The billion dollar ringtones war
By Steve Gordon

Ringtones are a huge business. According to Jupiter Research, ringtones generated $6.6bn dollars in global revenue in 2006. They are also one of the most contested areas of the music business with a fierce battle being fought between major record labels and music publishers. The labels have argued for years that music publishers charge too much money for the use of their songs, and in some cases arbitrarily deny consent altogether.

Since sales of CDs have declined in almost every year since 2000, and digital sales of full songs have not made up for these losses, labels are desperate to make money from other sources. Ringtones have long been one of their few rays of hope.

Ironically the same companies that own the four major labels, Warner, EMI, Sony/BMG, and Universal, also own four of the world's largest music publishers, Warner Chappell, EMI Music Publishing, Sony/ATV and Universal Music Publishing. Nevertheless, these companies, although related by common ownership, are in a civil war.

Most ringtones are "master" tones, that is, they consist of original masters, which are owned by the labels. The underlying music, that is, the songs, are controlled by the songwriters' representatives, the music publishers. Many of the most successful ringtones are controlled by both major labels and major publishers. For instance, according to Billboard, one of the leading ringtones in fall and winter of 2006 was "New Ms. Booty" by Bubba Sparxxx. The master is owned by Virgin Records, a division of EMI Records, but the publisher is EMI Music Publishing. The labels usually charge 20 to 40 per cent of the retail price. So, for a ringtone selling for $2.99, the labels generate 60¢. to 120¢.

Prior to the decision of the Register of Copyright last October, which is the focus of this article, publishers were able to negotiate 10 per cent of retail or more, so their take for a $2.99 ringtone was around 30¢. But, ringtone companies would either make the labels pay the publisher's share, or try to negotiate the labels share down by the amount payable to the publishers. They labels weren't happy with this, but the publishers' policies regarding ringtones angered them for several other reasons, too.

The labels pay production costs running into millions for the production of master recordings, but publishers control songs simply by signing a songwriter to a contract. The compulsory license provided by Section 115 of the United States Copyright law, as discussed more below, permits anyone to make a mechanical or digital copy of a full song for only 9.1¢; So some publishers, for instance those controlling songs by the Beatles, Aerosmith and Jimi Hendrix, have refused to license their music for ringtones for any price, thus denying the labels significant potential revenues. Therefore, it was hardly a surprise that last September the labels, through their trade organization, the RIAA (Recording Industry Ass. of America), challenged the Copyright Royalty Board (CRB) to determine whether ringtones are subject to the compulsory license provided under Section 115 of the US Copyright Act. As we will discuss below, the labels won this battle. But, as we shall see, the war is far from over.

Ringtones - come and get 'em
For nearly a century, the US Copyright Law has provided that once a song or other kinds of musical works have been recorded and distributed to the public, anyone else can make and distribute recorded copies of that song by sending a notice to the Copyright Office and paying a royalty on each copy to the owner of the copyright in the song. The amount of this royalty is adjusted from time to time and is currently 9.1¢ for each sale. Because the owner of the copyright in a song cannot withhold consent, this is known as a "compulsory license."

Originally conceived with player pianos in mind (hence the rather archaic use of the term "mechanicals" to refer to the royalties paid for such uses), many believe that this provision has contributed to the dramatic growth of the recording industry in the United States by allowing artists to re-record hits or songs that would have languished in obscurity, and generating more sales of that song.

Although one is entitled to a compulsory license by complying with the procedures detailed in the Act, these steps are fairly cumbersome, and include monthly accounting obligations. All the major music publishers and many of the most important independent publishers voluntary issue licenses for the compulsory rate with easier requirements through the Harry Fox Agency, a division of the National Music Publisher's Association (NMPA), an organization controlled by the music publishing industry.

In 1995 Congress amended Section 115 to apply not only to physical sales, including CDs, but also to the digital music downloads, that is, digital phonorecord deliveries or "DPDs". But one area that was not specifically addressed was the use of songs as ringtones on cellular phones.

Music publishers took the position that although this was a license to make a digital copy of a song, it was not subject to the compulsory license, meaning that licenses had to be obtained directly from them (or from the Harry Fox Agency) on whatever terms they could negotiate with the phone companies, record labels, or other ringtone providers. Moreover, some songwriters and publishers denied consent at any price.

Why Ringtones fall under a blanket license
In response to the RIAA's formal request for a determination of the issue, and after hearing depositions from both lobbies, the Register of Copyrights, Marybeth Peters, made her decision. In a 34 page written Opinion dated October 16, 2006, she decided that ringtones are indeed subject to the compulsory license under Section 115 of the Copyright Act.

The music publishers had argued that by creating excerpts you change the fundamental character of the recording and thus ringtones fall outside the scope of S.115. Peters rejected this argument, and ruled that the Section 115 license is not limited to the reproduction and distribution of copies "of the entire musical work", and that an excerpt qualifies for the statutory licensee. The only exception, she found, is if the song is so fundamentally altered, by changing the melody or lyrics, for instance, as to become a "derivative work" in which event the consent of the copyright owner would still be required.

(Although she did not refer to them directly, the Opinion presumably also applies to "ringback tones", which are audio snippets that the caller hears while waiting for the person called to pick up the line.)