Report suggests to change the licensing framework for sound recordings

By Emmanuel Legrand

The licensing framework for sound recordings is in need of an overhaul to allow more autonomy for rights holders to negotiate fairer deals at market rates, according to a report penned by Mark Schultz, Professor at the Southern Illinois University School of Law and President of the Institute for IP Research.

  The report, titled 'The Market for Performance Rights in Sound Recordings: Bargaining in the Shadow of Compulsory Licensing', received financial support from the Geneva Network, which is funded by from a range of public sector, non-governmental and private sector organisations, including the recording industry. 

  In the executive summary, Schultz noted that the music business “is, in some respects, more regulated than most other industries. For instance, most countries essentially impose a compulsory license on the owners of rights to sound recordings, requiring them to license the right to broadcast and publicly play their recordings to all who are willing to pay a standard rate. They cannot refuse to license; they cannot do exclusive deals; and, importantly, they cannot set their own prices.”

Market-driven rate-setting

  For Schultz, the compulsory licensing regime limits the owners of sound recording rights to essentially receive “equitable remuneration” for the broadcasting and public performance of their recordings, with rates set by courts, regulators, or legislatures rather than markets. "This institutional arrangement is quite unusual," he explained.

“Society usually leaves price setting to the market for good reasons. Regulators and courts simply cannot set 'correct' prices, as they have neither the access to information nor the capacity to process it that millions of market participants do collectively. Moreover, non-market pricing violates important non-economic values such as self-determination and autonomy,” wrote Schultz.

  To address these issues, Schultz makes the following recommendations:
• Restore injunctions as a remedy and negotiating tool.
• Approach rate-setting “with the understanding that courts and regulators are unlikely to have enough knowledge to determine the right rate, with awareness that the institutional setting skews bargaining power in favor of the licensee.”
• Courts and regulators should thoroughly assess current and changing economic conditions before fixing rates.
• Shorten negotiating windows for licensees to “rebalance bargaining power and avoid unnecessary litigation” by making new rates retroactive to the date of the first offer from licensor; awarding a higher interest rate, accounting for the internal rate of return of the licensee; and adding penalties or pre-established damages for bad faith delay.
• Restructure licenses to allow for exclusivity and windowing in order to promote competition and diversity in business models.
• Consider streaming service royalties as a compelling comparable transaction.

  Concludes Schultz: “These changes would rebalance a market long-distorted by an extraordinary institutional arrangement that deprives copyright owners of control of their property. If the example of television serves well, the results would likely create more dynamism and diversity in industry business models and content,with consumers the ultimate beneficiaries.”