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Why Apple Is Negotiating Licensing Deals for Its Cloud Music Service

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Rumors have been flying for weeks that Apple is deep in negotiations with record labels and publishers to secure the licensing rights necessary to provide a cloud-based music service. But why does Apple need to negotiate anything? Doesn’t Apple already have the right to sell music through the iTunes music store? To understand what’s going on, we need to take a quick look at how music licensing works, and why Apple is trying to work with the music industry.

Without going into too much history on the subject, what makes music copyright a bit unique when compared to other media is that the law recognizes two co-existent copyrights: the underlying musical composition, and the recorded performance. The law requires permission, usually in the form of a license or royalty fee, from both parties to sell a song for download, play it on the radio, play it in a bar or restaurant, and so on. Licensing is handled by publishers and record labels, and blanket licenses for certain uses are provided by performing rights organizations (PROs) like ASCAP, BMI, SESAC, SoundExchange and the Harry Fox Agency.

While certain uses, like “synchronization” rights to use an audio recording in a movie or on TV, or “master use” rights to put a recording on a compilation album require a specific agreement, a CD comes with an implicit license for the buyer to play the music for their own personal use. It does not allow public performance. However, the American music industry long ago recognized that it would be in their best interests to simplify licensing for certain public performance uses, like recording a song someone else wrote on your record, using a short sample on a hip-hop record, playing a CD in a bar or restaurant, or playing a song on the radio. The rates for these uses are set by congressional statute. These statutory licenses allow radio stations to play music without negotiating a specific license for each and every song with both the publisher and the record label.

In a twist of historical circumstances, U.S. copyright law treated radio airplay differently in that it required the payment of publishing royalties for the songwriter, but not performance royalties for the recording artist or their label. It was thought that this arrangement would be fair because radio airplay would help market the record and drive sales for the recording artist. Internet radio, which emerged in the mid-90s, challenged the status quo because it could lead to a future where all music would be streamed over the Internet, and only songwriters would get paid and recording artists would get nothing.

So for just over the last 15 years or so, the music industry has been trying to work out how to craft an arrangement that compensates everyone — writers, publishers, recording artists and record labels — in the face of changing technologies that demolish laws and contracts crafted in the days of AM radio. The current law requires non-interactive digital streaming services like satellite and Internet radio to pay both publishing and performance royalties, but traditional broadcasters like AM/FM radio still only pay the publisher. Interactive online services (like Rhapsody, Rdio, or Spotify where the user picks the songs) are not allowed to use statutory licenses, and have to negotiate their own deals with publishers and record labels.

For Apple, the issue is determining if their new cloud music service changes their role from a music retailer, to that of a broadcaster, or an interactive streaming service.  Should they have to pay a royalty each time that song is played or streamed over the Internet? Can they pay the statutory license fees, or do they have to negotiate with the labels?

Amazon (s amzn) has chosen not to reach an agreement with publishers and record labels. Google (s goog), rumored to have been rebuffed by the labels in their negotiations, is now in a similar position. They both argue that their services are simply cloud storage for digital downloads for which the consumer has already paid a one-time permanent license. By their argument, there is no difference between using a digital media player to access a file stored in the cloud, and accessing a file on a computer hard drive over your home network.

Apple is going straight to the publishers and the record labels to work out a deal that will allow them to offer the music service they want to provide at a cost that makes sense. As rumors describe it, Apple’s service would not be an interactive subscription to any music (such as Rhapsody or Rdio), but rather on-demand access to only music you’ve purchased.

One of the sticking points is reported to be the “scan and sync” feature to avoid unnecessarily uploading copies of songs from the user’s music library if Apple already has them on file. It worries record labels that Apple might scan an illegal copy of that song on the consumer’s computer that was never paid for, and then “sync” that song to provide access to a legal copy on Apple’s service. The rumored solution is that Apple is willing to pay some amount for every “synced” song, no matter if it was originally purchased on the iTunes store or not. Despite the licensing cost to Apple, it does save Apple from paying for the bandwidth usage for everyone to upload gigabytes of music, and it saves the cost of storage to keep 10 million copies of Lady Gaga’s latest single.

While it’s difficult to predict what will happen, it does seem likely that Amazon and Google have made Apple’s offer more attractive to the record labels. Even in the complicated world of music licensing, any royalty, even if smaller than the labels desire, is infinitely better than no royalty at all.

