• Structuring relationships between developers and publishers and the ownership issues that arise in development agreements, including work-for-hire, joint ownership and cross-licensing issues;
• Protecting against developer default or insolvency, including the pros and cons of source code escrow arrangements and the applicability of Section 365(n) of the Bankruptcy Code;
• How clearances and consents have become critically important with the increased incorporation in games of real world elements (cities, buildings, people, etc.) and third party IP (e.g. music, video clips, characters, logos, etc.), with an examination of recent case law (Kirby v. Sega and Grand Theft Auto/Pig Pen); and
• Strategies to maximize revenues from online and mobile games, including sponsored exclusive features and content, “in-game” ads, syndicated games, and tiered subscriptions.

The one-hour Webinar will also feature “live chat” functionality to enable viewers to ask questions and comment on the presentation in real-time.  Presentation materials will be available for download.

The Webinar will be held on September 16, 2009 from 1:00 pm to 2:00 pm EDT.  To register, click here.

Of course, in the alternative, AT&T claims that to the extent AT&T is not directly liable, secondary liability attaches via the doctrines of inducement, vicarious and contributory liability—essentially, liability for contributing to and benefiting from the unlawful performance of ringtones by AT&T customers. This argument is likely designed to cut against the exemption codified in the Copyright Act allowing the “performance of a nondramatic literary or musical work … to the public without any purpose of direct or indirect commercial advantage… if there is no direct or indirect admission charge.” (see 17 U.S.C. § 110(4)). This would, in theory, prevent ASCAP from proceeding against individual consumers who, although they may be publicly performing a musical work according to Copyright Act, are doing so without commercial advantage and thus not infringing.

ASCAP also reveals in its motion that it has consistently licensed other mobile carriers’ sale and distribution of ringtones, charging “2% of revenue and an alternative usage-based fee calculation.” In fact, ASCAP claims that prior to the Second Circuit’s 2007 decision that digital downloads of sound recordings do not trigger the public performance right (see United States v. ASCAP, 485 F. Supp. 2d 438 (S.D.N.Y. 2007)) (the “Download Decision”), “very few parties ever questioned or challenged ASCAP on the question of whether ringtones required public performance licenses.”

For business people and transactional lawyers alike, perhaps the most notable takeaway from ASCAP’s motion stems from AT&T’s claim that the ringtone providers (e.g., Jamster, ThumbPlay, etc.), not AT&T, “bear contractual responsibility for securing public performance rights.” In other words, AT&T is stating that if public performance royalties are due, it is the responsibility of content providers, aggregators, and ringtone creators to make payments to the performing rights organizations, not distributors like AT&T and other mobile carriers/network operators. Put simply, this contention highlights the need for parties to these types of agreements to be more explicit than ever about which party will be responsible for performance royalties if and to the extent any public performance rights are implicated. Here, AT&T is pointing the finger at the providers, and to the extent this tactic works, the providers would be responsible for paying royalties based not only on their own revenue, but the mobile carriers’ revenue, which, according to the ASCAP’s standard licensing agreements, is deemed part of the provider’s “client revenue” that is included in the “royalty base” for calculating provider payments to ASCAP. Moreover, any party ultimately saddled with responsibility for making performance payments would not only be required to pay 2% of revenue to ASCAP, but would also be required to remit similar amounts to the two other major performing rights organizations in the U.S. (i.e., BMI, SESAC), raising the total performance royalty rate to more than 6% of revenue–a sizeable payment, and in addition to the mechanical reproduction fees due to those same publishers and writers that are members of the performing rights organizations.

Ultimately, ASCAP, in its attempt to receive royalties from AT&T, devotes the majority of its motion to arguing the extensive nature of ASCAP’s control over the ringtone in an effort to distinguish ringtones from full-audio downloads addressed in the Download Decision, as the outcome of this case may very well turn on the question of the party responsible for triggering the performance. In other words, if an ongoing connection is maintained or required whenever the ringtone is played on a consumer’s phone (e.g., similar to the connection required when a sound recording is streamed over the internet), then the second kind of public performance (i.e., the digital transmission performance) may be triggered. On the other hand, if AT&T can successfully argue that the ringtone is downloaded only once to a consumer’s phone (similar to an iTunes track) without simultaneous or near simultaneous playback and continues to reside on the device exclusively, then merely prompting the playback of same by AT&T for an incoming call should fall more squarely within the confines of the Download Decision.

