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VOLUME 5 | NUMBER 1 | SPRING 2018

Bringing the Music Industry Out of the Dark Ages
with the Help of Alternate Dispute Resolution

Madisson Blum


Madisson Blum-portrait

Madisson Blum is a rising third-year student at Pepperdine University School of Law where she is focusing on the areas of entertainment and intellectual property law. She is also an editor for her school's Dispute Resolution Law Journal and an editor for the ELIPS journal. She can be reached at Madisson.Blum@pepperdine.edu.

As the world develops and changes, new technology is being introduced to consumers on a daily basis. The entertainment industry seems to fight progress in certain areas while wholeheartedly embracing it in others. One of the most well-known transformations was within the film and television industry: streaming services like Netflix and Hulu are having a lasting impression on consumers and how the industry will run as a business moving forward. [1] However, not everyone in the industry is ready to let go of the way the things were run.

The music industry, although seemingly part of the digital era for quite some time, has been very reluctant to come to terms with the reality that entertainment revolves around streaming services. Record companies and publishing houses are slowly losing dominance over the music market. Their relationships with artists and the consumers [2] are suffering because of their reluctance to adapt to changing technologies.

Before the impact of streaming on the industry, major music labels were essential to an artist’s success. [3] Twenty years ago, the music industry was run by record companies, specifically Sony Music Entertainment, Universal Music Group, and Warner Music Group. [4] An artist would rely on these record labels to be the middleman in producing the music and distributing the music to the consumer. [5]

The typical structure was that recording contracts would advance money to the artist. This money would go to producing, distributing, and promoting the album and give the artist a small percentage of the domestic sales in exchange for exclusive recording services and making the record labels the sole copyright owner. [6] In theory, the more records that were sold the more money the artists made. [7] In practice, artists often never see any of these royalties due to the structure of their contracts.

In order to be successful, artists were dependent on these labels selling the music because they were the ones who had the ability to reach the public. [8] In order to do so, licenses for the rights to use, create, and distribute the music were created. [9] Through music licensing, people in the industry are able to distribute, record, and perform song compositions. Everyone from record labels, publishers, to radio stations and streaming services must acquire some sort of bundle of rights from a license to work in the music industry. [10] A specific type of license concert venues, radio stations, and now streaming services are interested in are the performing rights to a song so that they could play any music that is not within the public domain. [11] In other words, artists have the exclusive right to play their music publicly and authorize others to play their songs under copyright law. [12] In order for artists to allow others, like labels and streaming services, to use their work to make a profit, the artist must issue a license to them. [13] Because of the amount of influence the record companies had on the industry, artists did not question the repercussions of making these contracts, most notably how little they were receiving for their licenses. [14]

A few years later, the digital world took over the entertainment industry. [15] Instead of using films and recordings the way people were used to, everything was working towards becoming digitally recorded and distributed. [16] As exciting as the introduction to the digital age was, the music industry soon started to see the consequences of not taking advantage of the newer system before it was too late. [17] As music digitized, the sales of physical albums took a huge decrease and piracy became a new obstacle at the expense of the livelihood of the artist, publishers, and distributors. [18] In 2003, Apple launched their ninety-nine-cent song business model through iTunes. [19]

From that point on, instead of being forced to buy physical copies of music in stores in order to listen, people were now able to buy individual song files for ninety-nine cents and most albums for nine dollars and ninety-nine cents. [20] Apple’s digital store was so successful that in its first year, Apple sold more than 30 million music downloads and Time Magazine had named iTunes the "Invention of the Year." [21] However, this new product also made it easier for people to illegally copy these files and distribute them second hand for free. This led to the rise of services that gave consumers the ability to pirate music like the relaunch of Napster. [22]

With this shift in the industry, more problems were arising pertaining to the sales of albums. Because music was now on an outlet that let consumers immediately receive the benefit of downloading their recently purchased music, music lost the nostalgic aspect of audiences owning it as a physical object. [23] The option to listen to music in the digital form made it much easier for people to steal as well. As more people stole music, artists saw an increase in the availability of their music to the public but a decrease in profits because of a reduction in sales. [24] Between 1999 and 2014 the music industry suffered a loss of 43% of its revenue without seeing any significant gain. This only started to turn around in 2015 when streaming services such as Spotify and Apple Music became more popular. [25] During that year, revenue from recorded music increased by three percent. [26] While streaming platforms were taking over a third of all the music industry’s revenue, contributing over two billion dollars, the physical sales of music had fallen by ten percent. [27]

