Judiciary HomepageInternational Cablecasting Technologies, Inc. ("ICT")owns a digital subscription music service, Digital Music Express ("DMX"). DMX delivers 30 channels of diverse music programming to 300,000 homes and 20,000 businesses in the United States. I designed DMX to be a friend to the recording industry and to promote rather than displace sales. DMX exposes hundreds of artists that get little radio exposure. DMX does not play entire albums, or even two cuts in a row from the same recording.
As former chairman and CEO of two record companies and a former RIAA board member, I have long supported the principle of a performance right for commercial use of sound recordings. Regrettably, ICT cannot support H.R. 1506.
H.R. 1506 tilts the playing field against DMX by giving a windfall exemption to analog and future digital broadcasters. H.R. 1506 relieves DMX's broadcast competitors from both performance royalties and programming restrictions. There is no legal reason for disparate treatment of broadcast and subscription services that both play copyrighted sound recordings for commercial purposes. To ameliorate the marketplace distortion created by H.R. 1506 to the competitive advantage of broadcasters, H.R. 1506 should be crafted so as not to further prejudice subscription music services:
ù The statutory license under H.R. 1506 should cover typical programming practices and formats. Under H.R. 1506, subscription services must negotiate special licenses just to play new songs. (Broadcasters, by contrast, could play entire albums anytime, any way and for free.) To rectify these inequities, the exclusive 3-to-4 month window (section 3(d)(2)(A)) must be eliminated and the definition of the "sound recording performance complement" (section 3(j)(5) must be clarified.
ù H.R. 1506 must not abide anti competitive and discriminatory licensing practices by record companies that hold interests in music services. Section 3(h) enumerates "kitchen sink" factors by which record companies obtain antitrust immunity, while forcing discriminatory rates on competing services. H.R. 1506 should require nondiscriminatory licensing of subscription services at the same standard rates, terms and conditions that record companies offer to their affiliated subscription services.
ù Subscription programming is not "digital phonorecord delivery". Interactive services "deliver" (ie,. sell) phonorecords. Subscription music programming services, like radio, do not "deliver" phonorecords. Yet under H.R. 1506, DMX could unfairly be charged an additional "compulsory mechanical license" fee. H.R. 1506 should clearly acknowledge that subscription services are not engaged in "digital phonorecord delivery" under Section 4(d).
Chairman Moorhead and Members of the Subcommittee:
My name is Jerry Rubinstein. I am the founder, Chairman and Chief Executive Officer of International Cablecasting Technologies, Inc., or "ICT." On behalf of ICT, thank you very much, Mr. Chairman, for inviting me to testify today.
ICT programs, markets and distributes a digital music subscription service known as Digital Music Express or DMX. DMX provides 30 channels of continuous, commercial-free music to home subscribers and commercial businesses, via cable systems and satellite transmission.
I come from the record business. In the 1970's through the early 1980's, I was Chairman and C.E.O. of ABC Dun hill Records and United Artists Records. As a former director of the Recording Industry Association of America, I share the concern that the record industry remain vibrant and profitable. For 20 years, I have joined the record industry in calling for the recognition in U.S. copyright law of a performance right for sound recordings.
DMX uses innovative technologies to assure that we are a resource that promotes rather than displaces record sales. The remote control that DMX provides to the consumer, at the touch of a button, gives the consumer all the information they need to walk into a record store and purchase the recording. We do not play albums in their entirety. We don't even play two songs in a row by the same artist. Soon, we will be offering subscribers an 800 telephone number that they can call to purchase by mail order the records heard on DMX.
We compete primarily with broadcast radio and other subscription music systems. Currently, two major commercial home music subscription services compete in the United States. My company, DMX, is independently owned by ICT. The other, Digital Cable Radio's "Music Choice," is primarily owned by three of the world's six major record companies: Time Warner, which controls the Warner, Reprise, Elektra and Atlantic labels; Sony Corporation, which owns the Sony Music, Columbia and Epic labels; and EMI, which owns the EMI, Capitol, Liberty and Angel labels.
