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Tuesday, the Senate Judiciary Committee held a hearing on the sound recording performance royalty, titling the hearing  "Music and Radio in the 21st Century: Assuring Fair Rates and Rules Across Platforms" (a webcast of which can be accessed here).  While the hearing was ostensibly to search for a way to come up with a uniform system of determining music royalties across various digital media platforms (though the broadcast analog performance royalty snuck into the discussion from time to time), in reality it appeared to be two things - a search for compromise and a demonstration of the dramatically different perspectives from which the recording industry and the digital radio industry approach the topic.  While one might assume that the dramatically different approaches would mean that no compromise was possible, there were a few areas of commonality that perhaps reflect the potential that, at some point, common ground can be found.  We will review the hearing's discussions in multiple parts - today dealing with the issue of the standard to be used in assessing royalties for the public performance of sound recordings and, in a subsequent post, we will summarize the differing world views of the participants and why the dramatically different ways that they see the business make for difficulty in compromise.

But first, a summary of the issues that were to be discussed at the hearing. Essentially, the hearing was to discuss two bills addressing different aspects of the royalty issues.  Senator Feinstein of California, who chaired the hearing, was looking for any common ground that might exist that would allow for movement on the Perform Act that she has introduced.  That act would attempt to do two things - (1) assure that a common standard was used to assess sound recording royalties in all digital media and (2) adopt standards that would require digital services to use some form of security or encryption that would make "stream ripping" more difficult.  The first goal of her bill, looking for a common standard, was an attempt to avoid some of the problems that have been evident in the royalty proceedings that have thus far been held before the Copyright Royalty Board which have resulted in dramatically different royalties - ranging from 6 to 8% of revenue for satellite radio companies and a similar royalty for digital cable music services (see our posts on those rates here and here) derived under an "801(b) standard" (after section 801b of the Copyright Act) , and the royalty for Internet radio that has been estimated to range between 75% and 300% of gross revenues of those services, derived from a "willing buyer, willing seller" royalty standard.  The Perform Act would subject all to a single standard - and it currently proposes a new standard - "fair market value."

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The FCC has released a Public Notice announcing its approval of the XM and Sirius satellite radio merger.  The public notice is only two pages long, with a four page appendix providing very brief summaries of the conditions imposed on the two companies which a majority of the Commissioners found sufficient to protect consumers from harm from the merged entity.  The full text of the decision, providing the full reasoning of the Commission on its approval, has not yet been released.  Until it is, the impact for broadcast ownership and the treatment of broadcast consolidation set by the precedent of this decision remains unclear.

The conditions placed on the merger and outlined by the decision include some surprising ones beneficial to broadcasters, including that the merged company not use its terrestrial repeaters to originate local broadcasts and that the company not enter into exclusive agreements precluding the broadcast of local sporting events by over-the-air broadcast stations.  The decision also imposed price caps on the service for three years, and set out conditions to open the manufacturing of satellite radio receivers to more companies and prohibiting any restriction on combining the radio receiver with other audio devices including digital radio receivers.  No condition requiring that satellite radio receivers be capable of picking up over-the-air digital radio ("HD Radio") was imposed, though the FCC promised to issue a Notice of Inquiry to review that issue.  Specific programming channels will be made available for noncommercial educational use and for leased access.  The FCC also made clear that satellite radio will be subject to the FCC's EEO rules.

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The New York Times ran an article about how certain African-American radio hosts were acting as cheerleaders for the Obama campaign, and contrasting that to past elections where talk radio hosts like Rush Limbaugh gave a boost to Republican candidates on their programs.  How is it that these programs can take political positions without triggering requirements that opposing candidates get equal time?  Under FCC rules, unless a candidate' recognizable voice or image is broadcast by a station, there is no right to equal opportunities.  In the past, until the FCC abolished the Fairness Doctrine by declaring it to be unconstitutional, even without a candidate appearance, the station would have had an obligation to give both sides of a controversial issue of public importance, such as an election, free time to respond to on-air statements by an announcer.  When the doctrine was abolished, stations were free to air pointed programs taking positions on issues, giving rise initially principally to the conservative commentators, and more recently to their more liberal counterparts such as those heard on Air America radio.

