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Today the Copyright Board of Canada approved a tariff on services offering streamed or downloadable music to end users in Canada. Here is the tariff and the reasons for the Board's decision. For permanent downloads, "online music services" pay 7.9% of the track's retail price, but at least 4.1 or 5.3 cents per track depending on whether it is sold as a single or bundled with an album. Subscription services offering streams and limited downloads pay based on a formula that reflects a percentage of monthly revenues and the number of tracks licensed. That is for reproduction rights in respect of musical works. Royalties are payable to "CMRRA-SODRAC inc.", a joint venture between the collectives representing most music publishers in Canada. For what it's worth, here's my take.
The major controversy over the royalty rate was whether to track the
price of licenses in the physical CD market
or follow the ringtones precedent as a new measure of value in the digital context. The Board
chose to take the CD rate, discount it slightly because this is a new market and convert it into a percentage of retail price with a minimum floor.
It will be interesting see what the
implications of this choice are for other contexts, like webcasting for example. This could also bear on the way the price of licenses for
other rights, such as communication, are calculated.
Note that this is only one of several payments online music services
are required to make to copyright owners. Services may also need to pay
for the right to communicate musical works, which is dealt with under SOCAN's famous Tariff 22.
Assuming that "making available" isn't a separately licensable act,
this would take care of underlying compositions and lyrics.
However, in
Canada, performers and sound recording makers (usually record labels)
also have multiple rights. Each may ask for remuneration for the
communication of their respective performances or sound recordings.
Expect NRCC
to file a tariff covering these rights soon. Of course, don't forget
about permission to reproduce master recordings, which must be obtained
separately from the record labels. And while in practice performers
often assign their rights to the labels, that isn't always the
case so still more negotiations might be necessary.
There was a notable disagreement in this case between the
publishers and the record labels about the labels' role as an eventual one-stop
shop for all these copyrights. The labels sought to reduce at least
some of the complexity of the rights clearing process by becoming
aggregators of sorts. They wanted to be able to market music
publishers' rights along with their own rights in sound recordings. Like a package deal for online
music services.
Not surprisingly, the publishers weren't happy about
that idea. The Board favoured the publishers. That could
leave the labels wondering about other options to stave off
obsolescence in this rapidly changing environment.
With the labels somewhat out of the loop, the question remains: Who
will end up paying this tariff? That's a good question. In other words,
who is an "online music service"? The tariff does not apply where the service chooses which content to stream, such as with webcasting for instance.
The clearest examples of targeted services are retailers
of digital downloads like iTunes, Napster, Yahoo Music Unlimited and PureTracks (the last two still don't work on my Mac), etc.. But don't forget about companies that market music for streaming or download to mobile phones, like Rogers, Bell, Telus and others.
Though the tariff states that it does not cover the music that goes into mashups or samples, I see little reason why sites like MySpace or YouTube
couldn't be targeted by this tariff for other reproductions where whole
or partial tracks are distributed. But the tariff doesn't seem have been
drafted with these sites in mind, so whether they will or must pay is another matter.
The Board said that "subscription services" connotes sites with payment systems, yet at the same time was careful to include services that are "financed through other means, such as advertising." This seems to fit the SpiralFrog model, if and when that gets off the ground.
Should companies with alternative business models like Noank Media,
which provides blanket licenses to legalize and monetize online file
sharing, be pleased, upset or indifferent about this tariff? Unfortunately, it is just not clear how it applies, if at all, to such companies. Much depends on how the tariff is administered and enforced.
Moreover, the tariff
purports to apply to anyone who authorizes reproductions by users in
Canada, whether or not the service is run by a Canadian or hosted in
Canada. With Tariff 22, the Supreme Court endorsed a "real and
substantial connection" test that weighs multiple factors. For all
these reasons, I suspect there are more than a few unsuspecting
services who will be asked to cough up some cash. Litigation is likely.
You might also be wondering whether some of these
services don't already have licensing deals in place. My understanding
is that those deals will be retroactively renegotiated to reflect the
rate contained in this tariff.
But it raises another question about
what a service can do if it wants to negotiate around the tariff, in
other words, clear rights "at source" so to speak. To the extent
services clear rights outside of the tariff scheme, they
can get a break on the amount they'll pay under the tariff but not, it
seems, total immunity. We will
also have to see how this plays out in
practice.
Let me make one other interesting observation about this tariff. Earlier I posted
about a proposed provision that would have made it mandatory for online
music services to "use all technical and other means available to it to
ensure that the reproductions made by a user are exclusively for that
user’s private use."
The Board rejected the notion of mandatory DRM
systems, which should please a whole bunch of people, including
retailers like eMusic, the Canadian Music Creators Coalition,
most music fans and others who don't think DRM is the way to go. This
also suggests that a similar provision in SOCAN's revised Tariff 22
won't be approved when the Board considers that proposal next month.
My colleague Michael Geist questions the purpose of this tariff. I agree that the main parties could have (and in fact did) negotiate their own agreements independently. But by setting standard terms for at least one
of the rights required by online music services, the tariff could help
create more competition in Canada's online music market. Now, music publishers can't really refuse to deal with anyone willing to take these terms.
It could also
be seen a baby-step on the road to DRM-free downloads and perhaps
relaxing Apple's stranglehold on digital music distribution. It remains
to be seen, however, how broadly the tariff will apply and how it will interact with Tariff 22. Don't be
surprised if that is a matter for the courts to sort out.
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