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So you want to start streaming your radio station on the Internet?  Or maybe you want to start a whole new Internet radio station.  In a session at last week's Texas Association of Broadcasters Annual Convention in Austin, Dave Oxenford talked about the legal considerations starting an Internet radio station, while Chris Dusterhoff of Bryan Broadcasting in Bryan/College Station, Texas talked about some of the technical and business issues in doing so.  A copy of Dave's PowerPoint presentation from that session is available here.  The presentation addresses some of the issues that you need to consider, including the music royalties that will be required from most webcasting operations. 

In addition to the issues involved in streaming your signal on the Internet, broadcasters have a host of other legal issues that they should consider in connection with their digital presence.  Issues that arise with service marks and copyrights, with employment issues, social media, privacy and sponsorship disclosure were all addressed in Dave's presentation on the Legal Issues in the Cyber Jungle.  A copy of his PowerPoint presentation is available here.  Dave also mentioned that stations with websites featuring user-generated content, to help insulate themselves from copyright infringement that might occur in the posts from their audience members, should take advantage of the registration with the Copyright Office that may provide safe harbor protection if a station follows the rules and takes down offending content when identified by a copyright holder.  The Copyright Office instructions for registration can be found here.   Additional information about use of music on the Internet can be found in Davis Wright Tremaine's Guide to The Basics of Music Licensing in a Digital Age. 

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David Oxenford, Bob Corn-Revere, David Silverman, Brendan Holland, and others from Davis Wright Tremaine's media and communications practice will be in Las Vegas, Nevada from April 10-15 for the 2010 NAB Show.  The NAB convention is an annual event and a focal point for engineering, legal, and business issues for the broadcasting and greater media worlds.  Bob Corn-Revere will be speaking at the American Bar Association Conference, Representing Your Local Broadcaster, on April 11, on a panel on new technology and the dangers it poses for journalists reporting from disaster areas or other scenes where immediate verification of information is not possible - the panel is called:  "Clear and Present Danger, Guiding Journalists Through the Catastrophic Perils."  David Oxenford, on the morning of April 12, will be speaking at the NAB Show on a panel called, "Copyright Licensing: Seeking a Bridge Over Troubled Waters", a panel dealing with the proposed broadcast performance royalty, streaming fees, the current ASCAP and BMI negotiations, and other copyright issues that arise in day-to-day operation of a broadcast station.  Dave will also be moderating a panel at the Radio and Internet Newsletter's RAIN Internet Radio Summit, to be held in conjunction with the NAB Show, at the Renaissance Hotel on April 12.  Be sure to join us at these and other events in Las Vegas.

To help you attend the Show, we have been offered some discounts and free admissions for our readers.  The RAIN Summit, Internet Radio's main event, has offered readers of the Broadcast Law Blog a 30% discount on admission to the conference.  That conference includes a full day of discussion of Internet radio topics, and will feature many of the industry's biggest names.  From past experience, this always a great event with much great information, important for anyone with any interest in Internet radio and digital media.  The Summit features great networking opportunities, with a box lunch and post-conference reception.  An Exhibit Hall pass to the NAB Show is also included for RAIN attendees

For those not interested in Internet radio, we can still get you into the NAB Show's Exhibit Hall - for free!  The NAB has offered our readers free access to the Exhibit Hall at the show. This free Exhibits-Only pass includes:

• Access to the Exhibit Hall at the Show
• Access to the Opening Keynote and State of the Industry Address
• Access to Info Sessions on the Convention floor
• Content Theater and Destination Broadband Theater

To find out how to register for these discounted offers, click on the Continue Reading link below.

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In recent weeks, SoundExchange has begun to send letters to broadcasters who are streaming their signals on the Internet without paying their SoundExchange royalties.  Despite all of the publicity about Internet radio royalties and the controversy about the rates for those royalties, there still seem to be webcasters unfamiliar with their obligations to SoundExchange.  As we have written many times, SoundExchange collects royalties for the public performance of the "sound recording", a song as recorded by a particular artist.  Those royalties, which are charged only to digital media companies like Internet radio, satellite radio and digital cable radio, are paid half to the copyright holder in the recording (usually the record company for most popular songs) and half to the performers on the recording.  These royalties are paid in addition to the royalties paid to ASCAP, BMI and SESAC for the public performance of the musical work - the underlying musical composition, the words and music of a song - money that is paid to the composers of that musical work.  So just paying ASCAP, BMI and SESAC is insufficient to cover your streaming operations when music is being used. 

While these royalties have been law since 1998, and have been set by decisions first by a CARP (Copyright Arbitration Royalty Panel) in 2003, and then by the Copyright Royalty Board in 2007, it seems like some companies still have not gotten the message about the obligations to pay these fees.  Thus, in the last few weeks, SoundExchange has been sending out letters to companies that have not been paying.  The letter are not particularly threatening - instead pointing out the obligations that companies have to pay the royalties, and asking if the webcaster may be paying under some corporate name that is not readily apparent from the website.  The letter also points the webcaster to the SoundExchange website for more information.  Finally, it notes that SoundExchange represents the copyright holders for collections purposes, and notes that nothing in the polite letter waives any rights that those holders have to pursue actions for failure to pay the royalties - in other words to sue for Copyright infringement.   So, gently, webcasters are reminded to pay their royalties or risk being sued for copyright infringement, with potential large penalties for playing music without the necessary licenses.

