Friday, June 13, 2008

Guest Blog: Josh Wattles and Compulsory Licensing

Back in April, I did a post on a new reverse value theory. Josh Wattles, a friend and lawyer in Los Angeles with long, vast experience in the copyright and entertainment fields, made some comments. Offline, we talked about him writing a longer piece, and maybe doing a guest blog. He has now done so, and here it is:

Josh Wattles

The process of fixing prices and terms under compulsory licenses in the Copyright Act needs change. Streamlining is not a meaningful option but better participation by the government to represent the public interest might go a long way in producing useful results.
Compulsory licenses are born in politics. They are compromises.

Every compulsory license is also an admission of failure - - a confirmation that neither the market nor the rights of copyright owners are flexible or efficient enough to permit a common place licensing structure or to avoid the compulsory approach.

On principle a compulsory license should occur only at last resort and from absolute necessity after a proof of market failure and a need for the statute to intercede. Most, however, have nothing to do with lofty aspirations of balance or with enabling an otherwise impossible market or even with a measured response to benefit a clamoring public. Instead, they have everything to do with power players reaching for commercial advantages within a niche market. A compulsory license can even be a feint at its obvious purpose, price setting: neither the commercial user group nor the copyright owner group wants to actually rely on the license or its price because they just want to set a ceiling or set a default to stage private side arrangements.

Compulsory licenses aren’t conceptually challenging, like fair use is, and they are never intellectually amusing once drafted. They are brutishly commercial in purpose and in application - - and painful to read. The compulsory licenses from the recent past were drafted by skilled lobbyists and lawyers and the result suffers from a lack of simplicity and economy. Finding out what the license covers or how it can be triggered is like tracing a tan-colored line through the Pismo dunes. Try §119, the compulsory and statutory licenses for cable and satellite retransmissions.

Compulsory licenses are apparently haphazard: there is a compulsory license you can use to carry some broadcast signals on cable, but not all; or there is a compulsory license to use the underlying music in a recording but not to use another recording; or there is a statutory license for non-interactive webcasting if the service doesn’t repeat songs too often or play albums in sequence; and so forth. This happens because compulsory licenses are designed not as market solutions but as small nips and tucks that ease other commercial uses of copyrighted content without anyone losing out on important parallel interests.

Because a compulsory license comes out of a political process you would think ultimately a deal was made at some level. But as it turns out, increasingly the “license” is just a set of rules for a follow-on process - - a rate setting proceeding before a Copyright Royalty Board itself generating reams of spinfastic briefings, dueling economists and industry experts, with live testimony and written submissions. In a proceeding designed to set a “market rate” equivalency which would ultimately be openly published, the CRB procedures nonetheless permit liberal, secret submissions of the parties’ pricing activities on the ground of commercial sensitivity. All struggle in the CRB forum to apply various standards of review left intentionally vague in the statute as a result of prior failures to arrive at compromises on clear guidelines. A CRB decision is inevitably appealed by disgruntled parties - - which can mean everyone who was there. The whole process is petty and overdrawn favoring in outcome those most capable of withstanding the tedium and boredom.

There is no mystery in how the process became so over-wrought. It is a result of serial manipulations by well funded commercial interests seeking wholly appropriate advantages over competitors, suppliers or customers. Sometimes they trip over each other and themselves. AOL argued the user side and Warner Music Group argued the copyright owner side of a webcasting proceeding back when they were both owned by Time Warner. Those subsidiaries also lobbied on opposite sides to produce the statute giving rise to that compulsory license.

A Congressional committee is currently sponsoring private negotiations towards a revision of the compulsory that sets the price for the use of a musical work in a recording or in a download. There, the four largest music publishers are up against the four largest record companies - - well, not really, because each of these is a perfect pair. The four largest record companies also own and control the four largest music publishers. All eight enjoy a combined market share of around 70% to 80% of all music. As close as they are as family, the record companies and their music publishers have managed to tied up the committee and the Copyright Office for years trying to broker terms for their latest “compulsory” license.
There is no shame certainly among the participants about any of this gaming for advantage. In fact, it seems certain that more compulsory and statutory licenses with the same structural defects will be used with still more twists and tweaks hoping to tip the outcome. Almost every discussion of licensing Internet-based distribution ends up with a compulsory or statutory license proposal.

Most proposals for compulsory licenses argue the commercial case - - why that particular market segment needs unitary licenses or set prices- - and they might argue the social utility of the license - - providing full access or some other benefits for end-users. But inevitably when it comes to process there is less focus. The CRB has gone through a variety of iterations. Still procedural issues come up by and large as efforts to tip the scales more than to protect the scales from tampering.

So, if gaming is inevitable across the board, why not let us all in to play?

Here is the opening salvo for reform.

First, if you are going to throw in the towel on making an open, free market deal and use the government to impose one, then the government should be a continuing party in interest and not just a rental hall where the negotiation takes place. The DOJ should be in every compulsory license proceeding with the brief to protect the commercial fairness of the outcome. Second, the people should be openly invited too. Of course, it’s so crushingly boring the public would never come, so the FTC should be in every proceeding as well with the brief of representing the interests of end-use consumers.

