Spotify: Good for Music Lovers, Bad for Musicians?, The Christian Science Monitor, July 20, 2011,
<http://www.csmonitor.com/Innovation/Horizons/2011/0720/Spotify-Good-for-music-lovers-badfor- musicians> accessed 25th July 2015
153
Postingof Enigmax to TorrentFreak, http://torrentfreak.com/lady-gaga-earns-slightlymore- from-spotify-than-piracy 091121/
154
DavidVon Wiegandt, Spotify: IncentivizingAlbum CreationThrough "TheFacebook"ofMusic, 2 Berkeley J. Ent.& Sports L. (2013).<
http://scholarship.law.berkeley.edu/bjesl/vol2/iss1/9> accessed 25th July 2015
155
Paul Resnikoff, Spotify Defends Its Payout Structure, Digital Music News, Sept. 19, 2011,
<http://www.digitalmusicnews.com/stories/091911spotifydefends.> accessed 25th July 2015

DISSERTATION
32
ability to remain in business.156 The report showed that Spotify made £6.8 million ($10.7
million) from subscriptions and £4.5 million ($7 million) in advertising revenues, but the cost
of goods, which includes licensing fees paid to record labels, reached £18 million ($28.4
million).157
Spotify is not the main culprit when it comes to the low payouts. The reason performers are
not adequately compensated is that the law forces interactive services to integrate their
contractual splits between record labels and performers, and the agreements often reflect the
label’s greater clout.158 This is because Spotify must negotiate directly with the copyright
owner of the sound recording, which is usually the record label, in order to license the
streaming of the song.159 The internet is filled with articles, posts, blogs, and reports of
performers being undercompensated by Spotify. However, there is unsurprisingly little to no
evidence that record labels are complaining about being underpaid. The four major record
labels own stock in Spotify, and the returns on the stock investment are unlikely to filter
down to payments for the artists.160
Spotify’s hope lies in adjusting its business model to benefit from the current legal
framework. Its “freemium” business model has pushed over 20% of its users to purchase a
monthly subscription161 Restructuring the current model could further increase this
percentage. For example, Spotify could limit the free services it provides, thus encouraging
more users to pay for a subscription. The market of services like Spotify that enable the mass
consumption of music without having to pay for a single download, and yet lets users choose
the specific songs they wish to hear is somewhat limited at the moment.162 Also, there are not
many services with which consumers could directly substitute Spotify, so it should consider
further experimenting with its “freemium” model in order to generate more revenue from
subscriptions.
156
Josh Halliday, Spotify Could Launch in US Without Major Labels, The Guardian, Nov. 23, 2010,
<http://www.guardian.co.uk/technology/2010/nov/23/spotify-us-record-labels.> accessed 25th July 2015
157
ibid
158
DavidVon Wiegandt, Spotify: IncentivizingAlbum CreationThrough "TheFacebook"ofMusic, 2 Berkeley J. Ent.& Sports L. (2013).
Available at: http://scholarship.law.berkeley.edu/bjesl/vol2/iss1/9
159
DavidBalaban, TheBattleof the Music Industry: The Distribution of Audio and Video Works Via t he Internet, Music and More, 12
Fordham Intell. Prop. Media & Ent. L.J. 235, 252 (2001).
160
Michael Arrington, This Is QuitePossibly The Spotify Cap Table, TechCrunch,Aug. 7, 2009<,http://techcrunch.com/2009/08/07/this-is-
quite-possibly-the-spotify-cap-table/> accessed 25th July 2015
161
Information, Spotify,< http://press.spotify.com/uk/information> accessed 25th July 2015
162
Stuart Houghton, If you love music, should you use Spotify?, Trusted Reviews (Jul 25 2013),
<http://www.trustedreviews.com/news/if-you-love-music-should-you-use-spotify.> accessed 25th July 2015