I therefore am concerned, as I will explain below, that the narrow performance right in H.R. 1506 unfairly targets only DMX. H.R. 1506 exempts analog broadcasters, exempts digital broadcasters, and legitimizes discriminatory licensing practices by record companies that are vertically integrated into subscription services, such as Music Choice. Only one company is left to bear the burdens of H.R. 1506 -- DMX. Those burdens are compounded by draconian program regulations, and possible punitive mechanical license obligations.
DMX Programming
DMX serves up a diverse menu of specialized program formats, including channels devoted to orchestral and chamber music, country, folk, religious and inspirational music, top 40, classic rock, jazz, blues and alternative music. We have obtained all broadcast licenses for performance of copyrighted musical works, and pay license fees to ASCAP, BMI and SESAC.
DMX began programming in September 1991, to an average of 23,000 monthly subscribers. By the end of last year, DMX had approximately 300,000 subscribers nationwide. Through partnerships with cable and satellite operators, DMX now is capable of reaching some 17.5 million cable households across the United States. DMX also provides background music to more than 20,000 businesses in the United States. We are expanding our network internationally into Europe, Canada, Latin and South America and Africa.
DMX Supports Performance Rights. But Opposes H.R. 1506 Because it Unfairly Targets DMX
It comes as no surprise to anyone who knows me and my history in the music business that I am a strong believer that sound recording companies and music performers need and deserve performance rights, and that commercial entities that perform sound recordings should compensate producers and performers. I have called on Capitol Hill and in the press for the enactment of a performance right as a fundamental principle of copyright law.
But a performance right applied only where it seems convenient or pragmatic to do so, is not principled at all. It becomes a pretense of fairness and an excuse for discriminatory treatment. That is why, with deep disappointment, l must Strongly oppose H.R. 1506.
The intent of H.R. 1506 is to level the playing field of copyright law for producers and performers in sound recordings. The limited scope of H.R. 1506 instead distorts the marketplace for music programming. By entirely exempting broadcasters, and giving licensing advantages to vertically integrated record companies, H.R. 1506 tilts the playing field against DMX in the following ways:
ù H.R. 1506 imposes a performance license and payment obligation only on digital subscription services, while it broadly exempts all broadcasters, whether analog FM or tomorrow's CD-quality digital broadcasts. This commercial advantage for the broadcast industry cannot be justified under copyright principles or market realities. Whether over radio airwaves, cable or satellite, a public performance is a commercial use that should be subject to a performance right.
ù The statutory license Should, but does not, cover typical programming practices. H.R. 1506 gives another perk to the broadcasters by exempting them from the "sound recording performance complement" and the three-to-four month "exclusive window." These provisions will prevent subscription services from providing normal programming that radio broadcasters do free of any performance royalty, unless we pay the record companies a second premium. The exclusive window and sound recording performance complement are unduly restrictive and unworkable in practice.
ù In addition to the performance royalty, H.R. 1506 unfairly may foist upon subscription program services the obligation to pay compulsory mechanical royalties ordinarily applicable only to record companies. The definition of "digital phonorecord delivery" blurs the fundamental differences between interactive services and subscription services. Interactive services, like record companies, sell records. Subscription services, like radio stations, program selections of music for listening. It would be illogical, unjustifiable and prejudicial to apply the section 115 compulsory mechanical license to DMX.
ù The "Licensing to Affiliates" provision inadequately safeguards against anti competitive licensing practices by record companies that are vertically integrated with digital music subscription services. The threshold of ownership under Section 3(h) is too high to assure equal treatment for all competitors, and the language of clauses (h)(1) and (2) opens loopholes wide enough to justify almost any form of monopolistic behavior or unlawful discrimination, and would hamper any attempts to remedy such behavior through the courts.
I wish to elaborate on these basic philosophical and policy points, and to comment on a few specific concerns with respect to the drafting of H.R. 1506.
1. THE BROADCASTER EXEMPTION FROM LICENSING OBLIGATIONS IS UNJUSTIFIED UNDER COPYRIGHT LAW AND THE REALITIES OF THE COMPETITIVE MARKETPLACE.
Broadcast or Subscription. It's All A Performance
As a matter of copyright law, there is no reason to limit a performance right to subscription services. Performance rights should be applied to all commercial users of sound recordings, including over-the-air broadcasting. Every day, tens of thousands of copyrighted sound recordings from compact disks are played over radio stations with high quality reproduction. Not a penny of performance royalties is paid to producers and performers by those broadcast stations now, nor would it be paid under H.R. 1506.