No matter what side you come down on, ASCAP’s PR machine has been slammed in the past for seeking payment from less than profit driven adversaries, including campfire balladeers such as the Girl Scouts. This time around though, eager to combat a slew of negative news reports trashing ASCAP’s pursuit of ringtone monies, ASCAP moved quickly to address the matter with its own membership, dispatching the following clarification to its writers and composers:

“Bottom line, ASCAP is striving to license those that make a business of transmitting its members’ music. This holds true for any medium where businesses have been built by using this music as content or a service – whether terrestrial broadcast, satellite, cable, Internet or wireless carriers providing audio and video content. To be completely clear, ASCAP’s approach has always been to license these businesses – not to charge listeners/end-users.”

Also, noteworthy in ASCAP’s response, is the fact that ASCAP states that it is “in Federal Rate Court with the two largest U.S. wireless carriers,” evidencing that ASCAP will be staging this battle for ringtone royalties on multiple fronts, including with Verizon, AT&T and possibly ringtone providers supplying the mobile carriers.

Needless to say, this will be a long, hard-fought battle and the public performance organizations, still reeling from the Download Decision (which incidentally is still in the appeals process), will not go quietly when the mobile carriers continue to enjoy revenue in the billions from the sale of ringtones. As always, we will continue to closely monitor this case given the potential impact on our clients’ businesses and the need for licensing and distribution contracts that accurately delineate each party’s roles and responsibilities in this constantly evolving digital space.

  Royalty Rate Analysis

After months of hearings, testimony and deliberations, on October 2, 2008, the United States Copyright Royalty Board (CRB) announced newly established rates for royalties to be paid to writers and composers (as opposed to performers) whose musical compositions are made and distributed as sound recordings (i.e., phonorecords), including via (1) physical recordings (e.g., CDs, tapes, vinyl, etc.), (2) permanent digital downloads, (3) ringtones, (4) limited/tethered digital downloads and (5) interactive streaming.

 These new rate determinations, which will remain in effect until December 31, 2012, break new ground. Following a drawn-out battle between the National Music Publishers’ Association (NMPA) (representing song writers and composers) and the Recording Industry Association of America (RIAA) and the Digital Media Association (DiMA) (representing the record labels and digital music retailers, respectively), the CRB established, for the first time, a rate for the distribution of ringtones (24¢ per delivery), while surprisingly maintaining the same rates for the distribution of physical recordings and permanent downloads of digital recordings that had been in effect since January 1, 2006 (9.1¢ per delivery). The rates for the distribution of sound recordings as limited/tethered downloads (i.e., downloads that only play a fixed number of times or for a fixed period of time) and as interactive streams (i.e., online digital streams of recordings selected by an end user on an on-demand basis), both of which had been slated for resolution by the CRB among the other rates at the outset of the lengthy proceedings, were actually negotiated to a consensus by the parties during the hearings, and their settlement was adopted by CRB, subject to ratification following public comment.

The announcement of the rates for limited downloads and interactive streaming of recorded music are of the utmost importance to both the publishers and the record labels alike because, prior to the announcement of the proposed rates, any service seeking to offer limited downloads and/or interactive streaming of recorded music was required to negotiate a royalty rate with individual writers, publishers or mechanical royalty collections agencies such as Harry Fox. In other words, copyright ownership in a sound recording alone (or obtaining a license from the owner, typically a record label) does not allow for the distribution of that recording without first obtaining a license from the song writer or publisher owning and/or controlling the copyright in the musical composition contained therein. Section 115 of the Copyright Act, also known as the “mechanical compulsory license”, however, provides a mechanism whereby a licensee (typically retailers or record labels) may be automatically granted a license to distribute sound recordings containing songs that they neither own nor control simply by adhering to the terms of the compulsory license and paying the rates set by the CRB. In other words, the express permission of song writers and publishers is not required to make and distribute sound recordings incorporating their musical compositions, provided that the licensee pays the applicable rates and complies with the terms of the statute.

