The Journal of The DuPage County Bar Association

Back Issues > Vol. 21 (2008-09)

Monetizing Music Over the Internet :  An Examination of Online Money-Making Opportunities for Artists and Web Sites
By Daliah Saper & Dominika Szreder

By utilizing new technology, independent artists, established musicians, and music businesses are “monetizing” music over the Internet without the necessity of large advertising budgets or the blessings of a major record label. Online distribution models are rapidly evolving and generally include: the sale of music files in downloadable form; web casting; streaming live events/concerts; broadcasting music via Internet radio stations; offering subscription services that allow users to select music on demand; and providing databases of music lyrics—just to name a few.

If you are an attorney retained to handle the intellectual property issues associated with monetizing music online you must understand the nuances of copyright law as it applies to different players in the music industry.  Specifically, three types of clients stand to benefit from monetizing music on the Internet: 1) individual artists and composers; 2) web sites actively using music content; and 3) web sites passively allowing users to upload  music.  This article addresses the different ways each type of client can monetize music on the Internet, and the legal considerations inherent in the monetization.

I. A PRIMER ON MUSIC COPYRIGHT LAW
Recorded music generally falls into one of two categories: phonorecords, which are fixed copies such as compact discs and cassettes, or public performances, which are either live or transmitted via channels such as radio broadcasts.1  In order to sell phonorecords of recorded music, one must license the copyright holder’s exclusive rights of (i) reproduction and (ii) distribution.2  These rights are commonly referred to as “mechanical rights” in the music industry and are usually concurrently licensed.3  In order to transmit songs via public broadcasts, however, one must instead license the copyright holder’s exclusive right of public performance.4  Although the divide between listening to a song and buying a song is temporally small on the Internet, the distinction between phonorecords and public performances is instructive in licensing matters.

Every song has two copyrightable identities: as both a “musical work” and a “sound recording.”5  The musical work encompasses the composition of the music, typically consisting of the lyrics and notes, whereas the sound recording is the performing artists’ rendition of the music.6 Although both the musical work and sound recording coexist on the same phonorecord, copyright law recognizes each as separate copyrightable works.  Usually the record company owns the sound recording, and a publishing company owns the musical work. 

II. ARTISTS/COMPOSERS
If your client is an artist or composer, emerging or established, the Internet provides limited barriers to entry into the music industry.  The ease of distribution over the Internet allows artists to reach out to a worldwide audience almost instantaneously.  Meanwhile, access to analytical and demographic data enables targeted and inexpensive marketing. 

Under traditional music industry practices, artists only receive a negligible percentage of revenue generated by a record or even nothing if the record fails commercially.7  However the digital distribution of songs directly over the Internet enables artists to receive a greater share of the revenue generated by each song and/or record.  Furthermore, the Internet allows artists to retain control of the right to reproduce and distribute their own songs, rather than transferring that right to record labels.  Just how an artist chooses to reproduce and distribute his songs depends on the particular web site and underlying technology.

A. Internet Distribution Methods
At present, two basic types of music distribution methods thrive on the Internet: downloads and streaming.  Downloads occur when a distributor transmits an actual music file to a customer, without any contemporaneous playback of the recorded music.  Unlike downloads, streaming does not leave a physical music file with the customer, and instead involves contemporaneous playback of the music. 

B. Independent Download Distribution Model
Last year, the largely successful band Radiohead offered their album online for three months at an open price.8  No longer under contract with a record label, Radiohead allowed each Internet user to pay whatever he considered a fair price for the album download.  Although Radiohead was not the first to independently distribute their album online, they have popularized an approach to monetizing music on the Internet that is a viable option for established and emerging artists alike.  

C. Online Music Retailers
A number of music retailers on the Internet offer music downloads and/or subscription services.  On web sites like Artistdirect.com, individual artists can sell their songs and merchandise directly to Internet users and retain most, but not all, the revenue from these sales.  The assignment of reproduction and distribution rights between artists and online music retailers varies by web site.  Accordingly, artists and their attorneys should take care to understand exactly which rights they are monetizing and transferring.

D. Web casters
Web casters, perhaps better known as Internet radio services, stream music without making a permanent copy on a user’s computer.  One type of service directly broadcasts on the Internet, like Pandora.com, while another involves licensed radio stations streaming their over-the-air programming on the Internet.  Although individual artists may have no say in ensuring their music is played on licensed radio stations on the Internet, there is an opportunity for music licensing with independent Internet radio stations.  Independent internet radio stations generally pay royalties both to copyright owners of the sound recording and to the performers who are featured on such sound recordings.  For those independent artists that have retained all their rights in the music, entering into a licensing agreement with an internet radio station may provide an appreciable stream of royalties in the future.