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In the last two weeks, David Oxenford has, at two different conferences, moderated panels on digital music rights and licenses.  At the Digital Music Forum East, in New York City on February 25, 2010, his panel focused on rights and licenses generally, featuring panelists from SoundExchange, BMI, the Harry Fox Agency, Rightsflow and MediaNet.  As a handout, David provided copies of Davis Wright Tremaine's Guide to The Basics of Digital Music Licensing, available here.  Discussion on the panel included the question of when there is a public performance versus when there is a reproduction of a copyrighted piece of music (see our post here), royalties for interactive streaming (see our post here), and the difference between a sound recording and a musical composition, rights to both of which are needed in most digital uses of music (see our post here).

At the RAIN Summit North, held at Canadian Music Week on March 12, David's panel discussed the music royalty structure for Internet Radio companies in Canada. Panelists included the CEO of  Re:Sound (the Canadian version of SoundExchange, collecting royalties for the public performance of sound recordings) and the head of CMRRA-SODRAC (CSI), the Canadian Rights Society that collects for reproductions of musical compositions.  In Canada, broadcasters and Internet radio companies pay not only to SOCAN, the Canadian equivalent of ASCAP, BMI and SESAC in collecting for the public performance of musical compositions, but also to CSI for the reproductions of musical compositions made in servers, buffers and other digital reproductions. 

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In one more indication that the Broadcast Performance Royalty (or "performance tax" as opponents of the legislation call it) is not dead yet is an article in yesterday's New York Times reviewing the issues at stake in the proceeding.  What was perhaps most interesting about that article was the fact that it appeared only one page away from an article about Internet Radio service Pandora, and a discussion of how that hugely popular service was almost driven out of business by music royalties set by the Copyright Royalty Board in their 2007 royalty decision.  The article about the broadcast performance royalty mentions that one of the difficulties in assessing the impact of the proposed royalty is that no one knows how much it will be, as it would be set by the Copyright Royalty Judges on the CRB.  Yet the Times makes no mention of the controversy over the previous decisions of the Board in the context of the Internet radio royalties, and how such royalties almost impacted services such as Pandora.  

How much would the proposed royalties on broadcasters be?  We have written before on that subject,here.  Under previous decisions using the "willing buyer, willing seller" royalty standard which is set out in the legislation that has passed House and Senate Judiciary committees dealing with this issue, the lowest royalty for the use of music in any case before the CRB has been 15% of gross revenues.  Even using a standard seemingly more favorable to the copyright user (the 801(b) standard that assesses more than the economic value of the music but also looks at the impact that the royalty would have on the stability of the industry on which it is imposed), the royalties have been in the vicinity of 7% of gross revenues for both satellite radio and digital cable radio, the two services that are subject to royalties set using the 801(b) standard.  This is more than broadcasters currently pay to ASCAP, BMI and SESAC - rates which are also currently the subject of proceedings to determine if these rates should be changed (see our posts here and here).   

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According to British press reports, Warner Music's CEO Edger Bronfman Jr. stated that it will cease making its music available to advertising supported streaming music sites.  This has prompted some questions about how this decision would affect services such as Pandora, Slacker, Accuradio and other Internet radio companies - would it deny them access to substantial amounts of music?  In fact, as these US services operate under a "statutory license", created by Congress, they get access to  all legally recorded music in exchange for the payment of a royalty established by the Copyright Royalty Board.  Essentially, under this statutory license (otherwise known as a "compulsory license"), a copyright holder cannot deny access to companies operating under the license, as long as those companies comply with terms of the license, and pay the established royalty.  Thus, even if the Warner Music decision really is true, this decision should have little or no impact on US Internet Radio stations operating under the compulsory license.

What would it affect?  Presumably it could hurt services that don't rely on the statutory license.  Internet Radio operators who want to rely on the statutory license must meet a set of requirements set out by statute in order to qualify for the license.  We've written about those obligations before here, in connection with the waiver of some of these requirements in the royalty settlement between SoundExchange and the NAB.  Services operating under the license must meet the "statutory complement", meaning that they cannot play more songs from an artist or CD in a given time period than allowed by the law, specifically:

• No more than 3 songs in a row by the same artist
• Not more than 4 songs by same artist in a 3 hour period
• No more than 2 songs from same CD in a row

In addition, Section 114 of the Copyright Act sets out other limitations on a service operating under the statutory license.  The service must provide the name of the artist, song and CD in text on its site, to the extent technically possible, while the song is playing.  There are also certain restrictions about tying the music being played to commercial content on the site, and requiring that sites take steps to prevent digital piracy.  And, most importantly, the service cannot be "interactive."

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Each year poses a new set of regulatory deadlines, and to help you remember all of those deadlines, the Davis Wright Tremaine Broadcast Group has prepared a calendar setting out the dates that broadcasters need to remember in 2010.  The calendar can be found here, and sets out FCC imposed deadlines for, among other things, Ownership Report filings (for noncommercial stations for now, until the status of the Form 323 for commercial stations is resolved), for quarterly issues programs lists, for EEO public file and Mid-Term reports, and for children's TV reports.   The calendar also provides reminders about the dates of SoundExchange filings and payment obligations, and for the political windows during which lowest unit rates apply for the Federal elections to be held in 2010 (for the House of Representatives in all states, and for the Senate in over a third of the states).  Lots of dates to remember - so check out the DWT Broadcasters Calendar.

