The Copyright Royalty Board has asked for comments on proposed royalty rates for the use of sound recordings by "Preexisting Subscription Services." In adopting the Digital Millennium Copyright Act, Congress divided digital music services into various categories, each of which are assessed different royalties for the use of sound recordings. Preexisting subscription services were those digital subscription music services in existence as of the date of the adoption of the DMCA. Basically, these were the digital cable music services that were in operation in 1997. In the proceeding now being resolved by a settlement between Music Choice (the one remaining service that was in existence in 1997) and SoundExchange, the companies propose a royalty of 7.25% of gross revenues of the service for the period 2008-2011, and 7.5% of gross revenues for 2012. A $100,000 minimum payment is due at the beginning of each year. Comments on the settlement are due on November 30. As set forth below, this settlement sets the stage for the upcoming decision on satellite radio royalty rates - as these two services are both governed by a royalty-setting standard that is different than that used for Internet radio.
The Copyright Royalty Board announced the proceeding to set the royalties for Preexisting Subscription Services at the same time as they initiated the proceeding to set new royalties for Satellite Radio Services - which were also considered to be preexisting services at the time of the adoption of the DMCA - not because they were actually operating, but as their services had been announced and construction permits to construct the satellites had been issued by the FCC. No settlement has been reached with the satellite radio services (except as to limited "new subscription service" that XM and Sirius provide in conjunction with cable and satellite television packages where, according to the CRB website, a settlement has been reached), and a hearing was held earlier this year to take evidence on what the rates for those services should be. As we've written before, SoundExchange has requested royalties that would reach 23% of a satellite radio operator's gross revenues. The satellite radio case has been completed, briefs filed, and oral arguments were held in October. A decision in the case is expected before the end of the year.
Some commenters have suggested that the 7.5% royalty rate should be viewed as a precedent for the controversial Internet Radio royalties. As SoundExchange has argued for "parity" and "fairness" in royalties in connection with its push for a performance royalty on broadcast stations, this argument certainly has an emotional appeal. If, as SoundExchange claims, broadcasters should pay a royalty to insure "fairness" with other audio service providers, then Internet Radio should pay a rate that is equivalent to that of the Preexisting Subscription Services. However, the decision will not provide any legal support, as the standard that applies to to Preexisting Services is different from that which applies to Internet Radio. As we've written before, under the DMCA, the CRB is to use a "willing buyer, willing seller" standard to evaluate what the royalty should be for Internet radio. Essentially, the willing buyer, willing seller standard evaluates a strict economic model of what two theoretical parties negotiating arms-length contracts would pay in a rational, competitive marketplace. No public interest evaluation is considered - one of the reasons that the Copyright Royalty Judges felt constrained not to offer any special rate for small webcasters.
By contrast, the Preexisting Services (both cable and satellite radio) are evaluated under a different standard - the so-called 801(b) standard, which looks at a number of factors in determining the royalty. Not only does this standard look at insuring a "fair return" to the copyright holder, but it also looks to maximize the availability of copyrighted works to the public, and to insure stability in the industries involved by minimizing the disruptive impact of royalty changes. Finally, this standard looks to the relative roles and contributions of the parties in bringing the copyrighted materials to the public in terms of their "creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication." One can easily see how this standard, if applied to Internet radio, would have resulted in a decision different than that which the CRB reached, and why Internet Radio companies have asked for the adoption of that standard as part of the Internet Radio Equality Act.
The role that the comments that the CRB is seeking on the Music Choice settlement is limited, as only parties to the proceeding can "object" to a settlement under the terms of the statute governing CRB proceedings. Other affected companies can offer comments, though the legal impact of those comments has yet to be tested. Watch this space for information about the satellite radio royalty decision when it is released.