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Ever been startled by the sudden burst of song from a colleague’s cell phone? For Jacqueline Charlesworth, that’s the sound of the cash register ringing. As senior vice president and general counsel for The Harry Fox Agency — a New York-based collecting agency that acts as a clearinghouse for nearly all licensing money flowing to music publishers — she has spent four years helping reap billions of dollars for her firm’s clients from these ringtones. While the music industry struggles to sell CDs, the ringtone business is booming, funneling $3.5 billion into music industry coffers last year, according to London-based telecommunications consultancy The Arc Group. Ringtones may account for 25 percent of music sales by the end of 2006, thanks to millions of consumers paying $3 for 25-second versions of songs — incredible when the full-length version can be purchased for just 99 cents on Apple Computer Inc.’s iTunes. Even more mind-boggling is the disarray this suddenly popular technology has caused, as the many arms of the recording industry struggle to determine how to apply copyright laws to ringtone sales. Recording companies and music publishers have always argued about money, and now they have intellectual property ambiguities and a gigantic new revenue stream to fight over. Publishers, historically the industry’s stepchild, may have the upper hand this time. What’s at issue is the interpretation of �115 of the 1909 Copyright Act, which forces music publishers to accept relatively small compulsory license fees for their copyrighted music. Nowadays, that figure is 8.5 cents for each unit — i.e., a record or CD — sold. However, �115 also states that reproduced works subject to compulsory fees can’t be fundamentally altered, notes Charlesworth, a lawyer whose stature in the music industry is growing almost as quickly as teenagers change their ringtones. “If you take just a 30-second clip of a song, that’s a fundamental alteration,” she says. Some in the industry disagreed with Charlesworth — and tried sending publishers just the compulsory fees. On July 16, 2004, Charlesworth reiterated her stance with a notice sent out to record labels, ringtone vendors, mobile carriers and other licensees. “It wasn’t a legal threat,” she says. “Just a reminder.” Steven Marks, senior vice president of business and legal affairs for the Washington, D.C.-based Recording Industry Association of America, wrote back to Charlesworth on Sept. 8, 2004, criticizing her legal reasoning. Says Marks: “There’s no precedent in copyright law for the proposition that every partial reproduction or other use of a work is a derivative work,” and thus subject to licensing negotiations. As far as he is concerned, compulsory licensing applies. And so the battle began. There’s nothing the press likes more than a good feud, but this one has been largely ignored, perhaps because few in the industry or among its observers can agree on what a ringtone is. A derivative of original published music? A fragment of a digitally downloaded song file? A cell phone user’s fashion statement — thus a public performance for which fees have to be collected on behalf of performers and publishers? The answers to these questions have big implications for the wireless and music industries. If ringtones are mechanical reproductions of recorded music in the usual sense (like compact discs or digital music files), any licensee who sells a ringtone has only to notify Harry Fox of a sale and pay the compulsory fee. If, on the other hand, ringtones are reproductions that make a significant change in a song’s composition or consumer use, Harry Fox and its music publishing clientele can charge much more than 8.5 cents per unit, or they could even refuse to issue a license. Ringtone vendors aren’t just paying publishers, however. Record companies, in charge of music retail sales for more than half a century, insist that a ringtone’s most valuable property lies in the underlying master recording of the music that makes up the ringtone. Which the record labels own — and want to be paid for. And what about the fact that many cell phone users put ringtones on their phones to impress others? Performance rights organizations, such as the American Society of Composers, Authors and Publishers, insist that this means a cell phone is giving a public performance when it rings. Naturally, these organizations want money, too. Today’s controversy had its overture in the 1900s, when the world encountered its first form of reproduced music: the piano roll. According to Mary Beth Peters, register of copyrights at the Library of Congress, music publishers lobbied Congress at the time to “grant them the exclusive right to authorize the mechanical reproduction of their works.” Congress did grant publishers that right, but it wasn’t exclusive. In a move whose impact was not felt for another 50 years, legislators wrote �115 into the 1909 Copyright Act, allowing anyone to make a mechanical reproduction without the consent of the copyright owner. The only thing that was required was notice to the publisher and a payment of 2 cents per reproduction. Congress wanted to protect against a publishing monopoly, Peters