Ring Tone Revenues Foster Copyright Detente

December 23, 2005


Neil J. Rosini, Michael I. Rudell

Revenue Claimants Make Peace, Not War

(Originally published in the New York Law Journal, December 23, 2005.)

Just a few years ago, the average U.S. consumer might have had a difficult time defining a ring tone. At least thirty million of them now have a clear idea. That’s the estimated number of Americans who have downloaded musical ring tones to date – a fourfold increase since summer, 2004. They currently are paying $2 to $4 per tone and generating domestically an estimated $600 million per year. This revenue is like manna to a music industry knocked backward by the persistence of unlicensed peer to peer networks. But the technology has raised some challenging copyright issues among revenue claimants that have yet to be ironed out.

For the moment, those claimants seem to be making peace with one another, rather than instituting litigation. Although some of them, as a result, are taking uncustomarily generous slices from a large revenue pie, none has yet risked a fight that might cut back ring tone availability or dampen consumer enthusiasm and reduce everyone’s share.

For anyone still unfamiliar with the definition of a ring tone, it is a sound effect or song emitted by a phone to announce an incoming call. The traditional sound effect – ringing bells – satisfied the needs of mobile phone users for some years. But when more and more phone models began allowing for individualized selections of musical tones, demand for this new form of personalization grew dramatically. A personalized ring tone not only allows for the immediate identification of an incoming call on one’s own phone in a room crowded with mobile-phone owners, but also makes a personal statement of musical taste. With the right model phone, an owner can even program specific songs for specific callers, allowing identification of the source of an incoming call without touching or seeing the phone.

Originally, musical ring tones were only available in “monophonic” form: a simple series of tones –- each a single note — that might remind one of several bars from a favorite CD as performed by a very simple computer. Technology then advanced to the “polyphonic” level, which are like monophonic ring tones with multiple notes played at the same time, creating harmonies. They sound closer to that favorite CD, but without original instrumentation or vocals. The most recent advance is the availability of “master tones,” also called “realtones,” which are 20-30 second snippets of actual sound recordings. These not only sound like a favorite CD but are that favorite CD. Although hip-hop music is the most popular choice, selections range from rock to television theme songs to classical music. Currently, sixty percent of mobile ring tone revenues are generated by master tones.

Consumers buy ring tone downloads from phone carriers, and if the carriers allow, from content owners and third party aggregators. The phone itself generates the personalized ring tone after a digital download. This distinguishes a ring tone from a ringback or callback tone, which is the sound heard when making a call while the other party receives a ringing signal. A ringback is generated within the phone system rather than by the calling instrument or the one being called. In addition to purchasing ring tones, mobile phone owners with the right equipment can purchase ringbacks to serenade incoming callers with a personalized selection while they wait for their call to be answered. About 7% of total ring tone/ringback sales come from ringbacks.

Musical ring tones currently outsell legal song downloads even though they cost at least twice as much. (A popular form of legal download, to an iPod, costs only 99 cents for the entire song, not just a 20 second snippet with poor sound quality.) Ring tones and ringback sellers do not compete with record pirates, however, and for the time being at least, consumers are willing to pay this premium for the pleasures of personalization.

In the world of physical CD distribution, the key claimants to rights and income are the music publishers, performing rights organizations (principally, ASCAP and BMI, referred to below as PROs), and record labels. They also turn out to be key copyright claimants in the world of ring tone downloads, though the precise contours of the rights of music publishers and the PROs under current law are not as clear as they could be.

In the physical record world, music publishers collect a “mechanical license” fee per CD that covers rights to reproduce and distribute the underlying musical composition embodied in the CD’s sound recording. For historical reasons, Section 115 of the Copyright Act provides that mechanical licenses can be obtained on a compulsory basis once the musical composition has been released on a CD, in exchange for payment of fixed statutory fees and compliance with statutory formalities. As a result, even voluntary mechanical licenses are customarily granted at the statutory rate, which usually falls short of a dime per copy. This same paradigm was exported to digital downloads – called “digital phonorecord deliveries” – when Section 115 was amended in 1995. Music publishers now receive the same for digital deliveries that they receive for physical distribution.

The PROs collect and pay to composers and music publishers their respective shares of income from public performances of the underlying musical compositions embodied in sound recordings. These include performances in public places as well as transmissions to the public by television, radio, internet webcast and any other “device or process whether the members of the public capable of receiving the performance . . . receive it in the same place or in separate places and at the same time or at different times” (17 U.S.C. Section 101, emphasis added). PROs commonly base their fees on a percentage of income earned by license holders.