DISSERTATION
33
2. Pandora – an introduction
Pandora, an Internet Radio music streaming service was launched in 2005 as a personalized
radio experience. It allows users to customize their playlists after one song based on liking of
that particular song. As a non interactive webcaster Pandora pays statutory performance
royalties for the sound recording and performance royalties for the underlying composition.
Statutory performance royalties for digital music are paid to the non profit organization
SoundExchange, which collects the royalties and pays them to artists and record companies.
Writers' royalties are paid out to the PROs ASCAP, BMI, and SESAC. Unlike satellite radio
providers like Sirius, which pay a percentage of its revenue as performance royalties, Pandora
pays a per-stream fee every time a song is played.163 This "willing buyer, willing seller"
model is still based on the statutory rate, but does not account for the internal performance of
the company." As a result, Pandora paid out royalties of sixty percent, fifty percent, and fifty
four percent of its revenue in fiscal years 2010, 2011, and 2012 respectively.164 Despite not
turning an annual profit in its seven-year history, Pandora continues to survive by increasing
its user base across multiple platforms. Since 2010, it has launched on over two hundred
consumer electronic devices including Blu-Ray players, smart phones, and cars.ss In 2011,
Pandora was the number two all-time downloaded free iPhone app and the number one all-
time downloaded free iPad app. 165 Now, mobile use contributes to seventy-five percent of
Pandora's 3.3 billion annual total listener hours.166 In December 2012 Pandora expanded
internationally by launching online and on mobile devices in Australia and New Zealand.
The company has transplanted its customization to Oceania by offering playlists based on
local hits or featuring local artists in addition to its ten thousands songs already recognized
through the Music Genome Project.167 Slowly but surely, Pandora is contributing to the
global fight against online piracy by offering users customizable platforms and providing a
potentially viable revenue stream for artists.168
163
Geoff Morris, Pandora Versus Musicians - Internet Radio Fairness Act, AsuSports AndEntertainment LawJournal Blog(Oct. 15, 2012),
<http://www.sportsandentertainmentlawblog.com/2012/10/pandora-musicians-internet-radio - fairness act/? accessed 25th July 2015
164
ibid
165
Joey Flores, The Downfall of Pandora, Consumer Choice and Emerging Music, Hypebot (Nov. 7, 2012),
<http://www.hypebot.com/hypebot/2012/1 1/the-downfall-of-pandoraconsumer-choice-and-emerging-music.html.> accessed25thJuly 2015
166
Pandora Refreshes its Mobile Apps,Usa Today,Oct. 30, 2012,< http://www.usatoday.com/story/tech/personal/2012/10/29/pandora-
refreshes-its-mobile-apps/1667745/> accessed 25th July 2015
167
2014] 36 Hastings Comm. & Ent. L.J. 193
168
ibid

DISSERTATION
34
2.1 How Pandora works
Pandora delivers playlists for its users based on their taste in music. For example, a Pandora
user enters a type of music genre or a name of an artist or a band, which the program then
uses to generate a unique playlist that consists of tracks that are within the genre or similar to
the artist or band entered.169 The users only have a limited number of “skips” per hour they
can use to move from an undesired song to the next one, and they cannot fast-forward
songs.170 Since the users only have limited control over the songs that they hear, Pandora is a
non-interactive Internet radio service provider. Pandora’s main source of revenue is
advertisement sales for mobile devices as well as desktop computers.171 The ads may be
heard as audio between the songs, or they can be visual ads that pop up on the user’s
screen.172 Pandora also generates revenue from user subscriptions: if a user subscribes to
“Pandora One,” and pays a monthly fee of $3.99 per month or $36 per year, the user is able to
enjoy the service ad-free.173 However, as for its revenue, Pandora relies almost entirely on
advertisement sales, which make up around 85% of Pandora’s revenue.174
In the past five years, Pandora has incurred losses of $105 million.175 In fact, the Internet
radio service provider has never had a profitable year.176 The licensing costs that Pandora
faces are significant, in comparison to its revenue. It pays royalties both to SoundExchange
and to PROs for the performance of the sound recordings and musical works to which
copyrights are attached.177 “Content acquisition” costs (i.e. royalty payments) alone take up a
large proportion of its income stream, for example, in 2011, 54% of Pandora’s revenue was
169
Pandora, <http://www.pandora.com> accessed 25th July 2015
170
ibid
171
Pandora,DetailedHistorical Financials Q2FY14,< http://phx.corporate ir.net/External.File?item=UGFyZW50SUQ9MTI5NjA3fENoa
WxkSUQ9LTF8VHlwZT0z&t=1.> accessed 25th July 2015
172
Personalization And Music Discovery Ignite Passion For Internet Radio, at 7, <http://www.pandora.com/static/ads/media-
kit/TheChangingLandscapeOfRadio.pdf> accessed 25th July 2015
173
Pandora One<, http://www.pandora.com/one> accessed 25th July 2015
174
Pandora,DetailedHistorical Financials Q2FY14,< http://phx.corporate ir.net/External.File?item=UGFyZW50SUQ9MTI5NjA3fENoa
175
Mark Rogowsky, Pandora Finds Little Profit in Reinventing Radio, Forbes
<http://www.forbes.com/sites/markrogowsky/2012/09/10/pandora-finds-little-profitin-
reinventing-radio/.> Pandora, Detailed Historical Financials Q2FY14,< http://phx.corporate
ir.net/External.File?item=UGFyZW50SUQ9MTI5NjA3fENoa WxkSUQ9LTF8VHlwZT0z&t=1.> accessed 25th July 2015
176
ibid
177
Claire Suddath, Should Pandora Pay Less in Music Royalties? Bloombergbusinessweek (Jul. 1, 2013)
<http://www.businessweek.com/articles/2013-07-01/should-pandora-pay-less-inmusic-royalties.> Pandora, Detailed Historical Financials
Q2FY14,< http://phx.corporate ir.net/External.File?item=UGFyZW50SUQ9MTI5NjA3fENoa WxkSUQ9LTF8VHlwZT0z&t=1.> accessed
25th July 2015

