The webcasting deal: What took so long?

How high were the webcasting royalties set by a federal copyright board more than two years ago? So high that the bacon-saving discountannounced Tuesday for "pureplay" webcasters will still require large ones to pay at least25% of their revenues to SoundExchange, the agency that represents labels and performing artists. Techdirt's Mike Masnick also notes that the deal calls for a minimum annual fee of $25,000-- not exactly chump change. Nevertheless, webcaster Kurt Hanson hailed the agreement, saying that the rates imposed by the Copyright Royalty Board "would almost certainly have been a death warrant -- they were the [equivalent] of 70%, 100%, or even more of some webcasters’ total revenues."

Those percentages seem outrageous, but consider this: The royalty set by the CRB for 2009 amounted to 2.7 cents per listener per hour of music streamed. The fact that such a fee would amount to 70% or more of a webcaster's income shows how little these companies have been able to generate from advertisers. The picture has actually worsened for webcasters this year as advertisers cut their spending online and off, strengthening the companies' argument for a discount.

If the numbers were so stark, why did it take a virtual eternity for webcasters and the music industry to agree on a model that seems sustainable? I'd blame four things:

Fotoglif and the art of converting infringers into partners

Michael Betts once owned a photography studio, but for the past couple of years he's made a business out of distributing images rather than taking them. Today his Toronto-based company, DigiSphere, offers the latest iteration of Fotoglif, a site that provides bloggers and other Web publishers free images taken by the same professional shooters who supply news agencies around the world. Previously, Fotoglif compensated the agencies for the shots that were published online; now it will cut bloggers in on the action too.

What's interesting here is how Fotoglif confronts a problem common to copyright holders online. Just as it's relatively easy to find and copy media online, it's brain-dead simple for Web publishers to grab photos from around the Net and slap them onto their sites. Sure, there are companies such as Attributor that crawl the Web to search for unauthorized uses of copyrighted material, helping the owners of the material to identify infringers. But the scale of the infringing is vast, and it's not clear how much return a copyright holder might get from a big investment in enforcement.

Instead of trying to track and stop infringers, Fotoglif's strategy is to offer online publishers something better than free ...

A big week for copyrights and piracy

The sale of The Pirate Bay probably ranks as the week's biggest news for those of us who obsess about copyright issues, followed by the ruling that Usenet.com's newsgroup-access service infringed on the major record companies' copyrights and the Supreme Court's decision not to take Hollywood's appeal of the Cablevision network DVR ruling. But two other developments in U.S. courts seem more important to the average music fan because of the potential they have for disrupting digital services.

The first is the latest lawsuit filed Monday by MCS Music America of Nashville and a dozen other music publishers against the operators of two current and one former subscription-music services. The suit seeks a hefty financial penalty from the companies for including the publishers' songs in their services, even though federal law compels the publishers to grant the necessary licenses. The second is a move by the American Society of Composers, Authors and Publishers to have a federal court declare that cellphone ringtones aren't downloadsbut rather public performances for which they are entitled royalties. In other words, ASCAP argues that playing a 15-second snippet of "Don't Talk to Me About Love" when a call comes in is the legal equivalent of blasting the song over the speakers at a hockey rink. In fact, ASCAP argues, it's an infringement even with the volume turned off.

The Pirate Bay: sold and (gasp) reformed?

The recent prosecution of The Pirate Bay, a popular site for finding and downloading bootlegged movies, songs, video games and software, suggested that the company's gleeful flouting of copyright law might not be sustainable. (The Stockholm District Court sentenced four of The Pirate Bay's leaders to a year in jail after finding them guilty of violating copyrights, and fined them close to $30 million.) Something had to change at TPB, and it looks like it's going to be three things: the ownership, the business model and the infrastructure. Whether the site ends its love affair with all things bootlegged, however, is another question entirely.

Variety reported that Swedish video game company Global Gaming Factory X agreed to pay about $7.7 million to buy TPB, although the site's blog hinted that the deal was still tentative. (Apprently, the buyer still has to raise the money.) Variety quoted Global Gaming CEO Hans Pandeya as saying the value in TPB was its traffic: more than 20 million visitors and 1 billion page views a month.

"In order to live on, The Pirate Bay requires a new business model, which satisfies the requirements and needs of all parties, content providers, broadband operators, end users and the judiciary," Pandeya said. "Content creators and providers need to control their content and get paid for it. File sharers need faster downloads and better quality."

But as TPB's blog notes, "If the new owners will screw around with the site, nobody will keep using it. That's the biggest insurance one can have that the site will be run in the way that we all want to." Loosely translated, that means Global Gaming will quickly lose those 20 million visitors if it tries to stop users from downloading "Transformers: Revenge of the Fallen" for free....