The abolition of the Fairness Doctrine also allowed broadcasters to editorialize, even endorsing candidates for political office without having to give the opponent of their favored candidate equal time, just like print media can do. Similarly, a station can take a position on a ballot issue, or on another controversial issue of public importance in their communities without having to provide time to those with opposing viewpoints - allowing stations to fully participate in their communities political life.  Under the Fairness Doctrine, stations even had to give time to those with viewpoints opposed to parties who bought time on a controversial issue if the opponents could not themselves afford to buy time.  The occasional discussion of reviving the Fairness Doctrine ignores these issues.

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The FCC's Notice of Inquiry and Notice of Proposed Rulemaking on Sponsorship Identification issues (which we summarized in our firm's advisory and about which we wrote here), which deals with a host of issues including embedded advertising and product placement, was published in the Federal Register late last week, starting the clock on the filing of comments.  Comments on this wide-ranging proceeding are due on September 22, and replies on October 22.  With the broad range of issues that are discussed in this proceeding, from proposed rules on the size and length of textual sponsorship identifications in television advertising to sponsorship identification requirements for live-read radio commercials, there is something on which almost every broadcaster will want to comment.

A recent New York Times article helped bring the proceeding to the attention of the general public.  The article writes about television stations which are paid to have morning show hosts place coffee cups with identifiable logos (in this case cups of McDonalds coffee) on the desk of the news anchors of a morning news program.  Under some of the proposals identified in the Notice of Inquiry in this proceeding, some sort of identification (perhaps a crawl or superimposed message) of the sponsor for the placement of those cups would be required concurrently with the visual images of the cups on the screen.  The same would be true of the appearance of a product in any scripted comedy or drama, and perhaps even when feature films are run on TV in which the filmmaker was paid to include specific products in the movie.   Adoption of any of these suggestions could certainly change to face of broadcast television, particularly as it adapts its advertising practices to deal with Digital Video Recorders and other technological advances.  For broadcasters to retain their flexibility in such matters, they should file comments on or before the September 22 filing deadline. 

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Congress years ago tried to regulate indecency on the Internet through the Child Online Protection Act, through regulation of content that was harmful to minors.  Because of the sweeping nature of the restrictions, the Courts have repeatedly invalidated the law.  We wrote in March 2007 about a Federal District Court decision invalidating the law (this post also details the provisions and prohibitions of the Act).  Now, the Third Circuit Court of Appeals has upheld the District Court ruling, finding that the law violated the First Amendment rights of website operators, as the government had not shown that the Act's restrictions were the least restrictive means of accomplishing the government's objectives - protecting children.  According to the Court's findings, voluntary filters would accomplish the same ends, and allow adults to view adult material which might be harmful to children under the Act's definition but which is not legally obscene and is therefore constitutionally protected .  Our law firm's  Advisory Bulletin on the Third Circuit's decision can be found here.  The Third Circuit decision is available here.

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The Third Circuit Court of Appeals today released a decision overturning the FCC's fine of CBS Television for its Super Bowl broadcast of the notorious Janet Jackson halftime show and her "clothing malfunction."  The decision is available here.  Our partner Bob Corn-Revere argued the case.  Full details on the decision are contained in our firm's Advisory Bulletin which was just issued.  But essentially, the court found that the FCC had not sufficiently justified its departure from prior precedent that any "fleeting" content would not result in a fine by the FCC, nor had the FCC justified its decision finding that the conduct of CBS was "willful," as the Court questioned whether the independent actions of Janet Jackson and Justin TImberlake could be attributed to CBS.  The decision was remanded to the FCC with the instruction that it could not fine CBS but that any further decision could be only declaratory in nature - setting policy for the future. 

If the FCC decides to wade back into the indecency area, it will have to deal with two decisions finding its rulings arbitrary and capricious.  We wrote about the Second Circuit decision throwing out the "fleeting expletive" fines arsing from slips of the tongue during the Golden Globes, the Billboard Music Awards and other programs (see our last post on that case here).  Of course, the FCC has asked the Supreme Court for review of the Golden Globes case, so we'll all have to stay tuned for more information about what action that Court will take, and what the FCC will do with respect to these decisions. 

