Licensing Digital Music in Brazil, Mexico, and the United States

LET IT BE:

LICENSING DIGITAL MUSIC IN BRAZIL, MEXICO, AND THE UNITED STATES.

A COMPARATIVE APPROACH.

A DISSERTATION

SUBMITTED TO STANFORD LAW SCHOOL

AND THE COMMITTEE ON GRADUATE STUDIES

OF STANFORD UNIVERSITY IN PARTIAL FULFILLMENT OF THE

REQUIREMENTS FOR THE DEGREE OF

DOCTOR OF THE SCIENCE OF LAW

María José Cordero Salas

May 2018

Let It Be: Licensing Digital Music in Brazil, Mexico, and the United States. A Comparative Approach.

Abstract Internet and digital technologies have completely transformed the global music industry, including licensing practices. Long-standing copyright concepts and institutions that enable music markets have also been affected. These changes along with pre-existing “copyright fragmentation” pose important challenges for licensing digital music. Using a qualitative case study approach, this thesis focuses on analyzing the licensing practices for download and interactive streaming used in Brazil and Mexico; two of the most relevant music markets in Latin America. The study further draws on a comparative analysis of the licensing practices in these countries and those in the United States. This kind of comparative approach reveals differences in how stakeholders in each nation have chosen to overcome licensing hurdles. It also illuminates how the role of the government and the regulatory framework in each country impacts efficient licensing. This study identifies several trends in licensing music for download and interactive streaming uses. The first pattern consists of the economic rights that must be cleared to obtain these licenses. For downloads, the mechanical right, comprised of the distribution and reproductions rights, must be cleared. For interactive streaming, both the reproduction and the public performance rights must be licensed. While some differences exist in the local laws regarding these rights, these differences do not impact licensing significantly. The study also establishes that standardized practices for licensing digital music exist in all three countries. Digital music providers (DMPs) who need to obtain a license first clear sound recording rights and then, on a local basis, clear musical works rights. DMPs practices derive from the national processes for licensing digital music. The case studies demonstrated that licenses for downloading activities have a two-step process across the board: clearing mechanical rights for sound recordings and musical works. Nonetheless, licensing interactive streaming offers more variability and additional hurdles. In addition to identifying trends in digital licensing practices, this study also reveals pervasive challenges. These include the lack of an authoritative public database that identifies the rights of every song; the lack of transparency in royalties’ distribution; the

difficulties of identifying licensors for mechanical licenses; and other issues arising from the fragmentation of copyrights. Depending on the nature of the regulatory framework used in each country, it either enables stakeholders to solve their licensing issues or acts as a barrier to problem-solving. These findings suggest that private actors may be best suited to come up with arrangements to coordinate property and develop solutions to licensing problems. This premise is consistent with existing copyright literature, but further empirical testing is necessary. In this context, this study concludes by suggesting that the role of the government in digital licensing of music should be to encourage private actors to implement solutions to enhance licensing, but some caveats exist. For instance, governmental oversight of collective licensing is important to ensure transparency. Such supervision, however, should not deter the capabilities of stakeholders to innovate and implement solutions that can lead to a more efficient scheme. Further, this research contributes to the comparative intellectual property law literature by providing new insight into how the licensing of digital music compares across jurisdictions in the Americas.

Acknowledgements This project is the result of several years of work, in which many individuals and institutions participated in some way. The multinational dimension of this work required the contribution of a myriad of individuals, companies, and institutions that helped me to surmount the enormous challenges found in cross-border research, which at times seemed daunting. I am very grateful to my advisor, Professor Paul Goldstein, and the members of my committee, Professors Lisa Ouellette and Phil Malone, who were essential in guiding me through this process. Their support and advice provided me with an ideal setting to freely explore ideas while receiving keen advice in the most challenging times. I am also grateful to Professor Deborah Hensler, whose support and dedication to the JSD program have created an unmatchable environment to develop empirical legal research. Clara Lewis whose tutoring gave me wonderful guidance in carrying out this project. In addition, the support of my JSD friends, my family away from home, has been fundamental to the accomplishment of this long project. Belonging to the Stanford community has been one of the greatest privileges of my life. I am forever grateful to this community which has allowed me to grow as an academic and as a person. I was fortunate to receive financial or other support from different sources at different times during this process. In particular, I want to acknowledge the MICIT-CONICIT, the Gregory Terrill Cox Research Fellowship from the John M. Olin Program in Law Economics, and the Cañas-Peralta Fund at Stanford Law School, for their generous support. Many individuals were also fundamental to the gathering of data. I especially want to thank Enrico Roberto and to Denis Solera. The most prominent acknowledgment goes to each of my anonymous informants, whose valuable insights and their generosity with their knowledge and time allowed me to understand their experiences in the music industry. Last but not least, I am forever grateful to my friends and family, who have supported me throughout it all. To Dean, my lovely husband, the most fabulous surprise I found at Stanford, and whose love and unconditional support has made this all possible. To my

mom Dyala, who has been my backbone and eternal source of love. To my dad Carlos, whose intellectual curiosity inspired me to pursue further education. To my siblings Paula, Carlos, and Roberto, for being there along the way. Finally, Lucas, my nephews, and niece for being my joy always.

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Table of Contents Abstract ...... iv Acknowledgements ...... vi Table of Contents ...... viii List of Tables ...... xi List of Abbreviations ...... xii Chapter I. Introduction ...... 1 1. The Puzzle: Licensing Music in a Changing Environment ...... 2 2. Structure of the Study and Research Questions ...... 7 3. Contribution to the Legal Scholarship ...... 9 4. Delimitation of the Study ...... 10 5. Principal Findings ...... 11 Chapter II. Background and Conceptual Framework ...... 14 1. Introduction ...... 14 2. The Relevant Economic Rights ...... 15 3. The Key Stakeholders ...... 20 4. Contractual and Management Practices ...... 24 5. Challenges for Clearing Rights: Fragmentation, Anticommons and Thickets ...... 28 6. Territoriality of Copyright Law ...... 31 7. Transaction Costs and Copyright Governance ...... 32 8. Market Driven & Regulatory Approaches to Reduce Transaction Costs in Music . 35 9. The Case for Empowering Private Actors in the Digital Environment ...... 41 Chapter III. The United States: A Highly Regulated Licensing Framework ...... 47 1. Introduction ...... 47 2. Economic Rights Implicated in Digital Uses in the U.S...... 48 3. Licensing Digital Music in the United States Market ...... 52 3.1 Musical Works Licensing ...... 52 3.2 Licensing Sound Recordings ...... 60 4. Challenges and Recommendations to Enhance the U.S. Licensing System ...... 62 4.1 Licensing Efficacy and Transparency, and Data Problems ...... 63 4.2 Disparate Treatments Under the Law and Unfair Compensation ...... 66 4.3 The Role of the Government in Regulating Licensing ...... 69 5. Conclusion ...... 76 Chapter IV. Licensing Music for Digital Uses in Mexico ...... 80 1. Introduction ...... 80 2. Methodology ...... 82 3. Mexico in Context ...... 86 3.1 The Mexican Music Market ...... 87 3.2 The Mexican Copyright Law and International Treaties ...... 89 3.3. Collective Licensing in Mexico ...... 90 4. Economic Right Implicated in Digital Uses in Mexico ...... 91 4.1 Author Rights for Musical Works ...... 91 4.2 Related Rights for Sound Recordings ...... 97 5. Licensing Practices for Digital Uses: Main Challenges and Solutions...... 102 5.1 Clearing Musical Works Rights ...... 104

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5.1.1 A Single Window for Composers and Publishers ...... 104 5.1.2 Identifying Fragments: Musical Works and Related Data ...... 111 5.1.3 Rates for Musical Works ...... 113 5.2 Clearing Rights on Sound Recordings ...... 114 5.2.1 The Changing Landscape of the Market: Fewer Record Labels and the Rise of New Aggregators ...... 115 5.2.2 Contract Negotiations: Main Aspects and Commercial Tensions ...... 116 5.2.3 Confusion of the Role of Artists’ Organizations and their Legal Attributions . 118 6. The Role of the Local Law and International Practices ...... 121 7. Conclusion ...... 125 Chapter V. The Changing Landscape of Licensing Digital Music in Brazil ...... 129 1. Introduction ...... 129 2. Methodology ...... 132 3. Brazil in Context...... 137 3.1 Brazil’s Economy and Infrastructure ...... 137 3.2 Brazil’s Music Market ...... 138 3.3 The Brazilian Copyright Framework and the WIPO Internet Treaties ...... 142 3.4 Public Performance and Collective Management in Brazil ...... 144 4. Economic Rights Implicated in Digital Uses in Brazil ...... 147 4.1 The Indisputability of Clearing the Reproduction Right ...... 148 4.2 The Changing Interpretations of the Making Available Right ...... 149 4.2.1 The Lack of Clarity of the BCL...... 150 4.2.2 Judicial Decisions ...... 151 4.2.3 The Role of IN2 in This Debate...... 154 4.2.4 The Conceptual Discussion: Interactive Digital Transmissions as an Electronic Distribution Right or as Public Execution? ...... 156 4.3 Clarifying the Law ...... 163 5. The Changing Landscape of Licensing Practices for Digital Uses of Music ...... 167 5.1 ECAD’s First Efforts in Licensing Public Performances ...... 168 5.2 The Push Towards a Model Based on a Distribution Right Approach ...... 173 5.3 The Move Toward Consolidating the Public Execution Approach ...... 177 5.4 Current Licensing Practices ...... 179 5.4.1 Sound Recordings Negotiated Directly with the Labels...... 179 5.4.2 Musical Works Cleared on a Local Basis and Their Challenges ...... 181 5.5 Stakeholders Adaptation to the Changing Landscape ...... 185 6. The Idiosyncrasies of the Brazilian Case: The Role of Local Law and the Central Government in Influencing the Framework for Licenses...... 186 6.1 The Consultation Process ...... 187 6.2 Positions of Stakeholders ...... 188 6.2.1 MinC’s Authority ...... 189 6.2.2 Services Already Pay Royalties ...... 190 6.2.3 Change in Licensing Practices to a More Complex System ...... 191 6.2.4 Consumer Harm ...... 192 6.2.5 Fair Remuneration to Right Holders ...... 192 6.3 MinC’s Justification of Its Active Role ...... 195 6.4 Effects of the Current ECAD Model to Address Licensing Problems ...... 198 7. Conclusion ...... 201 Chapter VI. A Comparative Analysis of Licensing Practices ...... 203 1. Introduction ...... 203

2. Methodology ...... 204 3. Economic Rights Implicated in Digital Uses ...... 208 4. International Trends: The Approach of International Actors to Licensing ...... 212 5. Comparative Practices in Licensing ...... 214 6. Problems and Solutions in Musical Works Licensing ...... 216 6.1 Hard to Identify Several Licensors for Mechanical Licenses ...... 217 6.2 Right-by-right Licensing ...... 218 6.3 Song-by-Song Licensing in Mechanical Licenses...... 219 6.4 Data Problems ...... 220 6.5 Lack of Transparency ...... 222 6.6 Low Rates and Compensation ...... 223 6.7 Antitrust Concerns ...... 224 6.8 Common Trend: Private Actors Taking the Lead ...... 225 7. Problems and Solutions in Sound Recordings Licensing ...... 226 8. The Role of the State: Compulsory Licenses v. Private Schemes with Oversight 228 9. Lessons Learned and Policy Implications ...... 236 10. Conclusions ...... 238 Bibliography ...... 243

List of Tables

Table 1: Gervais Copyright Restriction Levels ...... 37 Table 2: Summary of Interviewees ...... 84 Table 3: Digital Music Revenues by Format (US millions, trade value) ...... 88 Table 4: Summary of interviewees...... 134 Table 5: Digital Music Revenues by Format (US$ millions, trade value) ...... 140 Table 6: Number of licensed digital music services in selected countries ...... 141 Table 7: Comparison Chart of Uses in IN2 ...... 155 Table 8: Arguments Supporting Electronic Distribution or Public Execution Approach ...... 157 Table 9: Comparison of Economic Rights for Downloads and Interactive Streaming ...... 210 Table 10: Comparison of Licensing for Downloads Interactive Streaming...... 215 Table 11: Problems in Licensing Musical Works for Digital Uses...... 217 Table 12: Types of Regulatory Schemes by Country and Right ...... 229 Table 13: Examples of Collecting Societies Governmental Oversight ...... 232

List of Abbreviations

ABRAMUS Associação Brasileira de Música e Artes

AMAR Associação de Músicos, Arranjadores e Regentes

ANDI Asociación Nacional de Interpretes

ASCAP American Society of Composers and Publishers

ASSIM Associação de Intérpretes e Músicos

BCL Brazilian Copyright Law

BMI Broadcast Music Incorporated

CISAC Confederation of Societies of Authors and Composers

CMOs Collective management organizations

CRB Copyright Royalty Board

CRM Directive Directive on Collective Management of Copyright and Related Rights and Multi-territorial Licensing of Rights in Musical Works for Online Uses in the Internal Market

DDI Diretoria de Direitos Intelectuais

DMPs Digital Music Providers

DPDs Digital Phonorecord Deliveries

DPRSRA Digital Performance Right in Sound Recordings Act

ECAD Escritório Central de Arrecadação e Distribuição

EJE EJE Ejecutantes, S.G.C

EMMA Editores Mexicanos de Música, A.C. A. en P

EMMACSACM Union of EMMAC and SACM

EU European Union

GMRO General Music Rights Organization

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HFA Harry Fox Agency

IAO International Artists Organization

IFPI International Federation of the Phonographic Industry

INDAUTOR Instituto Nacional de Derechos de Autor of Mexico

IP Intellectual Property

ISRC International Standards Recording Code

ISWC International Standard Music Work Code

MCL Mexican Copyright Law

MinC Ministry of Culture of Brazil

MRO Music Rights Organization

NAFTA North American Free Trade Agreement

NMPA National Music Publishers' Association

NOI Notice of Intention

NSA Nashville Songwriters Association

PROs Performance rights organizations

SACM Sociedad de Autores y Compositores de México

SBACEM Sociedade Brasileira de Autores, Compositores e Escritores de Música

SESAC Society of European Stage Authors and Composers

SICAM Sociedade Independente de Compositores e Autores Musicais

SOCINPRO Sociedade Brasileira de Administração e Proteção e Direitos Intelectuais

SOMEXFON Sociedad Mexicana de Productores de Fonogramas, Videogramas y Multimedia

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STJ Supreme Tribunal of Justice of Brazil

TRIPS Agreement on Trade-Related Aspects of Intellectual Property Rights

UBC União Brasileira de Compositores

UBEM União Brasileira de Editores de Música

WCT WIPO Copyright Treaty

WPPT WIPO Performances and Phonograms Treaty

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Chapter I. Introduction

Recent technological advancements in internet and telecommunications offer higher quality and more portable content. These advancements have triggered rapid growth in content industries.1 On the one hand, these changes mean that consumers have more access to content in different formats and on various devices. On the other hand, traditional content industries have been disrupted. These changes have had a vast impact on the ways news media, fictional TV, and music are consumed and produced. The music industry was perhaps the first to be disturbed by the onset of the digital era.2 In a little over a decade, the paradigm of the industry changed. The industry’s value chain and distribution channels were utterly altered. The arrival of digital and file-sharing technologies and the extensive adoption of broadband connections undermined traditional sales models.3 Digital music almost entirely replaced physical records. According to data from the International Federation of the Phonographic Industry [IFPI], global record sales rose from US$24.1 billion in 1990 to peak at US$39.4 billion in 1996.4 In 2003, however, sales sharply decreased to US $32 billion,5 as users adopted digital file-sharing technology pioneered by Napster in 1999.6 While Napster was found to be an illegal service in the United States,7 the MP3 format persisted beyond the platform. The music industry was cautious with the use of new digital formats,8 and, as at other times during its history, change was not easily

1 PIPPA NORRIS, DIGITAL DIVIDE: CIVIC ENGAGEMENT, INFORMATION POVERTY, AND THE INTERNET WORLDWIDE 4 (Cambridge University Press, 2001). Peter S. Menell, Envisioning Copyright Law´s Digital Future, 46 N.Y.L. REV. 63, 99 (2002) (explaining how technological developments and the deployment of broadband led to the convergence of digital computer and traditional content.) 2 WILLIAM KRASILOVSKY & SUDNEY SHEMEL, THIS BUSINESS OF MUSIC: THE DEFINITIVE GUIDE TO THE MUSIC INDUSTRY 7 (Watson-Guptill Pub., 10th ed. 2007). 3 OECD, Digital Broadband Content: Music, at 6 DSTI/ICCP/IE(2004)12/FINAL (Dec. 13, 2005). 4 IFPI, RECORDING INDUSTRY IN NUMBERS (2004). 5 Id. For a detailed account of the transformation of the music industry during the 21st century see WILLIAM KRASILOVSKY & SUDNEY SHEMEL, supra note 2, at 3-12. 6 Alejandro Zentner, Measuring the effect of file sharing on music purchases 49,1 J.L. & ECON 63-90 (2006). 7 A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (2001). 8 WILLIAM KRASILOVSKY & SUDNEY SHEMEL, supra note 2, at 10 (“Initially, it opposed the introduction of the digital audio tape (DAT) in the United States because it was afraid that DAT would stunt the CD market and result in mass home duplication of high-quality recordings, with an attendant loss of compensation to record companies, artists and music publishers.”)

embraced by major record labels and industry veterans.9 Yet new players adopted the technology and pushed for change.10 Today, after almost two decades of struggles with the changes brought by technology, the global music industry has started to grow again. But to survive, the industry underwent major transformations, including embracing new business models that redesigned the industry.11 Downloads and interactive streaming emerged as dominant business models.12 Despite their different natures, both business models have an element in common: they depend on new and complex licensing schemes, by which digital music providers [DMPs] obtain the necessary copyrights from several right holders to operate in the market legally. Thus, the use of licensing in the predominant business models of the digital era has increased exponentially. Licensing has also become an essential part of the business. These renewed licensing practices are the focus of this study, as they are essential for the digital music industry.

1. The Puzzle: Licensing Music in a Changing Environment Licensing music has always been a convoluted process. In the context of the digital environment, two major sets of factors contribute to the intricacy of digital licensing practices. The first one consists of the same changes brought by digital technologies that transformed the market structure of music. For instance, the new value chain of digital music opened space for the rise of new players such as DMPs and aggregators. Record labels are no longer in charge of distribution through brick and mortar stores; DMPs perform these tasks. As a result, the role and relevance of the stakeholders in the music industry have also changed. These significant shifts have provoked tensions in the

9 Many times, in history the music industry has been hesitant in negotiating rights in the upheaval of new technologies, e.g., the appearance of sheet music, phonograms, and iPods. See WILLIAM KRASILOVSKY & SUDNEY SHEMEL, supra note 2, at 414. 10 See Helen McLure, The Wild, Wild Web: The Mythic American West and the Electronic Frontier, 31(4) THE WESTERN HISTORICAL QUARTERLY, 457 (2000). Shane Greenstein et al., Digitalization, Innovation and copyright: What is the agenda? 11 STRATEGIC ORGANIZATION 110, 111-2 (2013) (pointing out that online music retailing was one of those first cases in which the industry had to reconvert. The prediction was that intermediaries would disappear, but this didn’t happen). 11 In 2003 Apple Inc. stroke a deal with major record labels and launched the iconic iTunes store, which marked a new era of music and licensing agreements. Apple was uniquely positioned to reach pioneer licensing deals with the music industry. 12 The business model of streaming is comprised of a series of micro-transactions, where the value comes from high volumes, whereas download models depend on sale of unbundled copies.

relationships among players and disrupted completely the industry. Other examples of the challenges brought by technologies and the new business models include the high volumes of transactions and the explosion of data associated with it, which further complicates the licensing process. The second factor that increases the complexity of today’s licensing practices feeds from an already cumbersome product: music. Because music is usually the invention of several creators, music licensing has always involved a myriad of right holders and intermediaries. These actors too have had to adjust their strategies for the digital era. The new digital business models have also led to the reallocation of power among right holders and intermediaries such that scenarios for clearing rights are now fundamentally different. In addition, copyright law, which is central to licensing, has adapted to cover digital uses, creating confusion about the implicated rights in digital uses. In a nutshell, licensing music in the digital setting faces different challenges that range from those posed by the changing environment and technologies to traditional legacy issues that existed before the digital era. Nonetheless, the same technologies also offer solutions to simplify the convoluted processes of licensing. As new digital business models reshape the music industry, this study analyzes two issues that have arisen in licensing: (1) how copyright law adapted to encompass rights implicated in downloads and interactive streaming, which will be referred to as “digital uses;” and (2) how stakeholders adjusted their licensing practices in the digital space. The international copyright framework provides useful guidance to analyze the first problem. With the changes wrought by online distribution and digitalization of content, copyright law faced significant challenges.13 The World Intellectual Property Organization [WIPO] responded to these challenges in the 1990s by creating what are known today as the “Internet Copyright Treaties”—the WIPO Performances and Phonograms Treaty [hereinafter WPPT]14 and the WIPO Copyright Treaty [hereinafter WCT].15 These treaties updated the international copyright framework by amending preexisting rights and adding new ones that would incorporate digital forms of

13 PAUL GOLDSTEIN, COPYRIGHT'S HIGHWAY: FROM GUTENBERG TO THE CELESTIAL JUKEBOX (Stanford University Press, Rev. Ed. 2003). ROBERT MERGES ET AL. LEMLEY, INTELLECTUAL PROPERTY IN THE NEW TECHNOLOGICAL AGE 319 (Aspen Publishers, 3rd ed. 2003). 14 WIPO Performances and Phonograms Treaty, Dec. 20, 1996, 36 I.L.M. 76 (1997) (“WPPT”). 15 WIPO Copyright Treaty, 1996, 36 I.L.M. 65 (1997) (“WCT”).

exploitation. The solutions negotiated in these agreements allowed flexibility to implement the rules nationally. As a result, domestic laws encompass digital rights differently. This study first explores what rights pertain to digital uses under the international framework and then examines how such rights have been adapted to local law. The second problem consists of the changes the industry has adopted to clear rights in a context of the radical transformation of the music industry. The United States Copyright Office explains this makeover and the challenges to licensing in this new setting: This balkanized licensing scheme was not overly problematic during the analog age, when determining the boundaries between rights was relatively straightforward. In pre-digital days, radio and record distributors represented distinct commercial channels with different licensing needs. Today, however, digital providers often merge these roles. As a result, the demarcations between traditional licensing categories are no longer as clear—especially with respect to the relation between reproduction and distribution rights, on the one hand, and public performance, on the other. The current complexity of the music licensing marketplace is attributable at least in part to the blurring of the traditional lines of exploitation.16

This excerpt summarizes well the changes in the licensing landscape. In the analog era, the limits between distinct licensing categories were evident due to the distinct modes of exploitation. Traditional radio and physical music distribution were different commercial channels with different licensing realities. The music industry used a simple input and output procedure to create phonograms, where record companies licensed musical works rights directly with publishers. The distribution of the phonogram (a physical object) was in the hands of retailers who had no need to obtain a copyright license. Final consumers, then, could buy a copy of the phonogram for their private use. Other uses, such as those related to traditional radio and the right of communication to the public or performance rights, were usually collected by collective management organizations [CMOs] or performance rights organizations [PROs] on a local basis. This market structure, however, is not prevalent today. In the digital age, clearing rights has become a more work-intensive and intricate activity. The evolution of the musical market has blurred the lines between traditional modes of exploitation, combining these

16 U.S. Copyright Office, Copyright and the Music Marketplace, 25 (Feb. 5, 2015), at http://bit.ly/2iDBODv

modalities in a single service. As a result, actors in the value chain of the music industry had to adopt practices to meet the challenges of this new environment. Commentators acknowledge the challenges of obtaining licenses for digital uses in the changing landscape of the music industry,17 including the lack of transparency and uncertainty in rights clearance processes.18 Musicians and DMPs complain of the difficulties of licensing musical works,19 mainly because of problems related to the structure of licensing, and the governance of copyright. In addition, practical challenges arise because of the cross-border nature of some of these transactions and the borderless nature of the internet that contrasts with the territoriality of copyright law. Many of the licensing problems originate from the ownership structure that copyright law assigns to music. Scholars describe this type of ownership structure as “fragmentation,” which leads to the need of clearing many exclusive rights from different right holders. Intellectual property [IP] scholars also refer to IP thickets to describe the intricate design of rights that a user must obtain to use a particular IP asset, as it occurs in the musical field. The research literature associates certain shortcomings with unwarranted property fragmentation, including high transaction costs and the perils of the tragedy of the anticommons. Another concern is the anticompetitive behaviors that tend to manifest in this industry. Copyright and economics scholars have also analyzed the options to minimize these problems and maximize the utility of copyright through licensing. Private solutions, such

17 Sacha Wunsch-Vincent, The economics of copyright and the Internet: Moving to an empirical assessment relevant in the digital age, 9 WIPO ECONOMIC RESEARCH WORKING PAPERS (2013). Jeffery W. Natke, Collapsing Copyright Divisibility: A Proposal for Situational or Medium Specific Indivisibility, MICH. ST. L. REV. 483, 491–500 (2007). See also chapter III, section four. 18 See generally IVAN PITT, DIRECT LICENSING AND THE MUSIC INDUSTRY (Springer, 2015). Herkko Hietanen, The pursuit of efficient copyright licensing: How some rights reserved attempts to solve the problems of all rights reserved, Lappeenranta University of Technology, 15-16 (2008) (“the level of detail brings complexity which inflates transaction costs. Using specialists, who can handle the complexity, is a necessity when dealing with copyright licensing.”) 19Rebecca Thusnet, The Next Great Copyright Act Conference at U.C. Berkley, Rebecca Tushnet's 43(B)log, (April 3, 2014), http://bit.ly/2i3OhDV (“What do music people want? Artists complain they aren’t collecting enough; not getting enough from labels. Labels are concerned with illegal alternatives, fair rates. Publishers/songwriters: losing mechanical royalties, as physical and digital downloads peak; too little money vis-à-vis the record labels; reform of the consent decrees. Services: too complicated/takes too long to get a license; if you get it wrong damages can be crushing.”) Other stakeholders are concerned about piracy prompted in the digital environment. See Robert W. D. Veitch & Ioanna Constantiou, User Decisions Among Digital Piracy and Legal Alternatives for Film and Music, EUROPEAN CONFERENCE ON INFORMATION SYSTEMS (2012) (claiming that the availability of legal alternatives is positively associated with the decision to use a legal access mode).

as contracts and collective licensing schemes, have been some of the most used mechanisms, but legislators have also used compulsory licensing to address these problems. Scholars tend to argue in favor of private solutions while stressing the inconvenience of mandatory licensing systems.20 These prescriptions dominated in the analog era, yet revisiting regulatory choices in the new landscape of this industry is important. In the digital environment, rights clearances are even more complicated but can benefit from technologies that provide certainty, transparency, and traceability. Even though old industries and institutions tend to path dependency in the face of changing markets, music stakeholders seem to be making adjustments. Some long-standing practices of private actors and government-designed institutions are changing. Yet, some claim these changes are inadequate, unbalanced, or unfair in their distribution of benefits.21 Some proponents believe the only effective approach would be a more drastic overhaul of the system, such as with the creation of new clearing rights houses that can clear all the rights in a single transaction.22 However, before suggesting regulatory prescriptions, more empirical research is necessary to understand how the stakeholders of the music industry are adapting their licensing practices and governance structures to the digital environment. Many stakeholders doubt whether national copyright frameworks can cope with the challenges posed by digital content and the distinct nature of these DMPs. For instance, the United States and the European Union [EU] directed public policy queries to study the law and consider amendments.23 In fact, the EU has launched several amendments to the European framework, including the directive on collective management of copyright and related rights and multi-territorial licensing of rights in musical works for online uses in the internal market [CRM Directive].24 This Directive intended to empower rights

20 See infra chapter two. 21 Tilman Lueder, Working toward the next generation of copyright licenses, Fordham Conference on International Intellectual Property Law & Policy, 4 (Apr. 20-21, 2006). 22 See infra note 145. 23 See generally U.S. Copyright Office, supra note 16. The European Union has launched several consultations. See generally: http://bit.ly/2kqs833 24 Directive, E. U. Directive 2014/26/EU of the European Parliament and of the Council of 26 February 2014 on collective management of copyright and related rights and multi-territorial

holders to have a say in the management of their rights that is performed by CMOs and to improve the functioning and accountability of such organizations. Moreover, the CRM Directive envisioned to facilitate the multi-territorial licensing of musical works for digital uses. Before these amendments, the former EU Commissioner for the Digital Agenda, Neelie Kroes, noted several challenges in the European context: “We are also looking at copyright. That’s an area where I’ve long called for change. I’m fed up hearing from people who cannot legally access the music and films they love; from artists who can't reach the audiences they want; from scientists who can’t properly use modern research techniques.”25 Even though the challenges in the EU are different due to the existence of the European single market, Commissioner Kroes’ remarks pinpoint the concerns that exist elsewhere regarding the problems that copyright law face in the digital era.

2. Structure of the Study and Research Questions In many other regions of the world, the problems associated with the transformation of the music industry and the new context for licensing digital uses have not been scrutinized. This study has a two-fold objective. First, the study generates an analysis of digital licensing practices in the Mexican and Brazilian markets—two of the most relevant music markets in Latin America. Second, the study draws on a comparative law perspective to offer new insights on the relationship between these countries’ licensing practices and the United States’ music market; and to contrast the responses of stakeholders to overcome licensing hurdles in each nation. To accomplish these objectives, this dissertation contains three independent descriptive and exploratory studies. Chapter two offers the necessary background to understand the music industry as well as a literature review to put in context the problems under analysis. This chapter includes a review of issues such as exclusive rights, copyright fragmentation, and its perils, as well as public policy options to regulate the licensing space, namely market-driven or regulatory approaches. It also presents a licensing of rights in musical works for online use in the internal market, Official Journal of the European Union, L 96.309 (2014): 29-3. 25 Neelie Kroes, European Commission Speech, Opportunity and Innovation: capitalizing on the digital revolution, Dialogue with European Parliament ITRE Committee (Mar. 9, 2013).

working hypothesis: if licensing for digital music is left in the hands of private actors with few interventions from governments, then private actors can attain better arrangements that maximize the efficiency of transactions. Chapter three introduces the United States case study, while chapters four and five present two individual case studies on the licensing practices in Mexico and Brazil. In addition, these case studies describe how digital copyrights operate according to local legislation and which stakeholders own such rights. Each case study answers the following questions:

i) Under local Copyright Law, what economic rights are implicated in digital uses of music? ii) What are the current licensing practices for streaming and downloading digital music? iii) How relevant are the local Copyright Law and the government in shaping these practices?

The first question is essential to determine what actors are involved in licensing music for online uses. In identifying the specific rights involved in these activities, this question helps generate an understanding of who benefits economically from music—a discussion that has been making headlines around the globe. Economic rights impact how royalties flow and who benefits from these royalties, which is not necessarily the original creator. The second question helps identify the licensing practices for digital uses, which is essential to understand how these practices have evolved. Finally, the third question permits discernment the role of the local law and governments in shaping these practices. These two case studies look at local problems, policies, and practices. To portray a vibrant picture of the licensing practices for digital music in Brazil and Mexico, these case studies draw on qualitative data from publicly available information as well as in- depth semi-structured interviews with relevant stakeholders. A methodology section and a more comprehensive explanation of the data can be found in the respective chapters. Chapter six presents the third study: a comparative analysis of how digital music licensing works in the United States, Brazil, and Mexico. The comparative analysis

facilitates a discussion of public policy recommendations on how to best regulate the digital music market. The study’s comparative approach responds to the following research questions:

i) How do licensing practices for digital uses compare in Brazil, Mexico, and the United States? ii) What is the role of the government in shaping these licensing practices? iii) What lessons can be learned from these cases to support a licensing system that supports a balanced scheme between the interests of the stakeholders?

This chapter contains a full methodology section that details the study’s comparative approach, but it is essential to clarify a few methodological choices at the outset. The United States was chosen to be part of this study because it represents one of the most influential music markets in the world. The American case also shows an intense policy debate that offers the positions of international players that play a significant role in the global market; and puts forward interesting regulatory solutions to solve some of the problems of the marketplace. The rest of the chapter answers both research questions and offers some recommendations on issues that should be considered when governments evaluate regulation on digital licensing practices. In the interest of attaining a balanced copyright system and to establish best practices moving forward, I offer specific policy proposals based on evidence from the case studies—what I refer to and present as an ideal system. It is necessary to acknowledge that these recommendations will benefit from future research that utilizes other methods, including quantitative analyses. Chapter eight offers a detailed consideration of the limitations of this study and presents conclusions.

3. Contribution to the Legal Scholarship Even though copyright and economics scholars have stressed that analyzing copyright licensing and management practices in the digital era is important, little empirical work has been devoted to exploring these issues. By producing an empirical analysis of licensing practices in two often overlooked markets, Mexico and Brazil, this study begins

to fill this gap. The study describes licensing practices for digital music in these markets and how copyright operates in these transactions. This focus reveals both how actors in these markets are behaving and how copyright law is used in practice. Expanding the literature on comparative intellectual property law, this research provides new insight into how this licensing phenomenon compares across jurisdictions. A comparative view of licensing practices is critical since many of these practices are transnational in nature. For instance, companies conduct many contracts in a multi- territorial fashion, and many stakeholders operate internationally, creating cross-border practices that are often elusive when analyzed from a national perspective. In this sense, comparative study of this phenomenon allows understanding of the transitional practices at an aggregate level and sheds light on how global players (licensors and licensees) shape their businesses. This study also contributes to the literature on copyright’s adaptation to new technologies, and provides insights into the problem of availability of content in different jurisdictions, as copyright-clearing processes can become a barrier of entrance for products and services. In addition, this research adds to the public policy discussions of how to regulate the music industry. The study concludes by considering whether a market-driven approach or a regulatory approach is more desirable in the context of the digital music industry.

4. Delimitation of the Study This study is limited to the analysis of two different uses of music: downloading and interactive streaming—defined previously as “digital uses.” Downloads are understood as “a transmission of an electronic file containing a digital copy of a (…) work that is sent from an on‐line server to a local hard drive.” 26 Notably, for copyright purposes two traits of download activities are relevant: (1) a copy of the original file is produced as a result of the transmission; and (2) the final user has the capability to control the file independently from the person or entity that initially made the work available.

26 United States v. Am. Soc’y of Composers, Authors & Publishers, 627 F.3d 64, 69 (2d Cir. 2010).

In contrast, streaming entails an online transmission that “renders a work perceptible by the recipient as it is received by the client‐computer’s temporary memory.” 27 Different types of streaming services exist, but this study only considers the interactive kind. In interactive streaming, also referred to as “on-demand streams,” transmissions occur at the specific request of the end user. Even though the final user can hear or see the transmission, she has no control of the work nor can she make a copy of the work. The transmitter remains in control and possession of the work, and the work is only available when the transmitter decides to make it available.28 In addition, it is important to stress that this study analyzes the licensing practices that occur between copyright holders or intermediaries and DMPs. The research excludes licensing practices between final consumers or individuals that consume music for their personal use. This exception is essential as those licenses present other characteristics and escape the scope of this research.

5. Principal Findings This descriptive and exploratory study identifies several trends in licensing music for downloading and interactive streaming uses across the three countries under analysis. The first pattern consists of the economic rights that must be cleared to obtain these licenses. For downloads, the mechanical right, comprised of the distribution and reproduction rights must be cleared. In the case of interactive streaming the reproduction and the public performance rights (with different names and origins) are the relevant rights to license. While some differences exist in the local laws regarding these rights, such differences do not impact licensing significantly. International treaties have promoted the harmonization of copyright laws around the world, reducing variability of local laws. Nonetheless, differences exist and users seeking a license should look out for these differences.

27 Id. at 74. 28 Daniel Brenner, Gently Down the Stream: When is an Online Performance Public Under Copyright?, 28 BERKLEY TECH. L.J. 1167, 1175–77 (2013) (distinguishes two types of transmissions: (i) real‐time multicast streaming, where a server sends out one stream to all users simultaneously in a manner similar to traditional aerial broadcasting (often used for simultaneous Internet transmission by terrestrial radio stations); and (2) unicast streaming, where a session‐based one‐to‐one connection is established between a customer and the server that is used to transmit a video or sound recording over the Internet in response to an individual user’s request.)

The study also establishes that standardized practices for licensing digital music exist. DMPs needing to obtain a license first clear sound recording rights and then clear musical works right on a local basis. To clear sound recordings, they seek arrangements with major record labels and aggregators that represent independent labels—who manage digital uses individually. As a second step, DMPs clear musical works usually on a local or a regional basis through CMOs that manage performance rights as available. This behavior of DMPs derives from the national processes for licensing digital music. The case studies demonstrate that licenses for downloading activities have a two-step process across the board: clearing mechanical rights for sound recordings and musical works. Record labels and aggregators directly license mechanical rights for sound recordings, whereas publishers usually manage mechanical rights. Interactive streaming results in a licensing process of two steps in Mexico, and three in Brazil and the United States. Direct negotiation between user and record labels and aggregators—to obtain a license that includes the mechanical and performance rights of sound recordings—is the norm in all three countries. The licensing of musical works is what differs in these countries and what can be considered the most cumbersome part of the process. In the case of Mexico, these two rights are cleared in a single license obtained through EMMACSACM system—a private single window that was built upon agreement between publishers and the local CMO. In contrast, in Brazil and the U.S. these two rights must be cleared in two steps: the mechanical right through each publisher, and the public performance right through local CMOs or PROs. Some common problems exist as the lack of an authoritative public database that identifies the rights of every song; the lack of transparency in royalties’ distribution; the difficulties to identify licensors in mechanical licenses; and issues arising from the fragmentation of copyrights, including the hurdles associated with song-by-song and right-by-right licenses. However, the regulatory frameworks that exist in the three countries either act as a barrier or otherwise allow stakeholders to fix these issues. For instance, in the case of the U.S., the system seems to impede some solutions that could ease transactions, whereas, in the case of Mexico, the system does not pose barriers to accomplish solutions that have resulted in significant breakthroughs to facilitate licensing.

This research seems to reveal an important trend: The more space the government and law provide to stakeholders to conduct their licensing operations, the more solutions seem to flourish that work to improve efficiency and reduce fragmentation. This observation seems to suggest that private actors may be better suited to find arrangements to coordinate property and solve to licensing problems, which is consistent with existing literature. However, given the constraints of the design of this project, further empirical research will be necessary to verify this premise. In this context, legislators should resist the temptation to implement solutions, such as compulsory licenses, that reduce transaction costs at the expense of severely constraining the options and ingenuity of licensees. Regulatory frameworks are hard to change and may not be responsive to the evolving conditions of the market and technology, which can impede actors’ ability to adapt. However, there are some areas in which private actors have not been able to solve their own problems. On these instances, limited government intervention to establish incentives that would encourage private stakeholders to correct the problems found in licensing would be ideal. While this research focuses on understanding how licenses can reduce transaction costs and optimize efficiency, it is important to stress that this study finds that licensing practices used in digital music can have implications on the promotion of local music and cultural diversity. As a result, promoting cultural diversity should be a goal that goes hand in hand with efficiency and dissemination objectives. Additional research that reveals how the governance mechanisms in place in the digital era for creative works impact the promotion of cultural diversity should be pursued. After all, we should not only be worried about efficiency in content markets but the production and preservation of cultural diverse assets.

Chapter II. Background and Conceptual Framework

1. Introduction Music is messy. Music is known to be an intricate business in part because of its collaborative, creative nature and, in particular, the way copyright divides property over a song. A single song combines two copyrightable works—the musical work and the sound recording—and in each of these two, there are several distinct rights, which often belong to different right owners. The musical work entails the composition and lyrics, if any, which belong to their respective composers and, in many cases, their publishers. The sound recording involves a fixed performance of a musical work that belongs to a broader range of individuals, including producers and performers (e.g., singers, musicians, and back-up singers). In addition, copyright law offers a bundle of rights to each of these right holders that further divide the property. The most relevant of these rights for digital music are the reproduction, public performance, and distribution rights, which in turn receive dissimilar treatments across different jurisdictions. The copyright scholarship describes the system of copyright ownership in terms of “fragmentation,” or the number of individuals that own a song, for instance, from whom permission is necessary to exploit such song. Fragmentation is part of the design of copyright law, which creates a set of statutory rights that is susceptible to division among many different individuals, including not only the original creators, but also assignees or intermediaries. The literature has identified many problems associated with excessive property fragmentation, including the increase of transaction costs and the dangers of the tragedy of the commons and anticommons. The intellectual property literature also refers to IP thickets to describe the complex layout of IP rights that a company or a user must obtain to use a given IP asset, such as in music. There are options, such as different licensing arrangements, to minimize these problems. In the analog era of the music industry, different right holders used a variety of solutions to simplify transactions and solve fragmentation. In addition to a variety of individual contractual provisions, fragmentation was reduced in some jurisdictions through collective licensing for public performance. For instance, CMOs or PROs were

established to clear performance rights that could not be managed directly by right holders or assignees. In some countries, these organizations were private; in others, they were created by law. Other countries have also created compulsory licensing systems to reduce fragmentation and minimize competition issues. However, scholars have traditionally favored private solutions to solve property fragmentation and its perils. The scholarly literature on copyright and economics, thus, provides important tools to understand the complexity of ownership of music and the regulation of copyright licensing. The following sections introduce relevant background of the music industry combined with literature in copyright law and economics. This chapter considers the relevant economic rights, the various stakeholders involved, the predominant practices that the music industry has used traditionally to manage the economic rights, as well as the main scholarship that informs this research. The chapter concludes by explaining the working hypothesis of this study which argues that licensing, as a means to exercise copyrights should be left in the hands of private actors with few interventions from governments. This working hypothesis finds support in the literature briefed in this chapter.

2. The Relevant Economic Rights Far from being an academic exercise, determining which exclusive economic rights, out of the bundle of rights that copyright law awards to creators of music, are relevant for a specific use is of the utmost importance. Identifying the specific rights involved in digital music businesses allows us to understand who are the actors that benefit economically from music and how royalties flow among stakeholders. Most experts agree that the relevant rights to clear for downloading and interactive streaming activities include the reproduction and the making available rights.29 Understanding the history of

29 KEA, Licensing music works and transaction costs in Europe 26 (2012), http://bit.ly/2nI0Zdw. European Commission, Creative Content in a European Digital Single Market: Challenges for the Future - A Reflection Document of DG INFSO and DG MARKET 5 (2009), http://bit.ly/2iAOZ82 (“most online distribution forms necessarily requires the simultaneous clearance of the digital reproduction right and the making available right.”) See generally MIHÁLY FICSOR, THE LAW OF COPYRIGHT AND INTERNET. THE 1996 WIPO TREATIES, THEIR INTERPRETATION AND IMPLEMENTATION (Oxford University Press, 2002).

these rights under international copyright law allows for a better grasp of how they have evolved around the world. The reproduction right emerged internationally in the Berne Convention for the Protection of Literary and Artistic Works [hereinafter Berne Convention] 30 and was clarified in the WIPO Copyright Treaties for the digital environment.31 In general terms, the right of reproduction entails the right to reproduce the work by making tangible or intangible copies. The common consensus is that the right covers reproductions made in the process of online distribution. Yet, countries have the discretion to exclude, from the scope of the reproduction right, temporary copies that are part of the digital communications process.32 The WIPO Copyright Treaties first coined the making available right for authors, performers, and producers.33 This right entails “the making available to the public of works in such a way that members of the public may access these works from a place and at a time individually chosen by them.”34 The wording intended to cover downloads, interactive streaming, and future technologies. These agreements also imposed certain requirements that must be met when implementing the right, such as that the right must be exclusive and must be described in technology-neutral terms. 35 Another important

30 For authors’ rights see Berne Convention for the Protection of Literary and Artistic Works art. 9, Oct. 31, 1998, Pub. L. No. 100-568, 1988 U.S.C.C.A.N. (102 Stat.) 2853 [hereinafter Berne Convention] (“Authors of literary and artistic works protected by this Convention shall have the exclusive right of authorizing the reproduction of these works, in any manner or form.”) The reproduction right for performers and producers is established in the Rome Convention (Article 9) and the WPPT (Arts. 7 and 11). 31 The agreed statement concerning Article 1(4) of the WCT clarified that the right of reproduction and exceptions fully apply in the digital environment, in particular to the use of works in digital form. 32 Sidney SHEMEL & WILLIAM KRASSILOWSKY, THIS BUSINESS OF MUSIC 433-5 (Billboard Books, 10th edition, 2007) (Explaining that digital systems are distinct from common copies because there are many copies made as part of the process of playing and transferring a file. Nevertheless, specific temporary copies are exempted from the reproduction right in some jurisdictions, notably those that are necessary to run a computer program.) For instance, Article 5(1) of the Copyright Directive excludes temporary copies in Europe, and in the U.S., there is an exception for copies necessary to run a computer program. (17 U.S.C. § 117). See also Mihaly Ficsor, Copyright for the Digital Era: The WIPO Internet Treaties The Spring 1997 Horace S. Manges Lecture, 21 COLUM.-VLA J.L. & ARTS 197, 204 (1996) (explaining the discussions regarding whether to exclude transient copies from this right.) 33 Jane C. Ginsburg, The (new?) right of making available to the public, in. Intellectual Property in The New Millennium, ESSAYS IN HONOUR OF WILLIAM R. CORNISH, 234-47, (Cambridge University Press, 2004) (debates whether this is a new right or a clarification of rights awarded under the Berne Convention.) 34 WCT, supra note 15, art. 8. WPPT, supra note 14, arts. 10, 14. 35 See U. S. Copyright Office, MAKING AVAILABLE STUDY | U.S. COPYRIGHT OFFICE (2016), at https://bit.ly/2q5SUy3 (last visited Oct 21, 2016). (“For example, the making available right is technology neutral. This means that it covers all formats in which a work may be digitally

feature is that the right focuses on access to the work as opposed to receipt. Scholars agree that the scope of the right covers two acts, namely: the offer to access individually the work by the public; and the actual transmission of the work upon request of to a member of the public. 36 However, the offer alone is enough to trigger the right, regardless of whether the transmission occurs or not. The negotiation history of the Copyright Treaties illustrates the extensive conceptual discussions that existed over how to materialize the making available right. This debate is instrumental in understanding the dynamics of copyright in the digital world. The international community could not reach a consensus about how to grant an exclusive right37 due to the complex nature of interactive transmissions, where the distinctions between reproduction, distribution, and communication to the public vanish.38 To conclude the treaty and find some resolution to this conceptual discussion, negotiators reached a compromise referred to as the “umbrella solution,” allowing members to implement the right through existing rights—mainly the distribution right and the communication to the public right, or through a combination of existing rights.39 Importantly, history reveals that the umbrella solution was conceived differently for author rights in the WCT, and for related rights in the WPPT.40 Yet, freedom to implement remains in both cases, so long as the minimum requirements of the treaties are

communicated, including downloads, streams, and any other existing or future developed methods of online transmission. The making available right also focuses on access rather than receipt. […] And, the making available right extends to the delivery of works through one‐to‐one on‐demand transmissions—i.e., those that can be received by members of the public individually in separate places and at different times.”) 36 Jane C. Ginsburg, supra note 33, at 236. 37 Mihaly Ficsor, supra note 32, at 197–224. (“There was, however, no agreement on which one should be chosen of the two main candidates: the right of communication to the public and the right of distribution). The discussion centered on the different type of acts that are involved in an interactive transmission that, at the same time, received a different treatment in different countries.”) 38 Mihály Ficsor, International Harmonization of Copyright and Neighboring Rights, in WIPO Worldwide Symposium on Copyright in the Global Information Infrastructure, 374 WIPO Pub. No. 746 (E/S), 1995 (“The borderlines among the right of reproduction, the right of distribution, and the right of communication to the public are getting blurred.”) 39 MIHÁLY FICSOR, supra note 29, at 208. (“The essence of this idea is to identify the said acts, make the necessary clarifications, do away with Bern Convention gaps, but then leave as much freedom as necessary (and reasonable) to national laws concerning the specific legal characterization of the acts (that is, the selection and combination of the specific exclusive rights to be applied).”) 40 U. S. Copyright Office, supra note 35, at 12-13.

met, such as providing for a technologically neutral exclusive right rather than a simple remuneration right. Because the “umbrella solution” granted member countries the flexibility to implement the making available right by different means,41 this right differs around the world and materializes either through a broad distribution right, a right of communication to the public, a combination of existing rights, or a stand-alone right.42 This solution, therefore, resulted in greater differences between jurisdictions and the ensuing possibility of atomizing the right further. Notably, the umbrella solution emerged as a compromise between two streams of thought regarding how the making available right should be implemented in the context of existing laws.43 The first current, led by the United States, promoted the view that the distribution right could encompass the making available right,44 whereas the EU proposed that the right of communication to the public could better incorporate such right. These countries defended the approach already used in their domestic legislation, as well as the commercial practices that private right holders had in place in each nation.45 Thus, the parties decided to attain a flexible approach such as the umbrella solution to allow different ways to protect digital transmissions. Generally speaking, the distribution right entails that authors, performers, and producers have the exclusive right of authorizing the making available to the public of the original and copies of their works through sale or other transfer of ownership.46 The industry refers to this right paired with the reproduction right of musical works as the “mechanical right.” 47 Songwriters traditionally transfer the mechanical right to publishers, usually on a song-by-song basis.48 For sound recordings, the distribution right

41 U.S. Copyright Office, supra note 35, at 12. Goldstein, supra note 13, at 313. 42 For a survey on how countries implemented this right U.S. Copyright Office, supra note 35, at E. 43 MIHÁLY FICSOR, supra note 29, at 233. 44 For a detailed study on how the US implements the making available right through distribution see generally U.S. Copyright Office, supra note 35. MIHÁLY FICSOR, supra note 29, at 236. 45 MIHÁLY FICSOR, supra note 29, at 190-1. 46 WPPT, supra note 14, at Arts 8 and 12. WCT, supra note 15, at Art. 9. 47 The industry recognizes the mechanical right as a combination of the distribution and reproduction right. JEFFREY BRABEC & TOOD BRABEC, MUSIC MONEY AND SUCCESS 33 (Schirmer Trade Books, 2011). AL KOHN & BOB KOHN, KOHN ON MUSIC LICENSING 677 (Aspen Publishers, 2010). The term “mechanical” was coined since the reproduction is heard through a machine. 48 The mechanical rights and the “making available” rights are not necessarily managed in the same way and the licensing practices may vary.

first emerged in the WPPT, and no similar formulation was part of existing Treaties—the Rome Convention or the TRIPS Agreement.49 On the other hand, the right of communication to the public was built on more granular transmission rights granted by prior international agreements. Importantly, this right did not develop evenly for authors and related rights holders, which has important implications for the management of the right or their specific categories. For author rights, the Berne Convention created several specific transmission rights, such as broadcasting and public performance. Traditionally, collecting societies manage these rights on behalf of creators on a domestic basis. Further, the WCT systematized all of these transmissions-related rights of Berne under a broad communication to the public right, which also included the making available right under Article 8 of the WCT.50 In contrast, the WPPT did not incorporate a communication to the public right for related rights, and the treaty, instead, incorporated a making available right as a stand- alone right, without any reference to any form of communication to the public right.51 The negotiating parties were not ready to extend an exclusive right of communication to the public to performers and producers, thought they continued to provide a remuneration right, as previously granted in the Rome Convention.52 Thus, the making available right was conceived independently from the communication to the public right for performers and producers. Even though the umbrella solution permits countries to implement the right through different means, it is important to note that the right must be an exclusive right and not a simple remuneration right.53 The design of the right of making available

49 WORLD INTELLECTUAL PROPERTY ORGANIZATION, GUIDE TO THE COPYRIGHT AND RELATED RIGHTS TREATIES ADMINISTERED BY WIPO, 246 (WIPO, 2003). TRIPS: Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPS Agreement]. 50 Article 11 of the Berne Convention defined this right as the exclusive right of authorizing: (i) the public performance of their works, including such public performance by any means or process;(ii) any communication to the public of the performance of their works. Scholars have agreed that, under Berne, the communication to the public right design was narrower and it was broadened in the WCT. 51 This key difference originates in the rights that prior agreements awarded to authors, on the one hand, and to performers and producers, on the other. Earlier treaties recognized to authors specific communication to the public rights. Yet, no such rights were awarded for performers and producers. 52 WORLD INTELLECTUAL PROPERTY ORGANIZATION, supra note 49, at 249. 53 Congressional Research Service, World Intellectual Property Organization Performances and Phonograms Treaty: An Overview, (1998) at 16 (“Although a reservation is possible on the public communication rights, no reservation is possible on the “public availability” right of Articles 10 and 14. This means member States must provide exclusive rights where the transmission is made available on an interactive or on-demand basis.”)

under the WPPT was central for the record industry, as these companies license interactive transmissions directly. Even though exclusive rights, in particular the making available right, have different configurations in each country, it is common to find a standard treatment for downloading activities under domestic laws around the world. Downloads typically trigger the reproduction and the distribution rights—the mechanical right. In contrast, interactive streaming activities receive different treatment across jurisdictions, as they trigger different rights depending on how legislators implemented the making available right locally. In most cases, the reproduction right is involved when the DMP copies the song in its database. However, the interactive transmission of the song is less standardized and can trigger a myriad of rights, depending on the jurisdiction and local laws, making rights clearances a hard task.

3. The Key Stakeholders Many stakeholders are involved in the music market either as copyright owners, intermediaries, distributors (DMPs), or final users. This subsection clarifies who these actors are and the role of each in the value chain. As mentioned, the collaborative nature of music and its two-layer character mean that for every single song, there is a myriad of individuals with a copyright interest. For instance, Despacito was one of the most popular songs of 2017 and serves to illustrate the complexity of music and the many layers of ownership in a single song.54 The musical work contains lyrics and a composition that belong to three songwriters and composers— Ericka Ender, Ramón Ayala, and Luis Fonsi. In addition, several publishing companies appear to have a share in the musical work, namely Excelender Songs, Sony/ATV Rhytm, Dafons Songs, Sony/ ATV Latin Music Publishing LLC, and Cangris Publishing. Figures 1, 2, and 3 below show this information. Composers and songwriters [hereinafter authors or songwriters], as original creators, usually enter into a publishing contract with a publisher to represent them in the market. Publishers typically collect royalties, license the works and promote the works. As a

54 As I write this section, this song is stuck in my head as it has played all summer. Regardless of its genera or artistic value, this song illustrates well the point.

result, it is not uncommon for publishers to obtain copyright interests in the musical work in exchange for these services, and become right holders. The participation of the publisher varies depending on the publishing contract, but it can be up to 50% of the copyrights. 55 As can be observed in the case of Despacito, the one song has three composers, which have different publishing companies and agreements. The multiplicity of individuals and entities with a copyright interest in a single song can create severe data and split problems. On the other hand, the sound recording, which entails the specific performance of the musical work fixed in a phonogram or a digital file, belongs to the performer(s) and the producer of the phonogram. In the case of Despacito, Luis Fonsi and Daddy Yankee are the leading performers of the first iteration of the song. The performers own the copyright of their performances, while the producers own the copyright of the production of the song. The role of the producer is to manage the recording process and oversee the artistic vision of the creative project.56 In this case, the producers are three individuals, Josh Gudwin, Mauricio Rengifo, and Andrés Torres. Nevertheless, through industry practices, chiefly contracts, the record labels typically retain and manage the copyright on the sound recording for creators, performers, and producers. Finally, non-featured artists and musicians may be subject to copyright for their performances depending on the country. However, more often these artists are contractors or work-for-hire schemes, who have already signed their copyright interests to the record label. As Kohn explains, commercially successful records are often the product of contractual relationships between recording artists and labels.57 Through these contracts, record labels retain copyrights and control the licensing of sound recordings. Record labels, thus, are critical players in the music industry. Importantly, there are two types of labels: majors58 and independents (indies). Notably, indies are not normally owned by major recording companies. In addition to copyright holders, whether original creators or entities that assist creators and retain copyright (e.g., publishers and record labels), other intermediaries that

55 AL KOHN & BOB KOHN, KOHN ON MUSIC LICENSING 329-44 (Aspen Publishers, 2010). 56 U.S. Copyright Office, supra note 16, at 21. 57 Kohn, supra note 55, at 1454. 58 Major labels are Universal Music Group, Warner Music Group, and Sony Music Entertainment, Inc.

help with copyright management play an essential role in the music marketplace. Mechanical rights organizations, PROs, and CMOs are key for assisting the administrative burden of managing copyrights of musical works.59 Mechanical rights organization, such as the Harry Fox Agency in the U.S., exist to collect mechanical rights but are less common. In contrast, CMOs exist in most countries as entities that manage performance rights and conduct collective licensing for the right holders that are part of the organizations. The rationale underlying these type of organizations, and for songwriter and publishers to become members, is their ability to reduce transaction costs. This specific issue will be addressed in subsections four and seven. Nonetheless, figures 1, 2, and 3 introduce the complexity of rights management—who owns what rights, and how those rights are managed. These figures present the rights on Despacito’s musical works according to the databases of PRO’s in the United States, ASCAP, BMI, and SESAC.

Figure 1: BMI Repertoire60

59 The term PROs and CMOs are used interchangeably in this project. 60 http://repertoire.bmi.com/ListView.aspx?torow=25&fromrow=1&page=1

Figure 2: SESAC Repertoire61

Figure 3: ASCAP Repertoire62

61 https://www.sesac.com/Repertory/SongSearch.aspx 62 https://www.ascap.com/repertory#ace/search/title/despacito

On the other hand, new digital players have appeared on the distribution side, taking over the traditional distributor role. For instance, DMPs have become the new distributors in the digital era, largely taking the place of brick and mortar distributors in the value chain. Aggregators are another type of new player that offer independent artists and indie labels a service to license their rights to DMPs without requiring copyright assignment. The Orchard, CD Baby, and Kobalt are among the most notable aggregators. The chart below63 provides an overview of the predominant structure to clear rights, where the final consumer is out of the picture. However, it is important to stress that the final consumer is not part of this study. This usual licensing scheme is explored in detail in the next subsection.

Figure 4: Usual Licensing of Music for Online Uses

4. Contractual and Management Practices In light of this landscape where there are many copyright holders and rights for each song, the music industry has put in place management practices and institutions that facilitate the exploitation and licensing of music. This section provides a general overview of the most common contracts that exist in the industry that allow the coordination of copyright and, thus, the license to the user or DMPs. In addition, this

63 Source: http://www.eubusiness.com/topics/media/online-rights

discussion highlights the differences between individual and collective licensing, in particular those collective deals conducted through CMOs, the most common institution for collective licensing of music. The music industry has built different types of ownership arrangements among the different right holders to facilitate the control of music. In the case of musical works, composers typically assign the copyright to the publisher, or they jointly own the rights.64 As a result, the publisher, acting as the agent of the composer, conducts most of the licensing operations. Similarly, performers and musicians commonly assign completely their economic rights to record producers who control sound recordings.65 Works for hire, which allow these companies to retain ownership of the produced music, are also common in the record industry. These private contracts facilitate the management of ownership, and allow the coordination of rights to make these assets available in the marketplace, thus avoiding the tragedy of the commons. Nonetheless, the nature of musical works and the customary rules to coordinate ownership make licensing more difficult when compared with sound recordings. The following quote illustrates this trait:

Unlike sound recordings—which are typically wholly owned by an individual label—many musical works are controlled by two, three or even more publishers. Notwithstanding the default rules of joint copyright ownership, publishers and songwriters frequently have understandings that they are not free to license each other’s respective shares.66

Because many composers may collaborate on a song, there can be different publishers who represent such composers. The standard contractual practices of the publishing world prevent co-owners of a musical work from licensing the work without the rest of the shares. Thus, this type of practices makes musical works harder to license, unlike in sound recordings, where the label retains all the rights. The private nature of these contracts, moreover, pose several problems to study their outcomes and constitute a limitation to empirical inquiries. Yet, it is known that the

64 There are different types of arrangements for a detailed explanation see Sidney SHEMEL & WILLIAM KRASSILOWSKY, supra note 32, at 89. JEFFREY BRABEC & TOOD BRABEC, supra note 47, at 10-13. 65 JEFFREY BRABEC & TOOD BRABEC, supra note 47, at 149, 167 (explaining the recording and work for hire contracts.) 66 U.S. Copyright Office, supra note 16, at 163.

asymmetry in bargaining power between creators and publishers or record labels, has traditionally put creators at a disadvantage; the latter generally claim that they obtain unfair terms in these contracts. This criticism is more common in the recording industry. Some of these contracts are old and were designed under the logic of an analog market and when access to the production of a record was rather limited. Another important aspect is a decision that the copyright holders make: whether to conduct individual or collective licensing. The type of licensing depends on the type of use to be granted and the transaction costs associated with it. Individual licenses are awarded when the use in question is relatively simple to manage and transaction costs are low (e.g., users are easily identifiable and behaviors verifiable).67 In this case, the right holder directly negotiates and manages the license with the licensee. However, not all music uses are simple to manage, and collective licensing was developed as the solution for complex licensing situations and associated high transactions costs, such as in the case of performance rights. For instance, music used in supermarkets, bars, restaurants, shopping centers, night clubs, and local television programming constitute a public performance. Authorizing the public performance of music and collecting the associated royalties on an individual basis is not feasible, as searching and contracting costs would be prohibitive.68 The right holders cannot possibly know every single use of their work, and users could not regularly identify which right holders he needs to pay for each song. This is why specialized intermediaries that pool the rights of different creators are necessary to manage performance rights. Collective licensing, hence, permits under a single blanket license the authorization to perform several songs, avoiding vast transaction costs that would be incurred for a user to license every single song in the world catalogue.

67 Fabrice Rochelandet, Are Copyright Collecting Societies Efficient. An Evaluation of Collective Administration of Copyright in Europe 2 (2002), at http://www.serci.org/2002/rochelandet. pdf (explaining that individual arrangements have several advantages. “(1) When competitive negotiations prevail, there is a lesser risk of abuse of dominant position, and prices are likely to be closer to their competitive levels. (2) By benefiting from learning effects and financial capacities that authors cannot get in isolation, publishers and producers are the ablest to exploit a work. (3) Copyright administration by content producers is characterized by scope economies when it is undertaken jointly with contracting.”) 68 Id.

