The royalties that Sirius XM will pay to SoundExchange for the next 5 years will be decided by the Copyright Royalty Board ("CRB") in December. To summarize the hearings that have been held over the last year, the CRB held an oral argument last week, where Sirius XM and SoundExchange presented their arguments as to what those royalties should be. Sirius argued that the rates should be decreased, while SoundExchange contended that the rates should go up significantly from the 8% of revenue that the service now pays (see our summary of the current Sirius XM rates here). How can these parties have such different perspectives on the value of music, and what did this argument say about the application of the 801(b) standard that applies to Sirius? This standard is the standard that webcasters are seeking to apply to Internet Radio services through the Internet Radio Fairness Act which we wrote about here. If the IRFA is adopted, it would apply when the CRB next reviews webcasting rates in a case that will be decided by the end of 2015.
Sirius XM and cable music provider Music Choice, which was also part of the proceeding, are both governed by the 801(b) standard rather than the “willing buyer, willing seller” standard that applies to Internet Radio. The oral argument made clear that the adoption of the 801(b) standard is not in and of itself a panacea for the concerns about the royalties that have been set by the Copyright Royalty Board. Last week’s argument focused on the value of music in a marketplace – essentially the “willing buyer, willing seller” question. While other 801(b) factors were discussed, they were seemingly passed over quickly, with most of the focus being on the questions of the marketplace value of the music.
XM summarized two arguments that it raised as to the value of music. One argument was based on an economic analysis done by an expert witness who looked at the royalties paid by customized noninteractive webcasting companies (including Slacker and LastFM) for music used in their services, and made adjustments that led to the conclusion that, when you take out the value of the talk programming included in the Sirius package, and the value of the hardware necessary to listen to the station (something that webcasters don’t supply as the “hardware” to listen to a webcast is usually equipment that the listener already has, e.g. a computer or smart phone), the effective rate paid by such webcasters justified a lower royalty rate of between 5 and 7% of revenues.
But perhaps more interesting was their argument that relied on the direct licensing deals that Sirius was able to negotiate with over 90 record labels or artists, which all provided for a royalty at rates less than those at which Sirius currently pays. Sirius argued that these deals showed the true marketplace value of music, as they were negotiated outside of the royalty process by a willing buyer (Sirius XM) and willing sellers (the labels).
SoundExchange of course opposed the Sirius’ conclusions that rates should decrease. SoundExchange had its own expert witness who performed the same kind of economic regression analysis that had been used in past webcasting proceedings – taking the royalties paid by interactive digital music services (which are negotiated agreements not subject to a statutory royalty and not governed by the CRB or any other government agency), and doing an economic analysis to determine the value of the interactivity. By subtracting that perceived value of the interactivity, SoundExchange came up with a figure for a substantially higher royalty for Sirius than it currently pays.
SoundExchange argued that the direct licensing deals did not make for an appropriate benchmark as these deals represented a small part of all sound recordings that are available in the marketplace, and did not include deals with any of the major labels. Sirius of course responded that this was because the labels were encouraged not to negotiate with it (see this article on the lawsuit that Sirius has filed against SoundExchange for interfering with the private negotiations that it was having with other labels).
SoundExchange also attacked these deals by contending that they should not affect the CRB royalty decision as the deals were with the copyright holders, where all the royalty payments would go to the copyright holder, unlike the CRB royalties which, by law, half go directly to the artists. This argument seemed to gain some attention from the Judges, even though, were this logic to be followed, SoundExchange’s own evidence as to the rates would have to be rejected, as the royalties paid in the interactive marketplace also go to the labels. It seems to us that, if you are looking at a marketplace, you are looking at what buyers and sellers are agreeing to when they negotiate deals – no matter who those buyers and sellers are. In the real marketplace, the sellers usually are the copyright holders, not the artists, as the copyright holders are the ones authorized to negotiate such deals. If you reject those deals because the artists are not directly paid, you would never be able to find a marketplace deal to use as a benchmark, even though the Copyright Act specifically says that direct licenses should be considered. Moreover, as argued by Sirius XM, in such direct deals, the artists are in fact paid through the contracts that they have with the labels. We will be very interested to see how the CRB resolves this issue.
Beyond the debate over the marketplace value of the music, there was some discussion of the other 801(b) factors, including the promotional value provided by the plays on Sirius and Music Choice, and on the stability of the industry factor, looking at the financial stability of each of these companies and what impact a change in royalties would have on their businesses. Both Sirius and Music Choice provided studies that showed that their services promoted music – studies that SoundExchange rejected without offering its own studies to the contrary. SoundExchange argued that, as Sirius was now more economically stable than it was during the last rate proceeding, the rates needed to go up. The cost of Sirius providing the satellites and hardware to deliver their service was also discussed in the context of the “relative investment” 801(b) factor. But in the oral arguments, these issued seemed to be a sideshow to the principal issue of putting a marketplace value on the music. We’ll see how they are considered in the final decision, as these matters were important in the last satellite royalty proceeding.
Oral arguments are often misleading, so we can’t make predictions based on the questions that were asked. Decisions in this case are supposed to be rendered by mid-December, even though there has been another change in the Board’s composition in recent weeks, as Judge Wisniewski, the economist on the CRB, was forced to retire due to health reasons. So the CRB that will be making the decision in this case will be one where 2 of its 3 members have not previously ruled on a music royalty payment scheme. It should be an interesting decision released in December – one that may give some indication of how the Board will treat webcasting royalties when they come up for adjustment in 2015.