Broadcast Law Blog

As we wrote on Friday, the Copyright Royalty Board released to the parties their decision setting the sound recording music royalties for Internet radio for the years 2006-2010 - and the rates will be increasing significantly (absent success on appeal or in settlement discussions). The rates and appeal process are set out in our post on Friday.  The parties have until Monday, March 5 at noon, to request that the Board keep portions of the decision that contain confidential proprietary information out of the public record. Thus, the text of the decision is not yet public. Nevertheless, many parties are asking for more specific information about the decision and its impact. Certainly, when the decision is public, everyone will want to make their own judgments. But, until that time (which should be soon as the Board was careful to avoid using any significant amount of confidential information), I offer some observations about the decision (from my vantage point as a party who represented some of the webcasters involved in the proceeding), as well as thoughts on some of the questions that I have seen posted on various discussion boards this weekend.

First, it is essential to understand exactly what this decision covers. The Board’s decision covers only non-interactive webcasters operating pursuant to the statutory license. Our memo, here, discusses the statutory licensing scheme, and what a webcasting service must do to qualify to pay the royalties due under this statutory license. Essentially, a webcaster covered by this decision is one which operates like a radio station – where no listener can dictate which artists or songs he or she will hear (some limited degree of consumer influence is permitted, but a webcaster must comply with the restrictions set out in our memo).  Also, the webcaster cannot notify their listeners when any specific song will play. The decision does cover the Internet transmissions of the over-the-air content of most broadcast stations. 

The royalties are paid to SoundExchange – a nonprofit corporation with a Board made up of representatives of artists and the record companies. The royalties go to the copyright holders in Sound Recordings and the performers on those recordings ( the copyright holder is usually the record label. Royalties are split 50/50 – and the artist royalties are further divided 45% to the featured artist and 5% to any background musicians featured on the recording). 

The decision by the Board was the result of a long proceeding – which began in 2005. A summary of the proceeding can be found in our posting, here. Satellite radio also has to pay similar royalties, as do services that provide background music to businesses ("business establishment services"). Separate proceedings are underway to determine rates for these services.

With that background – here are some more thoughts on the decision – obviously in very summary form. The Board is charged with determining the royalty rates that would be determined by a willing buyer and a willing seller in a marketplace transaction. The Board was clear in the decision that it would look simply for evidence of what such a deal would be – it would not look at policy reasons why certain groups of webcasters (including small commercial webcasters or noncommercial webcasters) should get some special rate.

In setting the rate, the Board looked to proposed benchmarks by which it could determine what a hypothetical buyer and seller would agree to in the marketplace. It rejected the proposals advanced by the commercial webcasters that the appropriate benchmark was what was paid by the services for the underlying composition (i.e. the fees paid to ASCAP, BMI and SESAC). Instead, the Board adopted a benchmark rate derived by one of SoundExchange’s expert witnesses by taking the rate paid by certain interactive webcast services (ones which do not qualify for the statutory license and which thus must negotiate private deals with the record labels for use of their music), and adjusting those rates to take into account the differences in the statutory services (including the lesser value to consumers as they do not have the ability to select songs when using a service subject to the statutory license).  The Board concluded that the rapidly escalating rate was justified as it brought the statutory services closer to the interactive services as the advertising market grows over the next few years.

The reliance on this benchmark lead to the numbers that we reported on Friday.  In its decision, the Board also set out terms for payments.  The terms are essentially those that are now in place for large webcasters, with a few changes.  The Board approved an increase in the late fee on monthly payments - to a fee of 1.5% of the unpaid royalty per month.  The late fee would also be imposed on late filings of Statements of Account - the monthly reports as to how much a service owes and the computations used to reach that conclusion.  The Board also concluded that copyright holders and artist could review the statements of account filed by services that played their music, though such information could not be revealed to the public.

So what does this all mean?  Immediately, it creates issues for webcasters who were paying under the provisions of the Small Webcasters Settlement Act.  While the law is very confusing as the effective date of the decision, one reading is that the rates go into effect immediately, even while an appeal is pending.  Thus, services would be obligated to begin to pay at the rate decided by the Board (though past due amounts for 2006 and the first two months of 2007 would appear to not be due until the appeal is resolved).  But, as these new fees will exceed the total revenues of many smaller webcasters (see the report in the Radio and Internet Newsletter, here), this would impose an incredible hardship - probably an impossible burden - on these services.