As evidenced over the last two years, the trend among social networking websites (e.g., MySpace, etc.) and other digital entertainment websites (e.g., imeem, last.fm, etc.) has been the inclusion of digital music in forms other than traditional webcasting or internet radio (i.e., non-interactive streaming, where the end user does not select each individual sound recording) in favor of a more personalized user experience. Obtaining a license to provide interactive streaming, however, has thus far been both a lengthy and expensive process, but now website publishers will only be required to negotiate licenses with the sound recording owners or providers and pay the required mechanical license fees and the applicable public performance fees without the need to negotiate a separate licensing arrangement with the publishers.

The new mechanical royalty rates for limited downloads and interactive streaming are unlike the statutory rate structure for physical recordings, permanent digital downloads, and ringtones, all of which are all based on per unit calculations (i.e., “penny rates” or a fixed amount per distribution). Instead, these new rates are based on a percentage of revenue formula, with varying rates based on the business model of the service offering the musical recordings, including subscription-based and ad-supported models. In other words, the amount due to each publisher whose work is incorporated in a sound recording selected by an end user for streaming or downloading is a certain pro-rata percentage of revenue earned by the service or digital platform.

   The calculations are relatively complex, requiring multiple steps that vary according to the type of service. For all service models described in the proposed rate settlement, however, the calculation begins with a determination of monthly “service revenue” for the applicable accounting period, or all revenue recognized by the service from end users from the provision of the licensed activity, including subscription fees, sponsorships, commissions and third party advertising in connection with the interactive streaming and limited downloads offered on the service. The service revenue is then multiplied by the applicable percentage, which is identical across the all service models (10.5%). This amount is then subject to increase based on the applicable minimum payment amounts if the percentage of service revenue fails to exceed the minimums according to the type of service (i.e., whether music subscription fees are charged or whether the service is free or ad-supported).

For example, in the case of music subscriptions services (4 of the 5 service models), the applicable minimum payment is the greater of (a) a fixed amount for each paying subscriber ($.15-$.80) or (b) a fixed percentage of the amount paid by the service to the owners of the sound recordings (i.e., licensing fees paid to the recording labels and content aggregators) for the rights to steam and offer downloads of the recordings (17-22%). In the case of free or ad-supported models, the only applicable minimum is the fixed percentage of the amount paid to the owners of the sound recordings (18%-22%). Ultimately, the total amount due to the publishers is the percentage of service revenue or the applicable minimum payment amount (which ever is greater), less all public performance fees paid by the service provider to the applicable performing rights organizations for the rights to stream the applicable recordings.

These first time mechanical rates for music on ad-supported and free services represent a significant shift in the digital music space. First, it effectively removes any fixed payment obligation on such services (i.e., no penny rates based on the amount of subscribers, downloads, or streams) other than 10.5% of service revenue or the fixed percentage paid to the owners of the sound recordings. Second, the absence of fixed dollar minimums provides much-needed flexibility for new business models to emerge and should allow them to continue to exist, as many would cease to be profitable if required to remit fixed dollar amount minimums when all revenue generated is dependent on alternate sources, including the receipt of advertising dollars.

Once the proposed rates are ratified, expect to see increased streaming activity in the digital music space among purveyors of online content, especially social networking websites. In fact, within a few days of MySpace’s recent launch of its streaming music functionality, MySpace Music, the service had already well surpassed one billion streams, providing further evidence that a per stream or subscriber/member minimum would be cost prohibitive.

If this is in fact the case, the publishers now sit squarely in the driver’s seat for determining the future of purely ad-supported business models in the digital music space, many of which cannot exist if required to make any sort of minimum payment per transaction or subscriber. Once such a rate is set by the CRB, each individual business unable to accept a minimum payment will then be forced to negotiate directly with each individual publisher for each music track, and face not only enormous advance payment demands, but an endless nightmare of tracking down each individual publisher (which for some music tracks may be 5 or more) and securing a licensing arrangement that does not involve any such minimum.

The enormity of this time and money consuming endeavor will certainly turn many current and future purveyors of digital music away from the distribution of on-demand streaming music and conditional downloads which, in comparison to the permanent downloads, do not earn enough revenue given their ephemeral nature to warrant a fixed payment amount other than a percentage of what they actually generate.

Advances over the last decade in the media, entertainment and technology industries have been unparalleled. The new media landscape is dynamically shifting in real time and all businesses must anticipate and react to innovations in technology in order to seize new opportunities and develop unique business models.

