Record label faces online piracy suit

Along with representatives of such musical giants as Rodgers and Hammerstein and Elvis Presley, Mr. Stoller and his partner, Jerry Leiber, are plaintiffs in a lawsuit filed by music publishers against Paris-based Vivendi Universal SA's Universal Music Group. The suit alleges that Universal violated copyright laws by making songs available on one of its Web sites, Farmclub.com1, without obtaining the permission of the songs' publishers.

Universal is "doing the same thing, in effect, as Napster was doing," Mr. Stoller says. "They're involved in piracy."

Universal denies the allegations, saying the licenses it already has from publishers to make recordings should also apply to digital copies of the same music.

The music-publishing industry enjoyed a heyday during the era of Tin Pan Alley, when selling sheet music was a big business. But today, music publishers mostly represent songwriters by collecting the royalty fees due when their songs are performed or recorded. In return, they typically give the songwriter advance payments and a specified share of any royalties. Now, those royalties have emerged as a powerful and potentially crippling issue in major record labels' plans to distribute music online.

For months, music publishers and the record labels, which have historically been at odds over royalties, have been engaged in contentious negotiations over how much the publishers should earn for songs delivered by new Internet services. The publishers hope to get a bigger piece of the pie than they do for conventional recordings. But the record labels say they don't want to be locked into paying the publishers too high a per-song sum because the new digital services are likely to be costly to develop and may not generate profits for quite awhile.

"No one's going to launch a highly expensive digital-distribution model without knowing where we stand with the music-publishing community," says Ken Berry, president and chief executive of EMI Recorded Music, a unit of EMI Group PLC.

Family feud
The conflict has elements of a family feud. That's because many of the big music publishers are part of the same corporations that operate the nation's $14.3 billion-a-year sound recording industry. For example, EMI Group owns both EMI Music Publishing and EMI Recorded Music. "There's a great deal of respect between both divisions. But both divisions recognize that there may come a time when we could be on the opposite side of the playing field," says Martin Bandier, chairman and chief executive of EMI Music Publishing.

In both the lawsuit and the negotiations, the publishers' main weapon has been their New York-based trade group, the National Music Publishers' Association. The group is sometimes known by the name of its licensing arm, the Harry Fox Agency. The agency collects and distributes the royalties that publishers are owed each time their songs are recorded.

Edward P. Murphy, the trade group's plain-spoken chief executive, is a passionate defender of songwriters and publishers, many of whom are otherwise unrecognized. "We defend their rights because it's legally correct, and more important it's morally correct," says Mr. Murphy, a former sheet-music printer. He adds that, when songwriters' work is used without permission, "it deprives them of income... They're not all Michael Jacksons, and they're not all Madonnas."

Publishers currently collect 7.55 cents per track on each album that is distributed. That works out to about 8% to 10% of the wholesale cost of a compact disk. But as the digital era arrives, Mr. Murphy is angling to get publishers a better deal. He says they should get closer to half the revenue generated by the labels' planned new digital-music sales that will let consumers chose what songs they hear. "The distribution costs are less, the manufacturing costs are less, and the music should play a greater role," he says.

The legal right that the Fox Agency hopes to exploit in the digital arena dates back to 1909, when Congress granted music publishers a two-cent royalty on each player-piano roll sold. The Fox Agency itself was formed in 1927, to help publishers get paid for songs used in early films. Over the years, it began offering royalty agreements on everything from singing greeting cards to music piped through airline headphones.

From the start, the Fox Agency found itself in conflict with recording companies over so-called mechanical rights, the royalties music publishers and songwriters get on recordings of their songs. Harry Fox himself ran the agency from the late 1930s through his death in 1969 and was devoted to squeezing more out of the labels than the two-cent royalty mandated by federal law. "He had his heart and soul in this industry to improve mechanical rights," says Al Kohn, a former music-publishing executive. But despite Mr. Fox's efforts, the mechanical royalty rate stayed the same from the player-piano era through the early days of punk rock in 1978, when it leapt to 2.75 cents under a new federal copyright law. Since then, the rate has risen steadily to current levels.

Mr. Murphy became head of the Fox Agency in 1984 and later took over leadership of its parent association, of which he remains CEO. He recently relinquished his Fox Agency title. A longtime executive at classical-music specialist G. Schirmer Inc., he started as a manager at Schirmer's printing plant in Queens, N.Y., where he sometimes took special print orders from the composer Irving Berlin.

Mr. Murphy's point of view was shaped by events such as the advent of the copying machine, which wiped out much of his company's sheet-music business. He vowed that he wouldn't let new technologies hurt publishers again.

In 1990 his group backed a suit against Sony Corp. of Japan over its digital audio tape recorders, which could allegedly make near-perfect copies of songs. Harry Fox doesn't typically act as a plaintiff in such suits but instead rounds up individual music publishers to take the lead. Sony and its rivals eventually agreed to pay publishers a royalty on many sales of recorders or blank digital tape.

Shocked into action
Now, the emerging digital-music business has again shocked the publishers into action. "The Internet could be much worse," Mr. Murphy says. "The distribution is global, the copying is instant and perfect quality."

The agency's concerns first surfaced when songwriters learned that fans were printing their song lyrics on Web sites, often making embarrassing transcription errors. Charles J. Sanders, in-house counsel for both Harry Fox and its parent organization, says that representatives of rock groups such as Pink Floyd and Led Zeppelin complained: "I'm being misquoted. Who licensed them? I'm not getting paid for this."

