Online Entertainment and Copyright Law

Statement of

National Association of Recording Merchandisers

Hearing on "Online Entertainment and Copyright Law:

Coming Soon to a Digital Device near You"

Committee on the Judiciary

United States Senate

April 3, 2001

The topic of this hearing: "Coming Soon to a Digital Device Near You" should have been old news by now. Music retailers and wholesalers have been ready, willing and able to deliver secure online entertainment since 1999. It should have come already, and if it had, frustrated consumers would not have given Napster and other such peer-to-peer music copying services the popularity they enjoy today.

The members of the National Association of Recording Merchandisers ("NARM") are retailers and distributors of sound recordings. We have played a central role in building the modern music business by partnering with record companies to advertise, merchandise and sell their products, by promoting new artists, by helping fight sound recording piracy, and most of all, by listening to consumers. Each of our retail members strive to be responsive to consumers in terms of price, service, selection, and many other areas that serve to draw customers and distinguish one retailer from another. Retailers bring these competitive urges to the Internet where new competitive elements are introduced, such as ease of site navigation and responsiveness to consumer privacy.

Our members are responsible for the vast majority of all sales of pre-recorded music, and thus are well positioned to provide lawful access to music by downloading or streaming. Over 80% of our retail members have websites, and they are eager to be a part of digital distribution. The question this hearing has been called to ask is important: why isn’t it happening?

The short answer is because record companies, in their zeal to stop Napster-type file sharing, have taken the position that they can trust no one except other copyright owners. They have, therefore, ignored the opportunity which sits right in front of them.

The greatest Napster-related problem retailers have is not the free music on Napster. Retailers have a long history of competing successfully with free goods. We compete with (but welcome) free music over the radio, with libraries, used CDs, and personal-use copying. We recognize that these secondary channels have their place in society, as not everyone is willing or able to pay full price for a new CD. Our national interest in the widest possible dissemination of creative works is the only basis for Congress to have conferred copyright protection in the first place.

Retailers also compete with the free music coming from the record companies themselves: their record clubs routinely offer "12 CDs for a penny" promotions. With 8 million members per club, that’s over 160 million albums – over 1.6 billion song files – given away just to gain market share.

So if we are that good at competing with free music why are we here? We are here because the careful balance copyright law struck as part of the public bargain to encourage creation and dissemination of these works has been upset, and it must be restored as soon as possible.

The Copyright Monopoly

This balance been upset in several ways, all of which depend on the unique characteristics of the copyright monopolies enjoyed by the major record companies. Copyright law secures to authors or artists, for limited times, certain exclusive rights. For purposes of this hearing, the most important exclusive rights are the right of reproduction, distribution and public performance. When exercised by individual recording artists, each of these rights will encourage broad reproduction, distribution and public performance of their works because such are the avenues by which artists can be compensated, and thereby encouraged to continue their creative endeavors. Because each author depends heavily upon the willingness of others to reproduce and distribute their works, each author has an incentive to offer reasonable terms. For example, music retailers would simply refuse to carry the works of an individual recording artist if that artist demanded an unreasonable price, or imposed unreasonable terms and conditions on how the sound recording could be merchandised or sold. However, when artists assign these rights to corporations that have amassed multi-billion dollar collections of these rights, so that just 5 corporations control 80% percent of all of the sound recordings in the world, the ability of retailers to resist unreasonable terms is greatly diminished. No retailer can refuse to carry Destiny’s Child, Yo Yo Ma or Ricky Martin for long – even if Sony Music embeds them with advertising and links to its own online store.

Until recently, record companies could not control the distribution of copies of their sound recordings once title passed to another. Retailers and consumers were free to sell, lend or even give away lawfully made copies. Today, copyright owners have the power to make a sound recording “time out” after a certain number of plays or after a certain amount or time, the power to prevent a sound recording from playing on one device if it was first played on another, the power to make inoperable a sound recording received by gift, unless the person receiving it pays for it again. In short, thanks to digital technology, copyright owners today enjoy such a high level of control over their works that they hardly need copyright law at all.

NARM contends, however, that copyright law never permitted such a high level of control because it was against the national interest to confer it. Doctrines of “fair use” and “first sale,” which have been codified into law should not be done away with unilaterally through technology. Rather, they should be viewed as the embodiment of important legal principles intended to protect the public welfare and further the national interest.

