The full decision of the Copyright Royalty Board setting the royalty rates to be paid to SoundExchange by Sirius XM and Music Choice from 2013 through 2017 has now been released.  We wrote about the initial release of the summary of the decision before Christmas.  The final decision is interesting in many respects. First, it is the first decision to be released since two of the original three Copyright Royalty Judges left the bench. The decision, as released was actually two decisions – one signed by the new Chief Judge and an acting judge who filled in for Judge Wisniewski, the Board’s economic expert, when he had to retire for health reasons. The second decision, reaching the same result but based on different reasoning, was signed by the Board’s lone holdover, Judge Roberts, a long-time fixture at the Copyright Office before joining the Board. In addition, the decision seems to reject some premises that had long been used to justify royalty rates in other proceedings – and thus may give some insights on approaches to be used in the webcasting royalty proceeding that will begin in 2014 and conclude in 2015. The majority decision also, for the first time, gives at least some weight to direct licensing deals for the public performance of sound recordings by a noninteractive service. Finally, the decision provides explicitly for carve-outs from the established royalties for music on which no royalties need to be paid, including music that is directly licensed, and for pre-1972 sound recordings.

Before looking at the decision, it needs to be noted that these royalties are theoretically decided not just for Sirius XM and for Music Choice, but also for other services that fit into their class of service as defined by Sections 112 and 114 of the Copyright Act. Thus, the Music Choice decision applied theoretically to all "Preexisting Subscription Services" (or a "PSS") and the Sirius XM decision to all "preexisting satellite digital audio services" (or, as used in the decision, "SDARS" – satellite digital audio services). The "pre-existing language means that these services were either in existence or authorized by the FCC (for the SDARS services) at the time of the adoption of the Digital Millennium Copyright Act in 1998.  Of course, since 1998, all of Music Choices then-existing competitors in the cable audio business have gone out of business with one exception, and the second SDARS service – XM Radio – has merged with Sirius. So, effectively, these rates apply only to very few companies.

One importance of these rates is the fact that the DMCA decided that these preexisting services would use the 801(b) standard for the determination of royalty rates. We’ve written about this standard before. It is the one that is used by most other royalty decisions made by the Copyright Royalty Board (including the rates paid by the record companies under Section 115 of the Copyright Act for "mechanical royalties" for the reproduction of musical compositions used in producing CDs, downloads, and other sound recordings). It is also the rate that is proposed for use in the Internet Radio Fairness Act to set the royalties for Internet radio companies instead of the "willing buyer, willing seller" standard that is currently in use for webcasters. We will write more about the IRFA next week. While the difference in standard did not play a big part in the decision in this current CRB decision, it was analyzed and provided the framework for the decisions that were reached.

 

With that background, let’s look at the rates. For PSS, essentially the audio services that accompany cable television service, the rates (as a percentage of gross revenue) were set as follows:

 

2013     8%

2014     8.5 %

2015     8.5%

2016     8.5%

2017     8.5%

 

This represents a very small increase from the 7.5% royalty rate that was in effect in 2012.  That rate had been reached as a result of a settlement between the parties in the last royalty proceeding. While we will go into more detail on the reasoning in the decision next week, the CRB essentially rejected SoundExchange’s calls for the rate to be substantially increased (to 45% of revenue by the end of the term), and those of Music Choice asking that they be lowered. By rejecting the arguments of the parties, the Board looked to the last negotiated settlement as providing a benchmark royalty as to what reasonable parties would view as a marketplace rate, and proposed a modest increase as Music Choice plans more music options in the future.  On that basis, the Board came up with the rates that they adopted.

 

The Sirius XM decision involved more considerations, but essentially the same result. The majority of the Board rejected the proposals from SoundExchange to raise the rates.  It had proposed  starting at 12% of revenue in 2013 and ending at 20% in 2017.  The Board also rejected the Sirius proposals to lower the rates, currently at 8% of revenue, down to 5% based on evidence provided by direct licensing deals. Instead, the Board determined that the rates (as a percentage of the service’s gross revenues – minus certain non-music related income) should be as follows:

 

2013   9%

2014   9.5%

2015   10%

2016   10.5%

2017   11%

 

The majority of the Board rejected much of the expert testimony provided by both parties, and used the parties’ proposals to set the bounds of reasonableness for the rates (as the Sirius XM testimony suggested that their direct licensing deals were at 5-7% of revenue, the 7% was viewed as setting one bound of what was reasonable, with the 12% proposed by SoundExchange for the 2013 royalty forming another bound). We will write more about the details of the reasoning used to reach these decisions next week.

 

Another interesting aspect of the Sirius XM decision was the treatment given to the directly licensed sound recordings and the pre-1972 sound recordings. The Board agreed that the directly licensed sound recordings should be excluded from the royalties, as the licensing rights had already been obtained and paid for through the direct licenses. The Board also explicitly agreed, for the first time in any decision of which we are aware, that pre-1972 sound recordings also are not to be included in the revenue base, as the Federal sound recording copyright only applies to songs created in 1972 and after (with certain exceptions for earlier non-US recordings that are covered by US laws as a result of treaty obligations – see our discussion of this issue here and here).

 

While the Board recognized that the directly licensed sound recordings, and the pre-1972 sound recordings should be excluded, they had some trouble deciding how such an exclusion should be computed, as Sirius XM could not quantify the number of listeners to such recordings as used on their various channels. They obviously could count the number of times that such songs were played, but not how popular they were – how many people were listening to the songs each time they were played. To get to that number, the Board decided that a proxy should be used – the Internet streaming that Sirius XM does of its programming. The Board decided that Sirius XM could exclude from its payments a percentage equal to the percentage made up of the total number of performances streamed through its Internet service made up by the direct licensed and pre-1972 songs (a performance being one song streamed to one person – the manner in which most Internet radio services pay their royalties). So, if Sirius streamed 1 million performances in a given period, and of those 10,000 were streams of pre-1972 or directly licensed recordings, it could deduct 1% of the amount that it would otherwise owe SoundExchange.  This proxy was authorized only where Sirius XM streamed essentially the same programming that it provided on its satellite service.  If Sirius XM decided to stop streaming a channel, it was unclear how or if such an exclusion could be taken. 

 

There is much more to write about concerning the analysis of the competing cases.  We will look at those issues next week, and suggest how some of the analysis may be relevant to the Internet radio royalty issues that webcasters will be facing quite soon. 

 

Update – 1/5/2013 - The article initially indicated that only one PSS continued in business.  I have been informed that at least one other PSS is still in operation and qualifies for this rate, and the article has been corrected to reflect this.

 

Correction – 4/1/2013 - This article had incorrectly stated the rates for the SDARS services.