The large impact of streaming on the music industry is starting to change its whole business model and forcing it to change the way music is produced, marketed, and sold. [28] Because the tech giants are controlling streaming, they will inevitably decide the fate of the music industry's business model. [29] Based on reports, Spotify has had agreements with the major label companies that gives 55% of their revenue back to the labels, whereas Apple Music agreed to 58% of their revenue to be shared with the labels. [30] However, both streaming services do not plan to make these agreements the status quo and are attempting to cut the rate to at least 50%. [31]

The dominance of streaming services is causing rifts between artists and labels. [32] The essential role of labels can be boiled down to artist discovery, cultivation, and marketing, whereas digital technologies can offer all three. [33] Digital platforms have made it easier for artists, especially emerging unknown artists, to be "discovered" by an audience without having to work with labels. [34]

The digitization of music means platforms can now control the dominant marketing of the artist’s work and can replace jobs that make up half of the industry. As a result, many artists are questioning why they should hand over a high percentage of their earnings to labels they do not necessarily need. [35] For instance, Frank Ocean found a way around his contractual obligations to Def Jam records, a publisher owned by Universal Music Group. He released an album titled “Endless,” which fulfilled his contractual obligations. Two days later he released his real album, “Blonde,” under his own label through an exclusive streaming deal with Apple Music. [36] This behind-the-scenes deal damaged the relationship Ocean had with Universal Music Group and caused the CEO of the publishing company to ban all streaming exclusives with their other artists who were under contract. [37]

Another issue the music industry continues to run into with the streaming services is copyright infringement. Although consumers are paying the streaming companies, it is alleged that Spotify has not fully complied with obtaining licenses and giving payments for all of the songs they provide to the consumer. [38] Recently, as Spotify has gone public, the music industry is still attempting to threaten streaming services with litigation for streaming unlicensed songs. [39] This will likely lead to further disastrous relationships between tech companies and the record labels until the two find a way to co-exist.

As the music industry continued to deal with the new problems arising from streaming, it has attempted to find solutions through litigation. Litigation has helped the music industry convey a message that there are and will be serious consequences for people stealing music. However, the threat of these consequences does not reach their full potential because it is so hard to administer them. In the early 2000’s, many of the digital, file-sharing programs were taken to court in attempts to find them liable for copyright infringement because they were giving consumers the opportunity to illegally download music for free. [40] Although this successfully shut down sites like Napster, more digital providers continued to surface like Grokster and StreamCast.

The courts quickly realized it would be nearly impossible to enforce the copyrights of protected works against the consumers who should be held liable for direct infringement. [41] Instead, the music industry sued the companies which allowed the consumers to illegally access copyrighted work in order to control downloads through secondary liability. [42] In MGM Studios Inc. v. Grokster, Ltd, the Supreme Court held Grokster secondarily liable for intentionally encouraging direct infringement of copyrighted music. [43]

The music industry seemed to be successfully meeting their goal of diminishing illegal music downloads. In April 2003, however, they pushed their limits further by suing four college students for direct infringement. These students were running file-sharing engines that helped others on their school campuses share copyrighted songs. [44] The suits filed by the Record Industry Association of America (“RIAA”) sought the highest damages possible, up to one-hundred and fifty thousand dollars per instance of copyright infringement. [45] The RIAA’s goal in bringing these suits was to stop infringements across the board and the RIAA was “hopeful this round of lawsuits [would] send a message to others that they should immediately cease and desist.” [46]

The music industry’s message was being received loud and clear but it had a strongly negative effect. It did scare a few consumers into paying for copyrighted music again but it upset far more of them. They felt the big moguls of the industry were fighting more for their share of the profits than the effect piracy was having on the individual artists. [47] The lawsuits raised public awareness of the illegality of online file trading and had also brought a negative view on the music labels. [48] Because of the negative image publishing houses were starting to create for themselves, these lawsuits encouraged, rather than diminished, piracy. According to scholars, digital piracy remains an issue even with the option of streaming services providing an infinite amount of music for a small monthly fee. Billions of music files continue to be traded every month. [49]