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The new iPhone, connecting as it does to ATT's high speed wireless network, has allowed Internet radio to go wireless.  While this has been possible on many platforms in the past, it has never been as easy, seamless, ubiquitous and as promoted as with the new iPhone.  The CBS radio  stations on AOL Radio, Pandora and Soma FM are all available, as are add-on applications that open the door to streaming many other Internet radio stations.  Tim Westergrin of Pandora  was quoted as stating that the iPhone would change people's expectations of Internet radio, making it "a 360-degree solution - in the car, in the home, on the go."  But, as with any application that increases the audience of Internet radio, it comes with a cost, as the delivery of Internet radio by a mobile device, like a wireless phone, is subject to the same royalties established by the Copyright Royalty Board last year and currently in effect while on appeal - rates that are computed by the "performance," i.e. one song streamed to one listener (see our reminder on the per performance payment, here).

In the requests for reconsideration of last year's CRB decision, SoundExchange had asked that the Board make clear that its decision applied to noninteractive streams (i.e. Internet radio) delivered to wireless devices like mobile phones.  In one of the few actions taken on reconsideration, the Board granted that request (see our summary of the reconsideration, here, and the CRB decision here).  Thus, services making their streams available to the iPhone (except for those covered under the special percentage of revenue offer that SoundExchange made to a limited class of small webcasters, and noncommercial webcasters under 159,140 aggregate tuning hours a month), must count performances and pay the per-performance royalties due to SoundExchange.

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Broadcasters and other digital media companies have recently been focused on the royalties that are to be charged by the record labels for public performance of a sound recording in a digital transmission (under the Section 114 compulsory license administered by SoundExchange).  In a Notice of Proposed Rulemaking issued this week, the Copyright Office tentatively concludes that there could be yet another royalty due for streaming - a royalty to be paid to music publishers for the reproductions of the musical compositions being made in the streaming process under Section 115 of the Copyright Act.  This notice was released just as the Copyright Royalty Board is concluding its proceeding to determine the rates that are to be paid for the Section 115 royalty.  While there have been reports of a settlement of some portions of that proceeding, the details of any settlement is not public, so whether it even contemplated noninteractive streaming as part of the agreement is unknown.

How did the Copyright Office reach its tentative conclusion?  First, some background.  The Office for years has been struggling with the question of just what the section 115 royalty covered.  Traditionally, the royalty was paid by record companies to the music publishers for rights to use the compositions in the pressing of records.  This was referred to as the "mechanical royalty" paid for the rights to reproduce and distribute the composition used in a making copies of a sound recording (a record, tape or CD).  These copies were referred to as "phonorecords."  However, in the digital world, things get more complicated, as there is not necessarily a tangible copy being made when there is a reproduction of a sound recording.  Thus, Congress came up with the concept of a Digital Phonorecord Delivery (a "DPD") as essentially the equivalent of the tangible phonorecord.  But just what is a DPD?

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Yesterday, the FCC released its further Public Notice announcing that the freeze on filing certain Class A LPTV applications will be lifted on August 4th.  Previously, Class A stations had been frozen from expanding their authorized contours and from changing channels (displacing) while the DTV transition was underway.  Because Class A stations receive protection as primary stations, the FCC needed to lock those stations down until it had completed the DTV Table of Allotments, which it has now done.

Accordingly, as of August 4th (nearly four years to the day that the freeze was first imposed), Class A LPTV stations will once again be able to seek to modify their contours and change channels.  Applications filed prior to August 4th that requested a waiver of the freeze will be treated as having been filed on the 4th.  Thereafter, changes will be on a first come, first serve basis.  A copy of the public notice is available here. 

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Last week, the Office of Management and Budget determined that the FCC's new rules on Leased Access to cable channels (see our bulletin describing those rules) violated the Paperwork Reduction Act. This means that the new rules, which would have significantly lowered the cost for parties who wanted to lease cable channels to provide their own programming, will be sent back to the FCC for further consideration.  These rules are also on appeal to the Courts, which had stayed the effectiveness of the rules while the appeal is being considered, which is usually a good indication that the Court had issues with the rules as well.  The OMB action has the effect of returning the rules back to the FCC to be considered anew in light of the OMB findings.  Our firm has prepared a memo detailing the decision, here.  Given the OMB decision that these rules imposed too great a burden on cable systems, one wonders if this decision portends a similar result when the OMB reviews the FCC's rules on Enhanced Disclosure and an on-line public inspection file - rules that would impose a significant burden on television broadcasters (about which we wrote here).