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Many Webcasters who have elected the the royalty rates set by many of the settlement agreements entered into pursuant to the Webcasters Settlement Act must file an election notice with SoundExchange by January 31 to continue to be covered by those settlement agreements.   These agreements were entered into by groups of webcasters and SoundExchange, and allow the webcasters to pay royalties at rates lower than those rates set by the Copyright Royalty Board for 2006-2010.  January 31 is an important date even for those webcasters who are covered by agreements that don't demand an annual election, as most Internet radio operators must make annual minimum fee payments by January 31.  SoundExchange does not send out reminders of these obligations, so Internet Radio operators must remember to make these filings on their own.  The original election forms filed under settlement agreements signed by the NAB and by Sirius XM cover the entire settlement period from 2006-2015, so no election form must be filed each year, though minimum fee payments must still be made.  Note that certain small broadcasters, who need not meet SoundExchange recordkeeping obligations, do need to file an election to certify that they still meet the standards necessary to count as a small broadcaster.  The WSA settlement agreements that cover Pureplay webcasters, Small Commercial webcasters, Noncommercial Educational webcasters and other noncommercial webcasters all are entered into on a year-by-year basis.  Thus, to continue to be covered, parties currently governed by these agreements need to file a Notice of Election to again be covered by these agreements by January 31 (though note that the SoundExchange website provides for filings by February 1, presumably as January 31 is a Sunday).

The election forms are available on the SoundExchange website, though they are not easy to find. The forms that must accompany the annual minimum fees are also on the SoundExchange website.  Note that in some cases there are forms that cover both webcasters who paying under a particular settlement, as well as under the special provisions for small entities that are covered by these same agreements (e.g. Small Pureplay webcasters file a different form than other Pureplay Webcasters even though both are governed by the same agreement.  Similarly Small Broadcasters file a form different than other broadcasters, though both are covered by the same agreement).  These forms can be found at the links below.  Click on the name of the category of webcasters for a link to our article that summarizes the particular settlement, the minimum fees required, and the qualifications for small webcasters under that deal (if there is such a provision):

• Broadcasters minimum fee form - here.
• Small broadcasters election form - here.  Minimum fee payment form - here.
• Pureplay webcaster election form - here.  Minimum fee payment form - here.
• Small pureplay election form - here.  Minimum fee payment form - here.
• Small commercial webcaster election form - here.  Minimum fee payment form - here.
• Microcaster election form - here.  Minimum fee payment form - here.
• Noncommercial educational webcaster election form - here.  Minimum fee payment form - here.
• Other noncommercial webcaster election form - here.  Minimum fee payment form - here.
• Noncommercial microcasters election form - here. Minimum fee payment form - here.
• Satellite radio (for their webcasting operations - a deal that may also fit other commercial webcasters who are not covered by other agreements) minimum fee payment form - here.

Note that there is no specific form for NPR affiliates covered under the NPR settlement, as an organization set up by the Corporation for Public Broadcasting handles all payments and SoundExchange filings.  Other companies providing Internet radio services need to pay attention to these dates - and file the necessary papers and make the required payments by the upcoming deadline. 

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Last year’s Court of Appeals decision on Internet radio royalties for 2006-2010 remanded one issue to the Copyright Royalty Board for further consideration – the issue of the minimum annual fee to be paid by each webcaster. The Copyright Royalty Judges (“CRJs”) had decided on a $500 per channel minimum fee – a fee that created much concern in the Internet radio community as there was no clear delineation of what a channel was. For services, like Pandora, where there is a unique stream created for each listener, by some definitions there could be an almost infinite number of channels all subject to the $500 minimum fee. Following the CRB's initial decision, a number of the larger webcasters and SoundExchange entered into a settlement capping the minimum fee obligation at $50,000 per webcaster per year. Thus, services with more than 100 channels would only pay a minimum fee of $50,000 at the beginning of each year. However, this settlement was never extended to all webcasters - it applied only to those webcasters who signed the deal.  Following the Court remand, SoundExchange and DiMA (the Digital Media Association which represents many webcasters), submitted the 2007 settlement to the CRB to be codified into the rules that govern webcasters generally. Just before Christmas, the CRJs asked for comments on that settlement. Comments are due by January 22. 

In many cases, this settlement has been superseded by subsequent events – namely the settlements with webcasters that were entered into in February and then later in the summer under the provisions of the Webcaster Settlement Acts. Settlements with broadcasters, pureplay webcasters, small commercial webcasters and various noncommercial groups all set their own minimum fees (and, for the most part, cover the periods through 2015), and thus this proceeding is largely irrelevant to these webcasters. If this settlement is approved, the only remaining question before the CRJs on the remand of the 2006-2010 proceeding will be the minimum fee for some noncommercial groups that did not enter into any settlement, as this agreement on minimum fees applies only to commercial webcasters.

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The Copyright Royalty Board has ordered that most digital music services provide "census reporting" of all songs played by their service, along with other information including the number of listeners who heard each song each time it was played.  The decision, published in the Federal Register today, is a follow up to the Notice of Proposed Rulemaking about which we wrote here, proposing this new permanent rule to replace the interim requirements that required that digital music services provide that information for two weeks each quarter.  The only exception to the new obligation was for "small broadcasters" - i.e. those broadcasters who are only obligated to pay the minimum $500 annual royalty. These small broadcasters will continue to report on the songs that they play for only two weeks each quarter.

The new general rule requiring census reporting applies to all digital music services that pay royalties to SoundExchange for the public performance of sound recordings. However, the obligations set out in this general rule do not replace different rules that may be contained in settlement agreements entered into between services and SoundExchange.  Settlements with recordkeeping exemptions include the broadcaster settlement (summarized here), which give stations the ability to exclude some of their tuning hours from the census reporting requirements that were included in that settlement, and the noncommercial settlement agreements summarized here.  The CRB decision also excludes those services where per performance reporting is not possible (such as satellite radio services where there is no easy way to count performances). 

