5. Blanket Licenses for Unlimited Digital Sharing of Music
Lewis Haidt

5.1. Introduction
Innovation and technology are the twin engines that fuel California’s economic growth. Knowledge, information, enclosures around such “digital content” and architectures of control around set-top boxes flow simultaneously through the Network society on a global scale. Blanket licenses offer both the state of California a unique opportunity to monetize the digital sharing of content over the Internet network and scale upward to an international level. Consumers – particularly the recording business’ teenage and young adult music purchasers (the “Millennial Generation”) – have grown accustomed to a now decade-old digital environment where content is both disseminated via the Internet and discovered through “breaking” copyright. As more and more entertainment flows over digital networks, young Californians will find their entertainment first online, expecting instant consumer gratification, often first satiated in their university dorm broadband network experience. The entertainment industry thus faces both a challenge and period of opportunity and uncertainty as increased broadband connectivity further alters and disrupts traditional distribution systems.
Communication and Intellectual Property rights (IPR) policies struggle to adapt to this fast-changing environment. At the public policy level, this section addresses the issue of blanket licenses as a tool to monetize the digital sharing of music. This first part analyzes the losses incurred by the recording industry as consumer demand for digital music increases in the face of declining CD sales. This new consumption model, in turn, warrants an examination of the fundamental impossibility of stemming the flow of digital music through control measures such as Digital Rights Management (DRM). The following section presents an overview of the financial opportunities available to music publishers through blanket licenses and royalty agreements. The concluding section examines the State of California’s lost economic revenue, savings and innovation as a result of the absence of blanket licenses and inability to legally monetize the dissemination of digital music through the Internet.

5.2. A Hemorrhaging Business Model
“The music business is dynamic and ever-changing.”
(Krasilovsky & Shemel, 2003:3)

In March 2007, Nielsen Soundscan released a report regarding the recording business’ serious financial trouble relating to declining CD sales. Nationwide, media channels report the same trends: album sales show a 20% decline over the first three months of 2007 with eighty-nine million CDs sold from the start of the year through March 18 compared to the previous year for the same period. Overall, album purchases based on every 10-track sales is down 10% compared to the previous year. The Wall Street Journal highlights the decreasing importance and weight of CD sales in measuring an artist’s popularity:
‘One week, "American Idol" runner-up Chris Daughtry's rock band sold just 65,000 copies of its chart-topping album; another week, the "Dreamgirls" movie soundtrack sold a mere 60,000. As recently as 2005, there were many weeks when such tallies wouldn't have been enough to crack the top 30 sellers. In prior years, it wasn't uncommon for a No. 1 record to sell 500,000 or 600,000 copies a week.’
(Smith, 2007)

At the same time, The Journal points out that CD Sales still account for 85% of music sold. Recent sales figures come against a backdrop of consistent CD sales decline. In 2001, the Recording Industry Association of America (RIAA) stated that 882 million CD units were sold in the United States. The latest numbers for 2005 show that 705 million units are shipped: a 25% decline. The continuing drops in sales are demonstrated by the bankruptcy of Tower Records, which further confirms consumers are turning away from “brick and mortar” purchases. In a separate article, The Wall Street Journal frames the industry as being in a “free fall” (Smith, 2007).
In response, the recording industry turns to sales of digital music. Soundscan reports that digital music sales are up 50% from the previous year. However, this does not offset the decline in CD sales. Soundscan concludes that overall music sales incorporating both digital purchases and album sales show a 10% market loss. Furthermore, a focus on sales fails to incorporate the “sharing” of digital music online. The Journal reports that according to market research firm, BigChampaigne, a billion songs are downloaded through peer-peer networks. Steve Jobs, in an open letter to the recording business, highlights this “sharing” of music within Apple’s music store, iTunes. According to Jobs, 97% of Apple’s customers do NOT purchase their music through iTunes (2007).
Consumer surveys further document a sea change in the “millennial generation’s” behavior and attitudes regarding digital music. According to a Dan Coates, co-founder of Survey U, “File sharing isn’t the pernicious vice of a few bad apples – it’s a generational expression of digital entitlement. Boomers burned bras and draft cards – Millennials burn playlists” (Coates, 2007). The survey findings, based on a nationally representative sample of 500 college students in March 2007, reinforce the difficulty of using policy threats in the face of disruptive technological changes.
When asked if musicians suffer when content is downloaded without payment, 60% disagreed and felt that musicians did not suffer “since growing fan base buys concert tickets and makes other financial contributions to their success” (Coates, 2007). The two other consensus findings state that college students are the same as everyone else when it comes to copying without paying. Among respondents 55% agreed with this statement versus 26% who thought college students were chronic abusers with 19% neutral. In response to the question of whether the government provides a clear framework protecting digital property owners, only 14% agreed, with 34% neutral and 53% feeling that the government is out of step with copyright issues in the new digital era (Coates, 2007).
The challenge for the entertainment business crystallizes: how to transform a generation whose sense of entitlement has metastasized to a willingness to “steal” unlimited “illegal” downloads through peer-to-peer networks. As broadband connectivity increases, consumer surveys forecast that broadband users are skeptical regarding governmental regulation against illegal music downloads. According to a March 2005 Pew/Internet and American Life Project on Music and Video Downloading, some 57% of broadband users believe that there is not much the government can do to reduce illegal file-sharing, compared to 32% who believe that enforcement would help. On the questions of whether government enforcement would work, the same PEW survey found that 42% of all Americans who believe that government enforcement would not work (Madden & Rainie, 2005). Surveys also find that the vast majority of college students (68%) do not plan on changing their music purchasing habits as a result of the RIAA’s actions threatening students with civil prosecution (Coates, 2007).
A macro-view of the music industry shows a sector whose principal revenue flow is suffering significant, consistent losses due to disruptive technological changes. Increased broadband connectivity reinforces this consumer demand to digitally share content. As the means to share content increases, the industry threatens illegal downloaders with lawsuits and threats. The RIAA, against all common sense and a decade’s history to learn from, insists on enclosures around digital music. However, beginning in early 2007, signs of change do appear.