The OMB decision on the leased access rules highlighted some of the perceived shortcomings of the FCC decision, including that the FCC had not shown that they had taken steps to minimize the burden on companies who would have to hire staff to comply with the new rules, and they had not provided reasons why reduced timeframes for responses to requests for leased access were necessary.  Looking at these standards, one would have to think that much of the same reasoning would apply to the FCC's Enhanced Disclosure requirements for TV stations as set out in the new Form 355.  The completion of the Form would clearly require the hiring of new staff.  We've also questioned whether the Commission has given any justification for the increased paperwork requirements, as the information itself has no regulatory purpose as the FCC has not adopted any quantitative standards for public interest programming.  With no purpose and increased costs, how could the OMB treat the enhanced disclosure requirements differently than it did the leased access requirements?

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The FCC has released a Public Notice reminding TV stations to update their FCC Form 387 DTV Transition Status Reports.  If you will recall, these are the Reports filed by each station in February of this year outlining the steps remaining for the station to complete the transition to DTV.  Stations are under an obligation to update that status report as circumstances warrant, and also by October 20, 2008.

Now, however, the FCC needs to prepare a status report of its own, so it has requested that all stations update their Form 387 by no later than July 18, 2008, which is next Friday.  The Public Notice states that:  “Stations should report any significant changes to the information contained in their original DTV Transition Status Reports including a change in the station’s (1) transition plans, (2) construction or operational status or (3) existing service (e.g., reduction or termination of analog or pre-transition digital service). In addition, stations should report if they have filed (1) an application for extension of time; (2) an application for digital construction permit; (3) a request to reduce or terminate analog or digital operations; and/or (4) a petition for rulemaking to change their post-transition DTV channel.”   A copy of the complete Public Notice is available here. 

Accordingly, stations will need to review the status of their DTV transition and their plans for between now and February 17, 2009, and update the Form 387 by Friday, July 17th.  At the very least, stations migrating back to their current analog channel or else flash-cutting to digital on their current analog channel will need to reflect the fact that they have now obtained a construction permit authorizing that modification of the station’s facilities .  Alternatively, for those few stations that have nothing new to report, there's no need to file anything.

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We've written about the FCC rules against broadcasting phone calls without permission of the person at the other end of the line.  Specifically, we've written about the FCC's decision that held that these rules prevent the broadcast of people's voicemail messages without their permission, and about the FCC's decision to fine a station even though the owners did not know that the station announcer was broadcasting a phone call without permission and was doing so without the knowledge of the station owners.  Today, the FCC released another order on this rule, fining a station $12,000 for broadcasting a message left on the private cell phone of a station employee.  Even though the caller had called the radio station employee, the FCC found that there was an expectation that the call would not be made public without the specific permission for the broadcast of the recording from the caller.  As the station broadcast the call more than once, and the program on which it was broadcast was carried on multiple stations, the fine was increased to $12,000.  This decision makes it very clear that a call - incoming, outgoing, from a voicemail or live - should not be broadcast on a station unless the station is certain that the caller knows or should have known that the call will end up on the air.

 Another interesting aspect to the case was the fact that the licensee who was fined, a subsidiary of Clear Channel, had sold the station before the fine was levied, and there was apparently no "tolling agreement" required by the Commission by which the seller would waive any rights to contest a fine after the sale.  Nevertheless, the former licensee was still held liable for the events that occurred on its watch.  This again makes clear, as in another recent case about which we wrote, that the sale of a station does not cut off the Seller's liability for FCC rule violations that occurred on its watch.  So broadcasters have to take care, as the FCC will seek its due for rule violations. 

 

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I recently attended the convention of the Montana Broadcasters Association, and just a few weeks before that I had been at an event sponsored by the Washington State Association of Broadcasters.  Talking with small market TV Broadcasters in those states, an issue that does not affect major television markets but which complicates the digital transition has become clear.  In smaller markets in many states, particularly in some of the western states where there are multiple geographically dispersed cities in many television markets, there is at least one network affiliate in many cities that is either an LPTV or TV translator station.   As we've written before, LPTV and translator stations are not required to convert to digital by the February 2009 digital conversion deadline.  Instead, these stations can continue to operate in analog until an as yet unspecified date in the future.  While these stations are allowed to convert to digital, many do not have the resources to do so.  Thus, many of these stations will continue to broadcast in analog after the February 18 transition deadline.  What makes the issue particularly problematic is that most  DTV converters do not allow the "pass through" of analog programming, i.e. once they are hooked up, television sets only receive digital signals and analog signals are effectively blocked.  This presents the potential of marketplace confusion for those viewers who do not receive their signals from cable or satellite, as they will be getting conflicting messages - being told to get a digital converter to pick up the full-power stations in a market as they convert to digital, but if the consumer buys the wrong converter box, they will not be able to receive other LPTV and translator stations in the same market.