DISSERTATION
35
paid in royalties.178 Despite Pandora’s steadily growing popularity, the service is failing to
become profitable.179 In order to discover the reasons behind the business’s
disproportionately high content acquisition costs, one should look into the licensing
requirements Pandora has to fulfil.
2.2 Pandora’s Licensing Scheme
The rights granted to copyright holders can be found in § 106 of the Copyright Act. For
Pandora, the significant rights it has to consider are the public performance rights of §§
106(4) and (6), for the underlying musical works and sound recordings respectively.180
Section 106(4) gives the copyright owner an exclusive right to perform their musical work
publicly. Pandora pays songwriters and music publishers royalties for the songs that Pandora
plays. This happens by paying the royalties due first to PROs such as American Society of
Composers, Authors and Publishers (ASCAP), Broadcast Music, Inc. (BMI) and Society of
European Stage Authors and Composers (SESAC) with whom it has license agreements, and
who in turn distribute the money between the songwriters and publishers that they each
represent.181 Copyright owners of sound recordings have the exclusive right to perform their
work publicly by means of digital audio transmissions. Sound recordings can be licensed
under § 114 of the Copyright Act, which was amended in 1995 by the Digital Performance
Right in Sound Recordings Act (DPRA), to first, create the limited performance right in
sound recordings, and second, to establish a statutory licensing scheme for the performance
of sound recordings. In order to benefit from the statutory license, a service may not be an
interactive one, and the service must comply with the “performance complement.” The latter
is a qualification, set by the Copyright Act, that limits the number of songs from the same
artist or album that Pandora can play within a specified time limit. Therefore, the amount of
times a user can skip songs is limited.182 The rates for sound recordings are overseen by the
178
Ben Sisario, Pandora and Spotify Rake in The Money and Then Send It Off in Royalties, N.Y. Times
<http://mediadecoder.blogs.nytimes.com/2012/08/24/pandora-and-spotify-rake-in-themoney- and-then-send-it-off-in-royalties/.> Pandora,
Detailed Historical Financials Q2FY14,< http://phx.corporate ir.net/External.File?item=UGFyZW50SUQ9MTI5NjA3fENoa
179
Pandora,DetailedHistorical Financials Q2FY14
< http://phx.corporateir.net/External.File?item=UGFyZW50SUQ9MTI5NjA3fENoaWxkSUQ9LTF8VHlwZT0z&t=1> Pandora, Detailed
Historical Financials Q2FY14,< http://phx.corporate ir.net/External.File?item=UGFyZW50SUQ9MTI5NjA3fENoa
WxkSUQ9LTF8VHlwZT0z&t=1.> accessed25thJuly 2015
180
17 U.S.C. § 106(4)
181
Pandora & Spotify: Legal Issues andLicensingRequirements for Interactive AndNon-Interactive Internet Radio Broadcasters, 'Sofia
182
Pandora,< http://www.pandora.com> accessed 25th July 2015

