I am a member of Sound Exchange and received this memo from them today. I'd be interested to see what all of you think of this. To me, I see another way the artist gets taken again by corporate power...but I could be wrong in this perception. Again, I'd like to know what YOU think about the following.

Vicki Logan
JPF MSP Coordinator

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Dear SoundExchange Sound Recording Copyright Owner Members

As many of you probably know, DMX Music Inc. ("DMX"), is one of the three preexisting subscription services making transmissions to residential digital cable and satellite television subscribers under the Section 114 statutory license. 17 USC 114. The royalty rate for preexisting subscription services is 7.25% of the service's monthly gross revenues. 37 CFR 260.2(b). DMX also makes exempt transmissions of sound recordings to business establishments under Section 114(d)(1)(C)(iv) of the Copyright Act. 17 USC 114(d)(1)(C)(iv). A service making exempt transmissions to business establishments must pay a royalty of 10% of its "Gross Proceeds" if it relies upon the statutory license set forth in Section 112(e) of the Copyright Act to make ephemeral phonorecords of sound recordings (e.g., server copies of sound recordings used in lieu of physical compact discs) to facilitate exempt transmissions. 37 CFR 262.3(a)(3).

DMX filed for bankruptcy on February 14, 2005 and listed SoundExchange and RIAA as creditors with a combined claim of approximately $1,030,000. We believe the identification of RIAA as a creditor was incorrect and that the entire liability was for SoundExchange. A substantial portion of the outstanding liability was for DMX's commercial business, that is, exempt transmissions to business establishments. Although SoundExchange has never audited DMX, we believe the estimated liability of $1.03 million may be less than the actual liability. We have estimated that the unpaid liability could be as high as $1.8 million, although this is merely an estimate based upon extrapolations from certain DMX payment data.

DMX's assets are going to be sold to a company called THP Capstar ("Capstar") for $73.25 million. Based upon representations made to the bankruptcy court, Capstar is going to assume some but not all of DMX's assets and liabilities. Capstar is not assuming DMX's statutory preexisting subscription service license nor its business establishment service license. Capstar will presumably file with the Copyright Office to obtain its own statutory licenses , although we believe Capstar will not be eligible to pay royalties as a preexisting subscription service (the rates for which are below-market and more favorable than the rates available for entities described as "new subscription services"). It is our understanding that Capstar will seek to continue DMX's business of providing audio-only music channels to residential cable and satellite television subscribers as well as to business establishments.

Under the provisions of the Section 112 statutory license that permits services such as DMX to make ephemeral phonorecords of sound recordings to facilitate exempt transmissions, the transmitting entity (e.g., DMX) is entitled to a statutory license provided that certain conditions are satisfied, including that "the phonorecord[s] [are] retained and used solely by the transmitting organization [DMX] that made it . . . ." 17 USC 112(e)(1)(A) (emphasis added). SoundExchange argued before the bankruptcy court that this statutory language precludes DMX from assigning or transferring any of the ephemeral phonorecords it created to Capstar, as such an assignment would violate the statutory condition that the original transmitting entity, DMX, retain and be the sole user of such ephemeral phonorecords. Following SoundExchange's objection, DMX acknowledged before the bankruptcy court that it is not permitted to assign its database of ephemeral phonorecords absent the consent of individual copyright owners.

DMX contacted SoundExchange to see if SoundExchange would voluntarily consent to DMX's assignment of the ephemeral phonorecord database to Capstar for a payment of $300,000. Because the language of Section 112(e)(1)(A) prohibits the assignment of any ephemeral phonorecords created pursuant to the statutory license, SoundExchange took the position that it lacked the authority to grant DMX the right to assign any of the ephemeral phonorecords it created. SoundExchange is authorized by its sound recording copyright owner members only to license activities that fall within the scope of the statutory license and any activities that fall outside the license are subject to the exclusive right of the copyright owner. We believe that the purchase price offered by Capstar was reduced from $75 million to $73.25 million to account for license agreements and other assets (including the ephemeral phonorecords created pursuant to the statutory license) that would not be transferred as part of the sale of DMX.

We understand that DMX is still interested in obtaining consent to assign its database of sound recordings to Capstar in order to avoid having to destroy its entire database of sound recordings and having Capstar recreate the ephemeral phonorecords from scratch. Arguably, Capstar may also need the consent of the copyright owner to make exempt transmissions from any ephemeral phonorecords it obtains from DMX. Because DMX may be contacting you for a license to assign certain of your sound recordings that it reproduced pursuant to the Section 112 statutory license, we wanted to provide you with this background information. You are free to license DMX or Capstar, or both, to reproduce, distribute and perform your copyrighted sound recordings. While we cannot provide you with information on what rates and terms you should include in any direct license, we wanted you to know that you may grant a royalty free license, a license with the same terms and conditions of the Section 112 statutory license, or a license that has different royalty rates and more restrictive conditions than the statutory license to account for the additional rights not subject to statutory licensing.

While we are not providing you with legal advice, you may wish to consult with you own attorneys to discuss whether DMX's assignment of any ephemeral phonorecords created under statutory license without your consent may make them liable for copyright infringement. If Capstar makes exempt transmissions from ephemeral phonorecords it did not create, then you may similarly wish to consult with your own attorneys whether the use of such ephemeral phonorecords may give rise to a separate cause of action against Capstar.

Although SoundExchange has incurred legal fees to retain counsel to advise it during the DMX bankruptcy proceeding, any licenses you negotiate directly with DMX or Capstar do not require the payment of royalties through SoundExchange. You would be entitled to have those royalties paid directly to you.

Please do not hesitate to contact me if you have any questions.

Regards,

Gary R. Greenstein
General Counsel
SoundExchange, Inc.
1330 Connecticut Ave., N.W., Suite 330
Washington, D.C. 20036
ggreenstein@soundexchange.com
(w) 202.828.0126
(f) 202.833.2141