CMOs have been the typical institution in charge of collective licensing. According to WIPO, collective management of copyright and related rights is “a way of exercising copyright and related rights where the exercise of rights is impossible or highly impracticable on an individual basis.”69 The right holder decides to join a CMO that exercise her rights on her behalf. Historically CMOs have managed licenses and monitoring systems on a local basis and also have subscribed reciprocal arrangements with other CMOs based on territorial considerations.70 Among other functions, CMOs negotiate licensing arrangements for works on behalf of right holders and facilitate methods for collecting and dispersing royalties. 71 Authors have been able to use collective management as a collective barging mechanism to leverage their weaker position. The literature traditionally supported the premise that CMOs appeared to be efficient institutions that minimize delays, as well as reduce searching and contracting costs in licensing negotiations between intermediary, users, and copyright holders. 72 However, scholars now question whether these institutions remain efficient, relevant, and optimal in the digital era, for which no consensus exists.73 Structural issues in the way rights are managed are part of the list of problems that cause inefficiencies. For instance, often rights are managed concurrently by different CMOs within a country. The lack of coordination, at both a national and international level, also causes additional inefficiencies. Even though reciprocal agreements exist to coordinate and mutually represent CMOs in territories, these agreements were negotiated and concluded without envisioning digital services. Often these agreements can provide uncertainty and confusion for services looking to obtain licenses. This is particularly relevant for the new digital services that operate internationally since they need to clear rights in several jurisdictions in order to operate legally. But also, it is relevant at the local level as public

69 WORLD INTELLECTUAL PROPERTY ORGANIZATION, supra note 49, at 274-5. 70 Daniel Gervais, Keynote: The Landscape of Collective Management Schemes, 34 COLUM. JL & ARTS 34 591 (2010). Lucie Guibault & Stef Van Gompel, Collective Management in the European Union, 8 AMSTERDAM LAW SCHOOL RESEARCH PAPER (2012). European Commission, supra note 29, at 6. (The licensing of public performances of musical works is particularly complicated because musical works are licensed strictly on a national basis). 71 DANIEL GERVAIS, COLLECTIVE MANAGEMENT OF COPYRIGHT AND RELATED RIGHTS 5 (Wolters Klower, 2015) 72 Robert Merges, Contracting into liability rules: intellectual property rights and collective rights organizations, 84(5) CAL. L. REV. 1293-1393 (1996). 73 Fabrice Rochelandet, supra note 67, at 2.

performances or communication to the public of musical works through national law— licensed strictly on a national basis.74 In addition, some analysts agree on the particular difficulties that present licensing of public performances of musical works in the digital space.75 CMOs’ licensing dynamics also raise questions on the benefits that artists are receiving in the digital era, adding more challenges to the discussion.76 In addition, questions appear regarding whether this traditional CMO setup designed for an analog world is still viable for the digital space, where technologies may render these intermediaries irrelevant.

5. Challenges for Clearing Rights: Fragmentation, Anticommons and Thickets After reviewing the main characteristics of music and the practices of the industry, it is important to consider how the literature analyzes the challenges of licensing this type of art. Copyright law is a cornerstone in the promotion of creative content and an essential factor in the business models analyzed in this study. As such, copyright is a tool to conduct intricate transfer rights, but it also has essential characteristics inherent to its nature that influence copyright transactions—e.g., the coexistence of a bundle of rights in a single object. 77 From a theoretical perspective, copyright law is designed to allow fragmentation of the property rights available in a single subject matter.78 According to Molly Van Houweling, fragmentation within the copyright context refers to “the number of people to whom ownership of any single creative artifact and the work of authorship embedded in it can be divided (and thus, importantly, the number of people from whom permission must be sought before others can exploit the work).” 79 In other words,

74 European Commission, supra note 29, at 6. Also, Withdrawals of catalogs or moves in the composition of the societies can impact digital services, who rely on what the CMO affirms to have the ability to license. 75 Id. 76 Frederic Choquette, Reassessing Spotify, MUSIC BUS. J. (2012) http://bit.ly/2p0zASh (Last visited Feb. 10, 2018). 77 William M. Landes & Richard A. Posner, An Economic Analysis of Copyright Law, 18 J. LEG. STUD. 325, 325-33(1989). 78 Daniel Gervais & and Alana Maurushat, Fragmented Copyright, Fragmented Management: Proposals to Defrag Copyright Management, CANADIAN J. OF L. & TECH. 2.1 (2003). 79 Molly Shaffer Van Houweling, Author Autonomy and Atomism in Copyright Law, 96 VA. L. REV. 549, 553–55 (2010) (introduces a useful framework and concept: “copyright atomism” in the digital environment. She defines it along three dimensions: proliferation (how many works are subject to copyright ownership), distribution (how many different people own copyrights), and fragmentation

fragmentation occurs due to the multiplicity of exclusive statutory rights that are susceptible to belong to different right holders (in the case of music, to authors, performers, and producers) and that can also be assigned or managed through other intermediaries.80 In the case of music, the first level of fragmentation derives from the very nature of music and the number of individuals who can own a fragment of a track. As discussed, a song encompasses two different copyrightable works, the musical work—understood as the underlying composition and lyrics; and the sound recording that comprises a particular performance of the musical work fixed in a recording medium (e.g., a digital file, CD, or record). To license a single song for online uses, DMPs need to clear the rights of authors (composers and lyricists), performers (singers and musicians), and producers.81 The second level of fragmentation entails the host of exclusive economic rights that must be cleared for digital uses,82 as mentioned earlier. In the case of downloads, two rights are necessary: reproduction and distribution. In the case of interactive streaming, there is more variation due to the divergence of the making available right. The main point is that because there is more than one right to be cleared per song, the possibility that different subjects own or control each of these rights is possible, augmenting

(how many, what type, and what size of separately-owned rights exist within each copyright bundle). She furthers defines fragmentation (“[it] is a function not only of the initial allocation and size of the rights divided among multiple potential claimants, but also of subsequent transfers. The fragmenting effect of such transfers depends in part on rules governing whether a single copyright can be divided into separate rights to exploit the work in different ways.”) Id. at 562. 80 Urs Gasser, Copyright and Digital media in a post – Napster world: International Supplement, Berkman Center for Internet and Society and Gartner G2 11 (2005). 81 Andrew Harrison, The Music Business- The Essential Guide to the Law and the Deals (Virgin Books, 2011). KEA, supra note 29, at 27 (2012), http://bit.ly/2nI0Zdw 82 Many of these rights are labeled differently in different jurisdictions, so I use the nomenclature set out for rights in international treaties. See Jane Ginsburg, International Copyright: from a “bundle” of National Copyright Laws to a Supranational Code? 47,265 J. COPYRIGHT SOC’Y (2000) (explaining the role of international copyright law and national law in an era of international dissemination of works).

fragmentation. 83 This fragmentation of copyright ownership can undermine the very purpose of copyright.84 Economic theory has long discussed the problems of excessive real property fragmentation, which also elucidates the problem with copyright fragmentation. The discussion starts from the theory of the tragedy of the commons, in which Posner showed that the excessive fragmentation of real property causes high costs when transferring property, 85 thereby increasing transaction costs. Further, in his seminal work, Heller provides a full account of the tragedy of the anticommons as he describes the problems associated with fragmentation in real property and the shortcomings of coordination breakdown of property when there are multiple right holders who can exclude others from use, causing underuse of the asset.86 Similarly, IP scholars have identified intellectual property thickets as a manifestation of the tragedy of the anticommons. The field mainly refers to “patent thickets” as “a dense web of overlapping intellectual property rights that a company must hack its way

83 European Commission, supra note 29, at 5 (“most online distribution forms necessarily requires the simultaneous clearance of the digital reproduction right and the making available right.”) DLA Piper, Legal analysis of a Single Market for an Information Society, 9 (Nov. 2009), http://bit.ly/2jfUolI 84 Molly Shaffer Van Houweling, supra note 79, at 557 (asserting that increasing the fragmentation of copyright ownership among multiple individuals that own different rights for differing periods of time undermines the purpose of copyright.) 85 RICHARD POSNER, ECONOMIC ANALYSIS OF LAW, 61 (Wolters Kluwer Law & Business 3 ed. 1986). See also Garrett Hardin, The Tragedy of the Commons, 162 SCIENCE 1243, (1968); ELINOR OSTROM, GOVERNING THE COMMONS: THE EVOLUTION OF INSTITUTIONS FOR COLLECTIVE ACTION 182-84 (1990) (further discusses the tragedy of the commons in the context of water management.) 86 Michael A. Heller, The Tragedy of the Anticommons: Property in the Transition from Marc to Markets, 111 HARV. L. REV. 621, 624 (1998) (“multiple owners are each endowed with the right to exclude others from a scarce resource and no one has an effective privilege of use. When there are too many owners holding rights of exclusion, the resource is prone to underuse-a tragedy of the anticommons.”) Michael A. Heller, The Boundaries of Private Property, 108 YALE L. REV. 1163-1223 (1999) (discusses the boundary principle in property law that intends to avoid excessive fragmentation); Norbert Schulz, Francesco Parisi & Ben Deporter, Fragmentation in Property: Towards a General Model, 158 (4) J. INST. & THEOR. ECON. 594-613 (2002) (proposes a general model of anticommons fragmentation in property that suggests that the results of underutilization of joint property increase monotonically in both (a) the extent of fragmentation or number of property fragments; and (b) the foregone synergies and complementarities between the property fragments.); Ben Depooter & Francesco Parisi, Fragmentation of property rights: a functional interpretation of the law of servitudes 3:1 Global Jurist Frontiers (2003). Kevin Werbach, The Wasteland: Anticommons, White Spaces, and the Fallacy of Spectrum, 53 Ariz. L. Rev. 213, 230-231 (2011) (explaining that when many individuals possess rights in the same resource, under-consumption of the resource is possible.)

through in order to actually commercialize new technology.”87 This concept also exists in copyright law where users need to obtain several licensing deals for different economic rights from different right holders. To avoid these problems, private actors have incentives to seek arrangements that avoid these tragedies and reduce transaction costs.88 Indeed, different types of ownership arrangements among these right holders exist to facilitate the control of music and reduce the problems associated with fragmentation and transactions costs, as explained in subsections four and seven.

6. Territoriality of Copyright Law The territoriality principle of copyright law adds another layer of complexity to the fragmentation problem and licensing efforts. The territoriality principle89—which operates for most intellectual property rights90―bars the extension of one country’s law to conduct that occurs in another country.91 Harold Maier has synthetized the foundations of this principle as a statement that acts of foreign sovereigns should, when appropriate, be given effect within another state’s territory and that courts of all nations should indulge a presumption against the extraterritorial impact of law.92 Hence, each country

87 Carlo Shapiro, Navigating the patent thicket: Cross licenses, patent pools, and standard setting, 1 INNOVATION POLICY AND THE ECONOMY 119, 120 (2000). 88 Finally, Merges explains how strong and complex property rights structures can prompt private actors to create institutions that that lower transactions costs that assist in avoiding the tragedy of the commons. See Robert P. Merges, supra note 72, at 1293 (1996). DANIEL GERVAIS, supra note 71, at 3. 89 PAUL GOLDSTEIN, INTERNATIONAL COPYRIGHT: PRINCIPLES, LAW, AND PRACTICE: PRINCIPLES, LAW, AND PRACTICE 61-9 (Oxford University Press, 2001) (explaining the territoriality principle and its main critics thoroughly in spite of the digital economy); at 247 (“economic rights in creative products divide into those conferred by copyright or author’s right and those conferred by neighboring rights. The lines of division are not universal. One country may treat a recorded performance as a literary work entitled to copyright protection, while another country will exclude recordings from authorial works; and protect them only under one or more neighboring rights. Also, countries may take different approaches to the rights that attach to literary and artistic works.”) 90 Alexander Peukert, Territoriality and Extraterritoriality in Intellectual Property Law in Beyond Territoriality: Transnational Legal Authority in an Age of Globalization, Gunther Handle & Joachim Zekoll (eds), Queen Mary Studies in International Law, (Brill Academic Publishing, 2011) (explaining jurisprudence that elucidates the status quo of the territoriality principle in intellectual property). 91 PAUL GOLDSTEIN, supra note 89, at 16. David R. Johnson & David Post, Law and Borders-The Rise of Law in Cyberspace, 48 STAN. L. REV. 1367 (1995-6). Andreas P. Reindl, Choosing Law in Cyberspace: Copyright Conﬂicts on Global Networks, 19 MICH. J. INT’L L. 799 (1998). 92 Harold G.Maier, Extraterritorial Jurisdiction at a Crossroads: An Intersection Between Public and Private International Law, 76 AM. J. INT.’L L. 280, 282 (1982).

has domestic copyright laws that—despite harmonization efforts by means of international treaties—remain significantly different.93 In practice, this means that for each work, the right holder possesses an independent copyright in each country.94 Again, this causes a multiplication of rights, which has a particular impact on the digital environment, the distribution of online content, and management practices.95 Scholars have stressed that the effects of the territoriality principle together with the lack of an efficient method of copyright management cause greater market fragmentation.96 Many licensing contracts are national in scope; clearing rights in a multiterritorial fashion is difficult and generally entails substantial legal uncertainty.97 Yet companies keep pushing for global agreements, challenging the territorial nature of copyright law.

7. Transaction Costs and Copyright Governance In the context of this study, it is essential to consider the problems associated with the increased transaction costs that the fragmentation problem supposes. Posner illustrates simply how fragmentation increases transaction costs: “one problem is that having too many sticks in the bundle of rights that is property increases the costs of transferring property.”98

93 Marketa Trimble, A multiplicity of copyright laws on the Internet, 25 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 339 (2015) (explaining the issues related to the multiplicity of copyright laws on internet). 94 See RITA MATULIONYTE, LAW APPLICABLE TO COPYRIGHT: A COMPARISON OF THE ALI AND CLIP PROPOSALS 3 (Edward Elgar Publishing, 2011). 95 Scholars largely discussed this principle at the end of the last century and its impact in the cyberspace. See David R. Johnson & David Post, supra note 91, 1367. Paul Edward Geller, Conﬂicts of Law in Cyberspace: Rethinking International Copyright, 44 J. COPYR. SOC’Y. 103 (1996); Jane C. Ginsburg, Global Use/Territorial Rights: Private International Law Questions of the Global Information Infrastructure, 42 J. COPYR. SOC’Y 318, 319 (1995); Andreas P. Reindl, supra note 91, at 799; Raquel Xalabarder, Copyright: choice of law and jurisdiction in the digital age 79 ANN. SURV. INT’L & COMP. L. 8 (2002). 96 Lately, scholars have paid considerable attention to international private law to copyright as a way to solve many of the issues presented in the internet context. See European Max Planck Group on Conflict of Laws in Intellectual Property (CLIP), Principles on Conflict of Laws in Intellectual Property, (2011), http://bit.ly/2B3BrN2 (last visited May 1, 2016). 97 DLA Piper, supra note 83, at 23. 98 RICHARD POSNER, supra note 85, at 61.

Transaction cost economics offers a useful framework to scrutinize the complexity of licensing content..99 In fact, the transaction costs literature is regularly used when analyzing licensing arrangements and institutions, such as CMOs. Transaction costs economics offers a framework to analyze governance structures and how some of these arrangements can be more optimal than others.100 The transaction costs literature is traced back to 1939, when Ronald Coase first tackled this problem..101 Three different authors—Coase,102 Arrow,103 and Williamson104 —proposed different approaches for a

99 Oliver E Williamson, Chapter 3 Transaction cost economics in RICHARD SCHMALENSEE AND ROBERT WILLIG HANDBOOK OF INDUSTRIAL ORGANIZATION ELSEVIER, 142 (Elsevier Science Publishers B.V.,1989) (“Transaction cost analysis entails an examination of the comparative costs of planning, adapting, and monitoring task completion under alternative governance structures.”) 100 Barak D Richman, and Jeffrey Thomas Macher, Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences 115 DUKE LAW SCHOOL LEGAL STUDIES PAPER (2006) (“The basic insight of transactions costs economics is to recognize that in a world of positive transaction costs, exchange agreements must be governed, and that, contingent on the transactions to be organized, some forms of governance are better than others). STEPHEN A. MERRILL & WILLIAM J. RADUCHEL, COPYRIGHT IN THE DIGITAL ERA: BUILDING EVIDENCE, (National Research Council, 2013) (“With respect to the enablers of and impediments to voluntary licensing transactions in copyright works, research would determine the significance of transactions costs as barriers to utilization of copyright works, […] what are successful arrangements for managing transaction costs.”) 101 Ning Wang, Measuring transaction costs: An Incomplete Survey, Working Paper 2 Ronald Coase Institute, 2 (2003) “(Despite the voluminous literature in the new institutional economics, a theoretical consensus on what transaction costs are is still out of sight (e.g., Allen 1991, 2000; Hobbs and Kerr 1999; Klaes 2000a). There is not even agreement on what a world of zero transaction cost could be (e.g., Hsiung 1999).”) 102 Coase referred to transaction costs as the cost of “using the price mechanism or the cost of carrying out a transaction by means of an exchange on the open market.” Robert Coase, The Nature of the Firm, 4 ECONOMICA, 368-405 (1937). Further, Coase explains that in order to carry out a market transaction it is necessary to discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed and so on.” Robert Coase, The Problem of Social Cost, 3 J. L. AND ECON. 1,15 (1960). Later, he formulated the Coase theorem: “in a zero transaction costs world, the allocation of resources is independent of the distribution of property rights as long as rights are clearly defined.” This theorem is key for understanding the concept of transaction costs, which he defines as the resources used to establish and maintain property rights, using the price mechanism as the unit of analysis. 103 In contrast, Arrow offered a broader definition that encompasses all the transactions costs of running the economic system. Kenneth Arrow, The organization of economic activity: issues pertinent to the choice of market versus nonmarket allocation in THE ANALYSIS AND EVALUATION OF PUBLIC EXPENDITURE: THE PPB SYSTEM 48 (1969). Notwithstanding, Arrow proposes a systematic approach to transaction costs that may be too wide to be studied empirically. Ning Wang, Measuring Transaction Costs: Diverging approaches, contending practices, Division of Labour & Transaction Costs 111, 126 (2007). 104 Finally, Williamson builds on Corse but confines TC to a narrower piece, or to the “transaction,” which, in this stream of literature, is used as the unit of analysis. The costs refer to economic resources spent to conduct a given transaction. Williamson work takes a contractual arrangement focus. See generally Oliver E. Williamson, Transaction-cost economics: the governance of contractual relations, 22 J. L. & J.L. & Econ. 233, (1979). OLIVER E. WILLIAMSON, THE ECONOMIC INSTITUTIONS 0F

theory of transaction costs. These three streams are used currently when analyzing transaction costs, which have prompted a dispersed literature and discussion of which approach should prevail.105 Nonetheless, the literature has established that multiple transaction costs exist when licensing (contracting), including the costs of search, bargaining, and enforcement.106 The theory also suggests that transactions, in general, depend on opportunism, bounded rationality, asset specificity, uncertainty, complexity, and frequency, factors that are used as proxies to determine transaction costs empirically.107 Moreover, transaction costs scholars stress the importance of governance structures on the conduct of transactions, as these are chosen with the purpose to “reduce this friction and minimize the costs of doing business.”108 In essence, this framework seeks to determine what arrangements are optimal in so far as they reduce transaction costs. To tackle the transaction costs problem in the music industry, stakeholders created private arrangements and institutions, as explained in subsection four. On the one hand, CMOs are institutions intended to reduce these costs and to solve licensing bottlenecks.109 Some scholars consider CMOs to be efficient entities because they succeed in concentrating ownership and managing complex copyright transactions.110 On the other hand, other private individual arrangements also aim at gaining coordination of property and reducing transaction costs. For instance, songwriters, composers, and lyricists traditionally assign their work to publishers, and CMOs administer performing rights, while recording artists and producers typically assign their rights to record labels. However, this pattern is starting to change slowly, due to the democratization of both the technology to produce music and the distribution channels. Many artists today have the option to carry out their careers without necessarily signing with a record label. As a

CAPITALISM FIRMS MARKETS AND RELATIONAL CONTRACTING (New York, Free Press, 1985). In this context, the concept of transaction cost in the Williamsonian tradition presents the best suited framework for this research. 105 Douglas W. Allen, Transaction costs in ENCYCLOPEDIA OF LAW AND ECONOMICS 893 (1999). 106 Oliver E Williamson, supra note 102, at 135. 107 Id., at 145. 108 Gander, Jonathan, and Alison Riple, How relevant is transaction cost economics to inter-firm relationships in the music industry? 28 J. CULTURAL ECON. 57, 63 (2004). 109 Gerd Hansen & Albrecht Schmidt -Bischoffshausen, Economics function of collecting societies- Collective rights management in the light of transaction cost and information economics (2007), http://bit.ly/2Aohb9w 110 Fabrice Rochelandet, supra note 67, at 2, 13.

result, it is unclear if the current arrangements remain optimal to clear rights in the digital environment, and discussions persist about the value of these institutions.111 In the context of digital technologies, some industry stakeholders argue that transaction costs increase when licensing content,112 which has prompted discussions to seek new alternatives to clear and manage rights.113 For instance, the larger the number of separate territories in which a creative work is protected, the higher the transactions costs are for procuring global licenses.114 Nevertheless, some scholars have voiced the need to study copyright transaction costs, as no convincing data available on the administrative and transactions costs related to copyright, and in which way the system facilitates or creates barriers.115 This lack of data is an important limitation to the analysis on what copyright governance structures are more efficient from a transaction costs angle. Nonetheless, transaction cost economics and concepts from new institutional economic are important to bear in mind when analyzing licensing for digital uses.

8. Market Driven & Regulatory Approaches to Reduce Transaction Costs in Music As Posner explains, transaction costs are “a threat to the ability of the market to allocate intellectual property to those who value it the most. This means that an important focus of legal reform should be on means of reducing intellectual property transaction

111 Lydia Pallas Loren, Untangling the Web of Music Copyrights, 53 CASE W. RES. L. REV. 673, 676 (2002) 112 Kaitlin Mara, High Copyright Transaction Costs Cause “Friction,” Google Economist Tells WIPO, Intellectual Property Watch (Sep. 16, 2010). Available at: http://bit.ly/2jcyzXu (Last accessed 1/15/2018) (“strengthening copyright law and the explosion of information has led to huge transaction costs in managing legitimate transactions of copyright material.”) See also Shane Greenstein, Josh Lerner & Scott Stern, supra note 10, at 114. 113 Brian R. Day, Collective Management of Music Copyright in the Digital Age: The Online Clearinghouse, 18(2) TEX. INTELL. PROP. L.J. (2010); Jonathan Cardi, Über-Middleman: Reshaping the Broken Landscape of Music Copyright, 92 IOWA L. REV. 835, 838 (2007) (arguing that organizations that represent songwriters and publishers should be combined with record companies, which represent the interests of performing artists, to create a single licensing conglomerate. This idea is not feasible.) Luder Tilman, Working toward the next generation of copyright licenses, Presented at the 14th Fordham Conference on International Intellectual Property Law & Policy, (Apr. 21, 2006). 114 OECD, supra note 3, at 27. Frederic Choquette, Reassessing Spotify, MUSIC BUS. J. (2012) http://www.thembj.org/2012/05/reassessing-spotify-2/ (Last visited 05/10/2013) 115 Sacha Wunsch-Vincent, supra note 17, at 14. (“Arguably the transaction costs have to be set against the potential incentive effect of copyright across the economy which is difficult. One would want to assess the relative costs and benefits of various arrangements for managing transaction costs. And, surely one should assess the existing and potential effect of new technologies on existing licensing procedures and collective rights management institutions. At the moment, the data situation does not allow this easily.”)

costs, or, equivalently licensing costs.” 116 This section, thus, compares the different means often used in music to reduce transaction costs in music licensing: non-voluntary licenses, in particular compulsory licenses, vis-à-vis private solutions, including collective management arrangements. In addition, it explains oversight mechanisms for CMOs, as one of the key governance structures to manage copyright in music. Moreover, it addresses how all these arrangements affect the exercise of the exclusive rights granted under copyright law. In music licensing, there are several possible types of schemes to facilitate the identification of the parties of each transaction and the negotiation of prices and licensing conditions.117 Nonetheless, scholars have discussed whether licensing should be subject to a regulatory solution under certain circumstances to correct market failures or if it should be left in private hands.118 The grant of and the full exercise of exclusive rights is the underlying premise of copyright law, as it provides an incentive to produce creative works.119 Limited restrictions are desirable, as the purpose of copyright law is to award an incentive to the author for the creation of original content. Some restrictions to the exercise of rights are tolerated to achieve specific public policy goals (e.g., freedom of expression and fair use) or to correct market failures, including transaction costs.120 Gervais proposes a table to describe the levels of copyright restrictions on the freedom to exercise exclusive rights of the most common arrangements to license copyright. The higher the level of restriction, the more invasive the type of arrangement is.121

116 Richard A. Posner, Transaction Costs and Antitrust Concerns in the Licensing of Intellectual Property, 4 J. MARSHALL REV. INTELL. PROP. L. 325, 327 (2004). 117 Fabrice Rochelandet, supra note 67, at 3. 118 Robert P Merges, Compulsory Licensing vs. the Three “Golden Oldies,” Property Rights, Contracts, and Markets 508 Policy Analysis 1 (2004). 119 Paul Goldstein, Copyright, 38 J. COPYRIGHT SOC'Y 109, 112-14 (1991) (explaining that copyright awards an incentive to authors to encourage the production of creative works and the arguments to balance such incentives with dissemination.) 120 Paul Goldstein, Copyright on a Clean Slate, 48 HOUS. L. REV. 691, 696 (2011) (arguing that exclusive rights should not be extended when a “harm to fundamental political, social, and cultural values outweighs the value of market transfers.”) 121 Gervais, supra note 71, at 20. Gervais used this chart to illustrate the compatibility of these measures with Article 5(2) of the Berne Convention. I adapted the table and excluded the last level “exceptions” as its nature is different.

Table 1: Gervais Copyright Restriction Levels

Level Type of restriction 0 Full Individual License 1 Voluntary Collective Management (opt in) 2 Collective Management with Extended Repertoire (opt out) 3A Mandatory Collective Management / Presumption 3B Limitation to Damages to Tariff 4 Compulsory Licensing

As seen in this table, compulsory licensing is on the opposite extreme from full individual schemes where there is no intervention in the exercise of the right. Compulsory licensing is a non-voluntary scheme by which users are allowed to use copyrighted material on a non-exclusive basis.122 According to Merges, “conceptually, a compulsory license falls midway between granting full copyright, which gives broad control, and denying copyright protection altogether.”123 A such, this scheme should be considered to be a limitation on the rights of a copyright holder, in that the authorization to use the work does not come from such right holder.124 When natural transaction costs would be a barrier for transactions to occur, the use of a compulsory license is optimal.125 In theory, the absence of a negotiations between the licensor and licensees guarantees that the transaction costs of licensing are equal to zero.126 Instead, the compulsory system establishes fees that correspond to the price of the contract, and not the transaction costs.

122 Id. (explaining that non-voluntary licenses are arrangements where copyright holders are obliged to license their rights, regardless of their economic strategies or preferences. He also differentiates between statutory and compulsory license. Under the former scheme, users can freely use the content without first obtaining a license but have to pay a statutory compensation and management is also non-voluntary. Whereas compulsory schemes users negotiate the price with the copyright holder, who cannot refuse to license the work. In case of disagreement, the scheme provides mechanisms to arbitrate the price.) 123 Robert P Merges, supra note 118, at 1. 124 WORLD INTELLECTUAL PROPERTY ORGANIZATION, supra note 49, at 277. 125 Robert P Merges, supra note 118, 1 (“Compulsory licensing supposedly addresses the “market failure” of high transaction costs. But markets for digitized works do not suffer from market failures. Furthermore, the Internet has reduced the transaction costs that once served as a key rationale for compulsory licensing.”) 126 Id., at 328. Despite that theory establishes that no transaction costs exist in compulsory licenses, some costs do exist when establishing and operating the system. Depending on the design of the system, some costs may be passed on to the transaction.

Different instances of non-voluntary licensing exist in the music industry. For example, the Berne Convention allows member countries to establish compulsory licensing for broadcasting and certain related acts and for sound recordings, and member countries have the prerogative to establish in their national legislation how these rights should be exercised. 127 Thus, several countries have used Berne’s provisions to implement non-voluntary schemes, such as statutory regimes. 128 The United States is perhaps the most significant example of compulsory licenses for music, as described in chapter three. Mid-way between full private exercise of rights and compulsory licensing, there are several collective licensing arrangements that help to reduce transaction costs. This type of arrangement includes CMOs and clearing copyright centers. In the former scheme, all aspects of licensing—including fees, distribution rules, and licensing terms—are collective, whereas in the latter arrangement, the exercise of rights is collective but all the aspects of licensing are individual. 129 Collective management should be used when individual licensing is not possible, as WIPO memorialized in its discussion about collective management in the 1980s: The establishment of collective administration systems should be encouraged whenever individual licensing is not practicable and as preferable to non- voluntary licenses, even where such licenses should be admitted under the Berne Convention… and the Rome Convention.130

As such, collective management develops as an alternative when there is a need or when private creators agree to use collective licensing. As a result, CMOs vary from country to country, as does their configuration and the type of governmental oversight. According to Ficsor, the objectives of these organizations also vary; the most common goals include: to group authors to act as a community and increase their bargaining position vis-à-vis users; to promote and protect the economic and moral rights of creators; and to manage rights collectively whenever joint exercise is indispensable or

127 Berne Convention Articles 13 (1) and 11 bis 2. For a detailed history and meaning of these articles see WORLD INTELLECTUAL PROPERTY ORGANIZATION, supra note 64, at 82-83. 128 MIHÁLY FICSOR, COLLECTIVE MANAGEMENT OF COPYRIGHT AND RELATED RIGHTS 55 (WIPO, Geneva 2002) 129 Id., at 12. 130 Id., at 38.

highly necessary. 131 Some CMOs are formed privately and others are based on a regulatory framework, and this distinction can affect the way individual right holders exercise their rights. For instance, as illustrated in Table 1, voluntary collective management with an opt-in mechanism is closer to a full exercise of rights because the creator has control over the decision of whether to be part of the collective system. A degree lower in the full exercise of the right can be found in collective management with extended repertoire and opt-out membership, where all creators of a certain type are part of the CMO unless they specifically choose to opt out.132 Finally, creators have no option to exercise their rights individually when a mandatory collective management exists, resulting in a stark limitation of the exclusive right. 133 The two latter cases require a law that compels creators to belong to these CMOs. Thus, both schemes imply some state intervention. From an international copyright perspective, WIPO has clarified the conditions under which collective management can be consistent with copyright treaties sponsored by the organization. 134 From WIPO’s extensive study of this issue, it is most relevant to establish that mandatory collective management is only allowed in those cases where non-voluntary licenses are prescribed. 135 In other words, mandatory collective management is possible and desirable when the right is of simple remuneration,136 which

131 MIHÁLY FICSOR, Collective Rights Management from the Viewpoint of International Treaties, with Special Attention to the EU ‘Acquis’ in COLLECTIVE MANAGEMENT OF COPYRIGHT AND RELATED RIGHTS, at 44 (Wolters Klower, 2016). 132 Daniel Gervais, supra note 71, at 24. (explaining that this system “is a voluntary assignment or transfer of rights from right holder to a VMO followed by a legal extension of the CMOs repertoire to encompass non-member right holders.”) See also Ficsor, supra note 128, at 66-7 (explaining the requirements for this system to be in line with international agreements). On the contrary, see Alain Strowel, The European Extended Collective Licensing Model, 34 COLUM. J. L. & ART 668 (2012) (arguing that extended collective management in practice is an exception as the author cannot individually negotiate his rights). 133 MIHÁLY FICSOR, supra note 128, at 50. 134 Id., at 59. 135 Id., at 51 (“[…]it can be deduced that in general, mandatory collective management of exclusive rights may only be prescribed practically in the same cases as non-voluntary licenses (which result in mere rights to remuneration) or where the application of the three-step test, namely in the case of the right of reproduction under article (2) of Berne Convention, the right of rental under Article 13 of YRIPS, and the right of interactive making available to the public under Article 10 of the WCT and Article 16 of the WPPT.”) Disagreement exists in the point that mandatory collective management does not restrict the exercise of exclusive rights See Silke von Lewinski, Mandatory Collective Administration of Economic Rights- A Case Study, 200 Unesco e-Copyright Bulletin, 5-5 (2001). 136 MIHÁLY FICSOR, supra note 128, at 52.

includes the rights of performers and producers of phonograms to a single equitable remuneration for broadcasting, and the right of communication to the public.137 These prescriptions are important when analyzing collective management, as under these conditions non-voluntary measures can be a defensible regulatory intervention. The system of oversight of the actual collective management organizations is another important issue to ponder. The need to guarantee an effective exercise of the rights collectively justifies government regulation of CMOs.138 Experts agree that a certain type of oversight is convenient to ensure proper operation of collective management systems and the ultimate benefit of right holders, since dysfunctional organizations may lead to neglect or restrict the rights of creators:139 Government supervision of the establishment and operation of collective management organizations seems desirable. Such supervision may guarantee, inter alia, that only those organizations which can provide the legal, professional and material conditions necessary for an appropriate and efficient management of rights may operate; that the joint management system be made available to all rights owners who need it; that the terms of membership of the organization be reasonable, and in general, that the basic principles of an adequate collective management (for example, the principle of equal treatment of rights owners) be fully respected.140

Recently, the move to establish better supervisory frameworks became a trend around the world. Mismanagement scandals 141 prompted several governments to enhance the regulatory framework for CMOs, particularly provisions relating to transparency,

137 Art. 12 of the Rome Convention and Article 15 of the WPPT. 138 Ficsor, supra note 131, at 40.(“Some conditions that seem valid for intervention include fees only when the intervention is indispensable for prevention or elimination of actual abuse (in particular abuse of monopolistic position of fact or law) of the CMO; fees should only be distributed to the interested owners proportionally to the actual use of the work; prohibit the use of fees collected without the authorization of the right holders; foreign right holders should enjoy the same treatment; national legislation should may impose CMO for those rights where international treaties allow non- voluntary licenses or remuneration right collection.”) 139 Ficsor, supra note 131, at 45 (pointing out how certain regulation is consistent with international copyright law obligations.) 140 Ficsor, supra note 128, at 162. 141 European Commission, Directive on collective management of copyright and related rights and multi-territorial licensing – frequently asked questions (“the functioning of some collecting societies has raised concerns as to their transparency, governance and the handling of revenues collected on behalf of right-holders. Cases of risky investment by certain collecting societies of royalties that should have gone to right holders highlighted the lack of oversight and influence of right holders on the activities of a number of collecting societies, contributing to irregularities in their financial management and investment decisions.”)

accountability, and good governance obligations. In the EU, the Collective Management Directive aimed at obtaining greater transparency and governance of CMOs through fortified reporting duties and the control of right holders over their activities. 142 This regulatory approach is widely used in civil law tradition countries. However, other oversight mechanisms exist, such as antitrust supervision.143 In this context, the question remains which licensing scheme best fits the digital era, and what type of oversight is most appropriate today, if any. Some proponents argue that transaction costs for licensing content have increased in the context of digital technologies,144 and earlier institutional arrangements may be inadequate for the needs of the digital marketplace. Some scholars and practitioners urge right holders to seek new alternatives145 to clear and manage rights.146 The next section digs deeper into the role that the government should adopt in this context.

9. The Case for Empowering Private Actors in the Digital Environment Based on a careful review of the existing literature, the working hypothesis of this thesis is that if licensing, as a vehicle to exercise the economic rights of creators, is left in the hands of private actors with few interventions from governments, then private actors

142 Directive, E. U. Directive 2014/26/EU 143 Ficsor, supra note 128, at 48. Antitrust is an area of concern for CMOs since these organizations may trigger anticompetitive behavior. In the case of the U.S., as explored in chapter 3, consent decrees exist for two PROs. Other countries deal with antitrust issues differently. Some countries have monopolist CMOs established by law per right or per entity, others do not limit the number of CMOs that can coexist in the market. 144 Higher transaction costs and cumbersome licensing procedures were a major concern when digital content started to arise. See Pamela S. Helyar & Gregory M. Doudnikoff, Walking the Labyrinth of Multimedia Law, 41 TECHNICAL COMM. 662, 663-4 (“So while we have the technical ability to draw easily from the entertainment and computer industries in the development of multimedia products, the cumbersomeness of licensing procedures and the costs of licenses have often made it unfeasible for us to license elements from them”.) Barbara Zimmerman, Piecing Together a Puzzle: Rights Clearance for Multimedia ROM PROF., Oct. 1, 1995 (“The rights clearance process required to acquire the hundreds of copyright materials used in IBM's giant multimedia project, Columbus: Disc, Encountered and Beyond, proved a nightmarish undertaking”.) Kaitlin Mara, supra note 25 (“strengthening copyright law and the explosion of information has led to huge transaction costs in managing legitimate transactions of copyright material.”). KEA, supra note 29, at 27. See also Shane Greenstein et al., supra note 10, at 114. (discussing some of the challenges of copyright in the digital environment and whether current institutional arrangements deter entrepreneurial activity, as firms may encounter unsolvable licensing issues, questioning current institutional arrangements.) 145 WIPO, El derecho de autor y los derechos conexos en el entorno digital, OMPI- SGAE/DA/ASU/05/3 (2005) 146 See supra note 113.

can attain better arrangements that maximize the efficiency of transactions and promote the availability of content in the market. Put simply, private actors have incentives to seek solutions to make licensing more efficient. Providing autonomy to conduct arrangements can lead to better outcomes than imposing governmental solutions. The essence of copyright law is to award rights that allow creators to benefit economically from their creations and to attract investment in creative ventures that result in original expression. 147 For instance, the United States Constitution embodies the principle that copyright should “promote the progress of science” by guaranteeing creators “the exclusive right” to their creations.148 Other countries also include in their constitutions guidance to establish similar incentives to creators in the form of monopolies over their creations for a limited time. 149 However, these intangible 150 property rights suffer from problems such as poorly defined boundaries of the property right, which in turn cause problems when exchanging rights or licensing.151

147 A debate has always existed regarding the different purposes of copyright law on the common law or the droit d’auteur tradition. Nonetheless, both traditions agree, to some extent, that incentives are necessary. 148 U.S. Const. Art. I, § 8, cl. 8. Peter S. Menell, Governance of intellectual resources and disintegration of intellectual property in the digital age, Berkeley Tech. L. J. 1523, 1528 (2011) (discussing the objective function of copyright law.) 149 Art. 28 Mexican Constitution (“Neither do monopolies constitute privileges granted for a certain time to authors and artists for the production of their works and those which, for the exclusive use of their inventions, are granted to the inventors and perfectors of some improvement.”) 150 Richard A. Posner, supra note 116, at 325 (2004). (Licensing of IPR is different and complex because of its characteristics such as invisibility, ready appropiability, and divisibility. Difficulties discerning the boundaries and defining the boundaries of what is in a license further complicates licensing. Because of its divisibility, the same property may be licensed to a multitude of licensees, creating complex business relations.) 151 William M. Landes & Richard A. Posner, An economic analysis of copyright law,18 THE J. OF LEGAL STUDIES 325, 325-8 (1989)(explaining that the public good nature of copyright causes some problems. While the cost of creating a creative work is high, the cost of reproduction is low. To overcome this problem, copies should be priced at or close to marginal cost, but such revenues may not be sufficient to offset the costs of production. This is why the right to exclude others from making copies is essential for copyright law.) For a summary of the economics of copyright see generally Ruth Towse et al., The economics of copyright law: A stocktake of the literature, 5(1) REV. OF ECON. RESEARCH ON COPYRIGHT ISSUES, 1 (2008). Jane C. Ginsburg, Copyright and Control over New Technologies of Dissemination, 101 COLUM. L. REV. 1613, 1647 (2001) (arguing that the constitution does not clarify “how much control authors should be able to exercise over their works. That turns on the scope of copyright protection, particularly with respect to new markets fostered by new technologies. In articulating the reach of the author's exclusive rights over reproduction, distribution, and public performance and display, the copyright statute and the judges who interpret it attempt a balance: Creators should maintain sufficient control over new markets to keep the copyright incentive meaningful, but not so much as to stifle the spread of the new technologies of dissemination.”)

Besides encouraging the production of creative works, copyright law also aims to encourage their dissemination— “to promote the progress of science.” With these two competing purposes, copyright entails a paradox. On the one hand, it aims to maximize the diffusion of new works, while on the other, it creates obstacles to dissemination—due to the right to exclude others from copying, performing, and communicating those new works. 152 It is between these two goals that copyright law must strike a balance: providing the right to exclude others while promoting the dissemination of works for the enjoyment of those creations. As Posner claims, “striking the correct balance between access and incentives is the central problem in copyright law.” 153 Traditionally, this balance has been established through the design of exclusive rights, which grant right holders the capacity to control and be remunerated for their works (through the price mechanism) so long as the work is original. However, exclusive rights are not always absolute and often the law imposes limits to in order to correct market failures associated with the nature of creative works or to prompt dissemination—that is, in order to balance the competing goals of copyright law. 154 These two goals— incentivizing the production of creative works and their dissemination— inform the analysis presented throughout this dissertation. With this theoretical framework, then, the question is whether the market for digital content has significant market failures that would warrant placing limitations on exclusive rights and the exchange of these rights? The answer is no. The internet has existed for over twenty years and during this time, we have seen the ever-increasing dissemination of content. If anything, we are seeing more innovation and more dissemination. Despite the fact that several licensing bottlenecks still exist, technology is reducing transaction costs and permitting new business models.155

152 DANIEL GERVAIS, supra note 71, at 3. 153 William M. Landes & Richard A. Posner, supra note 150, at 325 (“For copyright law to promote economic efficiency, its principal legal doctrines must, at least approximately, maximize the benefits from creating additional works minus both the losses from limiting access and the costs of administering copyright protection.”) 154 Hal Varian, Transactions Costs and Copyright, WIPO SEMINAR SERIES ON THE ECONOMICS OF INTELLECTUAL PROPERTY, (2010). 155 Robert P Merges, supra note 118, 1. See also Paul Goldstein, supra note 120, at 691 (arguing that “Internet's unprecedented capacity to reduce transaction costs and to organize fluent markets for information and entertainment that previously were impracticable.”)

In the case of digital music, the fragmentation of rights and the hurdles to obtain licenses in high volumes pose significant challenges for market actors.156 Services that deliver content online face a fragmented environment due to the multiplicity of rights and right holders. Those services that operate in multiple jurisdictions also face challenges posed by the territoriality principle. To operate legally, these services need to make complex right clearances and face uncertainty due to the differences in domestic laws and the number of distinct stakeholders that may be involved in a single transaction. This reality begs the question, how can these practices be more efficient? To address this issue, in the early 2000s, some scholars and industry players advanced the idea that compulsory licensing would be the ideal solution to overcome licensing bottlenecks in the digital space.157 In contrast, other scholars have countered the argument and opposed compulsory licenses for digital content. Goldstein, for example, explains that using compulsory licenses to calm the anxieties brought by new technologies can prevent actors from seeking better methods to reduce transactions costs.158 Merges also opposes compulsory licenses and argues that such arrangements are less optimal than the solutions that private actors can design to tackle the problem of increased transactions costs. 159 More

156 Tilman Lueder, supra note 20, at 4. 157 See LAWRENCE LESSIG, THE FUTURE OF IDEAS 109, 259(Vintage Books, 2001) (arguing that several compromises in the Copyright Act history created compulsory licenses, awarding the copyright holder a guarantee of compensation but not perfect control over the use of the creation. He further proposes that Congress “should empower file sharing by recognizing a similar system of compulsory licenses. These fees should not be set by an industry intent on killing this new mode of distribution. They should be set, as they have always been set, by a policy maker keen on striking a balance.”) James H. Richardson, The Spotify paradox: How the creation of a compulsory license scheme for streaming on-demand music platforms can save the music industry, 22 UCLA ENT. L. REV. 45 (2014) (arguing that the compulsory licensing system for non-interactive transmissions has created a disparity playing field for similar services, affecting certain business models). On the other hand, compulsory licensing regimes may provide transparency and certainty. Yet many critics of this latter approach argue that these arrangements are not optimal and that private actors’ solutions tackle market inefficiency problems more effectively. 158 Paul Goldstein, Preempted State Doctrines, Involuntary Transfers and Compulsory Licenses: Testing the Limits of Copyright, 24 UCLA L. REV. 1107, 1137, 1139-1140 (1977) (further predicted that the technological capability in the digital era would bring tools for attaining freely negotiated licenses problem. He also analyzed the compulsory licensing in the context of the 1978 Copyright Act reform, Goldstein criticized the use of obligatory licensing and the assumption that it would ease “the friction between copyright and the new technologies.”) 159 Robert P. Merges, supra note 72, at 1392-3 (“The pressure of high transaction costs in an industry where repeat dealings are the norm will transactional mechanism than a legislature could create in advance.”) “When property rights are fully established, private negotiation rather than state

importantly, he argues that “intellectual property forces industry participants to invest in institutions to conduct transactions.”160 This theory is of the utmost importance in the analysis of licensing practices and the institutional arrangements created by private actors to solve the problems arising from clearing rights in the digital environment. The case seems clear for digital music: empowering private actors can solve fragmentation and other licensing issues, while also attaining a balance in the system, including fostering content dissemination. Strong and complex property rights structures can prompt private actors to create their own institutions that lower transactions costs and assist in avoiding the tragedy of the commons.161 As repeat players, private actors have the motivation, experience, and the know-how to attain agreements and design institutions to exchange rights in a manner that reduces transaction costs and increases efficiency. In addition, this approach promotes the dissemination of content that benefits consumers and society, while seeking to remunerate creators according to the prices set by the market. Thus, relying on private rights and the force of contracts can attain a better balance between the interest of copyright holders, users, and society. However, it is important to observe that in the case of collective licensing, due to agency problems, some oversight is desirable to attain transparency, accountability, and good governance goals.162 In this context, while licensing practices serve as a vehicle to overcome the fragmentation problem, by working to reunite the necessary fragments to use music, current practices, including traditional institutional arrangements used in the analog era, may be inadequate in the digital setting. As a result, some commentators have suggested that new alternatives to clear rights are necessary. Yet there is little empirical research documenting the scope of the problem of fragmentation in the digital environment and how stakeholders are adapting their practices in this setting. Are the changes in the intervention can iron out conflicts between interested parties.” Robert P. Merges, supra note 72 at 1392 160 Id. 161 Robert P. Merges, supra note 72, at 1293. 162 Daniel Gervais, supra note 70, 34 COLUM. JL & ARTS 34 591 (2010) (nothing that regulation is necessary for CMOs and recommends a flexible regulatory structure that focuses on actual operations with the purpose of ensuring transparency and efficiency for both right holders and users.) Fabrice Rochelandet, supra note 67, at 6 (explaining the need of oversight of CMOs in Europe based on an empirical analysis).

industry undertaken by private actors sufficient to cope with the digital era? This study begins to fill this gap by examining current licensing practices, analyzing how the industry has adapted to digital uses, and assessing how copyright law operates in the current environment. The first stage of this research focuses on describing licensing practices in the countries under analysis to understand how stakeholders and copyright law has adapted. The second stage of this study will consider the role of the government and the regulatory framework in the digital environment.

Chapter III. The United States: A Highly Regulated Licensing Framework

Our licensing system is founded on a view that the music marketplace requires a unique level of government regulation, much of it reflected in statutory licensing provisions of the Copyright Act. The Copyright Office believes that the time is ripe to question the existing paradigm for the licensing of musical works and sound recordings and consider meaningful change.163

1. Introduction

The U.S. music market is one of the most important and influential marketplaces in the world. However, the United States also possesses one of the most complicated music licensing systems, and heavy government regulation constrains the market. In particular, the Copyright Act contains several compulsory licenses as well as stringent antitrust oversight for PROs. Even though some degree of state intervention is also typical in other systems, the U.S. is an outlier in terms of the degree of regulation of its licensing framework. Yet, because of the weight of the U.S. in the world music market, the

American case study provides valuable insights to understand music licensing practices around the world, as well as the challenges for music stakeholders in the digital era. This chapter describes the American music licensing system, in order to set the stage for a discussion of the trends of the industry, best practices, and valuable lessons from this system that influences the global marketplace. This chapter draws heavily on two recent studies published by the U.S. Copyright Office: “The Making Available Right” and “Copyright and the Music Marketplace.” The former report examines the question of whether the U.S. complies with the obligations set forth in the WIPO Copyright Treaties on the making available right and it relies on fifty-six submissions of commentators who participated in the consultation. The latter report evaluates the current state of affairs of the American music marketplace and it received over one hundred submissions of stakeholders. Commentators for both reports included scholars, copyright lawyers, songwriters, artists, publishers, PROs, DMPs, labels, industry associations, civil society,

163 Copyright Office, supra note 16, at 1.

among others.164 The marketplace report also included the public testimony rendered by several stakeholders in three roundtables held in New York, Los Angeles and Nashville during 2014.165 The chapter begins by identifying the economic rights that are relevant for downloading and interactive streaming activities. Subsequently, it provides a general overview of how the American licensing system works and the Copyright Office’s assessment of the system’s shortcomings, including the compulsory licensing scheme of Section 115, the ASCAP and BMI consent decrees, and private negotiations for sound recordings. Finally, it presents the recommendations that the U.S. Copyright Office has made to achieve a modern framework for music licenses. A couple of these proposals have been included in the Music Modernization Act, which was approved by the House of Representatives in April 2018 and is pending Senate approval.166 In chapter six, the Copyright Office’s assessment and recommendations are evaluated through comparative analysis with the systems in place in Brazil and Mexico.

2. Economic Rights Implicated in Digital Uses in the U.S. Determining the economic rights implicated in each use defines which individuals or entities participate in and benefit from licensing. This section describes briefly which of the exclusive rights from the bundle of rights awarded in the Copyright Act are necessary to clear when licensing music for downloading and interactive streaming activities. The making available right under U.S. law can trigger different exclusive rights established in the Copyright Act. The embodiment of the making available right in the Copyright Act is the result of an interpretative exercise rather than a direct implementation of the Internet Treaties that coined such right.167 Based on a review of the

164 For a complete list of commentators see Copyright Office, supra note 16, at Appendix D. 165 For the transcripts of the roundtables visit and the submissions of the commentators visit U.S. Copyright Office, Licensing Study, at http://bit.ly/2FvUWgm 166 H.R.5447 - Music Modernization Act. This Bill was surprisingly passed unanimously on April 25, 2018, ten days after its introduction to the House. This Bill is not analyzed in detailed in this dissertation, as it arose outside of the data collection and analysis phase of this study. 167 For a detailed story of the implementation of the making available right see U.S. Copyright Office, supra note 35, at 15-7. Congress amended the Copyright Act through the Digital Millennium Copyright Act [DMCA] with the purpose of implementing several obligations contracted in the Copyright Treaties. However, no amendments were adopted relating to Section 106, which contains

legislative history, jurisprudence,168 and other free trade agreements to which the U.S. is a party, the U.S. Copyright Office determined that the U.S. fully complies with the Copyright Treaties because Section 106 of the Copyright Act is sufficient to encompass all the substantive conduct of the making available right.169 The Copyright Office states that the United States implements the making available right principally through the Copyright Act’s exclusive rights of distribution, public performance, and public display. In addition, to the extent that the act of making a work available to the public involves the creation of a copy, it may also implicate the right of reproduction.170

Under this view, online transmissions may trigger more than one exclusive right, including interactive streaming and downloading.171 In the case of downloads, no doubt exists that the right to make and distribute copies or phonorecords of the work is the relevant exclusive right to license.172 Likewise, it is generally accepted that downloads also implicate the distribution right, as the right that implements the making available right for download deliveries.173 The Digital Performance Right in Sound Recordings Act the exclusive rights. Nonetheless, a vast mass of litigation was necessary to clarify how copyright applies in the digital environment. 168 Copyright Office, supra note 35, at 3. In its analysis, the U.S. Copyright Office recognizes that the US courts have not been consistent regarding the making available right. The Supreme Court’s decision recognized the right in American Broadcasting Cos. v. Aereo, Inc. However, some district courts have questioned the existence of the right under U.S. law, in the absence of a download or a receipt of the transmission. 169 Copyright Office, supra note 35, at 3. 170 Id., at 18. 171 See, Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146, 1161 (9th Cir. 2007) (“Nothing in the Copyright Act prevents the various rights protected in section 106 from overlapping. Indeed, under some circumstances, more than one right must be infringed in order for an infringement claim to arise.”) 172 17 U.S.C. § 106(1). There are limitations to this right including ephemeral copies, but as noted below, the exceptions are narrow and do not broadly cover many transient copies that relevant in the context of digital uses, in particular, technical processes necessary for streaming. 173 U.S. Copyright Office, supra note 35, at 19 (“the Copyright Office adheres to the view that Section 106(3) is properly construed to cover the making available of copies of works to the public in the form of downloads, regardless of whether the plaintiff proves that an actual download occurred.”) However, discussions exist about the contours of the right that includes offers and not only actual dissemination. For a detailed explanation see Id., at 24-30 (explaining the intent of the statute as well as the progression of case law. “In the Office’s view, it is reasonable to read the “sale or other transfer of ownership” language [is]not a requirement for actual dissemination, but simply as a means of distinguishing the types of communication methods covered by the distribution right from those covered by other exclusive rights. By referring to distribution “by sale or other transfer of ownership, or by rental, lease, or lending,” the statute makes clear that the distribution right applies only to activities that enable a member of the public to obtain possession of a copy of a work, as

of 1995174 [DPRSRA] further clarifies the scope of digital deliveries, and case law has ratified that role of the distribution right in downloads.175 Minor disagreement still exists regarding whether the public performance right applies to downloads, but so far, the general understanding is that it does not.176 As a result, DMPs wishing to conduct downloads must obtain two mechanical licenses to clear the distribution and the reproduction rights of musical works and sound recordings. The first one is the mechanical license of Section 114 for musical works, typically held by HFA or the publisher. The second one is obtained through a direct negotiation with the right holder of sound recordings, typically a record label. Similarly, interactive streaming implicates two different exclusive rights. On the one hand, streams involve the reproduction of the sound recording and musical work whenever the DMP creates a copy of the song to include in its database,177 or when a temporary copy is done as part of the technical process to deliver the stream to the end

opposed to those that merely allow a work to be perceived, which generally fall under the public performance or public display rights.”) See also Peter S. Menell, In Search of Copyright’s Lost Ark: Interpreting the Right to Distribute in the Internet Age, 59 J. COPYRIGHT SOC’Y U.S.A. 201, 257 (2011) (examining the legislative history of the distribution right and arguing that such right). Diversey v. Schmidly, 738 F.3d 1196, 1203 (10th Cir. 2013) (“The essence of distribution in the library lending context is the work’s availability ‘to the borrowing or browsing public.’”) 174 The DPRSRA created the term "digital phonorecord delivery" ("DPD") and defined the term as follows: “A ‘digital phonorecord delivery’ is each individual delivery of a phonorecord by digital transmission of a sound recording which results in a specifically identifiable reproduction by or for any transmission recipient of a phonorecord of that sound recording, regardless of whether the digital transmission is also a public performance of the sound recording or any nondramatic musical work embodied therein.” Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104- 39, 109 Stat.336 (codified as amended in scattered sections of 17 U.S.C.). Despite that clarification, discussion exists on the evidentiary requirement to establish infringement. A minority group argues that the right of distribution does not cover digital transmissions at all, such as digital downloads because no transmission of the relevant file occurs and instead a duplicate is created. This view asserts that distributions need to be made “by sale or other transfer of ownership, or by rental, lease, or lending.” This restrictive view, though, has never been adopted by a court but it is important to note when contrasting these arguments with others brought internationally. Copyright Office, supra note 35, at 20. 175 Napster, 239 F.3d at 1014 (argued that users that upload digital files to Napster violated rights holders’ distribution rights); London-Sire Records, Inc. v. Doe 1, 542 F. Supp. 2d 153 (D. Mass. 2008. See also an exhaustive complication of case law supporting that digital transmissions are within the scope of the distribution right. U.S. Copyright Office, supra note 35, at 26. 176 On the flip side of the discussion, the distribution right includes offers of dissemination, some support that there is space to interpret that downloads implicate the public performance right. See Jonah M. Knobler, Performance Anxiety: The Internet and Copyright’s Vanishing Performance/Distribution Distinction, 25 CARDOZO ARTS & ENT. LJ 531 (2007); Jesse Rendell, Copyright Law in the New Millenium: Digital Downloads and Performance Rights, 81 TEMP. L. REV. 907 (2008). 177 Copyright Office, supra note 35, at 51.

user.178 On the other hand, an interactive stream that does not register a final copy implicates the public performance right of Section 106(4) for musical works and 106(6) for sound recordings. This right is implicated when the content is simply made available to users and it is not necessary that the transmission begins upon selection of the desired content by the user. Section 101 defines the meaning of perform179 and also clarifies the types of performances, including those that occur through a “device or process” that transmits the performance to the public whether they are capable to “receive it in the same place or in separate places and at the same time or at different times.” However, the scope of this right in the context of interactive streaming was not clear until courts clarified the issue.180 The Supreme Court’s decision in American Broadcasting Cos. v. Aereo, Inc.181 settled the question of whether individual streams implicated the public performance right, concluding that “when an entity communicates the same contemporaneously perceptible images and sounds to multiple people, it transmits a performance to them regardless of the number of discrete communications it makes.”182 Thus, it is now settled law that the public performance right encompasses the transmission of copyrighted works to the public through individualized streams.

178 Disagreement exists on this point. Ephemeral or transient copies, such as RAM copies that are necessary for streaming, are often considered as “copies” and “fixed” regarding Section 101, and therefore a potential infringement of the reproduction right of section 106(1). See U.S. Copyright Office, DMCA Section 104 Report 109 (2001), at http://bit.ly/2FEbmGO (last visited, Mar. 10, 2018). However, no general solution exists for certain licensed uses and courts have not been consistent on the issue. For a detailed analysis and proposed recommendations to amend the law see Dena Chen et al., Copyright Reform Act: Providing an Incidental Copies Exemption for Service Providers and End- Users (2011), http://bit.ly/2FuYhwd 179 17 U.S.C. § 101. (“to recite, render, play, dance, or act it, either directly or by means of any device or process or, in the case of a motion picture or other audiovisual work, to show its images in any sequence or to make the sounds accompanying it audible. […] (2) to transmit or otherwise communicate a performance or display of the work to the public, by means of any device or process, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times.”) 180 Previously the Second Circuit held that individualized streams did not trigger the public performance right. Cartoon Network LP, LLLP v. CSC Holdings, Inc. (held that a work is publicly performed within the meaning of the Transmit Clause and Section 106(4) only when multiple individuals are capable of receiving the same transmission.) WNET v. Aereo, Inc. 712 F.3d 676, 686– 94 (2d Cir. 2013). 181 ABC, Inc. v. Aereo, Inc., 134 S. Ct. 2498 (2014) 182 Id.

Finally, the Copyright Act does not treat all digital transmissions in the same manner and differentiates between interactive and non-interactive transmissions—e.g., webcasting is considered as a non-interactive transmission. The Copyright Act defines an interactive service as “one that enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording, whether or not as part of a program, which is selected by or on behalf of the recipient.”183 This conceptual distinction is important as non-interactive transmissions are subject to compulsory licenses, explored in the next section.

3. Licensing Digital Music in the United States Market This section explains how musical works and sound recording licensing functions in the United States. In a nutshell, two types of regulatory mechanisms heavily regulate musical works licensing: (1) the compulsory license of Section 115 for mechanical rights of musical works; and (2) oversight of PROs, which entails antitrust and rate setting mechanisms. In contrast, only non-interactive digital transmissions of sound recordings are regulated through compulsory licenses (Sections 112 and 114), while the law reserves all other uses for private negotiations, including interactive streaming.

3.1 Musical Works Licensing Licensing musical works in the United States is one of the most complex steps in music dealings. A user wishing to obtain a license of musical works for a downloading service needs to obtain a mechanical license based on Section 115. Whereas, a user in need to clear rights for musical works for an interactive streaming service must obtain both (1) the mechanical license, and (2) a public performance license with the relevant PRO. Three different PROs exist in the U.S. that manage different catalogs, but because of the breadth of digital services, DMPs usually need to obtain a license with each of these organizations.

183 17 U.S.C. §114(f).