Digital subscription music services and radio both compete for the listener's ear. Audiences tune in to enjoy a particular type of programming, be it on FM radio or DMX. By contrast, a consumer who wants to listen to a specific piece of music at a particular time will listen to a purchased compact disk, tape or vinyl record. We are no more in competition with record companies than is any radio station in America. Indeed, as l later explain, DMX implements promotional innovations that make DMX a more direct and effective promotional medium than broadcast radio.
The biggest differences between radio and DMX are, first, that radio derives its income from sponsors or taxpayer-funded subsidies, while commercial-free DMX derives its income from reasonably-priced monthly subscriptions. Broadcasters are better able than subscription services to pass on the costs of a performance right. Broadcasters can marginally increase the price of their commercial announcements to their sponsors. DMX cannot easily pass on the cost of a performance royalty directly to the consumer.
Second, DMX plays a much wider variety of music than could be supported in the average radio market. DMX exposes the consumer to many artists that receive little or no air play from the "more hits, more often" crowd on the FM dial. We are a new service and so we may not yet have gold or platinum records hanging on our wall; but that day surely is coming and very soon. Subscribers tell us that as a result of the diverse programming on DMX, they have purchased more albums by artists they would never have known but for DMX. So if the broadcasters are correct that air play promotes sales, surely DMX is a better friend to the record industry than is FM broadcasting.
Of course, many radio stations provide programming other than music, such as talk, news, weather and traffic, but that is why they obtained their spectrum for free in the first instance. It does not justify an exemption from a performance right; the amount played only affects the amount paid. There is no reason to exempt broadcasters while roping in DMX.
Subscription or Broadcast. Digital is Digital The distinction made in H.R. 1506 between digital and analog technology also finds no support in the legal principles that justify performance rights. It has no basis in fact. "Digital" does not, in and of itself, mean "better." A low bit-rate digital signal sounds worse than FM radio. Nevertheless, in today's technology, digital cable music subscription services are one step ahead of FM analog broadcast in terms of sound quality and interference-free reception.
Scant years from now, however, the public airwaves will be teeming with digital audio broadcast stations delivering CD-quality sound to millions of home consumers and commercial businesses, absolutely free of charge. The sound quality and reception of digital radio hardly will be distinguishable from DMX. Digital broadcast stations will compete for the same listeners as digital cable services.
But under H.R. 1506, digital subscription services must pay a performance right license fee; our digital broadcast competitors get off scot-free. If we find it unpalatable to cover digital broadcasting now, before it becomes a reality, it will become virtually impossible to do so once FM radio goes digital. If H.R. 1506, as the recording industry asserts, must look to the future, then we should not now exclude digital audio broadcasting.
Digital Subscription Channels Promote. Not Displace. Sales Subscription-based radio services do not displace music sales any more than do broadcast radio stations. In fact, as I suggested earlier, DMX technology is better designed than radio to promote, not displace, record sales. Digital subscription radio, and DMX in particular, adds technological innovations that mean more sales for the recording industry:
-- How many times do you listen to the radio, get interested in the music or the performance, but never hear an announcer identify the piece or the performer? DMX gives its customers the answer at their fingertips. The DMX DJ Remote control has a visual display window that, at the touch of a button, identifies the name of the song, the artist, the composer, the album name and identification number, and the record company that published the sound recording.
Under H.R. 1506, it would become mandatory to include such information in the transmission signal. DMX voluntarily has done so from its inception. However, l would urge that the types of required information be few in number, directly related only to the purposes of this legislation, clearly defined and permanently set. Without such specificity, the bill would impose an uncertain obligation to continually invest in new technology or equipment whenever the recording or music industries added some new code for unrelated purposes.
-- DMX is bringing a new service to its subscribers -- an 800 telephone number that the subscriber can call to purchase any compact disk heard on the DMX channels and receive it by mail order.