The following are the matters we consider to be of greatest concern:

Access

Every retailer need not stock every sound recording, but because the five major record companies account for over 85% of all sound recordings, every retailer must at least offer some sound recordings from every major record company or go out of business. In the past, record companies needed access to virtually every retailer, since 90% of all sound recordings are sold through retailers. The digital future will turn bleak, however, if record companies can control who will get to compete in digital delivery, and reserve this market for themselves. Thus far, record companies have shown the most interest in cross-licensing digital rights to each other, or to companies they control or in which they have invested. They have withheld rights from retailers who are perfectly capable of offering secure, compensated digital downloads, but who they no longer see as partners, but as competitors. We estimate that over 99% of the repertoire owned by copyright holders today remains off limits to legitimate retailers who are trying to compete with peer-to-peer file sharing.

Consumer Privacy

Today anyone can walk into a record store, pay with cash, and not have to reveal their identity to the store. If a retailer is too nosy, a consumer can simply take their business elsewhere. Online, because a credit card and other personal information are required, most retailers have created privacy policies which let consumers know, in advance, what happens to the information the store collects. Of concern to us is that, thanks to digital technology, record companies are routinely engineering ways to learn the identity of the consumer, even without the knowledge or consent of the retailer who delivers the download. The data can be sold or used by the record company to market directly to the retailer’s own customer. The retailer’s own privacy policy will be meaningless. The consumer will wonder why a particular company with which they do no business seems to know so much about their music tastes.

As Congress debates whether to impose minimum consumer privacy regulations upon online merchants, one thing should be non-negotiable: No online merchant should be forced to give up its customers to its suppliers. There is no question that secure digital distribution can prevent piracy without destroying privacy. There is absolutely no reason to allow copyright owners to leverage their copyrights into data mining.

Antitrust Concerns: Vertical Restraints

Never before have we seen the kinds of vertical restraints on music retailers that are today being thrust upon them by copyright owners. Retailers are being asked to sign license agreements that would effectively extend the copyright monopoly to every aspect of the retail channel. One popular approach, referred to as “agent retailing,” allows the retailer to offer the record company’s music for consumer download, but the record company – not the retailer – sets the price, determines the warranty, dictates the replacement policy for defective downloads, selects which sound recordings will be offered, specifies how the download will be marketed and advertised, and even determines what it will look like on the retailer’s web page. Such models raise serious antitrust concern because the retail level of distribution is the only place where true competition for copyrighted materials takes place.

Antitrust Concerns: Horizontal Restraints

After efforts to operate retail stores offering their own products exclusively failed, the record companies learned what retailers have known all along: Consumers do not go shopping by record label, but by artist and genre. The music business is not like selling batteries. You can't sell Ricky Nelson to someone who wants Ricky Martin.

Since they could not compete with retailers individually, record companies are increasingly operating in concert, setting up joint ventures among themselves and seeking cross-licenses with each other – to the exclusion of competitors. The likely framework for such ventures can be predicted by taking a look at record club licenses. The two existing record clubs are owned and operated by the major record companies, who cross-license to each other the right to make each other’s records. The licenses are on extremely favorable terms, and penalize artists by treating a large percentage of the licensed copies as “promotional” copies. The $2.50 licensed copy looks and sounds just like the $12.50 copy sold to the retailer because it is manufactured in the same factory using the same masters. The only significant difference is that by selling a “license” to reproduce, record companies hope to avoid their obligation under the Robinson-Patman Act to not discriminate in their “sales” of like products to similarly situated retailers.

Today, in the online world, a similar web of interrelationships among the major record companies is being spun which guarantees that no retailer can do business online without competing with an entity jointly owned and controlled by the major record companies. Consider the following: Bertelsman owns CDNow, which has strategic relationships with Sony and Time Warner. Sony and Time Warner are in negotiations to cross license films for digital distribution. Sony has also announced a joint venture with UMVD for a music subscription service called Duet. AOL Time Warner, EMI, BMG all own a piece of MusicNet. Bertelsman and UMVD have a joint venture site called "Get Music". All five major music companies became major shareholders in ArtistDirect. The major home video companies are working together on video-on-demand projects like MovieFly.

Copyright Law: The Right to Advertise

It has long been understood that retailers of copyrighted goods enjoy the right to reasonably copy portions of the works, display them, and publicly perform them, where the purpose is to promote the sale of the works in question. Notwithstanding the copyright owner’s exclusive right to publicly display a work, there is no question that booksellers can publicly display the books and magazines offered for sale. Just as the bookseller may allow patrons to leaf through and read books in the store without purchasing them, so too may a music retailer allow patrons to listen to the music in the store. Just as the bookseller may post a sample of a book’s text on the Internet, so, too, may a retailer post a sound clip.