3.1.1 Mechanical Licenses

Mechanical licenses are those that grant the licensee the rights both to distribute and to make copies of a musical work. In theory, licensees should seek to negotiate a voluntary mechanical license with the right holder directly.184 Typically, licensees obtain a voluntary license either through the publisher or the Harry Fox Agency [HFA]. However, the legislature established a compulsory mechanism under Section 115 that is intended to be a fallback option when an agreement in voluntary negotiations is not possible.185 The license of Section 115 covers digital uses.186 In 1995, this section was amended to include the reproduction and distribution of musical works made through digital transmissions or "digital phonorecord deliveries” [DPDs].187 Thus, Section 115 not only applies to the analog world, as it traditionally did, but also to the digital one. Further, in 2008, the U.S. Copyright Office clarified that streaming services must clear mechanical rights too. The Office reached this conclusion since streaming services make copies on their servers to facilitate the streaming process.188 To obtain a Section 115 license, specific requirements must be met. First, the user can only invoke this license when the copyright owner has already authorized the first making and distribution to the public of the recording of her musical work. Second, the licensee must serve a notice of intention to obtain a statutory license [NOI], either on the right holder or the U.S. Copyright Office when the identity or address of the right holder is unspecified in the Copyright Office’s records.189 This NOI should be made no later

184 U.S. Copyright Office, Compulsory License for Making and Distributing Phonorecords Circular 73 (revised Jan. 2018), https://www.copyright.gov/circs/circ73.pdf 185 Id. Nonetheless, voluntary negotiations can be impractical for digital services that need to clear significant catalogs. As a result, digital users are more often resorting to the statutory license process, which has an intricate design and high transactions costs. 186 The first compulsory license for this use was established in the 1909 Copyright Act. For a detailed explanation of the history and evolution of this statutory license see generally Timothy A. Cohan, Ghost in the Attic: The Notice of Intention to Use and the Compulsory License in the Digital Era, 33 COLUM. J.L. & ARTS 499 (2010). 187 Digital Performance Right in Sound Recordings Act of 1995 ("DPRA"), Pub. L. N. 104-39, 109 Stat. 336, 344-45 (codified at 17 U.S.C. § 115). See also 17 U.S.C. § 115(c)(3)(A). 188 Compulsory License for Making and Distributing Phonorecords, Including Digital Phonorecord Deliveries, 73 Fed. Reg. 66,173, 66,174 (Nov. 7, 2008) 189 17 U.S.C. § 115(b)(1).

than 30 days after the making but before distributing the phonorecords.190 Third, when the right holder is known, the user must make monthly royalty payments and deliver monthly statements of account to such right holder.191 A detailed institutional design also exists to manage this statutory license, but for this study, it suffices to describe the following elements. Composed of three administrative judges, the Copyright Royalty Board [CRB] has the task of fixing the licenses’ rates. Importantly, the rate setting process takes place every five years, and the CRB must take into account several statutory standards when setting the fee.192 This rate setting standard is known as the public policy-oriented standard. For the five-year period from 2013-2018, the rate schedule resulted from an industry agreement that was endorsed by the CRB in 2013.193 In January 2018, the CRB changed its approach from supporting settlements and updated the streaming rates favoring songwriters. In an unprecedented move, composers got an increase from a previous 10.5% to at least 15.1% share of streaming revenues over the next five years, an increase of 43.8%.194 This rate increase is the highest in the history of the CRB. It is the result of a lawsuit brought by the National Music Publishers' Association [NMPA] and the Nashville Songwriters Association [NSAI], on behalf of

190 Id. 191 17 U.S.C. § 115(c)(5). 192 17 U.S.C. § 801(b)(1). The criteria are the following: “(A) To maximize the availability of creative works to the public. (B) To afford the copyright owner a fair return for his creative work and the copyright user a fair income under existing economic conditions. (C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication. (D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.” 193 Adjustment of Determination of Compulsory License Rates for Mechanical and Digital Phonorecords, 78 Fed. Reg. 67,938, 67,939 (Nov. 12, 2013). According to this document, the current rate for downloads and physical copies of a musical work is 9.1 cents per copy, whereas interactive streaming services must pay a percentage of its revenue ranging from 10.5% to 12%. The interactive streaming rate is subject to royalty floors, and it is calculated after deducting public performance royalties for those works. Some commentators indicate that the willingness of the CRB to incorporate the industry's needs is based on an attempt to make the statutory license useful and practical, but not sufficient. Timothy A. Cohan, supra note 185, at 510. 194 Bill Donahue, Copyright Board Hikes Streaming Music Royalties, Law 360 (Jan. 29, 2018).

publishers and composers, against streaming services that belong to companies such as Google, Apple, Pandora, Amazon, and Spotify.195 In this case, the CRB delivered two additional groundbreaking rules, rehabilitating, to some extent, the value of this rate setting mechanism. First, it removed the total content cost [TCC] cap, allowing publishers to benefit from what labels obtain in free market negotiation. This change brings some degree of balance between sound recordings and musical works rates for the first time in mechanical licensing. “While an effective ratio of 3.82 to 1 [sound recordings vis-à-vis musical works] is still not a fair split that we might achieve in a free market, it is the best songwriters have ever had under the compulsory license.” 196 Second, the CRB approved a late fee for licensees that delay payment of royalties, a change which is expected to influence the licensing practices of DMPs. In short, the CRB has substantially redefined how mechanical licensing in the digital market should work. The power of the CRB to shape licensing practices is only possible because of the particular statutory design of the compulsory license. Experts generally agree that the compulsory licensing system strongly affects voluntary licensing practices.197 Even though in voluntary arrangements licensors can use different terms than the standard terms of the statutory license—for example, allowing quarterly reports instead of monthly reports―the licensors usually take into account the main elements of the statutory grant to establish the terms and rates of the agreement. In this sense, many commentators argue that the compulsory license terms, and particularly the statutory rates, constrain private negotiations, limiting the room to negotiate in private arrangements.198 As a result, the rate schedule and design of Section 115 act as a ceiling

195 NMPA & NSAI, Press Release CRB Dramatically Increases Rates for Songwriters (Jan. 26, 2018) at http://bit.ly/2GjzlIS 196 Id. 197 There is a sector that disagrees with this view and argues that voluntary licenses do not exist. For instance, Allshouse-Hutchens proposes that HFA licenses are not voluntary since there is language in the license indicates that the agreement is a compulsory deal. Jacqueline M. Allshouse-Hutchens, How to Give an Old Song a New License: A Recently Adopted Alternative to Rodgers and Hammerstein Organization v. UMG Recordings, 94 KY. L.J. 561, 580 (2005-2006). Similarly, Krasilovsky asserts that the courts have supported that HFAs are not separate privately negotiated contracts but a modification of the compulsory license. WILLIAM KRASILOVSKY & SIDNEY SHEMEL, THIS BUSINESS OF MUSIC 158 (Billboard Books 9th ed. 2003). For a further explanation on the relevance of this discussion see Timothy A. Cohan, supra note 185, at 512. 198 W. Jonathan Cardi, supra note 113, at 890. (“Regardless of one's characterization of the HFA form license, the background presence of the compulsory license serves as a ceiling on the price of traditional mechanical licenses and has had a far-reaching impact on the relationships of the various

for what the owner may charge.199 Thus, even though most licenses are still voluntary today, the compulsory license acts like a “ghost-in-the-attic,” as the Judges of the CRB have recognized on the record. The statutory license terms set the upper limits of the negotiating terms, capping the income that right holders can perceive for their musical works.200 With this design, the underlying terms of the statutory license impact the entire market, damaging market dynamics. However, the CRB’s decision of January 2018 is likely to bring changes that will benefit songwriters in an unprecedented way. This decision was rendered after the Copyright Office released its reports, in which many stakeholders expressed their desire to eliminate altogether Section 115. Despite these concerns, the anticipated changes will yield results that should be analyzed in the future to understand the influence of the statutory license in the field of digital music.

3.1.2 Public Performance Licenses The nature of public performance rights makes their individual licensing impractical; as a result, PROs or CMOs traditionally have served as entities for collective licensing of such rights. These entities pool individual musical works and bundle them in a single

music industry groups.”) See also Lydia Pallas Loren, supra note 111, 682. (“While the creators of most sound recordings do not utilize the statutory provisions for the compulsory mechanical license, the availability of such a license does affect the rate paid under a license granted by Harry Fox and the terms of the license. The parties to the licenses administered by Harry Fox are negotiating in the shadow of the compulsory license that both parties know could be used instead.”) Robert P. Merges, supra note 72, 1310. Jeffrey A. Wakolbinger, Compositions Are Being Sold for a Song: Proposed Legislation and New Licensing Opportunities Demonstrate the Unfairness of Compulsory Licensing to Owners of Musical Compositions, 2008 U. ILL. L. REv. 803, 808 (2008) (argues that the statutory license has had "little practical effect on the music industry: record companies still almost never invoke [it] .... labels find the monthly accounting provisions too burdensome, and copyright owners prefer direct licenses rather than going through the Copyright Office"). 199 U.S. Copyright Office, supra note 16, at 29. 200 Mechanical and Digital Phonorecord Delivery Rate Determination Proceeding, 74 Fed. Reg. at 4513. (“In describing this history and structure of the section 115 license, the Judges note how extensive and detailed is its operation, particularly with respect to the regulations adopted by the Copyright Office. The complexity of compliance, and the associated transactions costs, create a curious anomaly: virtually no one uses section 115 to license reproductions of musical works, yet the parties in this proceeding are willing to expend considerable time and expense to litigate its royalty rates and terms. The Judges are, therefore, seemingly tasked with setting rates and terms for a useless license. The testimony in this proceeding makes clear, however, that despite its disuse, the section 115 license exerts a ghost-in-the-attic like effect on all those who live below it. Thus, the rates and terms that we set today will have a considerable impact on the private agreements that enable copyright users to clear the rights for reproduction and distribution of musical works.”)

(blanket) license, making it possible for users to negotiate one license for all the compositions that exist in the PRO catalog. In the United States, several PROs were established to conduct collective licensing: the American Society of Composers and Publishers [ASCAP], Broadcast Music Incorporated [BMI], and the Society of European Stage Authors and Composers [SESAC]—each of which manage different catalogs. In this context, DMPs wishing to obtain an interactive streaming license would have to obtain an agreement with each of these three PROs. Typically, licensees get a blanket license from each of the PROs that allows them to perform any of the compositions in the PRO’s repertoire in exchange for a flat fee or a share of the revenue.201 Despite the benefits of certain practices used by PROs for licensing musical works present (for example, pooling performance rights, reducing fragmentation and transactions costs), they also raise antitrust concerns.202 In the American case study, it is not surprising to find that antitrust principles are the base of the PROs regulatory framework. For instance, individual consent decrees, managed by the Antitrust Division of the DOJ, regulate ASCAP and BMI. These instruments originated from lawsuits brought by the DOJ against ASCAP and BMI under Section 1 of the Sherman Antitrust Act to “address competitive concerns arising from the market power each organization acquired through the aggregation of public performance rights held by their member songwriters and music publishers.”203 The consent decrees emerged as a solution to

201 For a detailed explanation of blanket licenses see U.S. Copyright Office, supra note 16, at 33-34. See also, Christian Seyfert, Copyright and Anti-Trust Law: Public Performance Rights Licensing of Musical Works into Audiovisual Media 19 (Sept. 1, 2005) (unpublished LL.M. thesis, Golden Gate University School of Law), at http://digitalcommons.law.ggu.edu/theses/13. (“A blanket license typically grants the licensee, for example a TV station or the operator of an Internet website, the non-exclusive right to publicly perform any or all of the nondramatic musical works contained in the entire repertory of a PRS, in all or parts of its programs, and as often as the licensee wants.”) 202 These practices include tying and abuse of market position. For a detailed explanation see generally, Christian Seyfert, supra note 200. 203 Department of Justice, Antitrust Consent Decree Review - ASCAP and BMI 20 (2014), at https://www.justice.gov/atr/ascap-bmi-decree-review Among these practices, the DOJ found that ASCAP and BMI only offered blanket licenses for their repertoires and had the right to negotiate the public performance rights of their members exclusively. This exclusivity meant that their affiliates were barred from negotiating direct licenses. The government considered these practices to be anticompetitive price-fixing and tying. These concerns have continued, and in 1979 the Supreme Court held that blanket license should be examined under a "rule of reason" test, as a blanket license can address the problem of negotiating individual licenses. Broad. Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1, 99 S. Ct. 1551 (1979).

correct the anticompetitive conduct and have been in place since 1941 with subsequent amendments. While there are some differences among the consent decrees, they contain common central elements: (1) a prohibition on the PRO from engaging in exclusive licensing with their members; (2) the establishment of an obligatory license system, through the requirement that the PRO must grant a license to any licensee that applies, and such license must be granted under non-discriminatory conditions under the same circumstances; (3) an obligation that the PRO must accept any composer or publisher that applies to be a member, so long as she meets the standard criteria; and (4) a bar on publishers from withdrawing portions of their rights—e.g., public performance for digital transmissions―from the PRO.204 In addition, ASCAP’s consent decree prevents it from licensing other statutory rights on behalf of its members. This prohibition, for instance, creates an obstacle to creating a single window that clears simultaneously mechanical rights and performance rights. The decree also establishes a procedure to activate the licensing application.205 The process begins with the user's submission of a written request to the relevant PRO. If there is not a preexisting rate for the user's use, the PRO and the user usually engage in negotiations to set a fee. Alternatively, if the parties cannot agree on the rate, the decree allows prospective users to seek a determination of such a rate from a court—specifically, the Southern District of New York. If the PRO can prove that its fee is reasonable, the court imposes the final rate based on specified criteria.206 The “reasonable fee” language and the criteria set in the decree approximate this rate setting standard to a willing buyer/seller approach. Importantly, the consent decrees allow users to begin using the repertoire without payment before there is an agreement on the final rate, as these processes tend to be lengthy and burdensome. The consent decrees have received considerable criticism in the digital era and have been the target of oversight reviews and litigation. In the view of ASCAP and BMI, the consent decrees are restrictive, and their lack of malleability to adapt to the digital era

204 U.S. Copyright Office, supra note 16, at 36. 205 Id., at 40-2. 206 Id., at 41. Such criteria include the fair market value of the license and the monopolistic power of the PRO that can exercise disproportionate power in the market.

needs paired with the shifts in the value chain of the industry have caused an unprecedented unfair compensation for right holders.207 Among their petitions to amend the decrees, ASCAP and BMI requested expedited arbitration for rate setting; partial grants of rights and withdrawal of certain uses;208 and bundled licenses for musical works, such as a combined license of mechanical and performance rights.209 However, the Antitrust Division of the DOJ, after a two-year review process, found that such requests would not serve the public interest and denied all the petitions of the PROs to amend the consent decrees.210 In making this decision, the government stated that the current system has “well-served music creators and music users for decades and should remain intact.”211 In a controversial move during the last DOJ review, the government forbade fractional licensing and only allowed a single PRO to license a musical work if it could license the work fully or a “full work license.” In other words, songs created in collaboration by songwriters associated with different PROs could only be licensed by a single PRO, forcing negotiation amongst PROs.212 Before this decision, each PRO would handle the part belonging to its member. According to the DOJ, this type of incomplete licensing exposed licensees to copyright infringement.213 Songwriter groups were concerned that this change would lead to lower royalties, while the DMPs supported the

207 ASCAP, Public Comments of the American Society of Composers, Authors and Publishers Regarding Review of the ASCAP And BMI Consent Decrees, (Aug. 6, 2014) at 2, at http://bit.ly/2rLFdaM 208 In the case of digital music or “new media,” publishers withdrew their catalogs from PROs to manage them directly in order to attain market fair rates. Yet, PROs retained the rights to license other uses. Ed Christman, Universal Music Publishing Plots Exit From ASCAP, BMI, Billboard, (Feb. 1, 2013), at http://bit.ly/2DRRiAM This withdrawal forced Pandora to negotiate directly with the publishers, which resulted in higher rates than those available under the PRO system. Pandora challenged the withdrawal and the Court of the Southern District of New York, in two different rulings, prohibited the partial removal of rights, such as those for digital uses, since this action violated the consent decree. Both rulings held that publishers have to be all-in or all-out with rights to all their songs. In re Pandora Media, Inc. v. Am. Soc'y of Composers, Authors, & Publrs., 2013 U.S. Dist. LEXIS 133133 (S.D.N.Y. Sep. 17, 2013. 209 U.S. Copyright Office, supra note 16, at 37. 210 Department of Justice, Statement of the Department of Justice on the Closing of the Antitrust Division’s Review of the ASCAP and BMI Consent Decrees (Aug. 4, 2016), http://bit.ly/2EliggY 211 Id. at 3. 212 Id. at 11-3. 213 Id., at 8 ("Under a "full-work" license, each PRO would offer non-exclusive licenses to the work entitling the user to perform the work without risk of infringement liability. Under a "fractional" license, each PRO would offer a license only to the interests it holds in a work, and require that the licensee obtain additional licenses from the PROs representing other co-owners before performing the work.")

interpretation arguing that the consent decrees would guard the status quo.214 This brief change in the licensing landscape of performing rights came to a halt, however, with a Second Circuit decision, confirmed on appeal, that held that the BMI consent decree allows fractional licensing.215 Thus, despite attempts by both the PROs and the government to change the regulatory framework for PROs, and specifically the consent decrees, the status quo has been preserved. Some scholars, music pundits, publishers, and PROs support that the regime is the reason why songwriters cannot attain fair compensation for their performances when compared with those obtained for sound recording performances.216 In short, the many restrictions that PROs face under this oversight system constitute important obstacles to solve some of the most pressing needs in the current marketplace.

3.2 Licensing Sound Recordings Downloading or interactive streaming uses of sound recordings implicate either the mechanical right or a combination of the mechanical and public performance rights. In contrast to musical works, these rights are privately negotiated, and no regulatory provisions exist.217 Despite some disadvantages that the Copyright Act contains,218 sound recordings obtain a larger share of revenue than musical works. These higher profits can

214 Britanny Hodak, U.S. Dept. Of Justice Deals Crushing Blow to Songwriters, Forbes (Jul. 1, 2016) 215 United States v. Broad. Music, Inc., 207 F. Supp. 3d 374 (S.D.N.Y. 2016). Reaffirmed United States v. Broad. Music, Inc., No. 16-3830-cv, 2017 U.S. App. LEXIS 25545 (2d Cir. Dec. 19, 2017). 216 Steven J. Gagliano, Consent Decrees in the Streaming Era: Digital Withdrawal, Fractional Licensing, and Sec. 114 (I) 10 J. BUS. ENTREPRENEURSHIP & L. 317 (2017) (explaining in detail the shortcoming of the system including the prohibition of digital withdrawal, fractional licensing, and Section 114). See also PAUL C. WEILER, ENTERTAINMENT, MEDIA, AND THE LAW: TEXT, CASES, PROBLEMS 811-830 (1997) (exposing various challenges to the consent decree). 217 However, it is important to note that non-interactive streaming services, which are outside of the scope of this study, are subject to the compulsory license for public performance pursuant Sections 112 and 114. 218 While outside of the scope of this study, the report points out that the Copyright Act contains certain idiosyncrasies that have a negative impact in the music marketplace. For instance, federal protection for exclusive rights of sound recording exists only for recordings fixed after February 15, 1972. Records made before that date are protected by state laws, which allowed variations in protection of rights and distorted the marketplace. In addition, the Copyright Act only awards the public performance rights for digital transmissions, leaving terrestrial broadcast out of the scope of the right and making the U.S. one of the few nations that do not provide this protection. This discriminatory treatment of sound recordings results in inefficiencies of the marketplace as a whole.

be explained in part because of the coordination and copyright governance that leads to more streamlined licensing processes, among other factors. A licensee wishing to obtain a license for interactive streaming must negotiate directly with aggregators and record labels. Recording companies usually control all the rights available in a sound recording through contracts concluded with recording artists. Because of this centralization of rights, record labels have ample faculties and bargaining power to license their catalogs. In a different scheme, aggregators also concentrate the required rights to license on behalf of artists and independent labels. As a result, both aggregators and record labels are in the position to award holistic licenses, bundling the necessary rights of different rights holders in a single transaction. According to the Copyright Office’s report, because direct licenses are subject to the discretion of the parties, the license terms are different from those negotiated under Sections 112 and 114 for non-interactive services.219 Some of these services are comparable in functionality to interactive services but regulated differently. Thus, this setting could allow some comparisons of how compulsory licenses of non-interactive services contrast with the private market system of interactive systems. The report, however, does not offer concrete evidence and, instead, seems to rely on the assumption that the private market allocates better resources than compulsory licenses.220 An empirical analysis between these two systems could offer interesting insights and the Copyright Office is in the unique position to conduct such comparison since access to private data in this industry is cumbersome. To eliminate this disparity in regulation between interactive and non-interactive services, some independent labels, artist, and DMPs believe that interactive streaming should be covered under the license of Section 112. The Copyright Office report indicated that including interactive streaming services within such compulsory license is not feasible, as major labels would not likely be willing to abandon direct negotiations in

219 U.S. Copyright Office, supra note 16, at 52. 220 Some common traits of these licenses include an advanced payment for future royalties and administrative fees. The report also notes relevant steps that record labels took in their strategy in the digital era, such as receiving equity in Spotify. For instance, major record labels acquired an 18% equity stake in Spotify. This move was heavily scrutinized by the public, as there were claims that record labels would favor this service thereby affecting competition.

the open market.221 This stance is consistent with positions that record labels have taken around the world. Conversely, the Office recommends that Congress should protect the sound recording performance right by including terrestrial broadcasts in Sections 112 and 114, which would bring more parity between different uses of sound recordings. In a nutshell, compared to the process for clearing rights for musical works, the process for clearing sound recordings rights for downloading and interactive streaming is straightforward. First, sound recordings are not as heavily regulated as musical works are. Second, most licensing occurs through private and direct negotiations between the right holder and the user, which allows right holders to maximize their bargaining power and offer more efficient solutions. Third, record labels centralize all the necessary rights to be cleared for the digital uses, and therefore avoid the need for two negotiations for each sound recording. The licensing practices used to clear sound recordings are more streamlined and permit the coordination of property and the reduction of transaction costs.

4. Challenges and Recommendations to Enhance the U.S. Licensing System This section summarizes the challenges and recommendations identified in the process conducted by the Copyright Office. During this consultation, 110 stakeholders participated. This government review is the most comprehensive and recent report on the current situation of the music marketplace in the United States. The report found widespread agreement on four broad ideas, and the government recommends these principles should guide any reform. These principles are the following: (1) creators (songwriters and performers) should be fairly compensated;222 (2) the licensing process should be more efficient; (3) market participants should have access to authoritative data to identify music; and (4) payment and usage information should be transparent and available to rights holders.223 These valuable principles are important to present upfront since they underlie the challenges and recommendations presented below.

221 U.S. Copyright Office, supra note 16, at 177. 222 Id., at 68. The report notes several comments that support this principle and where creators favor that such fair compensation is based on “fair market value.” In addition, news articles and wider discussions in media also show that this is a major theme in today’s marketplace. 223 Id., at 1, 68.

4.1 Licensing Efficacy and Transparency, and Data Problems One of the most evident challenges in today’s licensing landscape is data accuracy. For decades, licensing of music relied on weak data, and stakeholders developed many licensing practices based on assumptions. The lack of adequate data has hindered transparency and the fair distribution of royalties for the creators of music. The report details this problem in the American context and rightly affirms that “accurate, comprehensive, and accessible data, and increased transparency, are essential to a better music licensing system.”224 Virtually all participants of the consultation agreed that the creation of a comprehensive database is one of the most pressing needs of the industry.225 Data constraints exist on four main fronts. First, songwriters and performers consistently complain about transparency issues in the reporting and payment of their royalties. This concern increases in the context of the digital environment, where the high volume of transactions and complexity of the deals increase the need for accurate data. Transparency problems are a significant concern in the context of direct deals between DMPs and publishers or labels.226 Yet, many transparency problems still exist in the practices that CMOs use. Second, there is a need for both the licensor and the licensee to identify each musical work and sound recording in each song and then associate the data of each musical work with the corresponding sound recording. The challenge of associating the correct data increases in the context of fragmented ownership, as explained in chapter two. The later problem has two major components. The first one refers to the lack of full adoption of data standards, while the second concerns the existence of multiple databases that are discrete and independent.

224 Id., at 8. 225 Id., at 183. 226 Id., at 187. The concerns regarding distributions through PROs decrease, as these organizations use standard practices that known by members. In contrast, the label and the publishers are only bound by the contract signed with the creator, which often do not address the issue. Some areas of particular concerns are royalties advances and their lack of monitoring, as well as equity agreements as part of the license and whether or not these are shared with creators.

The lack of standardization is a legacy problem of the industry. In the analog era, standardization and interoperability were not significant concerns.227 Several identification standards emerged in the industry, but there are two widely used: the International Standard Music Work Code [ISWC] for musical works;228 and the International Standards Recording Code [ISRC] for sound recordings.229 Even though the music industry has employed these data identifiers for quite some time, they have flaws that have impaired the identification of every single work and sound recording.230 This perspective can explain the absence of a comprehensive solution. Private actors have resisted relinquishing their own proprietary standards, as alternative solutions would potentially undermine their assets and require additional investment to adopt a new standard. Nevertheless, private initiatives have emerged as potential solutions, including those driven by technology such as fingerprinting.231 Many stakeholders recognize that technological advances are key to solving some of these problems. Third, several problems still subsist with the existing databases. The main shortcoming is that a unique database does not exist and many discrete systems compete with each other. Available databases include public records (e.g., the Copyright Office's registry), 232 private databases that belong to collective licensing entities (e.g., each PRO, Sound Exchange, and HFA),233 international efforts (e.g., WIPO), and data sharing

227 Id., at 184. 228 CISAC developed this standard, and the codes are assigned through their representatives and publishers. See What is an ISWC, ISWC INTERNATIONAL AGENCY, at http://www.iswc.org/en/iswc.html (last visited Feb. 4, 2018). 229 IFPI is the agency that manages this standard through local agencies. The code is assigned to each track. 7 Obtaining Code, USISRC, https://bit.ly/2JhTkcu (last visited Jan. 31, 2018). 230In the case of the ISWC, the code cannot be assigned until all the songwriters are identified, which frequently occurs after the release of the song causing the distribution of a digital file with no ISWC code for the underlying musical work. On the other hand, the ISRC use is more widespread as record labels assign the code to their recordings, and DMPs require the code on digital files. U.S. Copyright Office, supra note 16, at 60. 231 According to Wikipedia, “an acoustic fingerprint is a condensed digital summary, a fingerprint, deterministically generated from an audio signal, that can be used to identify an audio sample or quickly locate similar items in an audio database.” While the purpose of the technology is not the identification of ownership and rights but metadata can be included in the file. Acoustic Fingerprint, Wikipedia, https://en.wikipedia.org/wiki/Acoustic_fingerprint (last visited Mar. 5, 2018). 232 Some of this data can be helpful in identifying music. However, the database is not comprehensive nor up-to-date, and registration is not mandatory. This database does not include industry standards to code data. U.S. Copyright Office, supra note 16, at 62-3. 233 The main problem with these databases is that they only include their catalogs. In addition, they are only searchable manually and do not guarantee the accuracy of the information due to the

initiatives. However, most of these are not comprehensive, have limited search capability, and do not guarantee accuracy and completion. For instance, in the Despacito example presented in chapter two, the three databases consulted contained different information for the same musical work. According to the report, “while each of these databases represents an important and valuable component in the U.S. marketplace, because they are separate and separately controlled, they do not offer comprehensive licensing resource.”234 This issue is the main structural roadblock to the development of an authoritative database that is publicly accessible. Fourth, publishers also lacked, until recently, precise information on the compositions that they owned, as shown in the Pandora rate setting process of 2014.235 Publishers have made efforts to build comprehensive databases that identify their compositions. However, it is worth noting the relevance of having authoritative data about the rights each publisher owns. In the absence of accurate information, DMPs, who rely on this information to operate, can be held liable for infringement when they offer a composition not covered under the license. This information is necessary to identify and remove unlicensed songs. The report makes two recommendations to Congress regarding the need for reliable data to enable a more efficient and transparent market. First, it suggests placing incentives within the regulatory system that would prompt stakeholders to create an authoritative public database—that is, a private market solution that would leverage industry resources.236 Because the industry is best positioned to conduct this task rather than the government, 237 the role of the government should be to create incentives to encourage the coordination of a database, and the development of standards and goals of

representations made by their members. It is not the work of the PRO to verify the information but to rely on the statements of their associates. Id., at 64. 234 Id. 235 In re Pandora Media, Inc., 6 F. Supp. 3d 317 (S.D.N.Y. 2014) at 360-1. 236 Id., at 6. 237 Id., at 183-4 (explaining that legal impediments, the lack of resources of the government, as well as the rapid pace of data production and the need to keep the database up to date, make the government suboptimal candidate to conduct this task.) See also Maria Pallante, Next Generation Copyright Office: What it Means and Why it Matters, 61 J. COPYRIGHT SOC’Y U.S.A. 213 (2014) (arguing the need to modernize the Office but notes its limitations.)

the data system.238 Second, the Copyright Office recommends a plan to establish transparency in direct deals between publishers or labels and DMPs. The proposal would allow songwriters and artists the option to receive the payments through a music rights organization [MRO], detailed below. In this scenario, DMPs would forward the creators' royalties to the MRO along with the usage report.239 In short, the four data problems that plague the music industry worldwide have technological solutions. However, it is important that governments take a role to incentivize the correction of these issues to attain efficiency and transparency in licensing.

4.2 Disparate Treatments Under the Law and Unfair Compensation One of the most common complaints from stakeholders is the way in which several substantive provisions of the Copyright Act provide different treatment for similar uses of music (including platforms), as well as musical works and sound recordings.240 Musical works stakeholders and the government consider these differences to be distortions that create disadvantages in the market, including inequitable compensation that allegedly contributed to the decline of musical works owners' income in the digital era.241 The unfair compensation results from these pre-existing rules that do not treat musical works in a leveled playing field. The government, thus, urges Congress to seek consistency in the statute and regulate analogous platforms and uses in the same terms. In their view, this consistency will reward “distribution models that are most resource-efficient and appealing to consumers,” and “will encourage more equitable compensation for creators.”242 The study points out four specific instances where the copyright framework creates gaps and calls lawmakers to bridge them. Two of them are not relevant for this study—

238 The Office also notes that the most realistic solution is to incentivize the adoption of the more widely accepted standards (e.g., ISCR, ISWC, and ISNI). U.S. Copyright Office, supra note 16, at 184. 239 Id., at 188. 240 Id., at 81. 241 Id., at 69-78 (explaining the decline of revenues first from physical formats to downloads; second, from downloads to streaming business models. In addition, it explains the impact of piracy and the DMCA Safe Harbors, that according to the right holders, have a substantial impact on revenues. Non- performing songwriters have been particularly hit.) 242 Id., at 135.

the lack of protection of pre-1972 sound recordings,243 and the performance of sound recordings through terrestrial broadcasts.244 The third case refers to the unequal treatment of musical works and sound recordings in the digital space.245 In particular, the regulatory scheme for musical works performances does not allow right holders to privately negotiate specific uses (e.g., interactive streaming) as it does with sound recordings. Fourth, the report highlights two problems that arise from not having uniform rate setting rules for all government-imposed rates for the same right and use.246 The issues are (i) the different type of bodies that set the fees, and (ii) the various rate setting rules themselves. To tackle the first issue, the Copyright Office proposes concentrating the rate setting activity in the CRB, as opposed to splitting the responsibility between the federal district court in some cases and the CRB in others. 247 The second issue emerges because of the use of two normative rate setting approaches: the policy-oriented approach, based on Section 801(b)(1); and the willing buyer/seller approach. Some stakeholders believe that that the policy-oriented approach leads to below-market rates,248 while the free market approach results in higher compensation for creators. Section 801(b)(1) establishes a four-prong test that allows the CRB to ponder factors other than marketplace concerns (for example, a proposed rate’s potentially disruptive impact on the structure of the industries involved and on generally prevailing industry practices).249 Because of these policy considerations, the CRB can adopt lower rates than those prevailing in the free market. Leaving aside the question of which approach is best, the problem lies in using different standards under the three regulatory mechanisms of the American framework to set the rates which result in differentiated rates for music. The use of differentiated rate setting standards only harms the market and obliges music creators to subsidize those

243 Id., at 85-7. 244 Id., at 87-9. The recommendation in this sense is to extend protection to terrestrial broadcasts. The lack of protection for these sound recordings creates an unfair marketplace since labels and artist do not get compensated for these recordings when performed in terrestrial services, whereas owners of musical works get paid for the same use. 245 Id., at 2, 135. This disparity leads an unequal compensation as publishers are unable to negotiate free from “government constraint where record companies can.” 246 Id., at 81. 247 Id., at 83-4. 248 Id., at 143. These beliefs are grounded on scant data. 249 17 U.S.C. § 801(b)(1)(D).

who profit from their works.250 For instance, in the case of musical works, the consent decrees of ASCAP and BMI use the “reasonable fee” standard that approximates to fair market value.251 Meanwhile, the compulsory license of Section 115 (mechanical license for musical works) uses the four-factor policy-oriented approach to set the rates.252 Similarly, Sections 114 and 112 use different standards to set rates depending on the specific use of the sound recording. Some digital performances of sound recordings, such as satellite radio and preexisting subscription services, benefit from the policy-oriented rate setting rule.253 In contrast, internet radio or newer non-interactive subscription services benefit from the fair market value approach.254 The difference between these two rate setting standards results in earning disparities between creators for the same use or similar services, creating an unfair competitive environment.255 The report proposes a single rate setting standard of fair market value, which determines the price that “a willing buyer and willing seller would agree to in an arm’s length transaction.”256 The objective of these recommendations is to encourage equitable consideration of all the rates by a specific body under a common standard, which would achieve a fair result across the board.257 However, little agreement exists on the standard, as every group pushes for the rate setting standard that would suit its own interests. For instance, DMPs and public interest groups support a policy-oriented standard for all statutory licenses since it is more likely to produce lower rates.258 Not surprisingly, copyright owners favor the willing buyer/willing seller standard, as it is more likely to produce higher rates and

250 Id., at 144. The Office makes an interesting point when it claims that the historical motivations that justified the original design do not exist anymore (for example, the piano roll monopoly is no longer a concern). See also PAUL GOLDSTEIN, supra note 13, at 65-7. (reviewing the history of 115). 251 U.S. Copyright Office, supra note 16, at 143. (the PRO has the burden of proof to establish that the “proposed rates are reasonable. The PROs attempt to meet this burden by offering negotiated rates as benchmarks, economic evidence that may or may not be accepted by the court after considering its relevance—often through the lens of quasi-antitrust.”) 252 17 U.S.C. § 801(b)(1). 253 Id. §§ 114(f)(1), 801(b)(1). 254 Id. §§ 112(e)(4), 114(f)(2)(B). 255 Id., at 82 (“As DiMA noted, “[t]he ‘playing field’ regarding rate setting standards is not level, and the result is fundamental inequity.” Depending on whether they wish to see higher or lower royalty rates, however, these same stakeholders disagree as to which rate setting standard should apply.”) 256 Id., at 81. For an example of issues that parties take into account in fixing rates in a free market environment see discussion at 144-5. 257 Id., at 137. 258 Id., at 82 (summarizing the different positions per group. Interestingly, Spotify brings up the point that most favored nation clauses unfairly affect truly free market negotiations, prompting the use of the highest rates in the market).

compensation for copyright owners.259 Even though the issues discussed in this subsection are idiosyncratic to the American case, it is important to extract a lesson: differentiating between musical uses or rights is an ill-advised policy and can cause undesirable effects in the market, such as severely disturbing the compensation of musical works. This point set the stage for discussing the role of the government in licensing.

4.3 The Role of the Government in Regulating Licensing The American legal framework assigns a prominent role to the government in different aspects of this licensing system. However, not all uses of music are regulated in the same manner under the Copyright Act, as seen earlier. Both musical works and some uses of sound recordings have separate regulatory mechanisms that affect digital licensing and, according to some, create obstacles to an optimal marketplace. While compulsory licenses exist for mechanical and public performance rights (the public performance scheme acts as a de facto obligatory system) of musical works, the mandatory licenses for sound recordings under Sections 112 and 114 only cover non- interactive transmissions of sound recordings. The different regulatory mechanisms result in distinct degrees of intervention from the government. These regulatory mechanisms emerged to address specific market conditions that no longer exist today, chiefly competition concerns. For instance, legislators devised the musical works licensing devices at the beginning of the last century, when the market had different characteristics, such as the dominance of a single piano roll company.260 This design is poorly suited to the technologies and market dynamics of the digital age. Furthermore, as the Office asserts about its own role, “it is almost hard to believe that the U.S. government sets prices for music,” when today there is scarcely any other area that receives this type of direct federal intervention.261

259 Id., at 83. 260 Id., at 145. 261 Id.

The Copyright Office’s consultation process showed that today stakeholders worry about two antitrust concerns regarding Section 115 and the PRO consent decrees.262 The first refers to the excessive market power that some PROs, publishers, and labels can exercise on licensing negotiations. For this type of behavior, the Office claims, the remedies should focus on addressing the particular anticompetitive practice in question, as opposed to permanent solutions such as long-term price controls.263 The second concern consists of the very same monopoly power that the Copyright Act awards to individual right holders over their creations. While this idea seems to undermine the fundamental nature of copyright law, it is a widespread concern in today’s world. Many actors believe that access to large catalogs of protected copyrights benefits the public interest,264 and allows DMPs to compete in the market. However, many right holders object to this idea and maintain that they should retain their right to reject prospective licensees and withhold their creations from specific services.265 As a practical matter, compulsory licenses and the consent decrees deny creators the opportunity to say no.266 The Copyright Office rightly argues that “modern competition law does not view the rights enjoyed by copyright owners as intrinsically anathema to efficient markets”267 and rejected interventions in this matter. In this context where antitrust concerns do not exist, according to the view of the Office, the role of the government should evolve. Whereas DMPs and public interest organizations advocate for a more interventionist approach, copyright holders and their representatives back deregulation and a market-oriented approach. The final position of

262 Id., at 146. The dominant position of the dominant position of the Aeolian piano roll company in 1909 caused the enactment of section 115 for other could be able to compete. The consent decrees were also issued to oversee the blanket licensing used by these organization and the potential abuse of market power. Despite that the DOJ seeks to phase out legacy decrees, they do not plan to do so with these consent decrees. 263 Id., at 148. 264 See generally ZOHAR EFRONI, ACCESS-RIGHT: THE FUTURE OF DIGITAL COPYRIGHT LAW (Oxford University Press, 2011). 265 U.S. Copyright Office, supra note 16, at 148. (Right holders have abstained from using services that provide low-paying royalties. Thus, private actors have market strategies on which they avoid cannibalizing their sales and seek high paying models. Taylor Swift and Irving Azoff are two known cases taking a public stance in this matter.) 266 The law also provides differentiated treatment to other protected subject matter (e.g., audiovisual) and between musical works and sound recordings, altering the right to say no across the board and licensing decisions. 267 Id., at 149.

the government falls somewhere in the middle: without eradicating compulsory licenses, standardization should be pursued. The government also proposes separating antitrust policy objectives from rate setting goals. To achieve these targets, the report advocates changes in the compulsory licensing schemes for musical works to make it more similar to the obligatory license for sound recordings (process, rate setting standard, and oversight body). The study supports that musical works regulations are particularly pervasive and “removes choice and control from copyright owners that seek to protect and maximize the value of their assets.”268 The next subsections present the proposed changes.

4.3.1 Mechanical Licenses of Musical Works (Section 115) In the case of mechanical rights of musical works, the report finds that both licensors and licensees can agree that the compulsory license of Section 115 needs an overhaul, citing problems such as administrative challenges, unfairness,269 imprecision, delay of the rate setting process, and, especially, frustration with the government rates. However, some differences in their positions exist regarding this compulsory license. Copyright holders argue that the compulsory system bars them from controlling their works and getting higher fees; they propose a free market system that would abolish the compulsory scheme.270 To support their position, copyright owners point to evidence that the current rate has not kept up with inflation since 1909, as well as the existing gap between rates for musical works and sound recordings.271

268 Id. Even though it is out of the scope of this project, the Office considers that the mandatory licenses of Sections 112 and 114 works “reasonably well” and that the stakeholders support this scheme. Id., at 6-7. 269 Id., at 108 (explaining that section 115 license is unfair to copyright owners: ‘The notifications, statements of account, license terms, lack of compliance, lack of audit provisions, lack of accountability, lack of transparency, ‘one size fits all’ royalty rates and inability to effectively enforce the terms of the license demonstrate a complete breakdown in the statutory licensing system from start to finish.’) 270 Id., at 5, 162. This sector also contends that Section 115 acts as a ceiling that impedes seeking higher rates through private negotiations. See also 105-114. Copyright owners, particularly publishers, claiming that the system should be eliminated altogether. Nonetheless, licensors support its existence. 271 Id., at 106. (“a number of participants noted a 9 to 1 inequity of rates between sound recordings and musical works for downloads and CDs: when a song is downloaded from iTunes for $1.29, approximately 80 cents is allocated for the sound recording, but only 9.1 cents goes to the musical work. By way of contrast, rates for privately negotiated synchronization licenses—which are not

For their part, DMPs contend that the statutory right under the policy-oriented standard of Section 115 reflects the actual market value; they further argue that the standard is flexible, predictable, and provides fairness in compensating right holders.272 Moreover, DMPs assert that Section 115 is critical, fair, and an indispensable antirust device aimed at protecting against monopolistic powers.273 Licensees complain that the compulsory scheme requires a complicated song-by-song license that does not reflect the needs of a digital world where companies seek to license millions of works, hinting at the need to establish collective licensing mechanisms.274 To resolve these challenges, the Copyright Office proposes four measures that, while supporting the compulsory licensing scheme, also open the door to a more market-driven mechanism for interactive streaming and download uses. This flexible proposal seems to be a compromise between the central concerns of licensors and licensees. First, it suggests collective licensing of mechanical rights with an opt-out option for such digital uses.275 As a result, the digital uses would be left to free market negotiations when the opt out mechanism is chosen. According to the Copyright Office, this would put musical works on an equal footing with sound recordings, where free-market negotiations are the norm for downloads and interactive streaming. Second, the Office recommends the establishment of a blanket license for digital uses, when right holders opt to continue in the compulsory system.276 This feature has a double purpose. On the one hand, it simplifies and expedites the licensing process. A blanket license allows the user to file a single license with the collective entity for the whole subject to government oversight—generally reflect a 1 to 1 ratio between musical works and sound recordings.”) 272Id. Interestingly, record labels support DMPs in their argument that the standard used in section 115 does not result in rates lower than fair market value, but advocate to establish the willing buyer//seller standard. 273 Id., at 112. 274 Id., at 107, 163. Moreover, DMPs oppose individual licensing for musical works as a single musical work is comprised of several fragments that are hard to identify. “Song-by-song licensing is viewed by music users as an administratively daunting—if not sisyphean—task in a world where online providers seek licenses for millions of works.” 275 Id., at 164. (providing a detailed explanation of the arguments backing the proposal.) 276 Id. (The study contrasts the position of copyright holders and those of the DMPs. While the copyright owners believe that the ‘consent decrees were imposed to protect against anticompetitive behavior, they are now used to distort and manipulate the market for the benefit of a handful of powerful digital distribution.’ In contrast, licensees defend the consent decrees as they are vital to preventing anticompetitive conduct by the PROs and major publishers, and call for the expansion of antitrust regulations.)

catalog. On the other hand, by moving the burden of determining the rights within the song from the licensee to the PRO, it reduces users’ liability concerns for non-identifiable songs.277 However, blanket licensing should not be seen as a substitute for up-to-date and accurate data solutions. Third, the Copyright Office proposes to provide copyright owners with audit rights over Section 115 licenses.278 This measure would increase transparency. Fourth, the government supports the adoption of a market-driven standard for rate-setting, as discussed below. Finally, the Office suggests that the CRB rate setting mechanism should be reviewed on an “as-needed” basis rather than at set five-year intervals, as the law requires currently.279 The CRB would only intervene when the parties cannot reach an agreement. As a matter of policy design, the Copyright Office’s recommendations combine a market-driven approach with collective management. The goal is to reconcile the objectives of fair compensation to creators and licensing efficiency.280 Indeed, the Copyright Office’s proposal appears to be a sensible solution that balances stakeholders’ interests, as do other proposals presented below for the other regulatory schemes. In essence, while abolishing the compulsory license altogether is not politically sensible, the Office endorses to move closer to a system where private actors (and not the state) are in control and at the center of the scheme. This proposal recognizes the importance of empowering private actors in licensing, as they can best assess what arrangements and terms are more convenient for them.

4.3.2 Public Performance Licenses of Musical Works and Consent Decrees The 75-year old decrees that shape the licensing framework of PROs are outdated and do not meet the demands of today’s market. The Office explains that the consent decrees were initially founded to correct anticompetitive behavior but confuse this objective with rate setting. As a result, the current framework causes many obstacles for transactions in the digital space. However, stakeholders have different views on critical aspects such as

277 Id., at 170. 278 Id., at 173. 279 Id., at 171. 280 Id., at 164.

publisher withdrawals, the convenience and impact of the judicial remedy to set rates upon failure to obtain a direct deal; and the rate setting standard.281 Licensees showed confidence in the court’s rate setting process, as the Second Circuit has consistently established rates that approximate fair market value and foster a healthy competitive market.282 On the other hand, licensees object to the inconsistent regulation of PROs, since only ASCAP and BMI are subject to consent decrees, which creates an opportunity for the unregulated PROs to engage in anticompetitive behavior.283 Predictably, this group opposes catalog withdrawals and feels more confident operating under a government-supervised system as a fallback option when private agreement is not attainable (e.g., go to court to set the rate). Similarly, they support government oversight of publishers’ licensing practices.284 Conversely, copyright owners complain that the courts set rates below market value, and describe the fees as “unfair and unrealistic,” “artificially low,” and inequitable to those of sound recording performances (ratio of 1 to 12).285 This group also stresses that the rate setting standard that courts use is inadequate, and notes objections to the criteria used and the weight awarded to each factor. Right holders also worry that PROs cannot deny the license, resulting in non-competitive transactions that rely on government rates as benchmarks. Copyright owners and their representatives break ranks on the issue of allowing catalog withdrawals from PROs. Not surprisingly, publishers expressed the need to permit such removals, while songwriters disagree. Specifically, songwriters fear that such a change would mean the distribution of their royalties via publishers would no longer be subject to the specific transparency and accountability rules that currently apply.286 For their part, the PROs have raised concerns that catalog withdrawals could, on the one hand, raise their administrative costs and, on the other, negatively impact the structure of reciprocal agreements with foreign CMOS.

281 Id. 282 Id., at 92. 283 Id., at 96. 284 Id., at 152. 285 Id., at 92. 286 Id., at 153.

To address these concerns, the report proposes to make a fundamental change in the regulatory system by separating the oversight of rate setting for PROs from antitrust supervision. The Office asserts that these two policy objectives are different and have different needs. The Office proposes to adopt a flexible antitrust approach and endorses the sunsetting of the consents decrees, which act as preemptive restrictions.287 Instead, modern antitrust oversight can be carried out on a case-by-case basis. In addition, the Office believes that private enforcement can supplement the antitrust system, as private actors would police potential anticompetitive conduct. To enhance the PRO rate setting oversight function, the Copyright Office proposes the following amendments. First, it recommends assigning the rate setting role to the CRB on an as-needed basis, when the parties cannot agree to a private license. The entity has expertise and experience assessing rate-related issues, qualities that the federal district court lacks.288 The CRB would set the rates for all compulsory licenses, including sound recordings and musical works. The proceeding would focus on “industry economics rather than antitrust analysis offering a more auspicious framework to establish broadly applicable rates,”289 as should be the aim. Second, the Office recommends the repeal of Section 114(i), which bars the rate setting authority from considering sound recording performance rates.290 Third, the Office recommends streamlining the interim rate setting process and requiring immediate payment,291 as currently licensees can use the musical works long before the rates are settled. Fourth, the report advocates allowing the controversial withdrawal of rights from PRO management limited to interactive-streaming uses only in the form of the right to opt-out from collective management.292 The underlying rationale for this proposal is to

287 Id., at 156. 288 Id. The CRB has a broad experience in economics and setting rates for a broader spectrum of federal rates. 289 Id. 290 Id., at 104. 291 Id., at 158. 292 Id., at 159. Publishers have long lobbied for this change. Nonetheless, several stakeholders showed apprehension to such withdrawal, including PROs who could be left out from one of the most lucrative pieces of the business in the current market. Licensees’ main concerns are the potential raise in rates and opening a window for publishers to engage anticompetitive behavior. Songwriters are concerned with the lack of transparency on the distribution of royalties that publishers may have, as discussed earlier. Finally, different stakeholders expressed concern about the impact that such

level the playing field between sound recording and musical works, as evidence shows that regulated rates for musical works have resulted in lower fees as compared to the rates for the same uses for sound recordings in non-compulsory regimes. To make the withdrawal operative, the proposal adds some requirements for those publishers that choose to withdraw293 and recommends the creation of a non-profit general music rights organization [GMRO] to manage and make publicly available the withdrawal information.294 Finally, the report also puts forward the broadly supported measure of bundling mechanical and public performance rights for musical works in the same license.295 Allowing this bundling would increase the efficiency of musical works licensing, which has been fragmented due to legal impediments of two licensing systems (song-by-song licensing, under Section 115, and blanket licensing by PROs). To make the system operative, existing collective societies (including PROs and mechanical rights organizations) would be permitted to venture into the collection of the other right becoming a musical rights organization [MRO].

5. Conclusion Licensing music for digital uses in the American market is a fairly predictable but highly intricate process. Different statutory rights are necessary to clear for both sound recordings and musical rights in each of these uses, the mechanical right (reproduction and distribution) for downloads, and the mechanical and the public performance rights for interactive streaming. Besides the already cumbersome and fragmented copyright framework that exists in the Copyright Act for music, the American system regulates licensing transactions exhaustively, adding further complexity to the licensing of music. Indeed, the U.S. model of regulation in the music industry is based on the view that this market requires “a unique level of government regulation.” The scheme includes different regulatory withdrawal would have internationally with reciprocal representation agreements. For a lengthier discussion see at Id., at 97-100. 293 The requirements include identifying the particular use subject to withdrawal, the PRO, each affected work, where a direct license might be sought, etc. Id., at 159. 294 For a detailed outline of the design of the GMRO see Id., at 192-7. 295 Id., at 103.

solutions for musical works, including compulsory licenses and antitrust oversight. In contrast, no regulatory framework exists for the use of sound recordings in downloads and interactive streaming. As a result, the regulatory frameworks for musical works coexists with private licensing practices, creating gaps between what certain right holders can and cannot do with their creations, and limiting the sphere of their “exclusive” rights. There is a widespread belief that the American licensing system is broken and that it might not be up to the task to tackle the digital environment.296 Artists and songwriters, for instance, worry that they cannot make a living under the existing structure and the new market conditions. Publishers and PROs express frustration that their licensing prerogatives are subject to governmental regulation, which constrains their ability to conduct business. Record labels complain about the value gap and DMPs complain that the American licensing process is burdensome, inefficient, and an obstacle to innovation. The current licensing framework, as the Copyright Office concludes, is not the product of a well thought out policy for the modern era; rather it was designed largely in response to the specific market conditions of prior decades—conditions that no longer exist today. As it stands, the system provides different treatment to different classes of copyright owners and licensees, giving advantage to some and harming others. Moreover, these systemic outcomes do not reflect clear policy objectives or political choices. In this context, the Copyright Office recommends specific changes, based on careful analysis of a wealth of experience with the current system. The Copyright Office’s suggestions purport to harmonize all the compulsory licenses and the consent decrees in order to bring music to a leveled playing field. In this sense, all the regulated licenses would be guided by the same rate setting standard (the willing buyer/seller approach) and would be set by the CRB, as a specialized body. However, without a thorough comparison of the policy-based and market-based standards, it is uncertain that the chosen rate setting standard is the optimal choice. The Copyright Office is in the unique position to access the data required for a study of that kind. Moreover, the recent rate determination of the CRB for Section 115 (of January 2018) may be an indication that the policy-oriented standard can result in fair rates.

296 Id. at 1.

The Copyright Office proposal moved as far away from compulsory licensing schemes as possible, without eliminating them. Instead, the proposed scheme would allow right holders more discretion and room to exit compulsory licensing. For instance, the government suggested collective licensing (blanket licensing) with an opt-out provision under Section 115. Thus, a MRO would negotiate with users on behalf of the right holders. However, the right holders could opt out of the system and negotiate directly with the user. If no agreement is reached, in either of the two modalities, the CRB could enter to fix the fee. Under this revised scheme, the musical works right holders would be on similar footing as sound recording owners, who negotiate these rights on the private market. Virtually the same design is proposed for public performances of musical works. Moving in this direction is important as these adjustments may provide incentives for reaching a private agreement instead of seeking a court imposed solution. The proposal presents key suggestions to make licensing a more efficient process, such as permit bundling of rights of musical works, harmonizing the licensing schemes, creating data standardization incentives, and allowing blanket licensing for mechanical works. These ideas are valuable for other governments to consider how to solve the many problems of music licensing. Overall, the American case study embodies the inconveniences of excessively regulated licensing processes. First, this case illustrates that rate setting through compulsory licenses can be less efficient than private arrangements, as parties can reach an agreement based on their needs and the market. Second, the system has a lock-in effect. The processes and institutions in the American system remain mostly unaltered despite that there are needs to effect changes to improve efficiency and maximize the welfare of all stakeholders in the digital marketplace. The system hinders stakeholders (DMPs, PROs, and right holders) to seek more efficient solutions to licensing of musical works. For instance, the bundling of rights of musical works could facilitate efficiency in licensing, but the consent decrees ban this solution. In contrast, bundling is possible in sound recordings as no regulations, for instance, affect record labels or aggregators when licensing sound recordings, allowing greater efficiency.

As a result, the regulatory system can become a hurdle and can only be corrected through legislative or regulatory means, which, by their nature, entail a cumbersome process to change the framework. Private actors may be better suited to deal with the needs of their exchanges and seek and implement solutions as the circumstances require—e.g., bundling rights and blanket licenses, which are not currently allowed for public performance licenses. In addition, new technologies promise to become great tools for licensing including fingerprinting (already in use) and blockchain. Nonetheless, stakeholders need to have space to experiment with tools of this nature and include them in their operations without worrying of the constraints of the regulatory system. The compulsory license and consent decrees found in this system for musical works, thus, seem to be far from optimal to achieve modern, agile, and efficient licensing.

Chapter IV. Licensing Music for Digital Uses in Mexico

Overview

This chapter examines the digital music market in Mexico and (1) presents how Mexican Copyright Law implements international copyright obligations related to digital rights; (2) describes the current licensing practices used for digital music in Mexico; and (3) analyzes the role of domestic law in licensing digital music in the global market. The study confirms that, consistent with international obligations, Mexican Copyright Law recognizes essential economic rights that protect music in the digital environment. However, the research finds a dual implementation of the “making available right” for artists’ sound recordings—through an exclusive and a remuneration right—departing from international practice. Despite the seeming disparity between local and international practice, this study demonstrates that the licensing practices employed in Mexico adhere more closely to international practices rather than to the particularities of local law—an instance of the law in action and the forces of a global market. This study also exposes how stakeholders have adapted to the challenges presented to the environment by establishing a one-stop shop to license musical works, allowing higher efficiency.

1. Introduction Over the past 25 years, digital technologies and the internet have reshaped the music industry. Before the digital format appeared, music licenses were largely tied to the creation of a physical phonogram (vinyl records, compact discs, etc.), and record labels had a leading role in clearing rights. Today licensing happens in a more decentralized fashion, through contracts that often cross international borders and include several rights owned by a myriad of rights holders. These changes, along with what the literature describes as “copyright fragmentation,” pose challenges that stakeholders must overcome in order to license music for download and streaming. This chapter examines the digital music market in Mexico and (1) presents how Mexican Copyright Law implements international copyright obligations related to digital rights; (2) describes the current licensing practices used for digital music in Mexico; and (3) analyzes the role of domestic law and the government in licensing digital music in the global market. This study is an effort to analyze the radical transformation of the music

industry in the Mexican context—an important music market in Latin America—and aims at answering the following questions:

i) Under Mexican Copyright Law, what economic rights are implicated in digital uses of music? ii) What are the current licensing practices for streaming and downloading digital music? iii) How relevant is Mexican Copyright Law in shaping these practices—that are usually cross-border and for clearing services that operate online?

This study confirms that consistent with international obligations, Mexican Copyright Law encompasses essential economic rights that protect music in the digital environment. The reproduction and the distribution rights of the Mexican Copyright law [MCL] are the relevant rights for downloading activities; whereas the reproduction and the communication to the public rights are implicated in interactive streaming. A decision of the Mexican Supreme Court clarifies that the MCL contains a broader right of communication to the public that also encompasses the making available right. However, the research finds that the implementation of the “making available right” in Mexico is complex, since the MCL includes, for authors and performers, two different rights of communication to the public that coexist: an exclusive economic right and a right of remuneration. This formulation can be described as unconventional, as most countries do not provide a remuneration right, which is currently being lobbied by artists’ organizations around the globe. Despite the particular traits of the Mexican law, this study demonstrates that the licensing practices employed in Mexico adhere closer to international practices rather than to local law—an instance of the law in action and the forces of a global market. This chapter also exposes how stakeholders have adapted to the challenges presented to the environment in Mexico by establishing a one-stop shop to license musical works. This adaptation serves as evidence that supports the findings in existing literature on how intellectual property forces industries to create and invest in institutions capable of conducting the required transactions to clear rights. Finally, the study finds that domestic

Mexican copyright law has limited impact in influencing the transactions for international services. Many international stakeholders assume that copyright law in Mexico mirrors that of other countries what allows them to use standard practices across jurisdictions. This assumption entails “a minimum common denominator approach” to copyright laws across countries. The licensing practices arising from this approach are based on this assumption that laws are similar and not the actual consideration of the local law and its particularities. Section two of this chapter presents the employed methodology. Part three describes the environment and market of the case study in Mexico. Sections four, five and six present three key findings and analysis that respond the research questions. First, Mexican copyright law is consistent with international norms. However, the implementation of the “making available” right for artists and producers is not fully clear. Second, I find that Mexican stakeholders created an efficient one-stop licensing shop for musical works that illustrates how industries are forced to craft better institutions to clear rights, which is consistent with the working hypothesis of this research. Third, I explore the marginal relevance of local copyright law for stakeholders operating across jurisdictions. Finally, section seven offers conclusions and proposes further work. This case study of the Mexican music industry contributes to the existing literature on the evolution, adaptation, and resilience of copyright systems.

2. Methodology This chapter presents a case study of the licensing practices for downloading and interactive streaming used in the Mexican marketplace. The unit of analysis chosen consists of the transactions or licenses contracted between DMPs and right holders or their representatives. The research uses qualitative data from 24 in-depth semi-structured interviews297 conducted with various actors involved in licensing practices in the country, including national and international players. All interviewees are treated as “key informants” since

297 I stopped interviewing once I reached a saturation point. For literature in saturation see Patricia I. Fusch & Lawrence R. Ness, Are We There Yet? Data Saturation in Qualitative Research, THE QUALITATIVE REPORT 20:9 1408-1416 (2015).

they are experts and holders of specialized knowledge of these practices. Qualitative research theory recognizes informants as subjects who have 'richer' views than others due to their knowledge of the object of study.298 Using the key informants technique seemed natural in this context since the nature of this study is descriptive, and the objects of study are private contracts and processes that by their nature are not readily available to the public. Only the persons involved directly or indirectly with the negotiation or policies surrounding these licenses have a clear understanding of the mechanics of clearing rights, a process that has often be deemed to lack transparency and where all data is private and confidential. Thus, the most reliable method available to collect data, in this case, was semi-structured interviews with key informants. A purpose sampling strategy was paired with a snowball technique to select the interviewees.299 First, I created an inventory of all relevant parties in Mexico. This list included all forty-one companies that both (a) provided music services in Mexico between 2010 and 2016, and (b) were identified as licensees in public reports.300 The list also contains two relevant government entities and all four collecting societies authorized by the Instituto Nacional de Derechos de Autor [INDAUTOR] to work with musical rights. The full inventory thus encompassed forty-seven entities. It is important to stress that nineteen of the companies in my list no longer exist or no longer provide services in Mexico, and many of the existing firms declined to be interviewed or did not respond to interview requests. Second, after I cold contacted the identified organizations and established several contacts with different types of interviewees, I concentrated on using a snowball technique to obtain referrals to reach other players.

298 Martin N. Marshall, Sampling for qualitative research, 13 (6) Family practice, 522-526, 523 (1996). (“The technique is preeminently suited to the gathering of the kinds of qualitative and descriptive data that are difficult or time-consuming to unearth through structured data gathering techniques such as questionnaire surveys.”) 299 Id., at 523. 300 Every year IFPI publishes its Digital Music Report, which contains a list of licensees of sound recordings from major record labels. I used such reports from 2010-2016 and supplemented the resulting list with the names of licensees that EMMACSACM provides on its website.

Table 2: Summary of Interviewees

Type of stakeholder Contract Size of company Use of Music part 1 DMP Licensee Medium Download/Streaming 2 Expert Licensee NA Download/Streaming 3 Government Other NA NA 4 Publisher Licensor Large Download/Streaming 5 DMP Licensee Very large Download/Streaming 6 DMP Licensee Large Download/Streaming 7 Support Other Medium Download/Streaming 8 Aggregator Licensor Small Download/Streaming 9 DMP Licensee Small Streaming 10 DMP Licensee Large Streaming 11 DMP Licensee Very large Download/Streaming 12 Expert Other NA Download/Streaming 13 DMP Licensee Very large Download/Streaming 14 DMP Licensee Small Non-Interactive Streaming 15 Label Licensor Very large Download/Streaming 16 Label Licensor Very large Download/Streaming 17 Collecting society Licensee Small Download/Streaming 18 Government Other Small NA 19 Collecting society Licensor Large Download/Streaming 20 Collecting society Licensor Small NA 21 Expert Licensor NA Download/Streaming 22 DMP Licensee Very large Download/Streaming 23 Collecting society Licensor NS Download/Streaming 24 DMP Licensee Medium Streaming

As shown in Table 2, I classified the stakeholders into one of three groups depending on their role on these agreements―licensor, licensee or user, and others. The latter category included intermediaries who support either the licensor or the licensee, such as artists’ lawyers, as well as government officials involved in the copyright process. On the licensee side, I interviewed representatives from ten digital DMPs, which obtain licenses to provide digital music content to end users via downloading or streaming services. DMPs vary in size, from very large players to medium and smaller players, and most provide services across different countries. The core business of these DMPs ranges from beverage companies301 to internet providers, telecommunications companies, and exclusive DMPs. Five of these DMPs offered their music service in multiple territories;

301 Beverage or other consumer goods companies often use music as part of their marketing efforts.

one did it regionally; two only operated locally, and two operated in more than one jurisdiction but less than five. On the licensor side, I interviewed representatives from a total of nine licensors: four collecting societies, one publisher, two major record labels, one expert, and one independent record label. All nine licensors are well established in the industry and have worked for many years representing the rights of composers, artists, and/or producers. In addition to these primary stakeholders, I interviewed three copyright/licensing experts and officials from two governmental entities. All of them provide vital views on the licensing process from different angles. Most interviews were conducted one-on-one through Skype or in person over the period of a year between 2016 and 2017, except for three conversations that were held earlier as part of my pilot study.302 Most inquiries lasted for about an hour. The interviews were semi-structured and used a questionnaire I created to elicit information regarding respondents’ licensing practices, perceived challenges to licensing and copyright in the digital era, and their understanding of the law.303 I used other relevant data in the course of this research, including market data, licensing contracts, court opinions, legislative history, and domestic law. I conducted content analysis of these documents to gain valuable insights. As widely acknowledged in the social science empirical research literature, the use of case studies suits research aiming to explore in depth a particular phenomenon within a given context while utilizing different data sources.304 This is the case of the licensing practices for digital music in the context of Mexico. The decision to use a case study approach in this study derived from three factors: (i) the descriptive nature of this project; (ii) the different sources of data used; and (iii) the study of contemporaneous phenomena in a given location—Mexico.

302 I made three different research trips for this study. The first one occurred in February 2015 to conduct a pilot study with organizations with headquarters in Miami. The second trip was to Mexico in February 2016, where I was able to meet with CMOs and government, and others. Finally, I assisted the IFPI-FILIAE meeting in June 2016 in Ecuador, where I was able to conduct a handful of interviews and observe the discussions between these two sectors of right-holders. The interviewees took place between February 2016 and January 2017. 303 See Appendix I for a detailed list of questions used in the interviews. 304 R. K. YIN, CASE STUDY RESEARCH: DESIGN AND METHODS (Sage, 3rd ed. 2003). Kathleen Eisenhardt, Building Theories from Case Study Research 14:4 The Academy of Management Rev. 532-50 (1989).

Some of the limitations of this research are inherent to the nature of the case study method, in particular, the impossibility to generalize from this case to other contexts. These concerns of external validity, however, do not offset the multiple benefits of understanding in depth how licensing occurs in Mexico, a relevant market in Latin America where a lack of research exists in this field of study. Other limitations I encountered include a secretive industry in which many licensees and licensors were skeptical about participating in the research or, in a couple of instances, wary of providing anything more than general talking points.305 Nevertheless, the interviews provide essential information about licensing practices that is not available in market indicators or industry reports, validating the choice of using interviews as one data collection method. The data obtained from interviewees provides a detailed, in-depth picture of the evolving landscape of licensing music in Mexico and how these practices operate with the law.

3. Mexico in Context Mexico is a relevant case study for economic and cultural reasons. Mexico is the second largest economy in Latin America, and it has the second largest population (125.4 million in 2014) in the region, after Brazil.306 The country’s GDP was US$1.295 trillion in 2014,307 amounting to US$18,030 per capita in 2015.308 With these indicators, the OECD considers Mexico a middle-income country, though it continues to face many challenges to achieve its development goals. In particular, the uneven distribution of wealth and the large informal sector are two of the major hurdles for the Mexican economy. Yet, its size and growth potential make the country one of the most attractive countries in the region. For instance, Mexico has a vast potential to develop digital consumption. In 2012, 26% of households had access to the internet, while in 2016 this indicator reached

305 The music industry has traditionally been very reserved with their practices. Large amounts of information are confidential, including contracts with music providers and with artists or composers. I found that response rate went up when I promised anonymization. 306 World Bank Data per country http://bit.ly/2oDh3xC (last visited Dec. 18, 2017). 307 Id. 308 OECD Mexico Data, https://data.oecd.org/mexico.htm (last visited May. 20, 2017).

47%.309 With its large population and the fast progress of internet penetration, Mexico is an important online market with considerable growth potential. These new internet users are likely to become consumers of digital content, including music. Furthermore, Mexico’s creative industries have cultural and economic significance. With a short stroll around any Mexican city, one can immediately grasp Mexico’s cultural richness and colorful heritage. Its sizeable cultural production is consumed across the Americas and even beyond. According to ProMexico,310 in 2014 the creative and media industry accounted for 7% of the country’s GDP. During the same period, this industry was also the fifth most strategic industry of the nation, with sales of US$20 billion and an 8.3% yearly growth.311 In addition, Mexico is the 18th largest exporter of creative goods. Mexican art and entertainment content, including music, is widely consumed in Latin America. In fact, many Latin American artists relocate to Mexico when they are seeking to have a wider Latin-American reach. As a result, Mexico has one of the largest and most influential music industries in the region.

3.1 The Mexican Music Market In absolute terms, Mexico is the third most important music market in Latin America (Brazil and Argentina are first and second), while the country is second in digital revenue, surpassed only by Brazil.312 In 2015, the record industry reported revenue of US$126.4 million, which translates to 1 dollar of music revenue per capita.313 The year 2015 saw an impressive 14.4% growth in revenue over 2014.314 The revenue pie follows the global trend of digital (60%) overtaking physical (34%). All of these figures are encouraging for the industry, which expects that revenue will continue to grow.

309 Internet access is defined by the OECD as “the percentage of households who reported that they had access to the internet. In almost all cases this access is via a personal computer either using a dial-up, ADSL or cable broadband access. This indicator is measured in percentage of all households.” OECD, Internet access (indicator). doi: 10.1787/69c2b997-en (2017) (last visited Dec. 7, 2017). 310 Promexico, Creative Industries: The Mexico Advantage http://bit.ly/1HMUl3X (last visited Dec. 7, 2017). 311 Id. 312 In absolute terms, the Mexican market was valued at $126.4 millions in 2015, just behind Brazil ($247 millions) and Argentina ($141.6 millions). IFPI, GLOBAL MUSIC REPORT 2016, at 45. 313 Id., at 115. 314 Id.

Another important measure of the market is digital music revenues reported by format. IFPI data, as shown in Table three,315 indicates that authorized downloads are decreasing since their peak in 2013, as well as mobile personalization revenue (e.g., ringtones or personalized rings), once very popular throughout Latin America. In contrast, streaming services are proliferating and have overtaken downloads. Within streaming revenue, paid subscriptions and freemium streams rose to US$30.68 in 2015, up from US$9.01 in 2014, and ad-supported streams have been growing since 2011 but decreased in 2015.

Table 3: Digital Music Revenues by Format (US millions, trade value)

Downloads Streams Single Full Other Mobile Paid Ad-supported Other track album personal- subscriptions zation and Freemium 2015 16.31 8.18 0.32 1.30 30.68 17.76 1.08 2014 16.38 8.48 0.55 1.85 9.01 21.94 - 2013 21.48 10.42 1.05 2.52 3.88 11.44 0.15 2012 20.12 7.87 1.865 3.01 1.83 7.88 0.03 2011 12.69 4.70 0.76 3.23 2.67 6.86 0.10 Source: IFPI, Global Music Report 2016

These figures highlight the importance the changing landscape of the industry in Mexico, which is consistent with the overall global trends of the music industry. Digital has surpassed physical revenues, and downloads, once the most important source of digital income, are now decreasing rapidly.316 Streaming, instead, is taking over as the predominant business model in the digital era.

315 According to IFPI, the terms in Table 2 are defined as follows. Mobile personalization revenues: includes master ringtones, ring back tones, greetings, dedications and voice tones among others. Ad- supported streams income includes income from audio/video streams or tethered/temporary downloads monetized via-ad supported models. It includes income from video-on-demand services (e.g. YouTube, Vevo). Paid subscriptions and freemium streams include digital content delivered online or via mobile network. It includes income from subscription services’ free and premium tiers, and income from bundled subscriptions (e.g., Spotify and Deezer’s free and premium tier). Id., at 120. 316 Streaming is substituting downloads, which is still harshly criticized by local and global stakeholders who believe that the industry is suffering from revenue stream cannibalization.

3.2 The Mexican Copyright Law and International Treaties As a civil law country, Mexico follows the authors’ right tradition, which is essential to bear in mind to understand the copyright landscape. The first Mexican Federal Copyright Law [MCL], as a stand-alone statue, was enacted in 1947,317 and it was subsequently amended on several occasions to adapt the domestic copyright law to international standards contracted by Mexico in different international treaties.318 Congress made substantial changes to the copyright law in 1997 to reflect standards agreed to by Mexico in the Agreement on Trade-Related Aspects of Intellectual Property Rights [TRIPS] and the North American Free Trade Agreement [NAFTA], which entered into force in 1994 and 1995 respectively.319 The law of 1997 also included some of the elements under discussion in the WIPO Copyright Treaties that were being negotiated at the time of enactment of the law. In 2003, a significant reform bill was passed to incorporate different aspects related to the digital environment and some interests presented by organized groups of right holders.320 The 2003 amendments also implemented some residual aspects of the WIPO Copyright Treaties.321 Thus, Mexico has a relatively modern copyright law that, in principle, was adapted to meet the obligations of international treaties.

317 Ley Federal sobre derechos de autor (1948) 318 EDUARDO DE LA PARRA, DERECHOS HUMANOS Y DERECHOS DE AUTOR 158 (2015), http://bit.ly/2CGDR1z (explaining the evolution of the MCL and the subscription of international treaties by the government.) 319 The new and changing international framework, new technologies, and the interest of powerful right holders propelled the enactment of the federal copyright law of 1997. See SERRANO MIGALLON, NUEVA LEY FEDERAL DEL DERECHO DE AUTOR. 61 (Porrua, 1998). 320 Camara de Senadores, Exposición de Motivos, (Nov. 8, 2001), http://bit.ly/2BfD62L 321 Legislators of the 2003 amendments were clear in their intent to modernize the law, but above all, to provide opportunities so that right holders could participate in sharing new revenue streams from new technologies. See Senado de la Republica, Discussion: Presentation of the Opinion on the Decree by which the MCL is Amended (Apr. 29, 2003), http://bit.ly/2AoNyoJ (“In addition, the petitioners senators, mention that you should consider that new technologies facilitate corporate profits by using the intellectual property of artists, these companies pay small amounts for the indiscriminate use of all kinds of movies. For this reason, as mentioned by the proponents of this initiative, it is necessary to harmonize the rights provided for in the Federal Law on Copyright, as well as the procedures and international instruments; reclaim their historically recognized rights, and at the same time adapt the concepts and legal figures of current technologies.”) See also Congressman Jose Manual Correa Ceseña remarks id. (“We have to consider that new technologies generate profits that should be shared with those who create the artistic work […].”)

3.3. Collective Licensing in Mexico The coexistence of multiple right holders and rights has consistently made music licensing processes a burdensome task. To simplify licensing, the industry established management practices and institutions that allowed them to exploit and license music over time adequately. CMOs represent one of the legacy arrangements to reduce transaction costs and make licensing more efficient. In Mexico, CMOs have played an important role in licensing music and are adapting to the digital era demands. Given the size and importance of Mexico as producer of music content, the prospect of establishing CMOs spurred right holders to get organized to collect digital royalties. Four CMOs operate to collect and manage music performance rights in Mexico.322 Two institutions traditionally have intervened in licensing musical works rights. While not a CMO, Editores Mexicanos de Música, A.C. A. en P [EMMAC] is an organization that represents publishers. Sociedad de Autores y Compositores de México, Sociedad de Gestión Colectiva de Interés Público [SACM] represents authors and license performance rights.323 Together, they have authority to grant licenses for digital uses through a newer mechanism EMMACSACM. On the sound recording side, three organizations exist. Sociedad Mexicana de Productores de Fonogramas, Videogramas y Multimedia [SOMEXFON] collects performance rights royalties for analog uses for producers. For performers, two different collecting societies exist establishing an interesting institutional set-up. Asociación Nacional de Interpretes [ANDI] represents principal singers, while EJE Ejecutantes, S.G.C [EJE] manages public performance rights of musicians and choristers. 324 SOMEXFON does not currently participate in licensing digital uses, and it is unclear whether ANDI and EJE have a role in this context, given that many performers assign their rights. Yet, it was clear that some of these organizations are wrestling with the idea on how to remain relevant in the digital market, as described in the following section.

322 The law allows the existence of different collecting societies for the same rights. Even though the Constitution says that intellectual property does not constitute monopolies, lately competition authorities are moving towards an interpretation that these entities can behave in an anticompetitive manner.. 323 SACM is a CISAC member; it shares 212 reciprocity agreements with other authors' societies around the world 324 Founded in 1999, Eje has approximately 1700 members and manages a catalog of about 900 thousand songs.

4. Economic Right Implicated in Digital Uses in Mexico Studying the economic rights awarded under the MCL for musical works and sound recordings, as well as the licensing framework is essential to analyze the dynamics of the Mexican market. These prescriptions influence the way right holders contract and build licensing practices. To understand what rights are relevant for the digital environment under the Mexican legal framework, I rely primarily on analysis of the statute, case law, and legislative history. I supplement this section with interview data since only a few interviewees had a clear notion of what rights are implicated in digital uses.325 As indicated in chapter two, a consensus exists in international doctrine and practice that digital uses implicate a combination of the reproduction rights and making available rights. However, during the course of my interviews, I found that some stakeholders and legal operators in Mexico have doubts on what rights are implicated in such uses under Mexican Law. In fact, most interviewees assumed that the rights exist but claimed that they are not familiar with how the law encompasses such rights. Moreover, the imprecise implementation of the making available right in Mexican domestic law may be to some extent one of the reasons why this uncertainty subsists.

4.1 Author Rights for Musical Works Title II, Chapter III of the MCL contains an open list of the economic rights available to authors and compositors.326 In particular, Article 27 establishes the bundle of exclusive rights, of which reproduction, distribution, and communication to the public are most relevant for digital uses.327 Some interviewees also regularly cited these rights as applicable for such activities.

325 The lack of clarity on the rights implicated in digital uses under the MCL is a finding in itself. 326 Eduardo de la Parra, supra note 317, at 180. (Article 24 of the MCL creates a general rule that it belongs to the author the exploitation in any form. The list of exclusive rights is left open to future activities of exploitation not contemplated in the law.) 327 Art. 24, Ley Federal de Derechos de Autor [MCL], as amended Jan. 13, 2016, Diario Oficial de la Federación [DO] 13 enero de 2016 (Mex.). The statutory language reads as follow : “(I) the reproduction, publication, editing or material fixation of a work, in the form of copies or originals, carried out in whatever medium, whether printed, phonographic, graphic, plastic, audiovisual, electronic, photographic or other; (II) the communication of his work to the public in any of the following ways: (a) publication presentation, recitation and public performance in the case of literary and artistic works; (b) public showing by any means or process in the case of literary and artistic works; (c) public access by telecommunication; (III) the public transmission or the broadcasting of

The reproduction right—the seminal author’s right―is at the core of downloading and interactive streaming activities.328 As explained previously, this right refers to the production of copies, whether physical or digital or to the simple fixation of a work. The MCL includes the elements of the reproduction right as articulated in the Berne Convention, in which the reproduction is set to occur in any form and manner.329 In parallel, Article 16 defines reproduction as “any permanent or temporary storage by electronic means,”330 language that unequivocally protects copies in the digital space. Case law has further clarified that the reproduction right covers the digitalization of literary or artistic works [hereinafter works]—described as the representation of these objects in binary code.331 In addition, the same opinion confirmed that the reproduction right includes the storage of a protected work in digital form, as provided in Article 9 of the Berne Convention, and expressly clarified in the agreed statements concerning the WCT Agreement on Article I (4).332 As such, no doubt remains that downloading musical works implicate the reproduction right. Reservation exists regarding interactive streaming activities, where no jurisprudence has yet clarified the scope of the right. Nevertheless, the licensing practices used in Mexico and international sources indicate that clearing their works by any process, including the transmission or retransmission of the works by: (a) cable; (b) optic fiber; (c) microwaves; (d) satellite; (e) any other known mean or to be discovered; (IV) the distribution of the work, including sale or other forms of transfer of the ownership of the physical material in which it is embodied, and also any form of transfer of the use of exploitation thereof; where distribution is effected by means of sale, the right of opposition shall be considered exhausted on the first sale, except in the case expressly provided for in Article 104 of this Law; […] (VII) any public use of the work except in cases expressly provided for in this Law. […].” 328 For a detailed explanation of the reproduction right and its evolution from Berne to the Internet Treaties, see PAUL GOLDSTEIN & BERNT HUGENHOLTZ, INTERNATIONAL COPYRIGHT, 300-303 (Oxford, 2010). JORGEN BLOMQVIST, PRIMER ON INTERNATIONAL COPYRIGHT & RELATED RIGHTS, 106 (Edward Elgar, 2014). 329 WORLD INTELLECTUAL PROPERTY ORGANIZATION, GUIDE TO THE BERNE CONVENTION FOR THE PROTECTION OF LITERARY AND ARTISTIC WORKS (Paris Act, 1971) 54 (WIPO, 1978). (“The words "in any manner or form" are wide enough to cover all methods of reproduction: design, engraving, lithography, offset and all other printing processes, typewriting, photocopying, xerox, mechanical or magnetic recording (discs, cassettes, magnetic tape, films, microfilms, etc.), and all other processes known or yet to be discovered. It is simply a matter of fixing the work in some material form.”) The law further clarifies with an open list of examples of what such means can be “whether printed, phonographic, graphic, plastic, audiovisual, electronic, photographic or other form.” This language is identical to the one offered in the WIPO guide of the Berne Convention. 330 Art. 16, MCL. Reproduction is “the realization of one or more copies of a work, phonogram or videogram in any tangible form, including any permanent or temporary storage by electronic means, even if it is two-dimensional realization of a three-dimensional work or viceversa.” 331 Tribunal Pleno de la Suprema Corte de Justicia de la Nación [SCJN] [Supreme Court], Semanario Judicial de la Federación y su Gaceta, Novena Época, tomo XXVII, enero de 2008, Contradicción de tesis 25/2005-PL, Página 652 (Mex.) 332 Id.

reproduction rights is still necessary for interactive streaming, when a copy is registered in the database of the DMPs. The second exclusive right relevant to downloading activities is the distribution right. Sub-paragraph (IV) of Article 27 establishes the distribution right, which includes any form of transfer of the ownership of the physical material that embodies the work, or any transfer of use or exploitation of such work.333 In interviews, licensors and licensees referred to the combination of the distribution right and the reproduction right as the mechanical right, which is central for downloads and managed by publishers.334 The Suprema Corte, along the same lines, observed that “normally who has obtained the reproduction right of a given work, also obtains the right of distribution,” confirming industry practices.335 Thus, a digital platform that sells music online (downloads) would have to obtain a mechanical license. Finally, the legislator seemingly implemented the making available right for interactive transmissions through the communication to the public right, found in sub- parts (II) and (III) of Article 27.336 Sub-part (II) contains a list of specific terms related to

333 Eduardo de la Parra, supra note 317, at 185, 188. De la Parra presents a deep account of the forms of distribution available under Mexican Law. He argues that is ampler than those encompassed in international treaties. He clarifies that any form of transfer of ownership includes either pecuniary, such as sale rental, leasing; or gratuitous, (e.g. donations or free loans) are part of the distribution right. He also summarizes the theory in Latin America about this right. In addition, this paragraph also establishes the first sale doctrine. When distribution is conducted by means of sale, no opposition right would exist as it is exhausted with the first sale, except in the case expressly provided for in Article 104 of the Law, which basically refers to computer programs or databases. Further, De La Parra argues is not limited to sale but other forms of distribution thus making the Mexican first doctrine very broad. 334 Because publishers commonly manage the mechanical right, the MCL provides some rules about the publishing contract. The MCL includes general guidelines for the contract. Article 58 states that through a publishing contract for a musical work the author or the right holder assigns the reproduction right to the publisher, and authorizes her to carry out the mechanical reproduction of the work, etc. The Publisher is obliged, on his part, to disseminate the work by all means at its disposal and should receive a compensation, according to the agreed terms. 335 See Supreme Court, supra note 330, at 31. 336 Article 27 recognizes different communication to the public modalities. Sub-paragraph (II) stresses that the communication to the public can happen in three different ways, namely: (a) representation, recitation and public performance, in the case of literary and artistic works; (b) public display by any means or process in the case of literary and artistic works; (c) public access by telecommunication. Sub-part (III) stresses that public the public transmission or the broadcasting of their works by any process, including the transmission or retransmission of the works by: (a) cable; (b) optic fiber; (c) microwaves; (d) satellite; (e) any other known mean or to be discovered. Letter e) was also amended in 2003, where again the legislator strived to update the law to the digital environment.

the right of public performance, similar to Articles 11 (1) and 11 ter (1) of the Berne Convention. Subparagraph (III) exposes a list of activities related to broadcasting and rebroadcasting, in line with Article 11 bis of Berne.337 Surprisingly, the making available right language of Article 8 of the WCT Treaty is not expressly encompassed within this Article or elsewhere in the Statue.338 Nonetheless, case law offers assurance that the communication to the public right includes the making available right for interactive transmissions. In 2005, the Supreme Court explained the scope of the communication to the public right available in the statute and affirmed that it encompasses Article 8 of the WCT. The decision did not identify under which section of Article 27 the making available right fits, nor explained its reasoning.

The scope of the right of public communication has been expanded or at least clarified in the WIPO Copyright Treaty. This instrument establishes that it is the exclusive right of authors of literary and artistic works to authorize any communication to the public of their works, by wire or wireless means, including the making available to the public of their works, so that members of the public may access these works from a place and time individually chosen by them (Art. 8, WIPO Copyright Treaty).339

An interviewee familiar with the implementation of the Internet Treaties in Mexico explained that the definition of communication to the public of Article 16 (III) is essential to understand the making available right under the MCL. Article 16 (III) defines communication to the public as “the act by which a work is made available to ‘general reach’ for any mean, process that disseminates the work, and that does not consist in the distribution of copies.” Indeed, this definition is consistent with a broad and traditional

Scholars criticize the approach followed by the Mexican legislator of dividing these items into two different sub-paragraphs, as it creates the impression that there are two different and independent rights. EDUARDO DE LA PARRA, LAS RESTRICCIONES AL DERECHO DE EXPLOTACIÓN 191 (UNAM, 2010). (“there is no reason to split into two fractions the various modes of public communication, giving the mistaken impression that in addition to the ‘right of public communication’ (fr. II) there is an independent right of ‘public transmission or broadcasting,’ when in fact broadcasting and public broadcasting are only modes of public communication. An important sector of Mexican doctrine has warned this error and clarified that the acts mentioned in the fr. III of the article 27 of the MCL are acts of public communication, framing the definition of article 16 fr. III.”) 337 Id. 262-5. 338 The legislative history available does not contain any specific remarks about the implementation of the right but it stresses that one of the objectives of the 2004 amendment was to update the legislation to incorporate uses related to the digital environment. 339 See Supreme Court, supra note 330.

communication to the public right. Yet, the interactivity element is not explicit from the language either. Interestingly, in 2003 Congress introduced a new remuneration right for communication to the public activities covered in the law.340 As a result of this amendment, the MCL contains a double protection for these acts: first, an exclusive right of Article 27 (II) and (III); and second, a remuneration right of Article 26 bis. These two rights are different in nature and scope. While an exclusive right provides the author control to prohibit or authorize the use of his work, a remuneration right only grants the right holder the right to receive remuneration for a specific use.341 This remuneration right does not award the author the right to control his work but only to receive the corresponding remuneration. Any person can use the work so long as the royalty is paid effectively to the author or the CMO that administers the right. CMOs typically manage this right in Mexico provided that the right holder becomes a member of the organization.342 While the legislative history provides extensive reasons for the amendments, it does not clarify how the two rights jointly function or how it impacts the interactive streaming.343 Some scholars have criticized the legislator for the lack of precision of this

340 Article 26 bis, MCL. (“The author and his successor shall enjoy the right to receive a royalty for the communication or public transmission of his work by any means. The right is non-renounceable. The royalty will be paid directly by whoever makes the communication or transmission of the works directly to the author, or to the collective management society that represents them, subject to Arts. 200 and 202 V and VI of the Law. The amount of the royalties must be agreed directly between the author, or as the case may be, the corresponding CMO and the persons who make the communication or transmission of the works in terms of Article 27 II and III of this Law. In absence of agreement, INDAUTOR shall establish a fee in accordance with the procedure set forth in Article 212.”) 341 The Supreme Court of Mexico further clarifies the nature of the remuneration right established on Article 26 bis. (“There are two types of rights within author rights matter: moral rights […], and those of economic content (lato sensu), which allow the author or right holder to obtain economic compensation for the use of his works by third parties; the latter can be classified in two sub-types: 1) exploitation rights (strict sense), and 2) other rights, in which simple remuneration are found, such as royalties foreseen in Article 26 of the MCL […]”) supra note 330. 342 The MCL establishes several rules regarding the intervention of CMOs and the fixation of royalty rates, which in the first instance are decided by the collecting society and the user. If no agreement were reached, the government (through INDAUTOR) would establish a rate according to Article 212. 343 The legislative history is rich in this Article regarding its justification. The rationale to include this article was to strengthen CMOs and to award rights to authors that were being awarded in the bill to performers and producers. It was important to clarify that authors were not obtaining fewer rights than artists. In addition, the Commission pointed out that International Copyright Treaties recognizes this right. Comisiones Unidas de Educación y Cultura; de Estudios Legislativos; y de Turismo, Dictamen que Aprueba el Decreto por el que se Reforman y Adicionan Diversos Artículos de la Ley Federal del Derecho de Autor, (Dec. 12, 2002), http://bit.ly/2yYcY6Z

design and attempted to explain how these two rights interact.344 For instance, De la Parra maintains that the remuneration right of Article 26 bis coexists imperfectly with the exclusive right of communication to the public of Article 27.345 According to De La Parra, the author obtains both rights from creation, a situation that prevails until the right holder transfers either to a third party.346 Despite the idiosyncrasy of the Mexican legal framework and its complexity, this double protection has not impacted practice, as market players (licensors and licensees) conduct their transactions without expressing challenges due to the law.347 However, a couple of licensees questioned whether the remuneration right should be cleared for interactive streaming since it is not clear that such use entails a public communication as traditionally conceived.348 The scope of this exclusive right has usually encompassed only public transmissions. They claim that “there is a big legal gap” in this interpretation because streaming usually occurs in a private environment, as opposed to a public setting, through individualized streams. However, they do not discuss this issue with the collecting societies and simply assume they need to clear this right as a matter of practice, without really understanding the legal dimension. Even though no robust legal explanations exist in the jurisprudence or the legislative history to assert the rights that protect musical works in the digital realm, there is a sense that such works are sufficiently protected under the MCL. The reproduction and the distribution rights of the MCL are the relevant author rights for downloading activities; whereas the reproduction and the communication to the public rights are implicated in

344 Eduardo de La Parra, supra note 317, at 202. De Migallon, supra note 318, at 42. Eduardo de la Parra, Comentario a la Modificación de la Ley de Derechos de Autor Federal, 8 REVISTA DE DERECHO PRIVADO UNAM 110 (2004) (clarifying the addition of this right and its need during the legislative process). 345 EDUARDO DE LA PARRA, El derecho de regalías por comunicación pública in ASPECTOS GENERALES Y JURISPRUDENCIA DE LA SUPREMA CORTE PROPIEDAD INTELECTUAL: ANÁLISIS CASOS 270-7(Triant, 2013). 346 Id. 347 I was able to identify minimal doubt about this issue. During the course of my interviewees two licensees pointed out that they understood that they pay for streaming uses through a mere royalties’ contract, and not a license per se. These accounts show that in their view, these licensees are paying royalties for a remuneration right, and not an exclusive right. 348 Interviewee M13 reasons, “If you ask me I think this is not public communication. It is like if you are listening to a CD that you bought and play it in your house, in your car, as many times as you want. In that instance, you paid for the music, and no one is going to come to charge you. I think there is a very large gap, and CMOs know it and can be very voracious. I really do not think it is clear when there is public communication or not in these systems.”

interactive streaming. In addition, a remuneration right coexists with the exclusive right of communication to the public. This double protection has not created problems in licensing practices thus far but has created some confusion.

4.2 Related Rights for Sound Recordings According to the droit d’autor tradition, Mexican legislation awards related rights to performers and producers of phonograms. In the case of performers, the term “performer” includes singers and musicians.349 Article 118 of the MCL awards performers economic rights such as the exclusive right to “oppose (I) the communication to the public of their performances; (II) the fixation of their performances in a physical medium; and (III) the reproduction of the fixation of their performances.” The statue, thus, recognizes the rights of reproduction and communication to the public that are relevant for downloads and interactive streaming but does not grant a distribution right, which may be relevant for downloading uses. Remarkably, the law stresses that the bundle of rights outlined above is exhausted when the performer authorizes the incorporation of her performance in a visual or sound fixation, so long as the use of such fixations is for profit and such user makes the appropriate payment.350 By law, thus, once an artist makes a recording or signs recording deal with a record company, he exhausts his economic exclusive rights, including those related to digital uses. The expiration of the exclusive rights of the artist has a marked impact on contract negotiations and debilitates further their bargaining position. In fact, interview data confirmed that in Mexico it is common practice for many artists and performers to have work-for-hire contracts with labels, by which these companies retain all the rights. Because the law assigned performers’ rights upon the fixation of their performances, artists were left with no additional rights or compensation sources. The legislator of 2003 took issue with this dynamic and created a remuneration right for public communication uses in favor of artists, re-establishing an earlier right eliminated in the MCL of 1997.351

349 Art.116, MCL. 350 Id. 351 The legislative history highlights lawmakers’ intention to recuperate this remuneration right in favor of the artis, and to enhance protection for performers whose rights had been diminished under

The remuneration right “consists of an inalienable right to receive remuneration for the use or exploitation of their performances that are made for direct or indirect profit, by any means, public communication or made available.”352 This right is similar to the remuneration right granted under Articles 15 of the WPPT and 12 of the Rome Convention. Understanding this Article is important to determine whether this remuneration right also refers to the making available right for interactive streaming, as it does in the case of musical works. The initial draft of this provision included unambiguous language on the right to making available of interactive transmissions, replicating the language of the WPPT.353 In addition, the original draft provided that the right was non-renounceable, non- transferable, and of collective management.354 However, the Commission’s work simplified the language, striking out the non-transferable character of the right, the collective management mandate, and the description of the making available right, but still leaving the “make available” wording. Even though no detailed explanation in the record exists for these changes,355 the legislative history confirms that the remuneration right of Article 117 bis includes the making available right. In addition, two interviewees intimately involved in the enactment of this amendment affirmed that Article 117 bis refers to the making available right of the WPPT.

the 1997 law. (“The reform aims to regain the irrevocable and nontransferable right to public communication for performers. The Commission agrees (…) that performers were hurt with the provisions of the current law, because such benefits that historically were recognized by the Mexican State were abolished. The current law in force since 24 March 1997 did not incorporate the right to public communication, with the precision that established the 1956 Act. On the other hand, the preamble of the initiative adds that on April 28, 1999, the Senate adopted the International Convention Phonograms Treaty, created within WIPO. This is inconsistent with the text of the Federal Law of Copyright: while the Convention provides precise rights and public communication for artists, the Law does not. Therefore, the Committees believe that the reforms of Article 118 and 117 rectify this omission.”) Camara de Senadores, supra note 319. 352 Art. 117 bis, MCL. 353 Cámara de Senadores, supra note 319. The initial draft stated, “This principle (the remuneration right) is applicable to performances made available to the public in such a way that members of the public may access them from a place and a time individually chosen by them […]” The legislator was using the same language of the WPPT making available right, but implementing it through a remuneration right. 354 Id. 355 The Commission clarified that the right would be non-renounceable and non-transferable, despite the amendments. This clarification contrasts with the Supreme Court’s opinion on Article 26 bis, where the court ruled that such remuneration right was indeed transferable.

Consequently, two economic rights (one exclusive and one of remuneration) coexist for communication to the public acts, including the making available of interactive streaming communications, as similarly granted in the case of author’s rights. With this formulation, the artist could potentially retain the remuneration right while all his exclusive rights are conveyed to a third party upon the fixation of the performance. Still, an interviewee stressed that it is common for artists to transfer this right too in the contract, simplifying the landscape for licensing in favor of producers.356 However, questions have existed as to whether the assignment of the remuneration right is feasible under the MCL. Article 117 bis stresses that the remuneration right is non-renounceable. Moreover, the legislative record shows the clear intent of the legislator to warrant that creators, songwriters, and artists, would not transfer this remuneration right. In the case of songwriters, the Supreme Court ruled that the remuneration right is assignable and that the phrase “non-renounceable” of Article 26 bis could not bar the possibility to assign such right. Even though there is no case law regarding the remuneration right of performers of Article 116 bis, the same rationale could be applied in this case, concluding that the remuneration right for performers may be conveyable too.357 Yet, this issue remains unsettled. Interestingly, international performers organizations, such as the International Artists Organisations [IAO], are lobbying in different jurisdictions around the world to attain a remuneration right for interactive communication in favor of performers, similar to the right found under the MCL.358 These organizations believe that this type of right can be the ideal alternative to enhance performers compensation in the digital era. On the flip side, this scheme may also increase fragmentation, as clearing rights with local artists’ CMOs would become a necessary step for licensing interactive streaming.

356 The Supreme Court construed the inalienability of the remuneration right to allow transfers of the right, an issue that was initially banned by the legislator. See supra note 330. 357 In addition, Mexican law creates a remuneration right in favor of producers that implements the making available right, and also provides a formula on how to collect this payment in Article 133 to avoid double payments. This structure is the same as that used for broadcasting and communication to the public royalties, which is currently managed by collecting societies in Mexico. 358 For instance, artists launch a campaign named “Fair Internet for Performers” to lobby for a non- waivable right to equitable remuneration for on demand use, paid by on-demand platforms and subject to mandatory collective management in the European Union Copyright framework, which is under reform. See campaign at https://www.fair-internet.eu/campaign-partners/ FILIAE is another organization lobbying for the same right.

Finally, producers comprise the last group of licensors of music. These are individuals or legal entities that lead and have the responsibility for the fixation of sound recordings.359 The MCL provides four categories of exclusive rights to producers. The first type consists of the reproduction right,360 which, as discussed, is essential for downloading and interactive streaming activities.361 The scope of this right includes direct and indirect, total or partial reproduction of their phonograms or their exploitation. The second group contains specific distribution rights, including imports and rentals. This MCL Article also include the right of adaptation362 and distribution.363 Notably, the MCL does not include directly an exclusive right of communication to the public, unlike those awarded to performers and authors. Such omission conforms to international obligations and practices in other countries. In fact, international copyright law has never extended an exclusive right of communication to the public for related rights (i.e., performers and producers), but has granted a remuneration right for such activities. As a result, it is not surprising to find that the MCL does not confer to the producer such right in the form of an exclusive right but in the form of a remuneration right. Article 133 bis of the MCL grants such remuneration right, by which producers of phonograms “shall have the right to receive remuneration for the use or exploitation of their phonograms made for the purpose of direct or indirect profit, for any mean or public communication or making available.”364

359 The exact language reads as persons or legal entities that take the initiative and have the responsibility for the first fixation of the sounds of a performance or other sounds, or the representations of sounds; WPPT ART 2 D). TERCER TRIBUNAL COLEGIADO EN MATERIA CIVIL DEL PRIMER CIRCUITO. Amparo directo 76/2010. Sociedad Mexicana de Productores de Fonogramas, Videogramas y Multimedia, S. de G.C. (Somexfon). 27 de mayo de 2010. Unanimidad de votos. Ponente: Víctor Francisco Mota Cienfuegos. Secretario Salvador Andrés González Bárcena (Thus, the production of phonograms is an activity that does not constitute a work, but which is linked or related to the copyright inherent in a work exclusively sound, since it is limited to fixing that creation in a material or Digital, in such a way that the protected by the Federal Law of Copyright is an activity Generally entrepreneurial and therefore economic destined for mass production of goods Cultural activities.”) 360 Art. 131(I), MCL. 361 Serrano Migallón, supra note 318, at 88. 362 Art. 131, MCL. 363 Art. 131(III), MCL (“public distribution of the original and each copy of the phonogram through sale or other means including distribution through signals or broadcasts.”) 364 Comisiones Unidas de Educación y Cultura, supra note 342. (“The objective of the Law, to protect all sectors involved with copyright, motivates the Commissions to add Article 131 bis and reform articles 132 and 134, in order to expand to producers of phonograms the protection granted by them.”)

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In this context, it is not easy to infer from the MCL framework what right encompasses the making available right for interactive transmissions. Interview data and legislative history suggest that Congress did not intend to implement the making available right through an exclusive right, but rather chose a different path through the remuneration right of Article 133 bis. An interviewee familiar with the implementation process of the WPPT Agreement argued that Article 133 bis together with Article 16 contain the making available right. The result of this implementation could be inconsistent with the spirit of the WPPT Treaty. The treaty unmistakably establishes the obligation to award an exclusive right of making available in favor of artists and producers and prohibits its application through a remuneration right.365 The MCL design implies that the right holder would not be able to prevent the public performance of the sound recording. Instead, the right holder would only have the right to perceive a fee for the performance. Put differently, the user could always use the sound recording, so long as he pays the fee. This design, thus, could be an obstacle for the control that record labels exercise over their catalogs. Yet, as explained in the next section, this statutory peculiarity has not permeated to practice. An alternative explanation is possible. Following the two schools of thoughts exposed during the WPPT negotiations, distribution rights and communication to the public rights are amendable to implement the making available right. In the MCL, the public distribution refers to the original or copies of the phonogram including the distribution through signals or emissions, as well as any other form. With this language, it is possible to construe that this right includes the making available right. However, no data was found to support this interpretation and this issue remains unsettled. In sum, under Mexican Law, performers assign by law their economic rights to producers whenever they authorize the fixation of their performance, including the rights of communication to the public and reproduction. Despite that the initial intent of the legislator banned the transfer of the remuneration right, according to the jurisprudence of the Supreme Court, such assignment is possible. Thus, the MCL implements the rights

365 WORLD INTELLECTUAL PROPERTY ORGANIZATION, supra note 49, at 249. Congressional Research Service, supra note 53, at 16 (“Although a reservation is possible on the public communication rights, no reservation is possible on the “public availability” right of Articles 10 and 14. This means member States must provide exclusive rights where the transmission is made available on an interactive or on-demand basis.”)

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necessary for digital uses in a way that favors the assignment of rights to producers. On the other hand, the MCL grants producers the reproduction right, while the making available right for interactive communications appears to be awarded only through a remuneration right—though other interpretations are conceivable. Theoretically, a remuneration right is not the correct vehicle to implement the making available right, according to the WPPT. Still, so far, this issue has not impacted licensing practices in Mexico, but is has created doubts among certain stakeholders.

5. Licensing Practices for Digital Uses: Main Challenges and Solutions Before delving into the Mexican case, it is useful to explain how licensing practices for digital music operate in the rest of the world, an issue that interviewees addressed widely during this study. Currently, practices to clear rights for both musical works and sound recordings follow a pattern around the globe. Half of the interviewed licensees and four out of nine interviewed licensors in this study operate at a global level and consistently confirmed this finding. These actors tend to propagate standard global practices that later are taken into a domestic level, modified to fit local law and practice. For licensees, the standard practice consists of first seeking arrangements for sound recording rights with the leading record labels (e.g., Sony, Universal, and Warner), as well as relevant aggregators that manage independent labels or individual artists. The scope of the license varies depending on the territorial ambition of the business and the type of licensee. For instance, global licensees (or strong players that intend to take their business to a worldwide scale) prefer to obtain a worldwide license whenever possible, which avoids the need to clear rights every time they decide to operate in a new country. Yet, some of these licensees first obtained a license for a large market (e.g., the U.S. or a European jurisdiction) and then, negotiated amendments to such first arrangement to add territories not foreseen in the initial agreement. Several players used this expansion strategy when they were starting to operate. After clearing sound recording rights with record labels, licensees take a second step: clearing composition rights from publishers and local collecting societies. As explained earlier, the right of communication to the public (or public performance) of musical works is managed in a country-by-country manner, often through one or several local

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CMOs. In parallel, publishers tend to control the reproduction right, and even though international publishers can license their catalog internationally, they tend to negotiate the rights also on a territorial basis. DMPs need to obtain a license both of these rights for the catalog that is available through the local CMO. Regardless of their size, licensees nearly unanimously reported this step as one of the most challenging parts of the rights clearance efforts. Licensees claimed three main challenges that stem from licensing musical works. First, the existence of different rights (public performance and reproduction) and their management by different stakeholders pose significant challenges. Publishers control reproduction rights and local CMOs manage performance rights. Second, identifying the rights that each of these stakeholders administer is a burdensome task, as musical works are commonly not perfectly streamlined for the digital process. Third, often many local collecting societies or entities that manage these rights coexist in a given jurisdiction, which requires licensees to make sure that they obtain a license from each of these organizations. To tackle the first and the third challenges, global licensees try to obtain regional licenses whenever regional clearance structures are available. Otherwise, they resort to the more cumbersome task to clear rights on a country-by-country basis, which is the standard practice.366 Evidently, consistent with transactions costs literature, the least institutions the licensee has to deal with, the fewer searches and bargaining costs the service would face. Cognizant of these problems, publishers and CMOs in the Latin American region, for example, have created a pan-regional structure that recently emerged as an effort to streamline licensing in this region. The single-window, named Latinautor, unites publishers and CMOs of most Latin American countries except, Mexico, Brazil, and Argentina. In sum, standard licensing practices consist of first clearing sound recording rights, and second obtaining a license from the respective collective society(ies) where the licensee seeks to operate his service. This pattern of global practice is reshaped, to some extent, at a domestic level to address particular local challenges. The more the local practice departs from international process, the more time and resources licensees have to invest in licensing. This section explores essential idiosyncrasies of licensing practices in

366 Interviewees M11, M16, M6

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Mexico, where many musical services conclude contracts with major labels first and then move on to license musical works with the local entity that manages such rights.

5.1 Clearing Musical Works Rights 5.1.1 A Single Window for Composers and Publishers The most notable issue found in the process to obtain music licenses in Mexico is the single window or “ventanilla unica” to clear digital rights for musical works, which was reported as the first of its kind in Latin America. Reportedly, this effort was launched before Latinautor (a single window at the Latin American level), what explains why Mexico does not form part of such Latin American system. The importance of this novel coordination mechanism is its contribution to simplifying the process of obtaining a license, thereby reducing transaction costs. As explained earlier, one of the principal challenges that users seeking to license music face is the fragmentation of copyright in musical works—the existing multiplicity of rights and right holders in a single work. In the case of musical works, it is not clear when and whether publishers, composers or CMOs, need to clear rights when licensing digital music. For the musical work portion, it is hard to know whether composers effectively made a deal with a publisher to manage their works or if they are affiliated with a given CMO. Users would typically have to clear rights with both publishers and CMOs for different rights. In this cumbersome context, a single window that unites all the fragments in a single license becomes an ideal solution to simplify licensing. In 2011, the Mexican performance rights society for musical works, SACM, and a group of publishers, EMMAC, decided to create EMMACSACM—a unified system to license digital uses of the musical works that these organizations manage in the Mexican territory.367 This agreement vests EMMACSACM with full powers to license—in a single act— all of the author rights for digital uses available in their catalogs. The system only licenses digital uses of musical works, including internet and mobile devices. SACM

367 Registered in INDAUTOR on November 29, 2010. Over 110 publishers and approximately 30,000 authors and composers are associated with the system today.

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and EMMAC retain all other analog uses for licensing.368 Consequently, licensing for analog uses occurs in a more traditional fashion and licensees must obtain individual licenses from SACM and EMMAC. According to interviewees familiar with the establishment of EMMACSACM, the single window was established in response to the unique needs of digital music users, including internet and mobile uses. Its objective is to handle digital rights in a modern and agile way, according to the needs of the digital environment. A licensor describes this system’s objective as a mechanism to “put the same face to the user” (“poner una sola cara.”) Besides licensing and managing musical works, EMMACSACM also distributes royalties to the right holders—what some licensors consider its most important task. The accuracy of this back-end task is important since “otherwise right holders would have little interest in joining the collecting society or the system.” Even though EMMACSACM is not a separate legal entity and depends on decisions of the authors’ CMO and publishers’ organization, it has its own staff and an executive director that is jointly appointed by the two partners of the agreement—EMMAC and SACM. A joint council, formed by representatives of the two original entities, provides guidance on a regular basis to the director. Reportedly, the council is not a formal organ but a dialogue mechanism established in the EMMACSACM contract. Interviewees stressed that the relationship between editors and the composers’ CMO in Mexico was particularly challenging before the launch of the one-stop-shop. The country hosts a dynamic creative musical sector, where a myriad of individual authors and composers and international and local publishers coexist. However, in its early stages, collecting societies in Mexico prohibited the subscription of legal entities as members, barring publishers from becoming members of the CMO. According to two interviewees from this sector, this prohibition cemented the already existing differences between these two stakeholders. Even though relationships between publishers and musical works CMOs were not always straightforward in other countries, collaboration and joint work was the pattern. Yet, Mexico was an outlier in maintaining greater

368 These uses remain in the hands of SACM for performance rights and each publisher for mechanical uses. I asked to review the contract, but I confirmed that due to its confidentiality I could not see it.

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separation between the two actors and the functions they performed. Because the coordination between these two sectors is essential in the digital world, the creation of EMMACSACM was a crucial step forward and a necessary voluntary adaptation of the system. Thus, the single window represents the ability of these two stakeholders of leaving their historical differences behind and collaborating in sakes of efficiency. By and large, licensors and licensees related to the system reported that EMMACSACM is a successful enterprise,369 citing clarity, certainty, more control of the market, and increased transparency as the main benefits. Licensors indicated that this arrangement had benefited all parties involved. In their view, licensees benefit from having to sign only one contract, while licensors benefit by obtaining certainty of a fix and joint rate that, in turn, provides certainty to licensees.

The establishment [of the single window] has been one hundred percent positive. Indeed, it has been productive for both parties—editors, and authors. I dare to say it is not only positive for both parties but all parties because it is easier for the user to pay or get a single license. And for editors and authors, it is easier or provides more certainty to have a joint rate. [Interviewee M1]

Informants frequently cited efficiency as a condition for the system’s success: “EMMACSACM is a response to what seemed to be very inefficient. Why? Because when you negotiate different contracts with different entities [in the licensee side], it takes more time, and it is more complex, but this also avoids that, from our side, we lose control of the market.” As part of the efficiency aspect, licensors pointed out that contracts were concluded faster and that information flows quickly between parties, conditions that they consider essential in licensing digital music.

I think another important thing is that we have a very fast response time. The process of reviewing and sending contracts or comments is very fast. We have a very quick response from people to review the contract, which also facilitates the process. When a new user who arrives into Mexico, we have the first meeting and we sign the contract within a maximum of 60 days. This is quite fast, and also possible because the information internally flows very fast. [Interviewee M13]

369 Interviewee M12 (licensee), which also was critical of the system noted “I believe that it (EMMAC- SACM) has worked very well. They tried to modernize their work, so that when you are trying to close and agreement for digital, it is a good system. They work well.”

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Other licensors also pointed out that a more advanced distribution of royalties is a central component of EMMACSACM’s success. This system of distribution allows them to identify almost every right holder or beneficiary promptly. The allocation scheme is not one hundred percent accurate as some barriers to identifying some musical works remain. However, these remarks highlight, on the one hand, the advantages of having a joint system, and on the other, the opportunities that technologies offer to increase transparency and accuracy in the distribution of royalties to the beneficiaries of the system—composers and publishers. Additionally, licensors of musical rights highlighted that EMMACSACM’s mandate and its institutional structure play an important role in preserving the relationship between the two entities. EMMACSACM opened a communication channel between publishers and the CMO, which was essential due to the tensions that existed earlier between these two sectors.370 More importantly, as an interviewee pointed out “in this world there needs to be a lot of information exchange between all entities.” The mandate and the institutional structure permit more efficiency and stability in the operation of the system, as the entity can license catalogs without having to consult the two founding parties in each transaction. In contrast, in other single windows such as Latinautor, every stakeholder (editors and collecting societies) associated with the system, to some extent, is more involved in every transaction individually.371 Not having to consult every action does not mean that EMMACSACM partners do not have a say in

370 Interviewee 1M stressed that information flows and enhanced communications with partners is always an area to improve but is the main reason for the success of EMMACSACM. “Communication between publishers and collecting societies can always improve. Communications are increasing little by little, specifically in Latin America. It is always very important that feedback is provided to both parties because finally, each of them have a portion of the contract, of their business, whether it is reproduction, public performance, or phono-mechanic. In this world, there needs to be a lot of information exchange between all entities.” Interviewee 3M “A daily challenge is maintaining internal harmony, which is hard. It has been a very important work of all EMMACSACM stakeholders—associates, publishers local and foreign, and of the society— to keep harmony because evidentially the rights’ nature is copyright. Each person and organizations involved are different. Their vision and mission are totally different. It is not the same talking to a publisher than the society, and we know that. So, it is essential to maintain such harmony and take joint decisions, in benefit of the business and the market, and the authors that are represented by both parties.” 371 Interviewee 20M “I have a little less visibility into it because unlike Latinautor, where I see every agreement and sign it directly as the publisher, SACM and EMMAC have more of a mandate. So, they just tell us what the deals are done when they're concluded.”

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the day-to-day operations. In fact, as licensors involved in this system stated, constant dialogue between the two entities is common and fundamental to make the system work.

A consensus is always sought. All decisions are continually taken and discussed in a Council, where we seek consensus on the side of the publishers and the collecting society. Any situation that arises, any problems, any contract, any request that a user makes, any new service is always brought to discussion, and we seek to reach a perfectly concerted decision. [Interviewee M1]

EMMACSACM essentially represents a channel to exchange information and improve transparency in the world of digital licensing―a vital element for success, according to licensors of musical works. The following account emphasizes how crucial it is to preserve transparency between these two partners and to maintain a constant flow of information in order to maintain the relationship (as repeat players) and make the single window succeed in the long-term.

This [dialogue mechanism] gives its place to each of the participants, maintains the tranquility, and keeps this project alive because we do not speak of majority decisions. All the decisions we make we know they have an impact on the general market. Then they are taken by consensus, and this helps that all parties remain calm always because they will be heard. [Interviewee M3]

EMMACSACM also serves as an essential decision-making vehicle. For instance, through the single window, both stakeholders have agreed on the percentage of distribution that each entity gets for the rights they manage, which was underlined as a critical achievement of the body.372 While the International Confederation of Societies of Authors and Composers [CISAC] offers some guidelines regarding the allocation of rights depending on the use (e.g., streaming, downloads), it is up to the players to decide and set the distribution per right in every country. Thus, a split agreement likely adheres to CISAC standards, but parties must reach agreement on the final numbers in each country. Notably, EMMACSACM serves as the dialogue mechanism to achieve consensus on these issues and to negotiate central aspects of the business. Finally, another element of EMMACSACM’s success is the principle of providing the same treatment to the licensees. According to a licensor, this means that they offer the same rate to everybody “so that music providers can compete on an equal footing, and

372 These percentages are confidential, and I was not able to confirm specific amounts.

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that consumers can distinguish amongst the offers through commercial or another type of traits that they develop to compete.”373 Even though I was not able to verify whether the rates awarded effectively are the same for equivalent services, the point raised in this statement refers to potential implications of CMOs licensing practices and competition law. In addition, nearly half of the interviewed licensees considered that EMMACSACM is one of the best practices for licensing musical works and also stressed its efficiency. These licensees reported that EMMACSACM allows them to obtain, in a single transaction and a single site, a blanket license that covers all catalogs represented by EMMACSACM, which “is highly desirable and efficient.” In the words of a licensee, “the unique window is a swift and efficient solution to license and stimulate the use of digital music, and we benefit from it.” By and large, most licensees also indicated that Mexico is one of the most accessible places to conduct business in the region, primarily due to the advantages that EMMACSACM presents and its specialization in digital uses. Several licensees did not know much about the operations of EMMACSACM but affirmed that they do not usually face problems when licensing musical works in Mexico. These accounts show that efficiency is high and desirable,374 and are consistent with literature that finds rights clearance mechanisms as a solution to prohibitively high search and bargaining transactions costs.

And it's very comforting to know that I have everything that I need, once I've done a deal with them [EMMACSACM]. And I've been through the initial negotiation with them and a renewal. We've been there for two years. We just finished a new renovation a couple of months ago. That's Mexico; it's pretty easy. [Interviewee M19]

373Licensor M3 “Another important factor is that all those digital music services that are operating with digital music come to Mexico and that we became a point of harmony. We, when any player comes [to Mexico], one of our goals is that we don’t make a difference for one player keeps in the market, or one grows and not the other. We have to maintain the harmony of the market, that is why we manage standards and standard rates for everybody. So, they come and can compete with other things, with their commercial tools and other things, but we won’t be a factor for a company to continue and not the other one not, providing befits to one and not the other. It is a basic principle of the system and, it is very important.” 374 Many licensees pointed out that the duration of negotiations is efficient and the time to obtain a license was average.

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Despite the almost unanimous endorsement of the solution that this one-stop-shop represents, some concerns still exist regarding the catalog it represents. A few users of the system pointed out that even though EMMACSACM is very successful and a step forward, it does not manage 100% of the rights of musical works as it does not represent 100% of the publishers. However, the organization confirmed that it runs nearly 100% of the national catalog, including musical works that belong to independent musicians that are not affiliated with the system and manage their rights, and others. This means that there are at least some titles that EMMACSACAM does not administer. I was not able to analyze the deals and the membership of the right holders behind the system to confirm what percent or quality of the catalog is not part of this organization.375 Nonetheless, the fact that voluntary collective licensing organizations do not represent the totality of musical works available is consistent with one of the significant challenges of the sector historically. This problem affected the analog era and persisted in the digital space in Mexico and other countries where no additional regulatory measures exist. In sum, the establishment of EMMACSACM is the main adaptation of musical works rights institutions and the primary response to fragmentation and the complexities of copyright law in the digital era. Today this collaboration is necessary to make the market work, and EMMACSACAM embodies the Mexican solution.376 Moreover, the key to success appears to be the structure of the system that understands that publishers and the collecting society are different by nature. This arrangement also allows the flexibility to reach agreements through dialogues, which is fundamental. Nonetheless, problems persist, such as whether the entity represents all the available catalogs. This issue is not as prevalent as in the past, but it is still a concern. The single window solution is, however, one of the best private designs possible to reunite as many

375 Due to confidentiality reasons, I was not able to Access those contracts. Even though the law requires that contracts are registered at the Mexican Copyright Office (INDAUTOR), the public has no access to them unless a court case is pending. This practice is not uncommon when compared who has access to these contracts. Collecting societies around the world typically are criticized for this issue, as there is no way to verify the underlying contract, unless there is a legal case pending. 376 Because of its success, a couple of interviewees also argued that EMMACSACM has served as a case study for other initiatives in the continent, such as Latinautor, a regional one-stop-shop for musical works in Latin American countries—except for Mexico, Argentina, and Brazil. The Latinautor system was also cited as a very successful regional case study. I asked licensors if they would like to enter into that regional scheme, and the answer was that even though they think Latinautor is a good system, they are not interested in entering Latinautor since they have accomplished the same through their own system already.

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rights as possible on a voluntary basis. Because of its private and voluntary nature, it cannot force right holders to become part of the system nor guarantee to licensors that it holds one hundred percent of the rights available of musical works.

5.1.2 Identifying Fragments: Musical Works and Related Data Fragmentation is palpable and even chaotic when associating a song to the rights that belong to each right holder. Not surprisingly, both licensees and licensors reported that the task of identifying the rights of the musical work in each song is a primary challenge; and that the technological solution implemented to overcome this problem is one of the best licensing practices. The incorporeal nature of musical works and the fact that these works are not delivered as assets explain the challenges of identifying and managing the rights that exist in musical works. Understanding what we are really licensing is very hard because we are completely dependent on what we are told by partners [licensors]. And the reality is that licensing regime in many countries, or well in all countries, is not set-up to identify the specificity. Yet, they [collecting societies] are better positioned to tell us what they own. We don’t know. I have no visibility into what an agreement of someone with another party about how to distribute their content. [Interviewee M11]

Compared to the challenges of identifying and managing rights in musical works, the process for sound recordings is relatively direct. When music providers sign a deal with a sound recording right holder, they obtain actual digital files of the licensed content with clean metadata. This metadata is attributed to the asset or file, and it is this data that facilitates identifying accurately when the sound recording is used (matching) and simplifies the distribution of royalties according to that use. This process is done through a wide variety of technological tools and a robust database. In the past, the process of matching and royalty distribution for musical works was traditionally more complex and less precise. Many data problems existed and became legacy problems of the digital era. The main obstacle was that the entities that manage these rights controlled a list of the repertoire and the specific right holder(s). However, this list did not entail how these titles and rights materialize with a specific asset (a sound recording), making the matching between these data points a hard task and increasing uncertainty due to the lack of identification. This disassociation is why some stakeholders

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claim that the entities that administer those rights do not necessarily know what they are licensing today. “They know in an abstract copyright sense someone wrote the song, for instance, Feliz Cumpleaños, but they don’t know how that is manifesting when is not recorded in a service or platform. That link is very hard to make.” In principle, the claim is that the collecting societies which manage these works do not have a comprehensive picture of all their rights and repertoire and how it is being used, since the lists of repertoire that they manage do not indicate where they are embodied in a given sound recording. As noted by a licensor, this issue is not a new problem but also existed in analog businesses. However, the sharp rise in the volume of transactions in the digital era exacerbates this problem, which is not unique to Mexico. The industry, however, is continuously investing resources to attain better solutions. According to some licensees, the entities that administer these rights tend to be passive players and do not possess a comprehensive understanding of how their content is used. However, EMMACSACM demonstrated quite the contrary as the entity developed technology to do its own matching and identification work.377 The database belongs to the organization, in contrast with other Latin American countries, where a third party provides this service.378 Because of the volume of information received, the challenge is to deal with big data, accurately and promptly, identifying each work, and in the long- term building databases with cleaner information. Independently assessing the success of this matching process was not possible. However, many accounts suggested that matching conflicts rarely occur. In fact, interviewees familiar with the matching system claimed that unidentified works are a low percentage, ranging between 3-5% of works that are not first identified but are susceptible to be recognized after the parties of the system (publishers and SACM) run their internal processes. While this figure is low, it is higher than the Latinautor system

377 Their process to identify works is comprised of several levels of identification. The first one is the ISRC. The second level is the ISWC. In a third level the performers are identified. The abundant data that each licensee sends is matched against such database. After running this matching, both publishers and the collecting society review for error and unidentified works. They do liquidations every quarter. 378 Back Office is a leading business that provides matching services for the rest of countries in Latin America through different arrangements http://www.backoffice-ms.com/ I was not able to understand why they opted to develop their own technology instead of outsourcing the service, as it has been common in Latin America. An interviewee suggested that it may be that they do want to retain control of all the processes, but I could not establish this preference.

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(1% of conflicts). Licensors in Mexico widely acknowledged that “much work needs to be done” in this area to improve their outcomes. For licensees, the problem of identification is vital. Indemnities clauses appeared to be a way for licensees to tackle the identification problem.379 Licensees consistently commented that they craft the indemnities language carefully to prevent contingencies from third parties claiming ownership of a particular work. As stressed by an interviewee “in the end, who makes the music available to the public is us [the service], so that's why we have to take care of this important subject of indemnities. The issue at stake is that if you are giving me a song and a third party complains, I am going to transfer that contingency directly to you, since you are the one licensing to me.”380 Even though licensees consider indemnities to be critical, third-party claims are rare in practice, far less common than the rate of such claims in audiovisual works. In this sense, some licensees argue that even though claims are low, the risk is always present for their services. In fact, a licensee explained that the risk was not theoretical because there is a growing trend of copyright infringement lawsuits filed in other jurisdictions by songwriters that claim that DMPSs do not secure mechanical rights for all songs. The underlying problem is that the data necessary to identify rights holders are often missing, inaccurate, or incomplete. Thus, a reliable centralized administrator to process data that can provide accurate reporting, matching, and clean data, is critical to the success of all relationships in this business. EMMACSACM has made significant progress on this front with its own technology and resources. Challenges, however, remain in Mexico and internationally, space in which having an authoritative database, and not discrete efforts, would be the optimal solution.

5.1.3 Rates for Musical Works Significantly, licensors confirmed that the value of musical works has increased in the digital world. Historically, the industry treated musical works differently, and songwriters received lower rates for their composition. “These works weren’t valued as one of the

379 The issue of indemnities came up a few times. Once a licensee stressed that in his experience negotiating this clause, he noted that the collecting society may be more skeptical of committing to the indemnity clause than record labels. 380 Interviewee M12

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main ingredients for music, and the percentages assigned to musical works were typically low.” In Mexico, the rate of participation was 7.5% in the analog world. Today the standard rate is between 12 to 15%. Despite that rates have increased already, licensors of musical works reported that rising the rates further remains a challenge for their sector and one of their main objectives in the digital setting.381 In one licensor’s words, their intention is “to increase the value of musical work rights while maintaining harmony in the market.” This increase does not seem to be unique to Mexico; it seems to be a more systematic demand from the greater international community of musical works right holders to attain higher rates for digital uses. In addition, both licensors and licensees reported that the rates are consistent with international market rates. Reportedly the industry “doesn’t tend to get any agreements that depart too much from those market rates. In fact, they don't differ all that much from the worldwide market rates. So, there are no real surprises in terms of what they are. You know, publishers will always ask them for more, and the DSPs always want to pay less. But we do not share these rates.” [Licensor] In addition to confirming that international rates do not diverge much, this account also suggests there is only minimal room for negotiation.

5.2 Clearing Rights on Sound Recordings Licensees reported that licensing sound recording is a straightforward practice, as opposed to the more complex task of licensing musical works. Licensees claimed that this process is not as complicated because these works can be licensed seamlessly by record labels, including across multiple jurisdictions at once. Because sound recording practices are more streamlined, technology-driven, and tend to be more global, they are more predictable and easier to follow. Interestingly, the particular traits of the Mexican legislation on sound recordings have not affected licensing practices in the country, which follow international patterns. Some remarkable aspects of licensing sound

381 Typically, these contracts last for two-year. Licensors explained that shorter-term contracts allow them to retain the flexibility to adapt the rates according to the market. This term coincides with the term fixed in sound recording licenses.

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recordings in Mexico are presented below. However, few issues are particular to Mexico since this the sound recording industry tends to be global.