If subscription programming threatened the record industry, one would not expect three of the world's six major record companies to have so heavily invested in the Music Choice subscription service; but one also would expect that DMX and Music Choice already would have depressed record sales. This is hardly the case. Since l launched DMX in 1991, record industry revenues from compact disk sales are up by nearly 50 percent.
Despite the furor and rhetoric over the dangers of subscription services, one may search high and low for a single shred of empirical evidence that digital cable and satellite based services displace sales. I guarantee you will not find it. DMX studies show what the U.S. Congress Office of Technology Assessment confirmed in 1989: those who are the most interested in new audio technologies are the heaviest purchasers of recorded music. Our research shows that DMX listeners generally increase their purchase of recorded music because of exposure to new artists on DMX channels. The DMX listener is the record industry's best customer.
Throughout this century, new technologies initially feared as dangerously competitive have proven instead to be synergistic. Records didn't kill the concert hall, they whetted consumer appetites to see live performances. Radio exposed the public to new artists and promoted both record sales and concert tours. Tape decks and personal recorders spurred the purchase of millions of prerecorded cassettes for playback. The VCR and MTV created the multi million dollar worldwide market for sales of music video.
If listening to DMX may displace record sales, so would listening to the radio. Arguably, broadcast radio would displace sales more than DMX. All broadcasters preannounce records. Many publish a daily or monthly program guide. DMX does none of these. Consumers don't know what is going to be played next on DMX. As I have noted, DMX does not play entire albums. FM radio stations do, and often. For example, this month the recording industry released two long-awaited rock recordings, both expected to be smash hits in the record stores. One, is the Pink Floyd double CD live recording, "PULSE"; the other is the new album by Soul Asylum. Reportedly, a local Washington, D.C. FM radio station played both of those albums in their entirety -- indeed, they played the entire Pink Floyd album even before it became available for purchase in record stores.
DMX is not asking for the right to play entire albums. I personally think it can be harmful to the recording industry, and I do not support it. But given the magnitude of rat!o listening versus listening to DMX, it makes no sense to say that subscription services cannot engage in normal programming formats and practices, or must pay a premium price for that basic need, while broadcasters remain untouched. I can't imagine what the broadcasters have done so right to deserve these multi million dollar perks, or what DMX has done so wrong to be forced to foot the bill. And it would be ironic if this bill encouraged broadcasters to play whole albums or multiple cuts so as to maintain a competitive edge over subscription services.
Finally, the justification for performance rights does not lie in the rare possibility of home off-the-air recording. It resides in the principle of payment for commercial usage. Congress recently addressed and resolved this separate home recording issue in the 1992 Audio Home Recording Act. Once again, there is no principle that justifies exempting broadcasters while imposing performance rights on DMX.
A Broadcaster Exemption Will Not Promote International Reciprocity
One justification offered for H.R. 1506 is that it will help our trade negotiators to unlock pools of performance royalties held hostage in foreign countries, which royalties rightfully should be paid to American record companies. Mr. Chairman, through my experiences in the record industry and DMX's foreign operations, l am well familiar with the attitudes expressed abroad toward the lack of a sound recording performance right in this country. Unfortunately, the limited scope of H.R. 1506 will do nothing to change those attitudes, and instead may reinforce them. Of the more than 60 countries that currently give performance rights to sound recordings, none has a law comparably narrow in scope to H.R. 1506. Those countries all broadly apply their performance right. No other country differentiates between analog and digital, and subscription and non subscription services. It is hard to imagine that countries that have intentionally withheld from United States interests more than $120 million in annual royalties, in spite of the obligations of the Berne Convention, the Rome Convention and the GATT, would suddenly open their coffers in light of a performance right that applies only to digital subscription music services.
I have heard the argument that while H.R. 1506 does not solve the international problem, it couldn't hurt and could possibly help -- like a bowl of chicken soup. Mr. Chairman, the narrow performance right of H.R. 1506 is a mighty thin broth. Chicken soup remedies will not cure international inequities. We should not use H.R. 1506 as an excuse not to take the strong medicine we really need. If we are unwilling to do what is right, we should not enact an unfair bill just for the sake of doing something.