Today, all of that is changing. Our members are reporting efforts by copyright owners to prohibit these forms of advertising without a license. The only effective way for retailers to advertise even pre-recorded sound recordings over the Internet, for physical distribution, is to post an image of the artwork and offer a 30-second or so sound clip as a sample. BMI has taken the novel position that a 30-second sound clip, considered the industry norm within the bounds of fair and sensible use, is illegal absent authorization from the copyright owner. Some record companies are demanding that retailers get their permission even to post the graphics of the CD itself. There cannot possibly be any diminution in value to the copyright owner when retailers promote the lawful sales of the copyright owner’s own works. The sole purpose for this seemingly irrational behavior appears to be to gain greater control over distribution. Indeed, at least one record company has offered to license these uses at virtually no cost, yet requiring a written acknowledgment that a license is required, and reserving for itself the right to withhold authorization to show graphics or offer 30-second samples of any songs it chooses. Absolute and total control over distribution appears to be the sole objective.

Copyright Law: Preservation of First Sale Doctrine

Such total control over distribution is something Congress has historically insisted must never fall into the hands of copyright owners, because "the policy favoring a copyright monopoly for authors gives way to the policy opposing restraints of trade and restraints on alienation." M. Nimmer, D. Nimmer, Nimmer on Copyright, § 8.12[A]. Congress has provided that notwithstanding the distribution right, the owner of a lawfully made copy or phonorecord is entitled, without the consent of the copyright owner, to sell or otherwise transfer title or possession of that copy. 17 U.S.C. § 109(a).

Initially, copyright owners resisted the notion that Section 109(a) applied to digital works. They eventually acknowledged that the first sale doctrine continues to apply in the digital world,[1] but now add the caveat “in the absence of licensing or technological restrictions to the contrary.”[2] In other words, this federal right will exist in the digital world only as long as they permit it. NARM believes that it is preposterous to contend that a federal right as important as the first sale doctrine, established first by the courts and later codified by Congress, can disappear at the whim of the copyright owner either by use of licensing restrictions or a line or two of computer code. Yet, that is exactly what they intend to do: nullify a federal statutory right. Sony has decreed that anyone who purchases The Writing’s On the Wall, a CD by Destiny’s Child, installs it in their computer’s CD-ROM drive and fails to return it to Sony within seven days after buying it from a record store, has lost their federal right to sell it or otherwise transfer title.[3]

Copyright Law: Selling What You Don’t Own

At bottom, technology is allowing copyright owners to enforce “licenses” of rights they do not own, and to use rights they do own as leverage to require members of the public to give up their statutory rights.

We have already heard one recording industry speaker talk about a future in which a consumer can select from a number of choices, and “maybe just choose to buy a license to listen to the music.” On its face, such a statement may sound like consumers would be given more choices, but in reality, choice is being taken away. Copyright owners have never had the exclusive right to listen to music, and therefore have no right to sell licenses to listen. For example:

The reproduction right: A copyright owner may license the right of reproduction, but it is an abuse of that right to demand payment in the form of consumer data, to license it discriminatorily so as to insure that some retailers fail while others succeed, or to cross-license it among the other copyright monopoly holders to the exclusion of retail competitors.

The distribution right: A copyright owner may license another person to distribute copies and phonorecords of its works, but it is an abuse of that right to require that those who obtain lawful ownership in the chain of distribution give up their statutory right under 17 U.S.C. § 109(a) to sell or otherwise transfer title or possession without the copyright owner's consent, or to license the distribution subject to technological restrictions that prevent the owners from exercising those rights.

The right of public performance: For a copyright owner to sell someone permission to listen to the copyright owner’s music is like selling a license to read a book separate from the book itself. Even when a copyright owner licenses to someone the exclusive right of public performance, the copyright owner has no right to dictate who can watch the performance. There is no exclusive right of private performance of a work, much less an exclusive right to listen to a private performance.

Congress should stand firmly in favor of confining exploitation of copyrights strictly to the those rights conferred by Congress, and subject to the limitations imposed by Congress. It must not allow copyright owners to use technology and contracts of adhesion to limit consumer and retailer rights, nor to simply take control where Congress has clearly denied it.

Retailers do not need the permission of record companies to sell pre-recorded sound recordings. They have the right to set their own prices, choose their customers, play the sound recordings in the store and stream short samples online, all without the authorization of the copyrights owners. Those rules should apply equally in the online world, but instead, copyright owners are licensing what they don’t own, and enforcing those licenses by use of technological restrictions. If they are unwilling to abide by the Copyright Act in letter and spirit, it may be up to Congress or the courts to tell them, like the Fourth Circuit did in Lasercomb America, Inc. v. Reynolds, 911 F.2d 970 (4^th Cir. 1990), that they will lose their power to enforce their copyrights until they stop leveraging their copyright power into areas beyond the limits set by Congress.