The problem has been exaggerated as converter boxes with analog pass through have been delayed in reaching the marketplace.  When I bought converter boxes in Washington, DC early last month, neither of the two major electronics retailers had the converter boxes with analog pass-through available.  A well-reviewed box from EchoStar was supposed to hit stores last month, but it is in short supply.  I can find it on-line only at the Dish Network's (owned by EchoStar) own website.  Thus, for households who buy and connect most of the available digital converter boxes, suddenly their analog LPTV stations are gone.  In some of these smaller Western markets, that may mean the loss of one or more local network affiliates.

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Last week, the FCC commenced its long anticipated proceeding to reexamine its sponsorship identification rules. This proceeding has been rumored for over six months, having appeared on an agenda for a Commission open meeting in December, only to be pulled from the agenda days before it was to have been voted on. The Commission has initiated this proceeding, to a great degree, at the urging of Commissioner Adelstein who has been vocal in his concerns that the broadcast and advertising industries, in adopting advertising techniques to respond to technological and marketplace changes, has been exposing the public to commercial messages without their knowledge.  One of the principal practices of concern to the Commission, though not the only one, is embedded advertising (as the Commission refers to product placement and product integration into the dialog and/or plot of a program). While many of the trade press reports have focused on embedded advertising, this proceeding is wide-ranging and important to the broadcast, cable and advertising industries. Comments on the proceeding will be due 60 days after its publication in the Federal Register, with replies 30 days later.   We have prepared an Advisory, summarizing the issues raised by the Commission in this proceeding, which can be found here.

According to trade press reports, this proceeding was initially planned as a Notice of Proposed Rulemaking (NPRM), which would have proposed rules which, after public comment, could have been immediately adopted. After significant lobbying from the advertising community, the Notice was released in two parts. First, there is a Notice of Inquiry (NOI), asking a series of questions about the current state of advertising on broadcast and cable outlets, and asking how the Commission should amend its rules to deal with new advertising techniques. Second, the Commission’s announcement contains an NPRM with respect to certain specific items, including proposing to clarify the type of sponsorship identification necessary in television advertising, the extension of the sponsorship identification rules beyond local origination cablecasting to cable network programming, and clarification of the rules with respect to live-read radio commercials. The specifics of the NOI and the NPRM are set forth in our Advisory. 

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In two recent FCC decisions, one dealing with a commercial operator and that other with a noncommercial licensee, the Commission's staff addressed the issue of how large an FCC fine could be imposed on a broadcaster without that fine being subject to reduction because of the licensee's inability to pay.  In the first case, a commercial station was fined for violations of the EAS rules.  As we've written before, EAS seems to be the most common violation found at broadcast stations by FCC inspectors.  However, what is most notable about this decision is not the violation, but the Commission's discussion of the penalty for that violation.  As in many cases, the licensee argued that, as it had experienced several years of financial losses, the amount of its fine should be reduced as the payment of that fine would impose a financial burden on it.  The FCC rejected the argument, finding that as the fine was less than 2% of the licensee's gross revenues, it was not excessive.  The Commission stated that, while profits and losses may be important in determining whether a licensee can pay a fine, in most cases, if the fine is less than 2% of gross revenues, it will not be considered excessive even if the licensee has not been making a profit as it it not a significant overall expense.  Therefore, the Commission refused to reduce the fine because of financial hardship argument.

In the noncommercial case, the applicant claimed that a fine that it was issued for not having any quarterly programs issues lists in it public file should have been reduced because that fine would significantly deplete the station's budget that had been allocated to it by the School District with which it was associated.  However, the licensee only provided the FCC with information concerning the budget allotted to the radio station, and it did not provide any financial information about finances of the licensee school district.  Without that information, the Commission stated that it could not determine that the fine was excessive, so it did not reduce the fine on the basis of financial hardship.  Clearly, the Commission is not anxious to reduce a fine based on the licensees financial inability to pay, so a licensee looking for such a reduction must carefully document its request showing that the fine would impose a financial hardship.

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