Some reasons for the DOJ to be in the room: (1) Every compulsory license is by definition anti-competitive in origin. It exists because there was no competitive milieu in which an adequate license could be fashioned. (2) Ultimately, every compulsory license results in an aggregation of commercial users, an aggregation of owners or both to argue the rate and to distribute the proceeds of the license. These are powerful collectives inherently capable of mischief. (Some like ASCAP and BMI are already under court supervision as an antitrust matter; but other more ad hoc collectives are not, such as SoundExchange.) (3) These collectives carry even greater market power because they enjoy broad statutory anti-trust exemptions in order to participate in the rate setting process. (4) Finally, all compulsory licenses impact businesses well beyond the scope of the license itself. Someone needs to take a long view inside the rate proceedings to argue the impact of price and terms on competitiveness and on adjacent open markets. That isn’t happening now.

Protecting end-users would seem to be an even more self-evident requirement in setting rates and terms under compulsory licenses. The whole purpose and logic of permitting a compulsory license has to do with creating efficiencies so that the general public benefits through access and, one would hope, fair pricing. The compulsory license should meet this goal by creating order where otherwise there would be a distribution bottleneck. But the statute sets up a false bargaining process in which owners and users debate the appropriate terms and rates before a tribunal that has only loose instruction (and at times none) on protecting the public interest on price and terms. The process assumes the commercial parties act as surrogates for the end-user consumers and assumes that the general public itself is unaffected.

For example, a statutory standard to be followed in a couple of the compulsories is establishing “rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” §114(f)(2)(B) and §112(e)(4). Leaving to one side that, by definition, a compulsory license would not and cannot be negotiated in the marketplace at all precisely because the market doesn’t impose any price or term by compulsion, the standards of review in §114 have no care as to whether the public is served by the resulting rates and terms.

The CRB is not generally charged, as it should be, to arrive at a price and at terms that the public itself might want and might accept or that might spur further entries into the market in order to benefit public choice. In some instances, the distributors and the copyright owners have no obligation to show the CRB that the resulting compulsory pricing would actually fly with any end-user consumer. But just stating these as factors that the CRB should consider without providing advocates leaves open the question of how the judges would go about gathering appropriate evidence, surveys and expert opinions. If there were organized consumer groups we could give them standing to argue their interests. But it is too much to ask, particularly in emerging markets, that consumers either organize or loose at the table. The FTC should do it for them and provide the analytical expertise to learn the market and raise adverse impacts.

The basic premise of a real marketplace is that either side can just walk away. A compulsory license changes that critical dynamic. Once gone, the parties can’t battle things out by themselves in front of an arbitrator to produce even a mock negotiation. Instead, licensing authority needs to be exercised by the CRB on a fully informed, not just partisan, basis.


joshua wattles said...

Thanks Bill for your extraordinary generosity to copyright geeks everywhere in writing this blog every day and thanks for your special generosity in sharing your platform with me. The views in this piece are just mine, no agenda for any client, and are really part of an excursion to find repair for a compulsory licensing system here in the United States that has become frustrating to many. Since more of these are coming an open, abstract dialogue, maybe here and hosted by Bill, could add to a design of a better mousetrap.

William Patry said...

Thanks so much for your post and comments Josh. The blog is absolutely a collaborative effort; it exists in order for people to share their thoughts and ideas, so that we may all learn. My late mother, aleha ha-shalom, instilled in me the religious obligation of learning every day for the sake of learning, and we all learn best from each other.

Scott said...

The discussion is all very interesting. Of course, despite the ad-hoc way in which compulsory licenses are set up, they do have a positive social utility. A work available under compulsory license has higher public utility than one which is not: the transaction costs are much lower (no need to negoatiate a purchase), and the fees under a compulsory license scheme are (in particular, for valuable works) lower than the monopoly rents a content producer might be able to charge otherwise. Many bar bands' livelihood depends on having access to the BMI and ASCAP catalogs, even if the collection practices of these agencies are frequently predatory, and often result in double-dipping (an ASCAP-licensed band playing in an ASCAP-licensed venue, for instance).

One question to consider when trying to design a "fair" scheme: Should a uniform (or at least maximum) rate apply to all works in a given class, or should price differentiation be permitted (a scheme where a song by the Beatles costs more to play or cover than a song by a band which is unknown, unpopular, or critically reviled)? One one hand, the Beatles' track is, by many measures, more valuable than the other; on the other hand, valuable works can still achieve greater reward under a fixed-rate scheme due to greater numbers of purchases of the work.