DISSERTATION
36
judges in the Copyright Royalty Board (CRB), and the royalties are paid by the licensees to
SoundExchange, which then distributes them to the copyright owners of the sound recordings
(usually record labels and recording artists).183 SoundExchange was appointed by the judges
of the Copyright Royalty Board as the sole entity that collects statutory royalty payments for
sound recordings.184
2.3 Pandora’s Business Model and Licensing Scheme – An Evaluation
The actual determination of royalty rates happens either by negotiation or arbitration.185 The
CRB is involved in both options.3 The parties (here, Pandora and SoundExchange) may
agree on rates through negotiations, and present them to the CRB for adoption.186 If the
judges of the CRB decide to adopt the agreed rates, similarly situated parties are allowed to
opt in.187 In the case that the parties have not reached agreement, the CRB judges will
conduct arbitration in order to set the rates, in accordance to the “willing buyer, willing
seller” standard.188 This system encourages Pandora and SoundExchange to reach an
agreement through independent negotiations and without intervention. However, the
asymmetrical licensing structure for different types of radio has been a point of concern for
Pandora, as it sees this as “unfair.”189 The broadcaster also worries about the CRB judges’
level of expertise, since they must make royalty rate decisions based on a standard that
requires deep understanding of the workings of the music industry.190 Alternative solutions
for these concerns are manifested in the Internet Radio Fairness Act.191
While Pandora is one of the first radio systems to fairly pay record companies and artists, the
payments are killing the company. Pandora and a handful of other internet radio providers are
looking to alter the "willing buyer, willing seller" model with the Internet Radio Fairness
183
Soundexchange, Working With SoundExchange,< http://www.soundexchange.com/wp content/uploads/2013/07/About-
SXInfographic.pdf> accessed 25th July 2015
184
ibid
185
Licensing101 at Howare the rates andterms determined?, Soundexchange<, http://www.soundexchange.com/service-provider/licensing-
101/ > accessed 25th July 2015
186
ibid
187
ibid
188
Licensing101 at Howare the rates andterms determined?,Soundexchange<, http://www.soundexchange.com/service-provider/licensing-
101/ > accessed 25th July 2015
189
Tom Pakinkis, Pandora tells Congress: internet royalties are “unfair and indefensible”, Musicweek (Nov. 28, 2012),
<http://www.musicweek.com/news/read/pandora-tells-congress-internet-royalties-areunfair-and-indefensible/052727.> Licensing 101 at
Howare the rates andterms determined?,Soundexchange<,http://www.soundexchange.com/service-provider/licensing-101/ > accessed
25th July 2015
190
191
Senator Ron Wyden, The Internet Radio Fairness Act Of 2012, <http://www.wyden.senate.gov/download/summary-of-internet-radio-
fairness-actof- 2012> accessed 25th July 2015

DISSERTATION
37
Act.192 Introduced in the House of Representatives in September 2012, the bill would shift
non interactive webcast services to the satellite radio model.193 Instead of paying half of its
revenue to SoundExchange, Pandora could adopt Sirius's eight percent rate.194 However
artists and record companies condemn the bill as Pandora's attempt to "fill its pockets"
instead of generating more revenue through advertising. What the labels and artists fail to
realize is that the service offered by Pandora democratizes the digital marketplace. Unlike
broadcast radio, which offers a static set of music, Pandora's customizability offers an array
of music to users from obscure ska for hardcore reggae lovers to Top 40 for teens.195 Doing
so recognizes different niches of users and in turn pays artists that would have otherwise not
be discovered. Without a way to protect this customizability while also paying a feasible
amount of royalties, Pandora and services like it will bulk up their playlists with
advertisements or focus more on mainstream artists until they become as homogenized as
their predecessors.196
3. Comparative analysis
Spotify listeners can choose the songs they want to play due to the interactive distinction in
the DRPA. Spotify’s on demand streaming qualities make it an “interactive” service which
means it also has to take into consideration other licensing rights in addition to the mere
performance of a song, such as distribution and reproduction rights. This service is better
suited to stream and share music that users already know.
Pandora is a “non-interactive” service and has to deal with fewer licenses. This service does
not let users choose the specific songs they want to listen to since it falls under the non
interactive distinction in the DRPA , but rather finds songs that are "musically similar" to
their favourites.
192
ibid
193
Ben Sisario, Proposed Bill Could Change Royalty Rates for Internet Radio, N.Y. Times, Sept. 23, 2012,
<http://www.nytimes.com/2012/09/24/business/media/proposed-bill-could-changeroyalty- rates-for-internet-radio.html?_r-0.> accessed
25th July 2015
194
Joey Flores, The Downfall of Pandora, Consumer Choice and Emerging Music, HYPEBOT (Nov. 7, 2012),
<http://www.hypebot.com/hypebot/2012/1 1/the-downfall-of-pandoraconsumer-choice-and-emerging-music.html.> accessed25thJuly 2015
195
ibid
196
Ben Sisario, Proposed Bill Could Change Royalty Rates for Internet Radio, N.Y. Times, Sept. 23, 2012,
<http://www.nytimes.com/2012/09/24/business/media/proposed-bill-could-changeroyalty- rates-for-internet-radio.html?_r-0> accessed25th
July 2015

