2nd Circuit Blesses Customized Internet Radio in Yahoo Decision

But it’s not clear how the ruling may affect the next generation of customization features. The Digital Media Association said the 2nd Circuit opened the door to “investment and innovation.” A Pandora executive told us that his company, whose predecessor was founded in 2000, never considered the lawsuit in developing its business model, built on user suggestions and unique playlists for each listener based on shared musical attributes. The Big Four labels sued Yahoo’s Launch Media in 2001. Only Sony appealed a 2007 judgment in favor of the service as a noninteractive webcaster required to pay only government-set royalties.

The case turned on whether Launch offered a service “specially created for the recipient, or on request, a transmission of a particular sound recording … which is selected by or on behalf of the recipient” -- the federal definition of “interactive.” No one disputed how Launch chose songs to play. But Sony said there was “no tipping point for the level of influence a user must assert” for a service to become interactive, said the unanimous opinion by Circuit Judge Richard Wesley for a three-judge panel. The trial court told the jury twice there was “no bright line marking the limits” between interactive and noninteractive, he said. That “may have misled the jury” into thinking it was supposed to determine the legal definition of “interactive,” but that’s beside the point, the judge said.

In approving the DMCA, the House conference report gave examples of interactive features, such as a service that lets a “small number of individuals” request songs to be performed in a playlist that’s “not available to any individuals outside of that group,” Wesley said. The ability to “move back and forward between songs in a program” also constitutes interactivity, the report said. Congress clearly was worried that services would give listeners “the ability to select music in such a way that they would forego purchasing records,” Wesley said. He said the Copyright Office provided “little help.” The judge noted the agency had declined DiMA’s request in 2000 to clarify that user influence didn’t constitute interactivity, and said the office twice reversed itself days apart on the likelihood that Launch’s service was interactive.

Wesley explained at length how the Launchcast service works to explain the difficulty of allowing each user to choose what song to play. Users suggest artists when they create stations. They choose and rate genres of music, and choose a percentage of new music -- songs they haven’t rated -- for the station to play. The minimum allowed is 20 percent new music. Users can share their created stations with others and buy music that’s playing, but they can’t start over a song that has played, Wesley said.

Launchcast puts together a “hashtable” of roughly 10,000 songs for each user logging in, based on user-rated songs, those “implicitly” rated by Launchcast because they are part of the same album as rated songs, the highest-rated songs across the service and 5,000 “random” songs. Another complex series of equations and restrictions reduces the playlist to 50 songs in random order. No more than 20 percent of a playlist can be user-rated songs, and the service follows regular Internet radio rules, such as no more than three songs by the same artist. “It is hard to think of a more complicated way to ’select songs,’ but this is the nature of webcast music broadcasting in the digital age,” Wesley said.

Though Launchcast creates a unique playlist for every listener, the service clearly doesn’t provide a “specially created program,” because it doesn’t give “sufficient control to users such that playlists are so predictable that users will choose to listen to the webcast in lieu of purchasing music, thereby -- in the aggregate -- diminishing record sales,” Wesley said. Sixty percent of the hashtable created for each station completely ignores user preferences, he said, adding in a footnote that such selection is “little different from a radio station streamed over the Internet,” for which only a statutory license is needed. Listeners “do not even enjoy the limited predictability that once graced the AM airwaves on weekends in America when ’special requests’ represented love-struck adolescents’ attempts to communicate their feelings to ’that special friend,'” Wesley said.

The decision “creates a safe harbor for a whole industry and business model,” said P2P defense lawyer Ray Beckerman. “Thank you, Sony.” The other labels wisely decided not to appeal the trial-court outcome, “which in any other case could have been explained away as being based on, and limited to, a jury’s conclusion as to the facts” of the case, he said. Sony’s appeal blesses customized services in the mold of Launchcast as a “matter of law … no matter what the jury might have found.”

The eight years of uncertainty about the contours of an interactive service doesn’t seem to have bothered Pandora, perhaps the best-known customized radio service. “Our lawyers will probably look” at the 2nd Circuit decision “at some point,” CEO Joe Kennedy told us. Originally Savage Beast Technologies, the company spent its first four years developing its Music Genome Project and licensing the recommendation technology to brick-and-mortar retailers such as Best Buy. Pandora launched its own streaming service in 2005, two years before the trial court sided with Launch. Kennedy declined to say how the decision could affect the streaming industry, such as decreasing reliance on direct licenses for heavily-customized services. We couldn’t reach Slacker to learn its licensing plans in light of the ruling. A spokeswoman for Last.fm’s parent, CBS, declined to comment.

“After ten years of record industry threats and litigation, DiMA is thrilled” the 2nd Circuit verified that “consumer-influenced radio promotes the discovery of new music, promotes artists and delivers to fans an experience that benefits all participants in the music industry,” Executive Director Jonathan Potter said. “Hopefully this verdict will clear a path for a new wave of Internet radio investment and innovation.”

A DiMA spokeswoman told us the lawsuit certainly affected Internet radio business models. “Innovation and investment were significantly stifled,” she said. “Internet radio providers consciously deleted features or reduced functionality in an effort to ensure that they would not be targeted for this type of suit,” which could force them to “pay whatever [labels] might demand” to play their music. That Pandora landed a $35 million funding round shortly after SoundExchange came to terms with streaming companies over royalties (WID July 27 p3) doesn’t mean that the interactivity question was on the back burner, she said. Pandora’s deal was simply about “capital, not innovation.”