Digital Jukebox Licensing 102 – Sync and MFN’s

This week we delve deeper into the complexities of licensing music for digital jukeboxes. 

Last week I wrote about licensing for digital jukeboxes being like a 4 legged stool, and went into the first three of those legs: master use licensing, public performance licensing and mechanical licenses.  This week we discuss the fourth leg, Sync, as well as some of the complexities of negotiation contract terms and why the JLO doesn’t apply to digital jukeboxes.

Sync Licenses -  When it comes to Karaoke and Music Videos, there is another type of license that is required apart from what is needed for audio-only music. This license from the publishers  is called a Sync License –  which as the name suggests, covers the use of any use of music synced to visuals in movies, television, television commercials, video games, music videos and Karaoke.  Occasionally, in the case of music videos,  the music label agrees to “clear” sync rights for the licensee through the relevant publisher, but most times these rights are cleared directly through the publisher .  There are also public performance rights required for the transmission of audio visual works, which can be licensed through the PRO’s or directly through the publishers in some cases. Sync licenses for music videos were nearly impossible for digital jukeboxes to acquire as recently as a few years but the labels and publishers seem more willing to discuss these today.  Touchtunes and NSM Music both are able to offer Karaoke on their digital jukeboxes through sync licensing with the major publishers.

And recently, NSM Music became the first company in the US to offer licensed music videos on a pay-per-play jukebox through a license agreement with EMI Music.

So to offer a competitive digital jukebox product it the United States, you must license 4 different rights from thousands of different entities.  Sometimes just finding the right contact people is a huge challenge.  But when you do, and you get to the negotiation part, there’s a contract term that in almost all the major licensee agreements that make things get even more complicated.

MFN’s

Most of the major licensors of music, and this goes for both publishers and labels, demand what is called a “Most Favored Nations” (MFN) clause in their contracts.  This essentially means that if I do a deal with Record Label “A” and agree to pay them $X, and then do a deal with Record Label “B” and agree to pay them $2X, I have to go back to Record Label “A” and give them the same deal I gave Record Label “B”.

When you consider that all the labels and publishers have different catalogs (both in size and genre emphasis) which will account for different levels of play across a network, it can be challenging to juggle the simultaneous negotiations that must go on prior to launch of a product.

The lack of a compulsory license (discussed in the first post last week) combined with the MFN clause is the reason that some artists don’t appear on some digital jukebox networks.  Since rights holders are not “forced” to license their works on equal terms to all licensees, some rights holders hold out for more than others.  And when the impact of licensing content from a rights holder that is asking for substantially more than all the other rights holders are getting essentially increases what everyone else would get due to MFN’s, networks run the risk of increasing their content costs beyond what would allow for a profitable business. We will discuss this in more detail next week.

The JLO

Back in the old days, before the advent of digital jukeboxes with hard drives and internet connections, when jukeboxes played either vinyl records or CD’s, jukebox operators could purchase their music at a record store and install it in a jukebox.  The Copyright Act of 1976 added a compulsory license for jukeboxes, requiring jukebox operators to pay a flat fee per box to the US Copyright Office.

In 1989, the US joined an international copyright treaty called the Berne Convention, which opened the door to negotiated licenses between the PRO’s and the Amusement and Music Operators Association (AMOA), a trade association of jukebox operators.  This led to the creation of the Jukebox Licensing Office, which to this day administers the “Jukebox License Agreement” which gives CD and Vinyl jukebox operator’s licenses to virtually any song on a jukebox.

However, there are some BIG EXCEPTIONS to the Jukebox License Agreement.  It does not cover performances:

- that are set on free play;
- that are played only by employees or entertainers;
- that are “roped off” and not accessible to the public;
- that are located in establishments where an admission fee is charged;
- that are video jukeboxes;
- that are karaoke jukeboxes;
- that are also used for advertising, games or other non-music options;
- that are downloadable or streamed

This license does not cover any device which: (i) receives and/or sends transmissions (i.e. downloads or streams) of musical works; and/or (ii) employs a hard drive for the storage of digital phonorecords or other recorded musical compositions. So in essence, the JLO and the Jukebox License Agreement are of no relevance to licensing music for digital jukeboxes.

Next week we will cover why certain artists can “hold out” from licensing their music and changes to copyright law might make that an even bigger threat to the digital jukebox in the near future.