Dueling spins on the Cablevision ruling

The Supreme Court left intact the U.S. 2nd Circuit Court of Appeals' ruling in favor of Cablevision's network DVR service, a move that almost certainly will lead more cable operators to offer TiVo-like services without putting recorders in their subscribers' homes. Advocates on both sides raced to put their own spin on the court's decision, which the justices issued sans comment. Here are two typical ones: Gary Shapiro, head of the Consumer Electronics Assn., said the decision was important to innovation in remote computing and data storage, such as Google's online applications and Apple's .Mac (now called MobileMe) service. Patrick Ross, executive director of the Copyright Alliance, countered that the decision "is unfortunate and potentially harmful to creators and creative enterprises across the spectrum of copyright industries."

But as the Justice Department noted in its brief, which urged the justices not to take up the case, the 2nd Circuit's ruling may not have much bearing on other companies' services.

Rising above the noise floor with Tommy Boy's Tom Silverman

With the Internet and inexpensive digital production tools enabling anyone to record and distribute songs worldwide, the barriers to entry into the music business have effectively evaporated. But that's a double-edged sword, argues Tom Silverman, founder and chairman of Tommy Boy Entertainment. "There must be 100 Elvises and Beatles that are stuck in the noise floor," unable to attract the attention they deserve, Silverman said. Don't get him wrong -- he's optimistic about the chances for those artists. But he thinks the industry needs to take a new approach to recorded music, one that looks more like the 12-inch record model that helped establish Tommy Boy as an independent label in the 1980s.

I caught up with Silverman at a recent conference for music retailers. He was there wearing several hats, including those of a board member of SoundExchange (the agency that collects performance royalties from digital broadcasters) and the American Assn. of Independent Music (a trade association of indie labels). He was also pitching the New Music Seminar, a conference for independent acts and labels that he's reviving after 15 years of inactivity. (More on that later.)

According to Silverman, the music business historically had three costly choke points that made it hard for artists to succeed without the help of a major record company: recording music in a studio, marketing it to radio and the public, and distributing it to record stores around the country. Technology has eliminated the choke points for recording and distribution, but not for marketing. "Democratization has happened everywhere except exposure," Silverman said. In fact, opening the floodgates online to DIY artists has only made it harder for them to be heard above the din of the 5 million bands and solo acts with MySpace pages. "My great concern," Silverman said, "is that the cream isn't rising to the top any more."

RIAA: 2, Jammie Thomas-Rasset: 0

Maybe Jammie Thomas-Rasset should have quit while she was behind. Just as in Thomas-Rasset's first trial in 2007, a Minnesota jury found today that she infringed the copyrights of two dozen major-label songs on the Kazaa file-sharing network. But the new jury handed down a much larger punishment -- $80,000 a song, not $9,250. For the labels, that's roughly equivalent to selling 114,000 songs at Apple's iTunes Store.

Thomas-Rasset didn't seem likely to pay the original $222,000 penalty, so it seems even less likely that the RIAA will be able to extract nearly $2 million from her. The trade group has always been more interested in winning the judgment than the amount awarded; spokeswoman Cara Duckworth told CNet that the group has been willing to settle "since day one." But the size of the jury's verdict may only increase calls for Congress or the courts to reduce the financial penalties for copyright infringement

Thomas-Rasset's was the first trial in the campaign against individual file-sharers that the RIAA began in 2003 and ended late last year. As such, it was one of the few tests of the legal underpinnings of that campaign, including the argument that making tracks available to others online (by keeping them in a folder that was open for sharing) was a form of infringement. U.S. District Judge Michael J. Davis instructed the jury in Thomas-Rasset's first trial that making songs available was an infringement, a low threshold that would enable the labels to prove piracy just by collecting lists of the songs in people's shared folders. But Davis second-guessed himself after the verdict and ordered a new trial, mirroring the views of several other judges who had rejected the RIAA's interpretation of the law.

The result of the second trial suggests that the higher threshold isn't enough to derail the labels in an infringement lawsuit. The RIAA's anti-piracy contractor, MediaSentry, presented evidence that Thomas-Rasset actually distributed 11 copyrighted songs through Kazaa (to MediaSentry's investigators), and cited metadata from tracks in her shared folder strongly suggesting that the files had themselves been downloaded, not purchased or ripped from her CD collection. RIAA witnesses also linked the Kazaa uploads to a unique identifier on Thomas-Rasset's modem and computer and showed that the unusual username on the Kazaa account matched one that Thomas-Rasset acknowledged using on several other websites. In other words, the RIAA's case was built entirely on circumstantial evidence, but there was a lot of it.

Thomas-Rasset and her attorneys seemed eager to continue their battle against the RIAA, and although the trade group insists that it doesn't plan to file any new cases, there are still a number of older claims yet to be resolved. Defense attorneys are fighting these on several fronts, arguing that, among other things, MediaSentry's investigative tactics were illegal.