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On October 8, 2009, David Oxenford moderated a panel at the Digital Music Forum West in Los Angeles on the Future of Internet Radio.  Panelists included Kurt Hanson, the publisher of the Radio and Internet Newsletter; Johnie Floater, General Manager of Media for Live 365; and Jim Rondinelli, SVP of Strategic Development at Slacker.  The panel discussed the business of Internet radio, as well as the issue of Internet Radio royalties. 

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On October 6, 2009, David Oxenford participated in a panel called "Post-Millennium Analysis: The DMCA in the 21st Century" at the Future of Music Coalition's Policy Summit in Washington, DC.  Other panelists included David Carson, General Counsel of the US Copyright Office, and Mitch Glazer, Executive Vice President, Government and Industry Relations for the RIAA.  The panel discussed, among other topics, webcasting royalties and the proposed broadcast performance royalty, and the safe harbor provisions of the DMCA for services which allow the posting of user-generated content.

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On September 25, 2009, David Oxenford moderated a panel at the NAB Radio Show in Philadelphia called "The Day the Music Died - Streaming, The Performance Tax and Other Copyright Issues."  In addition to the music royalties involved in webcasting and the possible broadcast performance royalty, the panel discussed other copyright issues, including the state of the current negotiations between the Radio Music Licensing Committee and ASCAP and BMI over composer's royalties for broadcast stations, and issues about licensing music for podcast and mobile applications.  Panelists included Bill Velez, head of the Radio Music Licensing Committee, which is conducting the ASCAP and BMI negotiations, and Jack Donlevie, the General Counsel of Entercom, who was involved in the negotiations of the Broadcaster-SoundExchange settlement on Internet Radio Royalties.

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The question of when a digital music service is “interactive” and therefore requires direct negotiations with a copyright holder in order to secure permission to use a sound recording is a difficult one that has been debated since the Digital Millennium Copyright Act was adopted in 1998. In a decision of the Second Circuit Court of Appeals released today, upholding a jury decision in 2007, the Court concluded that Yahoo’s Launchcast service (now operated by CBS) is not so “interactive” as to take it outside of the statutory royalty despite the fact that the service does customize its music offerings to the tastes of individual listeners. To reach its decision, the Court went through an extensive analysis of both the history of the sound recording copyright and of the details of the criteria used by Launchcast to select music for a stream sent to a specific user. By determining that the service is not interactive, the service need only pay the SoundExchange statutory royalty to secure permission to use all legally recorded and publicly released music.  Had the service been found to be interactive within the meaning of the statute, the service would have to negotiate with each sound recording copyright holder for each and every song that it wanted to use on its service to get specific rights to use each song - potentially resulting in hundreds of negotiations and undoubtedly higher fees than those paid under the statutory license.

The issue in the case turned on an analysis of the DMCA’s definition of an interactive service.  The statute defines an interactive service as one where a user can select a specific song or “receive a transmission of a program specially created for the recipient.” It is clear that Launchcast did not allow a user to request and hear a specific song.  But, by specifying a genre of music, and by specifying favorite artists and songs and rating other songs played by the service, a listener could influence the music that was provided to it.  Was this ability to influence the music sufficient to make it an “interactive service” and thus take it out of the coverage of the statutory royalty?

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The four settlement agreements between SoundExchange and different groups of webcasters were published in the Federal Register today, setting the dates by which Internet radio operators need to opt into the terms of certain of these deals by filing a Notice of Election with SoundExchange.  The deals each have different opt in dates, so it does get confusing.  For larger webcasters interested in taking advantage of the rates set by the Sirius XM deal (which we summarized here), their notice must be filed on this form with SoundExchange within 15 days.  For noncommercial webcasters wishing to take advantage of the deal struck with the Northwestern College on behalf of Religious Broadcasters, but open to any noncommercial webcaster (a deal we summarized here), the option to be included in this deal must be made by an existing webcaster by September 15 (on this form for most noncommercial webcasters, but on this one, and similar forms for 2006 - 2008, for those eligible for the microcaster provisions).  Noncommercial webcasters affiliated with educational institutions who want to take advantage of the record-keeping breaks contained in that Noncommercial Educational deal, also summarized here, apparently need not submit a form until it pays its minimum fee for 2010, but the end of January.  As the fourth deal, with the Corporation for Public Broadcasting, does not even affect periods until 2011, affiliated stations need not file a notification with SoundExchange at this time, though CPB may have its own opt-in requirements for its member stations.

As we've written before (here and here), these deals are on top of the Pureplay settlement, summarized here, where an Internet radio station can still opt in by submitting this form by August 17 (or a small pureplay webcaster can file this form by that same date).  Broadcasters have had their own settlement (summarized here and here), where the opt in dates have passed, as have the dates for opting into the  "microcasters" deal for small commercial webcasters (see our summary here).  New stations just launching have the option to select from any of these alternative rate structures.  It is a confusing jumble of regulations that a webcaster needs to carefully sort through to determine which set of rates would best fit their own business model.  Read these deals carefully, as all have details that must be observed to insure full compliance.

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The Corporation for Public Broadcasting has entered into a settlement with SoundExchange extending their current agreement on Internet Radio royalties for "Public" radio stations through 2015.  The previous deal, about which we wrote here, covered the period from 2006 to 2010.  This new agreement picks up in 2011 and covers included stations through 2015.  As in the previous deal, the new agreement has a payment by CPB to SoundExchange satisfying all royalties for all of the covered stations.  This was the fourth agreement that was announced last week, about which we wrote here, although details of this deal had not previously been released.  We have written about the other deals entered into under the Webcaster Settlement Act of 2009 ("WSA"), including the deals with Sirius XM (here) and with other noncommercial webcasters (here). 

This agreement covers stations affiliated with NPR, American Public Media, Public Radio International, and the Public Radio Exchange. CPB will pay to SoundExchange $2,400,000 in five yearly installments, covering up to 490 public radio stations in the first year, and up to 10 additional stations per year thereafter (up to 530 in 2015).  The fee is also subject to adjustment if all of the covered stations exceed certain listening levels.  Those levels, and the required true-up for performances in excess of the caps, are set out below.  However, the CPB payments for excess performances are limited to a total of $480,000 over the 5 year period of the Agreement:

Year              Music ATH Cap              Per Performance Rate

2011                279,500,000                         $0.00057

2012                280,897,500                         $0.00067

2013                282,301,988                         $0.00073

2014                283,713,497                         $0.00077

2015                285,132,065                         $0.00083

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Noncommercial webcasters were provided with two royalty options under settlements reached with SoundExchange pursuant to the Webcaster Settlement Act of 2009 ("WSA").  One settlement was with Noncommercial Educational Webcasters.  The other, when announced, was characterized by SoundExchange as being a settlement with noncommercial religious broadcasters, though it applies to any noncommercial webcaster who elects to be subject to its terms.  As set forth below, except for certain mid-sized noncommercial webcasters who have more forgiving recordkeeping options under the Educational deal, it would seem that the settlement with the religious broadcasters provides far more advantageous terms, and it also reaches back to cover the period from 2006 through 2010.  The Educational webcasters agreement covers only the rates for the periods from 2011-2015.  These settlements provide another example of the issue raised before the Senate Judiciary Committee of the arbitrary nature of the precedential nature that will be accorded to WSA settlements in future webcasting proceedings.  The noncommercial agreement with significantly higer prices has been accorded precedential weight in future CRB proceedings, while the one with lower rates is, by its terms, not precedential in future proceedings.

It is easiest to start with a review of the 'Religious" broadcaters settlement (which, as we said above, is open to any noncommecial webcaster).  The agreement provides for a $500 per channel fee for each channel or stream offered by the noncommercial webcaster.  For that flat fee of $500 per channel, the webcaster can stream up to 159,140 monthly aggregate tuning hours of programming on each stream.  An Aggregate Tuning Hour ("ATH") is one hour of programming streamed to one person.  Thus, if you have 2 people who each listen for an hour, you would have two aggegate tuning hours.  A station with 2 listeners who each listen for half an hour would have one ATH of listening.  4 listeners for 15 minutes each would also add up to one ATH.  The 159,140 monthly ATH number represents listening of approximately 221 average simultaneous listeners 24 hours a day, 7 days a week.  If a webcaster exceeds this listening level, it must pay for excess listening on a per performance (per song per listener) basis, at the rates set out below.

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The recent settlement on Internet radio royalties between Sirius XM Radio and SoundExchange provides yet another option for commercial webcasters trying to determine the royalties to be paid for the public performance of sound recordings.  While the settlement is signed by just these two parties, it will be published in the Federal Register and be available for all commercial webcasters who comply with its terms - which will essentially be any webcaster who is not a "Broadcaster" as defined in the NAB Settlement, about which we wrote here.  As set forth below, the royalty rates available under this settlement are slightly lower for 2009 and 2010 than those set by the Copyright Royalty Board back in 2007, but slightly higher than those available under the NAB settlement.  However, in 2013-2015, the rates available under this deal are actually lower than those agreed to by the NAB, meaning that they present a better deal for webcaster expecting their audiences to grow in the next few years.

First, the most important issue - how much will it cost?  As with the CRB decision, the NAB deal, and the Pureplay deal (about which we wrote here) as it applies to large pureplay webcasters, the rates established by the deal are based on a "per performance" charge.   A performance is one song as listened to by one listener.  So if a song is played on an Internet radio station subject to the deal and 100 people are listening at the time the song is played, there are 100 performances.  The rates established by the deal are as follows:

           Year              Rate per Performance

2009                      $0.0016

2010                      $0.0017

2011                      $0.0018

2012                      $0.0020

2013                      $0.0021

2014                      $0.0022

                        2015                      $0.0024

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On Tuesday, just before the Senate recesses for its summer vacation, an abridged version of the Senate Judiciary Committee held a hearing on the proposed sound recording performance royalty for over-the-air radio.  Internet radio royalties were also encompassed in this discussion, principally concerning the issue of "platform parity", i.e. whether all music services subject to the sound recording performance royalty should pay a royalty determined by the same standard, or perhaps even the same royalty.  We've already written this week about some of the issues surrounding the broadcast performance royalty (why it's still being considered given that a majority of the House of Representatives has already signed a resolution against the royalty, here, and discussing the likely amount of the royalty were it to be adopted, here).  Neither of these issues was discussed in depth at the hearing.  But a multitude of other issues were raised in the hearing. and we'll address many of them over the next few days.  But first, today, a summary of the issues raised.