5.2.1 The Changing Landscape of the Market: Fewer Record Labels and the Rise of New Aggregators Changes in the marketplace have favored the concentration of record labels and the rise of aggregators. Labels started to concentrate since the 1980s, but it was in the last 20 years when the industry saw major mergers, resulting in the existence of only three major record labels— Sony Music Entertainment, Warner Music Group, and Universal Music Group.382 In contrast to the concentration of record labels, the new digital landscape opened space for a new type of intermediaries: aggregators. These intermediaries function as distributors of sound recordings of individual artists and small record labels. Aggregators obtain the digital rights from the artists and license these recordings to DMPs. Aggregators have played a role in democratizing the music industry since they have opened mass distribution to small artists, without compromising their rights.383 More importantly, this new market structure has facilitated the labor of clearing sound recording rights, as the licensors are well-identified and use standard licensing practices. Licensees explained that they need to clear rights with major record companies, relevant indie labels, and aggregators. The quantity of licensors is limited and some of them concentrate large amounts of content and have the ability to grant multi-territorial licenses, simplifying the process.384 The market structure of sound recordings provides

382 In 1998, six major record labels existed—the “big six.” In 2004, this number fell to four and finally the number dropped to three in 2011 with the merger of Sony and EMI. 383 The changes in technology and business models have made possible for individual artists to make direct agreements with music platforms, while also opened space for new aggregators to emerge in the business—offering distribution services to independent artists. But in contrast with traditional record labels, aggregators do not offer other traditional added value services, such as marketing, A&D, etc. Licensor M8 explained: “classical record companies offered several services of great value to artists and were in charge of producing phonograms. One of those services was having contacts with publishers, and we dealt with them directly, amongst other people. We still offer a lot of value to our artists, and we have the capability of reaching all international markets.” 384 Record companies make deals at the global, regional or local level, which go along with the structure of their business and where their subsidiaries are located. Labels still use a territorial rights scheme that is followed by a business structure that goes along with that territorial nature, which produces a complicated structure. This means that for the digital business the transactions produced in a certain territory are reported and taxed locally, and then the local record label pays headquarters or the entity that signs the artists the royalty. So, a music service provider would seek

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clarity to licensees on who the licensors are, which contrasts with musical works licensing. Further, licensees stressed that the most important contracts were those with major record labels, which remain key stakeholders, as they control approximately 60% of sound recordings.385 Record labels act on their own behalf as producers, as well as on behalf of signed artists.386 Smaller licensees were more likely to report that negotiations with record labels are typically tense and tough, likely because their bargaining power is generally much lower than that of record labels. However, the same licensees stated that record labels are sophisticated players that had expertise and represent a major advantage to simplify the licensing process.

5.2.2 Contract Negotiations: Main Aspects and Commercial Tensions Most licensees noted that the licensing contract with major record labels is somewhat of a standard contract. Similarly, the record labels’ perspective is that they work from guidelines that provide different terms depending on the business model.387 The reality seems to be that some industry standards exist for different business models, but negotiation is possible depending on the bargaining power of the counter-part and the needs of the specific service. to negotiate a license with the local record label entity. The key is that regardless of their structure the record label usually has worldwide rights of their artists. 385 Paul Resnikoff, Two-Thirds of All Music Sold Comes from Just 3 Companies, Digital Music News, (Aug 8, 2016), http://bit.ly/2DbAfGj (“According to data released by independent label group WIN, an astounding 62.4 percent of all music sold, downloaded, and streamed worldwide comes from just three major labels, in 2016. In the United States, that figure is 64%, and a lopsided 77% in the UK.”) 386 During my interviews, a lot was said about how labels have transformed to accommodate the digital marketplace. Regarding their role in the analog world, record labels used to be in charge of paying to publishers the mechanical right. Record labels would handle getting the product ready for consumption—either CD, vinyl, etc. Arrangements between producers and publishers existed to establish rates. To some extent, this relationship changed in the digital model, where these payments are done directly by the music provider to the publisher (except in the US). Licensor M4 “The model of physical sales was simpler because you were selling a specific product. It had some problems associated with inventory and supply chain. In contrast, the digital model is more complex because you use very intricate licensing schemes since you are not doing sales anymore. Yet, having digital assets is simpler to control, pay royalties, manage returns, etc. [referring to the record companies.]” 387 Interviewee M7 “Licenses are not standard, but there are some guidelines. Each license is tailor- made to the specifics of the partner’s business. This is the advantage of just having a handful of providers. We try to be flexible depending on the partner; we do not want to only have global partners, but also want to find local partners that have an expertise in the market. Negotiations duration depend on the transaction, and it varies. Normally licenses last for 24 months.”

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According to interviewees from record labels, the process of launching contracts feeds from global teams that “have a repository of all the business models and what kind of models have worked or been set up in the different regions of the world.”388 If the deal is local in nature, then the local team adds or builds on this, as every region has its own unique nuances that affect commercial success. For new business models, labels tend to start from scratch in structuring the contract. Importantly, the duration of most contracts tends to be 24-months, consistent with the industry standard. Several licensors explained that they seek short-term deals because of the changing nature of digital businesses. Licensors explained that this shorter term allows them to revise rates and react to any changes that may happen. Several interviewees pointed out that the commercial terms related to the service receive much attention during the negotiation. The type of service and the permitted uses are determined based on the kind of partner.389 There was a marked difference in the responses regarding how easy it is to comply with all the requirements imposed by record companies to access their catalogs. Bigger players did not make any remarkable comments in this point. In contrast, smaller licensees did bring up some difficulties of complying with all the terms and surviving the marketplace. For instance, a small licensee reported that the number of requirements (technical, financial, and legal) that record labels demand for a non-interactive streaming service surpassed their business possibilities and the realities of the market (Latin America). In her words:

The contracts [with record labels] were hard, and the market changed. Some were contracts in dollars, and some of the Latin American currencies suffered last year, which made these contracts not viable. We are in fact right now in the process of closing those contracts and the service. [Interviewee M7]

388 Interviewee M8 389 The business set-up starts with an assessment of risk in a particular business opportunity, and how that aligns with the market trends and key partners in that markets and space. The deal is negotiated in this light. Some commitments are required depending on the type of partners and the milestones of the business. A bond or guarantee is typically required to cover the operative and administrative work since operating costs can be big. Depending on the type of partner they would be able to get the entire catalog or a portion of it. Bigger partners, with a proven track record or with strong core businesses (other than music), can get a license for a full catalog. Smaller partners would usually do a pilot with a limited catalog, and this pilot can be scaled up or down depending on its success. When the proof of concept is shown, they move to expand licenses if desired.

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This account may help explain commercial tensions and why on some occasions services go out of business, as observed between 2010 and 2016 for the Latin American market. In Mexico, in particular, nineteen services went out of business in this period. Even though only one interviewee representing a service that went out of business responded to the interview request, some other interviewees offered insights regarding why many services shut down. These explanations included that there is not enough differentiation between the services; there is not enough space for so many services in the market; small players cannot compete with larger companies because of the hard conditions imposed in the contracts; and contracts negotiated in dollars become expensive due to the fluctuation of currencies in some Latin American countries— thought his explanation did not apply to the Mexican scenario. In addition to these explanations, it is publicly known that most platforms are not necessarily profiting yet from digital music. It will be important to observe the high mortality trend continues into the future and whether the commercial terms allow only big players to survive.

5.2.3 Confusion of the Role of Artists’ Organizations and their Legal Attributions Collecting societies that represent artists in Mexico are uncertain about their role in licensing uses for the digital space. These licensors are not the only stakeholders feeling wary; a few licensees were also unsure whether they needed to clear rights with these organizations, and in fact, one reported that he was negotiating contracts to pay artists’ rights to these organizations for digital uses, which departs from general international practices. It is not clear whether this confusion stems from the particularities that the Mexican Copyright Law offers, as discussed earlier, or from the ambition of these groups to remain relevant in the digital space thus acting as “agents.” Interview data and the analysis of the law presented in section four support both explanations. Regarding the “agents” reason, a licensor interviewee confirmed that the organization she represents is currently working with its “members to explain the importance of the digital environment, and the value of having the organization manage these rights.” Their goal is to have their associates award that representation or a mandate to the collecting society. Many collecting societies in Latin America have served as a type of agent for

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artists, in particular for those local artists that have no contracts with record labels. The following statement reflects this development also in Mexico:

Right now, more than anything, we are trying to raise awareness in our membership, and those who have already uploaded works to the internet and who are managing their music alone and directly. We are trying to pull them, so they give us the mandate to do their digital negotiations. [Interviewee M13]

As it can be observed, these stakeholders may be trying to build momentum around this “agent” dimension of their work, since the new realities of the business also allow more artists to produce their own recordings and directly manage their rights. Thus, it might be possible for CMOs to collect for digital uses on behalf of independent artists, thereby establishing themselves as players in this environment. Further, some interviewees related to the work of artists’ CMOs support that artists should have the right to perceive royalties for digital uses, even when their exclusive rights are assigned. They recognized that the traditional industry practice is for producers to license digital uses directly, including the rights of performers. In the case of Mexico, this is possible due to the structure of the law and because artists typically have a labor relationship with the producer or assign all the rights contractually to the producer. Despite the acknowledgment of such assignment practices, these interviewees believe that performers should receive a portion of royalties for streaming activities, as a “public performance remuneration right exists, and CMOs are seeking to collect royalty payments for their members.” Based on this presumption but without explaining the particularities of the law, two licensors said to have established communication with a couple of platforms to license his catalogs for online uses. One of these licensors effectively signed a contract with a DMPs, instrument that was available for review in this study. I also confirmed the account of the ongoing negotiations with the platform. Even though these two instances were the only two examples I found of DMPs negotiating with artists’ organizations, they demonstrate that these organizations are trying to institute themselves as players in licensing artists’ rights. Other informants disagreed with this possibility and asserted that all performers rights are assigned once the artist signs the contract with the producer. In this context, it is helpful to understand how economic rights can be assigned under the MCL. The

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discussion of section four, regarding the implementation of the making available right for neighboring rights in Mexico, helps to explain whether artists may preserve rights to collect royalties for streaming after signing a recording contract. As explained, Article 117 bis establishes a remuneration right that can be interpreted to encompass interactive communications over the internet or streaming activities. This remuneration right is independent of the exclusive rights that are assigned and exhausted when artists fix their performances. In the words of an interviewee:

Indeed, when signing the contract with the labels, the Mexican law says that the artists’ exclusive rights are exhausted, they disappear. Then all those who are artists can no longer enter into a licensing scheme because their exclusive rights disappear. The law awards them rights of simple remuneration. Artists will be able to collect royalties, but they will not be able to give licenses. [Interviewee M19]

According to this interviewee, even if by law all exclusive rights of the artist are transferred to the producer upon signature of the record contract, the law presumes that artists can still preserve the remuneration right of Article 117 bis since the law states that this right is non-renounceable. In this sense, Article 83 bis further clarifies that the remuneration right remains with the author or performer in works for hire relationships. However, as explained in section four, the Supreme Court held that remuneration rights for musical works are transferable, interpreting that the non-renounceable nature of this right could not bar the possibility to assign the right.390 Even though there is no case law regarding the specific remuneration right of performers, by analogy, it could be extrapolated that this remuneration right may be conveyable too.391 Nonetheless, the transferability of the right of remuneration for performers appears to remain unsettled. In the case that the prevailing interpretation confirms the assignability of artists’ remuneration right and artists effectively assign such right in their recording contracts, no remuneration right would exist for CMOs to collect royalties for digital uses. In contrast, if no such assignability is possible by law, then DMPs would have to

390 Notwithstanding case law, doctrine supports that remuneration rights are not transferable. The Supreme Court construed the inalienability of the remuneration right to allow transfers of the right, an issue that was initially banned by the legislator. See supra note 330. 391 In addition, Mexican law creates a remuneration right in favor of producers that implements the making available right and also provides a formula on how to collect this payment in Article 133 to avoid double payments. This structure is the same as that used for broadcasting and communication to the public royalties, which is currently managed by collecting societies in Mexico.

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clear this additional right in Mexico, adding complexity to licensing practices in the country but providing a supplementary source of income for performers members of these organizations. In essence, the unorthodox method of implementing the making available right into two rights in the case of performers (a remuneration right and an exclusive right) and whether such remuneration right is transferrable have triggered ambiguity regarding the role of artists’ CMOs in collecting royalties for interactive streaming. On the one hand, this legislative choice could potentially further the fragmentation problem because licensees would have to clear additional remuneration rights in Mexico through the local organizations that manage collective uses, as opposed to clearing rights directly only with the producer that manages all digital uses.392 On the other hand, the remuneration right offers an additional source of income for performers that could help to alleviate performers’ concerns about their decreased revenues in the digital world. Nonetheless, the clarity of how the remuneration right works in practice and the lack of awareness of stakeholders about the existence of this right explain why this issue has not played a more prominent role in licensing practices in Mexico. Instead, stakeholders adhere to international business practices to license performance rights, which are managed through record labels and aggregators. As a result, stakeholders follow international licensing practices to license these rights rather than the local law. The next section explores this issue closely.

6. The Role of the Local Law and International Practices An issue that came up consistently was the role that Mexican Copyright Law plays in licensing music for downloads and streaming. Eleven of the interviewees (including licensors and licensees) did not respond or did not know whether the law was relevant; seven informants manifested, to some extent, that local law was not essential for their operations; and five interviewees claimed that Mexican law was very important for

392 KEA, supra note 29, at 27. Some experts have expressed that remuneration rights are prone to create broader fragmentation and increase ex-post transaction costs because online service providers need to negotiate and pay the fees that the CMOs establish in a given country, in addition to those paid for exclusive rights to producers.

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licensing purposes. Thus, there seems to be a tendency to use international practices rather than local law to conduct licensing operations. As it might be expected, the group that responded that local law is somewhat irrelevant is mostly comprised of international licensors and licensees. As described earlier, sound recording licensing is mostly conducted on a regional or global scale with licensors that are international companies, while licensing for musical works is conducted at the national level. Thus, it may not be surprising that local law is not relevant for transactions involving the sound recording piece. For this license, in most instances, the licensing contracts are signed in foreign jurisdictions and designate a foreign country in choice of law and jurisdictional clauses.

Local jurisdiction is irrelevant. It is relevant only the country where you start. You have to have the rights for the work you use, and you sign a contract, for instance, with the Orchard that is located in the United States and it is governed with the law of the United States. You comply with that law and you have the rights, and you have the rights in the rest of the world. You are responsible for saying that you have the rights. […]Then it is as if there is only one law in the whole world. [Interviewee M16]

On the musical work side, these interviewees, as explained earlier, acknowledged that they needed to attain rights locally. “Now, a difference between the physical and the digital world, in terms of rights, is that in the physical world a label must clear the rights of the musical works from music publishers, and [in digital] we [licensees] have to obtain those rights, that is, in the United States or Mexico through the different publishers”. However, even for the musical works portion, some licensees did not seem to consider local copyright law thoroughly, as they applied their general international standards to clear musical works or accepted guidance from local right holders about how to obtain the license. The standard of due diligence processes to procure music licenses varied widely. I found that while very large services have the resources to retain local counsel, to evaluate their services that they aim to launch in a given country and to determine what rights and institutions may be implicated, smaller medium, and large services relay heavily on their in-house counsel and what the local right holders propose. Due diligence at this point is done with different levels of depth. Some licensees that conduct in-house due diligence stated that they run under the assumption that every country has a similar set-up that

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allows them to work with the “lowest common denominator.”393 This expression means that an assumption is made about how the law generally works in a region, without looking at the specific differences. In fact, several licensees recognized that even though the law is local, no significant differences exist, which allow these stakeholders to operate on the basis of these assumptions. “Because the law is different in each country and we need to build the product infrastructure at scale, we look for elements in the laws that are overlapping.” [Interviewee M14]. “I think we operate on the assumption that most Latin American countries are going to be more or less the same terms that they're going to require.” [Interviewee M19] Using the assumption that the law works in a certain way across different jurisdiction has been normally safe for licensees that conduct businesses relying on such notion. These services justify this assumption in the fact that most countries have a similar copyright system.394 Thus, the relevance of local law might be grounded in the similarities and principles of copyright law. Nevertheless, this assumption might not hold in some cases. Of course, this assumption resolves some problems that face these services that are international in nature and have a clear need to grow its service across jurisdictions.

There aren't too many marginal copyright law basic issues that are at play here. The laws are fairly straightforward. Licenses are required, so not too much I would say, except in Brazil. The only other factor that you have to know or another legal aspect of it that is relevant is where societies do have a mandate, a legally established mandate, and what does the government mandate say they can need to license. [Interviewee M20]

In this sense, another issue raised by some licensees was that Mexican law does not contain any specific provisions for music licensing in the digital era.395 According to this account, which is consistent with many others, licensing is executed through contracts and parties continue to enhance some covenants to address technological change and digital use overtime. Thus, in this view, adaptation takes place not through statutory law

393 I borrowed this expression from Interviewee M14. Several other interviewees described this same issue without using those words. 394 Nearly half of the licensees recognized that even though the law is local, no significant differences exist, which allow them to operate on these assumptions. 395Interviewee M12

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but practice. Contract law, international private law, and, in particular, business needs govern the dynamics of licensing. In contrast, the group that asserted that Mexican Law is significant for licensing music is mainly comprised of local licensors. According to one interviewee, when discussing digital music with licensees or in policy debates, there is a tendency to talk in terms of regional or global arrangements, which in his opinion can be misleading because local law cannot be overlooked.

The industry has to fulfill specific legal rules in each country, and often, the industry is using regional agreements these days, like in Europe. People in the industry say, ‘You know, we are going to sign on a global level, so we have stricter control, and we can achieve more.’ Often, this a double edge sword because the local legislation, incredibly, is not considered. Moreover, there are cases in which barriers exist, and they have to make deals on a local level. Thus, yes, there is a lack of knowledge in this part, and there isn’t a consideration of the local operations, and then, problems arise. We have face problems on occasions when they[licensees] want to include us in global deals. For users, it is even easier to sign a contract for a whole region or the whole work. However, here in Mexico, specifically, we have to respect, and we have to do it under our legislation. And we have to make new contracts, signing contracts locally because that is how the law establishes it. [Interviewee M3]

This view is consistent with the principle of territoriality and the willingness of local players to defend their turf in a global marketplace that threatens to displace local players that may become irrelevant. Finally, I was able to observe that many of interviewees were not able to offer much insight about Mexican law or the specifics of the arrangements particular to the Mexican market, even though they are responsible for conducting operations in Mexico. I extrapolated from these accounts that the lack of familiarity with the local Mexican environment does not mean that the Mexican system is flawed, but that these services use the minimum common denominator approach. In fact, many of them reported that their operations run smoothly, which in turn means that the system works well for them. This is notably true when licensees asserted that they face problems not in Mexico but in countries such as Brazil, where they use more resources to lobby and intervene in public policy outcomes related to music licensing and copyright law interpretation.

It [the relevant local law] is not really relevant. To be honest. I don't know very much about it, with one exception of the Brazilian case. I don't know very much about local

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law in Latin America because I don't need to. We just go to this people we ask them and we say what we need. With the record labels, you know like I said, they've got a LATAM division that they do a territory specific but it doesn't matter what Colombian Law says, differently than Mexican Law because they're giving it to us. [Interviewee M19]

In sum, there seems to be a trend of using international business practices for licensing that may not always be consistent with local law. International operators seem to rely on the assumption that a minimum common denominator copyright system exists. The use of this approach causes that, in some occasions, these operators may overlook the particularities of local law and, instead, use international licensing practices to guide their way of doing business. As a result, peculiarities that the Mexican Law may contain have not impacted international practice. This “irrelevance of local law” in licensing practices can be considered an instance of the law in action, as international practices tend to dominate how business are developed rather than the applicable law.

7. Conclusion This study confirmed that Mexican Copyright Law encompasses exclusive economic rights that apply to download and streaming activities. The reproduction and the making available rights are involved in both downloads and streaming activities. The statutory language, the available jurisprudence on the topic, and how operators apply the law in practice support this interpretation. However, it is somewhat uncertain what rights directly apply to the making available right under Mexican law, and how this right is implemented for both musical works and, in particular, for sound recordings. For authors and performers’ rights, the MCL creates such protection through two rights: an exclusive right and a remuneration right for public communication. The dual grant of rights to protect interactive communications is unconventional, yet compliant with the country’s international obligations. In principle, the legislator sought to protect creators (authors and performers) through the establishment of a non-renounceable remuneration right. However, the Supreme Court jurisprudence determined that such remuneration right for authors can be transferable, debilitating the legislative intent and the bargaining power of creators when negotiating contracts.

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It is unclear if the Supreme Court decision applies to the remuneration right awarded to performers in Article 117 bis. Nonetheless, the existence of remuneration right for performers is today a desirable outcome for international performers organizations, which perceive this type of rights as an alternative to enhance performers compensation in the digital era. On the flip side, this scheme may also increase fragmentation, as clearing rights with local artists’ CMOs would be a required additional step. In the case of producers’ rights, the law does not seem to award an equivalent exclusive right for interactive streaming, but Article 133 bis grants to producers a similar remuneration right. The implementation of this right through a remuneration right runs contrary to the intentions expressed in the WPPT Agreement, which grants an exclusive right. However, this legal distinction may have little real-world significance because in practice stakeholders still treat the making available right as an exclusive right that is directly negotiated through the record label. This study also found that licensing practices in Mexico do not significantly depart from international practices. The general practice consists of clearing sound recording rights with major record labels, aggregators, and independent labels, and then clear musical rights on a domestic basis. In general terms, music providers seeking to operate in Mexico need to get clearance from EMMACSACM for musical works and obtain a direct license with record labels and aggregators for their catalogs. A fairly fragmented environment existed in Mexico before the establishment of EMMACSACM, posing challenges that restrained the development of the market. Because every digital use includes mechanical and performance rights, collaboration is desirable between the stakeholders that manage such rights. Many organizations were stepping over the territory of other stakeholders, which created chaos and confusion. In addition, identifying the musical works was difficult and posed high transactions costs and uncertainty due to their incorporeal nature and the fact that musical works are not delivered as assets. In this context, the creation of EMMACSACM is a success story and has several benefits such as increasing the bargaining power of its stakeholders, coordination, transparency, traceability, and efficiency of the transactions. Importantly, this one-stop- shop has served as a solution to fragmentation. These changes allow local actors to

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engage with international companies and gain exposure to the global market. The structure and mandate awarded to EMMACSACM is a crucial element to its success, as it balances the competing interests of its dissimilar founding stakeholders. This single window solution on the musical works side is a stakeholder-driven solution and not a public policy promoted by the state, which signals the resilience of stakeholders, and its capacity to adapt to new scenarios. EMMACSACM as a case study demonstrates that stakeholders are motivated to create solutions to overcome complex property regimes, as proposed by Merges. Thus, state intervention is not required. As a result, local CMOs operating in Mexico have adapted to the demands of the digital environment by establishing an institution that streamlines transactions in this area. Adaptation by intermediaries of musical works (CMOs) has been motivated by technological change and the need for efficiency and accuracy. The single-window strategy allows for more precise reporting and has developed tools to track assets. Record labels have adapted their structures as well, and they are now in charge of negotiating direct licenses around the globe. On the sound recording side, ambiguity regarding the existence of a remuneration right of communication to the public for artists and producers has created confusion for some artists’ licensors about their role in licensing interactive streaming. The existing confusion has yet not impacted the standard practice, which today is consistent with international practices. A gap may exist between what the law dictates in Mexico and the licensing practices used by stakeholders in the country. For instance, Mexican law provides a remuneration right in Article 117 bis that is not considered by most licensees when doing business in Mexico. The scope of the right and whether it is transferable is not clear. However, this oversight can be explained as many stakeholders tend to overlook local law and operate on assumptions based on the general international practice that allow them to scale their business. The central assumption is based on the idea that all countries share a minimum common denominator of basic copyright law provisions. Mexico, thus far, has not been a country where music providers encounter public policies that impact their operations, despite that there are traits in the Mexican law that may alter these high-level practices.

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In this sense, this study demonstrates that the licensing practices employed in Mexico adhere closer to international practices rather than to local law—an instance of the law in action and the forces of a global market. As a result, the impact of local law is quite limited for international players, whereas for local players, unsurprisingly, the local law is fundamental. In addition, international players commonly bypass any friction with local law by employing choice of law and jurisdiction covenants in the contracts. In regard to musical works, local law has a more relevant role. This case study offers some examples of practices aimed at reducing fragmentation and transaction costs. These practices, technological tools, and new institutions allow the players to overcome many of the problems they face. Technology indeed has had an important role in fixing many of the data problems. These adaptations have been possible due to the flexibility of the regulatory framework of licensing in Mexico, where private actors enjoy the freedom to organize themselves and exercise their rights through different means. Another aspect found in Mexico is the increasing concentration of the market in fewer actors. The prospect of having a more concentrated market paired with the push for more global or regional agreements have the potential to create additional problems that may not be as easy to tackle due to the global nature of the market. Further research in competition law would shed light in these questions and would be useful for policy makers as this global market keeps unraveling.

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Chapter V. The Changing Landscape of Licensing Digital Music in Brazil

Overview This chapter explores the transformation of the music market in Brazil, revealing how both stakeholders and copyright law have adapted to conduct music licensing processes for downloading and interactive streaming business models. The study (1) explains what rights are implicated in these digital activities under Brazilian copyright law; (2) describes the evolution and current status of licensing practices for such uses in Brazil; and (3) analyzes the role of domestic law and the government in shaping licensing practices for digital music. This study finds that the stakeholders in Brazil understand that both the reproduction and the making available rights—as defined in international copyright law—are involved in downloading and interactive streaming licenses. However, the lack of clarity of the Brazilian Copyright Law has prompted disagreement among stakeholders on how the law materializes the making available right for interactive streaming, whether through the distribution or the public execution right. The distribution approach allows licensees to obtain a license directly from the right holders, whereas the public execution approach awards ECAD—a private entity with the legal monopoly to collect public execution royalties—a central role in licensing in interactive streaming. A recent ruling by the Supreme Tribunal of Justice, as well as rules released by the Ministry of Culture, have tilted the balance in favor of the latter approach. Currently, record labels and aggregators license directly sound recordings, while a host of intermediaries such as ECAD, UBEM and other entities manage musical works, offering a more challenging scene to clear rights. The evolution of these practices demonstrates that right holders have tried to adapt to the new digital paradigm, trying to simplify licensing and reduce fragmentation, while also preserving their status in the market. The central government has halted some of these changes, and prompted others, adopting a proactive role to protect the local industry through regulations. Surprisingly, the purpose of this policy decision is to attempt to confine royalty collection and distribution in Brazil in order to protect local artists from an ever-increasing globalized industry controlled by a few international actors. However, the model adopted by the government fails to address many concerns of various stakeholders.

1. Introduction This chapter studies the licensing practices used to license music for downloading and interactive streaming services in Brazil—the most important music market in Latin America. The research also studies how digital copyrights operate according to local legislation, as those rights define what players intervene in licensing. This study aims at answering the following questions:

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i) What economic rights are implicated in the use of digital uses of music under Brazilian Copyright Law? ii) What are the licensing practices for digital music? iii) What role do Brazilian Copyright Law and the Brazilian state play in shaping these practices?

This research adopts a case study approach and uses qualitative data from publicly available information and interviews with relevant stakeholders to portray a rich picture of the changes in licensing practices in Brazil. By examining licensing practices for digital music and how copyright has evolved to operate in these transactions, this chapter attempts to clarify how actors have adapted to this new context, and how the system works in Brazil. This portion of the study contributes to the literature of copyright management in the digital space and how new practices can support a balanced copyright system. The study finds that the reproduction and the making available rights are implicated in digital uses in Brazil. In the case of the reproduction right, interviewees commonly reported that this right is involved in downloads and interactive streams. However, confusion exists on how the making available right should be understood for interactive streaming under Brazilian law, causing diverging interpretations and unleashing a national debate that affects licensing operations in the country. The question is whether the making available right in on-demand streaming should be understood under the distribution or the public execution right. This discussion is not merely theoretical, as the interpretation has practical consequences in licensing: the public execution approach awards Escritório Central de Arrecadação e Distribuição396 [ECAD] a central role in collecting royalties, whereas the distribution approach circumvents ECAD. The difference over who manages the right has implications for several relationships in the industry, as well as for which tools, such as collective management institutions, the state can use to correct market failures. The chapter also shows the evolution of the licensing practices in this market, where stakeholders have faced uncertainty with the changing landscape of the practices. While the interpretation of the making available right is not fully settled, stakeholders have

396 ECAD can be translated as the Central Office for Collection and Distribution.

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started to accept the public execution approach, shifting licensing practices and roles in the market once again. The current licensing practices, thus, consist of direct and individual licensing of sound recordings by labels and aggregators. On the other hand, musical works licenses must be obtained through different entities that manage two types of rights: the União Brasileira de Editores de Música [UBEM], which manages mechanical rights for 60% of the catalog in the market, and other entities that control the remaining shares; and ECAD, which manages 100% percent of the public execution rights of musical works for interactive streaming. The “Diretoria de Direitos Intelectuais” [DDI] of the Ministry of Culture [MinC]— the public office in charge of copyright policy— has a determinant role in consolidating the public execution right approach through the “Instrução Normativa 2” [IN2],397 which interprets streaming as an activity that falls within the scope of the public execution right.398 With this act, the MinC took a high-level (and controversial) public policy decision that played a role in altering licensing practices in Brazil. Thus, this is a story of a major debate among different stakeholders in which the central government decided to proactively take a role in clarifying the law to achieve important public policy goals. This particular study concludes that the stakeholders in Brazil have tried to adapt to the changes and challenges of the digital environment (for example, establishing institutions that attempt to simplify licensing for musical works). However, due to the lack of clarity in the law—and more specifically, the lack of a clear delineation of particular economic rights—the government intervened to extend an alternative already present in the law, namely ECAD. This system, though not strictly mandatory, re-routes the collection and distribution of royalties and allows the central government to exercise certain controls. Despite these changes, uncertainty still exists. The ambiguity can be overcome by clarifying the scope of economic rights through legal reforms that should balance the needs of the creators, the market, and the consumers.

397 “Instrução Normativa” or a normative instruction consists of an administrative act expressed by a written order issued, in this case, by the Minister of Culture with the objective of regulating a law. See ACQUAVIVA, ACADEMIC DICTIONARY OF LAW (Editora Brasileira, 1999). 398 Instrução normativa No. 2, de 4 de Maio de 2016 [IN2], Estabelece procedimentos complementares para a habilitação para a atividade de cobrança, por associações de gestão coletiva de direitos de autor e direitos conexos na internet, conforme definida no inciso I do caput do art. 5° Lei n° 12.965, de 23 de abril 2014, DIARIO OFICIAL DA UNIÃO No. 85 de 04.05.2016 (Braz.).

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The structure of the chapter is as follows. Section two presents the theory behind the problem of fragmentation of copyright and the different licensing solutions to solve the problem. Section three explains the methods used in this study—a case study of the music industry in Brazil explored through interviews and other qualitative data—while section four describes particular features of the Brazilian context. Section five establishes the economic rights affected by digital uses and presents the unsettled debate on the rights implicated in interactive streaming. Section six shows the evolution of licensing practices in Brazil, fluctuating from practices that embody the distribution approach to those that reflect the public execution right approach. Section seven discusses the role of MinC in this context, while Section eight offers conclusions and proposes further work. This chapter presents the second case study that attempts to fill a gap in comparative copyright literature by examining current licensing practices in Brazil, analyzing how its music industry has adapted to digital uses, and assessing how copyright law operates in the current environment. This case study sheds light on how licensing practices in the digital era deal with the challenges that copyright management typically present, mainly fragmentation, transaction costs, and other inefficiencies. These observations are valuable in providing guidance on how the existing systems can improve based on the goal of attaining a well-balanced marketplace for content that takes into account consumers’ welfare.

2. Methodology This research employs a case study approach to understand the Brazilian music marketplace, the licensing practices conducted in the country, the role of the applicable local law, and how decision makers have shaped the sui generis legal framework for these practices. Three types of data serve as primary sources: (1) interview data; (2) a database built from opinions submitted by relevant actors in the course of MinC’s public consultation on digital music conducted between February and March of 2016; and (3) data from publicly available sources such as government documents, court opinions and

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filings, contracts, and the board minutes of ECAD from 2004 to February 2017.399 Secondary sources include market data, legislative history, and domestic law.

Interviews The study first analyzes data obtained from twenty-six in-depth, semi-structured, personal interviews conducted with a wide array of stakeholders involved in licensing practices in Brazil. The stakeholders were drawn from six different categories: right holders, DMPs, collecting societies, government, industry associations, and experts. The interviewees for this study can be considered informants as they possess special expertise and insider knowledge of the music industry and licensing practices, particularly processes involved in licensing for online use.400 The questionnaire I used and designed contained questions regarding each participant’s licensing practices, challenges, and his or her understanding and use of Brazilian law.401 Most of these interviews were conducted via Skype over the period of a year between June 2016 and November 2017, except for two that were done in person earlier as part of a pilot study in 2015. Most inquiries lasted for about an hour and four informants were interviewed on two different occasions. An informant’s role in licensing agreements is essential for understanding his or her perspective on copyright and music licensing practices for online use in Brazil. Depending on their role in these deals, stakeholders are categorized either as licensor; licensee or user; other; or non-party. Three informants matched in more than one category (e.g., a person from a record label that also works on an industry association group); these individuals were placed in the category that belongs to their predominant activity. The licensee and the licensor are the two parties to any license, but other actors such as lawyers and technical support companies are indirectly part of the process; these actors are designated “other.” Non-parties to the contract, such as government, civil

399 The research phase of this work concluded in February 2017, with the decision rendered in the case ECAD vs. Oi. It was important to include this decision in this study, as it had major impact on licensing practices. 400 Martin N. Marshall, supra note 298, at 523. (“Qualitative researchers recognize that some informants are 'richer' than others and that these people are more likely to provide insight and understanding for the researcher.”) Martin Marshall, supra note 297, at 93. 401 See Appendix II for a sample of questions I asked.

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society, and industry association actors also play relevant roles in the development of music licensing practices and copyright law in Brazil. The end users—individuals who consume music from a DMP—are excluded from this study, since the unit of analysis is the set of licensing practices used to negotiate digital music licenses between right holders and DMPs.

Table 4: Summary of interviewees

Contract Stakeholder Core Business Size Use of Music 1 Non-party Government Government NA NA 2 Non-party Government Government NA NA 3 Licensor Collecting society ECAD member Medium Download/Streaming 4 Licensor Collecting society ECAD member Large Download/Streaming 5 Non-party Industry association Association indie NA Download/Streaming 6 Licensee DMP Media Large Download/Streaming 7 Licensor Right holder Publisher Small Download/Streaming 8 Licensor Right holder Major record label Very large Download/Streaming 9 Licensor Right holder Major record label Very large Download/Streaming 10 Licensee DMP Media Small Streaming 11 Licensee DMP Internet company Very large Download/Streaming 12 Licensee DMP Telecommunications Very large Download/Streaming 13 Non-party Industry Association Advocacy right holder NA Download/Streaming 14 Licensor Right holder Indie label Small Download/Streaming 15 Non-party Civil society Digital rights Small NA 16 Non-party Civil society Research institution NA NA 17 Other Expert Technical support Medium Download/Streaming 18 Licensee DMP Internet Company Very large Download/Streaming 19 Licensee DMP Music provider Large Download/Streaming 20 Licensor Artist Publisher Large Download/Streaming 21 Other Expert Lawyer platforms NA Download/Streaming 22 Non-party Industry association Internet Services NA Streaming 23 Licensee DMP Music Large Download/Streaming 24 Licensee DMP Music Medium Download/Streaming 25 Licensor Collecting society ECAD member Small Download/Streaming 26 Non-party Civil society Digital rights NA NA

As detailed in Table 4, I interviewed eight representatives of DMPs from the licensee side—people involved in obtaining licenses to provide online music services to end users.

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These DMPs predominantly offer services across multiple countries and vary in size and market share. The core business of these DMPs ranges from telecommunication companies to internet, digital media, and solely music providers. Most of these actors are international companies, although there are a handful of local providers in this space. I interviewed eight representatives of licensors, including three collecting societies, two publishers, two major and one independent record label. All of the collecting society interviewees are members of ECAD—the only music licensing organization authorized by law to collect performance rights royalties in Brazil.402 In contrast with the practice in other countries, each of these collecting societies manages both musical works and sound recordings right holders within the same organization; the CMO also acts as an intermediary between licensees and right holders. These societies vary in size depending on their membership, but all three are experienced players that have represented the rights of composers, artists, and producers. Like the collecting societies, publishers and record labels also represent the views of the right holders—the licensors. Supplementary actors involved in licensing through the provision of services, to either the licensor or the licensee, play an important role in the digital music licensing ecosystem. The views and expertise of these additional groups are represented in two additional interviews: one with a legal expert in the music industry and the other with a technical support firm. Finally, I interviewed eight “non-party” actors. This group includes representatives of three civil society groups, two government offices, and three industry association groups. All eight have been actively involved in public policy discussions regarding digital licensing and rights related to music. The sampling strategy used in this study evolved from a quota sample to a snowball sampling method. Initially, I built a database of all relevant actors that totaled thirty-five players, including companies that owned music services, collecting societies, record labels, and government institutions. The database included twenty-two different firms that owned fifty-four different music services, which were in business in Brazil between

402 Despite numerous attempts, ECAD did not respond to requests to participate in this study; yet, the collecting societies that participated in this study represent half of ECAD’s membership. I obtained information from ECAD through its board minutes and through the public comments submitted to MinC’s public consultation.

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2010 and 2016.403 To compile this list, I used yearly reports from the record industry that identify such music services by country.404 Importantly, during this period more than two-thirds of such services were discontinued or no longer operated in Brazil; by 2016, only fifteen services belonging to eleven different companies served in the country. These changes in the Brazilian marketplace posed significant challenges for data collection. In addition, for some of the existing firms, my interview requests were refused, or I was unable to contact a respondent despite several attempts. Due to these difficulties in accessing the research population, the sampling strategy finally employed to select the interviewees evolved to a snowball technique to obtain referrals to the relevant players.405 I was able to interview seventeen of the stakeholders identified in my initial database of thirty-five, while nine interviewees were new referrals not contemplated originally. This data was coded and analyzed through Dedoose.406

Public Consultation Database The second source of data consists of a database built from comments submitted by different stakeholders in response to the Ministry of Culture’s call for public comments on proposed regulations for collective collection of copyright royalties in the digital environment. This public consultation procedure took place for a space of forty-five days ending on March 30, 2016. The Ministry of Culture conducted the consultation through an open online platform that allowed participants to comment on each paragraph of the consulted text, or to submit correspondence to be uploaded to the system. Over 262 citizens and entities engaged in the process, with nineteen entities submitting letters outside of the system, and 242 commenting directly in the platform. Importantly, in order to comment in the platform, commentators were required to agree to the terms of services

403 E.g., Microsoft owns Xbox Music, MSN, Groove Music, etc. Google owns YouTube and Google Play. 404 Every year IFPI publishes its Digital Music Report that contains a list of licensees of sound recordings from major record labels. I supplemented this list with the list of licensees that ECAD and UBEM provide on their websites. 405 The participants or informants with whom contact has been established use their connections to refer the researcher to other people who participate in the study. 406 Dedoose Version 7.0.23, web application for managing, analyzing, and presenting qualitative and mixed method research data (2016). SocioCultural Research Consultants, LLC www.dedoose.com.

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of the consultation, and provide a national identification number.407 The Intellectual Property Rights Board of the Ministry of Culture reviewed the comments and reportedly incorporated some of them to the final regulations draft published in May 2016. These comments evidence the attitudes and opinions of different stakeholders (e.g., artists, civil society, DMPs, industry groups) regarding the role of collective societies in the process of collecting royalties, and, by extension, the process of licensing digital content through streaming activities. I coded the data and evaluated it using content analysis.

Limitations Besides all the limitations that a case study methodology presents by design, such as its external validity, reliability, and generalizability, I encountered a secretive industry in which many stakeholders (including both licensees and licensors) were skeptical of participating in the study or were reluctant to provide more information than what might be found in generic public relations talking points.408 Nevertheless, I was able to obtain valuable insights and perspectives from the interviews and other data, which allows me to provide in this study a clear picture of the evolution of music licensing in Brazil and how these practices operate in conjunction with the relevant local law.

3. Brazil in Context 3.1 Brazil’s Economy and Infrastructure Brazil is a particularly interesting case study for research on developments in copyright law and music licensing practices in the digital age. This country comprises the largest economy and the largest population (207.8 million in 2015) in Latin America.409 It contains a full third of the population of the region (633 million in 2015). All of these measures make Brazil a very attractive market for the music industry.

407 Among the terms of use, the platform establishes “it is imperative that users when signing up, correctly identify themselves with his name and other data requested,” http://bit.ly/2Boadli 408 Large amounts of information in the music industry are confidential, including contracts with music providers, artists or composers. Because of the secretive nature of the industry, I conducted anonymized and confidential interviews, which allowed me to have more candid conversations. 409 World Bank Data. World Bank Data per country, http://bit.ly/2zBX4Ew (last visited Apr. 18, 2017).

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Between 2003 and 2014, Brazil experienced remarkable economic and social progress—growth which has been slowed but not undone by the recent economic recession there.410 This success translated into the rapid expansion of the middle class, adding about forty million new consumers since 2003. This economic growth, paired with the country’s regional influence and size, render Brazil as one of the leading emergent economies in the world.411 By 2014, Brazil was the world’s seventh-largest economy, though it ranked 95th for GDP per capita.412 Experts project that Brazil will become the fifth-largest economy in the world by 2050.413 In 2015, Brazil’s internet users, an important indicator of the digital music market, reached 58.3% of the population, according to the International Telecommunication Union (ITU). This figure has nearly doubled since 2007. While these numbers show the rapid increase of internet penetration, approximately 125 million Brazilians remain offline, suggesting great potential for further growth in the next few years. Another opportunity to connect more Brazilians to the internet can be observed by looking at mobile penetration figures. In 2015, there were 126 cell phone subscriptions for every 100 people in the country.414 However, only 38.85%, of these users had internet access on their cell phones, which means that there is great potential to add internet users.415 This shows that Brazil is a key online market with considerable growth potential.

3.2 Brazil’s Music Market Beyond of the economic and infrastructure factors that make Brazil an attractive marketplace for digital services, Brazil has a thriving and diverse cultural market. In 2015, the creative industries sector generated 2.64% of the country’s GDP.416 In addition,

410 In that period, the country lifted 29 million people out of poverty and decreased inequality. See http://bit.ly/2A5BK9J 411 Brazil is part of the BRICS countries, an acronym that encompasses the association of five major emerging national economies: Brazil, Russia, India, China, and South Africa. 412 Heinz-Peter Elstrodt et al., Connecting Brazil to the world: A path to inclusive growth, McKinsey Global Institute 3 (May 7, 2014), http://bit.ly/2Ari1lr 413 PWC, The World in 2050, (Feb. 2015), https://pwc.to/2fuA1CH (last visited Mar. 5, 2017). 414 ITU statistics, http://bit.ly/1FDwW9w (last visited Mar. 5, 2017). 415 See Statista. Number of mobile phone internet users in Brazil from 2015 to 2022, http://bit.ly/2ktCRXE For recommendations to tackle internet adoption problems see Michael Kende, Explaining the digital divide in Brazil, ISOC blog (Sep. 6, 2015), http://bit.ly/2jmPanl 416 SISTEMA FIRJAN, Mapeamento da Indústria Criativa no Brasil, (Dec. 2016), http://bit.ly/2i8Euq4.

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Brazil’s cultural richness manifests in the broad artistic offerings in the country.417 In particular, music plays a fundamental role in Brazilian culture. For instance, samba is a central piece of “Carnaval,” a true expression of Brazilian culture and identity. Even though Brazil is part of Latin America and shares many cultural traits with neighboring countries, language acts as a barrier for consumption of cultural products such as music and television. As a result, while the exchange of cultural products occurs naturally across other Latin American countries, many Brazilian cultural products are both created and consumed locally. The self-contained nature of the Brazilian market is illustrated in the figures for music consumption: the local repertoire represents 70% of music sales.418 As a result, the Brazilian music market exhibits the highest consumption of locally produced music in the region. Not surprisingly, the Brazilian repertoire is large and diverse, including more traditional genera such as rock, pop, and rap, as well as uniquely Brazilian sounds such as samba, bossa nova, capoeira music, and forró. As one interviewee pointed out, “Brazilians really listen to a lot of Brazilian music, and that's something that has great relevance.” Nonetheless, foreign music also has its place in the Brazilian market and has expanded its share over time. Brazil represents the tenth biggest music market in the world. Ahead of both Argentina and Mexico, it is the most important music market in Latin America with the highest digital revenue. In 2015, the record industry reported income of US$247 million, which represents US$1.2 per capita.419 Even though revenue decreased by 1.8% from 2014, due to the economic crisis and the fluctuation of the real, Brazil still offers potential for growth in the digital music industry. In fact, 2017 revenue projections for the digital music segment alone amount to US$141 million.420 The Brazilian music market behaves consistently with the music industry’s chief global tendencies: the substitution of digital music products in place of physical products like CDs, and a gradual move from downloads to streaming. As shown in Table 2,421

417 Id. at 23. 418 Brasil Music Exchange project, http://bit.ly/2kPJHX9 (last visited May 5, 2017). 419 IFPI, supra note 311, at 110. 420 Statista Digital Music Outlook March 2017. 421 IFPI defines the terms in Table 5 as follows. Mobile personalization revenues include master ringtones, ringback tones, dedications, voice tones, etc. Ad-supported streams include income from audio/video streams, tethered/temporary downloads monetized via-ad supported models; video-on- demand (e.g., Vevo). Paid subscriptions and freemium streams include digital content delivered

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industry data indicates that downloads have been gradually decreasing, from a high of US$18.52 million in 2014 down to US$17.52 million in 2015. In contrast, streaming revenues have increased swiftly since 2011. Within streaming revenue, the paid subscriptions and freemium streams segment tripled from US$11.5 in 2014 to US$33.71 in 2015, while ad-supported streams increased from US$21.85 to US$28.57 million in the same period.

Table 5: Digital Music Revenues by Format (US$ millions, trade value)

Downloads Streams Single Full Other Mobile Paid Ad-supported Other track album personal- subscriptions zation and Freemium 2015 6.784 9.628 1.238 12.86 33.71 28.57 2.064 2014 7.629 8.398 2.489 12.27 11.50 21.85 1.162 2013 8.722 7.209 0.642 0.642 9.415 12.30 0.806 2012 5.489 3.801 0.382 0.382 10.49 10.96 0.419 2011 2.624 0.109 0.392 0.392 12.96 3.060 0.226 Source: IFPI, Global Music Report 2016

In terms of user penetration of digital music services, Brazil will reach 35.4% in 2017. In fact, IFPI found that 66% of internet users in Brazil engaged with licensed music in 2017, and 86% of them used smartphones to consume music.422 This growth trend will continue in the future. Projections indicate that the Brazilian digital music segment will reach 39.9% of users and account for US$188 million in sales by 2021. Like other dynamic digital musical markets around the world, Brazil has attracted and fostered several different platforms that provide digital music services. According to IFPI’s Digital Music Report, fifteen licensed music services existed in Brazil in 2016, whereas twenty and twenty-three existed in 2015 and 2014, correspondingly.423 This downward trend is consistent with market behavior in other jurisdictions. Many of the platforms that existed in 2010 have either disappeared from the music market altogether or have chosen to not operate within a specific country. The high mortality rate of these services reveals a highly competitive market, where many services do not reach enough

online or via mobile network; free and premium subscription services; and bundled subscriptions. IFPI, supra note 39, at 120. 422 IFPI, Music Consumer Insight Report 2017, 7,13 (Sep. 2017), http://bit.ly/2hcq6lM 423 IFPI Music Reports 2010-2016.

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users and fail, or are bought up by other larger services. Table 3 shows the changes in available music services over time in the three leading countries in Latin America, including Brazil.

Table 6: Number of licensed digital music services in selected countries

Country 2016 2015 2014 2013 2012 2011 2010 Argentina 18 16 17 12 7 5 6 Brazil 15 20 23 19 19 24 27 Mexico 22 22 24 25 20 16 16 Source: IFPI, Digital Music reports (2010-2016)

The following chart reveals the market share of each of the platforms available in Brazil for 2016 according to user preferences. As shown, Google Play Music leads the market, followed by Spotify and iTunes. Some of the services displayed below, such as Rdio and Rara, are reportedly no longer available in Brazil. As discussed previously, this data suggests that DMPs face substantial difficulties in attracting and retaining users in this very intense marketplace. Figure 5: Platforms Used in Brazil

Platforms Used to Listen to Digital Music by Internet Users in Brazil, March 2016 (% of respondents)

Don't listen to digital music 24% Other 21% Rara 1% Grooveshark 2% Sonora 4% Xbox Music 7% Rdio 9% Deezer 11% iTunes 15% Spotify 19% Google Play Music 32% 0% 5% 10% 15% 20% 25% 30% 35%

Source: Conecta, "Conectaí Express" as cited in press release, April 13, 2016424

424 Conecta, "Conectaí Express" (April 2016). 2,000 internet users ages 16+ in Brazil were surveyed online in March 2016.

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In a snapshot, Brazil represents the most relevant market in Latin America due to its size, while distinctive characteristics, such as the high rate of consumption of local music, also set the Brazilian market apart from others. Accordingly, Brazil is a critical case to analyze in depth.

3.3 The Brazilian Copyright Framework and the WIPO Internet Treaties Like other Latin American countries, Brazil possesses a legal system based in civil law. In the realm of copyright law, Brazil’s system is based on an author’s and related rights approach. This system is governed by the Brazilian Copyright Law [BCL], which was enacted in 1998 and reformed in 2013.425 Brazil is also a member to several relevant international copyright treaties, including the Berne and the Rome Conventions, which support many of the policy choices of the BCL; but remarkably Brazil is not a party to the Internet Treaties.426 Brazil chose not to become a member to these Treaties because of disagreements on how to protect computer programs. In this respect, Brazil is a clear outlier in the region and internationally: nearly all Latin American countries have ratified both Internet Treaties, as have 95 countries around the world. Although Brazil has made no formal commitment to observe the WIPO Internet Copyright Treaties, data shows that the legislature attempted to incorporate the treaties’ main elements in the BCL. For instance, MinC maintains that the BCL includes all the substantive provisions of the Internet Treaties, making the BCL “in complete harmony with international copyright standards accepted on the internet.”427 The legislative history of the BCL supports this interpretation, and the international discourse leading up to the adoption of the Internet Treaties permeated the internal discussion of the BCL in Brazil. The legislative record of the BCL shows that members of Congress often referred to the Internet Treaties and clearly tried to include the same language from the Internet Treaties

425 Lei No. 9.610,de Fevereiro 19 do 1998, Lei Federal do Direito Autoral [BCL], as amended Lei nº 12.853/13. 426See supra notes 14 and 15. 427 Ministerio Da Cultura [MinC], Secretaria Executiva, Diretoria de Direitos Intelectuais, Nota Tecnica DDI/SE/MinC (June 7, 2016) at 5. Importantly the MinC also mentions that the BCL reflects the conceptual dispositions deriving from the international debates of the last twenty years. It also clarifies that the original text of the BCL was a variation of an earlier bill (PL no 5430/1990), which was also inspired in the Internet Treaties discussions. Id. at 2.

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within the text of the BCL. As a result, despite Brazil’s failure to sign onto the Internet Treaties, these instruments were intended to be core components for interpreting the Brazilian legal framework for the digital environment, and they continue to play a central role in debates on copyright law and policy in Brazil. The importance of the Internet Treaties for the digital environment, and for this discussion, is evident: the treaties modernize the framework of international copyright law and set minimum protection standards that member countries must observe. These agreements also harmonize copyright laws, including the economic rights that protect works, performances, and phonograms on the internet. For instance, the treaties amended the classic reproduction right with the explicit purpose of adapting it to the needs of a digital environment; and they included innovations such as the making available right for interactive streaming transmissions. But besides harmonizing laws and creating new rights tailored to digital needs, the treaties provide a framework and nomenclature to study the rights available in the different domestic laws, acting as a minimum common denominator. Using these treaties’ rights language, scholars and practitioners428 agree that the economic rights involved in downloading and streaming activities are the reproduction and the making available rights.429 The Internet Treaties, however, do not offer a straightforward prescription of how countries should implement some of these obligations, including the making available right. Instead of imposing a rigid one-size- fits-all solution, the agreements allow for flexibility to implement the rules nationally through an “umbrella solution.”430 This approach makes it possible for different jurisdictions to enact the making available right through diverse means: either through a broad distribution right, the right of communication of the work to the public, a

428 Interviewee referring to the rights implicated in general “Well you know it depends on which law you're looking at here. The distribution is so. I think in the U.K. we call that the making available right. So, it depends on which law. And which wording you're using. But generally, each law has something that goes along the lines of making available and then another right, which goes along the lines of making a copy.” (Licensee’s lawyer B10) 429 According to the Art 8 of the WCT and Articles 10 and 14 of the WPPT, this right consists of the act of “making available to the public of works in such a way that members of the public may access these works from a place and at a time individually chosen by them.” The substance of this right is essential for interactive streaming, where users have the discretion and control what they listen or consume. Because streaming has displaced other business models and acquired prevalence in revenue streams, typifying legally this activity became an essential debate in Brazil. 430 Goldstein, supra note 89, at 313. Congressional Research Service, supra note 53, at 15.

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combination of existing rights, or a stand-alone right.431 As a result, domestic laws around the world have been amended to implement these instruments in quite different ways, creating names and conceptual variations for the making available right.

3.4 Public Performance and Collective Management in Brazil CMOs traditionally play a significant role in licensing uses of music where transaction costs are high, such as performance rights, where it is impractical for the right holders and the users to directly negotiate a license.432 Thus, the nature of performance rights necessitates the use of collective licensing. 433 As intermediaries, CMOs are complex structures that are regulated to different degrees across jurisdictions. In Brazil, the CMO system holds distinctive features that shape the process of digital licensing. In particular, the law requires that the public performance right must be managed exclusively through ECAD. Since this right has acquired specific relevance in streaming, as explained below, it is critical to understand how the collective institutional landscape works in Brazil and how it adds to the complexity of the licensing process. In Brazil, several CMOs coexist on a non-exclusive basis and compete against each other in the same artistic domain. Currently, seven CMOs operate in the musical field, and each of them manages a defined catalog for the ownership interests of several types of right holders—composers, artists, and producers. The make-up of the Brazilian entities is peculiar; in other regions, it is more common to have CMOs that are specific to a single type of right holder—that is, a CMO may exist for composers, or performers, or

431SILKE VON LEWINSKI, INTERNATIONAL COPYRIGHT LAW AND POLICY 428–29 (Oxford University Press, 2008). MIHÁLY FICOSOR, supra note 29, at 204-54. For a detailed survey on how countries implemented these rights see U.S. Copyright Office, supra note 35, at Appendix. 432 Music licensing can be conducted individually or collectively, depending on the type of use to be granted. Individual licenses are awarded when the use in question is relatively simple to manage. In this case, the right holder directly negotiates and manages the license with the licensee. However, not all music uses are simple to manage, and collective licensing was developed as the solution for complex licensing situations and associated high transactions costs, such as performing rights. Collective licensing, hence, permits to award under a single blanket license the authorization to perform several songs, avoiding huge transactions costs that would entail for a user to license every single song in the world catalog. 433 Authorizing the public execution of music and collecting the associated royalties on an individual basis is not possible. The right holders cannot possibly know every single use of their work, and users could not regularly identify which right holders he needs to pay for each song. This is why intermediaries are necessary to manage performance rights.

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producers, but not all three. In the Brazilian system, however, each CMO serves several sets of stakeholders whose interests may be quite divergent. As shown by Valente, historically, internal conflicts between CMO members often resulted in the establishment of a new entity.434 In addition, before the BCL of 1973, the absolute lack of governmental controls and approvals over CMOs prompted authors to associate freely, multiplying the number of existing organizations further.435 This proliferation of CMOs served to increase fragmentation in the Brazilian licensing system, forcing users to obtain licenses from each individual entity. The lack of coordination and clarity of the rights that each organization managed caused confusion and even doubled charges for users. In short, the existence of several CMOs without regulation increased transaction costs and hindered the full enjoyment of the economic rights of right holders,436 obliterating the very advantages that collective management is supposed to provide. In response to the fragmentation of collective management, in 1973 the Brazilian legislature created ECAD, an entity designed to centralize the collection and distribution of royalties arising from public execution.437 ECAD enjoys an exclusive legal monopoly for public execution. The organization uses an intricate "two-layer" distribution model, where individual CMOs must become ECAD associates, and then ECAD collects and distributes royalties to these associates. Importantly, associate CMOs manage and control ECAD, set the rules and prices for public execution through ECAD’s governing mechanisms, and supply all the data related to their repertoires to ECAD’s database. Currently, there are seven CMOs associated to ECAD: Associação Brasileira de Música e Artes [ABRAMUS],438 Associação de Músicos, Arranjadores e Regentes [AMAR],439

434 PEDRO AUGUSTO P. FRANCISCO & MARIANA GIORETTI VALENTE, DA RADIO AO STREAMING, 30-95 (FGV Diretio, 2016). This work portrays the history of CMOs in Brazil and the prevalence of conflicts of interests that caused the multiplication of CMOs. Direct conflict and cooperation were common in the relationship between these entities, which would be the trend of relationships between new and old CMOs. Id. at 115. (“Still, it is interesting to note that in Brazil, the emergence of new collective management societies in the musical field was due to the occurrence of disagreements between the different types of copyright holders, as well as power/prestige disputes, remuneration and political- ideological.”) 435 DANIEL GERVAIS, supra note 71, at 91. 436 PEDRO AUGUSTO P. FRANCISCO & MARIANA GIORETTI VALENTE, supra note 433, at 122. 437 See Art. 99, BCL. 438 ABRAMUS was founded in 1982 and has more than 50,000 members among authors, performers, musicians, phonographic producers and editors. This organization is the association with the largest

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Associação de Intérpretes e Músicos [ASSIM],440 Sociedade Brasileira de Autores, Compositores e Escritores de Música [SBACEM]441, Sociedade Independente de Compositores e Autores Musicais [SICAM],442 Sociedade Brasileira de Administração e Proteção e Direitos Intelectuais [SOCINPRO],443 and União Brasileira de Compositores [UBC].444 ECAD, suitably, acts as a one-stop-shop for public execution rights, reuniting all the repertoires in one license. The centralized model arguably resolved the fragmentation problem for performance rights, but the institutional design of the entity led to other shortcomings, including anticompetitive practices, lack of transparency, cartel formation, and abuse in the collection of copyrights.445 To address these concerns, Congress adopted amendments in 2013 that gave the central government a mandate to authorize and supervise individual CMOs,446 which until that point had been largely unregulated. The 2013 reforms also allowed the central government to oversee ECAD, for which earlier regulation attempts had failed. According to its new mandate, MinC published several instruments to regulate the matter further, setting a new and much-needed regulatory model for collective management in Brazil.447

number of members of ECAD. ABRAMUS also manages other works such as dramatic and audiovisual works. Besides public execution rights, it also manages the mechanical rights of a few of its members (Article 2 c) of ABRAMUS Statute), http://bit.ly/2n30kTy (last visited Nov. 6, 2017). 439 Established in 1980, AMAR is the newest ECAD member. It associates creators, such as composers, authors, performers, conductors, performers, etc., and other legal entities such as music publishers, sub-publishers, and phonographic producers. http://bit.ly/2jn8C3E (last visited Nov. 6, 2017). 440 ASSIM was founded in 1978, http://bit.ly/2jkKEpu (last visited Nov. 6, 2017). 441 SBACEM has about 18,000 members, including authors, interpreters, musicians, publishers, and producers of music and was established in 1946, http://bit.ly/2A5wfYu (last visited Nov. 6, 2017). 442 SICAM was founded in 1960 and also has a diverse membership, http://bit.ly/2zll8r5 (last visited Nov. 6, 2017). 443 SOCINPRO was established in 1967 and associates 1,067 authors/composers, 56 publishers, 4,900 interpreters, 661 record producers, 527 musicians, and has 4,586 inactive members, http://bit.ly/2Bakqx9 (last visited Nov. 6, 2017). 444 UBC is one of the oldest CMOs and was established in 1942. Currently, it has 23 thousand members, among authors, performers, musicians, publishers and record companies, http://www.ubc.org.br/ubc/quem_somos (last visited Nov. 6, 2017). 445 Several scandals of corruption lack of transparency, and price-fixing served as grounds to the 2013 amendments. Seando Federal do Brasil, Comissão Parlamentar de Inquérito destinada a investigar supostas irregularidades praticadas pelo Escritório Central de Arrecadação e Distribuição - ECAD (Requerimento nº 547, de 2011 – SF) Reporte final, (abril, 2012), http://bit.ly/2BdAHSJ 446 Art. 98-A, BCL. 447 Decree no. 8.469 of 2015 and Normative Instructions Nos. 3, 4 and 53 of the Ministry of Culture

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Besides being involved in collective management for the public execution right, some entities have begun organizing collective licensing for mechanical rights. UBC and ABRAMUS—the two largest CMOs associated to ECAD—recently began licensing mechanical rights for a limited number of members.448 In addition, UBEM was established in 2010 with the idea of serving as a single window for 40 publishers, including the most important publishers in the country. While UBEM is not a CMO, it has been instrumental in licensing digital uses collectively, as will be detailed in section four.

4. Economic Rights Implicated in Digital Uses in Brazil Although answering the question “what economic rights are implicated in the use of digital music under Brazilian Law?” may seem a mere academic exercise, the answer to this question determines what actors (right holders or organizations) must be involved when licensing music for online uses. In addition, identifying the specific rights involved helps to gain understanding of who benefits economically from music—a discussion that has been making headlines around the globe. Economic rights impact how royalties flow and who benefits from such royalties, which is not necessarily the original creator. Internationally, music industry stakeholders and scholars alike concur that the reproduction and the making available rights are the two economic rights involved in downloading and interactive streaming.449 This is also the common understanding in Brazil, where most of the interviewees confirmed that these two rights are implicated in both activities. In the case of the reproduction right, interviewees did not express concerns regarding the contours of licensing for digital copies. Conversely, confusion exists on how the making available right for interactive transmissions should be understood under Brazilian law, unleashing a national debate that has disrupted licensing operations for interactive streaming in the country. One group supports the idea that the making available right materializes in the BCL through the distribution right, while

448 UBC started licensing mechanical rights in 2009, but these services are offered separately only in special cases. http://bit.ly/2jZtsK1 ABRAMUS, on its part, reportedly started handling mechanical rights recently http://bit.ly/2Bd94IG 449 See infra chapter two, section one.