explains. Section 115′s unintended accomplishment was the creation of record labels, which emerged — thanks to their lawyers — with the ability to secure master recordings, monopolize distribution and sell records for whatever the market would bear. The labels paid the publishers a couple of cents a copy and, after paying other costs, kept nearly half of retail sales. “For a long time, record companies made a lot of money, and publishers were very neglected,” says Frank Scibilia, senior counsel at Proskauer Rose and EMI Music Publishing’s primary outside attorney. Compulsory licensing has been modified several times since it was first enacted. In 1976 Congress tightened the licensing to apply only to sound recordings for “private use” (such as records played at home), that didn’t “change the basic melody or fundamental character of the work.” If modifications occurred, both permission and payment had to be negotiated. During the ’80s and ’90s, Congress raised the compulsory rate until it reached its current 8.5 cents per reproduction and, in 1995, applied compulsory licensing to “digital phonorecord delivery.” The DPD amendment paved the way for sales of music downloaded via iTunes, Rhapsody and other digital music sites. But would compulsory licenses apply to ringtones? That was the big question in 2001, when ringtone producers, commonly known as aggregators — including small startups like New York-based Zingy Inc. and Moviso LLC in Los Angeles — first approached Harry Fox for publishing clearances. The aggregators wanted to offer simple monophonic ringtones (single-pitch successions that mimic the rhythm and melody of more complex compositions). Steven Masur was outside counsel for Zingy at the time. Masur believed Zingy could get away with paying publishers the compulsory rate. However, Zingy’s chief executive, Fabrice Grinda, wanted to play it safe. “I thought we had a good argument,” says Masur, who founded IP boutique Masur & Associates. “But Zingy was trying to launch a business and didn’t want to attract lawsuits. Grinda thought it would be better to pay more to get this deal done quickly.” Early deals like Zingy’s established the level of payment music publishers now expect. Still, because ringtones were unsophisticated — and because no one knew what a hit they’d soon become — few paid attention to these agreements. “In the early days, it was a great business,” Masur says. “You paid for the content, you paid for the license, you sold at a higher price — and you made a good profit. Then, others started coming to the table.” Who came? The record labels, for one. By 2004 mastertones — compressed snippets of studio-recorded music — were the hot new thing. In order to offer them to the public, aggregators needed to obtain both publishing clearance and permission from those who held the rights to the recordings. That meant negotiating with record companies. According to Gordon, who has represented both aggregators and record companies, the labels were peeved when they learned how much the publishers had gotten from the aggregators. According to multiple sources, aggregators had typically agreed to pay 25 cents per ringtone or 10 percent of the gross ringtone revenue, whichever was greater. So when the labels, which had been used to getting 40 percent to 50 percent of gross revenue from sales of digital music files, demanded a similar percentage, aggregators balked, says Gordon. Meanwhile, as ringtone sales were taking off, others started listening in. By the end of 2003, two performance rights organizations, ASCAP and Broadcast Music Inc., or BMI (which collect royalties for performances and distribute them to songwriters, publishers and others), sent letters throughout the industry declaring that playing a mastertone on a mobile phone was a form of public performance. They demanded payment. According to Richard Reimer, senior vice president of legal services at ASCAP, this amounted to 2 percent of revenue attributable to ringtones, 1.5 cents per ringtone, or a quarterly minimum fee of $500, whichever was greatest. “We monitor the market closely and regularly send letters if we need to,” Reimer says. “Most have paid.” Musicians piped up, too. Some had their lawyers review their recording contracts. According to Whitney Broussard, a partner at Selverne, Mandelbaum & Mintz who represents such artists as the Wu-Tang Clan and M�tley Cr�e, these contracts didn’t mention ringtones. Most record labels tried to rectify this by re-entering negotiations with artists, says Broussard. However, he points out, “an artist is under no obligation to grant ringtone rights.” To the consternation of the labels, some artists have started making their own ringtone deals with aggregators. During the summer of 2004, record companies and others again tossed around the idea that they could pay just the compulsory fee. Charlesworth says that a couple of licensees, including one major label, tried sending in the 8.5 cents for each ringtone sold. She directed her staff to return the money, then sent out her notice. One thing her letter did not describe was the consequences for those who kept sending compulsory payments. Pressed on whether this might inspire Harry Fox or other publishers