Conclusion

Today, we are asking that the first sale doctrine be respected for digital downloads just as it is for pre-recorded copies; that all retailers be allowed equal access to retail each record company’s music library; that each retailer be allowed to compete on price, service, and privacy; that no retailer be required to get the copyright owner’s permission to advertise the products they sell; and that no consumer be required to become part of the copyright owner’s data mine as part of the price for listening to music. If our demands to the copyright community for freedom to compete, for freedom to advertise what we sell, and for freedom to protect our customers’ privacy are not met, tomorrow we may be asking Congress for something more: We may be asking for antitrust investigations of these unfair trade practices, and for fair but compulsory licenses to make secure downloads and digital transmissions.

NARM’s retail members are confident that, given half a chance, they could offer the public a superior product and service to that offered by free peer-to-peer file copying. Although some record companies are beginning to respond to the concerns of retailers, the record companies, as a whole, are giving them no chance at all.

NARM is the principal trade association for retailers and distributors of sound recordings. Its approximately 1,000 members are engaged in all aspects of music distribution to the consumer. For further information, please contact Pamela Horovitz, NARM's President, at (856) 596-2221.

SONY MUSIC ENTERTAINMENT INC. LICENSE AGREEMENT

This legal agreement between you as end user and Sony Music Entertainment Inc. concerns this product, hereafter referred to as Software. By using and installing this disc, you agree to be bound by the terms of this agreement. If you do not agree with this licensing agreement, please return the CD in its original packaging with register receipt within 7 days from time of purchase to: Sony Music Entertainment Inc., Radio City Station, P.O. Box 844, New York, NY 10101‑0844, for a full refund.

1. LICENSE; COPYRIGHT; RESTRICTIONS. You may install and use your copy of the Software on a single computer. You may not network the Software or otherwise use or install it on more than one computer or terminal at the same time. The Software (including any images, text, photographs, animations, video, audio, and music) is owned by Sony Music Entertainment Inc. or its suppliers and is protected by United States copyright laws and its international treaty provisions. You may not rent, distribute, transfer or lease the Software. You may not reverse engineer, disassemble, decompile or translate the Software.

SOURCE: Destiny’s Child CD, The Writing’s On The Wall, readme.txt file
SCHEDULE A ‑ Business Rules

In the absence of contrary Business Rules provided with a Content offer, the following default Business Rules shall apply to all UMG Content:

1. You may only download Content to a portable device that is (i) compatible with the InterTrust Technologies Corp. digital rights management system, (ii) compliant with the requirements of the Secure Digital Music Initiative (SDMI), and (iii) compliant with UMG's content security requirements.

2. You may not copy or "burn" Content onto CDs, DVDs, flash memory, or other storage devices (other than the hard drive of the computer upon which you installed the Software). In the future, UMG may permit you to make these types of copies of UMG Content to certain SDMI‑compliant storage media.

3. You may not transfer your rights to use any particular copy of Content to another. For example, you may not transfer your rights to another at death, in divorce, or in bankruptcy. This is not an exclusive listing; it is only a set of examples. Notwithstanding this Business Rule, you may email a Content Reference to another consumer to enable that consumer to purchase his or her own rights in Content.

4. You may not transfer or copy Content (with the rights you have purchased) to another computer, even if both computers are owned by you. You will be able to copy locked Content to another computer, whether that computer is owned by you or not, but the rights you have purchased to use that Content will not travel with the copy. In the future, UMG may permit you to make these types of transfer of UMG Content along with the rights you have purchased.

5. You may not print the photographic images, lyrics, and other non‑music elements that are distributed with Content.

6. When you purchase the right to unlimited use of Content, the use rights associated with that Content terminate upon your death.

7. There is currently no free UMG Content. All rights must be purchased. The only exception to this rule is that 30 second audio clips may sometimes be made available by UMG without charge.

8. UMG may revoke your rights to use Content pursuant to the terms of the foregoing License Agreement; in the case of a violation by you of the License Agreement; in cases of suspected fraud by you or another; in cases of a suspected security breach by you or another; in order to forestall or remedy any legal exposure to UMG or its affiliated companies; and in other situations in which UMG in its judgment believes it advisable to do so in order to protect Content, the Software, and/or UMG and its affiliated companies.

[1] Report to Congress: Study Examining 17 U.S.C. Sections 109 and 117 Pursuant to Section 104 of the Digital Millennium Copyright Act, U.S. Department of Commerce, National Telecommunications and Information Administration, March 2001, Part IV.

[3] The Sony Music Entertainment License Agreement is contained in the readme.txt file that accompanies the music files on the same CD. An excerpt showing the pertinent language is attached to this Statement. Another company's license agreement used for a download is also attached.