Considering that the amount of people copying protected songs is so large as well as the cost of litigation as a whole, it would be unmanageable for the music industry to continue to sue individuals for direct infringement. It would also be impossible to hold the most popular streaming services, like Spotify and Apple Music, liable for secondary infringement because streaming services have found a way to reach consumers legally. The music industry may have made it clear that they are not afraid to take any company or individual to court. However, in the long run, litigation could cause more turmoil for the industry.

Although Congress and courts have tried to regulate disputes in the music industry, these are not issues for the government, judges, or a jury to handle. The music industry has different expectations for their industry that these parties do not fully understand. Because of how unique the music industry is, people who do not specialize in music, like most jurors or judges, will not understand the difficulty and importance of these types of disputes. [50] A jury may be able to take the law presented by a judge and apply it to the facts in front of them. However, this is still unlikely to find the best resolution for music rights disputes. [51] For example, the outcome of the litigation may be either: (1) a finding of infringement where perhaps none exists. This unfavorable outcome could be chilling the creation of new musical works. (2) The jury may not find infringement where unlawful copying has actually occurred. This will promote more piracy. [52] Congress has also admitted that they are not the most qualified candidates to resolve disputes in the music industry. [53] During the congressional hearing on June 25, 2014, many members of Congress agreed with the industry that the government has no place in determining what was best for the music industry. [54]

The results the music industry is desperate for could be better determined through Alternative Dispute Resolution. This would allow them to avoid putting the industry’s fate through the court system or the legislature. ADR would involve qualified individuals who, due to their experience and knowledge of the industry, would be better suited to resolve these disputes than a judge, jury, or congressman. ADR would also reduce the costs of determining a solution, offer more personalized attention, as well as a speedier resolution compared to the alternatives.

Specifically, through arbitration, the music industry can have someone with more expertise and experience in the industry resolve these issues. This is unlike litigation where matters are decided by a judge who typically has little to no experience with the music industry and is only considering precedent in determining a resolution. [55] Even worse, the parties’ fates could be in the hands of a jury who has no experience or knowledge of the industry or the law itself. With arbitration, the parties are no longer required to have an unqualified third party evaluate their disputes.

The important issues the industry are concerned about are contractual disputes over creative control, ownership of master recordings, and agreement stipulations. [56] These specific creative and copyright issues make ADR more relevant because it can be more tailored to the needs of the industry. That would be a better fit than trying to force the industry into the litigation mold that has only addressed copyright infringement. [57] The music industry could also use the money saved through ADR for more positive purposes, [58] especially because the majority of the disputes stem from the loss in revenue of sales of music from the past couple years. [59]

Personalized attention is also crucial because both parties will not cooperate with one another until their interest and rights are addressed as well as acknowledged by the other side. [60] Litigation tends to isolate the parties from one another and discourages the parties from seeing their opponents’ point of view. A music rights dispute is typically a dispute over who may perform and license one or more compositions as their own. [61]

The demand for resolution of such disputes is often urgent since musical ideas can be easily adopted by new artists and transferred to different musical media. [62] If these disputes were to go through litigation, it may be too late by the time the parties are given a verdict. Both the nature of the dispute and probability of another artist seizing on a profitable idea favors the use of ADR over litigation. [63]

The entertainment industry tends to have disputes between parties who are of a high profile and would prefer to keep settlements confidential. By using ADR rather than litigation, the parties involved would have the option to keep things as confidential as they prefer. [64] Overall, ADR is by far the better choice for settling the disputes in the music industry over litigation.

