Tuesday, August 22, 2006

Ringtones - Observations on the 6% Solution

I’ve now read the Copyright Board’s Ringtones decision of August 18, 2006. Here are some observations.

1. It’s not obvious that any or all of the various methods of delivering ringtones to customers involve a “communication to the public by telecommunication”. The remaining objectors conceded that there was a “communication by telecommunication” of a musical work - but disputed whether it was “to the public”, which is indeed an arguable point. The objectors’ strategy was to argue that the communication was not “to the public” - and, alternatively, if there was liability, the “communication” aspect is purely incidental to the reproduction right and should thus be valued accordingly.

2. But, actually, it’s not clear that the provision of ringtones to customers in the various ways that this is normally done even involves “communication” or “telecommunication” at all. There are many ways of moving music around on the internet - and it is arguably erroneous to lump them all together as “communication” or “telecommunication” or both. For example, the transmission of a digital file that must be stored and may later be performed as a musical composition is arguably not the same thing at all for copyright purposes as real time on demand streaming that cannot be stored for later retrieval and amounts, in effect, to on demand radio or webcasting.

3. The problem with this decision lies in the result that effectively conflates and perhaps even confuses the communication right with the reproduction right. This goes back to the Board’s 1999 decision in SOCAN’s Tariff 22. Whether or not this should have been challenged following the 1999 Tariff 22 decision, or whether it should have been raised in this instance is a matter upon which reasonable minds may disagree. But the result, unless reversed, will likely compound the imposition of multiple layers of payment to multiple claimants for multiple rights involving the same activity and transaction. The concept of “double payment” will likely become “triple” or more.

4. Thus, ringtone users will eventually be making payments potentially for the communication right, the performance right, and the reproduction right to potentially three categories of claimants who sometimes wear multiple hats - composers/authors and their publishers, record producers and performers. The same will hold true for online music - i.e. iTunes.

5. In fact the Board itself even seems to hint in para. 12 of its decision that SOCAN could file a tariff for the “performance in public” of a ringtones, which would compound the multi layering problem to a new level, i.e.

SOCAN has not filed a tariff for the performance that may occur when a ringtone is played in a public setting. (Emphasis added)

6. The Board does more than hint in paragraph 7. It virtually lays down the red carpet for the recording industry to come and claim their share of the pie in respect of master tones (i.e. recorded performances).

7. Is this what Parliament intended? One would hope not. This would be the antithesis of efficiency and even the music industry has mixed feelings about it - witness the opposition even of CRIA to SOCAN in this hearing and to the music publishers in the CSI hearing on online music starting on September 6, 2006.

8. Even the Copyright Board cannot make the internet cash pie expand forever, and the current and future internecine battles in the music industry are mostly about how large the pie can grow and how it will divided before the growth boom finally gets corrected.

9. Note that composers and authors have always been paid for ringtones obtained though Canadian wireless providers or any other “authorized” sources, and access is tightly controlled in Canada. The essence of the transaction involves a reproduction - which has already been taken into account in the “behind the scenes” licensing. The question is how many more times and to how many more parties is the Copyright Board going to allow payments to be made? SOCAN doesn’t control reproduction rights here. But it represents the same composers, authors and publishers who do. If the Copyright Board is correctly interpreting the law, is Parliament going to stand by and let this multiple payment game continue?

10. This would not surprise me. The policy of Canadian Heritage is to support collectives in a variety of ways, including subsidies and legislation that creates new rights and the possibility of new tariffs and ever increasing revenues. Many of these officials probably see the prospect of multiple payments to multiple collectives for the same transaction as a good thing. Collectives do indeed serve an essential function - if not encouraged to excess. But the danger of the Canadian Heritage approach is that it appears to exemplify the old fallacy that that, if copyright is good, more of it must be even better. Lest we forget, we are dealing with the collective exercise of monopoly rights.

11. It was exactly this type of multiple payment problem arising from then new technology (“talking pictures”) that led Parliament back in the 1930's to put the brakes on SOCAN’s predecessor by establishing the predecessor of the Copyright Board.