More interesting, IMHO, is the argument Harvard Law Professor Charles Nesson and others are raising that the statutory damages provided in copyright law are grossly excessive -- even unconstitutionally so. The two Thomas-Rasset verdicts, each of which was reached after just a few hours of deliberations, reflect the juries' irritation with her defense. But even if she did put 24 copyrighted songs in her shared folder, it's hard to believe that the labels suffered anything close to $2 million in damages. More important, the mere threat of such a penalty could persuade some accused infringers to settle with the RIAA rather than fight, even if they weren't the ones responsible. Thomas-Rasset may not be a sympathetic defendant, and there's no excuse for illegal downloading. But she will have done all Internet users a favor if her case prompts lawmakers to recalibrate the statutory damages in copyright law.

-- Jon Healey

Healey writes editorials for The Times' Opinion Manufacturing Division.

Photo credit: Julia Cheng / Associated Press

Who says subscription music services are dead?

Consumers have been slow to embrace music subscription services, so much so that Napster recently slashed its price by more than half to try to spur growth. Even services that colleges offered for free (or with the charge buried in other student fees) failed to catch on (killing off start-ups Ruckus and Cdigix), a testament to the enduring popularity of music-sharing and free downloading on campus. But one music industry player says it's actually "extremely successful" with a subscription music-on-demand service for the college market. That would be Naxos, which specializes in ... classical music. And it's prices aren't cheap, either.

This is a lesson in the value of finding the right niche in a time of technological upheaval. Naxos is both an independent classical-music label and a distributor of classical music. That's classical as in Charles Ives symphonies, not John Williamssoundtracks (which Naxos of America Chief Executive Jim Selby refers to as "crossover" classical). Using music from its own and its customers' rosters, it put together a service called the Naxos Music Library that's both an online jukebox and a classical-music database. (Note: the service offers no downloads, tethered or otherwise. It's streaming only.) "The metadata is incredibly deep," Sean Hickey, sales and business development manager for Naxos, said in a recent interview. That information -- which is comparatively sparse on other services -- is crucial to Naxos' target audience: music students, educators and musicians. They pay $220 to $240 a year for the service (which is sold only in bundles of five or more subscriptions), compared with $60 for Napster's music-on-demand offering. Selby said Naxos has signed up more than 1,000 colleges and universities for the service, collecting hundreds of thousands of subscribers there. Subscription sales are up 35% year over year, Selby said. It helps that there are more than 600 accredited music schools in the U.S., as well as music degree programs at many other institutions. The company is offering the service to younger students too, having just signed up the public school systems in Baltimore and Chicago. "It's not Rhapsody, but it's not meant to be," Selby said. "There's lot of educational tools on there.... No one else is trying to do that."

Universal Music and Virgin Media, striking out with MP3s?

The major record companies' retreat from DRM took another step today, when Universal Music Group and Virgin Media, a leading broadband provider in the U.K., announced what amounted to a DRM-free, all-you-can-eat subscription music service. Although it's still vaporware and confined to the U.K., the new service strikes me as a big deal, with some equally large caveats.

Unlike Napster or Rhapsody, which essentially provide access to an unlimited library of music for a monthly fee, the Virgin Media service will let people acquire an unlimited amount of music. (The service is due later this year, the companies said; Virgin is still trying to round up licenses from other labels and music publishers.) An offer like that could completely trump today's subscription offerings, which have struggled to win acceptance among mainstream consumers. It's simple to explain and requires no change in music fans' approach to collecting tunes. But this brings us to caveat No. 1, which is pricing. There was no indication from the companies today what they planned to charge for the service, but it's likely to be considerably more than what Nokia collects for its DRM-based "Comes With Music" phones (where the downloads are nailed to the user's phone and/or PC). My back-of-the-envelope calculation was that "Comes With Music" carries an $8 to $16 monthly premium for two years' worth of unlimited downloads from all four major record companies. I know there's some argument that music fans aren't hugely sensitive to prices, but I have trouble believing they'll tolerate ISP rates that are 40% or 50% higher so they can download tracks guilt-free.

BitTorrent users spend money, too

Vuze -- the company that's trying to sell licensed, high-def videos to users of the BitTorrent file-sharing software -- has spent much of the past two years trying to persuade Hollywood that its users are customers, not thieves. So far, however, the major studios have entrusted little to Vuze beyond movie trailers and other promotional videos. Now Vuze is trying to prod Hollywood with some eye-opening data about its clientele's buying habits and purchasing power: in addition to being copyright infringers, they spend a lot of money on movies and movie-watching gear. Said Vuze CEO Gilles BianRosa, "Those users are actually Hollywood's best customers."

Yes, that's a self-serving comment. But BianRosa's assertion is supported by a survey by media consulting firm Frank N. Magid Associates of about 1,300 Internet users between the ages of 18 and 44, nearly 700 of whom use Vuze. The survey, which Vuze released late Tuesday, included the following insights about the members of the company's audience: