Digital exploitation has evolved significantly as cloud-based services and new business models emerge. As the digital market diversifies and matures, and as digital initiatives become a means to legitimize markets that previously were virtually unmonetizable, digital licensing models become increasingly important. As a result, new digital licensing issues continue to arise on a frequent basis. Here are some key digital licensing issues that bear watching in 2012, and beyond: - Cloud/Locker services - Subscription services - Collective licensing - Digital radio/Turntable FM - Previously unmonetized markets This exclusive white paper was written by Jeff Liebenson, Principal of Liebenson Law in New York City and President of the International Association of Entertainment Lawyers (the IAEL). The IAEL will discuss the above issues at several of its sessions at Midem, January 28-31, 2012. The schedule of the IAEL’s sessions at midem can be found here: http://www.iael.org/news/49

1. Digital Licensing: Hot Issues
Jeff Liebenson, Principal, Liebenson Law
(
(USA) )

2. Table of Contents
1. Introduction
oduc o
2. Cloud/Locker services
3. Subscription services
4. Collective licensing
5. Digital radio/Turntable FM
6. Previously unmonetized markets
7. Conclusion

3. 1.
1 Introduction
Digital exploitation has evolved significantly as cloud-based services and new
business models emerge. As the digital market diversifies and matures, and as
digital initiatives become a means to legitimize markets that previously were
virtually unmonetizable, digital licensing models become increasingly important.
As a result, new digital licensing issues continue to arise on a frequent basis.
Here are some key digital licensing issues that bear watching in 2012, and
beyond:
b d

4. 2.
2 Cloud/Locker services
The licensing of locker services takes place with a backdrop of unresolved legal
issues regarding how music is copied on the server in the cloud, the source of
the music, and the manner in which that music is accessed by the consumer.
When a consumer copies his or her own music into a cloud-based locker, they
arguably may have a fair use defense in the US (although there is no clear court
g y y ( g
ruling to this effect), and the source of their files may be a factor in determining
this. However, there is no fair use in Europe, and where fair dealing exists it can
be more narrow in its effect. Also, there is no private copying right in the UK. So
this creates issues for the international launching of cloud services. (Apple’s
g ( pp
iTunes Match service just recently launched in several countries outside of the
US.)
The recent ruling regarding MP3Tunes stated that that service was not ineligible
for the DMCA safe harbor to insulate it from liability in the US (although it had not
properly followed procedures to do so). That ruling is under appeal, and the
situation may differ in other markets.

5. In a market where an individual may “space shift” a legally obtained file from one personal
device to another, that still may be treated differently than a company that provides a
commercial service that permits the widespread shifting of legal and unauthorized files.
Also, if fair use or a similar defense does not apply in a market, then all tracks uploaded to
a locker may constitute infringements. This may create the type of “red flag knowledge”
which invalidates a service’s opportunity to operate in the safe harbor.
Uploading and copying music to the cloud involves a reproduction by the consumer, but the
performance or communication to the public right is implicated when the consumer
accesses the music from the cloud. Various locker services operate differently. Amazon’s
t e us c o t e c oud a ous oc e se ces ope ate d e e t y a o s
and Google’s services require each consumer to upload a distinct copy (even though other
consumers may have uploaded their own copies of the same tracks). That strengthens the
argument that fair use may apply in the US to those uploads.
Moreover, if a consumer streams from his or her own file rather than from the service’s
master copy in the cloud, then that file is streamed by the service to only one consumer, not
to the general public. That would not be a public performance or a communication to the
public.
public This could avoid the need for the service to license the public performance (or
communication to the public) right and avoid royalty payments, but it would be
technologically highly inefficient.

6. Although Amazon initially maintained that no digital licensing was required for its locker
service and it launched without them, Apple chose to obtain digital licenses and Google
eventually did so as well (other than with Warner).
They did so in part to gain certainty regarding the unresolved legal issues. Apple also
avoided requiring its consumers to upload their own copies of tracks by licensing the rights
to “scan and match” each consumer’s music library to the copies already on Apple’s
servers and to permit them to upgrade to Apple’s high quality copies of those tracks.

