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CD Protection May Force Labels To Pay Double Royalties

A dispute over royalty rights on copy-protected CDs and other types of music discs is helping to stall the release of some new music technology, and could result in record labels owing tens of millions of dollars in back payments to music publishers.

At issue are “double session” CDs that include two versions of each song on a disc, formatted for playback on different kinds of devices. The most widely distributed type are copy-protected discs that prevent CD tracks from being copied to a hard drive, but that also include a digital version of the songs, often in Microsoft’s Windows Media format, that can be transferred to a computer or portable digital music player.

Music publishers and songwriters, who are entitled to payments of a few cents for every copy of a song sold, contend that since these double-format discs hold two copies of songs, they should be paid for both copies. They’ve been negotiating with record labels for months, but already hundreds of millions of discs have been released around the world, raising the possibility of huge back payments.

“From a legal standpoint, the position of the music publishers is that these discs contain two separate (copies of each song),” said Cary Ramos, an attorney representing the National Music Publishers’ Association (NMPA). “The fact that they are the same recording doesn’t mean that we should treat it as one.”

Innovation versus piracy

The licensing dispute highlights the new power of music publishers as the recording industry seeks to shift gears from selling songs on discs meant solely for traditional stereo systems to formats optimized for use on computers and computer peripherals-a change with profound implications for artists, consumers and everyone in between.

Music publishers see the shift as an opportunity to recast decades-old contracts with record labels that have left them with a relatively small fraction of the sale price of a CD. Copy-protected discs offer a big chance to do so, since the lion’s share of unauthorized files traded on file-swapping networks comes from unprotected CDs.

The labels are bent on reducing piracy by preventing consumers from making unlimited copies of tracks on future CD releases, much as they have required digital download services such as Apple Computer’s iTunes Music Store to include locks on the tracks they sell.

Still, labels don’t want to see their already beleaguered profit margins shaved further, and they are seeking ways to avoid doubling the amount they pay publishers for what most consumers perceive as the same product.

So far, both sides say they want to resolve the dispute through negotiation, rather than litigation. But the high-stakes dispute underscores how technology transformations still remain captive to licensing and rights issues created for a decidedly pre-digital world.

Until last year, it was the record labels that were widely viewed as the stumbling blocks to taking the music industry into the digital age. Initially loathe to license their music to online sites that talked openly of revolution in the music business, the labels even drew a federal antitrust probe seeking evidence that they were collaborating to block digital businesses.

But that probe ended late last year, showing no evidence of illegal collusion, and most labels are now eagerly licensing their music to as many online song stores as they can.

As a result, the focus on digital licensing has switched to scattered music publishers and songwriters, which typically receive between 7 and 8 cents for each physical copy of a song sold. Ordinarily wielding far less power, and commanding far fewer financial resources than the record labels, this scattered group of individuals and associations now is proving a more potent force in the digital transformation.

In some cases, individual publishers and songwriters are responsible for keeping hugely popular music out of the official digital stores.

In the case of the new two-part discs, labels are for the most part going ahead and releasing the new formats without obtaining new licenses or striking new deals with the scattered publishers. But that decision could be costly.

Copy-protection company Macrovision alone says its double-session technology has been distributed on more than 200 million individual compact discs, for a total of about 2 billion tracks, around the world. At even just a few cents a song, that potentially represents looming liabilities of tens of millions of dollars for record labels if they ultimately have to pay for the second session tracks.

Macrovision says labels seem to be more worried about the copy-protection technology’s compatibility with different devices, and about consumer reaction to copy-proof discs, than about the looming royalty issues, however.

“It’s not fully resolved yet,” said Adam Sexton, vice president of marketing for Macrovision’s music division. “But I think it is something that they’re going to be able to work through.”

To date, negotiation between the sides has been cordial, if tense. Publishers, which have previously sued labels such as Universal Music for distributing digital music without obtaining publishing clearance, say they want to settle the new royalty rates without resorting to lawsuits. But the tension is fraying nerves in some corners.

“We’re trying so hard to make a business out of this,” said David Ring, vice president of business development at Universal Music Group’s eLabs division, speaking at the Music 2.0 conference last month. “But the pace of negotiations is really frustrating. While publishers want to argue about how big a slice of the pie they get versus the record companies, the pie is shrinking,”

Convenience versus livelihoods

As with so many of the licensing issues in the music business, the details of the dispute have little immediate bearing on the consumer experience.

In most of the double-session discs being released, the extra formats included on the disc are aimed at making it easier for consumers to use their music on multiple devices as digital audio technologies proliferate.

The copy-protection technology produced by Macrovision and others blocks people from ripping MP3s, a format that consumers can duplicate at will. The second session includes digital files that can be used on a computer or an MP3 player, with certain restrictions aimed at preventing tracks from being distributed endlessly on file-swapping networks such as Kazaa. While these discs remain controversial among American consumers, slowing release of the technology in the United States, the technology is far more widely accepted in Europe and Japan.

Similarly, on some Super Audio Compact Discs (SACD), a high-fidelity format sold in many record stores, ordinary CD-quality audio versions of songs are also included, so that the discs can be played in car stereos and other older players. Even hybrid DVDs are hitting markets, with such features as the entire soundtrack for a movie included along with the film itself.

This may be more convenient for consumers, but it worries publishers and songwriters. Their livelihoods have relied on people buying versions of their songs in multiple formats-once on a DVD, and again on the soundtrack album, for example. They’re worried that their income will be substantially reduced if people are able to buy a disc that combines multiple formats.

Nevertheless, they say they are big supporters of the new formats, as long as the right royalty terms can be negotiated. Ramos said the process is necessarily slow, because a quirk of antitrust law forbids music publishers from negotiating as a group or trade association on this particular issue.

“They think the sound is great, and that there are wonderful features for consumers,” Ramos said. “They’re as anxious as anyone to work out financial issues.”

The delay-and the insistence on sticking to licensing structures created when albums were released on pressed vinyl-is frustrating some digital advocates, however.

“We have a system…where (publishers) have been paid on a per-piece basis, instead of a percentage of revenue,” said Jon Potter, executive director of the Digital Media Association, also speaking at the Music 2.0 conference last month. “Now some (publishers) are being opportunistic in order to make up for old wounds.”

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