Larger noncommercial webcasters, who exceed the usage limitation covered by the flat $500 fee, would also face huge new royalties, as all overages would be at more than four times the rate that they pay for such overages now. 

For all these services, a new obligation to track performances - how many listeners heard each and every song played by a service - is one that many small services will find difficult to meet.  While some technical companies may be able to track that information, many smaller webcasters do not use services provided by those companies.  And, as many Internet radio operators have been paying their royalties for 2006 and thus far in 2007 on a percentage of revenue or on Aggregate Tuning Hour basis, will they have any basis to determine their obligations for the fees that are retroactive to January 1, 2006?

The other type of service that could be hard hit by the decision would be the services that generate individual streams for each listener, or services that have many individual streams or channels.  As the decision places a $500 minimum fee on each station or channel, and does not clearly define what is meant by a "channel" or "station," an argument could be made that services that generate an individual stream for each listener would have a $500 obligation for each stream they generate - even if that stream played just one song. 

There are many other issues that will arise once the decision is released and reviewed by the public.  But this decision is sure to have impact far beyond the streaming world.  In the recently proposed XM/Sirius merger, about which we wrote here, the satellite radio services were arguing that competition from Internet Radio lessened any anticompetitive threat from the anticipated combination of the companies.  Similarly, broadcasters have argued that webcasters provided competition that justified a relaxation of the multiple ownership rules.  If many Internet radio stations disappear after this decision, these two proceedings may well be affected.  Also, if the Internet does not provide an outlet for new broadcast entrants, will there be a greater clamor for more Low Power FM stations?  These issues and other ramifications of the decision are sure to follow. 

We will have more on the decision as questions arise and once the full text is made public. 

We have produced some PSAs here that are gaining momentum in the internet radio industry to address the issue. They are free and royalty free. We even produced the music in house. You may want to air them on your station... lots of lengths and versions are posted. We even posted a script in the case you wanted to cut your own.

Get em here:
http://www.wzfb.com/savenetradio

I hope all is well.

Dave

Inhibiting the growth of webcasting was the goal from the outset, with passage of the anti-webcasting provisions of the DMCA. The impossibly burdensome music use reporting requirements and now these grossly unreasonable compulsory license fees are part and parcel of the over all effort to put an end to webcasting.

The problems lies with the music industry's addiction to its traditional sales-based revenue model and the negative policy implications that has for consumers, technology firms, consumer electronics makers, and digital audio service providers of all types (not just webcasters). There can be no doubt but that public policy should support the opportunity of music industry rights holders to derive substantial revenue from their contributions to culture and to commerce. By the same token, however, the industry has no right to demand that public policy support its desire to do business in a particular way.

What's really needed is an alternative to the music industry's sales based revenue model.

I recently published a White Paper (available at bennettlincoff.com/fixing_what_is_badly_broken.pdf) in which I propose such an alternative. Mine is a comprehensive approach to rights licensing and rights management that does not depend on the efficacy of digital rights management (DRM) technology for its success. Specifically, I suggest that the rights of songwriters, music publishers, recording artists and record labels in their respective musical works and sound recordings should be aggregated so as to create a single right for digital transmissions of recorded music. The digital transmission right would be a new right, not an additional right. It would replace the parties' existing reproduction, public performance and distribution rights (and, in those territories where it applies, the communication right).

Ownership of the digital transmission right in individual recordings would be held jointly by the songwriters, music publishers, recording artists and record labels who contribute to the recording. Each rights holder would have authority to grant non-exclusive licenses for digital transmissions of those recordings on any terms they and their licensees find to be mutually acceptable. The only limitation on this authority would be the obligation to account to co-owners pursuant to whatever arrangements they make among themselves for the division of royalties earned from this newly-established right.

