TechKnowledge No. 16

Musical Mandates: Must the Pop Music Industry Submit to Compulsory Licensing?

By Clyde Wayne Crews Jr.
August 15, 2001

As famously illustrated in the Napster dispute, record companies have been reluctant to allow consumers to download copyrighted music from the Internet. That aversion has generated calls from Napster and other digital media services for compulsory licensing: they want government to force record companies to share music. Politicians such as Sen. Orrin Hatch (R-Utah) have reluctantly warned that mandatory licensing may be invoked as a last resort against stonewalling record companies.

A new and ominous step in this direction is the Music Online Competition Act, introduced by Reps. Rick Boucher (D-Va.) and Chris Cannon (R-Utah). The bill is aimed at MusicNet and pressplay, which are competing record-company-backed consortia set up to offer their catalogs over the Web in the coming months. MOCA represents compulsory licensing-lite: If MusicNet or pressplay license songs to one another, equal terms must be granted to everyone else.

The renewed embrace of forced licensing is entirely backward. Digitization presents an opportunity, not to expand the already extensive regime of compulsory licensing, but to move beyond it. As a backdrop to the compulsory licensing debate, an academic dispute rages today over whether intellectual property should be protected at all in the digital age. But it ought to be easier to reject the idea that politicians should take away the ability to manage one’s intellectual property through forcible sharing.

The five major record companies oppose MOCA’s mandates. But ironically, MOCA could benefit them. If widely applied to all future licensing deals, the bill could thwart new companies that might otherwise enter the music-making business, thus freezing today’s market structure. Regulatory interference with private licensing and promotional arrangements could dissuade new, competing labels.

Compulsion should not be part of the mix as thousands strive to create the “celestial jukebox” (and library and movie theater) of tomorrow. Compulsory licensing-and the attendant regulatory price-setting-is rooted in the idea of “market failure,” the perception that it is too difficult for scattered owners and licensees to agree on terms or to gauge usage. But sometimes, private associations can overcome licensing bottlenecks, as University of California, Berkeley, professor Robert Merges has noted. Today, with electronic technologies that make it easier to track files and communicate, compulsion is even less defensible. Calls for compulsory licensing aren’t based on market failure in the sense of an inability of willing parties to come to terms or to track files, but rather a desire to force unwilling parties to relent. Adversarial lobbying frustrates what should be a torrent of voluntary, diverse contractual business deals.

Already, 1998’s Digital Millennium Copyright Act has created confusion in at least one category of digital licensing-for Webcasters-because of fights over royalties and terms permitted under its statutory license. If there were no mandatory licensing in the DMCA, pressures to negotiate genuine deals might have further advanced this market. Few if any competitors would be panting for artificially created markets, or forming trade associations to lobby Washington, provoking opposition rather than partnerships.

The goal since the digital upheaval of copyright has been to get artists and composers paid. Opposing factions agree on that, but disagree over whether intermediaries (like record companies) should get paid. But here especially, it’s better to allow the market to work (and perhaps even bypass the middleman as the Internet is famous for doing) rather than risk locking in the existing order through forced licensing merely so that agitators can get their hands on the existing catalog of music.

Clearly there is no voice in the sky proclaiming that producers, artists, composers, retailers, and consumers must deal with existing record companies. If those companies’ terms are as bad as many claim, we’d be better off with a truly competitive infrastructure than with a highly regulated version of the existing structure-even if that takes time. Unfortunately, companies like MP3.com that could help create that competition by focusing on tomorrow’s artists and disgruntled major-label refugees, are better known for seeking copyright infringement immunity for hosting copies of users’ music. They directly provoked the wrath of the record companies, when emphasis on the future might have spurred more favorable deals.

Ironically, voluntary collaborations by record companies to cross-license digital music-which do represent a natural market alternative to mandatory licensing-risk incurring antitrust scrutiny. MusicNet and pressplay are now subjects of a Department of Justice investigation of alleged monopoly power. Likewise, Boucher and Cannon worry that MusicNet and pressplay together would own 80 percent of the world’s “music catalog,” and thereby wield monopoly power over distribution and cross-license content. But wait a minute: the complaint of music lovers until now has been that record companies wouldn’t cross-license, which would force users to subscribe to more than one network. (Recall that one-stop “shopping” was part of the reason for Napster’s popularity.) Why propose compulsory licensing schemes, partly in the name of trustbusting, while suffocating voluntary efforts that provide the universality so actively sought? Besides, fears of an 80 percent market share are overblown. There’s little need to worry about a monopoly on entertainment, a non-depletable good. And competitive licensing could cut that share anyway.

In the final analysis, the foot-dragging of record companies may not be due just to fear of “Napsterization,” but the desire to wait out broadband deployment. Most music is sold offline (at places like Wal-Mart). That minimizes the urgency for record companies to embrace the Web. Change will come naturally as broadband access becomes universal, and record companies are forced to sell downloads and streams, rather than plastic disks. Presumably that is what MusicNet and pressplay anticipate.

But the licensing terms that define relationships in this emerging marketplace need to evolve along with the Internet itself, not be specified in advance by politicians. Record company reluctance to digitize music catalogs is ultimately a transitional problem (setting aside troublesome copy-protection issues). Government must not compel sharing just because special interests are stamping their feet. Otherwise, forced licensing won’t likely stop with music; mandated contracts for e-books and movies could be next.

It is pointless to set up an artificial digital marketplace grounded in force and mistrust. Incentives for producers, composers, artists and rights holders to distribute copyrighted materials won’t always mesh. Still, digital distribution and the market institutions it can spawn (even “monopolistic” ones like MusicNet and pressplay) will respond to incentives more efficiently and effectively than to adversarial compulsory licenses. The “celestial” content of tomorrow will be hampered if compulsory licensing discourages selective partnerships, strategies, and competing business plans.

We should not ask Washington to coerce better deals for online content than we might negotiate privately. Aside from the threat to entrepreneurialism that would result, it’s hard to make a case for a right to be entertained, even in today’s advanced welfare state.

Clyde Wayne Crews Jr. (wcrews [at] cato [dot] org) is Director of Technology Studies at the Cato Institute in Washington, D.C. To subscribe, or see a list of all previous TechKnowledge articles, visit www.cato.org/tech/tk-index.html. Also see: “When Rights Collide: Principles to Guide the Intellectual Property Debate,” Cato TechKnowledge #10, June 4, 2001.