5.3. The Digital Millennium Copyright Act and Digital Rights Management
“Now the Apple CEO says he would gladly sell songs without digital restrictions, if the record companies let him. That's hardly a brave defiance, and besides, I don't believe him.”
(Doctorow, 2007)

The governmental framework to which respondents in the survey refer is the Digital Millennium Copyright Act (DMCA), which creates significant civil liabilities for tampering with Digital Rights Management (DRM). DRM is the term for measures that wrap the purchases of digital content with restrictive software that inhibits consumers’ ability to share or copy the music from one consumer device to another. The DMCA allows copyright holders to serve injunctions and collect significant penalties for violations of copyrights.
Even the creator of the DMCA during the Clinton Administration, Bruce Lehman, now recognizes that change is needed. In a March 2007 talk held at McGill University, Lehman states that “our Clinton administration policies didn't work out very well" and "our attempts at copyright control have not been successful" (Geist, 2007). In the same talk, Lehman blames the recording industry for failing to adapt to the online marketplace in the mid-1990s. In an even more shocking admission, Lehman explained the Clinton/Gore administration’s philosophy in promoting their specific Intellectual Property Rights (IPR) policy. Lehman “rationalized” that in negotiating Free Trade treaties such as North American Free Trade Agreement (NAFTA), officials counted on Intellectual Property Rights, specifically the movies and music’s copyright, biotechnology patents and other IPR-based content to be the catalyst on which the American economy would flourish.
The State of California, and Hollywood if were to “see” the true benefits found in innovative “interactive media,” should embrace change and not adopt a failed economic public policy built around enclosures of digital content and other intellectual goods. DRM presupposes a secure world in which CDs are not made available on digital networks. Yet Eric Garland, CEO of BigChampagne, points out that “In six years of tracking piracy, we’ve never seen a statistical difference in piracy of a popular song that was released without DRM and a popular song that was released with DRM” (Braiker, 2006). In a further challenge, the Pirate Party in Sweden exists with its sole focus based on the destruction of modern copyright. As David Sarno wrote in the Los Angeles Times:
When the Pirate Bay's Stockholm headquarters were raided last May and their servers seized, the Motion Picture Assn. of America thought it had scored a major victory. ‘Swedish Authorities Sink Pirate Bay’ trumpeted its news release. (As has since been pointed out, this is a mixed metaphor.) But the rejoicing didn't last long. The site was back online three days later, and worse yet for Hollywood, the raid and several mass protests afterward generated so much sympathy for the pro-file sharing cause that both candidates for prime minister announced publicly that they did not think young file-sharers should be treated as criminals.
(2007)

While the MPAA goes after the Pirate Party, other critics have taken a more nuanced perspective such as Timothy B. Lee, an adjunct scholar at the Cato Institute, who is quoted in the same piece. Critics such as Lee recognize a historical fact: disruptive technologies change the ball game and democratic societies should learn to adapt.