Mr. Sanders quickly assigned a few staffers to surf the Net for song pirates. The publishers' group sued some Internet operations and sent out hundreds of warning letters to sites such as On-Line Guitar Archive, or OLGA, a giant catalog of thousands of guitar fingerings, or tablature. Cal Woods, a graduate student who ran the site, says he had never heard of Harry Fox before he got a copyright warning in 1998. He quickly took down the site. "I never intended getting into all this," he says.

Later, working with a lawyer, Mr. Woods decided to offer some of the tablature with no lyrics, as well as some Christmas songs he assumed were in the public domain. Then, in October 1999, he got another cease-and-desist letter, along with a list of copyrighted songs such as "Frosty the Snowman" and "White Christmas." Mr. Woods removed them all, but some Internet users were outraged. "Who's Harry Fox?" one musician asked in a Web posting. "If I figure out how to play some song, what's he got to do with it?"

But by the late 1990s, the publishers were fretting about a new phenomenon: Thousands of perfect digital song copies were zooming across cyberspace with the help of the online service Napster. Napster acted as a middleman, letting music fans swap recordings free of charge using MP3, an Internet-friendly format that turns music on CDs into small digital files. EMI Music Publishing's Mr. Bandier recalls his son surprising him with a downloaded copy of the Stevie Wonder hit "Superstition," an EMI song, and dozens of other tunes. "It scared the hell out of me," he says.

A CD Flashback
Seeing a new form of music distribution on the horizon, Mr. Murphy mobilized his forces. But as the publishers and labels attempted to work out payment rates for digital music, their past conflicts were always close to the surface. One battle involved so-called controlled composition clauses, in which record labels got some artists who write the songs they perform to accept a reduced publishing royalty as part of their recording contracts.

Mr. Murphy also ruefully recalls that the labels asked some publishers to accept a lower royalty to boost the CD format in its early days. But, he adds: "It turns out they didn't need a break. So it's difficult this time out to say they need a break on this new technology."

Against a backdrop of mutual suspicion, the publishers' group began dickering with both record labels and new Web-music companies about digital music rates. It struck licensing deals with some fledgling Internet firms, such as EMusic.com. But it backed the record labels' copyright suits against Napster and MP3.com over the digital music offered by their services.

After a federal judge last year found that MP3.com had infringed copyrights, the publishers' group reached a settlement with the San Diego dot-com that included a license for its My.MP3 service, which allows users to listen to songs they already own on CD. (It requires users to insert the CD in question into a CD-ROM drive for verification.) In March, a federal judge in San Francisco ordered Napster to remove all unauthorized music from its site.

Coming to terms
Many Internet services and record labels have so far refused the Fox agency's terms. The publishers have generally sought a guaranteed payment tied to the number of times consumers listen to a given song online. In its deal with MP3.com, for instance, the publishers get 10 cents for each song the Internet firm offers, as well as another quarter-cent each time a customer listens to a song. Mr. Murphy says the publishers want more than that for services that don't require a previous CD purchase.

The recording companies, which still don't know how much consumers might be willing to pay for online music, find such terms hard to swallow. If the cost of offering digital music becomes too high, it "may wipe out the economics of a business before it starts," says David Pakman, president of myplay Inc., an independent Internet-music company.

"There's this ambiguity right now, this dark cloud, of what the publishers are going to demand," says David Kang, senior vice president for new technology and strategic development at Bertelsmann AG's BMG Entertainment.

Adding to the complexity of the issue is the fact that music publishers get paid for their material in a variety of ways. When a song is recorded, it is the Harry Fox Agency that collects the royalty; last year it collected $570 million on behalf of its members. But when a song is performed publicly, as in a radio broadcast or a concert, performance-rights organizations Broadcast Music Inc., American Society of Composers, Authors & Publishers and Sesac Inc. collect royalties for publishers and songwriters. Those organizations want to be paid for their work in the digital arena -- including for some of the same services for which the Fox Agency hopes to charge -- but they largely have held off taking legal action involving digital music-delivery services.

'Bring it on'
Last fall, the publishers and labels began focusing on the labels' plans for new digital services, meeting mostly at the publishing group's midtown Manhattan offices, where the walls are hung with sheet music signed by songwriters. The lack of progress in the talks was evident a few days before Thanksgiving, when Mr. Murphy remarked that the publishers hoped the issue wouldn't end up before regulators or the courts.

Larry Kenswil, a Universal Music Group executive, seemed to take Mr. Murphy's statement as a thinly veiled threat that the publishers were planning to sue Universal, whose free Farmclub.com made it the first record label to test the market for an online music subscription service. "If you want to sue my company, bring it on!" Mr. Kenswil shot back, according to meeting participants. "I wanted to make clear that the Farmclub dispute should not affect the negotiations between the publishers and the recording companies overall," Mr. Kenswil says.

Things went downhill from there. A few days later, the record labels petitioned the U.S. Copyright Office to resolve the dispute. Two weeks later, the publishers sued Universal. The group is seeking damages of as much as $150,000 for each of the "hundreds" of songs in the Farmclub service. In its response, Universal said that it was already paying royalties to publishers for the right to make recordings.