Political Reality And Fundamental Fairness
In the months since the introduction of the Senate companion performance rights bill, S. 227,1 have heard across Capitol Hill that it is politically impossible to impose a performance right on the broadcasters. Sure, it would be fair and proper to enact a broader performance right, they say, but for political reasons it simply cannot be done. This is the kind of talk that leaves citizens like me scratching our heads.
If political realities dictate that H.R. 1506 must exempt broadcasters, please recognize that this exemption creates severe distortions in the marketplace that could render subscription services noncompetitive with broadcast radio. I therefore implore the Committee to make every effort in H.R. 1506 to ameliorate those distortions. I will address the remainder of my statement to the specific provisions of the bill that should be amended to balance the obligations and exemptions of H.R. 1506 with fundamental fairness to DMX.
2. THE EXCLUSIVE WINDOW AND SOUND RECORDING PERFORMANCE COMPLEMENT OVER-REGULATE SUBSCRIPTION SERVICES.
The most basic element of fairness needed in H.R. 1506 is to ensure that the statutory license covers typical programming practices. A statutory license is meaningless unless it allows subscription services to compete with broadcasters who are exempt from the license obligation. A subscription service should be able to program typical music formats, such as top 40, adult contemporary, country, rock or Jazz, based on the statutory license alone without the need to negotiate separate and more expensive deals with each and every record company. Unfortunately, this is not the case under the current draft of H.R. 1506. The "exclusive window" provision combined with the "sound recording performance complement" make programming under the statutory license completely noncompetitive with broadcast radio, and unattractive and unacceptable to the listener.
Something for Nothing for Broadcasters; Nothing for the Statutory License Fee
It seems odd, at a time when Congress is debating dismantling the Federal Communications Commission and loosening restrictions on transmission services, that Congress should consider such severe over-regulation of subscription service programming. As I noted previously in my testimony, DMX voluntarily adopted a programming code from its inception, so I have no conceptual problem accepting reasonable complement restrictions. The restrictions in H.R. 1506, however, are plainly unfair and unworkable.
Let me give you but one example of how H.R. 1506 over-regulates DMX. Top 40, modern rock, and adult contemporary formats program current hit songs interspersed with older hits. Michael Jackson's new single, "Scream," has been played on the radio for about two weeks. It entered the charts at number five -- supposedly the first time this has happened since the Beatles. Jackson's new double disk set, "History," hit the record store shelves yesterday. Radio stations are all over these Michael Jackson records like a sequined suit.
H.R. 1506, however, prevents subscription services from playing any part of the record at all. The statutory license would be subject to an "exclusive window." That means DMX or any other subscription service cannot play a new record until three months after the record gets air play, or four months after it is placed on sale. So, unless DMX paid a premium price over and above the statutory license fee, DMX could not play these radio hits until late September. Within three-to-four months, today's number one will have fallen off the charts. In other words, subscription services will have to pay the statutory license fee, and get nothing in return. Broadcasters pay nothing, and get programming regulations that restrain their competition. This is absurd. It's enough to make me "Scream."
A reasonable complement gives all the protection the recording and music industries really need. The window is broken. Shut the "exclusive window." The solution is clear: the window should be eliminated for subscription music services.
ù The "Sound Recording Performance Complement" Is Vague And Needs Clarification
The sound recording performance complement defined in H.R. 1506 is reasonable in number. If songs are not transmitted consecutively from the same album, then the performance does not substitute either for album purchase or listening. Similarly, if three songs from the same featured artist or boxed set cannot be consecutively transmitted, then the performance does not substitute for a "greatest hits" package; but it allows for the programming of consecutive cuts -- the "two-for Tuesdays" or artist blocks common throughout the radio broadcast industry.
Candidly, DMX engages in neither of these practices, and so the numbers set forth in the complement are acceptable to me. However, l certainly can conceive of a reasonable programmer playing two or three cuts in a row in appropriate circumstances, or to celebrate the birthday or the passing of a great songwriter or performing artist. This complement number in H.R. 1506 will protect such reasonable programming practices while also adequately protecting the economic interests of the recording industry and performers. Nevertheless, the complement proposal requires clarification in a few key respects.
Liability Should Not be Imposed for Unknowing Violations.