First, it should be made clear that there was not a full committee in attendance.  While a few Senators came and went without saying a word, questions were asked or comments made by only 5 Senators of the 19 on the Committee.  So judging how the full committee feels about the issues raised when only 5 Senators (4 of them Democrats) asked questions may not be a fair assessment of how the committee as a whole feels about the issues raised.  But, broadcasters should take warning that all of the Democratic Senators in attendance seemed to be sympathetic to the idea of adopting a broadcast performance royalty.  However, it must be noted that all also seemed somewhat sympathetic to the concerns about the financial impact of the royalty on broadcasters.  Just as members of the House have cautioned broadcasters to negotiate on a royalty before one is imposed on them, Senator Leahy of Vermont, the Chairman of the Committee, echoed those sentiments, promising that "legislation will move" on this issue - meaning that the issue will not simply fade away, despite the signatures on the NAB petition opposing the performance royalty.

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SoundExchange has posted on its website this afternoon four press releases announcing new settlements of amounts due for Internet radio music royalties.  These settlements were negotiated under the provisions of the Webcaster Settlement Act of 2009.  The announcement lists settlements with two noncommercial groups representing College Broadcasters and noncommercial religious broadcasters, as well as a deal with Sirius XM for their streaming of music.  The fourth deal is with a group to be named later - a little mystery that sounds like something out of a trade of baseball players done right at the trading deadline.  In effect, that is the case here, as yesterday was the final date for deals to be done under the terms of the WSA.  These deals join the Pureplay Webcasters settlement announced earlier this month, as well as the deals with the Corporation for Public Broadcasting for NPR affiliates, the NAB for commercial broadcasters, and with microcasters done in February under the terms of the Webcasters Settlement Act of 2008 (links to our description of these deals can be found here).

The press releases do not release detailed terms. For Sirius, the release states that the parties agreed to a per performance rate which is not specified, covering webcasting royalties through 2015.  These rates do not apply to Sirius performances that are done by satellite, which are covered by the Copyright Royalty Board rates recently upheld by the US Court of Appeals.  Instead, these rates only cover the streaming of Sirius programming done over the Internet or to mobile devices using Internet technology.  The Collegiate Broadcasters agreed to a rate that provided the flat $500 fee for the first 159,140 aggregate tuning hours a month set by the CRB decision, and then per performance fees at the NAB rates for all streaming above that amount.  The religious broadcasters deal is less defined, discussing a per performance rate, but not providing any more details of the agreement.  For both noncommercial groups, there are references to reduced recordkeeping requirements for some webcasters, but again, those have not yet been detailed.

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The Pureplay Webcasters settlement agreement, which we summarized here, was published in the Federal Register on Friday, starting the 30 day clock running for the election of the deal by existing webcasters.  While this deal offers better per performance rates to large webcasters than offered by the rates established by the Copyright Royalty Board, and higher permissible listening levels to Small Commercial Pureplay webcasters than allowed under the Microcaster deal, this option still is not for everyone.  For larger webcasters, there is a minimum fee of 25% of total revenue, so companies with multiple lines of business will not want to opt into the deal.  For smaller webcasters, the fees are higher than under the Microcaster deal, including a $25,000 minimum yearly fee, and there are per performance rates that are charged when the webcaster offers services that are "syndicated," i.e. played through a website other than that of the webcaster itself.  So electing this deal is right only for larger "small pureplay" webcasters who have revenues over $250,000 (where they will be paying royalties in excess of the $25,000 minimum fee under any deal) and those entities nearing the audience caps of the Microcaster deal.  Nevertheless, for those webcasters who fit within the constraints of the deal, it offers benefits over the other existing options.  The opt-in date set by the deal is August 17, 2009.  The forms to opt into the the Small Pureplay webcasters agreement are here.  The forms for larger Pureplay webcasters are here. 

Note that this is just one of many options available to webcasters, each tailored to webcasters of specific types.  Noncommercial webcasters associated with NPR or the Corporation for Public Broadcasting have their own deal, where essentially CPB pays the royalties.  See our description of this deal, here.  Streaming done by broadcasters, who would not want to take the "pureplay" deal as their broadcast revenues would be subject to the royalties, have their own settlement agreement, which we described here and here, setting out per performance rates different than those arrived at by the CRB.  Small commercial webcasters can elect the "Microcaster" deal, which we described here.  And for those entities that don't fit under any of these categories, they will have to pay the CRB rates, which we described here and here.  The Radio and Internet Newsletter recently ran a good, basic summary of these alternatives, here.  Note that there still is another two week period where, under the Webcaster Settlement Act of 2009, agreements can be reached with SoundExchange by other webcaster groups to potentially pay rates that are different from any of those agreed to so far.

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The US Court of Appeals for the District of Columbia today released its decision for the most part rejecting the appeals of webcasters of the 2007 decision of the Copyright Royalty Board setting Internet Radio royalty rates for the use of sound recordings.  The Court generally upheld the Board's decision, finding that the issues raised by the appealing parties did not show that the decision was "arbitrary and capricious" - a high standard of judicial review that the Courts accord when reviewing supposedly "expert" administrative agency decisions.  On only one issue did the Court have concerns with the CRB's decision - that being the question of the $500 per channel minimum fees that it had required that webcasters pay.  The Court found that per channel fee, which could result in astronomical fees for some webcasters regardless of their listenership, was not supported by the record evidence, and remanded that aspect of the case to the CRB for further consideration.