Hughes Hubbard and Reed’s New Media, Entertainment and Technology group recognizes the pace at which these advancements are affecting the day-to-day operations of our clients. We specialize in helping clients exploit such developments to stay ahead of the curve by understanding the way technology influences business. It is not merely the convergence of the media, entertainment and technology industries, but the impact of such convergence on the global consumer, which drives the marketplace forward. We combine the resources and experience of a traditional law firm with an understanding and passion for today’s cutting-edge technologies to assist our clients in navigating the new realities and challenges arising from this shifting landscape.

Digital Media and Internet

• Digital audio-visual content licensing, distribution and syndication initiatives on all new media platforms including wireless, broadband, satellite radio and IPTV
• Online social networking services, virtual reality communities, blogging, massively multiplayer online games (MMOGs)
• Mergers & acquisitions, strategic alliances, online sponsorships/promotional collaborations and joint ventures
• Embeddable media player development, deployment and syndication
• Electronic publishing and distribution
• Integrated marketing, contextual advertising and brand management
• Viral marketing and Internet based “word of mouth” campaigns
• Ad serving, syndication, publication, targeting and tracking
• User-generated content ingestion, distribution, syndication and liability-related issues
• Digital content screening, moderation and filtering
• Online gaming, sweepstakes, contests and promotion compliance
• Digital Millennium Copyright Act – safe harbors and anti-circumvention issues
• Adoption and content of website Terms of Use agreements

Entertainment

• Development and production matters for motion picture and television productions, including writer, producer and director arrangements, guild issues, special effects agreements, location agreements, and other production related matters and documentation
• Domestic and international motion picture distribution in all media, including output deals and ancillary exploitation
• Cable and television broadcast, syndication and other distribution
• Motion picture and television finance, including single- and multi-project finance and all forms of debt, equity and mezzanine financing
• Strategic alliances and motion picture and television co-production and co-financing arrangements
• Major record label sound recording, publishing and associated rights clearances
• Independent music recording, publishing and licensing
• Video game development, publishing ,distribution and licensing for all platforms, including console, handheld ,wireless and online games
• Professional sports league television licensing and retransmission
• Professional athlete employment contracts and talent agreements, including spokesperson, appearance and sponsorship agreements
• Literary and other underlying rights acquisition and licensing
• Rights clearance for motion pictures, television productions and video games
• Product, character and technology merchandising and licensing
• Television format licensing
• Overall and housekeeping deals with talent elements and production companies
• Motion picture and television library acquisitions and dispositions
• Network, cable system and satellite affiliation and carriage agreements
• Product placement and commercial tie-ins
• Motion picture and television marketing agreements and arrangements
• Registration and licensing of patents, trademarks and copyrights
• Litigation concerning the interpretation of recording, film and distribution contracts
• Theme park, gaming and hotel operation

Technology and Information Security

• Privacy, data and information security compliance
• Information technology, business process, call center and manufacturing outsourcing transactions
• Website development, hosting and colocation arrangements
• Electronic commerce, publishing and distribution
• Technology and data export compliance
• Record retention and disaster recovery/contingency planning compliance
• Wireless device and network applications
• Software/hardware and intellectual property procurement, development, licensing and distribution
• Micropayment, contactless payment, smart cards and other alternative electronic payment technology implementations
• Technology transfers and acquisitions
• Technology service and maintenance agreements
• Domain name disputes

New Media, Entertainment and Technology Attorneys

• Dan Schnapp
• Rita Haeusler
• Wayne Josel
• Peter M. Langenberg
• Lindsay Orosz
• Matthew Syrkin
• Other Attorneys

Ad-supported music distribution services offering streaming music, limited downloads, or both, should be extremely concerned at this latest development. While it is certainly encouraging to see the sides agreeing on some of the rates at issue, the publishers have been fervently opposed to any rates purely based on a percentage of revenue given the enormous difficulty in accounting for the many different business models, alternative accounting systems and various deductions and other methods of calculating revenue. As such, the publishers have continuously pushed for a minimum calculation for determining the monies they are owed, whether based on plays, streams, downloads or subscribers (e.g., a penny rate or amount per individual subscriber) in order assure themselves revenue without the need to confront and investigate every business model turning to compulsory licenses.

[TO BE CONTINUED]