5.4. The History of Disruptive Technologies: Consumers Always Lead
The basic technological fact is that CDs, which do not have DRM, can be digitized with greater ease than ever before and distributed on to networks more rapidly than anytime in history. The other basic fact of human nature is this: people like to share music and other digital content with their friends and family. They always have and they always will. Furthermore, hackers such as the Pirate Party create counter-measures to break any efforts to further reinforce enclosure systems. The recording business’ corporate logic taken to an extreme reveals itself in the Sony Rootkit debacle. In this incident, Sony/BMG embeds spyware or “rootkit” DRM software surreptitiously into their CDs, which infect consumer’s computers, exposing these systems to other viruses and vulnerabilities. Sony/BMG chooses to turn consumers own computers against themselves.
DRM and the DMCA provide tools for the RIAA to sue companies that create new consumer, often technological or appliance, services, which “break” copyright. Yet as Aram Sinnreich has written:
Unlike legally distributed major-label music files, the MP3s we download from BitTorrent or rip from our CD collections are free of the constraints that DRM imposes: They can be burned, transferred, remixed or reordered as we see fit”
(2007)

Sinnreich, like many other critics, points out how DRM, in fact, allows Apple to exploit the recording industry’s obsessive focus on “stealing” at the expense of “sharing.” Over the last decade as the SurveyU results confirm, a whole generation has rejected the corporate recording industry’s best options. Instead of paying for CDs or restricted digital music, a whole generation – since Napster – has both chosen to go off the grid onto peer-to-peer networks sending a loud message to the recording industry.
Thus, in the zeal to protect copyright and inhibit innovation, the recording business prevents price competition as Apple, until recently, has been able to set fixed prices due to their monopoly position. Apple’s monopoly position as the dominant manufacturer of the most popular digital music player – the iPod - grants them the ability to unilaterally set digital music price purchase points. Thus, the very attempts to protect copyright have, over the last decade, backfired and robbed the music industry of significant profits due to their inability to offer consumers significant choices regarding digital music purchases, thus expanding their own market.

5.5. Signs of Change: DRM – Defective by Design
“Magnatune – We are not Evil. Music downloads and licensing. Listen all you want for free, then license our music online, or buy our MP3/WAV downloads”
(Magnatune)

Against the pessimistic CD sales outlook for 2007, EMI Records becomes the first record label to sell their digital music without Digital Rights Management on iTunes. EMI and Apple set a 30% higher digital music purchase price for the non-DRM songs. A week later, Microsoft’s Zune Music store also announced that it would sell EMI music without DRM. For the first time, consumers are able to purchase digital music, albeit at a higher price, and share it with their friends without restrictions. This new consumer option – songs purchased without DRM – becomes the catalyst for breaking Apple $1 single song music purchases price point.
Behind this decision lies the idea that consumer demand for non-DRM songs translates into a willingness to pay more for popular songs. But the millennial generation is used to not paying for their “free” peer-to-peer downloads, which the RIAA calls “stealing.” Back at the corporate level, in contrast to Steve Jobs’ stated claim to remove DRM from Apple’s iTunes, he does not move to allow independent musician’s to release their songs “free” of DRM. Yet in a sign of growing consumer dissatisfaction, “Defective By Design,” the Free Software’s campaign to end DRM, collected over 6,000 signatures imploring Apple to release its DRM, particularly on independent artists songs (Heller, 2007).
The decision to release non-DRM songs reveals how, for EMI, the potential profits found in increased consumer digital music purchases outweighs both the cost of continued DRM enforcement and the risk of copyright infringement. This trade-off is the fulcrum on which new communication policy is determined. Whereas copyright policy historically focuses on protecting authors, copyright in the digital age expands to a focus on fighting infringement (Wu, 2004). This focus prevents new policy options from being considered. Apple shows the logic behind its actions in deferring to its corporate partners and ignoring independent artists (despite its consistently brilliant market campaigns that fool the so-called “creative class” and conceal the gap between brand marketing and reality). Furthermore, numerous critics point out that Steve Jobs, as the largest Disney shareholder due to the billion-dollar sale of Pixar, could encourage Disney publicly to drop DRM like he did in his “pro-active open letter” (Doctorow, 2007). Compared to previous disruptive technologies like the appearance of radio in the early 20th Century, the recording industry avoids more imaginative public policies capable of leading to significant profits and consumer satisfaction. Meanwhile, master strategists like Jobs, Mark Cuban or the YouTube’s founders exploit the entertainment industry’s insular thinking, literally banking billions of dollars on their entrenched resistance to innovation and tools for change. One such tool is blanket licenses.