7. 3.
3 Subscription services
The download market shows signs of maturing and the music industry needs to
develop new sources of digital revenue. Access-based subscription models seem
poised to be the main opportunity to do this, as well as being a potential means to
direct users away from piracy. So subscription services are vitally important to the
future of the industry, and the ability of labels and artists to be paid for their works.
Subscription
S b i ti services h
i have offered th b t value proposition f some ti
ff d the best l iti for time, b t
but
they have been under-marketed, poorly understood, and faced a number of other
problems. Now with the advent of Spotify and other freemium and low cost
services, subscriptions are generating lots of buzz and surging subscriber
numbers.
b
Publishing rates and other licensing issues still remain a challenge to their
international expansion. When the Copyright Royalty Board in the US followed
years of proceedings with it 2008 ruling, it settled th publishing rates f on-
f di ith its li ttl d the bli hi t for
demand streaming on subscription services (as well as for certain other digital
uses). This removed great uncertainty for the digital licensing of subscription
services in the US.

8. Key issues remain regarding obtaining licensing with respect to publishing splits
and from unknown publishers. The absence of a central registry of publishing
rightsholders continues to ffrustrate digital services wishing to obtain the
necessary licenses. RightsFlow was a prominent company assisting distributors
in this area, but its recent acquisition by Google may take it out of the
marketplace.
Meanwhile, in Europe the international licensing situation in some ways may be
even more difficult. GEMA still has not licensed Spotify so it is not available in
Germany. Spotify just launched in its Nordic neighbor, Denmark, this past
October, hi h indicates the h ll
O t b which i di t th challenges of meeting th necessary li
f ti the licensing and
i d
rights issues to launch in multiple countries.
The industry is attempting to navigate a transition, while encouraging subscription
services t b
i to become an i important f t
t t feature of th f t
f the future di it l marketplace.
digital k t l
Business models are changing and royalties on a per stream basis are lower than
for downloads.

9. Recently Coldplay, The Black Keys and others have pulled their repertoire from
Spotify due to the low royalty payments they receive, and the concern that the
service may cannibalize other more lucrative digital opportunities. The current
royalty amounts for these services are low because, among other things,
subscriber levels are just beginning to build, and new subscribers are just
beginning to be encouraged to upgrade to the enhanced premium paid service. In
the US,
th US a six month h
i th honeymoon period expires l t thi week when S tif ’ f
i d i later this k h Spotify’s free
subscribers will start experiencing usage restrictions. The unlimited Spotify
experience will begin to shift towards limitations, until free users are required to
decide whether to pay in order to maintain the same type of experience. If and
when paid subscribers i
h id b ib increase, so t will royalty payments.
too ill lt t
So while some artists focus on protecting their short-term revenue opportunities,
the industry has a long-term strategic need for these subscription services to
develop i t significant revenue generators i th f t
d l into i ifi t t in the future.

10. 4.
4 Collective licensing
The EC has been in a complex dance with the European collective rights societies
to encourage more streamlined European-wide licensing. Those efforts have
ff
resulted only in increasingly complex licensing requirements.
Before the EC efforts, rights needed to be licensed from the society in each
European market. Urging th societies t engage i cross-border li
E k t U i the i ti to in b d licensing h
i has
resulted in the major publishers taking greater control of their rights, withdrawing
the digital rights for their Anglo-American repertoire from the European societies,
and creating their own new entities from which those rights must be licensed.
This has l further
Thi h only f th complicated th li
li t d the licensing requirements f E
i i t for European di it l
digital
services. The EC recently announced that it is planning to publish draft legislative
proposals early this year for new rules for the cross-border licensing of digital
music.
While this situation continues, a similar development occurred this past year in the
US when EMI withdrew the digital performance rights for its April Music catalog
from ASCAP so it could exercise those rights through direct licenses. This
created greater control for EMI and the opportunity to require advances, but it
t d t t lf d th t it t i d b t
further complicates an already complex digital licensing environment.

