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


As famously illustrated in the Napster dispute, record companieshave been reluctant to allow consumers to download copyrightedmusic from the Internet. That aversion has generated calls fromNapster 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 reluctantlywarned that mandatory licensing may be invoked as a last resortagainst 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 competingrecord-company-backed consortia set up to offer their catalogs overthe Web in the coming months. MOCA represents compulsorylicensing-lite: If MusicNet or pressplay license songs to oneanother, 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 alreadyextensive regime of compulsory licensing, but to move beyond it. Asa backdrop to the compulsory licensing debate, an academic disputerages today over whether intellectual property should be protectedat all in the digital age. But it ought to be easier to reject theidea that politicians should take away the ability to manage one'sintellectual property through forcible sharing.

The five major record companies oppose MOCA's mandates. Butironically, MOCA could benefit them. If widely applied to allfuture licensing deals, the bill could thwart new companies thatmight otherwise enter the music-making business, thus freezingtoday's market structure. Regulatory interference with privatelicensing and promotional arrangements could dissuade new,competing labels.

Compulsion should not be part of the mix as thousands strive tocreate the "celestial jukebox" (and library and movie theater) oftomorrow. Compulsory licensing-and the attendant regulatoryprice-setting-is rooted in the idea of "market failure," theperception that it is too difficult for scattered owners andlicensees 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 electronictechnologies that make it easier to track files and communicate,compulsion is even less defensible. Calls for compulsory licensingaren't based on market failure in the sense of an inability ofwilling parties to come to terms or to track files, but rather adesire to force unwilling parties to relent. Adversarial lobbyingfrustrates what should be a torrent of voluntary, diversecontractual business deals.

Already, 1998's Digital Millennium Copyright Act has createdconfusion in at least one category of digital licensing-forWebcasters-because of fights over royalties and terms permittedunder its statutory license. If there were no mandatory licensingin the DMCA, pressures to negotiate genuine deals might havefurther advanced this market. Few if any competitors would bepanting for artificially created markets, or forming tradeassociations to lobby Washington, provoking opposition rather thanpartnerships.

The goal since the digital upheaval of copyright has been to getartists and composers paid. Opposing factions agree on that, butdisagree over whether intermediaries (like record companies) shouldget paid. But here especially, it's better to allow the market towork (and perhaps even bypass the middleman as the Internet isfamous for doing) rather than risk locking in the existing orderthrough forced licensing merely so that agitators can get theirhands on the existing catalog of music.

Clearly there is no voice in the sky proclaiming that producers,artists, composers, retailers, and consumers must deal withexisting record companies. If those companies' terms are as bad asmany claim, we'd be better off with a truly competitiveinfrastructure than with a highly regulated version of the existingstructure-even if that takes time. Unfortunately, companies that could help create that competition by focusing ontomorrow's artists and disgruntled major-label refugees, are betterknown for seeking copyright infringement immunity for hostingcopies of users' music. They directly provoked the wrath of therecord companies, when emphasis on the future might have spurredmore favorable deals.

Ironically, voluntary collaborations by record companies tocross-license digital music-which do represent a natural marketalternative to mandatory licensing-risk incurring antitrustscrutiny. MusicNet and pressplay are now subjects of a Departmentof Justice investigation of alleged monopoly power. Likewise,Boucher and Cannon worry that MusicNet and pressplay together wouldown 80 percent of the world's "music catalog," and thereby wieldmonopoly power over distribution and cross-license content. Butwait a minute: the complaint of music lovers until now has beenthat record companies wouldn't cross-license, which would forceusers to subscribe to more than one network. (Recall that one-stop"shopping" was part of the reason for Napster's popularity.) Whypropose compulsory licensing schemes, partly in the name oftrustbusting, while suffocating voluntary efforts that provide theuniversality so actively sought? Besides, fears of an 80 percentmarket share are overblown. There's little need to worry about amonopoly on entertainment, a non-depletable good. And competitivelicensing could cut that share anyway.

In the final analysis, the foot-dragging of record companies maynot be due just to fear of "Napsterization," but the desire to waitout broadband deployment. Most music is sold offline (at placeslike Wal-Mart). That minimizes the urgency for record companies toembrace the Web. Change will come naturally as broadband accessbecomes universal, and record companies are forced to selldownloads and streams, rather than plastic disks. Presumably thatis what MusicNet and pressplay anticipate.

But the licensing terms that define relationships in thisemerging marketplace need to evolve along with the Internet itself,not be specified in advance by politicians. Record companyreluctance to digitize music catalogs is ultimately a transitionalproblem (setting aside troublesome copy-protection issues).Government must not compel sharing just because special interestsare stamping their feet. Otherwise, forced licensing won't likelystop with music; mandated contracts for e-books and movies could benext.

It is pointless to set up an artificial digital marketplacegrounded in force and mistrust. Incentives for producers,composers, artists and rights holders to distribute copyrightedmaterials won't always mesh. Still, digital distribution and themarket institutions it can spawn (even "monopolistic" ones likeMusicNet and pressplay) will respond to incentives more efficientlyand effectively than to adversarial compulsory licenses. The"celestial" content of tomorrow will be hampered if compulsorylicensing discourages selective partnerships, strategies, andcompeting business plans.

We should not ask Washington to coerce better deals for onlinecontent than we might negotiate privately. Aside from the threat toentrepreneurialism that would result, it's hard to make a case fora right to be entertained, even in today's advanced welfarestate.