The digital transmission right would be enforceable only against those directly involved in providing digital transmissions of recorded music. Accordingly, consumers would not incur any liability merely for surfing the web, accessing streaming media, or downloading music files. Neither would copying for personal use require authorization. Similarly, software developers, technology firms, consumer electronics makers, and telecommunications and Internet access providers, as such, would have no liability under the digital transmission right. On the other hand, service providers would need licenses if they operate web sites, social networking services, P2P file-sharing networks or the like that provide digital transmissions of recorded music.

Consumers would only need licenses if they act as service providers in their own right; that is, whenever they are responsible for the digital transmissions at issue. By way of example, consumers would need authorization if they operate music-enabled personal or hobby web sites; or if they upload music files to a web site or service that does not have its own license under the digital transmission right authorizing this activity by users of its service (known as a "through-to-the-user license"); or, if they offer recordings to others through participation in a P2P file-sharing network, or similar service, that does not have such a through-to-the-user license.

The right would be implemented through a combination of free market transactions between individual right holders and service providers and voluntary collective rights administration. The best results for all would flow from a marketplace in which collective licensing is the norm and direct licensing the exception. The division of ownership of rights that I suggest will tend to encourage rights owners to work together through collective licensing organizations. I also suggest solutions to the complementary issues of how to license transborder transmissions and on what basis to distribute royalties each from those transmissions. In my view, overall success for the music industry will depend on the presence in each territory of at least one collective organization whose catalogue encompasses all or nearly all recordings and which is authorized to grant worldwide rights at its local rates for all digital transmissions of recorded music that originate from its territory.

Through the digital transmission right implemented as I suggest in the White Paper, digital transmissions of recorded music could be made available from the largest number and widest array of licensed sources, anytime, anywhere, to anyone with network access. Consumers would be free to enjoy music when, where and how they themselves decide. Technology firms and consumer electronics makers would be free to offer greater interoperability between the many recording, playback and communications devices that are available, and to meet consumer demand for new products with next generation capabilities. And, in the aggregate, music industry rights holders would do at least as well financially under my proposal as they do now under the system that my proposal would replace.

As a commercial webcaster with a classical music internet radio station, a 200% increase in the performance rights fees over the next four years is both unreasonable and debilitating to growing a profitable business. Strategically, we'll withstand the increase by doubling the minimum length of each selection we play, creating less numbers of "performances", as well as aggressively seeking out marketing deals with labels housed outside the U.S. that are willing to provide airable product and waive U.S. performance rights fees on behalf of their orchestras in exchange for preferred treatment on our station and website. It is very sad the Copyright Office in its decision making logic, chose to treat Internet radio in the same light as a service that sells downloadable music or offers listener-chosen playlists. It will absolutely cause small webcasters to either go out of business or operate illegally.

In response to Bennet Lincoff's post:

I agree with everything you write, and hope to carve out enough time to look over your white paper in detail. The present system for rights administration is cumbersome, outdated, and badly in need of reform.

But why not take it one step further? I think it is time to revisit the idea, first posited by the RIAA in the 1990s that digital transmission - ANY digital transmission - is fundamentally different from an analog transmission, and needs to be dealt with differently from the standpoint of royalty liabilities, programming restrictions, and copy protection.

In my blog post yesterday at http://www.saveourinternetradio.com I wrote the following:

Let’s reassess that reasoning (referring to what I called the "Artificial Analog/Digital Divide") in the light of 21st-century reality. Is there, in truth, a fundamental difference in the experience of an online listener to Radio Paradise and someone who was listening to identical programming on an FM station? Every one of our listeners - indeed, anyone who has ever clicked on a webcast as background music while working - knows the answer to that question. No! There is no difference whatsoever. Radio is radio, whether it comes in digital or analog form.

As for the recording angle, I would challenge any random group of RIAA lawyers, copyright judges, or members of Congress to listen to a digital recording of our radio station and a high-quality cassette recording of an analog FM station and tell which was which. I guarantee that they could not. The differences in quality are too subtle for all but the most discerning listener to notice.

The quality jump between AM and FM broadcasts was an order of magnitude more significant, yet the music industry managed to thrive their way through that transition. The advent of decent-quality cassette recorders in the 70s, coupled with stereo FM broadcasting, made it possible for anyone who wanted to to make copies of their favorite songs from the radio, with a quality not too different from the analog LPs sold at the time. Did that spell a death-knell for the music industry? Not hardly. The 70s and 80s saw a phenominal growth in the sales of LPs and, later, CDs.

