Is Spotify tuning in to the wrong statutory channel?

The much-anticipated launch of the music streaming service Spotify finally occurred in India on February 28. It got mired in controversy as Warner Music Group filed a suit for injunction against Spotify in the Bombay High Court, where the case is now pending.

A sizeable number of broadcasters, artists, labels, publishers and even choice before music consumers will be affected by how this legal battle unfolds.

Spotify and Warner tried negotiating the terms of the licensing agreement but failed to reach any consensus. Spotify instead used Section 31D of the Copyright Act to obtain a statutory licence against Warner. Section 31D was inserted by the 2012 amendment to the Copyright Act to allow ‘broadcasters’ to communicate to the public a previously published work after giving a unilateral notice and paying royalty rates determined by Intellectual Property Appellate Board.

While the section was specifically introduced in the context of radio broadcasters, Spotify has relied on an office memorandum issued by the Department of Industrial Policy and Promotion (DIPP) in 2016, which expanded the scope of broadcasters to Internet Broadcasters. The validity of this memorandum is suspect because reading streaming services into the ambit of broadcasters amounts to creative statutory interpretation or quasi legislative action by the DIPP in a manner not delegated or envisaged by the parent act i.e. the Copyright Act itself.

Spotify crossed one million users in India one week after launch
Spotify crossed one million users in India one week after launch

The specific question in front of the High Court is that of the meaning of the word “broadcast” under Section 31D covers internet radios and interactive streaming services. Broadcast has been defined in Section 2(ff) as ‘communication to public’, which could possibly include these services. It is, however, necessary to also understand the legislative intent and the possible consequences of the application of the section to services like Spotify.

Can Section 31D even regulate streaming services?

A bare reading of the text of Section 31D shows that it was drafted only with FM radio broadcasters in mind. For instance, it requires prior notice to be given to the publisher about the ‘duration and territorial coverage of the broadcast’. This is patently unsuitable for internet broadcasters like Spotify which allow their consumers to control the music output. The inadequacy of this section in regulating streaming services can be appreciated better when compared to laws in other countries.

The United States, for example, recently passed the Music Modernization Act, 2018 (MMA) after long-drawn negotiations with stakeholders from across the industry. The MMA provides for a compulsory licensing scheme in a slightly different context to tackle the issue of streaming services’ inability to identify the rightful owners of music and streamlining the payment of royalties. To achieve this, the Act creates a distinction between interactive and non-interactive broadcasters. It applies specifically to the former i.e. streaming services like Spotify, Apple Music, etc. and not the latter i.e. internet radio broadcasters such as Pandora. This is because non-interactive broadcasters like Pandora only require a public performance licence, and do not require ‘mechanical licences’ for reproduction and distribution of their work from the owners, in the way Spotify does.

The Act also mandates streaming services to report information regarding the number of streams or downloads of songs. Additionally, it provides that if the parties choose to enter into voluntary licensing deals, they must not do so by engaging in anti-competitive agreements.

The primary difference is that under Section 31D, statutory licence is given which can be asked as a matter of right. Whereas under the MMA, a compulsory licence is provided, which typically requires the applicant to prove that the rights holder had acted unreasonably.

Under Section 31D, statutory licence is given which can be asked as a matter of right. Under the MMA, a compulsory licence is provided, which typically requires the applicant to prove that the rights holder had acted unreasonably

Moreover, in India, there is no distinction between interactive and non-interactive broadcasters for the purpose of statutory licensing. Section 31D relates to the right of communication to the public under Section 2(ff) via grant of a statutory licence. This is distinct from the right of reproduction which is not covered under Section 31D. However, if Spotify succeeds in court, it would inevitably also get reproduction rights as part of its statutory licence.

These dimensions of the licensing scheme could have hardly crossed the minds of Indian legislators in 2012.

Market conditions, legislative intent, circa 2012

Section 31D was introduced by an amendment to the Copyright Act in 2012, at a time when private FM radio was still finding its feet in India. The industry was under heavy losses since the market players had bid highly for FM frequencies and were unable to make sustainable revenues. At this time, music publishers started subjecting them to exorbitant rates for broadcasting. This was possible because these publishers had other sources of revenue, such as sale of CDs, ringtones etc. and were able to negotiate unreasonable licensing agreements with radio broadcasters.

The Standing Committee (pdf) reasoned that these problems arose because of the voluntary licensing scheme. Thus, the non-voluntary or statutory licensing scheme was introduced to fulfil the twin objectives of ensuring ‘returns to the owner of the works’ while making ‘access easy for broadcasting’. This allowed radio broadcasters to obtain statutory licences from publishers at rates decided by the Copyright Board.

Cut to today. With change in time and the advent of new technology and options, music consumption and its methods have undergone a drastic transformation since the 2012 amendment. Legacy systems such as CDs, cassettes and other similar media have given way to online streaming services. In fact, these digital sources now constitute 78% of revenues for the global music industry.

It is it at a time like this that Spotify has attempted to use a statutory licensing provision that was made for the FM industry. Availability of cheap smartphones and even cheaper data packs has made it easier for streaming services to capitalise on the potential of the vast market of music consumers in India. According to an annual study conducted by the International Federation of the Phonographic Industry (IFPI) in 2018, Indians spend 21.5 hours a week listening to music, which is higher than the global average of 17.8 hours. Further, 95% of internet users in India, consume music through on-demand streaming.

Disallowing publishers from negotiating rates for such an important source of revenue could amount to depriving them of their rights in the work.

Music publishers hold the short end of the stick now

During the first half of 2018, the global music industry recorded 8% growth and similar positive growth is predicted for this year. Leaving the growth in the share of public performance aside, 65% of total global revenue accrues via digital music sales which include streaming, downloads, mobile and other kind of interactive revenue streams. In terms of breakdown of the digital revenues, streaming accounts for about 70% of global revenue. Thus, streaming is crucial for the global music industry and the Indian industry replicates this trend. Music publishers will have to increasingly depend on digital services, particularly online streaming for revenue.

Usually, voluntary agreements between broadcasters and publishers include ad sales revenue, additional ad spots etc. for the publishers as illustrated by Sony Music’s licensing deal with Spotify. This is particularly relevant in markets such as India where less than 1% of subscribers are paid ones (paywall). Further, even these few paid subscribers are charged minimally in India compared to subscription rates across the world. For instance, an Apple Music subscription costs $2 per month in India versus $10 in the US.

If broadcasters such as Spotify use Section 31D to operate without having to negotiate a deal with music publishers, the latter lose out on revenue streams other than regular streaming payouts, which are particularly important to the Indian market.

Rethinking Section 31D to revive the purpose of copyright

Copyright schemes usually endeavour to internally balance the interests of the author in remuneration for her creative effort with that of the public in increasing access to and availability of the author’s intellectual and artistic creation by imposing an artificially created market on all participants. Within the realm of this legal monopoly, contracts can help in the achievement of copyright aims through licensing of protected materials, allowing authors to make economic profits through private negotiation of prices.

A statutory/compulsory licensing scheme acts as an exception to copyright rules by restricting the copyright owner’s right to choose their contracting partner. This restraint is usually justified when their enjoyment of the right as loggerheads with public interest. In the current instance, Section 31D may not be the best route of obtaining licences for a service like Spotify. But it is necessary to understand that these rights are incredibly powerful and provide scope for abuse by the right-holder. In which case, the legislature may have to step in to provide a statutory/compulsory licensing scheme that is more in tune with the needs of the music streaming industry.


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