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Digital Music: Still Scores Left to Settle

By Jane Black Randall Wixen represents some of the biggest names in music -- and he's not shy about defending their copyrights. In 2000, he sent a cease-and-desist letter to Presidential candidate George W. Bush, who had been playing Tom Petty's hit I Won't Back Down at campaign rallies. "Any use made by you or your campaign creates, either intentionally or unintentionally, the impression that you and your campaign have been endorsed by Tom Petty, which is not true," wrote the president of Wixen Polin Music Publishing, which negotiates on behalf of its stable of songwriters. The Bush campaign backed down.

Wixen's tactics aren't any softer when it comes to the burgeoning digital music services, such as the label-backed MusicNet and Pressplay. Wixen is no Luddite. But he fears the services are a ruse by the labels to give artists and publishers a smaller piece of the profits: "I'm all in favor of new delivery systems," he begins, "but it shouldn't change the relationship so that we get less and the labels get more."

SONGS FOR RENT. Without the artists that Wixen and other powerful independent music publishers represent -- about 10% to 15% of songwriters, including such big names as Steve Miller, Bob Dylan, Neil Young, and The Doors -- digital music services worry they'll never be able to compete with the underground peer-to-peer services (P2P), which offer unlimited lists of free songs dating back to the dawn of recorded music. Moreover, the gaps in the catalog are particularly important to digital music services' target audience: Well-heeled music fans between the ages of 24 and 55 who want the value-added features that illegal services such as KaZaA don't offer (see BW Online, 4/22/03, "Web Music Gets Its Act Together").

Traditionally, publishers are required by law to grant so-called mechanical licenses to labels and others who want to sell music. It works like this: Songwriters are paid 8 cents for each track that's physically produced -- if the writer has 12 songs on a CD and 1 million disks are produced, the songwriter gets paid $960,000. The new digital services, which charge subscribers $10 a month, allow subscribers basically to "rent" songs. A subscriber can download unlimited tracks to a PC hard drive, but as soon as the subscriber quits the service, the music disappears. Such restricted downloads, also known as "tethered downloads," are the foundation of subscription services because they prevent people from making an infinite number of perfect digital copies on CDs -- or uploading them to the Internet, where they could be shared on illegal P2P services.

Here's the rub: Tethered downloads don't fit the industry's traditional definition of an 8-cents-a-strike copy. And some publishers are asking: If the subscription company earns $10 per month by offering a collection of our songs, why should we get paid only once? Until independent publishers are assured that they'll get the same terms in the digital world as they get otherwise, they're not prepared to budge.

WHO GETS WHAT? The remaining music publishers are willing to negotiate. About 85% of songwriters, represented by the Harry Fox Agency, have agreed that the compulsory "mechanical license" covers tethered downloads, too. In an October, 2001, agreement with the Recording Industry Association of America (RIAA), publishers accepted a $1 million payment up-front in exchange for a promise that the services would account and pay for use of the publishers' work when the Copyright Office ultimately sets a rate. (That won't happen until the market is deemed more mature.) All the music services need to do is file the appropriate legal paper work and the right is granted.

That's easier said than done, respond Pressplay and MusicNet. They say Harry Fox isn't equipped to handle the volume or detailed nature of their requests. On average, executives say, Harry Fox is able to approve only about 50% of requests since, in many cases, it doesn't know who owns the publishing rights to a particular song.

The task is even more onerous with popular hip-hop songs, which often include samples from a variety of different tunes. For example, Christina Aguilera's hit Dirty from last fall featured popular rapper Redman. Aguilera's publisher granted digital rights while Redman's didn't.

NEEDED: SIMPLICITY. Cases like these mean it can take a few months for Harry Fox to track down and receive permission from the publisher. That's not fast enough for digital services keen to offer the latest hits. The result: Digital music services sometimes end up doing the legwork themselves. MusicNet, for example, contracts with a Burbank (Calif.) company that employs 12 people to research digital publishing rights.

Harry Fox admits that the process is often slower than it would like. After all, until two years ago, it licensed work only on an album-by-album basis. Changing the system to accommodate tens of thousands of individual song requests takes time, says Carey Ramos, an attorney who represents Harry Fox. But Ramos says these complaints are just an attempt to pass the blame for consumers' slow uptake. "The music publishers made an incredibly generous offer," says Ramos. "Imagine if Microsoft were asked to give away Windows free now and that sometime, years later, people would pay for it."

The standoff has many in the industry calling for Congress to step in. "I'd rather see a solution based on the spirit of cooperation in an industry that's contracting," says John Jones, MusicNet's chief of content and music acquisitions. "But we think a clearer definition of the [law governing tethered downloads] may ultimately be what's necessary." Bob Ohlweiler, senior vice-president of digital service MusicMatch, says clarifying statutory rights for rentals of music "would make clearance of publishing rights electronic and simple. We believe that would be advantageous for the industry."

NOT MUCH TIME. On Apr. 3, the Digital Media Assn. (DiMA), which represents large Webcasters and computer companies such as Microsoft (MSFT) and Intel (INTC), submitted a proposal to the Copyright Office that would reduce the rates paid to music publishers. But this strategy may be a mistake if it only serves to further anger the publishers and songwriters. Ramos charges that the digital music providers are trying "to turn music publishing into a government-regulated utility." Nor are the proposals doing anything to inspire cooperation from the powerful independent publishers who, like Mark Twain, believe that "no man's life, liberty, or property are safe while the Congress is in session."

For the flagging music industry, time is running out. In February, the RIAA reported a 9% decline in CD shipments vs. February, 2002, and a 6.8% slide in sales for all of 2002. With drops like that, the key to getting the publishers on board may not be legislation but convincing them that a huge potential audience exists for paid digital music and that music-downloading services have arrived.

The more subscribers these services attract, the more inclined publishers will be to take them seriously and make more of their own music available. One sure way to boost traffic would be to lower the price of subscription services. Customers may not be willing to pay top dollar for a service with a limited catalog, but they would pay something. And the greater the number of songs that are offered, the greater the number of fans that will sign up.

It's a virtuous cycle. But the music industry to find harmony, someone is going to need to back down. Black covers the online music industry for BusinessWeek Online

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