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another advances the theory that the making available right is protected via the public execution right. This debate is starting to gradually settle as a result of extraordinary actions taken by the central government and the contribution of a recent judicial decision. However, some doubt remains on the precise limits of the law, and understanding the arguments of the debate is useful in considering what amendments the legislature might undertake to clarify the legal framework. The following section captures this contentious discussion. The most interesting part of this debate is not the legal doctrinal merits of either side—in fact, I found that both interpretations are plausible—but the underlying interests behind the arguments, and the respective policy implications of each proposition. The distribution right position implies that ECAD will be circumvented for licensing interactive streaming, while the public execution approach awards ECAD a role in this process.

4.1 The Indisputability of Clearing the Reproduction Right It was a common understanding among interviewees that the reproduction right, for both authors and related right holders, is triggered in downloading450 and streaming activities alike. In fact, during the course of my interviews, none of the informants raised doubt whether the reproduction right must be cleared, and pointed out several Articles in the BCL that award this exclusive right to authors, performers, and producers.451 The BCL is unambiguous about the reproduction right. Article 5 (VI) stresses that the act of reproduction includes not only tangible copies of literary, artistic, or scientific works, or phonograms, but also digital copies through any permanent or temporary storage by electronic means or any other means of fixation that may be devised in the future. Thereby the BCL comports with international copyright law, and in particular

450 Interviewees consistently pointed out that no doubt exists of the reproduction that occurs in a download. No debate in this sense exists since the download of music is, in essence, the act of reproduction of a digital file that contains protected a musical work and sound recording in the equipment of the consumer. The resulting copy in possession of the consumer constitutes the main characteristic of digital reproduction in the download business model. 451 Article 29 paragraph (I) awards authors with such right, while Article 90 paragraph (II) establishes the right in favor of performers. Surprisingly, for performers Article 90 encompasses both the reproduction right concurrently with the execution right. This legislative technique may contribute to confusion, as it will be discussed. Finally, Article 93 (I) contains such right for producers.

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with the concerted Agreement on Article 1(4) of the WCT, which requires that the reproduction right is fully applicable in the digital environment. In June 2016, MinC published a technical note explaining in detail how different activities in the digital environment fit within the provisions of the BCL. In the case of downloads, MinC clarifies that the BCL recognizes different uses that trigger the reproduction right:452 (1) where a temporary or permanent copy is conducted in the consumer’s equipment; (2) where the DMPs conducts the digital storage of the protected subject matter to make such file accessible to the public; (3) the distribution by which a permanent or temporary copy is offered to the final user.453 For interactive streaming, MinC explains that only the upload that the platforms perform in order to make the work available to the final user constitutes a reproduction in terms of the BCL. Incidental and transitory copies stored in the user’s device represent a reproduction that falls outside of the scope of the exclusive right of reproduction of the BCL. Notably, the Brazilian legislature decided that certain intermediate steps do not constitute reproduction, including incidental or transitory copies necessary to make streams available to the user.454 The question of whether transient copies should be classified as a reproduction is a matter for domestic legislation to determine, as no international obligations exist in this matter.455 As a result, the BCL contains a well- defined reproduction right that provides clarity for digital uses.

4.2 The Changing Interpretations of the Making Available Right A more remarkable and intricate story is about how the “making available right” is construed under Brazilian law, and how these interpretations alter licensing practices of

452 MinC, supra note 426, at 18. MinC relies on the following BCL Articles for each activity: (1) Articles 29.I for authors and 90.II and 93.I for related rights; (2) Articles 29 IX for authors rights and 93.II and 90 IV for related rights; (3) Articles 29 VII for authors and 90 IV and 93 II for related rights. 453 As explained, MinC claims that the distribution right is implicated in downloads, because the possibility to conduct a temporary or permanent copy is offered to the user. This interpretation is consistent with the practice of the music industry that traditionally recognized distribution in conjunction with the reproduction right, as the mechanical right, which is at the core of downloads. 454 Art. 30 §1, BCL (“The exclusive right of reproduction shall not be applicable where the reproduction is temporary and done for the sole purposes of making the work, phonogram or performance perceptible by means of an electronic medium, or where it is transitory or incidental, provided that it is done in the course of the use of the work that has been duly authorized.”) 455 For instance, the Directive 2001/29/CE of the European Union adopted a similar approach where transient copies are excluded from the sphere of protection of the exclusive right of reproduction.

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music in the country. Stakeholders argue that the BCL is unclear about what economic rights cover interactive transmissions, or the making available right. One group asserts that the making available right materializes in the BCL through the distribution right, whereas another group claims that the public execution right encompasses it. Several underlying interests exist to support each of the two interpretations, which in turn can reshape licensing practices to tilt the balance in favor of certain stakeholders.456 The distribution right approach consolidates a scheme where record companies directly and individually license their catalogs for digital uses, usually through global contracts, while musical works are licensed by publishers or entities that manage mechanical rights. In contrast, the public execution right approach alters this practice by awarding ECAD authority to collect royalties for interactive streaming, giving this institution a role in the licensing scheme, in particular in the case of musical works. The discussion around these two approaches took place both in the courts and through a public consultation conducted under the auspices of MinC. In the courts, at first, the distribution approach prevailed, until a recent decision issued by the Supreme Tribunal of Justice [STJ] in February 2017. Before the STJ decision, MinC issued IN2, an instrument that also favored the public execution interpretation. The court decisions, the regulations, and the public consultation conducted by MinC shed light on this conceptual debate, which is key for the purposes of this study, but also, together with interview data, illuminates the underlying interests of the stakeholders and what is at stake for each of them in terms of power and control of the market.

4.2.1 The Lack of Clarity of the BCL According to the interview data, a majority of stakeholders believe that Brazilian copyright law lacks clarity regarding how economic rights interplay with digital activities. Interviewees used adjectives such as “ambiguous” and “unclear” to describe

456 U.S. Copyright Office, supra note 35, at 8. The U.S Copyright Office stresses the technological neutrality dimension of the making available right, which encompasses technological developments of the future; its focus on access as opposed to receipt; and its on-demand dimension.

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the BCL,457 and pointed out the need to “clarify the different modalities of digital uses and the economic rights involved as well as the relationship of these concepts with technology so that the law is not obsolete.” Some went a step further and described the Brazilian law as outdated and unclear as a whole, while more moderate opinions defined the confusion as limited to a problem of “enquadramento legal,” which means that the problem is how to frame digital activities vis à vis the Brazilian Law. In particular, informants pointed out that it is hard to visualize how interactive streaming fits within the BCL,458 and how the making available right materializes in the BCL. Similarly, MinC argues in public documents that a lack of clarity exists regarding which rights from the BCL are involved in services exploiting works on the internet.459 For example, the lack of clarity is evident in the discussion of how streaming should be understood under the BCL, as will be examined in section five. While is this is a broader claim than that offered by most interviewees, it seems that, at the very least, everyone concurs that the law is ambiguous with respect to copyright in interactive streaming activities.

4.2.2 Judicial Decisions The scholar Braga de Siqueira claims that in Brazil “the absence of clear regulation on the legal nature of the acts of exploitation of copyrights on the internet makes it difficult for the judiciary to resolve legal disputes in this area.”460 Brazilian courts indeed faced this challenge and delivered contradictory decisions in the issue. In 2012, the courts started to converge, to some extent, on the view that interactive streaming does not involve public execution.461 ECAD vs. Oi became the leading case

457 Interviewee B2 “what is really lacking in Brazil- which would help a lot - would be a clarification of the rights involved in the digital environment and the definitions of modalities, because the law is somewhat ambiguous in relation to the very definition of modalities.” 458 Interviewee B13 explained that one of the leading problems is that “the law of 1998 is older than these business models that are very recent, especially streaming. However, copyright is always in the wake of social revolutions, then things happen, and then copyright law will then try to fit in. These recent business models have a legal adequacy.” 459 MinC, supra note 426, at 3. 460 Maria Rita Neiva Braga de Siqueira, Direito de colocação à disposiçãodo publico e a exploração dos direitos autorais na Internet : Antecedentes normativos e primeira Jurisprudência, 4 (8) RDCom Thomson Reuters Revista dos Tribunais, 15 (2014). 461 Some cases ruled in favor of ECAD, recognizing that fees for music used in internet transmissions were owed to the organizations. See in the case of simulcasting ECAD vs. Acaert 2011.000771-6 6a

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representing this perspective. ECAD intended to collect public execution royalties from Radio Oi for webcasting (interactive streaming) and simulcasting (traditional radio simultaneously transmitted on internet).462 Reversing the trial court decision,463 the appeals court ruled that webcasting does not engage public execution,464 as the transmission does not occur either publicly or in a place of collective frequency, thus failing to meet the terms of Article 68 of the BCL. Accordingly, the court explained: “once the user has selected the content to be heard, an individual and dedicated transmission will be initiated, whose execution will be restricted to that user's location.” Thus, as the basic elements of public and place of collective frequency are absent in the act, webcasting does not configure public execution. Citing this decision, other state courts adopted the same solution for webcasting, consolidating case law that excluded interactive streaming from public execution.465 None of the decisions clearly discussed the applicable legal regime for interactive transmissions. However, the Oi decision pointed out that webcasting is a new form of reproduction where there is an “indiscriminate and unrestricted public access.” Similarly,

Câmara Cível do Tribunal de Justiça de Santa Catarina. ECAD vs. ABC Brazil New Time 0013964- 34.2011.8.26.056 Tribunal de Justiça de São Paulo. 462 ECAD Vs. Radio Oi 5ª Câmara Civil do Tribunal de Justiça do Rio de Janeiro. The court established that the transmission occurred in two different forms: simulcasting and webcasting modalities. Webcasting is characterized by the interactivity offered to the user, who listen or download the songs in the moment and in the order that suits them while simulcasting is the simultaneous and unaltered transmission via the internet. The treatment of simulcasting is mentioned but not analyzed, as this modality of streaming falls outside of the scope of this research. 463 Id. The trial court considered that Oi was simulcasting the same content previously through its traditional radio, and it had already paid to ECAD royalties for such programming, ECAD, thus, could not charge if they already had received the payment for the transmission over the same programming. An additional charge would be a double charge, and the court alleged non bis idem. In contrast, the court considered that webcasting activities trigger public execution, resulting in payment to ECAD. The court reasoned that webcasting constitutes a new use of the work, payable "for the distribution of music by digital radio.”) 464 ECAD vs. Radio Oi 0174958-45.2009.8.19.001 19ª Câmara Civil do Tribunal de Justiça do Rio do Janeiro. In this case, ECAD sued to obtain payment for the internet broadcast of the programming of Oi’s traditional radio, claiming to be public execution under the terms of the BCL. 465ECAD vs. Fox Interactive Media Brasil Internet Ltda (My Space) 0386089-33.2009.8.19.0001 10ª Câmara Civil do Tribunal de Justiça do Rio de Janeiro. (The court considered that the systematic interpretation of the concept of collective frequency location leads to the departure of the streaming in the webcasting modality as an act of public execution.) ECAD v. Terra Networks 0176131- 07.2009.8.19.0001 10ª Câmara Civil do Tribunal de Justiça do Rio de Janeiro. ECAD vs. Radio Globo 0048707-14,2011.8.19.000 2ª Câmara Civil do Tribunal de Justiça do Rio de Janeiro

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the decisions in My Space466 and Terra Networks hinted at the same assumption that the reproduction and the distribution rights would be central in webcasts. “Insofar as the reproduction and an individual transfer of these works to third parties follows, the charge must be done directly by the right holder of music (artists, labels or representatives), which is why the party confirms that made the payment directly to the right holders.”467 Several interviewees criticized the arguments in these decisions as weak and imprecise; they pointed out that the courts’ understanding of the issue was limited. However, some informants also underlined the value of the decisions insofar as they provided certainty to the stakeholders: public performance was not part of interactive streaming. This trend in the jurisprudence soon came to a halt, however. On February 8, 2017, the STJ reversed the decision in the ECAD vs. Oi case, and rendered a landmark decision in the "Recurso Especial" no. 1.559.264-RJ. In essence, the court considered that interactive streaming of music does implicate public execution and, thus, as a practical consequence, the decision gave ECAD exclusive authority to collect streaming royalties from DMPs, since the law unquestionably grants ECAD sole authority to collect public execution royalties.468 The court arrived at this conclusion by extending the concept of public venues of collective frequency, established in paragraphs 2 and 3 of Article 68 of the BCL, to on-demand streaming music in the digital environment. The court also compared the effects of interactive streaming to public broadcasting in the analog environment. This reading of the law and the analogies drawn by the court coincide with the views presented by MinC in a technical note remitted to the judicial docket. Despite the decision of the STJ, which is one of the highest federal courts in the country, confusion still lingers among stakeholders. Because Brazil is a civil law country, the decision only applies to the underlying case. Thus, some interviewees still battle the opinion, saying that this judgment has no effect for others. However, the decision shows

466 ECAD vs. Fox Interactive Media Brasil Internet Ltda (My Space) 0386089-33.2009.8.19.0001 10ª Câmara Civil do Tribunal de Justiça do Rio de Janeiro. The court treats webcasting (interactive streaming) as distribution and not subject to public execution. 467 ECAD v. Terra Networks 0176131-07.2009.8.19.0001 10ª Câmara Civil do Tribunal de Justiça do Rio de Janeiro. 468 The court defined streaming as “a technology that allows transmission of data and information, using continuously a computer network. This mechanism is characterized by the sending of data through packages, without the need for the user to download the files to be executed.”

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the type of reasoning that the judges of the STJ would employ in similar cases, which may be the starting point to provide clarity in this area.

4.2.3 The Role of IN2 in This Debate Ten months before the STJ decision, MinC issued IN2 with the purpose of establishing complementary procedures for collecting societies to enable copyright royalties collection in the digital environment.469 This instrument was the result of a series of dialogues and a public consultation procedure carried out between 2014 and 2016, where stakeholders exchanged views on what rights should be construed to be part of digital uses under the BCL. MinC relied on its new authority, under amendments to the BCL, to supervise any CMOs that seek to collect royalties in the digital environment.470 Yet, the regulations of IN2 go further in interpreting the BCL and establish different categories of uses of digital content. The categorization of these uses is, in MinC’s view, an effort to clarify the unclear contours of the BCL, in terms consistent with MinC’s understanding of the legislative intent of the statute.471 More specifically, MinC’s interpretation impacts the landscape for the operation of streaming services, since the regulations establish that interactive streaming implicates the public execution right of the BCL. The categories of uses for which CMOs must be authorized to collect royalties are organized by separating author rights for composers (Article 3) and related rights (Article 4) for performers and producers. The chart below captures the exact language used to regulate each of the different use modalities.

469 Art. 1, IN2. 470 The regulations contain important design elements. First, its scope is limited to commercial, and for-profit online activities of internet application providers, whenever (i) the exploitation involves copyrighted content, and (ii) such exploitation takes place within Brazil. Both conditions must be met in order to trigger collection of royalties. It also defines “internet applications” as the set of functionalities that can be accessed through a terminal connected to the internet. At the same time, it defines users as internet application providers such as YouTube, Deezer, Spotify, and other online media. Art. 1 and Art. 5 (VII), IN2. 471 Although the IN2 addresses other issues, this interpretation changes the landscape for the operation of streaming services, since the regulations imply that these services are considered to trigger the public execution right of the BCL.

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Table 7: Comparison Chart of Uses in IN2

Type of Use Author Rights (Art. 3) Performers (Art. 4) Producers (Art. 4) Reproduction472 I -Reproduction, including any I - the reproduction I - the reproduction permanent or temporary storage by provided in art. 90 II provided in 93 I, including electronic means, in any device or including any permanent or any permanent or medium, in compliance with the temporary storage by temporary storage by provisions of arts. 5 VI, 29 IX and 30 electronic means, in any electronic means, in any § 1 of BCL. device or support, subject device or support, subject to art 5 VI & 30§1 of BCL. to art 5 VI & 30 §1 of BCL. Distribution473 II - the distribution provided for in III - the modality provided II - the distribution paragraph VII of art. 29 of the BCL, for in art. 90 IV. provided for in paragraph II made through sale, lease or any form of art. 93, when made of transfer of ownership or through sale, lease or any possession. form of transfer of ownership or possession. Communica- III - communication to the public, by IV - the right of public IV - the right of public tion to the any of the modalities provided for in execution provided for in execution provided for in public art. 29VIII a, g, j of the BCL, Art. 90 II of the BCL. Art. 93 III of the BCL. depending on the work, or the right of public execution provided for in art. 29 VIII i and art 68.§2 of the BCL, for the use of musical works, literomusic and phonograms, by means of a transmission that does not result in obtaining a copy of the work or phonogram by the consumer, nor any form of transfer of possession or ownership.

Notably, MinC drew from the language of several articles of the BCL to develop its interpretations of each of the economic rights. In the case of distribution, MinC’s interpretation holds that pursuant to Article 5 (VI) of the BCL the modalities of distribution include the sale, lease, or any form of transfer of ownership or possession of a work. Thus, distribution would exclude transmissions that do not result in the customer obtaining a copy of the work or phonogram, nor any form of transfer of possession or ownership. Instead, it held that such transmissions would fall within the sphere of public execution, a sub-category within the communication to the public right. In this way, MinC concluded that interactive streaming, like other transmissions, would be classified as public execution, a right whose management is assigned by law to ECAD.

472 The reproduction right is described as any permanent or temporary storage by electronic means, including any device and medium such as databases or computer storage. It also refers to Article 5 (VI) of the Law and the exceptions contained in Article 30.1 of the BCL. 473 The distribution right is encompassed in Article 5 VII as the distribution for the purposes of offering works or productions by cable, optic fiber, satellite, electromagnetic waves or any other system enabling the user to select a work or production and receive it at the time and place of his choice, provided that the access to the works or productions is made through any system requiring payment on the part of the user.

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Another significant issue is that, although IN2 regulates procedures for collective management, individual collection is still permitted for internet uses. Right holders that are members of a CMO may still choose to conduct individual collection, subject to some complex requirements established by the legal framework.474 This option is key for certain right holders such as record producers who usually license interactive streaming directly. Even though initial language hinted at a de facto mandatory collective system, IN2 does not make collective collection mandatory for internet uses.475 Although IN2 has formally entered into force, the regulations have not caused effects because the government acquiesced to the collecting societies’ request to suspend the application until 2018. Nevertheless, IN2 has contributed to a change in the views and practices of stakeholders. Moreover, the instrument represents a series of public policy choices made by the Brazilian government in order to attain concrete policy objectives, as will be explored in section seven.

4.2.4 The Conceptual Discussion: Interactive Digital Transmissions as an Electronic Distribution Right or as Public Execution? The pivotal point of discussion is whether an interactive digital transmission entails the distribution or the public execution right pursuant BCL—a debate which has some parallels to the discussions on the making available right that arose during the international negotiations leading up to the adoption of the Internet Treaties. Consequently, one group of stakeholders maintains that the legislature implemented the

474 The Brazilian legal framework offers the possibility to collect individually to members that are part of CMOs. To do so, individual right holders have to meet a series of requirements that make individual collection hard. Most importantly, right holders must notify the CMO that they wish to pursue individual collection, at least 48 hours before the act. (Art. 2 of IN2 and Art 98. 15 of the BCL.) CMOs must release to the public the list of their members that chose to collect their royalties for digital uses individually. (Arts. 3 and 4, IN2). In the case of public execution rights, the CMOs affiliated to ECAD must forward this notification to the ECAD (Art. 13 of Decree No. 8,469 of June 22, 2015. During the public consultation, a few comments suggested that this 48-hour framework is not adequate for exercising this right. Indeed, the current system favors collective management, making difficult individual collection. 475 In the consulted draft of this rule, it was unclear whether individual management was possible. Commentators severely criticized the draft and consistently expressed that right holders must have the option to choose always between individual and collective management. The resulting text finally clarified that both modalities are permissible, allowing both individual and collective management. The IN’s initial proposed only allowed individual collection if the right holder had no prior CMO representation. Article 2 “I - through individual management by the holders themselves, when not represented by entities of collective management.”

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making available right in the BCL through the distribution right,476 while another group claims that the right materializes through the public execution right, a modality of the right of communication to the public.477 A third group does not opine on what rights are implicated in such activity but disagrees that public execution, as a collective managed right, should be considered to take place in interactive streaming. Table 8 below provides a summary of the specific provisions of the BCL that the three groups use to support their respective positions.

Table 8: Arguments Supporting Electronic Distribution or Public Execution Approach

Electronic distribution supporters Public execution supporters Authors Art 29. VII— distribution for the purposes Art. 69 2 – It is considered public (composers of offering works or productions by cable, execution the use of musical compositions and optic fiber, satellite, electromagnetic waves or literal-music compositions, through the songwriters) or any other system enabling the user to participation of artists, whether paid or not, select a work or production and receive it at or the use of phonograms and audiovisual the time and place of his choice, provided works, in places of collective frequency, that the access to the works or productions by any process, including broadcasting or is made through any system requiring transmission by any means, and the payment on the part of the user. cinematographic exhibition. Performers Art. 90 IV – the making available to the Art. 90. II – the reproduction, public public of their interpretations or executions, execution and rental of his fixed so that any person to them may have access, performances; at the time and place individually chosen. Producers Art 93. II – the distribution by means of Art. 93 III – the communication of his sale or making available of copies. phonograms to the public by public execution, including broadcasting;

4.2.4.1 Distribution right approach and criticisms The proponents of the view that the distribution right under the BCL encompasses the making available right is a group mainly comprised of DMPs, civil society associations, and industry groups, including entities that represent major and indie labels.478 Some of

476 This group of proponents typically claimed directly that the distribution right is involved in licensing practices for interactive streaming. See. Spotify letter. 477 The arguments that I found for each of the groups greatly resemble those used during the Diplomatic Conferences of the Internet Treaties held at WIPO. 478 From publicly available data in MinC’s public consultation, the following is a list of the organizations that, to some extent, supported the view that distribution electronic comprehends interactive streaming: ABMI, Spotify, Brasscom, Imusoca, Napster, Abranet, ABPD, ABDTIC, and Deezer. Other organizations that I interviewed supported this view too.

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these stakeholders propound an unequivocal interpretation of the law,479 while others defend a more indirect claim based on the music industry’s practices.480 The latter argument takes a more pragmatic line and rests on past practice as the best guide to resolve legal ambiguity. For all of these stakeholders, the making available right expressly included within the distribution right, in Article 29- VII for authors and Article 90- IV for performers, and, less explicitly, in Article 93- II for producers. Several of the “distribution right proponents” explain that the BCL includes two types of distribution.481 “If I look at the law, there are two modalities of distribution. There is the plastic distribution of copies, which is that of the Berne Convention, and there is the electronic distribution that allows the user to access the work at the time and place that he chooses. This is, the elements of making available.” The first kind of distribution consists of the classical distribution pursuant to Article 29 VI of the BCL, where distribution implies the existence of tangible copies. The second kind is deemed as an “electronic distribution” or “digital interactive distribution,” pursuant to Article 29 VII of the BCL.482 An interviewee, citing a renowned Brazilian scholar, explained that the legislature included a new right of “electronic interactive diffusion” under the distribution

479 ABDTIC, Contribution to public consultation IN2, 5 (March 30, 2016). (“The BCL already provides a specific patrimonial right to confine the acts of interactive streaming in its art. 29 subsection VII (called by the jurisprudence as "interactive digital distribution"). See also ABMI, Contribution to public consultation IN2, 3 (March 30, 2016). (“Note that the legislator introduced the concept agreed upon in discussions within WIPO - the "making available" - to describe the term "distribution" which is precisely what we are talking about in webcasting and streaming on demand.”) Deezer (“streaming is a form of individualized distribution of music by electronic means that is contained in article 29 VII of the BCL, known as electronic digital interactive distribution”.) All the letters are available at http://bit.ly/2BIrnHu (last visited Dec. 20, 2017). 480 Spotify, Public consultation letter “Since 1996, the year of the promulgation of the BCL, the Brazilian phonographic market has been organized around Arts. 29.I and 5.VI (reproduction rights) and Arts 29.VII and 5.IV (distribution rights) for the licensing and collection of royalties due to right holders.”) 481 ABTIC, supra note 478 (“It is important to emphasize that the electronic distribution should not be confused with the classic concept of distribution, foreseen in art. 29. VI of the BCL, because it is based on the suppression of the figure of the physical copies, as a means of making a digital copy of the work available to the public in an individualized way, which leads to a need for transformation or adaptation of the classic concept of distribution of copies in order to encompass the intangible diffusion of the protected content and fixed in digital files.”) 482 ABDTIC further explains “It is, therefore, a concept of interactive electronic distribution that allows the user to select the content to be made available and receive it at the time and place of his choice.” Napster claims, “Thus, the right of electronic distribution is the right to discipline the acts of exploitation carried out through the Internet and that have interactivity as an essential element.”

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concept.483 This explanation is consistent with the arguments presented by the U.S. delegation during the Internet Treaties Conferences, which entailed the adaptation of the classic distribution right to new forms of exploitation of content in the digital context. In a way, this approach also foresaw the direct licensing allowed through the distribution right. The most salient difference between the arguments defended within this group is whether interactive streaming generates the transfer of property or possession, which is a question regarding the technology used for the transmission. Some stakeholders conclude that the central element of the electronic distribution consists of the capability of the user to access the work at the time and place that he chooses, or the interactivity, regardless of whether an electronic copy is produced or not.484 Other stakeholders provide a more straightforward answer and affirm that a transient copy is produced during streaming, providing the user with the temporary possession of the copyrighted content, thus fulfilling the basic characteristic of the distribution right.485 In contrast, MinC, the most vocal and articulate critic of the electronic distribution approach, argued that a transfer of possession or property of a copy is the central element to configure the act of electronic distribution, as designed in the BCL. This interpretation comes from reading Article 29 VII together with Article 5 IV,486 which defines distribution as “making available to the public the original or copy […] through the sale, lease or any other form of transfer of ownership or possession.” Therefore, for interactive

483 Manoel J. Pereira dos Santos, Execucao publica musical na internet: radios e TVs vituais, 103 REVISTA DA ABPI, 51-67 (2009). 484 ABDTIC, supra note 478, at 5-6 485 See Deezer, supra note 478. (“In streaming, there is the generation of a transient copy of the file for the user, who holds its temporary possession. Even if temporary, this copy of the work in the user's terminal is enough to de-characterize the streaming as a form of communication to the public by the BCL.”) Napster (“In general, the execution of the file occurs through the reproduction of its contents in the internal memory of the consumer device. This reproduction, which constitutes an act complementary to the online transfer, will be of a temporary nature, only for the perception of the work while the connection lasts or the access of the consumer/subscriber to the service is allowed. However, the temporariness of the reproduction does not make it a merely ephemeral copy or a mere technological process, the consumer being, in fact, in possession of the musical work.”) 486 MinC, supra note 426, at 48. (“We understand that this provision was actually constructed to include distribution through intangible means, but we understand that it effectively configures distribution if the transmission of content transfers possession or ownership. This paragraph aims to regulate those uses where a download takes place on the user's machine because, in the classical and in the electronic distribution, the relevant act is ownership or possession of the content. The fact that the user can make the selection of the work does not remove the core of the action which is the distribution of the content.”)

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streaming to fall within the sphere of this right, the transmissions would also need to transfer ownership or possession. The Ministry explains, however, that such a transfer is not registered in interactive streaming.487 Further, MinC defends that Article 29 VII contains a list of the means by which a distribution “can be made, including, among them, a system in which there is interactivity.”488 Thus, the interactivity element, in this view, is solely a medium that is employed to distribute the work (that is to say, a modality of distribution).489MinC concludes that the “distribution right proponents” err by considering only the interactivity element to trigger distribution, thereby failing to take into account the whole design of the article. Moreover, MinC continues, their interpretation would have the effect of adapting the norm to the practice of the market rather than observing the law as it was intended.490

4.2.4.2 Public Execution Proponents and Critics The “public execution proponents” group includes MinC as well as right holders’ organizations, including ECAD and other CMOs. Drawing on interview data, opinion articles, and most importantly a technical note produced by MinC, I summarize and analyze the arguments in support of this position below. It is important to note that the proponents of this approach did not present arguments in support of their position in the public consultation, unlike the distribution right proponents.

487 MinC considers that interactive streaming with offline use configures distribution due to the intangible transfer of possession to the user. Interviewee B21 “The instruction [IN]does in a way destroy a little the whole concept of electronic distribution in the [BCL]law, and treats the distribution of the Brazilian Law as the classical distribution, you know, the distribution of the Berne Convention, physical copies that is the issue by which a conflict arose between Europe and the United States in WIPO.” 488 MinC, supra note 426, at. 31. (“In the modality of article 29 VII the legislator uses the term distribution, being evident its intention of framing it as a species of the genus distribution. If it were not so, it could have used any other terminology […]. To consider that the use of the terminology in the provisions of article 29 VII is innocuous does not seem an alternative since there are no useless words in the Law. Even because, as previously shown, there was express mention of this intention in the discussions of the legislative process of the BCL, in the following terms: ‘We have some innovations that I would like to register: ... the concept of making the work available to the public by interactive means, such as distribution act...’” MinC thus argues that the legislator was clear in his intention of including as a modality of distribution, the electronic made available.” 489 Id. at 23. 490 Id. at 12.

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The main proposition of this group is that interactive transmissions fall within the scope of the public execution right, a modality of the communication to the public right,491 pursuant to articles 68 §2 and 5 V of the BCL. Article 68 §2 establishes the exclusive right of public execution as “the use of musical compositions or literal-music compositions, through the participation of artists, whether paid or not, or the use of phonograms and audiovisual works, in places of collective frequency, by any process, including broadcasting or transmission by any means, and the cinematographic exhibition.” Article 5 defines communication to the public as an “act by which a work is made available to the public, by any means or procedure and not consisting of the distribution of copies.” MinC relies on these provisions to reach its conclusion that all activities that involve transmissions without creating a copy492 must be conceptualized within the right of communication to the public, a conclusion that is supported by ECAD.493 Simply put, it is the absence of the copy that triggers the communication to the public.494 In this view, the concept of “place of collective frequency,” the central element to configure a public execution, has evolved to encompass new technologies beyond those available in the analog era. Through streaming technology, several individuals can access different works of their choice, simultaneously or at different times, in the same service or channel. Despite the individualized selections, the access to the channel remains collective, which is what constitutes public execution. Thus, what is important for the concept of “collective frequency” is the potential of an audience regardless of whether the access occurs simultaneously.495 Similarly, ECAD argues that the concept of "public"

491 MinC explains that the Brazilian legislation adopted the redesign of the communication to the public right as pursued in the WCT. As a result, the right of communication to the public appears in Article 29 VII as the genus, with several species including Article 68. Id. at 12. 492 MinC differentiates between interactive streaming that occurs online, with no possibility of making a copy, from the offline service that offers the possibility to make copies. To the latter service, MinC concludes that no public execution exists but distribution. Id. at 21 and 27. 493 Id. Enrico Roberto, Summary of Public Hearing, Unpublished manuscript. (2016) “ECAD, similarly, reasons if the transfer of ownership or possession of the file was registered, then public execution would not be triggered.” 494 Id., UBC, and Cisac argued “In Brazilian practice, the term "public execution" is broader than that adopted by the Berne Convention, covering all acts that are covered by rights that do not involve copying the work. 495 Comparative practice shows the evolution of the construct of “collective frequency” in other jurisdictions. MinC relied on EU’s case law to support the interpretation that streaming fits within communication to the public. MinC asserts that the legal tradition of Brazil is closer to the European

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established in the law cannot be understood restrictively, and, thus, defends internet transmission as a place of collective frequency.

Brazilian legislation does not state that this collectivity must be simultaneous, but rather that the work must be made available to the public. In streaming services, there is undoubtedly a potential collectivity, which perceives the work simultaneously or not because there is a technology that allows the enjoyment to occur at different times.

Finally, this group contends that technology does not change the characterization of the mode of use.496 The fact that the user can choose to access the works at his convenience is a result of the progression of technology, and streaming can, thus, be considered a natural evolution of broadcasting services.497 The STJ supported this argumentation in the Oi decision, tilting the balance to this approach. Critics of this view argue that the central element of public execution is not the potential for an audience but simultaneity: the fact that the music performance actually reaches a collectivity of people at the same time in a place of collective frequency.498 Since interactive streaming consists of an individualized transmission that occurs at the time and the place that the user chooses, there is no collective access of the work. The use is therefore individual and private, as opposed to collective and public.499

model and that concepts drawn from U.S. doctrine, where interactive access is treated as a single modality of use, are not applicable or relevant for Brazil. For instance, MinC rejects the reasoning of the Supreme Court’s Aereo decision that confirms that the public performance right covers transmissions to the public via individualized streams. Am. Broad. Cos. v. Aereo, Inc., 134 S. Ct. 2498, 2507 (2014) (“Aereo III”). 496 Enrico Roberto, supra note 492. (“Today, because of technological processes, this interactivity and choice can occur in the same vehicle of communication, but this possibility of choice provided by technology does not alter the nature of the action performed, which refers to the perception of the work and not to the possession.”) 497 Interactivity, MinC argues, has existed in other services limited by the technology of the moment (e.g., radio allows users to change the station). Procure Saber, for instance, explained that the law is technology neutral: “Much has been discussed about the question of whether or not there is interactivity, but the fact is that, for Brazilian law, this fact does not interfere with the nature of rights. No provision in our legislation establishes a differential treatment for interactive use. Copyright follows the principle of technological neutrality: technology is neutral and does not directly interfere with the classification of the modalities of use and the copyright and related rights involved. The choice of the end user, the consumer, is a consequence of a technological evolution that does not change the nature of the right. The way in which communication or transmission is operationalized - through a point-to-point or multi-point system - concerns only the technology employed.” 498 Tim, supra note 478. 499 Deezer, supra note 478.

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Indeed, as warned by the proponents of public execution, the critics use a restrictive approach when interpreting the concept of collective frequency of Article 63.3 of the BCL.500 These critics argue that the law lists actual physical public places where public performance takes place.501 Thus, the extrapolation of these Articles to include interactive streaming should be a task of the legislature.

4.3 Clarifying the Law The purpose of this section is to establish what rights are implicated for downloading and interactive streaming under Brazilian law. There is a consensus that the reproduction and the distribution rights are implicated in downloading, but a significant debate persists regarding how interactive streaming should be construed. I have presented the contours of this debate to reveal the current legal framework for music licensing, as well as to highlight possible legal changes that may be observed in the near future. Moreover, as will be seen in section five, the unsettled state of the law and the ultimate outcome of this debate have significant implications for the evolution of licensing practices and the conduct of private actors in the digital music market. While a thorough dissection of the debate over the making available right and an analysis of the merits of each position in this debate is outside the scope of this study, it is important to note that both proposed interpretations of the making available right—the distribution right or the public execution right—are plausible. Doctrine exists to justify both positions in spite of the lack of clarity of the law and its legislative history. In this subsection, I present some additional observations on the controversy using international copyright law literature, in order to further elucidate the issue and provide insights for an eventual reform. This debate resembles, to some extent, the arguments and positions that the United States and the European Union defended during the WIPO Diplomatic Conferences of the

500 Art 68.3, BCL. “The following shall be considered as places of collective frequency: theaters, cinemas, ballrooms or concerts, nightclubs, bars, clubs or associations of any nature, shops, commercial and industrial establishments, stadiums, circuses, fairs, restaurants, hotels, clinics, hospitals, public bodies of the direct or indirect administration, foundational and state, means of transport of passengers by land, sea, river or air, or wherever they represent, perform or transmit literary, artistic or scientific works. 501 ABMI and ABTDA, supra note 478.

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Internet Treaties to determine how interactive streaming should be protected.502 The difference between these positions was never settled but tolerated through the umbrella solution, by which countries could implement the making available right through different means, namely, the distribution right or the public performance right, a new right or a combination of preexisting rights. The treaties merely required that the implementing right would be exclusive and not a mere remuneration right. Nonetheless, the initial positions of these countries have evolved, fact that is important to examine when using the original argumentation presented by these two countries.503 Goldstein explains how the Internet Treaties for the first time included “minimum standards for an exclusive distribution right and for an encompassing communication right,” and how both rights originated in domestic copyright practice.504 The Internet Treaties, therefore, propelled the development of broader distribution505 and communication to the public rights, the latter regarding author rights only. For instance,

502 Ficsor explains that this discussion was necessary as digital transmissions blurred the lines of what otherwise would be traditionally delimited category of rights. The distribution right concept entails the right to control the dissemination of works, which is intimately related to the change of ownership of the work or a copy. The distribution right is classified as copy-related right which means that copies are made available to the public usually at a deferred time from its actual use. Whereas, in a non-copy related right, such as the communication to the public, the protected subject matter is made available for direct use—as opposed to deferred use. Mihály Ficsor, supra note 32, at 204. 503 In fact, the position of the U.S. initially presented in the discussions at WIPO (defending distribution as the mean to implement the making available right) has been domestically refined through case law throughout time. This clarification is important because some of the groups argued the case of the U.S. to justify their position. U.S Copyright Office, supra note 35, at 28 (“the phrase “by sale or other transfer of ownership, or by rental, lease, or lending” in Section 106(3) indicates that the distribution right is implicated only where a copy of a work changes hands.) However, there is discussion about the mere act of offering copies without actually conducting the transfer. The Copyright Office argues that such act also implicates the distribution right. In the absence of such change in ownership of a copy, most often the pubic performance is triggered. Thus, the making available right is implemented in the U.S. through different means. Downloads implicate the distribution right as understood that an electronic transmission constitutes a transfer of ownership under Section 106(3) of the Copyright Act. On London‐Sire Records, Inc. v. Doe 1 542 F. Supp. 2d 153. See also at (“The text and legislative history of the Act indicate that Congress intended to afford copyright owners the exclusive right to control not only the actual dissemination of copies of their works but also the making available of copies to the public.”) 504 Paul Goldstein, supra note 89 at 247. 505 The history of the distribution right reveals that it had not received universal recognition and only a few countries included a full distribution right. In fact, some early copyright statues contained the right “vend” copies of copyrighted work. Jane Ginsburg at 345-346 In the international sphere, the Berne Act of the Berne Convention included certain rights linked to the dissemination of copies such as Article 12 that banned imports of infringing copies. But it was the 1948 Brussels Act that included distribution rights for audiovisual works. JØRGEN BLOMQVIST, supra note 328, at 119.

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case law has refined practice in the U.S. According to the American jurisprudence, downloads trigger an electronic distribution that entails a transfer of ownership or possession of a digital copy. Interactive streaming, in contrast, implicates the public performance right. One of the most valuable lessons from the discussions held at WIPO was that either of these two rights, as theoretically conceived and included in national legislations, needed to be adapted and clarified to delineate the nature of the making available right.506 In this sense, Ficsor suggests that for countries selecting the distribution right approach, it would be necessary to clarify that the right applies to transmissions beyond the mere transfer of property or possession of tangible copies. This advice is central in the case of Brazil where Article 29 VII seems to indicate that transmissions are a mode of distribution that appears to be limited by the transference of property or possession pursuant to Article 5 IV. Similarly, if the vehicle chosen for implementation is communication to the public right, Ficsor advised that this concept should be clarified to cover on-demand transmissions as well as to redesign the concept of “public.”507 In this respect, Brazil has made some progress. Specifically, the STJ recently concluded that the number of people the availability of the work through a transmission that has the potential to reach an indeterminate number of people who can access the works at any time. While the ruling is a valuable guide for stakeholders, codification of these important clarifications to the law would award much greater certainty. Otherwise, the legislature could also use the broader communication to the public right, which seems a more plausible vehicle than public execution to encompass interactive transmissions. Of course, this latter solution would not necessarily award management to ECAD, whereas the public execution approach adopted in the recent STJ ruling did authorize ECAD as sole manager of these

506 JØRGEN BLOMQVIST, supra note 328, at 119. MIHÁLY FICOSOR, supra note 506, at 208. (“Thus, if the right of distribution is applied, it should be accepted and clarified that distribution through reproduction via transmission - that is, making available copies by making such copies, through transmission of electronic signals, in the receiving computers and/or by their terminals (such as printers) - is also covered by the concept of distribution.”) 507 Id. (“Similar clarifications are needed regarding the concept of communication to the public. First of all, it should be accepted and clarified that the concept extends not only to the acts that are carried out by the communicators, the transmitters themselves […]. Further clarification was needed of the notion of the "public," more precisely in respect to what is to be considered to be made available (accessible) to the public. It had to be made clear that on-demand "transmissions" are also covered.”)

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rights; thus, public policy choices regarding the role of ECAD may also help to prompt the legislature to enact clarifying language. Another aspect in need of clarification is the differences between the rights conveyed to the different stakeholders. For example, even though composers, producers, and performers have a public execution right (which may be deemed to encompass the making available right), performers also hold a stand-alone making available right under Article 90 IV—a fact recognized by MinC.508 By the same token, it is important to clarify how this right would operate for performers with an interpretation where interactive streaming is comprised under a public execution right. Either way, the danger here would be to keep two separate articles in the law that regulate the same activity differently. Indeed, there are many clarifications to the law that may be necessary to provide certainty to stakeholders conducting business under this legal framework.509 Moreover, it should be emphasized that what it is a stake in these debates is whether interactive streaming—the dominant business model—is going to be managed individually or collectively, and how the choice affects the many relationships and contracts that have existed for decades. This discussion is the underlying factor that the legislature needs to ponder when elucidating the law. As one informant said: If they understand that the right that is triggered is the right of distribution, and therefore subject to a regime that is traditionally an individual regime, there prevails the understanding that the authorization must be individual, which is directly done by each owner or the companies. If it prevails the understanding that it is a right of management of public execution, then this is a right that in Brazil is traditionally exercised collectively. So, you end up bringing the collective management entity as the licensing agent. (CMO Employee)

This is, at the end, what is at stake in Brazil. Notably, this distinction is also the underlying reason why once the U.S. and the E.U. initially defended different solutions to implement interactive streaming. The new rights needed to fit the pre-existing contracts, practices, and interests of the industry to avoid unnecessary disruption, while also taking

508 MinC, supra note 426, at 15-17. 509 Interviewee B2 (“Then maybe clarify more in our law. For example, the expression that would be a literal translation of the making available, which is "making available to the public," it is used in our law several times, sometimes as a generic expression or as a specific type of law, of modality, is very clear. Even for the analog environment I think clarifying the definition itself, the concept of rights and modality would be useful.”)

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into account the interests of consumers and society. As shown in sections five and six, disputes between actors revolve around those underlying interests. In this context, however, it is important to stress that the BCL necessitate amendments to clarify how interactive streaming fits within the BCL’s exclusive rights. It seems that either approach is possible if the legislator follows the prescriptions recommended above when amending the law. Adopting the public execution approach may likely fit better the public policy interests outlined by the copyright authorities because this approach would allow for the collection of these royalties in Brazil through ECAD, as explored in the following section.

5. The Changing Landscape of Licensing Practices for Digital Uses of Music Brazil is reportedly one of the most challenging countries to obtain music licenses. In fact, during my interviews with licensees that operate across jurisdictions, it was common to hear phrases such as “Brazil is a mess,” “Brazil’s system is highly inefficient,” or “Brazil is the hardest country to deal with.” Their apprehension regarding the Brazilian system stems, on one hand, from the many entities, including CMOs and other music related entities, that operate concurrently in the Brazilian market and that were, until recently, largely unregulated. “Brazil is the hardest market in Latin America to license musical works due to its intricate structure.” (Lawyer for a licensee) Moreover, the changes over time in the interpretation of the applicable rights necessary to clear in interactive streaming licenses—particularly changes as to whether paying public royalties through ECAD is required—have prompted modifications in licensing practices. As a result of the recent STJ ruling explained above, the licensing practices are currently transitioning again, and not all the stakeholders have recognized the new proposed standard that includes the collection of public execution royalties by ECAD. Some licensees have rejected the applicability of public execution and the role of ECAD in on-demand streaming, causing further unrest and uncertainty. Overall, this changing landscape and the idiosyncrasies of the Brazilian system create a complex environment in which to clear music rights.

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5.1 ECAD’s First Efforts in Licensing Public Performances The first stage of licensing agreements in Brazil, as one interviewee described, was dominated by uncertainty and a lack of understanding regarding digital businesses. ECAD’s board meeting minutes show the evolution of the vision of the organization and its role in internet related services, such uncertainty, as well as the difficulties that they had in reaching an agreement to charge public execution royalties from internet uses. Ringtones were, until very recently, a very profitable activity in Latin America. So it is not a surprise to find the attempts to collect money from this business as one of the first discussions regarding new technologies that would start modeling the early practices of the organization. In February 2004,510 ECAD debated about international practices for ringtones charges and related CISAC recommendations. Two interesting issues can be observed from these deliberations. First, ECAD noticed that CMOs abroad jointly license the reproduction and public execution rights for ringtones, facilitating collection activities. However, the members noted that such joint collection was not the norm in Brazil and recognized that such a scheme presented challenges, which would become an issue that ECAD would try to solve. Second, the board considered the general position of phonographic producers regarding public performance for online uses, represented by ABRAMUS: phonogram producers would license directly any use of phonograms in interactive activities carried out through electronic means, but ECAD would be in charge of the collection of non-interactive uses. This position was consistent with the international practice adopted by the record industry, and it was an early manifestation of their stance in interactive streaming. The minutes show frustration among the members of the board, who stressed that “ECAD could not continue without collecting” for digital uses. Further, ABRAMUS ambiguously added “that phonogram producers are authorizing ECAD to collect public performance

510 Board Meeting Minutes 291 (Feb. 2004). A letter from ABRAMUS president explained the position of producers: “ABRAMUS, representing the vast majority of national music producers, is firmly in favor of ECAD's initiative for the collection of copyright and related rights to public performance arising from the use of sound recordings in internet, content which is owned by the phonographic producers […]. On the other hand, ABRAMUS clarifies that any type of interactivity existing in the way phonograms are made available in the websites (as well as the reproducibility and/or expansion of electronic uses in chain stores, hotels, etc.), may only be used with the prior express and specific authorization of the right holders of sound recordings, who will be obliged to share with other right holders through the terms of the contracts signed with them, strictly obeying such agreements between producers, authors, editors, musicians and other participants in the musical work. ”

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rights, which are related to ECAD’s activity”—hinting that non-interactive activities would not fall within the ECAD mandate. This first discussion encapsulated issues that would continue to come up over time. The second set of discussions took place in 2007. This time ECAD pursued a holistic effort to establish royalties for “new technologies” and developed a fee schedule that has served as their baseline until today. The proposal set criteria and parameters for the remuneration of public execution on the internet and new technologies, and installed a fee schedule that was built on the basis of practices utilized in other countries, such as Argentina, Belgium, Japan, France, and the United States.511 The proposal included rates for webcasting, simulcasting, live performances, ringtones, ambiance of websites, and podcasting. The fee schedule, however, seemed to have overlapping categories and the board did not discuss what activities belong to each class. The rates and the distribution processes evolved over time, and ECAD consolidated the distribution in three categories: internet other (including interactive streaming), internet simulcasting, and internet show.512 That same year ECAD signed its first license with YouTube, in what would become one of ECAD’s most iconic relationships with a user.513 With this deal, YouTube implied that their services might constitute public performance under Brazilian Law, a position that YouTube would later change. ECAD was not certain of the terms of the engagement; they called it an experimental contract514 and reviewed it periodically. The agreement was prorogated regularly until the end of 2012, before entering into a halt.515 In 2010, ECAD started pursuing other strategies to gain more contracts with interactive streaming services. At the board meeting of November, UBC suggested that ECAD should establish contact with UBEM to leverage their expertise in licensing with streaming DMPs.516 UBEM had just been created to collect mechanical rights for musical works from digital uses as a one-stop-shop and had already conducted some contracts.

511 Board Meeting Minutes 329 (Mar. 15, 2007). 512 Board Meeting Minutes 371 (Jun. 17, 2010), 407 (Feb. 20, 2013), 450 (Oct. 22, 2015). 513 Board Meeting Minutes 337 (Oct. 22, 2007). The initial rates were: Music Videos 7.5%; Premium Audio-visual 3%; User Generated Videos 2.5%. The term was 1 year retroactive to June 2007.) 514 Board Meeting Minutes 360 (Sept. 17, 2009). In this occasion, the terms were different and included a minimum of US $ 150,000 per year or 2.5% of site revenue, whichever was greater. 515 Board Meeting Minutes 399 (Mar. 15, 2007). 516 Board Meeting Minutes 377 (Nov. 17, 2011).

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Importantly, an interviewee recalled that, before the launch of UBEM, the mechanical side of musical works had not systematically been collected.517 According to Valente, publishers formed UBEM in response to Apple’s demand to deal with a single interlocutor of publishers in the country in order to enter the Brazilian market.518 In this context, ABDP, UBEM, and ECAD held meetings with the purpose of launching a joint strategy for licensing and collecting rights for digital music.519 The three entities created a committee to study how to consolidate the collection of copyrights in digital media and agreed to exchange information on licensed users of new media and internet.520 This effort seemed to be motivated by the need to tackle the fragmentation of rights implicated in digital uses, to facilitate licensing and increase collection. It is unclear from the minutes whether the cooperation efforts caused any confusion about the stake and role of each of organizations in collecting royalties for streaming of sound recordings,521 or if ECAD overstepped the producers’ territory, or if the producers changed their strategy. At the beginning of 2012, ECAD was negotiating contracts with Vevo, Nokia, and Apple. When ECAD revealed progress in these negotiations to its board, the representative for UBC indicated that publishers and record producers were analyzing the licensing of this type of user, and urged each member to verify internally about whether “ECAD should continue to collect from these users.”522 To dissipate uncertainty, on repeated occasions in 2012, ABPD communicated to the board that record labels authorized ECAD to charge non-interactive services, but producers would directly license interactive services.523 In a second communication, ABPD went further, emphasizing that the organization had communicated this stance to ECAD previously and

517 “Publishers realized they could charge, but in a very confusing way. The majors (Sony Publishing, Warner Chappell, Universal, Som Livre) founded UBEM that is not a CMO.” (Government official) 518 Valente, supra note 54, at 253. (“This demand would eventually cause an alteration in the way the publishers organized themselves: previously articulated in the context of several associations, they began a merger process that culminated in the founding of Ubem.”) 519 Board Meeting Minutes 378 (Sept. 12, 2011). 520 Board Meeting Minutes 380 (Feb. 16, 2012). 521 In one account, I learned that about a dispute where publishers and major labels tried to promote the idea that public execution should not be charged. “In 2012, a very specific problem to Brazil begun: major publishers and labels did not want to recognize the public execution right anymore. This position caused a rebellion in ECAD, which includes all types of owners—authors, performers, editors and labels. This conflict gave birth to the ECAD-UBEM agreement.” (Government official) 522 Board Meeting Minutes 392 (Jan. 26, 2012). 523 Board Meeting Minutes 395 (Mar. 29, 2012).

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warned that double charges might be likely otherwise.524 Independent producers, through ABMI, later adopted the same position and stated that its membership would not delegate to ECAD the collection of public execution royalties.525 As a result of this pushback from producers, ECAD changed course regarding how to address public performance of sound recordings and instituted practices to stop charging for the catalogs of right holders that wanted to license directly.526 ECAD announced that it would begin analyzing each situation to assess whether there was interactivity or not.527 More importantly, ECAD stopped charging for ABMI and ABPD members’ shares in interactive services, and revealed its intention to keep charging for sound recordings whose producers did not provide written notice of their intent to collect directly.528 Contracts that were being negotiated at the time (e.g., YouTube and Kboing)529 and later (e.g., Nokia Mix Radio, Spotify, and Deezer) included provisions indicating that the license did not award sound recording rights from producers associated to ABPD.530 Some members of ECAD believed that the organization should still charge for sound recordings used in interactive services that did not belong to ABPD and ABMI. For that purpose, ECAD conducted a study that established the market shares of those three

524 Board Meeting Minutes 402 (Sep. 18, 2012). “The position of ABPD and our associated companies remains the same, i.e.,: 1) Online services that transmit music in a way similar to traditional terrestrial radios, without no interactivity, must be licensed by ECAD. 2) Likewise, the so-called "simulcasting" (simultaneous transmission of terrestrial radio signals on internet) must be directly licensed by ECAD. 3) However, when the online service allows the user any possibility of interfering (online) in musical programming (either choosing the songs, pausing or going to the next or previous song, or any other form of user interaction with the programming) the licensing will be done individually by each company that owns sound recordings, who will be responsible for remunerating other right holders through the contracts concluded for such recordings. We inform this to ECAD [… ]in order to avoid possible and undesirable cases of duplicity of licensing.” 525 Board Meeting Minutes 406 (May 15, 2013). 526 Polimero asserts that ABPD withdrew the catalog of their associates. Juilian Polimero, O caso Google vs. UBEM (e ECAD), http://bit.ly/2AHHGqO (“Multinational record companies represented by ABPD began a process of removing their catalog from the agreement with YouTube and other digital interactive services, stating that they would not fall under public execution.”) 527 Board Meeting Minutes 395 (Mar. 29, 2012). 528 Board Meeting Minutes 411 (Jan. 31, 2013). 529 Board Meeting Minutes 402 (Mar. 29, 2012). 530 ECAD compared Nokia Mix Radio with a conventional radio and approved a monthly fee that excluded the part of related rights concerning producers associated to ABPD. See Board Meeting Minutes 418 (Oct. 16, 2013). For the initial proposed contract with Deezer and Spotify, ECAD approved a proposal and “clarified that the respective contracts will cover only author rights, excluding related rights.” The contract established that such users would be liable for obtaining the authorization from producers. The minutes also show that both users reported to have express authorizations of the right holders of sound recordings. Board Meeting Minutes 415 (Oct. 16, 2013).

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groups: ABMI, ABPD, and other producers. The study originated a proposal that attempted to determine the percent value of the “other producer” segment so that ECAD could charge based on that share.531 The board approved the use of the calculation to define the percentage authorized to charge in the contract with Kboing, though it is unclear if the proposal was used subsequently. Yet, this episode suggests that there were instances, in the early stage of the market, where ECAD licenses may have included sound recordings that were also licensed directly by the right holders (record producers). In any case, ECAD later created rules to avoid this risk of double charging in the future, as described in the following section. ECAD’s overtures to UBEM gave rise to a short-lived relationship. An “operational agreement” dated August 2014 formalized the relationship between the two organizations:532 only UBEM would collect for interactive streaming uses on behalf of ECAD, and they agreed on a split of 25% for public execution (ECAD) and 75% for reproduction rights (UBEM).533 The objective of the agreement was to cooperate in the licensing process of musical works for interactive streaming, where the rights of reproduction and public execution are simultaneously present in the same service.534 In addition, both parties committed to exchange information about negotiations with users of digital music. Accordingly, ECAD consistently discussed the contracts that UBEM was negotiating at the time during its board meetings. In short, at this early stage of the market licensors were organizing how to collect for digital uses. Because of the novelty of the services and the lack of precedent in the country, licensors changed their views and tried to install standard practices that quickly failed due to the divergent interests of the parties. At first, ECAD seemed to understand that public performance was involved in all digital activities and that the organization would be entitled to collect royalties for both, musical works and sound recordings. Also,

531 Board Meeting Minutes 406 (Mar. 29, 2013). (The approved percentages were ABPD 43.88%, ABMI 3.74% and others (not associated with these two associations) 52.37%. The board also resolved to update the study annually, foreseeing that changes would occur. ABRAMUS warned that several phonograms included in the "others" are holders represented by the ABPD phonographic producers.) 532 Board Meeting Minutes 432 (Aug. 19, 2014). 533 Board Meeting Minutes 401 (Aug. 15, 2012). 534 The agreement established interactive streaming as a special target, while it excluded radio and subscription-based television services.

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because of the novelty of the business models, the entity seemed uncertain on how to act, which led to several changes of approach to their collection. Later, record producers clarified that ECAD would only license non-interactive uses (e.g., internet radio or simulcasting) while they would individually license interactive uses. ECAD implemented changes to comply with this petition, while at the same time sought to establish an agreement with UBEM with the aim of simplifying public execution and mechanical charges in a single step. These changes also coincided with the timing of some judicial decisions that supported that interactive streaming does not entail public execution. All of these developments shaped a second stage, where licensees pushed back.

5.2 The Push Towards a Model Based on a Distribution Right Approach In 2012, several licensees and legal experts began challenging the notion that the execution right was part of interactive streaming, as ECAD had been claiming. Court rulings and the lack of clarity of the law contributed to the consolidation of views amongst licensees: first, the notion that public execution was not part of interactive streaming; and later that, in fact, the distribution right is part of those transmissions. Accordingly, licensees concluded that they would only need to clear reproduction and distribution rights to obtain a license for download and interactive streaming, and not the public execution right, as ECAD expected in the case of interactive streaming. That same year, the appellate court decision in the case of ECAD vs. Oi served to support the growing consensus among the licensees that public execution was not part of the business. Even though this decision would be ultimately reversed, it was cited in several cases where courts adopted the same solution, thereby consolidating case law that excluded public execution from interactive streaming.535 As discussed in section V, none of the decisions clearly discussed the legal regime applicable to interactive transmissions and only hinted that the reproduction and distribution rights would be central.536 Despite criticism of these decisions, interviewees underlined their value, insofar as they provided certainty that public performance was not part of streaming and thus, supported their understanding to use a licensing approach

535 Supra note 84 536 Supra Section 4.2.2

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where they could contract directly with stakeholders for reproduction and distribution rights, and not public execution, leaving ECAD out of the equation. It is fair to say that these decisions impacted, to some extent, how DMPs understood the law in Brazil and what the practices should be. One of the most remarkable cases is the YouTube contract, which, as indicated, was one of the first licensed services of its kind in Brazil. In May 2013, after several months of negotiation, Google (YouTube’s parent company) changed its understanding of the role that ECAD and public execution had in the case of on-demand streaming537 and declined to renew its 2007 contract with ECAD, by which they had accepted to pay royalties for public execution. It is unclear exactly what caused Google to change its position, but other DMPs reportedly adopted the same perspective and increasingly declined to negotiate contracts with ECAD.538 At this point, most licensees recognized they should negotiate with UBEM, as this entity had the authority to charge for mechanical rights of musical works that belonged to a large portion of the Brazilian catalog. However, the operational agreement between forced licensees to pay for both mechanical and public execution royalties. Licensees disputed the agreement because they believed they should not pay for public execution anymore.539 According to one licensor interviewee and press releases of artists, several licensees, uncomfortable with the operational agreement, unilaterally reduced the fee established in such contract. Licensees alleged, “because they did not recognize the public execution portion they would not pay for it,” and began paying only the 75% split for mechanical rights. In the words of an employee of a licensor:

537 Board Meeting Minutes 411 (May 15, 2013). 538 Board Meeting Minutes 428 (Apr. 14, 2014). (Spotify and Deezer after negotiating contracts stopped tests to integrate the systems with ECAD.) 539 “And what happened [with the operational agreement] is that Google said: "Well, if I do not recognize that there is public execution, I will not pay the ECAD such portion and I will only pay for the reproduction part 75% (or 9% of the full 12).” And then, the publishers started to worry because of course, if all the platforms took the same approach, and because the Ministry had prohibited an agreement between UBEM and ECAD. So, Google here was pictured like a bad guy who does not want to pay artists, but I understand why, of course, it cannot pay for execution because it is understood that there is no execution. If there is no execution in the law, there is no need to pay and there what the phonographic producers try to do is convince the platforms not to pay ECAD, but when paying the publishers, the authors of publishers, pay the integrated value and not the percentage, that is, the percentage would be the beginning of the editors but also the separate percent that would change the ECAD, and pay everything to a person...” (Lawyer platforms)

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so they removed the [25%] percentage, they put it in the contract and said: ‘this here is for public execution.’ If Brazilian law eventually says that one has to pay for public execution, ‘this is what we'll pay.’ And then publishers started receiving less. They could be getting a full percentage but they are getting 75% of the amount. So it was bad. […] This disrupts, disturbs everyone.

For instance, the YouTube contract with ECAD is a remarkable story of the escalation between licensees that would no longer pay for public execution, and the right holders’ frustration with such a response. After months of negotiations with UBEM,540 Google sued UBEM and ECAD because the company, among other issues, disagreed on the amount to pay to UBEM for the use of musical works via YouTube. Specifically, Google argued that it should only pay for public execution associated to live performances. This action irritated publishers who conducted a PR campaign surrounding the case. For instance, UBEM issued this statement: YouTube tries to promote the division of the artistic class with the use of companies that offer services, of collection of rights to authors and publishers using the signature of contracts involving small repertoires that establish smaller and harmful remunerations to the authors and publishers. YOUTUBE intends to pay only 75% of what it should, thus failing to pay so-called "public performance rights." This is not the case in countries such as the United States, England, Spain, Mexico, and Argentina, which receive 100% copyright. 541

Authors were also distressed about the distribution right approach and how Google and other DMPs refused to keep paying the fees corresponding to the public execution portion, as UBEM had a smaller amount to distribute to its members. Civil associations of artists started to push back against Google and other platforms suggesting that the international platforms did not want to pay Brazilian artists.542 They also disapproved of

540 The story of the negotiation of Google’s contract had several stages. ECAD approved the terms of the contract that UBEM was pursuing with YouTube and Google Play. (Board Meeting Minutes 432 Aug. 19, 2014) A month later, ECAD denied Google’s petition to obtain access to ECAD’s database of musical works. (Board Meeting Minutes 433 Sep. 24, 2014) The denial of the data exchange made the negotiation to enter a deadlock. (Board Meeting Minutes 434 Oct. 16, 2014) On January 2015, ECAD changed its tone and gave Google a term of 15 days to regularize its situation, arguing that the company had been “using musical works and phonograms with no authorized in YouTube, and more recently, in Google Play.” (Board Meeting Minutes 437 Jan. 28, 2015) In response, Google counter- notified ECAD, and later sued UBEM. 541 UBEM, Nota de esclarecimento: Youtube pretende impor no Brasil uma das menores remunerações aos compositors, http://bit.ly/2A1WIUM 542 Guillherme Delaro, Artistas brasileiros protestam contra Google, http://abr.ai/2AkP0Im (“Let’s be clear: this indignation is not just a 'Caetano thing'. All Brazilian artists are united. More than 150 artists have reproduced the image of Procure Saber in recent days, protesting against Google.”)