Music labels, which typically own the copyrights in sound recordings, produce, manufacture and sell physical CDs. In turn, they pay the mechanical license fee due to music publishers and keep the lion’s share of wholesale receipts for themselves, from which they pay expenses including payments to recording artists. In the world of digital master tones, they generally receive half of what consumers pay to phone carriers. And, as in the physical world, they must pay music publishers a share of that.

But what share of master tone revenues is due to music publishers? Under the Copyright Act, should it be the same mechanical license “penny-rate” that applies to physical CDs? And should the PROs also receive a share of ring tone fees collected by phone companies and other sellers, and if so, on what basis? The Copyright Act does not give explicit answers to these questions.

First, for the purpose of paying music publishers, record labels would like to rely on the digital phonorecord delivery provisions of the Copyright Act, which would result in mechanical license fee payments of about 9 cents per ring tone download. Record labels observe that ring tone distribution is accomplished by “distribution of a phonorecord of a nondramatic musical work by means of a digital transmission” which is just what the statute defines as a “digital phonorecord delivery.” (17 U.S.C. Section 115(c)(3)(A)). Music publishers, however, have taken the contrary position, asserting that the entire mechanical license fee structure is inapplicable to ring tones for one reason: under Section 115, no compulsory mechanical license is available in the physical or digital spheres if the “arrangement of the work . . . change[s] the basic melody or fundamental character of the work.” (17 U.S.C. Section 115(a)(2)). Music publishers say that snipping a 20- or 30-second segment from a song on a CD constitutes a “fundamental” change in the character of the song.

The industry group that represents the major labels, the RIAA, has threatened to seek a judicial ruling on the issue, but its members have so far tended to negotiate instead. As a result, while the copyright question remains unanswered, music publishers have been receiving about 25 cents per ring tone transaction – roughly three times the mechanical license rate.

Record labels do not purport to collect fees on behalf of PROs. To the extent PROs are due any payment from ring tone transactions, they are on their own to collect it. That entitlement depends on the threshold question of whether the download of a ring tone to a mobile phone constitutes a public performance. Because no one hears the download as it is being transmitted to the receiving device (unlike a television, radio, or webcast transmission), one might fail to find the “performance,” and categorize ring tone downloads with ordinary digital phonorecord deliveries, from which PROs receive no fee.

But the PROs point toward the performance of the ring tone itself: Is it not intended to attract attention in public places? Moreover, doesn’t a ring tone delivery result in something less than a true substitute for an unrestricted copy of the recorded song? At least in the view of BMI, a transmission of a sound recording that does not result in an unrestricted copy does result in a compensable public performance. While some might question whether the Copyright Act resolves these issues in favor of the PROs, BMI says it is successfully collecting performing rights fees from a large proportion of ring tone transactions.

By negotiating peace rather than declaring war, the record labels, PROs and music publishers so far have achieved a remunerative détente. This show of practical thinking not only avoids risk to a current income stream but also may reflect a forward-looking concern: how long will this phenomenon last?

Already, the practice of “side-loading” is growing. By this means, with the proper equipment, consumers can download their own digital music to their mobile phones without involving the phone carrier or paying a fee. This potential cause of diminishing revenue should be no less of a fair use than making any other personal copy of an unrestricted, legally-acquired CD or digital phonorecord delivery. (For this reason, industry executives may be placing higher long-term bets on musical ringbacks, which reside in the phone system rather than the mobile device, and therefore cannot be inserted by consumers on their own — at least not yet.)

Also, consumers aren’t settling merely for musical ring tones and ringbacks. Audio clips from films and television programs; comic routines from Comedy Central; pithy observations by Donald Trump; and announcements of baseball plays are also available as ring tones. Who can say whether their popularity relative to musical ring tones will increase?

The very nature of mobile phone usage also is changing. Last month, Sprint began selling songs in their entirety for download to mobile devices. Cell phones are morphing into the equivalent of iPods – albeit with a capacity for personal communication. This could convert the demand for personalized musical ring tones and ringbacks into a demand for entire songs, introducing new economics. More than 6% of mobile phone owners say they have downloaded full songs to their mobile phones.

The American consumer, not known for long-term adherence to trends, can turn his or her attention to any other means of spending entertainment (and personalization) dollars at any time. To split peacefully a ring tones revenue stream while the water runs deep seems to make good sense.