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The billion dollar ringtones war

Civil strife as labels fight publishers

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This may increase the variety of songs used as ringtones because publishers who previously denied permission, including songs by the Beatles, Hendrix and Aerosmith, can no longer withhold consent. However, Peters' Opinion left the answer to a very important question unresolved - the royalty split.

Peters concluded her opinion by writing: "[I]t is appropriate for the Copyright Royalty Judges to determine royalties to be payable for the making and distribution of ringtones under the compulsory license." Does this mean that the current statutory rate of 9.1¢ applies, or not?

According to Steve Masur, a copyright lawyer with a significant ringtone practice, the ringtone companies have a choice.

They can continue under their current contracts; or they can perhaps terminate or repudiate these and seek to enforce the compulsory rate; or they can negotiate a new rate, taking into account the ruling; or they can follow the statute for a 115 license and pay the 9.1 cent rate until it changes.

"Our reading of the decision is that the current compulsory rate (9.1¢) is the rate for ringtones until the tribunal creates a new one," says Masur.

However, a lawyer at the Copyright Office said that it is not exactly clear whether the 9.1 cent rate applies to ringtones, but since the Opinion would not supersede contracts currently in effect, and since the Copyright Royalty Board is currently holding proceeding on the new compulsory rate, the issue could be moot.

However, the CRB may not make a determination for more than a year so the question is important - a lot of money can change hands in that period, as we've seen.

Currently, master ringtones alone sell more than 6.5m downloads per week on average in the United States, according to Nielsen Mobile. And publishers often negotiated a rate of 10 per cent of retail or more. Since most ringtones exceed $2 retail price, the publishers usually receive twice the statutory rate. Switching from market rate to statutory rate of 9.1¢ could represent a drop of more than $700,000 per week or approximately $3m in publishing revenue.

Marybeth Peters' intent seems to have been to leave the appropriate rate to be determined by the CRB. One month after her Opinion, the trade groups for both the record companies and the music publishers both submitted written arguments to the CRB for what the compulsory license rates for ringtones should be. During the year to come, executives from some of the most powerful companies from the labels publishers and ringtone providers will testify at the proceeding. All of them are sure to argue that it's imperative that the CRB accept the rates that they propose.

The publishers are proposing the following terms: a rate equal to the greatest of (i) 15 per cent of revenue; (ii) one-third of the total content costs paid for mechanical rights to music compositions and right to sound recordings; or (iii) 15¢ per ringtone subject to periodic adjustments for inflation. This would mean that for a ringtone retailing at $2.99 with the record company's share at 40 per cent inclusive of the song, the payment to the publisher would be the greatest of (i) 15 per cent of $2.99, or 44.85¢; (ii) one third of 40 per cent of $2.99, or 39.86¢; or (iii) 15¢. Therefore the payment would be 44.85¢. The current standard price is 10 per cent of retail or approximately 30¢. Thus, the publishers are saying, first of all, we don’t think the compulsory license applies, but in case it does, we want even more than we are getting under freely negotiated licenses.

The RIAA, on the other hand, is asking that the rate be 7.8 per cent of wholesale. Assuming the wholesale rate for a $2.99 ringtone is approximately $1.25, the publisher would only get 9.75¢, which is only a slight increase over the current rate of 9.1¢.

Blanket benefits

Whatever the rate turns out to be, the Register's Opinion, assuming that the publishers' appeal is not successful, will have the effect of making licensing for ringtones more efficient. Although just a few publishers own a huge chunk of the most popular songs, there are tens of thousand's of publishers, and the ringtone companies previously had to negotiate for permission from any publisher that controls any particular song. Making the license compulsory removes the necessity of negotiating individual licenses while guaranteeing that the publisher and the songwriter still get paid.

Also, ringtone companies will have the ability to make ringtones of songs previously withheld from the market such as the Beatles, Jimi Hendrix and Aerosmith.

However, in regard to the appropriate rate that should apply to a compulsory license, the parties are very far apart, with the record companies trying to apply a rate that would result in publishers getting less money than they do now, and the publishers trying to get a rate that would give them significantly more money than the rates that they have been able to negotiate.

It will be up the judges of the Copyright Royalty Board to devise a rate that will fairly compensate the publishers without overpaying them considering the labels do put up much more money to produce the underlying masters than the publishers do for the songs. It is ironic though, that the labels, who have rejected the idea of a compulsory license applying to their masters, are such strong advocates of a compulsory license when applying to the songs controlled by their music publisher cousins. ®

© Steve Gordon 2007. Steve is an entertainment attorney and consultant in New York, and the author of The Future Of The Music Business. He was Director of Business Affairs, TV and Video at Sony Music for ten years. His website is at www.stevegordonlaw.com.

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