Ah, but the music industry thought that home music recording would destroy their sales, and lobbied unsuccessfully in the 1970s to cripple that technology. The same fear-based and misguided reasoning popped up again in the 90s, with the advent of digital recording and broadcasting, and this time the industry - flush with dollars earned after their earlier fears were proved groundless - succeeded in this attempt to preserve their bottom line at the expense of, well, pretty much every one else.

Crippling an exciting, groundbreaking industry like Internet radio is certainly not in the best interests of the public, nor that of musical artists, and not even - if history is any judge - of the music industry itself. Just as they were unable to see how the advent of home music taping actually spurred the sale of LPs and CDs, they are unable to tell exactly what impact Internet radio and other forms of digital media will have on the future of their industry - and to behave as if they do know, and for Congress to go along with them, is a grave error, and public disservice, that needs to be recognized and corrected.

So, if we are building a business - even a non-commercial business like Radio Paradise - by the use of copyrighted material, isn’t it fair that we pay for its use? Perhaps it is. But the fact remains that what we are doing does not differ in any substantive way from what a company like Clear Channel is doing, and to move forward under the fiction that such a distinction exists is neither fair nor rational.

Thirty years ago the Supreme Court wrote:
_______________________________________
"The limited scope of the copyright holder's statutory monopoly, like the limited copyright duration required by the Constitution, reflects a balance of competing claims upon the public interest: Creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public
availability of literature, music, and the other arts. The immediate effect of our copyright law is to secure a fair return for an `author's' creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good. 'The sole interest of the United States and the primary object in conferring the monopoly,' this Court has said, 'lie in the general benefits derived by the public from the labors of authors.'When technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of this basic purpose'."

In 2002 during the CARP hearings Dr. Thomas T. Nagle (one of the RIAA's lead economic experts is on the record with the following testimony:
"Dr. Nagle testified that the Panel (CARP)should accord no weight to agreements with licensees which are unable to endure in the marketplace. Dr. Nagle rested his overall analysis on the fundamental assumption that the current webcasting industry consists of a large number of marginal or insignificant entities and that a dramatic shake out must and will occur. This, in his view, is both inevitable and desirable because it will bring about market consolidation, which will result in the emergence of a far smaller number of viable webcaster companies. These, in turn, will be able to prosper and endure(operate at a sustainable scale at this future point of viability and, not incidentally, be able to afford significantly higher royalty payments to copyright owners. The actions of the marginal economic entities which are fated to disappear in this process, in Dr. Nagle's view, are economically inconsequential and offer virtually no probative value as benchmarks for setting future royalty rates."

_________________________________

Until the transcripts of the CRB hearing are made public admittedly there is no real evidence that such blatent inconsistencies of thought were given any weight in their decision. On the other hand, given the rubber stamp the board gave to Sound Exchange's proposals and ludicrous rates; I'd have a hard time believing justice or the broader public good was served any differently than it was back then.

If I digitize a traditional radio station's analog signal (with their permission), may I broadcast this on the internet without being subject to this muck?

(There is a theory that FM stations are not subject to this muck because they do not supply perfect digital copies of songs. Presumably, analog quality isn't as valuable to a willing buyer.)

In response to David S above - a digital signal of an over-the-air station is in fact subject to these royalties. When the royalties were first adopted, the broadcasters claimed that their signals, when just retransmitted on the Internet, were exempt, but the Copyright Office and the Courts rejected that argument.

What about HD radio? Does terrestral radio pay SoundExchange royalty rates for an HD signal?

That's supposedly a perfect digital copy.

Where does this leave us?
Surely, those of us that have the drive to create our own online stations, without any probable return of profit, don't have it within us to merely disappear.
How can we get past this impossible obstacle?

What is the status of the provision for the making of ephemeral phonorecords? Apparently the statutory language still exists, but is the attached surcharge (as previously adopted by the LOC) now expired?

There is a lot of speculation about this unprecedented increase in royalty rates. However, the RIAA has in the past asserted that creating temporary server copies of sound-recordings was still an exclusive right and entitled them to remuneration under statute (in fact, I believe they originally argued for a detailed log of ephemeral phonorecords as well).