to sue, Charlesworth danced around the question and finally replied, “They do so at great risk. We feel we have a much better legal argument.” The RIAA’s Marks disagrees. He says that the RIAA may go to court for a declaratory judgment that �115 applies to ringtones. And he has been lobbying Congress to update the Copyright Act to address new licensing issues, such as ringtones. For the past year, the House of Representatives subcommittee on courts, the Internet and intellectual property has conducted oversight hearings on �115. In hearings in June, Peters proposed the so-called 21st Century Music Reform Act, which would repeal �115 in favor of newly defined music rights organizations that would have the authority to license reproduction and distribution rights. Even so, record companies and music publishers have started to talk. One major label, Sony BMG Music Entertainment, has completed licensing deals with two publishing houses, The EMI Group and Warner/Chappell Music Inc. Sony got license clearances on a wide range of products, and the publishers got higher-than-compulsory ringtone license fees. EMI, Warner Music Group Corp. and Harry Fox are currently negotiating deals, say their spokespeople. “The way negotiations are going,” says Atlantic’s Taitz, “it seems publishers are about to win this battle.” The real issue, say some insiders, is bringing harmony to an industry unsettled by many changes — including the advent of file-sharing technology that has hurt retail sales; a burgeoning number of new licensing opportunities, including video games and movies; and large-scale mergers that find most publishing houses and record labels owned by just four companies (Sony BMG, Universal Music Group, Warner Music Group Corp., and EMI). The mergers themselves have produced dissonance that shows up in the company’s ringtone enterprises; internally, these giant corporations retain long-standing rivalries and old ways of operation. For example, even when EMI owns both the publishing and master work copyright, a lawyer from EMI Music must get a lawyer from EMI Publishing on the phone, and negotiate clearance for a ringtone. Aggregators face a comparable Gordian knot. Some contemporary music, such as hip-hop, includes samples of other songs. Aggregator Downplay Inc.’s former senior licensing manager Grace Chang says she had to secure and pay for several publishing, recording and performance copyrights for a single song: “Sometimes, it took six months to get all the licenses for a single ringtone.” Six months can be longer than a pop star’s fame these days. Taitz calls the system “unworkable. If we have a new hit song, we must get the ringtone into the marketplace right away.” Charlesworth says she understands the concerns, and that’s why she’s led a program at Harry Fox Agency to streamline the licensing process. Fourteen ringtone vendors have recently signed on to the new program, and Charlesworth says her firm is now in discussions with a major label. “There is real interest in resolving the issues without litigation,” she says. Les Watkins, vice president of business affairs and business development at Music Reports Inc., which provides copyright research for broadcasters, download services and other media that license musical works, estimates that the music business has lost billions of dollars because of operational and legal turmoil. An industry that’s seeking to adapt to new times needs to coordinate, promote new intellectual property laws and dance to a different beat. Otherwise, Watkins says, “the business will go away.”
TIMELINE
Early 1900sThe piano roll debuts, and the world hears its first reproduced music.1909The 1909 Copyright Act determines that producers of recorded music need not obtain consent from copyright holders — but must pay a nominal “compulsory” fee.1910-1950Copyright law and mass-market sales of records combine to make powerhouses of the record companies.1948Columbia Records introduces the long playing record. Reproduced music becomes more popular than live music, with the first million-seller a recording of Rodgers and Hammerstein’s musical “South Pacific.”1940-1960The Justice Department negotiates the method by which performers and publishers will be compensated — via ASCAP and BMI — for the broadcast of recorded music. 1978Congress amends the 1909 Copyright Act. Compulsory licensing now applies only to reproductions for “private use” that don’t “change the basic melody or fundamental character of the work.”1980-1990Cassette tapes and compact discs further increase the popularity of recorded music. Congress ups the compulsory license fee paid to publishers to 8.5 cents.1995Congress amends the 1909 Copyright Act again, making digitally distributed music subject to compulsory licensing.2000The cell phone ringtone fad takes off. Makers of ringtones, called aggregators, negotiate non-compulsory licenses with music publishers — typically paying more than the statutory fee.2004More complex mastertones become popular. Vendors may now have to gain rights for publishing, sound recording and performance.TodayThe music industry realizes it has to take a new look at licensing in the digital, mobile age.

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