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the licensees’ practice of negotiating with other groups (other than UBEM) to obtain a license for mechanical right, which excluded performance rights. “They are closing agreements with groups that have small catalogs, related to uninformed artists who do not know that the amounts they will receive are demeaning values.”543 At this point, the artistic class requested the intervention of MinC, who started to inquire about the UBEM-ECAD agreement.544 Purportedly, MinC considered the agreement to be illegal and in violation of competition law, as the contract would represent evidence of a cartel that was fixing prices without UBEM being a CMO.545 As a result, UBEM abandoned the agreement and notified ECAD of its decision by email the night before the meeting with MinC,546 ending the operational agreement in its first year. The email that UBEM sent to ECAD explained the withdrawal from the deal:

By formalizing with this Office [ECAD] the Operational Agreement, dated 08/29/2014, we sought the establishment of digital businesses in Brazil through a partnership where copyright holders were fully served, and users received a licensing model that would allow for a peaceful and prosperous commercial activity. The effective implementation of the operational agreement, in practice, besides being misunderstood, proved to be difficult to apply, generating institutional and operational inconveniences that are foreign to the original purpose of the operational agreement - it is worth noting, not provoked by ECAD or UBEM - that have led to the fragility of its compliance and to the understanding that its termination will be more appropriate to all those involved.

In its board meeting, ECAD accepted the termination of the agreement, and soon after carried on trying to find new strategies to collect for public performance, fighting the distribution right approach that was predominant at the time. The involvement of the artistic class was a key factor driving a change of approach once again. The heavy participation of artists and authors changed the dynamic and pushed to analyze the issue from a political aspect as well. Artists’ claims addressed the specific problematic of the lack of payment for public execution rights. However, this issue would become a broader policy concern of how artists are compensated in the digital setting, as explored below.

543 Julio Maria, Artistas brasileiros vão à luta contra o YouTube, http://bit.ly/2B0dEv5 544 Board Meeting Minutes 489 (Aug. 25, 2015). 545 “They are not CMOs. Then they can be characterized as a cartel because how all the charges were agreed to be the same without being a collective management society?” (Government official) 546 Board Meeting Minutes 449 (Sept. 17, 2015).

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5.3 The Move Toward Consolidating the Public Execution Approach There was always a doubt if we were talking to the right person [to obtain the license] because, of course, it prevailed, until recently, that there was no public execution involved. ECAD, in very specific cases, attempted to fight in lawsuits this interpretation, and tried to charge for such right. They defended that it would not be electronic distribution but public execution, because it is the only right that ECAD can charge. And they were losing. In fact, most of the court opinions were going in the opposite direction, consolidating the jurisprudence that supported that interactive streaming activities would not be public execution. Today all interpretations are open. MinC, then, started to work to regulate the situation, and the issue of collective management in the digital environment. (Licensee lawyer)

This quote summarizes, to a large extent, the transition of the market from the distribution right approach used in licensing, supported by consistent judicial opinions, towards the slow consolidation of the public execution right in webcasting. Recently the decision of the STJ, and the IN2 interpreted that pubic execution is at the core of interactive streaming activities, thus putting ECAD at the center of digital licensing. Before the decision of the STJ, MinC would be instrumental in shifting the balance in favor of ECAD. During the discussions of the UBEM-ECAD operational contract, MinC learned about inconsistencies in the market for digital music.

MinC held a series of meetings with Google, UBEM and ECAD to understand what was happening. In those meetings they always asked "for what right are you paying or for what right are you being charged", and each one said a different thing, and that seemed very strange, very strange, because you leave without knowing what right you are licensing and the other is charged without knowing why, everything seemed very strange. (Government official)

From this point on MinC got involved and created an informal working group, including the music labels, publishers, digital platforms, broadcasters, and others actors, to discuss the phenomenon of digital music and copyright.547 Reportedly, throughout this process, MinC change its institutional view on the issue: it moved from supporting the distribution approach to adopting the public execution position. The IN2 draft reflected this change and was open to public consultation in February 2016. An overwhelming

547 MinC’s authority to enter into this discussion was grounded in the 2014 BCL amendments that provided MinC with new powers to control and regulate collective management.

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variety of stakeholders, as analyzed in the next section, opposed the proposed regulations and disputed MinC’s interpretation in support of the public execution argument. However, the regulations were issued despite this disagreement. The interpretation brought concerns to the industry since stakeholders feared that the regulations would bring shockwaves to the previously existing licensing practices and schemes for digital music in Brazil, including a more compulsory approach to licensing. None of this happened. In fact, despite the change in the interpretation of the law and the fact that IN2 has formally entered into force, the regulations have not taken effect. MinC agreed with CMOs that they would defer the certification process until early 2018. So what is the importance of IN2 if it is informally suspended? Seemingly, the importance of IN2 was that MinC legitimated the interpretation that interactive streaming should be understood within public execution. No other governmental agency nor the judiciary had strongly supported this interpretation before. Shortly after IN2’s publication, ECAD sent letters to licensees that they must obtain a public performance license for their service to be legal. Slowly, licensees started to yield their position, entering into agreements with ECAD, despite their legal opinions. Consistently licensees that entered into agreements with ECAD explained that the decision was based on the company’s desire to avoid litigation, and instead just opted to accept the new normal.548 Thus, MinC contributed to moving the balance towards this interpretation and the practices. A notable exception to this trend was Google. On November 22 of 2016, the Justice Tribunal of Rio de Janeiro ruled on Google’s favor and determined that the use of music in YouTube was indeed not subject to public execution, except for live performances, and rather the uses in this service consisted of an individual reproduction.549 An appeal is currently pending, but this was indeed a positive precedent for Google so far. Finally, the decision of the STJ of February 2017 was the latest development in a series of events that strengthen the interpretations of the public execution approach. This

548 In fact, I observed how licensees started to comply with ECAD licenses. When I started my data collection, most licensees were openly opposed to obtaining a public performance license. After IN2, some companies started negotiations with ECAD, and some are still in the process. 549 Google v. UBEM, ECAD 0116365-13.2015-8.19.001. Câmara Civil do Tribunal de Justiça Rio de Janeiro.

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opinion is viewed as a major step in the consolidation of this interpretation.550 Even though this judicial precedent only applies the concrete case ECAD vs. Oi, the STJ is one of the most important courts that interprets federal law. Future cases in this court will probably be decided with the same reasoning.

5.4 Current Licensing Practices As shown before, licensing for digital uses has changed over time. Currently, the licensing practices are still settling, but there is a growing tendency towards consolidating the public execution right approach and the role of ECAD in collection. The subsections below present the major traits of the current licensing practices and their challenges.

5.4.1 Sound Recordings Negotiated Directly with the Labels In the case of sound recordings, the practices of licensees resemble international practices: licensees clear rights directly with major record labels (e.g., Universal Music Group, Sony, Warner Music), relevant Brazilian record companies, and aggregators that mostly amass the rights of independent record labels and artists. Most licensees agreed with the idea that obtaining the record label license is the most critical part of entering the market. On the related rights side, contracts are made directly with major record companies--they tend to be global contracts. Then we license with Brazilian record companies, covering all jurisdictions and directly. We also negotiate contracts with aggregators, as representative of several smaller labels. These are companies like Orchard, IODA. There are some acquisitions and concentration in this environment, but still is quite diverse and new aggregators are forming. (Licensee) Licensees that operate across the world emphasized the importance of having global contracts. Usually these licensees would already have a global deal in place with major record labels that allow them to operate in Brazil, or alternatively, they would add the jurisdiction to the already-existing agreement.551 Similarly, when the licensee negotiates

550 Although IN2 had also adopted this position, it was considered by many stakeholders to be a violation of the legality principle and an extra-legal exercise of the executive’s competencies. 551 “We have agreements with three major record labels Warner, Universal, and Sony that apply globally generally and the same terms apply. That said, they exist in a very long and complex way, and they have a lot of different parts and amendments to them. So we need to go back and check and make sure that a particular territory is covered. For example, when we launched in Latin America, we had to go back and check what was covered. For most of our major label agreements, we started out

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with local record labels, they also pursue a global contract if they operate internationally, and the same happens with aggregators. This approach to negotiating global agreements is vital for stakeholders that function on a multi-territorial basis because a single deal can address all the rights needed to operate, thereby reducing transaction costs. However, this set-up clearly favors those artists that work with major labels or independent artists and labels that use well-established aggregators. MinC, as discussed in section VII, takes issue with this feature of the international licensing system. Despite the hardship that negotiations with major record labels entail naturally, licensees commonly stressed that licensing sound recording was relatively simple because record labels and aggregators offer a complete package of rights. “Then again, on the side of companies that use the rights, this is very simple, because the record companies grant the full license and indemnify the companies if there is any question. So if you have unresolved issues, the issue will be settled between the record companies and their artists and performers. So again it is a relatively simple world.” (Licensee’s employee) Thus, the direct and global licensing guarantees certainty and help in removing the intrinsic fragmentation problems characteristic of music. Some licensees also stressed the importance of the contracts for overcoming differences across jurisdictions regarding the rights implicated in a given activity. Contracts do not name rights but assign all rights to the record label. As a result, the change to the new interpretation of public execution in Brazil does not affect the global practices because record labels always retain all the rights through the contracts they use to create sound recordings. “So, for example, Brazil is an exception for having public performance of related rights; this does not result in an additional entry or search for licenses with another licensor other than the label because they generally cover all rights.” (Lawyer of licensee) The direct negotiation with labels is also possible in Brazil because the legal framework for ECAD provides the opportunity for right holders to opt

with a first agreement for the United States. Then amended it (usually called the international agreement or the international amendment) to first authorize other countries in Europe. Then it was again modified to add new countries. So with the major record labels, it needs to be, country by country. We have to ask permission every single time for a new country when we move into. And occasionally, we do foresee upcoming countries.” (Lawyer of licensee)

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out of the collective management system.552 The opt-out system also means that ECAD may charge for sound recording owned by right holders that do not expressly manifest their intention to collect individually.553 Regarding rates, some of the elements that are taken into account to establish the fees are a percentage of the service revenue, a per subscriber minimum, or a flat fee at a minimum guaranteed. In some cases, the rule is that the rate would be the greatest of those three factors. “The percentage of revenue is usually pretty constant throughout the world. So there's not a whole lot of negotiation there. The place where there is a lot of negotiation is at the per subscriber minimum. And there's a different number for every product tier, and for every country. You know the question is it going to be US dollars or pesos.” (Lawyer of licensee) It is irrelevant if a DMP achieves any more advantageous terms in negotiating with a given major label, because the contracts with these record companies use most favorite rate clauses. This obligation means that the DMPs must extend the best terms it makes available to any other major label. This type of clause may create competition concerns, especially given the concentration of the market of sound recordings and the fact that these contracts are global.

5.4.2 Musical Works Cleared on a Local Basis and Their Challenges As is the case in other countries, clearing musical works recordings presents further complexity in Brazil too.554 With the current interpretation of the law, licensees for download uses must obtain licenses directly from publishers, in particular, UBEM and other smaller publishers or entities that manage the reproduction and distribution rights (jointly mechanical right) on behalf of composers. In contrast, for interactive streaming,

552 According to article 19 XIX of the Collection Regulations of ECAD, the price to be charged would be proportional or adjusted if the digital service (user) publicly performs musical works, and/or phonograms that are licensed through individual contracts. Further, Article 42 clarifies that the price of the license for digital services segments may be proportionally reduced, taking into account the number of musical works, litero-musical works, or phonograms that are under an individual rights management regime. http://bit.ly/2jmkdzC 553 I was not able to identify a right holder in this situation but the minutes confirmed this possibility. 554 Under the distribution right approach, users needed to clear the reproduction and distribution rights only for musical works. Since public execution has become the prevailing interpretation in the market for interactive streaming, clearing rights for the use of musical works with ECAD is now necessary.

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licensees must obtain two licenses: (1) with UBEM and other entities for the reproduction right; and (2) with ECAD for public execution.555 UBEM unites some of the most important publishers in the country. It has evolved to serve as a type of single window for accessing the catalog of the associated publishers. The structure of the entity also allows an active role for some of the most powerful members of UBEM, namely the three major publishers, in negotiations of the licenses and the decisions of their terms.556 Despite criticism,557 UBEM facilitates the negotiations and the process of licensing musical works. Yet, UBEM entity does not represent the entire market of musical works in Brazil, which creates another challenge for licensees. As one licensee explained, “In Brazil, I know what I need to do except for mechanicals.” No hard data exists to determine what percentage of the catalog available is represented by UBEM, but interviewees with a good understanding of this market estimated that the entity represents approximately 60 to 70% of the market. Licensees obtain the remaining percent from other smaller actors in this field. Some of the smaller organizations with which licensees negotiated agreements for mechanical rights include UBC and ABRAMUS, whose traditional business model was collective management of performance rights.558

UBEM is the collective in Brazil that controls about 70 % of the market. So that's the first and easiest place for us to go to Brazil to get rights. They can only give us the rights for the particular works that they control. And they don't have a 100% of the market. The rest of that 30 % we have tried to reach out other collectives or independent publishers or other people, and doing similar deals with them. There are a couple of them that are in the initial negotiations with them. So every now and somebody in the Brazilian office will email me with an introduction to a new

555 MinC, supra note 426, at 27. 556 “The negotiation done by UBEM is simple in the sense of being with a single entity. It is always presided over by one of the three majors, but those who go to the meeting are the three presidents of the major publishers, UBEM’s lawyer and the general secretary of UBEM. Who actually negotiates and decides the commercial terms and makes the concessions are the three presidents [Sony/ATV, Warner/Chappell Music, Universal Music Publishing Group]. “(Licensee) 557 “And then you have the mechanical right, which isn’t an official society, it is a group of publishers that have gotten together, called UBEM, and they don’t have all the reproduction rights. They don’t have an overlap of repertoire. They don’t have all the things. It isn’t clear for us, and we are in the middle of what we are getting. Brazil is one of the worse, one of the most difficult territories.” (Licensee) 558 In fact, both of these entities started working on the mechanical rights space within the last eight years.

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organization that we've never heard before. They say "hey we control some mechanical right that UBEM doesn't control. So let's do a deal" […] The problem is: I don't know everybody who I need to talk, and I know that if Brazil gets a single collective for all rights just like Mexico and Argentina, the situation can improve. And then I know that is who I 'd need to pay and it's their problem who gets the money. So that would be nice. I'd like that to happen in the US too but it's not going to, so I guess it isn't going to happen in Brazil. (Licensee’s employee)

The incorporeal nature of musical works further exacerbates the problem of the fragmentation of mechanical rights among different (and often unknown) entities. Unlike sound recordings, musical works are not delivered as assets and are not identified with specificity; these characteristics can lead to confusion regarding what rights the user is receiving with the license. This problem of musical works identification is not exclusive to Brazil, and licensors have taken steps to minimize this problem. For instance, UBEM and other entities contracted with Back Office, a leading service in Latin America that provides matching services and resolves identification problems. Despite progress on this front, some licensees are uncertain of the robustness of their licenses and the associated business in the country. No lawsuits have been filed against DMPs in Brazil for the infringement of reproduction rights; yet, licensees understand that infringement may be an outcome, as it has been in other countries.559 This risk is something that users need to assume since often the licensor cannot offer the representations and indemnities that would curb this risk.

We have probably, four, five, or six either in process or already done these other mechanical collectives or licensors. Even with that, I am confident that we don't have close to 100%--UBEM has 70 percent, and maybe we have another 10- 15% in addition to that. I don't know exactly what we have covered, but I know there's a hole. And I know that we're not 100 % licensed for everything that we need for mechanical rights in Brazil. And that's just something we have to live with. You know we've made an effort to try to reach out to find the people that we need to talk to. When they

559 Since 2016, Individual composers such as David L and settle a sub-publishers and composers alike have filed several legal cases against streaming services around the world for copyright infringement, claiming that they did not receive payments for unmatched. E.g. The National Music Publishers' Association (NMPA) sued Spotify and later settled. David Lowery filed a class action lawsuit against Spotify and other actions against Napster and other services. See. Jason Thrasher, David Lowery, Cracker Frontman and Artist Advocate, Explains His $150 Million Lawsuit Against Spotify, Bloomberg (Apr. 7, 2016), http://bit.ly/2AAsjMq

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pop their heads up and say hi I want a piece of royalties, we'll sign them up. (Licensee)

Many challenges associated with mechanical rights licensing remain, but, as the interviewee quoted above notes, licensees have learned to live with the uncertainty of the environment. Even when DMPs can bear the risk of infringement and operate under uncertainty, it is also important to question what happens with the composers that are not represented in current agreements and whose works are potentially used with no compensation. Worse, in this case study, some informants pointed out that UBEM had received royalties for catalogs not necessarily under the control of the entity. This problem is certainly not unique to the Brazilian system, but it is an area that disserves attention; innovative policies and new technological solutions could promote the simplification of licensing and improve the identification of these creators. On the other hand, the negotiations with ECAD are complex because the entity holds considerable bargaining power, according to a licensee that had negotiated with ECAD at the time of the interview. The rates are fixed according to a fee schedule that has been pre-approved by the entity, where interactive streaming services published rates are 4.5% of gross revenue per month of the service.560 According to the fee schedule, 3% of the collection belongs to musical works, and 1.5% to sound recordings.561 However, the final negotiated fees are approved by the board of directors of ECAD, and normally different factors are taken into account: a percent of the service revenue, a per subscriber minimum, or a flat fee at a minimum guarantee.562 After the cancelation of the operational contract with UBEM, ECAD had to acquire new capabilities to process the high volumes of information from streaming. Reportedly, ECAD initiated contact with Back Office, which also manages UBEM’s matching process. This process faces the same challenges pointed out above, but at least all the matching is carried out by the same entity.

560 ECAD, Regulamento de Arrecadação (2016), http://bit.ly/2jmkdzC 561 Id. at 28 562 Board Meeting Minutes 444 (Jun. 24, 2015). For instance, the streaming subscription service of Apple Music was licensed in the following manner: for monthly subscriptions, the applicable percentage shall be the highest of 3, 75% of Apple's revenue (after taxes) and a portion proportional to the minimum monthly subscription fee per month, Individual Monthly Subscription USD 0.74 and Monthly Subscription USD 1.29.

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In short, licensing musical works in Brazil requires several steps for licensees that can be cumbersome. First, no single entity exists to clear mechanical rights, which creates confusion on what specific rights the licensee is permitted to use. Second, in the case of interactive streaming, ECAD would have to issue a license that usually covers 100% of the territory (right holders can still opt out from ECAD for the collection of specific uses), which provides more certainty to the licensee.

5.5 Stakeholders Adaptation to the Changing Landscape This section shows the fluctuations in the licensing practices since the inception of digital services in Brazil. These practices changed in light of changes in the understanding of the law at the time: from a public execution to a distribution approach, back to the latter interpretation. Today, practices seem to be settling around the public execution approach because of the ruling of the STJ and the publication of IN2, which provoked a desire amongst licensees to stop confrontation and start cooperating with ECAD, despite their diverging understanding of the law. The evolution of licensing practices in Brazil demonstrates how right holders have strived to adapt to the new digital paradigm, trying to simplify licensing while also preserving their status in the market. In the early stages, based on foreign experiences, ECAD attempted to establish practices to collect public performance royalties in all digital uses, including interactive streaming. Also at this early stage, a large number of publishers created UBEM with the purpose of collecting, in one stop, mechanical royalties for musical works from different right holders. Further, in an effort to simplify licensing, ECAD and UBEM attempted to enter into an operational agreement to collect public execution and reproduction royalties for interactive streaming in a single act. Unfortunately, UBEM quickly dissolved this licensing mechanism when MinC expressed its concern that the arrangement could violate competition and copyright law. The brief duration of the agreement does not permit in-depth analysis of the convenience of this mechanism, which could have helped to improve efficiency in licensing while potentially rising transparency and competition concerns. However, it is important to indicate that bundling of rights is an important tool that can contribute to simplify licensing and reduce transaction costs, which in turn can benefit right holders and consumers.

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In general, the current licensing scheme works as follows: sound recordings are licensed directly and individually to DMPs from record labels and aggregators who manage the reproduction (for both uses) and the performance (interactive streaming) or distribution (downloading) rights necessary to award licenses for digital uses. In the case of interactive streaming, this direct licensing is possible because record producers, members of ABPD and ABMI, notified ECAD that they would manage individually such use. This notification seems to fulfill the BCL’s requirements to opt out of collective management. Thus, ECAD does not collect public performance for such catalogs. On the other hand, to clear musical works, the public execution and mechanical rights are managed through different entities. UBEM has the authority to license mechanical rights for 60% of the catalog in the market, and the remainder must be licensed from smaller entities or publishers that are not easy to identify. In the case of performance rights, licensees must obtain a license through ECAD for interactive streaming. For downloading activities, then, licensees need to secure a license from UBEM and other entities that manage these rights. In short, Brazil presents a thorny scene to clear rights in part because of the lack of clarity of the law that has permitted different interpretations. In addition, the already intricate institutional system that existed in the country, where institutions and stakeholders try to preserve their place in the system, further complicates the landscape. However, the willingness of stakeholders to adapt and create a more efficient mechanism, coupled with a relatively new government oversight mechanism of CMOs, may contribute to ease the processes and stabilize the market in the near future.

6. The Idiosyncrasies of the Brazilian Case: The Role of Local Law and the Central Government in Influencing the Framework for Licenses The Brazilian case study presents a particular setting to study the policies and the role of government in regulating music in the digital environment in Latin America. While in other regions regulatory discussions have been active, in Latin America no significant concerns have been raised. For instance, the United States Copyright Office and the European Union Commission have conducted inquiries on the issue, and the Commission

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has made amendments to the European framework. The discussions in Brazil and MinC’s active role to regulate this matter set Brazil apart from the rest of Latin America. This section further explores the motivations behind MinC’s decision to release IN2 and the implications of this policy. The following sections offer a deeper dive into the substance of the regulations, the process that MinC undertook to elaborate and issue this instrument, and the positions of the different stakeholders. As established earlier, the regulations embody MinC’s interpretation of the rights implicated in activities that exploit music in the digital environment and also fill in evident gaps and ambiguities in the law. Through a series of meetings with the different sectors and a public consultation, MinC took on a leading role in interpreting the law for digital uses. Available data on IN2’s public consultation show that an overwhelming majority of participants expressed negative views about the IN2’s content. In particular, several commentators and interviewees questioned the government’s legal interpretation that construes the public execution right to include interactive streaming activities, as well as MinC’s competency to dictate IN2. How did these regulations come about? What views did relevant stakeholders express during this process? Why did the government pursue this sui generis approach and depart from the opinion shared by the majority of stakeholders? How and why did MinC change its views on interactive streaming? These are questions that guide the discussion in this section, which is critical for understanding the current landscape of licensing of digital music in Brazil.

6.1 The Consultation Process MinC’s DDI elaborated the proposed regulations and conducted a public process that consisted of two stages. In the first phase, between August and December 2015, MinC held a series of meetings with relevant stakeholders. MinC reportedly used the information and views collected during this period to formulate the proposed draft of the INs.563 Moreover, several interviewees confirmed that MinC changed its outlook on the

563 MinC’s website explains that “based on these contributions [obtained in through meetings], the Ministry of Culture prepared the IN draft, submitted to the public consultation, as a proposal to regulate collective management in the digital era.” http://bit.ly/2CMT94G (last visited Dec. 20, 2017).

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core issue during this time, transitioning from supporting the distribution right approach to the public execution position. In the second phase, MinC opened a public consultation process on the proposed draft. Comments were invited during a 45-day period, and 262 commentators, both 234 individuals and 28 institutions, participated via the online platform hosted by MinC.564 Overall, the query stimulated an unusual debate on issues such as what rights are involved in digital activities, and how these rights should be managed.

6.2 Positions of Stakeholders The public consultation process made available two types of interventions: those conducted through the platform, where commentators noted their observations in the text; and those communicated outside the platform. This distinction is important for purposes of the qualitative analysis presented below. For instance, the comments submitted outside of the platform consist of nineteen letters containing substantial and careful argumentation in support of the participant’s position. These letters prove to be especially helpful to understand the problems and virtues of the text under consultation, in the eyes of these stakeholders. Most of these commentators were institutional actors such as DMPs, CMOs, and industry associations. In contrast, the comments submitted in on MinC’s online platform were different and more limited. This distinction is the direct result of the nature of the commenting mechanism since the online platform limited the allowed number of characters and invited comments on specific portions of the text rather than responses to the document as a whole. These features encouraged the creation of multiple submissions per user and also constricted the arguments presented. Indeed, some may be described as “positional” statements, which present a stance without explaining the position. Nevertheless, the online comments provide valuable data about the broad contours and trends in participant

564 I obtained this number by coding the number of participations in the platform. I found that 247 commentators commented directly through the platform, while 19 submitted letters outside of the platform. However, seven of the stakeholders that sent letters (Deezer, Napster, ABMI, ABPD, Tim, DBCA and UBC) also commented on the platform. To avoid this duplicity, I only counted the participation of these stakeholders once. ECAD participated in this public consultation, which was valuable to gain insights on their views.

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views. Most of these suggestions originated from individuals (e.g., civil society members, artists, users) and some institutions (e.g., ECAD, UBC, GAP, Procure Saber). An overwhelming majority of the participants in the consultation expressed rejection or negative views regarding the proposed regulations. An issue that came up consistently in the query was the debate around distribution and public execution, presented earlier. Other recurring themes with no detailed explanation are the following: Stakeholders supporting IN2 offered statements such as: “IN does not create a new tax,” “we need rules for the digital environment,” “supported because it is critical to creating clear rules for the collection of copyright in the digital environment.” Those opposing IN2 manifested arguments such as: “IN is an example of bureaucracy,” “IN equals interventionism from the state,” “the Brazilian government wants to control everything,” and overwhelmingly, “IN would create more taxes or fees for consumers.”

6.2.1 MinC’s Authority There was ample debate regarding the exact level of authority bestowed on MinC through the relevant provisions of Brazilian copyright legislation. While it is beyond the scope of this study to analyze in detail the merits of MinCs competence, it is important to acknowledge this issue, because right holders, DMPs, and industry groups alike consistently questioned the source and nature of MinC’s authority. In fact, a wide array of stakeholders with divergent interests, including platforms and CMOs, expressed doubts about MinC’s power to issue IN2. For example, one representative of a CMO manifested support for the INs but also expressed concerns about the authority of MinC to issue these INs.565 Informants regularly argued that MinC' only had a mandate to regulate limited aspects of CMOs, and that MinC was exceeding its authority by attempting to interpret and clarify the law. Commentators pointed out that IN2 deviates from the competences of MinC, which should be restricted to the procedures to authorize CMOs. Thus, most stakeholders concluded that IN2 would constitute a violation of the legality principle or legal reserve.

565 SOCINPRO, REL-SEC 002-16 (March 30, 2016) http://bit.ly/2BkcKZh In the same sense see also UBEM.

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For its part, MinC argues that Law 12.853/2013 granted new functions related to collective management of copyrights, including the “responsibility of granting authorization to CMO entities, in addition to regulating and supervising the activities of the authorized entities.” The Brazilian Congress amended the BCL in 2013 with the explicit purpose of regulating ECAD566 after almost 13 years of operating as an unsupervised legal monopoly. This amendment reestablished MinC as the entity with authority to supervise ECAD and oversee collective management in Brazil.567 Thus, MinC asserted that, in assuming the competences of the amended law, MinC decided to establish regulations on CMO collection and distribution of copyright royalties in the digital environment. MinC concludes that its actions are justified in light of the lack of clarity of the law in the face of the new business models and challenges brought up by the internet.568 In short, MinC maintains that its actions concerning IN2 fall within the scope of its newly acquired competencies created through the amendments of 2013. While the majority of stakeholders supported the position that MinC was taking this authority too far, as of this writing, no legal challenge to the regulations has been filed. In the meantime, MinC and the CMOs reached an agreement to hold off activities related to the approval and certification processes established in IN2 until 2018.

6.2.2 Services Already Pay Royalties Stakeholders opposing IN2 raised the concern that streaming services already pay directly to musicians and authors the values established in agreements between them. Some of the comments along these lines include: “These values must be negotiated between musicians, record labels, and distributors.” “The copyright services are already paid directly to authors, and each author can withdraw her consent from a streaming service if she finds that the combined value is not fair.” “It makes no sense to charge for

566 Mariana Valente et al., Brazil launches public consultation on copyright in the digital environment, Internet Lab Blog (Feb. 16. 2016) http://bit.ly/2ABdQ39 (“The main consequence of this reform [of 2013] was the establishment of rules for the activity of ECAD, an organization that collects and distributes royalties for public performance rights, and that functions as an umbrella for bringing together 9 associations to which the copyright and neighboring rights holders associate.”) 567 Since ECAD’s creation, MinC had the authority to regulate it. 568 Mariana Valente, supra note 185. See also http://culturadigital.br/gcdigital/entenda-mais/

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something that is already paid.” In the view of the commentators, services already pay royalties through individual contracts; creating an additional charge would be a bad policy as there could be a double payment for the same activity. Some characterized this additional payment as a double dip in the distribution chain of rights.

6.2.3 Change in Licensing Practices to a More Complex System Producers raised their concerns that IN2 would alter the existing commercial practices that are based on individual licenses and private contracts among the owners of relevant rights.569 Some supporters of this view argued that IN2 would alter these practices thereby disrupting the development of the Brazilian digital markets and reducing incentives for investment, which affects the compensation of right holders. IFPI describes the current practices in detail: As per the music industry practice, performers transfer by operation of individual contracts (and sometimes by virtue of statutory presumptions) their exclusive making available rights to record companies. Record companies subsequently authorise the digital services with respect to all the rights they own and/or control, including the performers’ rights. In this respect, the industry licensing practice for digital services is no different from that for the distribution and sale of physical CDs; performers transfer their rights to record companies and record companies license the digital services. It is important to emphasize that the unambiguous transfer of rights from performers to record companies, as well as the ability to negotiate commercial terms directly with the services are essential for the record companies to be able to effectively conduct their business – otherwise it would difficult for the companies to cover and justify their substantial investments in the artists and the recordings. (IFPI)570

Other individuals lashed out at what they perceived to be the interventionism of the state and its willingness to regulate private practices. “Content producers receive their copyright as their current contract with the company in question, the state interventionism is against freedom and superimposes the current contracts and halting the future. This is only a demonstration by the state that wants to be present in all segments of society, imposing itself on everything and everyone.” (Another type of user) These stakeholders believed that there is no reason to interfere with such contractual practices because individual licensing and privately negotiated contracts are effective in

569 RRIA (March 22, 2016) 570 IFPI, IFPI Comments on the Draft Normative Instructions on Collective Management of Rights in the Digital Environment (March 29, 2016) http://bit.ly/2AfzvR7

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fostering a dynamic market. Instead, IN2 would make the licensing, payment, collection, and distribution procedures of the country more difficult and complex. Some acknowledged the fact that the market could adapt to the proposed change, just as it would adapt to similar changes properly enacted via the legislature, but the expected adaptations would create costs that would transfer to consumers, as detailed below.

6.2.4 Consumer Harm Commentators argued that as a result of any increase or excess of payment, such cost would be transferred to consumers, which would eventually harm the industry. “Ridiculous and pointless and will directly harm the consumer, because this new collection would be passed on directly to the consumer.” (Individual commentator) “Even if the characters in the market could adapt to the proposed change, this adaptation would involve costs, which would undoubtedly be passed on to the consumer; which would also occur with double charging.” (Spotify) On its part, defenders of IN2, such as Procure Saber, explained that IN2 has no economic impact - neither for digital platforms nor the consumer. “The free services will not be affected, and the prices charged to the subscribers by the platforms won’t change because there is no interference with the amount paid by the digital platforms to the holders.”

6.2.5 Fair Remuneration to Right Holders Creators, including artists, authors, and producers, put forward the view that they are not adequately compensated under the current system. IFPI, for instance, believes that “the single biggest problem facing all music right holders is the growing gap between the value some services are able to extract from their use of music and what they pay right holders.”571 Indeed, the global record industry has labeled this problem as the “value gap,”572 where some platforms, shielded from liability, exploit music without adequately compensating right holders. Platforms that do enter into negotiations with creators wield substantial negotiating power and offer paltry “take it or leave it” deals, which result in

571 Id. Other commentators such as RIIA supported this view. 572 IFPI, Rewarding creativity, fixing the value gap, http://www.ifpi.org/value_gap.php

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unfair negotiated terms.573 Despite this position, these commentators declared opposition to the normative instruction and urged MinC to study the problem instead of creating rules like IN2 that would harm the marketplace. In different terms, individual artists and groups also expressed this concern during the consultation period and especially outside of it. Within the inquiry period, artists vocalized their support for IN2 asserting, for instance, “it is appropriate to establish legal framework precisely at the time when large corporations are staking out the digital environment to their advantage and the detriment of the musician's rights.” Procure Saber574 further explain this situation: Our concern has always been to safeguard the rights of the artistic class in this new digital scenario, full of uncertainties and intermediaries and in which the musicians who participate in the recordings receive nothing. We consider that the text of IN points to solutions that will have highly positive effects for national authors, interpreters, and musicians, by identifying, among the different modalities of use, the right of communication—its section "Public Execution/Transmission." This is the only way to ensure the rights of these holders in the digital environment.

But it was outside of the consultation process that artists conducted broader outreach about their concerns. Around the dispute with Google, a coalition between UBEM, UBC, and the Procure Saber Association (a new group of artists), organized a campaign to explain the inadequate remuneration that artists receive in the context of digital music.575 In a manifesto, the coalition explained that creators do not receive the benefits produced by the use of their works on the internet, while DMPs obtain significant profits.576 The purpose of joining a coalition of authors, artists, musicians, and their

573 IFPI, supra note 189, at 2 (“As a result, the difference between the per-user or per-stream payments from such services, and those paid by services that negotiate fair terms with right holders before they launch, is staggering. As much is illustrated by the comparison of per user payments in 2014 from Spotify, the biggest streaming service licensed by right holders on the back of full exclusive rights, and payments from YouTube, the largest user uploaded content service, claiming that it is not liable for the content uploaded by its users and made available on its service.”) 574 Public Consultation submissions 575 Rodrigo Ortega, Manifesto de músicos e editoras acirra luta com Google por renda do Youtube (Sept. 9, 2016), https://glo.bo/2CAFdvj 576 The manifesto says: “In the highly competitive Internet music market, Google gains most from creators’ rights, alleging that it is a simple platform that offers content posted by third parties, as if it didn’t have responsibility […] Authors and artists have the right to negotiate fair and transparent terms for the use of their creations on Internet. It is not acceptable that platforms want to impose a business model that only benefits them and is unfavorable to those who produce the content. With this one-sided model, these companies intend to divide the artistic class by offering contracts of the type "take it or leave it.” http://bit.ly/2f6HlBJ

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representatives was to highlight this problem to the public and to pressure governments to ensure that their rights are respected.577 They [artists] are the main content of the business and the raison d'être of commercial success: music is fundamental to networks and their growth strategies. Even so, what is seen from these market giants is the disregard for authors, who are not identified as required by law and their remuneration isn’t compatible with the volume of transactions based on their works.

In addition, the coalition claimed that cultural traditions, innovation, and creativity are strategic assets that need to be preserved by the system. It is clear that this group found the market in Brazil to be unbalanced, and their public advocacy efforts attempted to reverse an “unfair and unreasonable situation.”578 However, in interviews, other right holders and DMPs responded that the imbalance results from old contracts that these artists concluded with their record companies years ago. In addition, interactive streaming puts users in charge of content selection, unlike the situation for radio and TV where programming is set for the user. In their view streaming “is another model, another universe, and they [artists] think that if they put ECAD to manage royalties, they're going to win as they do on the radio. And it is not like that. Artists do not even understand this.”579 In short, the problems of unfair remuneration of artists in the digital era has influenced the debate in Brazil. First, the temporary situation where DMPs did not pay public execution royalties pushed the discussion to the fore front. This situation has been

577 Stakeholders advancing their agendas. The conversation about fair remuneration is not unique to Brazil. In fact, CISAC and FILIAE, to name a couple of international organizations of composers and artists, conduct campaigns that pursue similar interests. What is particular about the Brazilian case is the role that the central government took 578 It is important to note that, at this time, this group was advocating specifically for the no payment of 25% of royalties from public execution. 579 “These are the artists who are dissatisfied with the multinational record companies because the best of their catalog is under old contracts. Streams already give only a little money, and given the low percentage [of their contracts], they are not earning anything, but that's not all. If you look at the five hundred most streamed songs at any platform, they don't show up in there. They do not appear in digital media. So even if it were some money, they would receive little anyway. And the reference they have is the public execution where they still get a lot because their music is played a lot on the radio and on TV, audiovisual sync and all that. But in digital media, who chooses is the consumer. In the radio who chooses is the radio owner, the programmer, on TV who chooses is the program director, so there is a whole kind of influence on these programs which doesn't exist in digital media, where the consumer chooses. The consumer is free and a series of barriers for forcing content within the platform exist. So it is much more open and more democratic. There are also recommendations, so even if you're listening to Caetano Veloso, the system will offer you an independent artist that is listened by who listens to Caetano, so it's a very good platform for discovery.” (Interviewee B16)

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resolved, however, it resulted in MinC becoming visibly concerned about artists’ compensation and the black box problem. These concerns were brought up by local artists and, to a lesser degree, by the recording industry and their value gap concerns.

6.3 MinC’s Justification of Its Active Role It is critical to explore why, despite the overwhelming opposition to the approach used in IN2, MinC nevertheless pushed this regulation through on the last day in office of the government of President Rousseff. All of this occurred while stakeholders, with conflicting views, concurred that MinC had no authority to issue IN2, as discussed. But what has motivated MinC to take this path? How did it weigh these arguments? MinC’s official explanation for its decision to draft IN2 was to create a specific regulation related to CMOs’ collection and distribution of copyright in the digital environment and to clarify how the law should apply in this context.580 However, there was another motivation. The normative instruction, as confirmed by several interviewees, was intended to “foster a better condition of remuneration in the national territory [Brazil] for the Brazilian artists and authors.”581 A coalition of creators of music persuaded the government to address the problem: Brazilian artists were not getting enough remuneration in the digital environment. Artists brought up this issue during the consultation and especially through a PR campaign, as described earlier. Interview data clarifies this preoccupation with what MinC viewed as a threat to the Brazilian market. A host of issues gives rise to this perceived threat, according to government officials. First, MinC justified its pursuit of policies that favor local creators as a response to the expectation that digital services are “a phenomenon that prophesies a massive transfer of value from the periphery of the system to the center.” In this view, digital business models tend to concentrate money in the hands of a few entities, whereas in the past the collection of royalties was more widely spread throughout the world, through the services of CMOs. Further, Brazil does not have, and would not likely develop, its own powerful internet companies. Instead, what Brazil, and other countries, possesses is local content that should be defended and fairly reattributed.

580 MinC website, http://culturadigital.br/gcdigital/entenda-mais/ 581 Interviewee 1B

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Brazil, Costa Rica or any country, we will never have Google, Facebook or a company like that. The only thing that we have is our content, if that content is not paid properly for our owners, I do not want to know anything else about that? Do you understand? That is, today our owners, authors, artists, and performers are injured in the digital space.” (Government official)

Second, the direct negotiation between transnational actors and DMPs constitutes another concern. “Those services negotiate directly with the record companies and publishers instead of negotiating with collective management organizations, and there is a perception that, if these [contracts] were negotiated with these CMOs that represent the right holder, the creators would receive a larger share.”582 In this view, CMOs would act as agents of local artists, promoting the interests of the creators. Third, the government identified the existence of a “black box” in the music industry that impairs understanding of how the money flows. The “black box” problem refers to the lack of transparency regarding what reimbursement each of the members of the value chain obtains from music uses (e.g., authors, publishers, performers, record labels, DMPs).583 Even though the contracts are private, the government claims there is a public interest element concerning economic order and competition. The private nature of the contracts and the relationships, however, prevent the government from compelling these actors to reveal the content of these agreements and associated reports. Information regarding the number of plays per song, payments, and how much the DMPs and labels received, in their view, would be necessary data to understand the black box problem. We have little knowledge about how the market really works because as part of the government we talk a lot about regulatory framework, interpretation of the law, legal positioning, etc. And we even try to make this interlocution with the agents that participate in the market. But the truth is that because it is a private relationship, we do not have access to contracts, nor to a series of information that would be useful to answer such questions - how does the market really works in practice, regardless of what law says. (Government official)

Interestingly, DMPs and labels allude to the same problem, though from a different angle. DMPs regularly claimed that record label contracts are to blame for the low payments that artists receive for digital uses, whereas record labels assert that the “value gap” created by DMPs is the real cause of the problem.

582 Interviewee B2 583 David Byrne, Open the Music Industry Black Box, NYT (Jul. 31, 2015), http://nyti.ms/2BfbNCN

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Fourth, related to the black box problem, the lack of information regarding money flows reveals a constant concern in the music industry over transparency. Besides the long-known concerns about the confidential contracts between artists and record labels, where the bargaining power usually favors the labels, the government focuses on the lack of transparency surrounding contracts between platforms and major labels that control nearly 70 to 80% of the global catalog. Fifth, the government expressed apprehension about the global and extraterritorial nature of some of the practices of the music industry. For instance, public officials claimed that public execution was not suitable for DMPs and record labels since global agreements are not concluded in Brazil but abroad. Through these global contracts, record labels receive all royalties on behalf of artists and musicians, which in the government’s view is no longer possible in Brazil. The amendments of law 12.853 of 2013 eliminated a legal mandate (Article 94) by which producers perceived royalties for public execution uses on behalf of artists. In the current BCL text, ECAD substituted record producers in collecting and distributing such royalties.584 In the view of the officials, this change obliges all the public performance rights to be obtained through ECAD. “That is why labels do not want to recognize public performance. The problem of the digital environment is that only labels benefit greatly, and there is a minimally equitable distribution among all those who are owners, and they want to keep most of the profits for the uses in the digital.” This interpretation seems to cast doubt on the capacity of private actors, like artists and record labels, to negotiate the rights obtained under copyright law. Thus, the proposed approach in theory would entail a sort of compulsory licensing system, where private actors cannot privately negotiate the rights—a solution that seems quite distinct from what the BCL establishes with ECAD. Another concern relates to the payments conducted abroad for uses of music occurred in Brazil. We want that uses that occur in Brazil to be paid in Brazil because when the payment occurs in another country, that other country will always be the United States. Taxes

584 Art. 94, BCL. “It is up to the phonographic producer to perceive for the uses referred to in art. 68 of this Law, the pecuniary gains resulting from the public performance of the phonograms and to distribute them with the artists; in the manner agreed between them or their associations and balance between the interests of all of the right holders and society.”

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will be paid in the United States. There is no transparency or state control to secure the rights of our authors. Collective management has a similar thing with what is called patent nationalism. There is collective management nationalism, then it is inadmissible for a State that the management of the rights that are done in its territory be done in a country that is not theirs, then we are radically opposed to having a global management that is clear that it will not be done in Brazil.

As this statement makes clear, a dose of nationalism was indeed part of the motivation of the government to adopt the interpretations of IN2. In essence, MinC recognized a series of concerns and issues that constituted matters of public policy. Arguing that Brazil should protect its creators, MinC endorsed the position of local artists that their retribution in the digital era had decreased. While falling short of meeting all the challenges presented, the solution that the government proposed put ECAD at the center of collection of digital public performance royalties. By doing so, MinC’s authority to supervise ECAD would thereby enable it to monitor the effective transfer of royalties from interactive streaming to artists and authors within Brazil. “The idea of the Ministry was to construct a legal thesis within the existing legal framework that would find a legal vehicle by which the state could follow minimally this distribution via ECAD. Through monitoring ECAD, it would offer greater control so that the values effectively reach the right person—authors or artists, according to their proportionality also provided by law.” By using ECAD, MinC could “localize” within Brazil the collection of some royalties and would allow MinC to supervise the agency. It is clear that MinC’s motivation in this discussion was to protect local artists from an ever-increasing globalized industry controlled by a few international actors, regardless of the success of the policy. This sort of nationalism is not new to Brazil’s policy choices, and it is an interesting policy discussion in the context of an industry that continues to experience changes, including concentration. Despite some valid concerns that this model tries to address, there might be unintended implications that should be considered.

6.4 Effects of the Current ECAD Model to Address Licensing Problems Putting creators first can be a desirable policy goal and can be a suitable approach for a country with immense cultural assets. In this sense, the ECAD model under IN2 represents a moderate solution to some of the perceived problems with the industry that

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affect artists. Using an overly excessive interventionist approach may not serve the interests of artists and risks upsetting the balance between right holders and society. The literature clearly establishes that, in the copyright realm, private actors are better suited to meet the challenges that they are facing through privately designed solutions; while others alternatives arising from technology can better achieve such goals. As established earlier, the Brazilian legislature could implement the making available right through public performance. Other jurisdictions around the world have adopted this approach. In fact, the STJ already adopted this interpretation of Brazilian law, making ECAD a central part of the collection and distribution for interactive streaming. Yet, it is important to consider how ECAD’s involvement in the licensing process of interactive streaming assists in solving the above-described problems—that is, how this policy choice attempts to achieve the goal of protecting the interests of Brazilian creators. The ECAD solution has the virtue of allowing the government to monitor, to a limited extent, flows of money from interactive streaming, as well as confining the collection of some royalties within Brazil. Moreover, the recent amendments to the BCL provide the government with tools that, if exercised correctly, can achieve better transparency and some control of the state in an activity that has proved to need close supervision. However, the ECAD system cannot solve all the perceived drawbacks in industry practices, and it also creates additional problems. For instance, it would bring extra transactions costs that do not arise from direct licensing. It also can trigger double charges for the same right, particularly for right holders who do not properly notify ECAD of their intention to conduct individual collections. Further, the ECAD solution cannot solve concerns regarding direct private negotiations between right holders and platforms and the black box problem, which is a worldwide problem. In fact, direct negotiations should not be understood as a drawback but as part of the healthy exercise of the property rights that copyright law grants to right holders. In this sense, ideas to convert ECAD into a compulsory scheme, as hinted in IN2 proposals but not implemented, could severely harm the marketplace.585 A system that

585 The current ECAD system is a central collection and distribution system for public performance royalties but not a compulsory scheme. Right holders can opt out of the system; thus, it is not strictly a compulsory system. In this sense, Article 98 of the BCL establishes as the rule a mandatory approach: “With the act of affiliation, the associations referred to in art. 97 become mandatory of

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forces collection of sound recordings and musical works through ECAD may be an ill- informed policy, as it has the potential to damage established market practices that are based in the free exchange of rights between market actors. Many of the problems that exist today, in fact, belong to old practices that are likely to die out as more suitable alternatives emerge. For instance, sound recordings are generally licensed through global contracts for interactive streaming. Record companies attain the rights to negotiate those deals since artists assign the necessary rights to labels to conduct such agreements. As a result, many times artists do not preserve any rights after signing those contracts, or they negotiate compensation. Even though it is reasonable to be concerned about the outcome of these negotiations, right holders must preserve their ability to manage their interests. Mandating record labels to manage their rights through ECAD would not fix the problems that exist with the agreements negotiated between artists and labels. Instead, policy-makers can look to technology, and not unnecessarily-interventionist regimes, to fix many of the flaws of the current system while democratizing the industry and empowering artists and authors. For instance, technology has provided artists with the opportunity to produce their music, and thereby retain their rights. These artists do not depend on a record label deal to reach the market. These ongoing changes in the relationships between artists and labels will slowly rebalance the place that artists have in the market. Another example is the possibilities that technology offers to improve identification of musical works with their right holders and match it with its use. Technology provides increased traceability and transparency in these transactions. In short, the availability of new technologies driven by the market suggests that the kind of government control that is proposed by some actors in Brazil is unnecessary and

their associates for the practice of all the acts necessary for the judicial or extrajudicial defense of their copyrights, as well as for the exercise of the activity of collection of these rights.” However, paragraph fifteen of the same article offers the possibility to opt out: “The copyright holders may personally practice the acts referred to in the chapeau and paragraph 3 of this article, by communication to the association to which they are affiliated, within forty-eight hours prior to their practice.” This means that despite the shortcomings that MinC and artists see in global contract practices, the current law and system do not circumvent this issue. Right holders are free to opt out of the CMO and, thus, the ECAD system. In this sense, direct negotiations and global contracts that involve public performance rights, and their management, outside of the ECAD system is permitted under current law. This is relevant for sound recording practices, as musical works are generally dealt with on a local basis.

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likely an overreach into the autonomy of right holders. Private actors are better suited to create solutions that that lower transactions costs and promote their interests, and that is perhaps a lesson to bear in mind when designing solutions to tackle the problems of industries that are experiencing transformational change.

7. Conclusion Brazilian music industry stakeholders have attempted to adapt to meet the challenges of the digital era (e.g., establishing one-stop-shop institutions that strived to simplify licensing for musical works). However, the lack of clarity of the legal framework has raised new challenges, inhibiting the formation of durable practices that provide certainty and predictability to the right holders. Downloading activities involve the reproduction and distribution rights of the BCL for both musical works and sound recordings. While there is agreement that a reproduction act occurs in interactive streaming, there is no consensus on how the making available right is contained in the BCL—through the distribution or the public execution right. A recent ruling by STJ, as well as rules released by the Ministry of Culture, have tilted the balance in favor of the latter approach, yet uncertainty persists. This discussion stems from the lack of clarity of the law on an issue that is central to the current music market. Both rights have evolved in different jurisdictions to accommodate the challenges of new technologies, such as interactive streaming. As a result, any approach to resolve this ambiguity can draw from international and local doctrine to accomplish a suitable interpretation, such as the one followed by MinC. What is most important is to achieve clarity in the law through a balanced legal reform that can provide ultimate precision to the operators in the market. This debate is not theoretical and has practical consequences in licensing practices. As demonstrated, depending on the interpretation, the policy choice can imply moving from individual licensing to a collective management scheme. For instance, under the current legal framework, if the distribution right is selected to encompass interactive streaming, then licensees would obtain a license directly from the right holders. On the other hand, if the public execution is deemed to cover interactive transmissions, then ECAD would ultimately play a central role in the collection and distribution of royalties

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raised from interactive streaming. This choice also means that the complexities and virtues already existing in the ECAD system are transferred to digital music licensing, a mechanism that was designed when the needs of the market were different. The choice of an individual or a collective licensing scheme has direct consequences for all the stakeholders and the public interest. Both models offer advantages and shortcomings. While individual licensing is possible now due to existent technologies and enhances the autonomy of the right holders, it may also increase the problems of transparency that dominate this industry. On the other hand, collective management under an ECAD-like system, which is not mandatory and has government oversight, can promote a minimal degree of transparency but does not assist with solving other problems, such as the “black box” problem, as intended by MinC and artists. The underlying question is what type of scheme is optimal? The answer would necessarily have to balance the interests of all the stakeholders directly involved, and those who are not, in particular, consumers. The ultimate policy choice must be grounded in a model that pursues transparency and a fair remuneration of the creators, while also providing efficiency and simplicity to the market operators. At the same time, it is essential to consider the existing relationships and private contracts of a global industry that has been resilient to change. Ultimately, evidence suggests that privately designed solutions can be more successful in lowering transaction costs and solving industry constraints. In fact, the best solution to this problem may lie in technology that can assist in good governance and provide more transparency, traceability, and accountability. Thus, the ideal system should allow enough autonomy for private actors to develop innovative solutions, but also offer oversight that promotes transparency. Further, this study revealed that the “black box” problem is a concern for digital music in Brazil. Yet, this research was not designed to explore that issue, and it is not possible to offer additional insights on this issue. Despite the difficulties of accessing this information, further work empirically assessing the "black box” problem should be pursued to understand the flow of payments in the digital era. However, it is crucial to underscore that the black box problem originates in part from old private contracts concluded between right holders that cannot—and should not—be overwritten by government policies. These contracts and practices too shall soon pass.

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Chapter VI. A Comparative Analysis of Licensing Practices

1. Introduction This chapter presents a comparative analysis of how digital music licensing works in the United States, Brazil, and Mexico. The objective of this chapter is to examine licensing from a comparative angle, identifying differences and similarities and how these countries have coped with problems that are often of a global nature. This part of the study attempts to respond the following research questions: (i) How do licensing practices for digital uses compare in Brazil, Mexico, and the United States? (ii) What is the role of the government in shaping these licensing practices? (iii) What lessons can be learned from these cases to support a licensing system that supports a balanced scheme between the interests of the stakeholders? The comparative analysis begins with an assessment of the economic rights implicated in each of the countries. Determining the economic rights that downloading and interactive streaming activities trigger under each country’s local law is essential in order to map the stakeholders and mechanisms that must be involved in licensing. Building on these findings, sections five and six offer a high-level view of the differences and commonalities between the three licensing schemes, as well as some of the standardized licensing practices that use DMPs. Sections seven and eight tap into the problems that affect licensing in these nations, while section eight compares the role of the government under each of the regulatory regimes, and how these schemes create obstacles or produce solutions. From the lessons identified in this chapter, section nine presents recommendations to address some of these issues. The recommendations do not tackle all the problems identified, as more data is necessary to correctly understand the problems. This chapter presents some trends in the three countries. The first pattern consists of the economic rights that must be cleared to obtain these licenses, which also derive in similar licensing practices. DMPs needing to obtain a license first clear sound recording rights and then clear musical works right on a local basis. Some common problems exist as the lack of an authoritative public database that identifies the rights of every song; the

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lack of transparency in royalties’ distribution; the difficulties to identify licensors in mechanical licenses; and issues arising from the fragmentation of copyrights, including the hurdles associated with song-by-song and right-by-right licenses. However, the regulatory frameworks that exist in the three countries either act as a barrier or otherwise allow stakeholders to fix these issues. This finding is consistent with the underlying assumption of this research. Private actors are best suited to come up with arrangements to coordinate property and solutions to licensing problems, whereas regulatory systems have a lock-in effect that impedes the enhancement of the same system. In this context, this chapter concludes by suggesting that the role of the government in licensing of digital music should be to encourage private actors to implement solutions to enhance licensing, but some caveats exist. Governmental oversight is important to ensure transparency in collective licensing. Such supervision, however, should not deter the capabilities of stakeholders to innovate and implement solutions that can lead to a more efficient scheme. Similarly, it is important that governments intervene by setting incentives that allow to create an authoritative database.

2. Methodology The comparative law approach is employed to analyze how digital music licensing works in the United States, Brazil, and Mexico, and offer public policy recommendations to approach the discussions on the regulation of the music market in the digital era. The comparative law method consists of comparing a specific area of the law in different jurisdictions.586

586 KONRAD, ZWEIGERT & KÖTZ HEIN, INTRODUCTION TO COMPARATIVE LAW 7 (Oxford University Press, 1998) (defining comparative law as the comparison of different legal systems of the world). See also John C. Reitz, How to Do Comparative Law, 46 AM. J. COMP. L. 617, 620 (1998). Vivian Grossvald Curran, Comparative Law: An Introduction in THE OXFORD HANDBOOK OF COMPARATIVE LAW (2006) (presenting a review of the method and the criticism to it). Edward J. Eberle. The Methodology of Comparative Law, 16 ROGER WILLIAMS U.L. REV. 51, 53 (2011). Edward J. Eberle, The Method and Role of Comparative Law, 8 WASH. U. GLOBAL STUD. L. REV. 451, 452 (2009). (“The fundamental exercise of comparing consists of looking at one mass of legal data in relationship to another and then assessing how the two lumps of legal data are similar and how they are different. The essence of comparison is then aligning similarities and differences between data points, and using this exercise as a measure to obtain understanding of the content and range of the data points.”)

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This study draws on techniques from both comparative functional and law-in-context approaches.587 The functional approach presumes that all societies face the same phenomena to which the law offers solutions and consists of comparing the institutions that accomplish the same function and seek to resolve a problem.588 This approach elucidates the specific context within which a law is able to attain certain goals and is thus useful for distilling policy recommendations and legal reform recommendations.589 On the other hand, the law-in-context approach enables the observation of how a specific law works in practice. By including aspects of this methodology, this study is able to bring licensing practices that are built on legal and non-legal prescriptions into view.590 The countries chosen for this study were selected to facilitate analysis of current debates and trends, as well as to shed light on understudied systems. Thus, the United States was selected because it is the most important and influential system in the global music market. In addition, the U.S. case involves an on-going intense public policy debate surrounding music licensing, offering the opportunity to explore the positions of various actors in the system including global players. This American case study presents a clear picture of how licensing works, as well as its challenges and virtues. Brazil and Mexico were chosen as they are the two most important music markets in Latin America, a region that is often overlooked. The data presented in this study come from a variety of different sources. The American case study is treated as part of the literature review and does not reflect my own empirical research. In particular, I rely on two studies conducted by the U.S. Copyright Office, based on comments submitted by stakeholders and academics. The name of these is the “Making Available Study,” which refers to whether the Copyright Act has implemented the making available right from the Internet Copyright Treaties.591 The second study, “Copyright and the Music Marketplace,”592 deals with licensing

587 Mark, Van Hoecke, Methodology of comparative legal research,1 L. & METHOD 1 (2015) (explaining the different approaches within the comparative law method). 588 Id., at 4. Ralf Michaels, The Functional Method of Comparative Law in THE OXFORD HANDBOOK OF COMPARATIVE LAW 339, 345 (2006). Konrad Zweigert and Hein Kötz, supra note 28, at 34. (“The basic methodological principle of all comparative law is that of functionality.”) 589 Ralf Michaels, supra note 593, at 345. 590 Mark Van Hoecke, supra note 30, at 7. 591 See generally U.S. Copyright Office, supra note 35. 592 See generally U.S. Copyright Office, supra note 16.

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practices in the United States, describes the shortcomings of the current framework, and proposes some amendments. Both reports incorporate public comments and testimony collected at roundtables from the public, including relevant stakeholders and academics. In the case of Brazil and Mexico, the information presented is the result of two separate case studies that I conducted in parallel. Both studies utilize qualitative data to develop an accurate picture of how licensing works in these two countries. The main sources of data are interviews and information collected from publicly available sources including government documents, court opinions, and contracts. In the case of Brazil, I built a database from opinions submitted by relevant actors in the course of a public consultation on digital music conducted between February and March of 2016. Both studies also draw on supplemental sources that include market data, legislative history, and domestic law. More details on the specific methodology of these case studies are included in chapters four and five, which contain such case studies Despite criticism of the comparative method,593 this approach offers several advantages. First, this type of analysis is particularly helpful in a setting where the object of study is a part of transnational practices and frameworks. 594 In the case of licensing of digital music, many contracts are conducted in a multi-territorial fashion and many actors operate at such level, pushing practices across borders that are fragmented with territorial copyright law. In this context, studying music licensing in the digital age in a comparative manner allows us to understand the transitional practices at an aggregate level and shows how global players (licensors and licensees) behave and shape their businesses.

593 For a discussion on whether comparative law constitutes a field of law or a method see James Gordley, Is Comparative Law a Distinct Discipline? 46 Am. J. Comp. L. 607 (1998); Matthias Reimann, The Progress and Failure of Comparative Law in the Second Half of the Twentieth Century, 50 Am. J. Com. L. 671 (2002); MARK VAN HOECKE, EPISTEMOLOGY AND METHODOLOGY OF COMPARATIVE LAW (Bloomsbury Publishing, 2004). 594 James Gordley, Comparative Legal Research, 43 AM. J. COMP. L. 555, 566 (1995) (“If the problem is transnational, one has to look outside one's national boundaries to understand it. And sometimes, neither the problem nor its solution are national. Jurists are seeking solutions that are general or transnational.”); Edward J. Eberle, supra note 29, at 476. (“In our increasingly globalized world, we are all faced with common sets of problems to solve. We need to focus on big policy questions so that these questions can be evaluated from a different perspective. Comparative law has much to offer here.)

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Second, some scholars argue that comparative methods are particularly appropriate to study intellectual property law.595 In this case, the underlying economic rights awarded to composers, performers, and producers are contained in a series of international copyright treaties that serve as a guide to implement local law. Through the establishment of minimum standards, these treaties attempt to harmonize the field of copyright law. Comparing treatment in different cases allows to assess the progress of harmonization. A third advantage of a comparative methodology is that it not only compares the letter of the law but also sheds light on legal practices. The law in action often varies from the law on the books; each case study portrays a realistic picture of how the stakeholders conduct their businesses and how these markets are regulated through local law. 596 Comparison of the law in action in different jurisdictions helps to reveal the reasons why and how the gap between theory and practice arises. Thus, this methodology is able to spur recommendations to improve the regulation of the object of study. Fourth, it allows comparison and presents similarities and differences in the legal systems and practices of licensing digital music in different jurisdictions. Because licensing digital music is an increasing global exercise, and by understanding where the advantages and bottlenecks of these systems are, it is possible to offer insights on how these processes can improve, as different countries have employed different policy choices. Finally, since the American market exerts particular influence over the entertainment world due to the importance of the marketplace, it is worth understanding whether any concepts or institutions from the U.S. system can inform the understanding of the practices found elsewhere, or if the contrary is true. The chosen methodology presents, nonetheless, several limitations that must be recognized, beyond all the various criticisms of the comparative law methodology in general. First, in the Brazilian case study, I faced a language barrier which I overcame with the assistance of a native speaker who worked as a research assistant. Second, Brazil and Mexico are civil law countries with a tradition of droit d’auteur, whereas the United

595 Irene Calboli, The Role of Comparative Legal Analysis in Intellectual Property Law: From Good to Great? in Methods and Perspectives in Intellectual Property (Graeme Dinwoodie ed.) 3-4 (2013). 596 Mark, Van Hoecke, supra note 587, at 1. (“In short, comparing only legislation is risky when there is no information available on how it works in practice, and such a limited comparison is only acceptable for countries which are not at the core of one’s comparative research.”)

