Ringtones not the right starting point for an online music tariff, say CSI opponents

If you can’t find a frame of reference for online music services, you can’t set a tariff on them. That seemed to be the argument advanced by a coalition of digital music retailers, ISPs and others at the Copyright Board of Canada over the past two weeks. This rationale is in stark opposition to a proposal by the Canadian Musical Reproduction Rights Agency Ltd. (CMRRA) and La Société du droit de reproduction des auteurs, compositeurs et éditeurs au Canada (SODRAC). While Cassels Brock and Blackwell LLP’s Casey Chisick, acting as lead counsel for the two copyright collectives, said the hearing was "about the intrinsic value of a song," Stikeman Elliott LLP’s Nicholas McHaffie, leading the objectors, said the tariff application was about CSI "trying to have it both ways." The Stikeman lawyer pointed to the contradiction between the collective’s argument that songs have a quantifiable intrinsic value, and its efforts to secure a different tariff payment structure for online music than other uses of music. "What has changed?" asked McHaffie, noting that tariffs are already in place for a range of uses of published musical works. "The theory is there’s greater value here, and therefore looking for greater compensation." CMRRA represents the rights of English Canada’s music publishers, while SODRAC represents the Francophone industry. The two collectives, working together as CMRRA/SODRAC Inc. (CSI), want as much as a 15% share of the gross revenues of online music services, or a minimum of 10 cents for each permanent digital music track sold. In addition, another copyright collective – the Society of Composers, Authors and Music Publishers (SOCAN) – has applied for its own tariff, up to 25% of the gross revenues of such services. SOCAN’s application, titled Tariff 22, will be heard at the Copyright Board next year. But it’s to a more recent – and ultimately successful – SOCAN tariff that CSI turned in order to make its claim. SOCAN’s Tariff 24, which covers sales of ringtones in Canada between 2003 and 2005, was approved last month and sets a rate of 6% payable to SOCAN on all ringtone sales (CNM, Sept. 7/06). To help make its case for an online music services tariff based on the ringtone market, CSI commissioned Paul Audley of Toronto-based media consulting and research firm Paul Audley & Associates to conduct a study of tariffs on musical works and provide evidence at the hearing. Tim Pinos, counsel for CSI, asked Audley about the extent to which online music services have made use of the reproduction right, which is the right to make copies of a musical work that CSI licences on behalf of its music publisher members. "The general conclusion that we reach is that there is a quite extensive and intensive use of the reproduction right," Audley replied, noting that the right is drawn on by both the services themselves – which reproduce digital music files across a number of servers for redundancy and efficiency – and the eventual end consumers, who make copies for personal use as specified by fair dealing provisions in the Copyright Act. When trying to draw parallels between the use of the reproduction right in other licensing environments, Audley and research partner Douglas Hyatt, an industrial relations professor at the University of Toronto, said that data from foreign markets wasn’t helpful in identifying a suitable rate for online music services here, because of the different rights regimes and tariff structures in other jurisdictions. Indeed, in countries like the US, UK and Germany, "a similar process is going on to what’s going on here," Audley noted. With no directly related experience to draw on from international markets, Audley said he and Hyatt arrived at SOCAN’s ringtones tariff as a suitable proxy, "because in our opinion they represented a negotiated agreement between music publishers and record labels." However, Audley also proposed an alternate proxy for studying a tariff on online music services: commercial radio. In keeping with the way many providers of digital downloads work, radio is "a singles media," he noted, meaning that very rarely are full albums played in the case of radio or downloaded in the case of online music services. However, Audley elaborated, they didn’t make the assumption that the tariff structure for ringtones could be entirely ported to the online music services market as-is. Instead, he said, ringtones were chosen as a proxy over other uses of the reproduction right covered by tariffs, such as recorded music or pay audio services, because "it was our conviction that in fact the digital music market is its own market," and that market would encompass full-track music downloads, online audio streaming, and ringtones. When asked by Pinos how Universal Music Group’s recently announced plans to offer advertising-supported music downloads might figure into a tariff, Audley said that CSI’s current proposal would likely catch it, either through the percentage of gross revenue – which would be based on advertising revenue rather than sales revenue in Universal’s case – or a per-user minimum fee. During his counter-questioning of Audley, McHaffie attacked the reasoning behind the suggestion that the ringtone market would offer the best comparison for a tariff on online music services, especially Audley’s assertion that it offered a well-established business history. "What if I told you that mastertunes have only been available since late 2005, early 2006?" McHaffie asked. Audley countered by noting that while ringtunes and mastertunes are relatively new arrivals and sub-segments of the overall ringtone market, the monophonic and polyphonic ringtone market is several years older and offers an extended data set for comparison. Reiterating a point made in his opening comments, McHaffie noted that the song itself was just one link in the value chain making up the paid music download market, and asked Audley if other inputs aren’t equally as important. "If all you had was a bunch of servers and the ability to conduct online transactions, you wouldn’t have a business," Audley observed. Both sides will present their closing arguments on Wednesday, September 20, but a decision from the board isn’t expected before SOCAN’s Tariff 22 hearing begins in April 2007. Digital music market still shaky on its feet: panelsAny increase in costs within the nascent digital online music retail industry could spell its doom, representatives of the industry cautioned at the Copyright Board hearings. "It’s a standalone business – obviously it has to make money or it’s something we’d shut down," Kerry Munroe, general manager of Yahoo Canada said. Much of the existing cost structure comes from the necessity of partnering with third parties, which provide a market-ready music catalogue with all the appropriate metadata and digital rights management in place – for a fee. Companies such as Rogers Communications Inc. and Bell Canada, meanwhile, assume the cost of the billing infrastructure, customer service, marketing and advertising, and other key functions. Rogers offers its music service in partnership with Yahoo Canada. When asked to describe the biggest challenges facing their online music businesses, Bell Canada GM of consumer Internet services Patrick McLean referenced unauthorized file-sharing and spoke of the difficulties of selling "a product priced around 99 cents, when your customers are used to zero." Members of a wireless carriers panel were similarly unanimous. Andrew Wright, director of business development at Bell Mobility, characterized his company’s service as "very, very thin margin to no profitability at this stage," while Upinder Saini, VP of new products and content development at Rogers Wireless, noted that "adoption is also very low at this moment."

Ringtones not the right starting point for an online music tariff, say CSI opponents

Broadcast | September 20, 2006

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