DISSERTATION
38
A satellite radio service provider Sirius XM delivers a myriad of content, streamed through a
satellite feed, available anytime, anywhere.197 In addition to commercial free music channels
there are also talk, sports, comedy, news, and exclusive content like Howard Stern that you
can find solely on Sirius XM.198 Since Pandora is an Internet radio service provider, it can
accurately measure how many times a specific song was played during a specific period.199
Therefore, the company has to pay royalties to artists and record labels on per song basis.200
Sirius, on the other hand, can’t measure its listeners, so the CRB makes it pay a portion of its
gross revenue. Currently, Sirius pays about 8 percent.
197
Stephen Faulkner,'Sirius XM's 8% RoyaltyRateIs Lower Than Pandora's, AndRightfully So' (seekingalpha.com,2015)
<http://seekingalpha.com/article/886511-sirius-xms-8-percent-royalty-rate-is-lower-than-pandoras-and-rightfully-so> accessed16 July
2015.
198
ibid
199
Trefis, 'The Battle For RoyaltyRates: Sirius XM AndPandora's Efforts ToStem TheCosts -- Trefis' (2015)
<http://www.trefis.com/stock/siri/articles/204027/the-battle-for-royalty-rates-sirius-xm-and-pandoras-efforts-to-stem-the-costs/2013-09-03>
accessed16 July 2015.
200
ibid

DISSERTATION
39
CHAPTER IV- SOLUTIONS TOWARDS A NEW LICENSING SCHEME
Compulsory licenses have two general characteristics: They compel copyright holders to
license their content to anyone running a business of a determined type, and in turn they
compel those businesses to pay a standard, statutory fee to use that content, with a guarantee
that some well-defined portion is paid directly to the artists.201
1) Setting a uniform compulsory rate structure for all streaming services
First and foremost a fixed rate per play of any one song to an individual subscriber should be
set and that should be applied universally to all plays for all subscribers across all interactive
music services. To mitigate risks, a minimum royalty rate related to the industry-wide
average rate might be established by the CRB. The CRB could require all interactive,
streaming, digital content providers to submit their annual subscriber base and net revenue
figures, and then set a rate that corresponds to the median. Secondly a set percent of business
revenue that is allocated according to song use proportionally should be formulated. Thirdly,
separate rates should be listed according to different ranges of total revenue (this is the model
currently used for broadcast radio blanket licenses). A more complex formula should be
created with various parameters including revenue, subscriber base, etc, that results in a
different rate for each separate business, but according to a known statutory calculation.202
Lastly, it might make sense to include both song copyrights and sound recording copyrights
in a single compulsory structure, with a complete breakdown across the various copyright
holders.203 Without both licenses, the music cannot be used, and even if a label licenses
recordings, publishers might still withhold licenses to use the songs.204
2) Removing the interactive distinction in the statute
There should be a removal of the interactive/non-interactive distinction that exists in the
Copyright Act and instead a compulsory license for all online music services should be
formulated.
201
Dan Krimm, 'Creating a Merit-Based Music Economy: Compulsory or Blanket Licensing for Interactive Subscription Services'
(musicunbound.com 2003) <http://www.musicunbound.com/meritmusic1.htm> accessed 25th July 2015
202
ibid
203
ibid
204
ibid

Neil Lopez Dissertation

Recomendados

Recomendados

Más contenido relacionado

Similar a Neil Lopez Dissertation

Similar a Neil Lopez Dissertation (16)

Neil Lopez Dissertation