5.6. Blanket Licenses
“The current battles surrounding peer-to-peer file sharing are a losing proposition for everyone.”
(Electronic Frontier Foundation 2004)

Blanket licenses are agreements that allow for a fixed percentage of revenue distributed to members of a Performing Rights Organizations (PRO) dependent on venue and terms. Blanket licenses represent a fundamental, different form of communication policy. Run through antitrust instead of copyright, they are private versions of compulsory licenses. Compulsory licenses are created and legislated by Congress. In contrast, Congress may set up regulatory agencies to oversee blanket licenses and the courts may resolve disputes that arise between various parties. Tim Wu describes this process in his paper, “Copyright’s Communication Policy”, “this de facto communication regime runs through the legislative process and the courts, and largely takes the form of industry specific liability rules, court created immunities, and special accommodations” (2004:279).
Two prominent studies – one by the Electronic Frontier Foundation and the other led by William W. Fisher of Harvard Law School – describe the necessary framework. First, rights holders register their works with a collective blanket license (CBL) organization and permit consumers the right non-commercially to copy and distribute the works online. The organization, in turn, offers a license to these rights that covers the entire catalogue works for a flat fee, either in a form of a monthly subscription or other payment structures (Fisher, 2005:18-21). Such a license indemnifies consumers from copyright liabilities. Statistical sampling technology estimates the rate of use of any particular piece of music.
In order to launch such a new license, independent and sympathetic artists become the first test for market viability. At the same time, other early adopters include universities, who presently feel threatened by infringement accusations and lawsuits. Under the collecting society scheme, universities buy blanket licenses for a small per-student fee, and no longer worry about what students are doing with the music. These licenses then lay the foundation for increased scalability up to the level of ISPs. Telecommunication corporations become the logical party to purchase such licenses for use over their networks.

5.7. New Intellectual Property policies: An Issue of Global Complexity
Significant legal and public policy details remain to be fleshed out particularly in how to launch such blanket licenses. Other questions include how to distribute payments between artists, labels, and publishers and how long it would take to get music companies to participate with a PRO offering such blanket licenses. But these are all policy deliberations that require industry and civic leadership and a reminder of the lost economic tax revenue to the State of California. Finally, a fully realized public policy strategy incorporating blanket licenses and a new collection society would require regional, national and global debates, discussions and collaborations regarding the intersection between digital media and Intellectual Property rights. Given that the State of California’s economic power is larger than most countries, this challenge does not seem insurmountable.
The opportunity both blanket licenses and new collection societies represent to the State of California cannot be overemphasized. Imagine a $5 charge per month for every Internet user, first in California, then in the United States of America, then worldwide. The economic windfall would be gigantic. Incorporating contemporary broadband numbers, such a license would generate approximately six hundred million dollars per month. This capital would need to be apportioned and distributed by sophisticated, currently non-existent digital and statistical sampling. But as recent California history proves, most dramatically seen in the dominance by Google in Search Engine Optimization (SEO) and Linux in operating systems software technology, there are no technological restrictions preventing such measures from being created.
A final note of caution is warranted. If a new public policy were to be initiated, such deliberations would require a degree of transparency and accountability heretofore missing. On one side, the AACS/Digg fiasco demonstrates that the entertainment corporations, to put it lightly, will not rush into any such new arrangement. On the other hand, one must be very careful not to position such efforts as the sole benefit for either the telecommunication or technology sector, which would have the most to gain. The public’s voice – those rural Californians, inner-city youth in Harbor Gateway and other impoverished communities – all deserve equal access to not only the deliberations, but any potential new revenue source found from the digital sharing of their self-produced, fan content.



5.8. A Proven History
Blanket licenses first came to prominence in the early 20th Century when the American Society of Broadcasters, Composers and Publishers (ASCAP) battled the incipient radio broadcast industry for royalties. Music copyright holders wanted the new broadcast medium to flourish, but they also demanded a revenue stream dependent on their copyrighted act (Wu, 2005:303). A specific vision developed over the last century – one that presumes “the copyright owners should have the power to demand a license for every revenue stream dependent on the copyrighted work – even revenue from adaptations to other media, or revenue arising from improved restaurant atmospherics (Wu, 2005:305-306).
At the same time, flat fee business models also have demonstrated market success. The most prominent examples occurred when AOL switched in the mid 1990s to flat-fee from an hourly usage system. This took place because of AOL response to the market pressure from rival ISP providers who were offering consumer flat-fee ISP connection. In a separate example, Disneyland phased out tickets in the late 1970's and early 1980's. Tickets were eliminated in June 1982, when all-inclusive passports became the only form of Disneyland admission (Frost, 2006). There is no reason that music business, and the entertainment business overall, cannot follow their own lead from two decades ago.
Over the last decade, ASCAP, BMI and SESAC, the three main PROs, aggressively have promoted licenses as new revenue streams arise. Blanket licenses fees can be based on “among others, a flat dollar fee, a per-subscriber or gross revenue fee, a fee based on net receipts from sponsors, or based on such other objective factors as the number of full-time students for universities, the seating capacity and the types of equipment used in nightlights and live entertainment expenditures for hotels (Brabec & Brabec, 2006:287). These revenues provide secure royalties for the PRO members. By way of example, BMI reported that:
“BMI this week posted revenues (excluding Landmark Digital Services, LLC) of more than $779 million for its fiscal year 2005-2006, which ended June 30. The figure represents an increase of 7 percent over the previous year, it was announced by Del Bryant, President & CEO of BMI. The revenues resulted in royalties for distribution to BMI-affiliated songwriters, composers and publishers of $676 million, an increase of 8.2 percent over last year. These results represent the largest performing right income of any copyright organization in the industry….