Another possibility to consider is if the music industry were to ever officially become a free-trade market business model, arbitration would still be beneficial to even out the playing field between the well-established players in the industry and the newly rising artists who are rookies to the industry. [65] The music industry could still find the binding resolution they were looking for in litigation by having a third impartial party arbitrate the final settlement for the pricing of the licenses. [66]

If the music industry does, in fact, overcome Congress and the court system by implementing a free-trade market, arbitration can help implement a more even playing field for negotiations. [67] Although in some cases mediation and simple negotiations could be other solutions to the music industry’s disputes, in the long run, arbitration will have a greater, more positive impact on the industry. With arbitration, the industry would be able to combine the pros of using mediation and negotiation without having to sacrifice the binding decisions they have been searching for through litigation. Instead of litigation, both the individual artist and the record companies will be brought to a more even playing field with a less formal and cheaper resolution through arbitration.


 

[1] Allie Volpe, The One Thing That Isn't Evolving With Netflix & Hulu's Takeover Of TV, THE THRILLIST, (Oct. 16, 2017), https://www.thrillist.com/entertainment/nation/netflix-episode-length-streaming-services-traditional-tv.

[2] Susie Casero, Associate General Counsel, Producers Guild of America, Pepperdine Law SI: Entertainment Disputes Class Discussion, (Sept. 15, 2017)

[3] Karen (Kai-Wen) Hsieh, UNLOCK THE MUSIC: REPLACING COMPULSORY MUSIC LICENSES WITH FREE MARKET NEGOTIATION, 17 Cardozo J. Conflict Resol. 595 (2016)

[4] The streaming revolution and why the music industry’s day of reckoning has yet to come, 13D, (April 26, 2017), https://latest.13d.com/the-streaming-revolution-and-why-the-music-industrys-day-of-reckoning-has-yet-to-come-7178e8aae549.

[5] 13D, supra note 4.

[6] Danwill David Schwender, ARTICLE: REDUCING UNAUTHORIZED DIGITAL DOWNLOADING OF MUSIC BY OBTAINING VOLUNTARY COMPLIANCE WITH COPYRIGHT LAW THROUGH THE REMOVAL OF CORPORATE POWER IN THE RECORDING INDUSTRY, 34 T., 34 T. Jefferson L. Rev. 225, 274 (Spring, 2012).

[7] Schwender, supra note 6.

[8] Schwender, supra note 6 at 254.

[9] Al & Bob Kohn, Kohn on Music Licensing, 20 (4th ed., 2010).

[10] Al & Bob Kohn, supra note 9.

[11] Licensing, BMI (2017), https://www.bmi.com/licensing.

[12] BMI supra note 11.

[13] BMI, supra note 11.

[14] David Israelite, Stop Shortchanging Songwriters, THE HILL, (March 25, 2014), http://thehill.com/opinion/op-ed/201663-stop-shortchanging-songwriters.

[15] 13D, supra note 4.

[16] 13D, supra note 4.

[17] Josh Herr, Startling Proof That the Music Industry is Doomed, THE FISCAL TIMES (Oct. 20, 2014), http://www.thefiscaltimes.com/2014/10/20/Latest-Startling-Proof-Music-Industry-Doomed.

[18] 13D, supra note 4.

[19] Peter K. Yu, ARTICLE: P2P AND THE FUTURE OF PRIVATE COPYING, 76 U. Colo. L. Rev. 653, 654-655 Summer 2005.

[20] Yu, supra note 19.

[21] Yu, supra note 19.

[22] Yu, supra note 19. (after Apple Computer unveiled the iTunes Music Store, a new Napster was introduced that offered a similar business model to iTunes as wells as offered a monthly subscription fee to access unlimited number of music streams and “tethered” downloads.)

[23] Herr, supra note 17.

[24] A study commissioned by NBCUniversal titled “NetNames: Sizing the Piracy Universe,” reported in September that online piracy in North America, Europe, and Asia had risen by 160 percent in two years consuming 24 percent of the Internet bandwidth in those regions. Michael Cieply, Hollywood’s Antipiracy Efforts and New Voice, NEW YORK TIMES (Mar. 31, 2014), http://www.nytimes.com/2014/03/31/business/media/hollywoods-antipiracy-efforts-add-new-voice.html?emc=edit_th_20140331&nl=todaysheadlines&nlid=65750106&_r=0.

[25] 13D, supra note 4.

[26] 13D, supra note 4.

[27] 13D, supra note 4.