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States is a common law country with a copyright approach. In addition, the United States is an outlier since it has one of the most complex and highly regulated licensing systems in the world, which can impact the comparison. The intrinsic differences in the systems of these countries are important to bear in mind. Yet these differences are also a rich source to inform the debate. Further, the nature of the problem—the changing landscape of the industry—is the same across jurisdictions. Finally, the assumption that the problem is the same across countries is also limited by the fact that there are variations of the problem in each country, and more importantly, local idiosyncrasies and actors shape the problematic in each country. Thus, the recommendations of this study are also constrained to each of the legal cultures of the countries under analysis. Nevertheless, important lessons can be learned from these cases as many of the stakeholders are global players.

3. Economic Rights Implicated in Digital Uses Copyright law predates the emergence of the technologies in question, which have resulted in the adaptation of copyright laws around the globe to protect these new uses through economic rights. The international agreements known as the Internet Treaties have had significant impact on the architecture and adaptations of these protections in local copyright statues. Parties to these treaties, such as the United States and Mexico, must comply with such obligations, whereas non-members, such as Brazil, can, in theory, ignore the treaties’ prescriptions. However, the Brazilian legislature has invoked the treaties when crafting the BCL. Despite their observance of the Internet Treaties, local laws in these three countries are not straightforward copies of treaty provisions, and they are often unclear and incomplete regarding the rights that are implicated in the digital uses under analysis. The first relevant finding is that in the cases of Mexico and Brazil many stakeholders regard the local law as either poor or flawed. Similarly, the law has not been completely clear in U.S. either, as evidenced in chapter three. This negative perception is especially prevalent in Brazil. However, although some problems may exist in the Mexican and the Brazilian laws, experience shows that legal systems tend to refine copyright protection over time. Litigation has served as a means to provide clarity and precision to copyright

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rules in the digital age. In the American context, extensive litigation has been key to delineate the contours of each right that is involved in digital uses. While some questions have not been entirely resolved, case law has established an important body of concepts that solidify the protection of musical works and sound recordings, further reaffirming the prescriptions of the Internet Treaties. In Brazil, courts also have been active in defining what rights protect interactive streaming uses. In contrast, stakeholders in Mexico have rarely used litigation to clarify the operation of the law in this field. The discussion of these technologies has been more limited, although some progress has occurred through cases unrelated to digital activity. In the most relevant case, the Supreme Court of Mexico affirmed that that the communication to the public right encompasses the making available right of interactive streams. Practices have shaped the operation of licensing in Mexico, as opposed to the actual law. Beyond the perceived clarity of the law, it was also important to assess the economic rights necessary to obtain a license for digital uses in in each of these countries. Despite key differences in each country’s legislation, a common pattern emerges regarding the economic rights triggered in digital uses. Under all three legal systems, downloading activities implicate the rights of reproduction and distribution for both musical works and sound recordings. The only significant difference is that Mexican law does not award a distribution right to performers, but this distinction does not permeate to practice, as will be analyzed in the next section. Interactive streaming also follows a pattern: it triggers reproduction and public performance rights. Yet important differences exist in the configuration of the latter right. The following chart summarizes these findings. I use the term “public performances” to refer both to communication to the public, the term used under the MCL, and to public execution, as used in the BCL. These three (reproduction, distribution and public performance) rights have differences but refer to the same type of activity.

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Table 9: Comparison of Economic Rights for Downloads and Interactive Streaming

Use Object United States Mexico Brazil Downloading Musical Reproduction Reproduction Reproduction Works Distribution Distribution Distribution Sound Reproduction Reproduction Reproduction Recordings Distribution Distribution (except performers) Distribution Interactive Musical Reproduction Reproduction Reproduction Streaming Works Public Public Communication (exclusive Public Execution Performance and remuneration rights) Sound Reproduction Reproduction Reproduction Recordings Public Public Communication (exclusive Public Execution Performance right only for performers and remuneration rights for performers and producers)

As can be seen, the MCL provides a double layer of protection to public performances of musical works and sound recordings, though only for some right holders. For songwriters and performers, the double protection exists, whereas producers only seem to obtain a remuneration right and not an exclusive right over their sound recordings. The first layer of protection consists of an exclusive right, whereas the second entails a simple remuneration right. The difference between each of these categories is that the remuneration right only awards the possibility to the right holder to receive compensation from the user.597 The original intention of the legislator was to make the remuneration right of songwriters and performers right non-renounceable, with the objective of preserving a source of compensation for these right holders. However, the Mexican Supreme Court determined that conveyances of this right are possible, which erodes the remuneration right. The architecture of the MCL can be described as unconventional. Most countries do not provide a remuneration right and an exclusive right to the same activity. Nonetheless, this design does not pose additional challenges for licensing, since the remuneration rights can be assigned via private contracts to make more efficient copyright management. Interestingly, artists’ organizations around the globe are currently lobbying governments to enact a non-waivable remuneration right for on-demand uses in favor of

597 In other words, as opposed to exclusive rights, the remuneration right does not grant control over the musical work or sound recording to the right holder, as she or he cannot prevent their use. For a detailed discussion see chapter IV.

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artists. In the view of these groups, a right of this nature would make up for the loss of compensation artists are suffering in the digital age. Finally, it is important to draw attention to common issues that come before courts when analyzing interactive streaming within the sphere of a right such as the public performance right. For instance, discussions about how to construe terms that refer to the public sphere in the digital realm have been frequent, in both the United States and Brazil. As described in chapter five, confusion exists as to whether interactive streams trigger the distribution or the public execution right under the BCL. One of the main concerns brought up in the discussion dealt with whether individualized streams could fit the concept of “place of collective frequency” of Article 63.3 of the BCL. Similarly, in the U.S. the Supreme Court addressed the question of whether individual streams can qualify as “public” within the meaning of the Copyright Act. Even though the statues are different, courts in both countries, with different reasoning, concluded that the public sphere could indeed fit personalized streams. This instance serves to illustrate the resilience of copyright law to comprehend new technologies.598 The critical lesson to draw from this analysis is the importance of clearly delineating rights under local copyright law, which can avoid confusion to legal operators. In doing so, however, it is also necessary to follow principles and underlying concepts built through copyright doctrine. It is in these principles that courts can act in light of new emerging technologies without the need to amend the law. Designing statues based on these principles can build resilience into copyright law. In summary, the three nations offer a clear and standardized landscape for downloads, where the mechanical right, comprised of the distribution and reproductions right must be cleared. The three countries also treat interactive streaming similarly by naming both the reproduction right and the public performance (with different names and origins) as relevant rights to license. Even though Mexico appear to offer additional rights, in

598 In Cartoon Network, LP v. CSC Holdings, Inc., the Second Circuit held that if only a single person was able to receive any individual transmission, then the performance would not be public. As a result, “private transmissions—that is those not capable of being received by the public—should not be aggregated.” “An individual transmission of the work, the court reasoned, that transmission would not constitute a public performance within the meaning of Section 106(4), even if several people received identical performances of the work through several transmissions.” See Copyright Office, supra note 16, at 199.

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practice these rights tend to follow the rest of exclusive rights contractually, avoiding licensing problems. Nonetheless, the existence of more rights always adds fragmentation and introduces the possibility that more steps need to be taken.

4. International Trends: The Approach of International Actors to Licensing A phenomenon that is not easy to observe when conducting individual country case studies is international business practices, but the comparative dimension can capture these elusive practices. During this research, licensees that operate at a global level (record labels, aggregators, DMPs) consistently identified business practices that guide their operation across countries. These interviewees confirmed that standardized practices exist and are desirable because of their utility for those seeking multi-territorial licenses. From the perspective of DMPs, these standardized practices consist of, first, clearing sound recording rights by seeking arrangements with major record labels and aggregators that represent independent labels—who manage digital uses individually. Second, DMPs aim to clear musical works usually on a local or a regional basis through CMOs that manage performance rights as available at those levels. Licensing sound recordings tends to be relatively straightforward since record labels and aggregators can directly license extensive catalogs of music. Direct licensing is possible for record companies because they typically retain all the rights of all the artists that are necessary to award a license on the sound recording without intermediaries. These rights include those from principal and secondary artists. Not without criticism, the contracts concluded between labels and recording artists usually assign all rights, or their management, to the label in exchange for different types of compensation packages. For instance, labels often employ “work for hire” contracts (particularly with musicians or background singers) or contractor roles, retaining all rights, usually in exchange for a salary or a lump sum. Singers usually sign a recording contract or a three sixty deal, which may or may not allow the artist to retain rights. Although some of these contractual practices with artists predate the digital era, these contract modalities facilitate the full control of sound recordings for labels in digital uses. This is how, instead of outsourcing the negotiation of licenses and collection of royalties for digital uses to a third-party entity, labels can and do conduct direct licenses around the world. As repeat and

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sophisticated players, record labels can simplify licensing processes while amassing bargaining power and a mandate that allows them to license their catalog on a global basis. The general sound recording licensing practices employed by labels alleviate the problem of fragmentation that faces stakeholders seeking to operate on a multi-territorial basis. These practices help to improve efficiency and minimize transactions costs.599 For instance, DMPs (licensees) that operate on a worldwide level only need to negotiate with major record labels (who own approximately 69% of the world catalog)600 and with aggregators that source independent music; this relatively small number of licensors mean DMPs incur relatively low bargaining and search costs. Licensors also benefit from using these practices, as they can control their catalogs seamlessly worldwide.601 In contrast to the predictable and straightforward licensing process of sound recordings, licensing of musical works is reportedly the most challenging step for companies when clearing rights, according to several interviewees. Some of the difficulty stems from the nature of performance rights for musical works which need to be managed on a country-by-country basis through local CMOs. In addition, CMOs are subject to different legal requirements in each country and have individual institutional idiosyncrasies that impact licensing processes. DMPs must work with the local entities that manage these rights in addition to clearing the necessary reproduction rights that are often controlled by different structures or stakeholders, such as publishers. For instance, separate entities manage reproduction licenses in the United States (e.g., the Harry Fox Agency for mechanical licenses, and ASCAP, BMI, and SESAC for different catalogs of performance licenses). The complexity varies country by country, but the same principle applies: the licenses must be obtained locally or, possibly, regionally (some countries have established multi-territorial organizations, such as Latinautor in Latin America) and often through several different institutions.

599 In contrast with the analog era where transactions costs were perceived on a local market basis and most business practices addressed local markets. 600 Global market shares 2016: Sony and Warner gain on Universal, as indies rule, MUSIC BUSINESS WORLDWIDE (2017), https://bit.ly/2yutgpe (last visited Mar 23, 2018). 601 The reason why labels can operate in this fashion is largely because they assume that local legislations, based on the WPPT, construe the making available right as an exclusive right of individual management.

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Although sound recording licensing practices have the advantage of reduced transactions costs, they also have the disadvantage of tending to concentrate power in just a few stakeholders. In contrast, while musical works practices are messy and inefficient, they allow the participation of domestic stakeholders that represent local musical interests. These local actors are essential to connect local artists to the world and contribute to cultural diversity. While this research has focused on understanding how licenses can reduce transaction costs and optimize efficiency, it is important not to lose sight of the relevance of preserving and promoting local music while also maximizing access to music. These goals—efficiency, dissemination, and promoting cultural diversity— should go hand in hand.

5. Comparative Practices in Licensing Licensing music is complicated because of the nature of music and the design of the applicable copyrights. However, some countries enact (or not) frameworks that allow a more efficient licensing space. Among the three countries analyzed, the United States presents an intricate frame that relies on compulsory licenses and antitrust oversight of PROs. Stakeholders believe that the system is inefficient and cumbersome. Similarly, Brazil was consistently described as a “mess” and the most challenging country in which to obtain licenses in the Latin American context. Brazil has a legal monopoly for public performances, where a unique entity can collect performance royalties. In contrast, Mexico has no significant regulations on licensing and was regarded as a relatively easy country in which to conduct transactions. Despite these differences, there is one common trait: clearing musical works is the most challenging part of the process. The case studies demonstrate that licenses for downloading activities have a two-step process across the board. The first step entails clearing a mechanical license for musical works, usually through publishers. The second step consists of licensing the same rights for sound recordings, which record labels and aggregators directly license. These steps must be repeated with each publisher, PRO, and record label, an issue that is resolved differently in each of the three countries. On the other hand, the pattern identified earlier regarding the economic rights implicated in interactive streaming results in a licensing process of at least two steps in

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Mexico, and three in Brazil and the United States. In Mexico, a licensee must negotiate directly with record labels and aggregators to obtain a license that includes the mechanical and performance rights of sound recordings. In addition, the licensee must obtain a musical works license that bundles the mechanical and public performance rights. Licensees receive this license from a single entity, EMMACSACM, which reportedly affiliates one hundred percent of the catalog of compositions available in Mexico. The EMMACSACM system is private and built upon agreement between publishers and the local PRO. Similarly, in Brazil and the United States, licensees must seek a license with labels and aggregators that also bundles the necessary rights for the use of sound recordings in interactive streaming. Musical works licensing is a more cumbersome process in both countries as it involves the mechanical and the public performance rights that are managed through different structures. Thus, the process to clear rights for musical works breaks in two steps. The following chart summarizes the process of licensing in the three countries under study for downloads and interactive streaming.

Table 10: Comparison of Licensing for Downloads Interactive Streaming

Use Object United States Mexico Brazil Compulsory license for mechanical rights Mechanical Mechanical license Musical Works managed by HFA or EMMAC-SCAM from UBEM and Section 115 blanket license other entities Downloading Song by song Direct negotiation with Direct negotiation Direct negotiation Sound record labels and with record labels with record labels Recordings aggregators and aggregators and aggregators

Use Object United States Mexico Brazil Mechanical license Bundled license UBEM and other managed by HFA and (mechanical and entities mechanical Section 115 Public Musical Works license and public Song by song performance) performance ECAD Public performance EMMAC-SCAM blanket license Interactive with each PRO blanket license Streaming Direct negotiation with record labels Direct negotiation with Direct negotiation Sound and aggregators record labels and with record labels Recordings ECAD may collect aggregators and aggregators for right holders that do not opt out

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As can be seen, the common theme is that record labels conduct direct licensing for sound recordings across the board, as well as aggregators (in their role as intermediaries). In this space, there is no specific regulatory oversight or agency intervention of any kind. In contrast, musical works licensing is subject to different types of regulations in the three countries. In particular, some oversight by the government exists for PROs in all the countries. The U.S. exhibits the most stringent control, through consent decrees, whereas Mexico possesses a laxer supervision regime for collecting societies. Brazil is somewhere in the middle with two relevant regulatory aspects. A legal monopoly—ECAD— exists for the collection and distribution of public performance royalties for both musical works and sound recordings, which is an opt-out mechanism. The government also has oversight duties over ECAD and any other collecting society. These systems have certain flaws and advantages, and more importantly, impact licensing differently. The following section explains the difficulties distinguished in each of the licensing steps, and how these problems are dealt with in each of the countries. These characteristics help to identify why some of these schemes are easier to navigate than others.

6. Problems and Solutions in Musical Works Licensing Musical works licensing has acquired a higher degree of complexity in the digital environment. Obtaining a mechanical license for compositions used to be an easier endeavor in the analog era, as publishers negotiated directly with record labels to produce a record. Today, DMPs must seek this license directly from publishers, adding an extra step in the business model of copy distribution. The high volume of transactions and other market conditions have also constrained mechanical licensing. Because of these shifts, many problems have risen, some are new, and some others are legacy problems that have become more evident in the digital context. The following chart presents a summary of the most critical issues found across the studied countries. Although some of these problems have been resolved by stakeholders in certain cases, there is evidence most of these problems have been a constraint at some point for each of the three countries, as detailed in the next section.

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Table 11: Problems in Licensing Musical Works for Digital Uses

Rights Countries Problem Type Public United Mechanical Mexico Brazil Performance States Hard to Identify Several Copyright/ Licensors for X - - Low High Market Mechanical Licenses Song-by-song license Legacy X Blanket High - High Copyright/ Right-by-right license X X High - High Legacy Lack of transparency Legacy X X Low Moderate High Data problems Legacy X X High Moderate High Antitrust concerns Market X X Moderate - Moderate

Low rates and Market X X High X X compensation

6.1 Hard to Identify Several Licensors for Mechanical Licenses Many of the problems related to mechanical rights licensing exist due to the nature of copyright law and the fragmentation issues that the design of the law cause. For instance, individual composers and songwriters work collaboratively on a composition. Each of them owns a portion of the musical work, fragments that are commonly managed by a publisher. Publishing contracts vary but usually divide property between composers and publishers. Despite the fact that the big publishing companies concentrate a significant share of the market, they do not own all the fragments in a single work. In addition, local publishers exist as well as individual compositions that do not form part of the main catalogs. DMPs have a hard time identifying which publishers or entities control musical works in each country. Thus, licensees struggle with identifying the universe of institutions or individuals from whom they should solicit a license. This problem is particularly rampant in Brazil where licensees reported this difficulty to be one of the major concerns when clearing mechanical rights. UBEM fused some of the most important publishers in the country and grew to serve as a limited single window for mechanical rights. Because this entity controls between sixty and seventy percent of the Brazilian market, it has facilitated negotiations and the process of licensing musical works. However, UBEM does not represent the entire market of mechanical

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rights for compositions, and it remains unclear who the other players are. As a result, Brazilian users operate in conditions of considerable uncertainty, exposing themselves to liability. This risk is something that users need to assume since usually the licensor cannot offer the representations and indemnities that would curb this risk. In Mexico, this problem is less prevalent because of the coordination of a high number of players through EMMACSACM. In this case, these actors have voluntarily joined forces under a single institution, but indeed the system does not offer a guarantee that one-hundred-percent of the rights are represented in the institutions, as EMMACSACM claims they do. In contrast, in the U.S. this issue is not technically a problem because a licensee can file a NOI with the Copyright Office to use the work of the unidentified right holder. Here the solution is a compulsory license, which in turn has many drawbacks as detailed in chapters two and three. A potential solution to tackle this issue without turning to compulsory licensing or other regulatory prescriptions is to create a voluntary registry at the Copyright Office in the relevant country, where all the entities wishing to license mechanical rights can be listed. This registry could serve as an incentive for users to list their operations. The registration of these institutions could have similar effects to those awarded in copyright registration under the Copyright Act, where registration is required to file an infringement lawsuit or to claim attorney fees. Failure to register the licensing entities could result in impediments to infringement lawsuits. Thus, this solution could contribute to decreasing identification efforts and the costs associated with this search, as well as enforcement costs for liability.

6.2 Right-by-right Licensing Having to obtain a license for mechanical and public performance rights—typically managed by different entities—creates inefficiencies and increases transaction costs. Akin to the problem of various licensors, this issue is related to the nature of copyright law, where right holders have different rights. Ideally, these rights should be exercised jointly in a single transaction to decrease transaction costs. In Brazil and the U.S., different institutions separately clear mechanical rights and public performance rights through different regulatory systems. In Mexico, this dual

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system of rights clearance used to be the norm too. However, publishers and the local PRO decided to create a single window that would license both rights in a single act. As a result, users only need to negotiate once with a single entity. This solution has two relevant elements: the first consists of bundling the two applicable rights on musical works, while the second brings together two (or more) different licensors under one procedure, forming a single window or a one-stop-shop. This solution tackles many problems at the same time, optimizing resources, reducing fragmentation, and enhancing efficiency in the process of licensing musical works. Interestingly, in Brazil, publishers, UBEM, and ECAD attempted to create a one- stop-shop to bundle these two rights in a single license. The national copyright authority stopped these efforts due to anti-competitive behavior concerns. No concrete evidence or studies were found to support this anti-competitive practice claim during the course of this study. However, this preemptive measure resulted in a significant setback to the effort to address this problem.602 Likewise, in the U.S. the consent decrees expressly impede bundling rights, which has deterred any attempt by the relevant stakeholders to seek a more efficient structure to clear rights. While many of these measures can be justified by antitrust concerns, it is essential to move away from preemptive schemes that deter efforts of private actors to attain efficiency, as in the case of Mexico.

6.3 Song-by-Song Licensing in Mechanical Licenses Song-by-song licensing is a legacy problem that severely impairs efficient licensing. This issue is related to the disruption in the value chain of music described before. The practice changed from record labels clearing mechanical licenses directly with publishers upon the fixation of the phonogram to DMPs having to acquire such a license. This change resulted in mechanical rights becoming more similar to performance rights— "smaller rights." Thus, single song clearances should not be the norm as they are cumbersome due to the high volume of transactions required to establish a DMP. Clearing songs individually is a problem primarily in the United States, where individual compulsory licenses must be filed if the user fails to agree on a license with

602 Granted, at that moment many stakeholders had doubts on the rights that were effectively necessary to clear under the BCL

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HFA. As a result, transaction costs of this system can be high, and single song licenses can be impractical in an era in which users need high volumes of musical works to make their services operative. In the digital environment, it is imperative to have a system that allows something close to blanket licensing used in performance rights clearance. In Brazil and Mexico, publishers have organized themselves to license catalogs in a bundle. In contrast, in the U.S., Section 115 does not allow blanket licensing, which would be the preferable solution.

6.4 Data Problems Another legacy drawback exacerbates the difficulties of identifying licensors and rights: the absence of complete, accurate, and up-to-date data to identify musical works and sound recordings. Without accurate data, the searching and enforcement costs can be excessively high and hamper licensing. As Goldstein explains, “copyright commerce requires not just readily divisible and transferable rights, but also information about those rights-who owns them, where the owner can be found, and whether and on what terms he will agree to a license.”603 Thus, making reliable data accessible for licensing purpose is a critical need for efficient licensing. This problem is more severe with respect to musical works, but data problems also exist when pairing musical works and sound recordings. Sound recordings are delivered as assets and producers identify them with a more systematic approach. Licensees, therefore, know with precision the asset (a file with associated metadata) that they are entitled to use. In contrast, musical works are treated differently. Their intangible nature, the lack of uniform practices to identify the rights associated with musical works in recordings (e.g., effective standardized identifiers), and the inexistence of a single authoritative database are the main problems with data. It is not surprising that these shortcomings occur in all three countries under study, as the entire industry around the globe faces this problem. Various solutions have emerged in different countries, where licensors have taken steps to curtail the problem. In Brazil, each entity uses a different data solution. UBEM

603 Paul Goldstein, supra note 120, at 693.

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and other organizations that manage mechanical rights outsource the matching and identification task to BackOffice, a leading service in Latin America that offers a single regional copyright database. In fact, Latinautor, the single window for Latin America, also uses BackOffice’s data solutions. As a result, BackOffice has developed a robust and comprehensive multi-territorial database, providing more precision and efficiency for its clients. ECAD, however, uses a proprietary database and solutions when processing public performance licenses. This discrepancy in data processing and databases raises the possibility of having different results in the identification of a single musical work. Such inconsistencies, consequently, may increase inefficiencies in the overall process. Mexican stakeholders used a comparable approach to ECAD’s. Instead of outsourcing the service, EMMACSACM decided to build a proprietary database and processes to overcome data problems. Yet EMMACSACM’s process does not present the same risk as that seen in the Brazilian case because the Mexican entity bundles the license. In the U.S., licensing bodies have chosen to build their databases as well, and to conduct the matching process through different systems. Data share initiatives exist, and the industry has tried to look for joint solutions, as described in chapter three. Although the emergence of data solutions is a positive sign that licensors are adapting to the digital environment and building critical infrastructure, the problem persists. The proliferation of discrete systems does not systematically address the problem. To tackle this issue holistically, it is necessary that entities agree to share data internationally, adopt unified standards, and build a single authoritative public accessible database. However, individual bodies, as revealed in interviews, are skeptical of yielding control of their proprietary systems. The Latinautor case indicates that adopting a single private solution is possible (e.g., BackOffice), defeating the incentives to maintain a proprietary system. Outsourcing the service has benefited the individual entities of the Latinautor system, including publishers and the CMOs of Latin America, except for Argentina, Brazil, and Mexico. Some of these entities are too small in size, and investing in resources is not the most practical solution. Like the Latinautor case, combining private and technological solutions seem to resolve data problems across countries most significantly. Other private solutions such as Kobalt or DistroKid also exist.

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In this context, it may be that in the long term the market will overcome the issue and find comprehensive solutions that become multi-territorial. Nonetheless, in the meantime, artists and songwriters are invariably worried because of their abated compensation. Further, the same incentives do not exist for larger entities in bigger markets that wish to control their assets. Thus, it may be necessary to turn to governments to offer incentives and facilitate coordination to resolve the problem as a whole. In this sense, WIPO can be a forum to spread standards and goals for a uniform data system. However, it is important to stress that private and technology-driven solutions are key and should not be superseded by governmental plans.

6.5 Lack of Transparency Concerns about transparency have been raised regarding the distribution of royalties performed by CMOs and direct deals. CMOs historically used rough methods to calculate songwriters' shares. Accurate data and the technology available today increase traceability and precision in royalty distribution, boosting transparency and accountability. However, the ability to trace direct deals concluded between publishers, labels, and DMPs is an increasing concern. The first issue is consistent across the board, whereas the second has been more prevalent in Brazil, moderate in Mexico, and low in the United States. Chapter three detailed the problem of direct deals transparency. In brief, in the United States, artists and songwriters demonstrated their concern about the possibility of having royalties flowing through direct deals between publishers and DMPs instead of PROs. My research did not pick up on this issue in Latin America because the research design did not include interviews with creators of music. However, the press has widely reported on creators’ concerns about such deals. In the case of Brazil, the government revealed its apprehensions about direct and private deals that do not allow to understand how the money is flowing. In the U.S., the Copyright Office proposed to give songwriters the option to assign a MRO to collect and distribute the royalties that would not flow through public systems. This proposal is interesting, but further complicates an environment that already has

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many players. Nonetheless, where collective licensing is used, as is the case of Brazil and Mexico, this solution can work. Efforts to create a framework for oversight of collecting societies can contribute to solving this issue. While the U.S. only has antitrust oversight over PROs, Mexico and Brazil offer supervision from the copyright authority of the central government. In the U.S., self-regulation on transparency issues seems to have been the trend, whereas in the other two countries, CMOs have reporting obligations and the government, with more or less authority, can eventually audit the collecting society. The latter approach can offer some advantages to enhance transparency in Latin American countries. First, with minimal cost, the government can guarantee and set incentives for these entities to anchor transparency as a priority. Second, awarding audit rights to songwriters and other members of CMOs would improve openness and access to information.

6.6 Low Rates and Compensation Low rates and compensation are, perhaps, the most commonly identified complaints across the board. Composers and artists insist that their compensation has decreased in spite of the growth in consumption of digital music. The rates set for licensing obviously impact the compensation of songwriters. In the case of musical works rates, the problem is partially a legacy issue, since these fees traditionally have been lower than sound recordings. Further, the rates set in the U.S. for mechanical licenses and performance rights have long influenced international markets.604 As explained in chapter three, the U.S. system contains several elements that tend to produce lower rates for musical works. In particular, there is a disparity between licensing musical works and sound recordings, as well as between uses of musical works. These incongruities materialize through rules such as various rate setting standards, prohibitions against using sound recordings

604 CISAC - CISAC Describes International Implications of US DOJ Decision on Billboard: “When It Needs Fixing…Don’t Break It Further”, CISAC, https://bit.ly/2b7kQsU (last visited Mar 24, 2018) (“Because of the size of the US market and its influence in the world, any changes in the way our US members operate has consequences for sister societies, songwriters and music publishers worldwide.”)

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performance rates as benchmarks, etc. These differences have affected the rates fixed in the U.S. and, thus, affected the international market. These legal distinctions do not exist in Mexico and Brazil, where private actors negotiate the rates. However, such negotiation occurs in the context of a global market that, according to interviewees, offers benchmarks from which local negotiations do not depart much. Though splits may vary between mechanical and public performance, there is a given fixed pie that the global market seems to determine. However, access to the specific rates in each country was not possible and interviewees limited to say that they do not depart from international market rates. Musical works rates are slowly increasing, though. Mechanical licenses rates have risen from the analog era, but still are smaller when compared with sound recordings. This finding was confirmed in all three countries (except for the period in Brazil where no performance royalties were recognized). In the U.S., mechanical rates experienced a historical increase last January, which will impact the compensation of songwriters positively around the world. Besides the lobbying by publishers and songwriters seeking to resolve domestic idiosyncrasies that would improve rates and compensation, no additional implemented solutions to solve this problem were identified. For instance, the U.S. Copyright Office report outlined steps to achieve parity between uses of music and between musical works and sound recordings. Amendments to the system that include market-oriented mechanisms within the current framework should result in higher rates. In Brazil, the STJ decision supported the collection of public performance rights. It is unclear whether this change has resulted in increased rates as I had no access to these numbers. Some stakeholders claimed that with the STJ decision the only change is how the revenue flows (through publishers or ECAD) and not the numbers.

6.7 Antitrust Concerns Antitrust concerns are an issue in the United States and Brazil. In the U.S., DMPs manifest that the American system currently prevents anticompetitive behaviors, while the Copyright Office believes that this concern is no longer a problem and should be approached differently. In Brazil, the government revealed its antitrust concerns with the

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arrangement between UBEM and ECAD that bundled mechanical and public performance rights in musical works. Different scholars and the U.S. copyright office have argued against the convenience of regulating PROs permanently through antitrust law.605 Indeed, antitrust law has an important role in this music market but it should evolve to be used to correct specific conduct and not as a permanent framework to control PROs or other actors. While the role of antitrust law should be to preserve an array of options for consumers in the marketplace and avoid anti-competitive practices, governments should avoid using antitrust law to bar the development of market solutions a priori. In this view, allowing more flexibility to these actors can result in new arrangements and solutions that facilitate licensing (e.g., bundling), bringing additional benefits to the overall market. Yet prompt government response to anticompetitive behaviors and private antitrust enforcements actions are key to maintaining a balanced market and to protecting consumer welfare. In this sense, it is important that governments can take a fresh look at the evolving conditions of the digital marketplace and adjust the competition oversight accordingly. Further research in this field, however, is key to analyze the implications of the changes in the digital marketplace. In particular, it is important to analyze anticompetitive practices and measure their impact on the marketplace choices available to consumers.

6.8 Common Trend: Private Actors Taking the Lead Evidence suggests that stakeholders related to musical works licensing have been adapting and seeking solutions to the problems derived from the changes in the industry due to the emergence of new business models. Some of these solutions include the establishment of the one-stop shop in Mexico to license musical works, allowing higher efficiency by bundling and making all licensors to operate from such structure; and building data systems to identify musical works and distribute royalties. These solutions share a common trait: they emerge privately in the absence of regulation that obstructs the development of solutions, as is the case in Mexico. In contrast, markedly different outcomes have resulted in the cases of the U.S. and Brazil. In

605 Daniel Gervais, Keynote: The Landscape of Collective Management Schemes Symposium: Collective Management of Copyright: Solution or Sacrifice, 34 COLUM. J.L. & ARTS 591, 603-4 (2010).

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Brazil, the government halted efforts of private actors to create a single window for musical works due to competition concerns. Similarly, the regulatory framework in the U.S. seems to function as a barrier to being able to fix many of the problems that exist in the licensing space. Read together, this study’s three case studies suggest that private actors may have natural advantages and incentives to solve licensing constraints, but regulatory frameworks can affect the capacity of private actors to solve such problems. It is important to note that while this pattern exists in the three countries studied here, the evidence presented is not conclusive due to the study’s comparative case study methodology. Further empirical research is necessary to establish this claim as conclusive.

7. Problems and Solutions in Sound Recordings Licensing This research has shown that licensing sound recordings is a simpler affair, as recording contracts create a concentration of rights in record labels who privately negotiate licenses with no regulation. A single licensor—recording companies--can control the multiple fragments of rights that would otherwise be scattered in different hands. With some minor differences,606 this process is in practical terms the same across the board. Licensees clear rights directly with major record labels (e.g., Universal Music Group, Sony, Warner Music), important independent record companies, and aggregators. Moreover, there is a tendency to conclude global contracts when available and convenient for the licensee, to avoid repeated transaction costs. As a result, this model bundles rights and most of the catalogs are in few hands.

606 Despite that the general process for licensing sound recordings consists of direct negotiations with record labels, Mexico and Brazil offer particular traits in their legislation that do not derive in practical differences when licensing. Yet, they deserved some attention in the analysis. Mexican legislation awards a remuneration right that seemingly include the making available right for interactive transmissions. In practice, this right has not produce an additional step to clear rights because it is assigned with the rest of the rights to record labels. If such right is not assigned or barred from assignment, an additional license would be necessary for interactive streaming activities. In the case of Brazil, ECAD has the legal mandate to collect all public performance royalties. Nonetheless, the regime has an opt-out provision, by which most record labels have opted out and dealt with interactive streaming licenses directly. This regime caused some confusion, however, licensors and licensees have adapted, and the presumption is that sound recordings are directly licensed.

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In the simpler world, are there any reported flaws? Indeed, low compensation to artists arose as the primary shortcoming of sound recordings licensing in Mexico and Brazil. While the U.S. Copyright Office did not evaluate this issue in its report, the headlines have well-documented the complaints of artists in the U.S. as well. In the case of Brazil, the government referred to this problem as a black box problem, claiming that information about artists’ compensation is shielded by the nature of private contracts. However, it is critical to ensure that direct negotiations constitute the proper exercise of the property rights that copyright law grants to right holders. Some of the problems that artists allege exist today in contracts are the result of old practices designed for a different market where many channels of distribution and alternatives to record deals did not exist. Even though the bargaining power of the average artists may never be proportional to that of recording companies, options to reach the market exist, which allows artists to manage their rights differently. Some organizations around the world currently lobby for an un-waivable remuneration right as part of a solution to increase artists’ revenues. Although this proposal is interesting, it would further fragment licensing, as a different licensor would manage this "smaller" right. This solution would increase the already high operating costs for DMPs, some of which are not registering profits. In fact, the high mortality of DMPs and their increased consolidation in fewer entities may be an indication that DMPs may already be paying royalties as close to the limit for a business to be viable. Nonetheless, low compensation of artists is real, but additional data and analysis are required to understand the dimension and potential solutions to the problem. This problem should also be analyzed in light of the costs of DMPs and the apparent concentration of DMPs. On the other hand, some users reported that the current setup favors those mainstream artists that work with record labels. This issue, nonetheless, is slowly becoming less urgent, since, compared with the analog world, independent artists today have many more options to distribute and produce their music, and consumers enjoy more music than ever today. The rise of aggregators and the willingness of some DMPs to distribute independent music has dramatically benefited smaller artists and the proliferation of new and diverse types of music. The lack of regulatory barriers for aggregators, as well as the

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availability of new technologies that allow artists to enter into direct relationships with DMPs is changing the landscape of music, benefiting new artists and consumers. Finally, another practice that may deserve some attention is the use of most favorite rate clauses in contracts, between major record labels and DMPs, and their antitrust implications. Under this covenant, DMPs must extend the best terms it makes available to any other major label. No solutions to this problem exist in any of the countries under analysis beyond general anti-trust law principles. Thus far, however, no cases have been filed against this market practice.

8. The Role of the State: Compulsory Licenses v. Private Schemes with Oversight The question of what role the state should have is intrinsically related to what regulatory approach the legislature has chosen, if any, to control the licensing process. This section analyzes two types of regulatory strategies: (1) structures and rules designed to exercise rights; and (2) the rules to supervise collective licensing. Both methods may limit the exercise of economic rights in music. This section also puts into perspective how these regulatory schemes influence the efficiency and the autonomy of stakeholders to correct failures and enhance licensing. Despite the fact that the implicated economic rights are essentially the same in the three countries under study, their differing regulatory frameworks mean that licensing processes differ. The United States presents the most regulated environment, followed by Brazil, where a legal monopoly established by law exists for public performances. Mexico’s structure (except for a monopoly for performance royalties) is similar to Brazil’s and, in addition, prescribes rules that affect freedom of contract. Tables 11 and 12 show, correspondingly, a comparison of these three regulatory frameworks and the governmental supervision powers over CMOs.

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Table 12: Types of Regulatory Schemes by Country and Right

Use Object United States Mexico Brazil Rules for publishing Compulsory Mechanical contracts & general General government license Rights government oversight of CMOs Musical oversight of CMOs works ASCAP & BMI General General CMO & specific Public governmental governmental ECAD government Performance antitrust oversight oversight of CMOs oversight Mechanical None Rights Sound None General CMO & specific None (except Recordings Public ECAD government section 112 and Performance oversight, or none if right 114) holder opts out

The American music licensing system is heavily regulated when compared with other countries. Different mandatory licensing schemes coexist, affecting digital licensing and creating obstacles to achieve a more efficient marketplace. While for musical works there is compulsory licensing for mechanical rights607 and collective licensing with antitrust oversight for public performance rights (this scheme acts as a de facto obligatory system), no regulatory framework nor role of the government exists for sound recordings, except for non-interactive transmissions through the compulsory license of Sections 112 and 114. According to Gervais’ copyright restriction levels table, these mandatory licenses pose the most restrictions to the exercise of exclusive right exists of the three countries. Similarly, the PRO consent decrees, motivated by antitrust principles, codify a series of limitations to BMI and ASCAP that impair their free operation in the market. As a result, both regulatory systems limit the full exercise of economic rights and withdraw right holders’ right to say no. Under these frameworks, therefore, the role of the government is one of rate setting through the CRB (an administrative body) and the courts. The DOJ also must supervise the consent decrees periodically, though no government role exists in the licensing of interactive transmissions of sound recordings. In fact, the role of the government has

607 Germany, India, Australia and Japan have compulsory licenses for mechanical rights as well. WIPO, supra note C02, at 123.

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remained mostly the same for over almost 90 years. Many stakeholders call to roll back these interventions and move to a more modern and market-oriented base system. Brazil, in contrast, only prescribes three sets of statutory provisions for collective licensing, a scheme that permits a better exercise of rights and preserves the right to say no.608 The first type sets general stipulations that CMOs must fulfill, while the second kind is directed only to ECAD, the entity that has to comply with both general and specific regulations. The third consists of the mandate that the federal government obtains to supervise all CMOs and ECAD. These powers are broad and target transparency, accountability, and good governance (TAG) goals. The authority, thus, of the central government is key to assure that collective licensing conforms to the general and specific legal requirements. In practice, MinC (the Copyright Office), as evidenced in chapter five, has set discretionary policy goals for the collective licensing system, limiting further the exercise of collective rights. Under the Brazilian framework, collective management is not compulsory. Upon affiliation of the right holder to the CMO, the entity retains a mandate to exercise his rights.609 The law provides an exception for members to exercise their rights individually, so long as they notify the CMO forty-eight hours before the act takes place.610 As a result, the general regime is consistent with a voluntary CMO (level 1 Gervais), but rules that

608 Other general rules emerged from the law and were recently amended after a series of scandals plagued local CMOs. After the 2013 amendments, the law declared collective management as an activity of public interest with a given social function that can only be performed by non-for-profit entities (Art. 97P1, BCL. Art. 97, BCL.). The law imposed rules regarding voting rights and appointments as officers. According to Art 97 §5 & 6, only original copyright holders directly affiliated with local CMOs could vote and be appointed as officers (only if residing in Brazil). It created a regime of oversight from the federal government, which also authorizes the functioning of the entities (Arts. 98 §1 & 98 A, BCL.). It imposed transparency and information obligations. E.g., CMOs must adopt principles of isonomy, efficiency and transparency in their collecting activity. This includes to offer a centralized repository of documents and contracts that proves the ownership of members (Art. 98§6) and information that is of public interest and that should be of publicly available through electronic means (§7); and make available to the users a database that contains the updated and accurate repertoire that the CMO manages (§8, 9 as well as others in Article 98B and 98C). The law also prescribes rules to determine rates and administrative expenses, such as parameters to guide the collection, ensure equitable treatment between associates, etc. Other provisions already existed in the law barring right holders to belong to more than one CMO that manage the same rights but allowed to transfer membership to another entity. Art 98 2, 5, BCL. 609 Art 98, BCL. 610 Art 98 §15, BCL.

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limit the actions of the collective entity exist (e.g., authorization, transparency, and accountability, etc.).611 In addition to the general CMO rules, the legislature designed a detailed regulatory framework for ECAD, the legal monopoly for the collection and distributions of public performance fees.612 Although the law is not entirely clear, ECAD’s scheme can be characterized as a mandatory collection agency with an opt-out mechanism and an imperfect extended repertoire.613 This scheme limits the functions that right holders delegate to collecting societies but does not theoretically restrain the individual exercise of the right holders. As observed in the BCL and practice, the system assigns to ECAD as the only entity that collects performance rights royalties, unless a right holder opts out of the system, according to the general rules of CMOs. The possibility to opt out is essential for the system. For instance, independent and major record labels have opted out of the system to license directly digital uses under study. In short, the role of the Brazilian government in licensing has expanded throughout time. It evolved from a regime that backed full exercise of rights with no supervision of collective licensing to a framework that imposes a legal monopoly for public performance rights, introduces obligations for CMOs, and establishes powers for government supervision. The regime entails limitations on the exercise of public performance rights, which must be collective but with an opt-out mechanism. Lastly, Mexico has a similar approach to Brazil for regulating CMOs. The Mexican framework contains three types of stipulations: contractual limitations, governmental oversight of CMOs, and obligations for CMOs. First, the law sets bounds for the negotiations of publishing contracts (e.g., maximum 15-year term contract and other conditions), which indeed impact how right holders exercise their rights with

611 See note 426. 612 In legal proceedings, the antitrust authority (CADE) decided that the “BCL gives ECAD a legal monopoly exclusively over collecting and distributing copyright amounts owed for the public performance of music, literary-musical works and recordings, but not the right to establish the amount to be charged for those rights jointly with the associations.” Barretto Ferreira e Brancher Sociedade de Advogados-Paulo Marcos Rodrigues Brancher, Fern & a Falesi Bezerra, ECAD HELD LIABLE FOR FORMING A CARTEL | LEXOLOGY, https://www.lexology.com/library/detail.aspx?g=26702f37- 3a22-40ef-8704-124c19ea98fa (last visited Mar 25, 2018). 613 Art 99, BCL.

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publishers.614 These provisions are a recognition of the asymmetry in bargaining power between publishers and authors, and is aimed at protecting authors in those negotiations. Second, the MCL awards supervision duties to the government, mainly to achieve TAG goals. Third, the CMOs must comply with general obligations that the MCL establishes (similar to Brazil’s framework). The law also expressly permits holders to choose to exercise their economic rights individually, through an agent, or through a CMO.615 In fact, the legislation clarifies that CMOs cannot intervene when the right holder chooses to effect individual licensing. However, if after becoming a member the right holder wishes to exercise the right privately, she must revoke the mandate awarded to the CMO. In the Mexican case, thus, CMOs are of a voluntary nature, with some TAG obligations mandated by law. The approach and the execution of the copyright authority in Mexico have been flexible enough, enabling the emergence of new solutions such as EMMACSACM.

Table 13: Examples of Collecting Societies Governmental Oversight

United States Brazil Mexico -Rate setting by Courts -Authorization for functioning & withdrawal -Authorization for functioning (ample capabilities) when: -DOJ oversees consent -Administrative and judicial settlement of i) the by-laws comply with the decrees: disputes between users and right holders or MCL Obligatory system their agents; or between owners and (ii) the conditions assure No partial withdrawal associations (collection & repertory issues) transparency and efficacy in the No bundling -Oversee (i) the transparency and efficacy of management of rights the management; (ii) representability of (iii) the functioning of the societies members; (iii) the compliance of by laws warrants -Authority to review databases, contracts, by -Withdrawal laws, agreements, minutes, financial statements, external audits, directors’ compensations, etc. -Obtain an annual report of the documents detailed above.

614 Mexico strong government oversight and little competition. Many provisos on contracts that aim to protect author in negotiations assuming that they have little bargaining power. Any transfer of economic rights has to provide remuneration for the author. Other guidelines apply to license terms and conditions, Max 15 yearlong licenses. It restricts freedom of authors, but it doesn’t apply to literally works. Assignment contracts need to be recorded in registry in order to be binding for third parties. (Art 56). 615 Art. 195, MCL.

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Having presented the general regulatory frameworks, it is important to consider how these schemes promote efficiency in licensing, support stakeholders to take actions that correct failures, and encourage a balance between all the stakeholders and the goals of the copyright system. Neither of these approaches is perfect but each offers some advantages and shortcomings to achieve those goals. While the American system provides some predictability in the process (at least for users), it can also be burdensome, lengthy, and expensive. The licensees know what to do in general and can activate a rate setting procedure as a fallback option, in case they cannot privately reach an agreement with the licensor. The tradeoff of this system is that it impairs the decision making of private actors. The compulsory mechanisms (for mechanical licenses and the ASCAP and BMI consent decrees), unmistakably, prompt non-voluntary measures that affect the market. In addition, these burdensome rules impair stakeholders to solve many problems on their own (e.g., bundling, single windows, etc.), worsening efficiency and halting progress of the overall market. In the case of Brazil, the ECAD system allows the coordination of public performance royalties collections, as many licensors exist, and provides for opting out, which strengthen individual exercise of rights. In contrast, Mexico has a purely voluntary CMO system with statutory obligations and government supervision has been flexible. Regarding CMO oversight, these countries use two schemes. In the U.S., the approach chosen is the permanent antitrust supervision for ASCAP and BMI,616 whereas in Mexico and Brazil belongs to a more transversal need to award powers to a governmental body to oversee these collective societies regarding TAG issues. With symmetrical competences to those awarded in Mexico, the Brazilian authority has tapped into its mandate to regulate broadly CMOs applying policy goals that affect licensing. These policy objectives, as interesting as they are, seem to transcend the mandate that the federal authority has when supervising CMOs. As a result, the actual supervision by the government has halted some of the changes, such as the constitution of a single window for musical works through UBEM. Even though some antitrust concerns existed regarding the creation of a single window through UBEM to clear musical works, this

616 See Glynn Lunney, Copyright CMOs and Collecting Societies: The United States Experience, in COLLECTIVE MANAGEMENT OF COPYRIGHT AND RELATED Rights 348-64 (3rd ed. 2016).

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concern was not verified through proper antitrust procedures and became a preemptive move. Modern antitrust law should deal with specific cases and circumstances, and not ban a single mechanism from the outset, which is what has happened in the case of the United States.617 In Mexico, instead, the government has taken a more passive role. As a result, publishers and CMOs have been able to organize privately a one-stop-shop for musical rights. The Mexican case seems to indicate that private actors are better suited to meet the challenges that they are facing through privately designed solutions, whereas regulatory barriers can impair the development of these private designed solutions. In addition, in a fast-paced environment, stakeholders need the flexibility to change and adapt to the situations. The case of Mexico illustrates how musical works licensors have adapted and solved the problems of licensing digital uses, whereas the case of Brazil shows the same instinct by equivalent licensors did not succeed, mainly due to a preemptive regulatory concern of the government. Likewise, in the U.S. the same solution is banned altogether. In short, the regulatory frameworks that exist in the three countries either act as a barrier or otherwise allow stakeholders to fix these issues. For instance, in the case of the U.S., the system seems to impede some solutions that could ease transactions, whereas, in the case of Mexico, the system does not pose barriers to accomplish solutions that have resulted in significant breakthroughs to facilitate licensing. This exploratory and comparative research seems to reveal an important trend: The more space the government and law provide to stakeholders to conduct their licensing operations, the more solutions seem to flourish that work to improve efficiency and reduce fragmentation. This observation seems to suggest that private actors may be better suited to find arrangements to coordinate property and solve to licensing problems, which is consistent with existing literature. However, given the constraints of the design of this project, further theory-testing empirical research will be necessary to confirm this premise. In this context, legislators should resist the temptation to implement solutions, such as compulsory licenses, that reduce transaction costs at the expense of severely constraining the options and ingenuity of licensees. Regulatory frameworks are hard to change and

617 The CADE decision prohibits ECAD to set prices.

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may not be responsive to the evolving conditions of the market and technology, which can impede actors’ ability to adapt. Nonetheless, it is crucial to recognize that there are some problems identified in this study in which a certain degree of intervention on the part of the government is desirable to overcome certain shortcomings. For instance, regulating CMOs has proven to be a necessary market intrusion. As discussed in chapter two, CMO supervision is essential because of their monopolistic position (legal or de facto) or the many transparency issues that can exist due to agency problems. No one-size-fits-all approach can endure due to the different market conditions in each country and other regulatory aspects, but regulators should distinguish between different policy objectives: antitrust and transparency. Competition concerns should be addressed in an ad hoc manner and not through permanent frameworks. Inversely, the government should be able to collaborate to achieve transparency, accountability, and good governance of CMOs through a framework that can be activated on an as-needed basis. Further, other issues in the licensing space require coordination and goal setting from the government, such as the establishment of a comprehensive unique database that contains musical works and sound recordings information. This study confirmed that some data solutions led by stakeholders were emerging. These efforts are not sufficient, however, and data problems persist. There seems to be an incentive for private actors to create their own data systems, which derives in the proliferation of discrete systems that do not systematically address the problem. To solve this problem, it is necessary that entities agree to share data and build a single authoritative publicly accessible database. In this area, where private actors have failed to establish a solution that solves the data problem, the market can benefit from the assistance of government in placing incentives to achieve these goals or taking the lead on coordinating the task. In addition, it is important to note the role of technology in advancing innovative tools to solve some of the existing constraints. For instance, technology and data solutions can contribute to reducing problems of transparency and accountability. Technologies such as fingerprinting (already in use) and blockchain promise to enhance traceability and transparency when exchanging digital rights. Moreover, technology has already helped to boost licensing practices, while also democratizing the industry and

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empowering artists and authors. For instance, technology has afforded artists the opportunity to produce and distribute their own music, and thereby retain their rights. These artists do not depend on a recording agreement to market their music. The new models of distribution and the emergence of new intermediaries, have removed the gatekeeping function of record labels. If no rigid regulatory frameworks are used to direct the market, technological tools can allow more efficiency and increase the availability of content. In sum, private actors may be best positioned to find arrangements to coordinate property and to solve licensing problems. However, there are some areas in which private actors have not been able to solve their own problems. On these instances, limited government intervention to establish incentives that would encourage private stakeholders to correct the problems found in licensing would be ideal.

9. Lessons Learned and Policy Implications Permitting private actors to lead and organize the development of licensing solutions is the central recommendation in the case of digital music, where a myriad of fragmented rights exist. Compulsory licenses or other systems that restrict the exercise of rights damage the capacity of private organizations to develop solutions that meet the needs of the market, when they repeatedly engage with licensees. Instead, voluntary agreements may result in a fairer evaluation of the market value of the rights and encourage actors to implement solutions that are particular to their repeated dealings. However, this suggestion has some caveats. In some areas, the government can aid private actors to achieve important goals, such as the creation of a comprehensive and unique database or establish systems that encourage TAG objectives. Private actors also need clear delineated property rights. However, technological change challenges the contours copyright law periodically. In the cases observed, litigation helped to clarify the applicability of copyright law to the new technological uses, demonstrating the resilience of copyright law to adapt to technology. In this sense, it is critical that legislators when amending the law, rely on copyright principles, such as the ideas behind economic rights. These principles and concepts can build resilience into the law.

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This study identified several problems that licensing digital uses of music currently possesses. Recognizing that there are no-size fits it all solutions for different legal systems with different traditions and culture, some general suggestions are offered to tackle some of the problems noted in this study: • One common problem for licensees is identifying all the mechanical license organizations that exist in each country. Creating a voluntary registry under the Copyright authority that lists the entities that award mechanical licenses is one solution. Registration could be designed as an incentive, such as by making registration is a requirement to file an infringement lawsuit or to claim attorney fees. Thus, registration is a cheap solution to decrease identification and enforcement costs. • Song-by-song and right-by-right (mechanical and public performance) licensing is another shortcoming that raises transaction costs. It is important to recognize that music consists of consumer assets that are formed of several fragments, but the whole asset is needed to function. Incentivizing, and more importantly, allowing private solutions such as one-stop shops that offer blanket licenses and bundle rights is the ideal solution. EMMACSACM, at a country level, and Latinautor, at a regional level, are good examples that show the benefits of opting for a private design such as the suggested. • Maintaining a framework that allows oversight of CMOS can contribute to solving transparency issues. CMOs are still key players in the market but should be supervised to ensure the transparency of their transactions. The government authority should authorize the functioning of the association and hold it accountable against TAG obligations established by law. In addition, awarding audit rights to members of CMOs would contribute to attaining openness and access to information. • Incentivizing the use of common data solutions, including data standards and a comprehensive public accessible database, would help to solve informational problems. However, private and technology-driven solutions are key and should not be superseded by governmental plans. • Antitrust concerns should be dealt with in an ad-hoc fashion according to local antitrust law. Permanent antitrust frameworks to regulate CMOs have shown to be detrimental. However, it is important to maintain a closer look at the most favorite

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clause that record labels use in the contracts with DMPs around the world, as some competition issues may arise from these clauses. Similarly, concentration in the DMPs industry is another area to keep in mind too. Further research in this area is advised.

In the case of the problem of low compensation, no apparent solution exists from the cases herein studied. Additional data and research are necessary to understand this problem further. However, it is essential to bear in mind two elements about this problem. First, the industry is still changing. Some factors that impact compensation, such as old “analog” contracts signed between labels and artists, or publishers and songwriters, may be phased out as new practices develop and creators understand the new musical landscape. Alternative options for creators have also emerged, allowing them to distribute their creations and reach their audiences in new channels, while retaining their rights. Data solutions should also enable improvements in the identification of right holders, improving collection and distribution. Second, any proposed solution should not harm private market negotiations nor limit the exercise of their rights. The bottom line is that right holders should preserve their ability to manage their interests. Private actors—in this case, right holders, collective rights organizations, and DMPs—seem to be better suited to create solutions that that lower transactions costs and promote their interests. That is perhaps a lesson to bear in mind when designing solutions to tackle the problems of an industry, like the digital music industry, that experienced radical change and where governments may be tempted to intervene early. However, a role for the government exists to assist private actors to achieve objectives such as TAG goals and establishing a unique database that promotes efficiency in licensing operations.

10. Conclusions

This study confirms that certain trends exist in licensing music for downloading and interactive streaming that are important to identify as many of the stakeholders involved in this industry operate on a global basis. These patterns confirm that copyright systems have evolved and that stakeholders have responded to change in the context of the

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digitalization of music. The most important lesson that this study suggests is that when the legal framework provides stakeholders with autonomy for conducting their licensing operations, more solutions to improve efficiency and reduce fragmentation seem to flourish. This observation seems to suggest that private actors may be better suited to find arrangements to coordinate property and solve to licensing problems, which is consistent with existing literature. However, given the constraints of the methodology used in this study, further research is necessary to confirm this premise. The first trend identified in this study corresponds to the economic rights that must be cleared in the three nations studied. For downloads, the mechanical right, comprised of the distribution and reproductions rights must be cleared. Similarly, in the case of interactive streaming, the reproduction right and the public performance (with different names and origins) are the relevant rights to license. Even though some differences exist in the local laws regarding these rights, such differences do not impact licensing significantly. International treaties have promoted the harmonization of copyright laws around the world, reducing the variability of local laws. Nonetheless, differences exist, and users of the system should be aware of these differences. A second trend corresponds to the standardized practices for licensing digital music. DMPs wishing to obtain a license typically clear sound recording rights first. To do so, they seek arrangements with major record labels and aggregators that represent independent labels—who manage digital uses individually. Second, DMPs aim to clear musical works usually on a local or a regional basis through CMOs that manage performance rights as available at those levels. This somewhat standardized behavior of DMPs parallels the national structures for licensing digital music. The case studies demonstrate that licenses for downloading activities have a two-step process across the board: clearing mechanical rights for sound recordings and musical works. Record labels and aggregators directly license mechanical rights for sound recordings, whereas publishers usually manage mechanical rights for musical works. These steps must be repeated with each publisher, PRO, and record labels. To centralize licensing in one organization, stakeholders in Mexico have created a single window that reunites different licensors and their rights under a single license.

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In contrast, interactive streaming results in a licensing process of two steps in Mexico, and three in Brazil and the United States. In the three countries, a licensee must negotiate directly with record labels and aggregators to obtain a license that includes the mechanical and performance rights of sound recordings. The licensing of musical works is what differs in these countries and what can be considered the most cumbersome part of the process. In the case of Mexico, these two rights are cleared in a single license obtained through the EMMACSACM system—a private single window that was built upon agreement between publishers and the local PRO. In contrast, in Brazil and the U.S., these two rights must be cleared in two steps: the mechanical right through each publisher, and the public performance right through local PROs. This research also recognizes common problems in licensing. These problems include the lack of an authoritative public database that identifies the rights of every song; the lack of transparency in royalties’ distribution; the difficulties to identify licensors in mechanical licenses; and issues arising from the fragmentation of copyrights, including the hurdles associated with song-by-song and right-by-right licenses. Most importantly, this study shows that private actors are tackling some of these issues whenever the legal framework and governmental supervision do not halt such efforts. The most significant examples of these efforts are the establishment of single windows—EMMACSACM in Mexico and Latinautor for some countries in Latin America. In contrast, private actors (ECAD and UBEM) in Brazil abandoned an initiative to create a single window to clear rights for interactive streaming of musical due to preemptive antitrust concerns of the Brazilian government. Similarly, the regulatory framework in the U.S. ban any initiative of this kind, where bundling and single windows could simplify licensing and increase efficiency. Technology has also helped to enhance licensing practices, while also democratizing the industry and empowering artists and authors. For instance, technology has afforded artists with the opportunity to produce and distribute their own music, and thereby retain their rights. These artists do not depend on a recording agreement to market their music. The new models of distribution and the emergence of new intermediaries have removed the gatekeeping function of record labels. Nonetheless, technology tools can only allow

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more efficiency and increase the availability of content if no rigid regulatory frameworks are used to direct the market. In essence, this research exposes how stakeholders have adapted to the challenges presented by the new environment, for example creating single windows and data solutions. These adaptations are consistent with existing literature on how intellectual property forces industries to create and invest in institutions capable of conducting the required transactions to clear rights. Private operators, as repeated players, have incentives to innovate and seek more efficient solutions, reducing transaction costs. This research also suggests that when governments and the legal framework do not constrain stakeholders to conduct their licensing operations, these stakeholders seem to pursue alternatives to improve efficiency and reduce fragmentation. This finding seems to imply that legislators should resist the temptation to implement solutions, such as compulsory licenses, that minimize transaction costs at the expense of severely constraining the options and ingenuity of licensees. Regulatory frameworks impose a “lock-in” effect as they are hard to change and may not be responsive to the evolving conditions of the market and the technology. New regulations could thwart actors’ ability to adapt. Instead, legislators and regulators should incentivize industry-driven solutions. Nonetheless, it is crucial to recognize that there are some problems identified in this study in which certain degree of intervention of the government is desirable to overcome such shortcomings. For instance, regulating CMOs has proved to be a necessary market intrusion. Even though this issue is not focus of this thesis, there was evidence to suggest that CMO supervision is essential because of their monopolistic position (legal or de facto) and the many transparency issues that can exist due to agency problems. Oversight of CMOs cannot benefit from one-size-fits-all solutions because of the different market conditions and regulatory aspects that prevail in each country. However, it is important that policymakers distinguish between different policy objectives: antitrust and transparency. Competition concerns may be addressed in an ad hoc manner and not through permanent frameworks. The U.S. case reveals that over-regulation severely harms market interactions. Governments are in the position to incentivize goals of transparency, accountability, and good governance of CMOs through frameworks that can be activated on an as-

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needed basis. In addition, technology and better data can contribute to reducing problems of transparency and accountability. However, it is important to encourage actors to come up with these solutions and integrate them to licensing. This study identified problems regarding the low compensation of artists and songwriters as one of the most pressing issues in the music marketplace. Additional data and research are necessary to understand this problem further. Equity matters that analyze royalty distribution between copyright holders and intermediaries, as well as the cost of copyright governance, are understudied subjects. More attention should be devoted to analyzing this pressing issue empirically. For the foreseeable future, however, the ability to conduct studies in this area will be constrained by limited access to data. Another issue to further research is the relationship of the licensing schemes used in the global music marketplace and the preservation of cultural diversity. No research so far has focused empirically in this space, including this project. The digital era has prompted the production of diverse content, but globalization also is believed to deter diversity. In fact, while this research focused on understanding how licenses can reduce transaction costs and optimize efficiency, it is important not to lose sight of the relevance of preserving and promoting local music while also maximizing access to music. These goals—efficiency, dissemination, and promoting cultural diversity— should go hand in hand. In this context, it is important to investigate how the governance mechanisms in place for creative works are impacting the promotion of culture diversity. After all, we should not only be worried about efficiency in content markets but the production and preservation of cultural diverse assets.

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Appendix I

The following are questions from the interview protocol for DMPs. A similar protocol with the same but adapted questions was employed with right holders and government.

1. Can you walk me through the process of obtaining digital music licenses for downloads and interactive streaming, including the negotiation with author right holders (typically a collecting management organization and/or publishers) and related rights (usually record labels or others)?

2. Please describe the agreements (term, catalog, uses, royalties, etc.).

3. According to the law, what are the rights (both in musical works/author rights and sound recordings/related rights) that you need to get license in order for your service to be legal (streaming and downloading, etc.)?

4. Is the applicable local law useful and relevant to carry out your transactions/business in Mexico? What factors of the law can be improved?

5. Who are your licensors for musical works? Are there particular challenges dealing with these actors? What can improve this relationship?

6. Who are your licensors for sound recordings? Are there particular challenges dealing with these actors? What can improve this relationship?

7. What are the best practices for licensing musical content that you are employing?

8. How has the licensing practices evolved overtime? What changes have you experienced?

9. How efficient and transparent are the current licensing practices? How can they improve?

10. What are the main challenges for your business in obtaining the licenses? What factors, if addressed, would improve the digital music business?

11. How can the local legal environment improve the digital marketplace?

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Appendix II The following are questions from the interview protocol for DMPs. A similar protocol with the same but adapted questions was employed with right holders and government.

2. Please describe the agreements (term, catalog, uses, royalties, etc).

4. Is the applicable local law useful and relevant to carry out your transactions/business in Brazil? What factors of the law can be improved?