The most frequent and complex dialogue I have with people about NSM’s business, and the digital downloading jukebox business in general, is around licensing. Most casual observers of the industry cannot possibly comprehend the complexity of music licensing. It’s not their fault either; it’s perhaps the most complex set of business arrangements I’ve ever been involved in.
I’ve personally overseen the licensing efforts of NSM Music in the US for the last two years. Before that I was peripherally involved with Ecast for 7 years. I’ve conducted content licensing for 20-years now. I’ve licensed intellectual property for various amusement and entertainment uses, ranging from major motion pictures to patents, such as:
- Stargate from Le Studio Canal+ and X-Men from Marvel Comics, for Laser Tag Arenas
- Tiger Woods PGA Tour Golf and numerous other video games for arcade versions from EA, Activision and others
- The Patent that covers Roland’s D-Beam Infra-Red Motion Sound FX Controller built into almost every Roland Keyboard and Drum Set
But none of these deals was anywhere near as complex as the music licensing efforts for NSM’s digital jukeboxes.
Music licensing for Jukeboxes is like a chair. You need all four legs, or your chair wobbles or falls over. The first leg of the chair is masters licensing, which is done through the music labels. The other three the legs (public performance, mechanical and sync) fall under the Publishing category, but they require distinctly separate efforts.
Recording Masters Licenses – A master recording license gives permission to reproduce the actual performance of a song. This is different than the publishing rights, which covers the music composition and lyrics of the song. Where this gets confusing for some is that despite its name, it has nothing to do with the Public Performance license as collected by the PRO’s (see below). The license is requested from the artist or the record label. Masters licensing is the one most people think of when they consider the licensing of music. And while it’s critical and expensive, in reality it’s much simpler than publishing.
Public Performance Licenses – The copyright owner of a song has the exclusive right to perform his or her song in public. Therefore, no one can play a song in public (such as in clubs, at live concerts, on the radio, on television, for background music in retail establishments, or on a digital jukebox) unless they receive permission to do so from the copyright owner. Performing rights organizations (PRO’s) such as ASCAP, BMI and SESAC are responsible for issuing licenses to and collecting money from people who want to play music in public spaces. These organizations are involved only in the public performance aspect of the publishing industry and are not traditional music publishers. Think of them as collection agencies for songwriters. The PRO’s have fairly standardized deals for digital jukeboxes so these licenses tend to be straightforward.
Mechanical Licenses – To use a copyrighted work, one must usually obtain a license that is negotiated with the copyright owner. These rights go back to the days of sheet music and player piano rolls. In the early days before recorded music, artists monetized their works by selling sheet music. Then with the advent of the player piano, music was encoded onto rolls of paper that would be fed through piano. That’s actually where the term music publishing came from. When recorded music was moved to records and then CD’s, a physical copy of the recording was made and sold, and the mechanical copyright translated to record sales as well. In the digital realm, it has been legislated that mechanical copyrights apply to even digital copies.
The Copyright Act provides for some exceptions to the copyright monopoly that are known as compulsory licenses. These exceptions require the copyright owner to issue a license to someone else whether the owner wants to or not. The exceptions relate to cable TV rebroadcast, PBS, vinyl and CD jukeboxes, digital performance and distribution or records, and phonorecords of non-dramatic musical compositions. Note I wrote vinyl and CD jukeboxes. Digital jukes need not apply for a compulsory license.
Mechanical licenses are some of the most difficult to obtain and report on, because there are so many different rights holders. Take a hip-hop artist that has sampled a groove from a classic R&B track. There could be 5, 10 or even more different songwriters on that one song. Now multiply that by 12 songs on an album. And again by thousands of artists.
And to further complicate things, publishing rights change hands all the time. One of the most famous transactions was when Michael Jackson purchased The Beatles catalog in 1985. That story was on the front page on the newspapers. But those types of deals happen on a smaller basis daily. And there is no central repository for that information. There are some companies that do a good job of attempting to track publishing rights data, like the Harry Fox Agency (HFA), which is why HFA was one of the first companies NSM did a deal with.
Sync Licenses – When it comes to Karaoke and Music Videos, there is another type of license that is required from the publishers called a Sync License – which as the name suggests, covers the use of any use of music synced to visuals in movies, television, television commercials, video games, music videos and Karaoke. Sometimes the music label agrees to “clear” sync rights for the licensee through the relevant publisher, and sometimes these rights are cleared directly through the publisher. There are also public performance rights required for Sync, which can be licensed through the PRO’s or directly through the publishers in some cases. Sync licenses were nearly impossible to acquire as recently as a few years ago, but the labels and publishers seem more willing to discuss these today. (Does your head hurt yet?)