Although there is no telling how these new rates were figured, SoundExchange could have easily put forth, as before, that ephemeral phonorecords have some economic value.

Perhaps the CRB may have factored that argument into their recent decision -- and merely implemented a "covert" ephemeral license fee directly into the performance fee? That would certainly explain the substantial albeit highly contentious royalty rate increase. After all, the CRB did accept the proposed "pay-per-play" rates put forth by SoundExchange.

Thanks for keeping us apprised of these issues.

In answer to some of the posts above, HD Radio is specifically exempt from these royalties.

Ephemeral copies are included in this royalty rate - but are assigned no independant economic value

And where do we go? There are still options - settlement, legislative solutions or the appellate process are all still options.

Is there any possibility of having the provision for an obligatory "ephemeral license fee" repealed while keeping the language that permits the making of at least one ephemeral phonorecord as necessary for digital transmissions of sound-recordings?

There has been talk of changing the law on ephemeral copies but, as with so many other things in Copyright law, unless all affected parties agree, it is rare that a change in the law is made. The copyright holders seem interested in asserting that the ephemeral license has some value so, unless they give up on that position, the license will probably stay in place

(quoting)

"The actions of the marginal economic entities which are fated to disappear in this process, in Dr. Nagle's view, are economically inconsequential and offer virtually no probative value as benchmarks for setting future royalty rates."

(endquote)

If the actions of the "marginal economic entities which are fated to disappear in this process" are economically inconsequential, then if those entities continue to operate without paying the royalties which will force them to disappear, that fact ALSO is "economically inconsequential" and should be treated as such! I bet they won't take THAT position though.

The majority of music that we play on our internet radio station is by indie and unsigned artists who submit their own music for air play along with permission to play and in the case of cd/ep's with permission to rip and convert. Here in Australia we have been hit with new laws that force us to pay copy write and other fees even when the OWNER of the copy write has given permission NOT to pay those fees.

Being outside of the USA and not playing USA Artists might help us get around the new USA laws, but as our stream is routed through a server located IN the USA, does this put us in the position of having to pay USA fees?

Will those still have to be paid if the non- USA artist/recording company has registered a copy write in the USA but has submitted the music for play with their written permission to play without paying the artist/recording company any fees?

Seeing as MOST music played on MOST radio stations is submitted for play by the recording companies or artists themselves, how can they then demand fees for playing that music when it is expressly what they want the stations to do?

It looks to me like this is just another way to try and limit the use of the internet by individuals to communicate with other individuals in other parts of the world.

David, how does one gauge the impact of this ruling on Webcasters? Does anyone keep reliable data on the number of Webcasters in operation at any given time? If this data is available, does it appear in time to have an impact on the rule-making process (or at least on the appeals process), or does the lag time keep you from being able to quantify the damage until it is far too late to do anything about it?

There are various companies that track how many webcasters operate. BRS Media has from time to time issued statistics on the number of operating stations. However, changes as a result of the decision will probably not get into the record on appeal - as the record is based on evidence submitted during the course of the trial. So, yes, essentially the quantification of the damages comes too late to do anything about it - except through the legislative process.

The Information Technology and Innovation Foundation (ITIF) just released a report on Internet Radio and Copyright Royalties at an event on Capitol Hill on May 10, 2007. In the report, we describe problems with the current copyright royalty system for Internet Radio, and what steps Congress should take to reform this system.

The report is available on our website at - http://www.itif.org/files/InternetRadio.pdf

Would using a streaming audio player, that only plays from a small set of mp3s classify as a broadcast or internet radio?

this audio player displays song and artist info, and is 100% secure from download of the source mp3. It allows users to skip, stop, and play songs. Only songs uploaded into the player by the site owner can be played.

Matt:

An interactive service that allows users to pick which songs can be played does not qualify for the statutory license. The rights to make copies of the songs and the compositions must be individually negotiated with the copyright holders. Read this post for more information about how the royalties work and what they cover: http://www.broadcastlawblog.com/archives/internet-radio-copyright-royalty-board-decision-on-music-royalties-clarifying-the-confusion.html