The Court surprised some observers by not reaching the constitutional issue of whether the Copyright Royalty Judges were properly appointed.  As we wrote before (see our posts here and here), issues were raised by appellant Royalty Logic, contending that these Judges should be appointed by the President, and not by the Librarian of Congress.  In the recent Court decision on the CRB rates for satellite radio, where the issue had not even been raised, one Judge nevertheless wrote that he questioned the constitutionality of the CRB.  The Court here decided not to decide the issue - finding that it had been raised too late by Royalty Logic, and raised too many fundamental issues (including whether the Register of Copyrights should herself be appointed by the President, potentially invalidating many copyrights) to be decided on the minimal briefing accorded it by the parties.

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The US Court of Appeals for the District of Columbia Circuit today issued a decision basically upholding the royalty rates set by the Copyright Royalty Board due under Section 114 of the Copyright Act by satellite radio operators for the public performance of sound recordings.  The CRB decision, setting royalties for the years of 2007 to 2012, established rates that grew from 6% to 8% over the six year term. As we explained in our post, here, the Board looked at the the public interest factors set out by Section 801(b) of the Copyright Act, factors not applicable to Internet Radio royalties, in reaching the determination these royalties.  Particularly important was the factor which took into account the potential impact of the royalties on the stability of the businesses that would be subject to the royalty, resulting in a reduction of the perceived fair market value of the royalty from what the board determined to be about 13% of gross revenues to the 6-8% final royalty set by the Board.  The Court upheld the Board's reasoning, rejecting SoundExchange's challenge to the decision, though the Court did remand the case to the Board to decide the proper allocation of the royalty to the ephemeral rights covered by Section 112 of the Copyright Act.

What was perhaps most interesting about the Court's decision was the concurring opinion of one of the three Judges, who stated that the fact that the Board's judges were appointed by the Librarian of Congress, and not by the President, "raises a serious constitutional issue."   This was the same issue raised by Royalty Logic in challenging the constitutionality of the CRB in the webcasting proceeding (see our posts here and here).  The Judge concurred in the majority decision as none of the parties to the satellite radio case raised the constitutional issue, but this very question was squarely raised in the webcasting proceeding, and thus may well be resolved in the decision on that appeal.

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A settlement under the Webcaster Settlement Act of 2009 was signed today by SoundExchange and a group of webcasters that I represented in the Copyright Royalty Board proceeding to determine the royalty rates for the use of sound recordings by Internet Radio stations for the period from 2006-2010. This agreement is for “pureplay” webcasters, i.e. those that are willing to include their entire gross revenue in a percentage of revenue calculation to determine their royalties. As permitted under the terms of the WSA, this agreement not only reaches back to set rates different, and substantially lower, than those that were arrived at by the CRB for the period from 2006-2010, but also resolves the rates for 2011-2015, relieving webcasters who join the deal from having to litigate another CRB proceeding to set the rates for those years. 

While no deal arrived at under the circumstances in which these webcasters found themselves (a CRB decision that did not set any percentage of revenue royalty rate and would seemingly put these webcasters out of business, the prospect of a new CRB proceeding that would costs significant sums to litigate with no guarantee of success, and with the only other current option being the “microcasters” deal unilaterally advanced by SoundExchange that severely limited the amount of streaming that a webcaster could do and imposed significant “recapture provisions” in the event of a sale of the webcaster's business) may not be ideal, the settlement does provide significant benefits over any other existing option for any webcaster who qualifies under its provisions. These deal points are set out below.

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The US Senate yesterday passed the Webcaster Settlement Act of 2009, following House passage 10 days ago.  Once the Act receives the signature of President Obama, the law will go into effect, and give webcasting groups and the recording industry 30 days to reach a settlement (or settlements) on Internet radio music royalties for the use of sound recordings.  While the parties did not need the Act to reach settlements for the period of 2011-2015, which is subject to a new royalty proceeding which is now in its early stages, the WSA extension was necessary to cover royalties for the period of 2006-2010, which are covered by the Copyright Royalty Board decision released in 2007.  Without this extension, the rates in effect under the CRB decision (or the rates agreed to under settlements with broadcasters, certain very small webcasters and NPR, and announced earlier this year as authorized by the Webcaster Settlement Act of 2008 ) would have to be paid for that period absent a successful outcome of the currently pending appeal. 

Several groups which participated in the last CRB proceeding have yet to reach settlements, including the "Small Commercial Webcasters" (the independent pureplay webcasting companies), the large webcasters associated with the Digital Media Association, and noncommercial webcasting groups not affiliated with NPR.  In the only statement made on the floor of the Senate before the unanimous approval of the Act, Senator Leahy, the Chair of the Judiciary Committee, cited the controversy over the rates set by the CRB decision, and stated that it was preferable that the parties involved in the case reach an agreement rather than having new rates imposed by the government (see his statement here).  With the passage of this act, the parties now have that opportunity to reach a settlement of the royalties reaching back to 2006. We will see what settlements are announced during the upcoming 30 day period.

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In recent months, SESAC has been writing letters to broadcasters who are streaming their signals on the Internet, asking for royalties for the performance of SESAC music on their websites.  More than one broadcaster has asked me why they have any obligation to SESAC when they are already paying SoundExchange for the music that they stream.  In fact, SoundExchange and SESAC are paid for different rights, and thus the payments to SoundExchange have no impact on the obligations that are owed to SESAC.  SESAC, along with ASCAP and BMI, represent the composers of music in collecting royalties for the public performance of their compositions.  SoundExchange, on the other hand, represents the performers of the music (and the copyright holders in those performances - usually the record companies).  In the online digital world, the SoundExchange fees cover the public performance of these recordings by particular performers (referred to as "sound recordings").  For an Internet radio company, or the online stream of a terrestrial radio station, payments must be made for both the composition and the sound recording. 