Recordings made decades ago are seeing a resurgence in popularity as older Americans and baby boomers replace scratched vinyl records with compact disks. Hundreds of collections and "greatest hits" anthologies on single disks or boxed sets are displayed in record stores, or advertised on late night television by companies as big as Time-Life and companies that consist of little more than a post office box and an 800 number. Last Friday's "Weekend" section of The Washington Post advertised two such collections:
-- "Only Rock and Roll" -- "All the best of the 50's through the 80's." 160 "Classic Pop Hits" from Chuck Berry to Fleetwood Mac, sold either as set or as 8 individual Cds of 20 songs each; and,
-- "Those Wonderful Years" -- "The definitive collection of pop hits from the 20's through the 50's." 140 classics by Duke Ellington, Bing Crosby, Rosemary Clooney and other "timeless artists," sold either as a set or as 10 individual CDs of 14 songs each.
There is no possible way that a programmer such as DMX can keep track of the hundreds of such collections or to take a license with every tiny record label and late night "greatest hits" packager in America. It would be prohibitively expensive even to try. Unfortunately, the current draft of H.R. 1506 would require DMX to do just that.
The complement applies if the two or three selections are "embodied in" a phonorecord or set of phonorecords. Under this standard, DMX could play songs from albums by the original artists, but DMX still would violate the complement because these same songs might be "embodied in" some anthology or collection. This is unfair. However, it is easily remedied simply by changing the words "embodied in" to the word "from." By requiring that the songs actually be played from a particular recording, the bill makes certain that liability is imposed only for knowing and intentional violations of the complement.
The Complement Needs Clarification
In return for paying the performance royalty, DMX surely should be able to understand what is included in the statutory license. Unfortunately, H.R. 1506 leaves too many unanswered questions as to what the complement means in practice. We raise several questions and suggest several clarifications below:
a. The Complement should apply on a per channel basis. If the complement applies across ail 30 channels of DMX service, DMX would have to get a separate license for each of hundreds of cross-over artists, just in case the programming on any of our channels happens to coincide.
b. "Selection" needs definition. Is a "selection" an entire symphony, or just one movement? Is it a complete opera, or is it measured by act, by scene or by aria? Is a medley of show tunes one selection or many? Several factors such as whether the "selection" is the whole or part of a greater work, how it appears on the recording, how it ordinarily would be performed live, would be relevant in a judicial balancing test.
c. "Featured recording artist" needs to be defined. Does the complement permit DMX to play consecutively a John Lennon record, a Paul McCartney and Wings tune, a George Harrison cut and then a Beatles song as long as Ringo sings lead? Is DMX liable if we consecutively play Mozart, Beethoven, Schubert and Stravinsky performed by the same orchestra? What if the orchestras were the same but had different soloists? What if there are four different orchestras, but all conducted by Leonard Bernstein?
"Featured artist" should mean a performing group or ensemble, or an individual performer identified as the principal artist performing on the sound recording. There should be only one "featured artist" per phonorecord; and a vocalist or soloist performing along with a group or ensemble should not be a "featured artist" unless that person is identified on the recording as the primary performer.
d. The Complement should apply at the time the program schedule is set. not at the time of transmission. DMX sets its programming in advance. Suppose I programmed my channel on June 15 for transmission today. On June 15, Michael Jackson's "History" album (one disk of which is a "greatest hits" package) did not exist, so if on that day I played three consecutive cuts from three different Michael Jackson albums, l did not exceed the complement. But if the complement is measured on the date of transmission, then I played one cut too many. Only by setting the complement as of the date of programming can DMX avoid liability for unintentional acts, and be liable only for knowing violations.
Mr. Chairman, it is critically important that unintentional acts do not result in liability. and that this is made clear before the legislation is passed. DMX is in its early stages of development. We have yet to turn an operating profit. I am sickened by the prospect of betting my company's future on the outcome of a court case for copyright infringement or some arbitration proceeding. Again, it bears reminder that broadcasters are exempt from all of these obligations. To achieve at least a relative degree of equity, H.R. 1506 must state with certainty that liability is imposed only for willful violations in clearly defined circumstances.
A Healthy Dose of Programming Reality
I understand the concerns that underlie the performance complement -- I twice ran record companies myself. But before we try to slay every bogeyman hiding in some record company executive's anxiety closet, we should take a close hard look at the programming practices of subscription music services today.