12. The result of this decision is another blow to the concept of technological neutrality, as some would define it. Why should the efficient transfer of a file over the internet trigger copyright liability for “communication” by “telecommunication” when the provision of the same file by much less efficient physical means (e.g. sending a CD by snail mail) does not? Quite apart from the spectre of multiple payments and layering, this amount to a tax on efficiency. It could also spread to other businesses, even beyond the music business. If the Board is right, then it would presumably follow that e-books involve the “communication” of literary works. But I shouldn’t give Access Copyright ideas.

13. There are no “appeals” from the Copyright Board. Judicial review is available in principle, but the Federal Court of Appeal almost never gets involved in overturning matters that relate to facts or rate calculation, although a major effort is underway to reverse the Board’s recent large and controversial hike in the commercial radio tariff. Where the issue is purely one of law, the Court of Appeal holds the Board to a simple “correctness” standard - which is the lowest threshold for review. But very often, the issue is or is argued to be one of mixed fact and law and the Court of Appeal will then tend to defer to the Board.

14. The problem on judicial review here, if it is sought, may be that certain issues that might have been raised weren’t raised, and that the Court of Appeal may regard the issues already on record, in any event, as mixed questions of fact and law - thereby giving more deference to the Board’s reasoning.

15. On the communication point, it strikes me that the Board hung its hat mainly on one word - the word “might” - from an obiter dicta passage in the Supreme Court of Canada’s decision in CCH v. LSUC. In that passage, Chief Justice McLachlin said that:

I agree with these conclusions. The fax transmission of a single copy to a single individual is not a communication to the public. This said, a series of repeated fax transmissions of the same work to numerous different recipients might constitute communication to the public in infringement of copyright. However, there was no evidence of this type of transmission having occurred in this case.
(Emphasis added)

16. The Supreme Court was not concerned in that case with the niceties of the various architectural permutations of how things happen on the internet, and the Copyright Board appears not to have delved too deeply even in this instance into how ringtones find their way from a composers’ pen to the intrusive and usually distorted cacophony that we too often hear during quite meditative moments at the opera or in funeral parlours.

17. Moreover, a fax “transmission” - note that the Chief Justice does not necessarily equate the word “transmission” with the word “communication” - results immediately in something that is directly readable by the recipient. The transmission of a ringtone file does not immediately result in the conveying of any information - much less music - to any person. It must get properly loaded into the handset, paid for, selected, and is later activated only when the cell phone “rings”.

18. Nor, with respect, should the Copyright Board put too much reliance on paragraph 42 of the SOCAN v. CAIP decision in which Justice Binnie agreed with the Board that “a telecommunication occurs when the music is transmitted from the host server to the end user.” There is a potentially big difference between “the music” being “transmitted” and a file being copied that only later can be heard as music when it is played on a device. This may sound picky and even akin to sophistry - but that’s the nature of history of copyright law, which has always focussed on legal and technological niceties.

19. It appears that the objectors may have indirectly broached the “communication” point indirectly by arguing that the Board was really seeking to impose a “making available” right - which is required by the 1996 WIPO WCT treaty. But - as everyone knows - Canada has notably NOT YET ratified this treaty. And even if Canada does, the scope of the “making available” right is very uncertain and Canada would be wise to implement it in the most narrow and careful possible fashion. Ironically, the cursory 1998 analysis by Johanne Daniel and Lesley Ellen Harris, upon which the government relied for so long, concluded, without any stated reasoning, that Canada already complied with the WIPO WCT treaty in respect of the required “communication right” that included “a making available” right for composers and authors. The debate about whether Canada does or does not already have a “making available” right evidently is far from over. Some will see this decision as effectively confirming that we do, even if the Board says that we don’t.

