Or, the Attractions (and Distractions) of Licensing

Spotify has been available in the United States for a few months now. Until the recent kerfuffle involving its Facebook integration, the reviews have been positive. If you review the features list with which we started this Online Music Services Series, you’ll see that Spotify comes as closer to giving consumers what they want than any other service. In fact, it’s not even that close:

• Portability: check: with Spotify Premium, you can listen to longs off-line and you gain access to Spotify’s mobile apps.
• On-demand: check: you can listen to any song you want to in either your or Spotify’s catalog;
• Music discovery: half-check: Spotify has a feature that allows others to share music with you, which should help you discover music you like, but nothing quite as robust as Pandora’s Music Genome.
• Extensive catalog: check: Spotify’s catalog has about 15 million songs.
• Low cost: half-check: Spotify Free has all of the features above except portability; for that, you need to shell out $9.99 a month, and you lose all access should your subscription expire.*

* If I were starting this series over again, I might have added “ownership” to this list. It’s important to me personally, which is why I resist subscription models and am a heavy user of iTunes. I’m not sure how important it is to the typical customer. I’ve heard that younger folks are more comfortable with the idea of not owning their music, so long as they have a programmable radio they can take anywhere.

Spotify’s client software gives users the illusion that their personal music collection and Spotify’s extensive catalog have been combined. It gives you the wonderful sense that your personal music collection has suddenly expanded to include 15 million additional songs. In fact, what is does is play “your” songs if they’re resident on the machine, and stream songs from Spotify’s catalog. To play “your” songs on other devices, or for your friends to play them, it doesn’t actually upload your songs but just makes an index of your songs and matches them to songs already in Spotify’s catalog.

Spotify’s streams are progressive downloads that are stored on your device in an encrypted file folder–which neatly solves the problem of how to protect progress downloads from capture, without the use of annoying built-in DRM. The client software decrypts and re-encrypts songs as you play them. This is also how Spotify’s off-line service works (I think): it just stores your off-line selections in an encrypted form. If your premium subscription expires, Spotify simply instructs the client software not to decrypt those files any more (I’m speculating a bit here).

If you’ve been reading our Online Music Services Series so far, you’ll be able to spot how Spotify infringes copyright in several ways.  It publicly performs songs from a “single master.”  It contributes to its premium subscribers’ infringement by providing the means to download and copy music files.  It’s not even close to being a webcaster because its subscribers can select (“request”) the songs they want to listen to.

Of course, Spotify doesn’t infringe because it’s fully licensed.  Well, that sure simplifies the legal analysis!

Only, all it does is exchange one set of complications for another.  Spotify, which was already successful in some European countries (and wildly so in its homeland of Sweden), announced in 2009 it would enter the U.S. market.  It promised that it would launch in the U.S. by the end of 2010.  But, as of December 31, not a single major record label had signed on. As everyone knows now, it finally launched in July 2011.

It turns out getting all of the necessary licenses to launch successfully in the U.S. was really, really hard. Have you bought a house, or have friends who did and wouldn’t shut up about how complex the transaction was? OK, imagine that, instead of buying a house (a complex but well-understood transaction), you’re trying to lease a piece of land that you want for its minerals, crops and timber. And you want to use a new-fangled mining technique that is reputed to damage the land, plant genetically-engineered crops that is reputed to harm the soil, and clear-cut the lumber in a way that is reputed to deforest the land. Scientists swear on a stack of Bibles that your new, modern techniques will not cause of any of these horrors, but few are really convinced.

Now further imagine that the mining, crop and lumber rights are held by different parties. No, it’s worse than that. They’re held jointly by different sets of parties. They’re not doing very well, so they’re willing to listen to your deal, but they afraid of the damage you’ll do to the land.

Now further imagine that the long-established but complex law of realty was recently replaced by an equally complex set of laws, and no one really knows how courts will rule now. It could be that you already have a right to, say, the lumber, but you won’t know until you stroll on the land, start whacking at trees and get sued.

If you put it like that, it’s a miracle that a deal was worked out at all, let alone in two years. To explain the extended analogy somewhat: Spotify had to secure four different kinds of rights from three different rights holders: (1) public performance rights in the sound recording from the record labels*; (2) public performance rights in the underlying songs from ASCAP, BMI and other performance rights organizations (“PROs”)**; (3) “mechanical rights” in both the sound recording and underlying songs from the Harry Fox Agency (“HFA”)***.

* Right now, these rights reside with the music labels because artists routinely assign their copyright to the labels, in exchange for a royalty. “Termination” or “recapture” rights might seriously alter this equation in the future, though. Recall from the previous posts in this series about Internet Radio that terrestrial radio doesn’t have to pay these royalties, but internet radio does.

** Because terrestrial radio has always had to pay these royalties, PROs are quite old, well-established and pretty good at what they do (estimate how many times a song has been played over the radio).

*** “Mechanical royalties” have traditionally related to sales of physical copies of music, e.g., vinyl records and CDs. For historical reasons, the HFA has administered these rights. In the digital age, HFA (and its competitors) have started administering digital downloads, which makes sense since traditional mechanicals and digital downloads both implicate the same right: that of reproduction.

The real sticking point, though, must have been the novelty of it all. The music industry was feeling stung first by peer-to-peer file sharing services, like Napster and KaZaa, which devalued the industry’s product by giving it away for free; and again by Apple, which not only got the better of the music industry in its iTunes deal but cemented in the public minds that songs cost about a buck.* The music industry understands the internet and e-commerce about as well as anyone else, which is to say, not very well; and its past experience with the internet made it distrustful of new internet-related schemes related to music. At the same time, the industry knows perfectly well that the internet, e-commerce, social media, etc., etc., etc., are the only way to rebuild value in its product. If only they knew what and how. And there’s a feeling that the window for implementing a successful, comprehensive internet strategy is closing.

* To be fair to Apple, though: the iTunes deal looked very good to the music industry back in 2003; nobody, not even Steve Jobs, thought iTunes would become as successful as it did. So it only looks like a bad deal in retrospect (as is often the case). And even Apple realizes the good days won’t last forever.

So, when a bunch of technologists, like Spotify, come calling with the umpteenth sure-fire scheme to “monetize” music over the internet, you’ll excuse the music industry if it doesn’t dive in immediately with both feet.

Next time we’ll (literalize) dramatize Spotify’s negotiations with the music industry and explain why so much rides on Spotify’s success.

Thanks for reading!

Rick Sanders

Rick is an intellectual-property litigator. He handles lawsuits, arbitrations, emergency injunctions and temporary restraining orders, opposition and cancellation proceedings, uniform dispute resolution proceedings (UDRPs), pre-litigation counseling, litigation avoidance, and other disputes, relating to copyrights, trademarks, trade secrets, domain names, technology and intellectual-property licenses, and various privacy rights. He has taught Copyright Law at Vanderbilt University Law School. He co-founded Aaron | Sanders with Tara Aaron-Stelluto in 2011.