“Although total license fees from traditional analog media continued to increase, revenues from cable, satellite, the Internet and other digital media surged ahead. Cable and satellite revenue grew by $24 million and now represents more than 17 percent of the company’s total. New media revenues grew to more than $16 million, an increase of 35 percent over the prior year. International revenues also hit a new high at $204 million, and general licensing income, from tens of thousands of bars and restaurants, retail, and service establishments, increased 12 percent over the prior year to more than $86 million.”
(2006)

Annual revenue showed significant increases for ASCAP over the five years from 1999 to 2004. For its 2004 reporting, ASCAP reported receipts of 697 million up from 668 million in 2003, 635 million in 2002, 646 million in 2001 and 577 million in 2000 (Brabec & Brabec, 2006). Technology allows increased reporting accuracy as well. This last year, BMI purchased the digital audio recognition technology named BlueArrow, which can accurately predict the identity of music played on television, cable, movies or the Internet in as little as two seconds.
Overall, blanket licenses emerge as a lucrative policy option, one that incumbent industries fear due to the new terrain that would be created if consumers were to have legal, unlimited digital downloads of music. The economy of California – the home to numerous music publishing copyright holders – misses out on both increased consumer saving and significant additional tax revenue derived from these royalties. As this white paper has documented, over the last six years Internet penetration shows sustained, upward growth and the desire to share content over digital networks will only increase. The Pew/Internet & American Life project most recent report, “A Typology of Information and Communication Technology Users” of May 7, 2007 demonstrates the vast untapped market waiting to be monetized both by increased broadband connectivity and improved digital sharing of content business models. According to the survey, “49% of Americans only occasionally use modern gadgetry and many others bristle at electronic connectivity” (Horrigan, 2007:cover).
Projections about future revenue and savings to the State of California are by nature speculative. However, Eric Garland of BigChampagne points out that while Apple may sell over one million tracks per day, P2P networks supply over one billion tracks per month (Kusek, 2006). The State of California benefits not only from increasing its citizen’s ability to upload and download content to digital networks, but also from promoting creative new means of distributing content. Consumers’ ability to download and share music non-commercially is being prevented by today’s incumbent music and overall entertainment industry fear of disruptive technologies.
Given the opportunity available to not only the State of California, but also the entertainment business itself, it becomes hard to guess exactly why the corporate music business resists blanket licenses. The independent music business has embraced blanket licenses, user-generated music videos, social network web marketing tools and numerous other innovations. The most “logical” reason would be the loss of mechanical royalties. The Billboard top-selling music artists’ mechanical royalties might decrease. However, CD sales show no reason to reverse their consistent sales decline. The most likely reason – when seen through a history of technology lens – is the age-old fear of new disruptive technologies and the professional risk senior executives might feel if their “new media” project don’t succeed on their first “launch.”

5.9. Conclusion
Blanket licenses solve the fundamental tension over how communication policy preserves copyright while allowing consumers non-commercial, open access to move music and other digital content over networks. Innovation results when entrepreneurs are able to compete, offer new services, and become more responsive to the needs of customers. The time has come for the State of California to envision and promote new business models allowing the non-commercial distribution of content over increasingly powerful broadband connections.
In conclusion, the State of California faces a series of critical choices as it analyzes the full range of possibilities regarding broadband connectivity. The most basic civic issue is this: will increased broadband connectivity be seen as a public good, powering digital media across the network for all Californians to use? Are rural farmers, immigrant laborers, working class truck drivers as entitled to digital content as Hollywood executives and Silicon Valley entrepreneurs? The answer to these sets of questions will determine the direction, the health, the flourishing or the decline of the State of California. Finally, if California is a vanguard both in terms of societal problems and solutions, these answers holds great importance for the country and our system of globalization as a whole.