III. WEB SITES ACTIVELY MONETIZING MUSIC CONTENT
There is no simple way to discuss how web sites actively monetize music content on the Internet, simply because the business models in this category are novel and continually evolving.  Though the web sites that fall into this category are diverse, the one common ground they all share is the need to obtain licenses for the music.  Generally, these web sites will have to obtain licenses for two separate copyrights: the sound recording and the musical work.  If the web site allows for downloading of music files, reproduction rights are implicated.  If the web site streams the music files, public performance rights are implicated. 
Recognizing these distinctions is critical in ascertaining the appropriate copyright owners to contact when seeking music licenses.9 

One should also be familiar with at least two statutes that implicate the licensing of music on the Internet: the Digital Performance Rights In Sounds Recordings Act of 1995 (“DPRA”) and the Digital Millennium Copyright Act of 1999 (“DMCA”).  Significantly, under the DRPA, Web casters must license public performance rights for sound recordings.  That is, in addition to securing licenses from owners of musical works, Internet radio stations must also secure licenses from owners of sound recordings.  It is not surprising that the royalty fees associated with Internet radio stations are significantly burdensome. The DMCA in turn established that certain Web casts are exempt from securing performance rights.  Given the exemption, it is important to carefully review both the DPRA and DMCA in advising web site clients as to licensing requirements.
Although outside the scope of this article, a number of key players are involved in the licensing of music on the Internet.  These players include: SoundExchange, a nonprofit performance rights organization that collects and distributes the revenue stream created by DPRA from public performances; ASCAP, BMI and SESAC, traditional performance rights societies; songwriters and music publishers; record companies or owners in sound recordings; and the Harry Fox Agency, which grants mechanical licenses.10

A brief overview of a few web sites below illustrates just how creatively businesses are actively monetizing music on the Internet:

a. Pandora: an automated music recommendation and Internet radio service that allows users to listen to particular songs or artists they enjoy;
b. i-Tunes: a digital media player application that allows users to play, organize, and download digital music and video files for a fee;
c. Jango: a cross between Internet radio service and a social network which builds a social network around the streaming music and then sells targeted ads;11
d. Seeqpod:  using music as a way to sell search technology and recommendation engines, visitors to the web site type out a song they are looking for in a search box,  and Seeqpod in turn finds the song on the internet and begins playing it without hosting the song itself.

IV. WEB SITES PASSIVELY MONETIZING MUSIC CONTENT
Web sites in this category rely entirely on user-generated content to monetize music.  Unlike the web sites actively using music as a revenue source, these web sites do not pay royalties or secure licenses from copyright owners.   Instead, they simply allow their Internet subscribers to upload, distribute, and/or stream music.  Although these types of web sites generally “get away” with not paying royalties, there is always the possibility of contributory or vicarious copyright infringement based on subscriber conduct.12   Notable mentions in this category include YouTube, a video sharing web site, and MySpace, a social networking web site that allows users to upload music and videos. 

V. CONCLUSION
The music industry is undergoing considerable changes as a result of the business opportunities available on the Internet.  Artists are attempting, and at times succeeding, to capitalize on their copyrights independent of record labels while web sites are experimenting with novel business models.  Copyright and licensing considerations in this ever-changing online music industry are in constant flux as well, as business practices and new statutes continually redefine legal parameters.  If your client is seeking to monetize music over the internet, the opportunities and accompanying legal landscape are vast.

1 Jonah M. Knobler, Public Performance Rights in Music Downloads: United States v. ASCAP and Beyond, 11 No. 12 J. Internet L. 1 (June 2008).
2 Id.
3 Id.
4 Id.
5 Id.
6 Id.
7 Cydney A. Tune, Licensing Music on the Internet, 22 Ent. & Sports Law. 1 (Summer 2004).
8 Alex Grange, A New Era of Monetizing Music: The Artists’ Model, http://www.indie-music.com/modules.php?name= News&file=article&sid=7773 (accessed Nov. 25, 2008).
9 Cydney A. Tune, Licensing Music on the Internet, 22 Ent. & Sports Law. 1 (Summer 2004).
10 Id.
11 Stacey Higginbotham, Jango and Seeqpod Hope to Monetize Music, http://gigaom.com/2008/01/09/jango-and-seeqpod-hope-to-monetize-music/ (accessed Nov. 25, 2008).
12 Cydney A. Tune, Licensing Music on the Internet, 22 Ent. & Sports Law. 1 (Summer 2004).

Daliah Saper is the principal attorney at the Saper Law Offices, LLC.  She handles cases involving trademark and copyright infringement, trade secret misappropriation, online defamation, and commercial disputes. She also helps clients choose the right business entity, drafts bylaws and operating agreements, negotiates contracts and licenses, and provides comprehensive trademark and copyright counseling.Dominika Szreder is an associate attorney at the Saper Law Offices, LLC.  She received her J.D. from Emory Law School in May of 2008. She received a B.A. in Marketing and Graphic Design from the University of Notre Dame and a B.A. in Philosophy magna cum laude from Seattle University.  Dominika is licensed to practice in Illinois.Dominika Szreder is an associate attorney at the Saper Law Offices, LLC.  She received her J.D. from Emory Law School in May of 2008. She received a B.A. in Marketing and Graphic Design from the University of Notre Dame and a B.A. in Philosophy magna cum laude from Seattle University.  Dominika is licensed to practice in Illinois.

 
 
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