People tune in a subscription channel like DMX to be exposed to a genre of music. We program a varied selection of artists and composers to increase listenership and to maintain audience interest. No one likes all composers or performers in a particular genre. Even people who love particular artists often can't stand some of the songs on their albums. That's why some tunes are hit singles and others end up on the flip side.
DMX programming policy of no entire albums, no consecutive selections, reflects these realities. It respects the interests of the record industry, and makes sense for a subscription programming service. But no subscription service can afford either to live with unduly restrictive programming micro management, or to pay premium prices for normal programming practices -- particularly when our broadcast competitors are exempt from both obligations. I urge you, Mr. Chairman, and the Committee, as a matter of fundamental fairness to ensure that the statutory license fee guarantees that subscription services can engage in normal competition with broadcasters and with each other. Please -- eliminate the exclusive window and clarify the complement.
3. THE COMPULSORY MECHANICAL ROYALTY SHOULD NOT APPLY TO SUBSCRIPTION PROGRAMMING SERVICES SUCH AS DMX.
Subscription services, like radio, program music selections for the purpose of listening. Recording from DMX does not substitute for purchasing a recording. If consumers want to listen to a particular record at a chosen time, they have to play it from their own collection, since they cannot do so via DMX. Consumers do not select the music to be played on DMX. They have no idea what is going to be played on DMX or when, since DMX does not publish a program guide, pre-announce record or album titles, or play "requests." DMX listeners thus have no real ability to tape from DMX and logically have little incentive to do so. Why tape when the styles of music you want to hear are available whenever you tune in?
Interactive services are clearly a different animal. The consumer uses an interactive service to purchase a song or album. The consumer selects the recording interactively, rather than in a record shop. The purchased recording is delivered electronically to the home, and the consumer "downloads" or records the delivered works on home equipment, such as an analog or digital recorder.
Thus, interactive services implicate the rights to make and distribute phonorecords, under section 106(1) and (3). By contrast, subscription programming services, like radio, are public performances only.
Unfortunately, the definition of "digital phonorecord delivery" in section (d) of the proposed amendment to Section 115 indiscriminately conflates these two distinct types of services. That section would loosely apply to any performance that "can be reasonably expected to result in a reproduction by or for any transmission recipient of such sound recording ... regardless of whether the digital transmission is also a public performance of the sound recording...." This overly broad language could impose upon subscription services a compulsory mechanical royalty in addition to a performance royalty.
It is unfair and prejudicial for DMX to pay an additional mechanical royalty like the record companies do for the right to make a compact disk or tape, when all we do is play recorded music in the same manner as radio stations. Broadcasters don't pay mechanical royalties. Given the similarities between broadcast and subscription services, and the clear distinctions between subscription programming and interactive delivery, there is no reason to impose the mechanical royalty on DMX.
Copyright holders entitled to assert the mechanical right came to Congress but a few years ago on this issue. Congress then gave them the right to payment for digital home recording via the Audio Home Recording Act of 1992. That legislation embodied an historic compromise among the music industry, recording industry, consumer electronics manufacturers and consumer groups, and was a delicate balance of those competing interests. There is no reason so soon to revisit this issue. The performance rights bill should not be exploited as an "end run" around the Audio Home Recording Act. H.R. 1506 should make clear that "digital phonorecord delivery" applies only to interactive services, and not to subscription programming entities such as DMX.
4. H.R. 1506 GIVES AN UNFAIR ADVANTAGE TO VERTICALLY INTEGRATED SUBSCRIPTION SERVICES.
H.R. 1506 does not adequately safeguard against the potential for anti competitive licensing practices by vertically integrated record and subscription services. Having exempted broadcasters entirely, care must be taken to avoid such a possibility. Otherwise, any provision that legitimizes disparate licensing practices by integrated record companies would mean that H.R. 1506 applies to only one company -- DMX.
The vertical integration of three of the world's largest record companies into one of the two digital subscription services raises serious issues for competition in this market. It is essential that any performance rights law must protect competing music services against discriminatory license practices. H.R. 1506 does not provide that needed protection.