[28] 13D, supra note 4, claiming that the “power in the Digital Age is derived by owning the final link in the consumer market value chain… [b]y failing to act on Rubin’s call-to-action in 2007, the industry ceded control of streaming’s future to tech insurgents.”

[29] 13D, supra note 4.

[30] 13D, supra note 4.

[31] 13D, supra note 4.

[32] See Peter S. Menell, PART II: DONALD C. BRACE MEMORIAL LECTURE THIS AMERICAN COPYRIGHT LIFE: REFLECTIONS ON RE-EQUILIBRATING COPYRIGHT FOR THE INTERNET AGE, 61 J. Copyright Soc’y 235, 245 (Winter, 2014), https://advance.lexis.com/document/?pdmfid=1000516&crid=fd969033-b707-4145-ac3c-68bd08cbfdcc&pdworkfolderid=56fa66bb-a385-4ba7-8296-5e2a1936a607&ecomp=gxptk&earg=56fa66bb-a385-4ba7-8296-5e2a1936a607&prid=eb4a1a52-087b-4f4a-a861-8f4966fd2bb1, stating the record labels “most effective spokespersons- recording artists- were divided and angered by record labels’ latest machinations to undermine their interest.”

[33] 13D, supra note 4.

[34] Josh Herr, supra note 17.

[35] Josh Herr, supra note 17.

[36] 13D, supra note 4.

[37] 13D, supra note 4. See Natalie Robehmed, Frank Ocean Just Went Independent and Ignited a Music Streaming War, FORBES (Aug. 23, 2016), https://www.forbes.com/sites/natalierobehmed/2016/08/23/frank-ocean-just-ignited-a-streaming-war-with-apple-and-universal-music/#70555946c636 (“For UMG, Blonde has led to a massive rift with one of its key artists and a decision to decouple itself from the lucrative, but oft criticized practice of providing exclusive streaming rights…UMG CEO Lucian Grainge sent an email to other executives stating that the company, which represents artists like Drake and Kanye West, would end all exclusives with music streaming companies like Apple.”).

[38] Eriq Gardner, Spotify Hit with $1.6B Copyright Lawsuit Over Tom Petty, Weezer, and Neil Young Songs, THE HOLLYWOOD REPORTER (Jan. 2, 2018), https://www.hollywoodreporter.com/thr-esq/spotify-hit-16-billion-copyright-lawsuit-tom-petty-weezer-neil-young-songs-1070960. See also Eriq Gardner, Spotify Hit with Two Lawsuits Claiming “Staggering” Copyright Infringement, THE HOLLYWOOD REPORTER (Jul. 18, 2017), https://www.hollywoodreporter.com/thr-esq/spotify-hit-two-lawsuits-claiming-staggering-copyright-infringement-1021771.

[39] Eriq Gardner, Spotify Hit with $1.6B Copyright Lawsuit Over Tom Petty, Weezer, and Neil Young Songs, THE HOLLYWOOD REPORTER (Jan. 2, 2018), https://www.hollywoodreporter.com/thr-esq/spotify-hit-16-billion-copyright-lawsuit-tom-petty-weezer-neil-young-songs-1070960.

[40] See A&M Records, Inc. v. Napster, Inc., 114 F.Supp. 2d (finding that the plaintiffs would likely prevail on the issue that Napster had knowledge of the infringements of plaintiffs’ copyrights resulting from file-sharing over its system); In re Aimster Copyright Litigation, 334 F.3d 643 (7th Cir. 2003) (finding that a file sharing service used in conjunction with AOL’s instant messaging service without authorization of the copyright owner was held liable for contributory infringement. See also 1-12 Music and Copyright § 12.04 (2013)

[41] See MGM Studios Inc. v. Grokster, Ltd. 545 U.S 913, 930, 2005 U.S

[42] See MGM Studios Inc. v. Grokster, Ltd. supra note 42.

[43] MGM Studios Inc. v. Grokster, supra note 42 at 930.

[44] Frank Ahrens, 4 Students Sued Over Music Sites, THE WASHINGTON POST (Apr. 4, 2003), https://www.washingtonpost.com/archive/business/2003/04/04/4-students-sued-over-music-sites/eed0f9bd-8b18-46ff-9446-f9abf6474a14/?utm_term=.80ad84124e4c. See also Peter K. Yu, ARTICLE: P2P AND THE FUTURE OF PRIVATE COPYING, 76 U. Colo. L. Rev. 653, 654-655 (Summer 2005).