11. 5.
5 Digital radio/Turntable FM
Pandora has become the leading US digital radio company (and it has had a
significant public offering) because it benefits f
f ff ) f from the compulsory licensing
provisions under the DMCA provisions of US copyright law. This avoids the need
for it to engage in any direct licenses with the record labels. Pandora’s
prominence and intense lobbying also enabled it to negotiate a reduction in the
license rate f it service.
li t for its i
It has been hard to replicate these advantages so far in Europe, so Pandora
remains a US-only service despite its need for growth.
The US compulsory license has been a haven for many services which wish to
avoid the time and expense of obtaining digital licenses from the industry.
Meanwhile, while i
M hil hil innovative services and b i
ti i d business models continue t d
d l ti to develop,
l
they strain the limits of what is permitted by the compulsory licensing scheme. To
what extent can these new services take advantage of the compulsory license?
The
Th US l law it i
itemizes a number of objective f t
b f bj ti factors which must b met t merit th
hi h t be t to it the
compulsory license. Their overall intent is to limit the compulsory license to non-
interactive streams, and to require direct licenses to be negotiated for interactive
streaming.

12. Turntable.fm launched this year to great public interest, but some of its features
raise issues about whether it is entitled, as it hoped, to avail itself of the
compulsory license and its rates.
These issues arise when the technology and functions of the Turntable.fm service
are carefully analyzed in light of the statutory standards for the compulsory
license. Users who listen to Turntable.fm hear streams of music programmed by
DJs, like in a DMCA-compliant radio service that qualifies for compulsory
, p q p y
licensing. But the service also permits its users to become the DJs who select the
music that will be streamed.
Even if the service is non-interactive as viewed from the perspective of the users
p p
who merely listen to the DJs’ selections, do the DJs who pick the songs that are
streamed operate within the terms of the compulsory license? If the DJs’
selection and listening to tracks is interactive, then that would require the service
to obtain direct licenses (and probably to pay advances).
( p y p y )
The Launch Media case addressed whether a service was interactive by focusing
on whether it permits “a degree of predictability—based on choices made by the
user—that approximates the predictability the music listener seeks when
pp p y
purchasing music.” The service in that case was held to be non-interactive.
However, Turntable.fm differs in many respects from that situation in which the
users could not select specific songs to be streamed, as do the DJs on
Turntable.fm.

13. There are a number of other possible issues to consider including whether the
tracks that users upload are properly obtained, since the DMCA provides that the
compulsory license applies only if the tracks are “lawfully made.” If the users’
tracks are not “lawfully made,” would Turntable.fm have a safe harbor defense?
The Pandora and Turntable.fm situations illustrate that services would like to
avoid licensing, but not all will be able to do so. As more innovative services are
developed, whether licenses are required or not may become increasingly
important.

14. 6.
6 Previously unmonetized markets
China has long been a tantalizing, but frustrating, market. Recognizing its
challenges of widespread piracy and the difficulty of enforcing IP rights, the
f ff f f
industry has been extremely flexible in structuring a model specifically designed
for this market.
Baidu (basically, the Google of Chi
B id (b i ll th G l f China with approximately 80% of th search
ith i t l f the h
market) has been providing its users with deep linking to pirate content, while the
widespread consumer perception has developed that music is meant to be freely
available. Pressure was applied by the major labels through lawsuits against
Baidu. Then breakthrough commitment was made th
B id Th a b kth h it t d through th US Chi J i t
h the US–China Joint
Commission on Commerce and Trade that China’s judiciary would pursue the in-
depth study of internet intermediary liability. These events combined to lead Baidu
to enter into an innovative deal with the major labels this past summer under
which th l b l di i
hi h the labels dismissed th i l
d their lawsuits, and B id agreed t li
it d Baidu d to license th l b l ’
the labels’
rights from One-Stop China--a joint venture of Universal, Warner and Sony--to
provide free licensed music. Baidu will pay the labels per performance and per
download, and they will exploit the music in a new social music service, Ting!
It is hoped that this may be the approach that will develop a legitimate market in
China. As technology spreads around the world, this type of open-minded
approach may enable other markets to be developed as well.

15. 7.
7 Conclusion
The nature and scope of digital licensing issues varies by market, and it takes
place in the context of business and governmental developments. How these
digital licencing issues develop and are resolved will impact on the f
future shape
of the digital marketplace.
And as that digital marketplace continues to evolve, new digital licensing issues
are sure t arise.
to i

16. About the author
This exclusive white paper was written by Jeff Liebenson, Principal of
Liebenson Law in New York City and President of the International
Association of Entertainment Lawyers (the IAEL). The IAEL will
discuss the above issues at several of its sessions at Midem
Midem,
January 28-31, 2012.
The schedule of the IAEL’s sessions at midem can be found here:
http://www.iael.org/news/49
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