10 Responses to “Why Apple Is Negotiating Licensing Deals for Its Cloud Music Service”

  1. If the royalty Apple pays is X because they are acting as a Spotify, Then shouldn’t spotify etc. pay the same X? If the deals are separate and on a case by case basis then I think Apple will get away with a lower deal.

    Wouldn’t that complicate the record companies deals ? Is there a law against the record companies ganging up on the spotify ? I expect not – but just wanted to know .

    • These deals can vary a lot with different guarantees, different upfront payments, different co-marketing dollars committed, etc. There is room for plenty of variation.

      You might be thinking of collusion between the labels to act anti-competitively, which is a different sort of problem.

  2. I know it wasn’t your intent, but thank you so much for explaining copyright and download laws clearer than anyone else has managed to do thus far.
    I appreciate the information, especially in such a relevant format!
    Long live iTunes (unless they get sued)

  3. “Even in the complicated world of music licensing, any royalty, even if smaller than the labels desire, is infinitely better than no royalty at all.” I respectfully disagree. It is *not* better than no royalty at all, because the small royalty the label makes does not make up for the diminution in value of the copyright itself.

    With millions of illegal downloads now “fenceable” into the state-of-the art product for consuming music (iCloud) why buy anything? Why subscribe to Spotify?? The technology exists to assure a “clean cloud”, but it is not being used because neither Apple nor the labels care about content creators in the long-term. A digital content exchange consists of 1) registration, 2) immobilization and 3) verification. The first two are done, but Apple refuses to do 3) and the labels want the upfront payoff so don’t insist on 3).

    • Yacko

      “diminution in value of the copyright itself”

      The writing and “blanking” (in this case recording) of new “blank” (in this case songs) year after year dilutes and diminishes the value of copyright itself. It’s like stock dilution. If all public companies issued new stock without consideration of the dilution of the value of all the stock issued, then finance would be in a sorry state. If entertainment was issued in quantity without regard for the financial carrying capacity of the public, then the value of each quanta of entertainment is diminished. Technological change has increased the pace of issuance of new material and repackaged old material and also made it possible for people whom the industry would consider to be marginal to create “product”.

      The entertainment industry has no one to blame but itself, though the alternative is unpleasant. Currently there is the aura of competition, that your item can move up the charts and sell more than somebody else’s gem. The long term result of this will be lower value for entertainment “product”, though a select few entities will reap short term bonanzas. The alternative is a cartel like OPEC which sets production ceilings and tries to regulate the price. Perhaps we are heading to a scenario where everything is streamed for a single set monthly fee indexed to inflation and the only real growth in entertainment revenue will be via the increase of the population. If that’s the case, then whatever royalty is settled for, it will be better than nothing, and there will be no going back to the greedy wild days of negotiate a new contract.

    • So you know how a service which has yet to be released actually works? Why do you assume Apple would allow illegitimate content? Their designs have always specifically reduced illegal activity, unlike the others.
      The good news for Apple is when Google an Amazon are requested to provide access on suspicion of storing counterfeit product, their services will become null and their customers easily pursued.

      • I am just commenting on the article as written, as are you. If you think this article does not accurately report the release details, why are you here then?
        So then, the article says, “It worries record labels that Apple might scan an illegal copy of that song on the consumer’s computer that was never paid for, and then “sync” that song to provide access to a legal copy on Apple’s service.” If Apple gives these counterfeits equal credit with purchased items, then legal buyers have been the fools and pirates are the big winners. And the value of copyright, like I said, is further diminished.

    • @ Emmett. I was commenting on your comment and your assumption not the author’s. I guess we have our answer – they’re charging (of course). I suppose a chargeable ‘armistice’ is some compensation though there’s still no guarantee iTunes Match won’t omit watermarked content. We’ll have to see.

      • Digital watermarks were an attempt to simulate print-out watermarks. They, by and large, haven’t worked. They certainly do not prevent digital counterfeiting (aka piracy). If the copyright holder applies it then the counterfeiter simply reproduces it. If Apple does this, it may mess up some legitimate users, or people who thought they had legal copies but they turned out to be watermarked, but watermarks won’t stop the thieves. The only process which solves the problem is the one they use in the financial industry.