[45] Frank Ahrens, 4 Students Sued Over Music Sites, THE WASHINGTON POST (April 4, 2003), https://www.washingtonpost.com/archive/business/2003/04/04/4-students-sued-over-music-sites/eed0f9bd-8b18-46ff-9446-f9abf6474a14/?utm_term=.80ad84124e4c.

[46] Frank Ahrens, supra note 46.

[47] Paul Goldstein commented: “Public respect for the rights of entertainment companies cannot be separated from the public’s perception of the respect these companies pay to the rights of the authors and artists who are the source of their product.” Peter K. Yu, supra note 19 at 661.

[48] See Peter K. Yu, supra note 19 at 661, explaining that “the public [had] little sympathy for the recording industry when it hears artists repeatedly complain that they have not received royalties owed to them by their record companies.”

[49] Peter K. Yu, supra note 19 at 654-655.

[50] Statement of Marybeth Peters before the Subcommittee on Courts, the Internet, and Intellectual Property of the House Committee of the Judiciary, 5-10, 110th Cong. 1st Sess. (Mar. 22, 2007), https://judiciary.house.gov/_files/hearings/March2007/Peters070322.pdf.

[51] Matthew H. Ormsbee, Music to Everyone's Ears: Binding Mediation in Music Rights Disputes, 13 Cardozo J. Conflict Resol. 225, 228 (2011).

[52] Ormsbee, supra note 52.

[53] See Music Licensing Under Title 17 (Part I & II): Hearing Before the Subcomm. on Courts, Intellectual Property, and the Internet of the Comm. on the Judiciary, 113th Cong. (2014), http://judiciary.house.gov/cache/files/6e799edc-1cb8-4365-a9bb-e48c32b91353/113-105-88240.pdf.

[54] Karen (Kai-Wen) Hsieh, supra note 3.

[55] Proceeding to trial can be a huge gamble for the parties because they lose all control over the final decision to a jury who is not as well equipped to decide. Kevin M. Lemley, supra note 88.

[56] Kaleena Scamman, ADR IN THE MUSIC INDUSTRY: TAILORING DISPUTE RESOLUTION TO THE DIFFERENT STAGES OF THE ARTIST-LABEL RELATIONSHIP, , 10 Cardozo J. Conflict Resol. 269, 276 (Fall 2008).

[57] Arbitration and mediation can alleviate this problem because in arbitration and mediation, the parties can choose their mediator and make sure they have someone with specific industry or technical knowledge. See Arbitration & Mediation, http://www.adr.org/sp.asp?id=28749 (describing arbitration and mediation services of the American Arbitration Association); Matthew H. Ormsbee, supra note 75.

[58] Statement of Marybeth Peters before the Subcommittee on Courts, supra note 74.

[59] Ormsbee, supra note 53.

[60] Racquel C. Callender, HARMONIZING INTERESTS ON THE INTERNET: ONLINE USERS AND THE MUSIC INDUSTRY, 48 How. L.J. 787, 805 (Winter, 2005).

[61] Ormsbee, supra note 53.

[62] Ormsbee, supra note 53.

[63] Ormsbee, supra note 53.

[64] American Arbitration Association, What We Do, American Arbitration Association https://www.adr.org/Arbitration (2017).

[65] Ormsbee, supra note 53 at 615.

[66] See, Matthew H. Ormsbee, supra note 53 at 246 (2011). See also Racquel C. Callender, HARMONIZING INTERESTS ON THE INTERNET: ONLINE USERS AND THE MUSIC INDUSTRY, 48 How. L.J. 787, 805 (Winter, 2005) (proposing that “[i]n developing a cooperative relationship it may become necessary for a third party to interject and set guidelines encouraging the relationship [between the music industry and the streaming services] Encouraging opponents to cooperate and resolve their disputes without judicial intervention reduces each party’s legal costs and the number of lawsuits filed in court.”).

[67] Karen (Kai-Wen) Hsieh, supra note 3.


             
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