Vertical integration could result in a record company charging its affiliate a monopolistic price, secure in the knowledge that 50 percent of the royalties simply are being paid from one pocket to the other. Or it could result in better financial terms for the affiliated entity, such as a lower performance royalty, more flexible programming terms, or advance exclusive access to new hit recordings. Any of these would be anti competitive.
Section 3(h) of H.R. 1506 attempts to remedy this problem, but I am deeply concerned that it simply does not go far enough.
ù Section 3(h) only applies where the recording companies own a "controlling interest," or can exercise a "controlling influence." What does that mean in terms of Digital Cable Radio, which is approximately 50 percent owned by three record companies? Is each company's shares enough to be a "controlling interest"? Does any one company hold a "controlling interest," or wield a "controlling influence"? Does this provision adequately prevent these companies from offering better terms to their affiliates out of self-interest, not out of a controlling interest?
H.R. 1506 should adopt a lower threshold. such as the 5 percent ownership figure adopted in the Cable Act regulations. at 47 C.F.R. 76.1000(b).
ù The body of section (h) promises licensure by the copyright owner on "similar terms and conditions to all other similarly-situated entities offering similar types of digital transmission services, ...." This seems fair in theory, but in practice, the possibility of arbitrary and discriminatory licensing remains. The antitrust laws are designed to preclude both unduly favorable licensing practices and monopolistic pricing. H.R. 1506 does not adequately address either of these practices.
ù The vagueness of subsections (1) and (2) of section (h) further expose competitors to discrimination. They list five specific factors and one kitchen sink factor that a record company could use as an excuse for disparate treatment. The enactment of these factors may unintentionally impede efforts in a court of law, by a competitor or the government, to remedy any anti competitive conduct.
To remedy these flaws, we suggest that the provision require that the record company shall offer to other entities the same terms and conditions offered to its affiliated entity. If the affiliated entity's license sets different rates based on factors such as numbers of subscribers, methods of delivery, number of plays, etc., then those rates would apply to the unaffiliated entity as well. However, if the license to the affiliated entity makes no such distinctions, then the record company should not be able to artificially discriminate against the unrelated entity by citing current differences between the entities. Subscription programming is a fledgling business that is growing in market penetration, number of channels and types of services. H.R. 1506 should not permit a record company to discriminate against an unaffiliated service based on distinctions that soon could evaporate or be rendered meaningless.
5. THE "AUTHORITY FOR NEGOTIATIONS" PROVISION SHOULD BE CLARIFIED.
H.R. 1506 would amend Section 114 of the Copyright Act to add a new paragraph (e), governing authority for copyright owners to collectively negotiate with subscription services. We agree that in concept this could lead to certain administrative conveniences for both sides. However, the provision also lends itself to possible refusals to deal or other collusive behavior. Therefore, we suggest that the provision make clear that this should be a non-exclusive mechanism for negotiations, and that any licensee has the unfettered right to negotiate directly with a record company if it prefers to do so. This can easily be attained by inserting the words "on a voluntary and non-exclusive basis" toward the end of the last sentence, between the words "may designate" and "common agents."
6. ANY BUSINESS SUBSCRIPTION EXEMPTION ALSO SHOULD APPLY TO DMX.
H.R. 1506 exempts subscription music services delivered to commercial establishments from the new performance right. As a provider of commercial services, DMX appreciates and supports that exemption as drafted. Should that provision be amended in any manner, DMX respectfully requests that its services to business establishments be treated the same as those of other entities.
What I hope my comments have shown, Mr. Chairman, is that the legal principles and equities that favor performance rights are not satisfied by the current draft of H.R. 1506. A truly fair bill would impose the performance right also upon broadcasters. If that fundamental equity must be sacrificed to political compromise, this bill should be carefully crafted to avoid compounding the marketplace distortions inherent in the broadcaster exemption.
The amendments and clarifications I request will go a long way toward restoring balance and fairness to those subscription services who disproportionately bear the brunt of this bill. With such changes, l would be able to support H.R. 1506. But as drafted, I strongly oppose it. A narrow bill skewed to the competitive benefit of broadcasters and vertically integrated music services is not "simple justice" -- it is simply unjust.
Thank you again for inviting me to testify today. I would be pleased to answer any questions.