Also--since Joshua mentions performance rights organizations--a common complaint against PROs is that it they are prejudicial to the interest of some of their associates--mainly less well-known songwriters--and favor the interests of established songwriters with large catalogs. BMI, in particular, has been taken to task for its promotional activities and its payment structure (which rewards bonuses to songwriters with large utilization). Securities law might be a model that any future regulation of PROs and similar societies might seek to emulate--a broker is not supposed to prejudice the interests of his smaller clients to benefit the larger ones. While many financial houses have been caught doing so, the fact remains that this is generally illegal, and many have been punished in various ways. While I'm oversimplifying the state of securities law vastly--perhaps similar legal standards are needed for PROs. After all, the SEC has been dealing with crooks in the financial markets for years, and has an immense body of experience in dealing with the sorts of shenanigans that unethical traders and dealers have been known to pull.

Andrew Oh-Willeke said...

The underlying assumption of compulory licensing is that the real life pricing structure in most fields of copyright licensing is far less varied thatn they could be, which is a result of having a small number of dominant players in most copyright markets who compete with each other and produce a high volume of product.

At the retail level, comparable sized product units (one movie ticket, one CD) are pricely almost entirely by how fresh they are and otherwise have a near uniform price. Competition between artists and between corporate media distributors is largely by volume. The same is true even in non-big player dominanted industries (like paintings) below the high points of the market.

As long as compulsory licensing is the tail being wagged by the dog, free riding on the larger market price determination for a whole class of medium, like a CD or Blu Ray Disk or major movie, of iTune song, shouldn't be nearly as difficult as it theoretically can be.

It is the sort of decision that half a dozen people with experience negotiating deals in any given area, acting in good faith, could make with little difficulty and a high degree of consensus.

The exception, online radio, proves the rule. It is hard to price set for because there isn't an established business model or price structure, largely because the big players aren't comfortable that they understand the market. Members of Congress probably had it right when they looked to satellite radio for guidance as the next closest analogy.

In the same vein, while contingent legal fees, Realtor commissions, and oil and gas royalties all could, in theory, vary dramatically, in fact, they hover very close to widely accepted market norms.

joshua wattles said...

Thanks for your comments Scott. It has been some time since I worked at ASCAP but let me correct a couple of points. First, there is no double dip when, as you say, "an ASCAP-licensed band play[s] in an ASCAP-licensed venue" because the band isn't issued and doesn't directly pay for a performance license. The perfomance license from ASCAP is issued to the venue and it covers the performing activities of the band while at the venue as well.
Secondly, both ASCAP and BMI must treat their affiliates and members on a non-discriminatory basis and the DOJ already monitors their activities in this respect. It is true that some members get better advances than others and there are many differences in the way different types of works are credited for different types of performances in different types of media under the distribution formulae. But the fromula itself, other than the advances,is applied uniformly. If you don't like the formula, many would probably agree with you. But the application of the formula is what it is.

With respect to the notion of paying the Beatles more because their work has more "value" consider that the flip side is a judgment that my son's electronic music isn't as good for some reason. The Beatles pick up more dollars on volume of use so a judgment of relative worth on the basis of the content of the work is unecessary.

Gary Greenstein said...


I've participated in a fair number of rate arbitration proceedings (CRB and CARP) and am left to question at the end of the day whether all parties wouldn't be better off with a single mediator or arbitrator who's job was to provide a recommendation to a joint House/Senate committee that would then codify rates in legislation. The process of re-litigating rates every 2 years (as it used to be) or even every 5 years (as it is now under the Copyright Royalty and Distribution Reform Act of 2004), does not necessarily result in more fair or accurate rate decisions; it mostly results in outside counsel making lots of money. And not all interested parties even choose to participate. For example, Pandora is an active lobbyist now trying to change the webcaster rates but Pandora wasn't involved in the most recent proceeding (possibly because they launched after the commencement of the proceeding). If the law is designed to balance the needs of copyright owners/creators/performers, on the one hand, and distribution services, on the other hand, with an ultimate goal of ensuring access to content for the American public, then maybe Congress shouldn't be not delegating these decisions. Consider whether recommendations should be made to a Congressional committee or joint committee, every 10 years, and then let the people's representatives make these decisions. The fact that the next webcaster proceeding is scheduled to commence on January 1, 2009, with a decision due by December 15 (+/-), 2010, for rates to go into effect January 1, 2011, will strike most people as silly. There is likely a better way to make these determinations.

Vincent said...

Are new compulsory licenses permitted under Berne's three steps?

"Members shall confine limitations and exceptions to exclusive rights to [1]certain special cases [2]which do not conflict with a normal exploitation of the work and [3]do not unreasonably prejudice the legitimate interests of the rights holder."

Josh's post leads me to agree with him that compulsory licenses are a bad idea, with the caveats that such licenses make sense where there are countervailing considerations such as a need for reduced transaction costs, a wariness about price discrimination based upon undesirable criteria, or a reasonable basis for public subsidy, such as public broadcasting.

joshua wattles said...


The frequency of these rate setting activities is a cause for concern as you point out very well. In emerging markets compulsories are a recipe for disaster. In some circumstances one might be better off with exemptions at very low levels of commercial activity leaving the bigger players to make deals.