20. The rate calculation issue will be even harder to review - the Federal Court of Appeal is very reluctant to interfere with the fact finding/evidentiary aspect of any tribunal’s work. Much of the evidence was treated as confidential - which may be just fine for the parties, including interests not present, although this leaves the public very much in the dark. Consider the expurgated final conclusion, which will cause considerable frustration to anyone trying to understand what the Board was trying to say here:

J. Ability to Pay[127] The Canadian ringtone market has grown very quickly in recent years. Mr. Sone estimated the revenues generated by ringtone retail sales in2004 to be over $15 million, and predicted that revenues might reach $30 million in 2006. In addition, the costs associated with the production and sale of ringtones seem to be quite low. Those figures, which were not challenged by the objectors, are indications of a financially sound industry. Moreover, the rate we have set is low enough not to lead to XXXXXXXXXXXXXXXXXXX in the ringtone market. In other words, larger than the XXXXXXXXXXXXXXXXXXXXX amount of the royalties that will actually be paid. There should therefore be no consequence on market prices.

(Footnote omitted)

XXX = expurgated by the Board

21. This is a highly unusual way to conclude a decision of this importance that will set the stage for much to come in the future. Look at the actual decision - it at least indicates the amount of space of the expurgated portions.

22. Interestingly, the rate arrived at by the Board after 14 months of consideration ends up being effectively the average of the rate proposed by SOCAN (10%) and the rate proposed by the objectors (1.5%). The exact arithmetic average would have been 5.75%. The Board ends up with 6%, although they have an admittedly more complex way of getting to that conclusion.

23. It is difficult to guess whether there will be judicial review. We’ll know by September 18, 2006. Depending on how one reads between the lines, so to speak, of the final paragraph, the 6% solution may not cause immediate serious pain to any of the remaining objectors. The Board seems confident that “There should therefore be no consequence on market prices.” - for reasons that must remain confidential. We shall see. That’s a lot for the Board to assume, especially when the impact of the inevitable future multiple layer ringtone tariffs becomes apparent.

24. The public interest factor in this case may not be as obvious as in some other Board decisions. If kids want to spend lots of money on ringtones and buy new ones every week in order to be “cool”, that is their decision - and it may annoy their beleaguered parents who will foot the bill. Clearly, this is discretionary spending. The real public interest lies in the legal and rate making precedents that are being set here.

25. The absentee proxy for the public interest - who is mandated by law to watch out here - is the Commissioner of Competition - who has basically never become involved in Board matters, even though there are many situations where such involvement might may be warranted. Moreover, the Board itself could and arguably should look out more for the public interest and play a more pro-active inquisitorial role. Instead, it treats most proceedings as adversarial. In the result, the administrative law process is often more adversarial than actual litigation.

26. If there is no attempt at judicial review, it may be because there is no immediate and direct cost/benefit advantage to any of the objector parties. If so, this will not be the first time that the public interest has been left behind by a simple cost/benefit analysis by the objectors and the unwillingness of the Board or the Commissioner of Competition to fully pursue their roles in the guardianship of the public interest.

27. The real danger is that this ruling on communication to the public by telecommunication will serve as a springboard - both legally and in terms of a quantitative proxy - for the forthcoming attempts by SOCAN and the music publishers and eventually others to add large amounts to the cost of online music obtained from iTunes, and other internet music modes, etc. The current 6% solution is far from a "low" rate. Given the size of the ringtone industry, it will be a lot of money and an important precedent and building block in other files to come.

28. It is not known why it took the Board 14 months to render this decision. Meanwhile, the CMRRA/SODRAC (“CSI”) attempt to add 15% to the cost of online music is about to start hearings on September 6, 2006 and will hopefully confront some of the “double payment” issues that are now looming larger than ever. That hearing is based upon the reproduction right. The SOCAN attempt to ratchet up the price of paid downloads by 25% based upon the allegedly applicable communication right is lurching along at full speed - albeit with several notable drop outs - including clients of mine once again. The SOCAN hearing in particular stands to be profoundly effected if there is successful judicial review of the current decision.

29. Finally, it’s frankly disappointing that the full Board did not hear this case. We had the benefit of the Chairman’s presence (he is a Court of Appeal judge from Saskatchewan). However, two of the most experienced Board members did not sit on this matter, which is potentially one of the most important that the Board has heard in a very long time.


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