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Introduction

Radiohead recently made their latest album available for online download. What makes Radiohead's online album release unusual is that it is up to the person downloading the album to decide how much they are willing to pay for it.

The traditional commercial structures employed by the industry are changing. The way in which Radiohead have released their latest album is an example of a radical way in which those in the industry are looking for new commercial structures to exploit the intellectual property in their music.

The difficulties faced by copyright owners in exploiting musical works online are also well known, forcing copyright owners to search for new revenue streams to fill the void left by the drop in traditional music sales.

Despite the availability of online sound recordings for some time and the considerable interest of those in the industry, it was not until recently that The Copyright Tribunal gave a decision regarding the valuation of copyright material (such as sound recordings) made available on-line.

The case apparently involved more parties than any previous case the Tribunal had dealt with and as a result was reportedly very expensive. These factors alone indicate just how important the issues involved are to the industry.

Background

The Mechanical Copyright Protection Society (MCPS) collects royalties on behalf of composers, writers and publishers which it receives from licensing mechanical copies (e.g. CDs) of sound recordings.

The Performing Rights Society (PRS) performs a similar function to the MCPS except that the royalties it collects and distributes come from the licensing of public performance, broadcast and communication of musical works.

It is easy to see how the activities of MCPS and the PRS overlap. To deal with situations where there is an overlap, the MCPS and the PRS formed the MCPS-PRS Alliance.

In 2005 the Alliance offered a licence to enable access to music online to a number of on-line music providers (such as iTunes, Napster etc). The proposed licence set out royalty rates payable to the Alliance on the purchase of music online, with varying rates for permanent downloads, webcasts, etc.

A number of mobile communication operators (including O2 and Vodafone) and iTunes ("the Applicants") referred the terms of the proposed licence to The Copyright Tribunal on the question of whether the gross revenue (from which the royalty is calculated) should include advertising revenue.

A number of webcasters also referred the licence to The Tribunal in an attempt to reduce the royalty percentages payable by them.

The Dispute Over Revenue

The Alliance asserted that gross revenue should include revenue from advertising on or connected with an online music service (resulting in a larger royalty), whilst the Applicants felt revenue from such advertising should only be included in royalty calculations in limited circumstances.

The parties all agreed that advertising revenue generated immediately prior, during or after a music download should be included in the revenue stream. The Applicants argued that advertising revenues generated :

The Applicants also asserted that only advertising revenue:

The Alliance, on the other hand, argued that music on a web page attracts visitors and encourages them to stay and therefore generates advertising revenue, even if the page is not concerned with providing on-line music as its main function, and that such use should therefore give rise to a royalty.

The Decision

The Tribunal issued an interim decision confirming that advertising revenue should be included in the gross revenue for calculating royalties when such advertising was viewed immediately prior, during, or after the download and where that download was made from a page featuring only music or music as a predominant part of the page. The Tribunal also ruled that advertising revenue from music-only pages should count towards royalty calculations. Whether or not a page offers online music as a predominant part of its page is subjective and according to the Tribunal, will depend largely on a visual assessment of the page in question.

Where a page is dominated by advertising and not downloadable music, revenue from such advertising will not contribute to the royalty.

The Tribunal ruled that sponsored links on a search engine should not give rise to a royalty.

The Tribunal set the royalty rate to be paid by webcasters under the licence.

The new royalty rate means that webcasters will be paying higher royalty rate than their traditional terrestrial radio counterparts.

One of The Tribunal's reasons for this was that music available online is more mood specific than music on terrestrial radio, and therefore has a greater impact on the listener and thus a higher impact on revenue generated.

The Impact

The case is indicative of the way in which those in the industry are looking to make the most of alternative ways to exploit copyright in musical works. That this decision coincides with the release of the new Radiohead album for free download suggests that the industry is keener than ever to identify and exploit new and alternative revenue streams.

The decision of The Tribunal offers important commercial guidance to the players in this industry by providing an indication of reasonable royalty rates and confirming the types of advertising revenue which can generate a royalty payment. This increase will certainly be welcomed by those who exploit music online. The decision may not, however, be so gratefully received by music creators and publishers, who have lost out on a potential revenue stream. The fact that online music providers can design and display web pages in such a way as to not qualify for an advertising royalty will not soften the blow.

Ashfords is regulated by the Solicitors Regulation Authority. The information in this article is intended to be general information about English law only and not comprehensive. It is not to be relied on as legal advice nor as an alternative to taking professional advice relating to specific circumstances.