Back in the old days, before the advent of digital jukeboxes with hard drives and internet connections, when jukeboxes played either vinyl records or CD’s, jukebox operators could purchase their music at a record store and install it in a jukebox. In 1978, Congress created the Copyright Law and added a compulsory license for jukeboxes, requiring jukebox operators to pay a flat fee per box to the US Copyright Office.
In 1989, the US joined an international copyright treaty called the Berne Convention, which opened the door to negotiated licenses between the PRO’s and the Amusement and Music Operators Association (AMOA), a trade association of jukebox operators. This led to the creation of the Jukebox Licensing Office, which to this day administers the “Jukebox License Agreement” which gives CD and Vinyl jukebox operators licenses to virtually any song on a jukebox.
However, there are some BIG EXCEPTIONS to the Jukebox License Agreement. It does not cover performances:
– that are set on free play;
– that are played only by employees or entertainers;
– that are “roped off” and not accessible to the public;
– that are located in establishments where an admission fee is charged;
– that are video jukeboxes;
– that are karaoke jukeboxes;
– that are also used for advertising, games or other non-music options;
– that are downloadable or streamed
This license does not cover any device which: (i) receives and/or sends transmissions (i.e. downloads or streams) of musical works; and/or (ii) employs a hard drive for the storage of digital phonorecords or other recorded musical compositions.
So in essence, the JLO and the Jukebox License Agreement are of no relevance to licensing music for digital jukeboxes.
So with digital jukeboxes excepted out of compulsory licenses and the Jukebox License Agreement, digital jukebox companies are left having to manually clear all their music manually. Which means contracts with major and independent record labels, PRO’s and thousands of publishers. And with no laws or rules governing these business arrangements, each entity can hold out for whatever they believe is a fair deal.
Most of the major licensors of music, and this goes for both publishers and labels, demand what is called a “Most Favored Nations” (MFN) clause in their contracts. This essentially means that if I do a deal with Record Label “A” and agree to pay them $X, and then do a deal with Record Label “B” and agree to pay them $2X, I have to go back to Record Label “A” and give them the same deal I gave Record Label “B”.
The lack of a compulsory license combined with the MFN clause is the reason that some artists don’t appear on some digital jukebox networks. Since rights holders are not “forced” to license their works on equal terms to all licensees, some rights holders hold out for more than others. And when the impact of licensing content from a rights holder that is asking for substantially more than all the other rights holders are getting essentially increases what everyone else gets due to MFN’s, networks run the risk of increasing their costs beyond what would allow for a profitable business.
Most music is licensed from the labels and the publishers. There is efficiency in a model that allows a network to license thousands of artists and hundreds of thousands of songs under a single agreement. While the deals tend to require large up-front advances, many times these advance payments are recoupable, meaning that the “per-play” license fees are set off against the advance. So if a network pays $xxx,xxx to Label “A” no more payments would be made to Label “A” until the per play fees exceeded the amount of the advance. This arrangement guarantees the label and publisher that they will get a minimum amount in license fees over the term of the contract, making the deal worth their while.
However, some bands retain the rights to their recordings or publishing, and band management can negotiate their deals directly. Sometimes these bands demand advances that are nowhere close to recoupable. Since royalties are based upon a per-play rate, large advances for small catalogues are unlikely to be recouped. Which means it can be economically unfeasible to do these types of deals in the nascent days of a network’s growth. As networks grow, these deals become more feasible. This is why you see new artists added to networks over time. And why only Touchtunes has The Beatles. They are the only network large enough to justify what had to be a monstrous advance.
Reclaiming Their Copyrights
A little known impact of the 1978 Copyright Law is that under certain instances, beginning in 2012, performers will be able to reclaim the rights to their recordings from record labels, and songwriters will be able to reclaim ownership of their songs from publishers. According to the New York Times:
When copyright law was revised in the mid-1970s, musicians, like creators of other works of art, were granted “termination rights,” which allow them to regain control of their work after 35 years, so long as they apply at least two years in advance. Recordings from 1978 are the first to fall under the purview of the law, but in a matter of months, hits from 1979, like “The Long Run” by the Eagles and “Bad Girls” by Donna Summer, will be in the same situation — and then, as the calendar advances, every other master recording once it reaches the 35-year mark.
The provision also permits songwriters to reclaim ownership of qualifying songs. Bob Dylan has already filed to regain some of his compositions, as have other rock, pop and country performers like Tom Petty, Bryan Adams, Loretta Lynn, Kris Kristofferson, Tom Waits and Charlie Daniels, according to records on file at the United States Copyright Office.
This stands to have a significant impact on the digital jukebox providers, as more and more artists potentially reclaim the ownership of their works, more and more individual deals will need to be struck. As noted above, sometimes these deals are not economically feasible from an advance payment perspective. And they are always burdensome from a time and effort perspective. So as hard as licensing music for jukeboxes is today, it looks like it’s only going to get harder.