Managing Digital Rights, Part II

Managing Digital Rights, Part II
Last month, Need to Know covered Digital Rights Management. DRM is the phrase that catches digital programs or "handles” that are tacked on to digital music files; they are designed to limit the ability of the file to be copied, downloaded, or played in certain media or systems. DRM came about largely as the major music industry’s chief weapon against illegal file downloading, and its utility and legitimacy continue to be hotly debated by consumers, musicians, aggregators and CEOs; i.e., every player in the digital music sphere.

But the landscape of digital music distribution changes faster than Nelly Furtado at the Junos, and in the last few weeks, the industry has introduced what appears to be an anti-DRM trend. As reported last month, Puretracks launched a DRM-free library (which, ahem, remains useless to Mac users; the Puretracks site refuses entry to Macs); EMI Music announced it would offer a substantial library of DRM-free files on iTunes. (For consumers, this would be a grand thing indeed had EMI not seized on the opportunity to make an extra buck by charging extra for DRM-free files. Sigh.) Others will doubtless follow.

Staying in the flow is extremely challenging, and even though the digital sphere presents a world of opportunity for little indies and bands, the fact is that without education, vigilance and a pile of infrastructure, it’s pretty hard to keep track of your rights. And by rights, I mean money. So if you don’t care whether you ever make a nickel from your music, read no further. Otherwise, here’s the low-down on how make money from the digital ether. In digital world, as elsewhere, your songs make money mainly from (1) sales and (2) copyright royalties. Sales revenue is generally straightforward: working through a label or distributor, you negotiate a deal that says you get paid x dollars, or perhaps x percent of revenues, from every sale. (To complicate things somewhat, many record contracts refer to the share of sales that you get as a "sales royalty” or simply a "royalty,” not to be confused with copyright royalties, meaning performance and mechanical royalties.) As in the terrestrial, in the digital realm you can sell your music through your own efforts, or use a distributor. Smaller "mom and pop” online retailers will contract with you directly, but larger retailers like iTunes — just like HMV in the real world — won’t carry your music just because you ask. If your distributor is a major label, then they can probably get your music on iTunes and the other major online music retailers without much trouble. If you are with an indie distributor or working solo, the larger retailers will either ignore you or require you to go through a content aggregator.

Content aggregators are kind of like warehousemen or freight shippers: they get the deal by having a large quantity of music to place on the same terms, which means only one deal needs to get done instead of hundreds. In return, content aggregators take a percentage of the download sale. The US-based Independent Online Distribution Alliance (IODA) represents many of Canada’s independent labels and artists. Meanwhile, there are plans afoot to launch an Independent Digital Licensing Agency, a partnership of a number of indie labels with the support of the Canadian Independent Record Producers’ Association. IDLA, which will be structured more like a collective rights organization and will open its doors to the most indie of indie operators, aims to knock content aggregators out of the loop. So that’s the 411 on digital sales revenue. Royalties are more complex because they come from the commerce of rights rather than actual product: your entitlement to collect royalties flows from your copyright. Every recorded song has two copyrights: the one in the recording (a.k.a. the "master”), and the one in the actual composition. Composition rights entitle you to do collect performance royalties every time your song is "performed or communicated to the public,” and to collect a mechanical royalty every time song is "mechanically reproduced.”

The digital universe has introduced a pile of other ways of reproducing and playing your music: file sharing, streaming, downloading, internet radio, subscription downloads, cellular downloads, and any number and variety of other "online music services.” It is an ongoing challenge to service providers, royalty organisations, and other interested groups to come up with systems that make sense. "Canada is not the only country where everything is in flux,” reports Martin Stiksel, co-founder of UK-based (see Meet & Greet). "As far as I am aware, the U.S. is the only country that has proper licensing for the online use of music. The UK doesn’t have proper licensing set up yet. The problem is, nobody has the proper rights ingested from their members. There are royalty organisations who find that they themselves do not have the rights or license of their members’ music, so they had to send out a memo or letter to their members getting these rights back into their system because most of them had not had them cleared or granted to them in the first place.”

Performance royalties used to come almost exclusively from live performance and radio or (if you happened to get a song on a soundtrack) from being broadcast on TV or cut into a film. SOCAN is currently before the Copyright Board trying to achieve a tariff for performance royalties from digital services like internet radio stations, streaming, webcasts, game sites and downloads both temporary and permanent. It's quite likely the Board will impose some degree of tariff, if not everything SOCAN is asking for. Either way, composers and publishers will benefit, while Mom & Pop services may suffer.

In the pre-digital days, the record label would pay you a mechanical royalty for every copy of your record that it "mechanically reproduced” in the form of a CD in order to sell it (it’s common now to see deals where they roll your mechanical royalties up with your share of sales revenue). With the rise of digital music files, the industry had to debate whether reproducing a piece of music in the form of digital code constitutes a "mechanical” reproduction. The general answer is that it is, in spirit, and so mechanical rights agencies have been able to argue that rights owners should be paid for the reproduction of their music in digital form. Most recently, CSI (being the collective persona of the Canadian mechanical rights agency CMRRA and its Quebec-based equivalent SODRAC) received a ruling by the Copyright Board fixing a royalty rate of 7.9 percent of the retail price with a 5.3 cent minimum per song for downloads, and a tariff of 5.9 percent of revenues for subscription services. Internet radio stations pay license fees to CMRRA by way of individual negotiation. You can get your share of these royalties only if you are a CMRRA or SODRAC member (which you can join as a publisher or songwriter).

The right to these royalties extend into the world of mobile content and cellular downloads. There are both performance royalties payable to you when your song is sold as a ringtone or a ringback (collected by SOCAN); as well as mechanical royalties depending on the deal you made. When you license a song to someone like Rogers to sell in their mobile music store, not only should Rogers pay you a percentage of sales, but you will also be able to collect royalties through the tariffs that Rogers pays.

The best thing you can do to ensure your rights are protected and your revenue is secure is to keep yourself informed. In other words, keep watching this space: by next month, everything could be different!