To illustrate the difference between the two rights, let's look at an example.  On a CD released a few years ago, singer Madeleine Peyroux did a cover version of the Bob Dylan song "You're Gonna Make Me Lonesome When You Go."  For that song, the public performance of the composition (i.e. Dylan's words and music) is licensed through SESAC.  The actual "sound recording" of Peyroux's version of the song would be licensed through SoundExchange, with the royalties being split between Peyroux and her record label (with backing singers and musicians receiving a small share of the SoundExchange royalty). 

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The House of Representatives Judiciary Committee today approved a bill that would impose, for the first time, a royalty on radio broadcasters for the public performance of sound recordings in their over-the-air broadcasts.  if this bill were to be adopted by the full House of Representatives and the Senate, and signed by the President, broadcasters would have to pay for the use of sound recordings (the actual recording of a song by a particular musical artist) in addition to the royalties that they already pay to ASCAP, BMI and SESAC for the public performance of the underlying musical composition.  While, from the discussion at the hearing today, the bill is much amended from the original bill (about which we wrote, here) to try to address some of the issue that have been raised by critics, the Committee made clear that there were still issues that needed to be addressed - preferably through negotiations between broadcasters and the recording industry - before the bill would move on to the full House for consideration.  It was, as Representative Shelia Jackson Lee of Texas stated, still a "work in progress."  In fact, the Committee asked that the General Accounting Office conduct an expedited study of the impact of this legislation on radio and on musicians - but it did not wait for that study before approving the bill - despite requests from some royalty opponents that it do so. 

While I have not yet seen a copy of the amended bill that Congressman John Conyers, the Chairman of the Committee, said had been completed only a few hours before the hearing, the statements made at the hearing set out some details of the changes made to the original version of the bill.  First, changes were made to reduce the impact on small broadcasters - reducing royalties to as little as $500 for stations that make less than $100,000 in yearly gross revenues.  Interestingly, Representative Zoe Lofgren pointed out that, in a bill that means to address the perceived inequality in royalties, a small webcaster with $100,000 in revenues would be paying $10,000 in royalties - 20 times what is proposed for the small broadcaster.  And the small broadcaster who would pay $5000 for revenues up to $1.25 million in revenue would be paying 1/30th of the amount paid by a small webcaster making that same amount of revenue.

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We recently wrote about the agreements between SoundExchange and various groups of webcasters, which became effective under the terms of the Webcasters Settlement Act.  These rates act as a substitute for the rates set by the 2007 Copyright Royalty Board decision  setting Internet radio royalties for the use of sound recordings in the period from 2006-2010.  The deal with broadcasters set lower rates than the CRB for 2009 and 2010, and also waived certain requirements otherwise applicable to webcasters, limiting the number of songs from the same artist that can be played in a given period of time (see our posts here and here).  There is also a deal that SoundExchange unilaterally advanced to certain small webcasters which allows for a percentage of revenue royalty, but limits the amount of listening to these webcasters allowed at these rates, and imposes significant recapture fees if a webcaster sells its service to another company that would not qualify as a small webcaster (see our post here).  April 30 is an important date under both deals, as it is the date by which small webcasters must elect the deal, and the date by which all broadcasters who elected the broadcaster deal earlier this month are to pay any back royalties which they owe for streaming from 2006 through the date of the agreement.

In talking to Internet radio operators, both broadcasters and small webcasters, many seem to be unaware of the records that need to be maintained to remain in compliance with the requirements of the deals.  Both the small webcasters agreement and the NAB-SoundExchange settlement require "full census" reporting of  all songs played by the service, which will include information for every song - including the name of the song that was played, the featured artist who performed the song, the album on which the song appeared, and the label on which the album was released.  In addition, the webcaster must report on the number of times each song was played, and how many people heard each transmission of the song.  Only very small broadcasters and "microcasters" under the small commercial webcaster deal, are totally exempt from these requirements.  Under their deal, broadcasters need not provide all the information for up to 20% of their programming, but this percentage of the broadcast week that can avoid full reporting will shrink every year (see our post here for details).

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In January, the Copyright Royalty Board asked for comments as to whether it should require "census reporting" of all sound recordings that are used by a digital service subject to the statutory royalty.  This would replace the current requirement that services need only report on the sound recordings used for two weeks every calender quarter.  Most of the comments that were filed dealt with the difficulties of certain classes of webcasters - particularly small webcasters and certain broadcasters - in keeping full census reports of every song that is played by a service, and how many people heard each song.  In a Notice of Inquiry published in the Federal Register today, the CRB asked for further information about the cost and difficulties of such reporting.  Comments on the Notice are due on May 26, 2009, and replies on June 8.

The real issues, as identified by the CRB, were raised by smaller entities that argued that they do not have the ability to track performances.  Especially problematic are stations that have on-air announcers who pick the music that they want to play in real time, and don't run their programming through any sort of automation system or music scheduling software.  Live DJs playing music that they want is a hallmark of college radio, but one that creates problems for tracking performances.  How can a DJ's on-the-fly selection of music be converted to the nice, neat computer spreadsheets required by SoundExchange for the Reports of Use of music played?

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The week, Congressman Rick Boucher, a member of both the House of Representatives Commerce and Judiciary Committees, told an audience of broadcasters at the NAB Leadership Conference that they should accept that there will be a performance royalty for sound recordings used in their over-the-air programming and negotiate with the record companies about the amount of a such a royalty.  He suggested that broadcasters negotiate a deal on over-the-air royalties, and get a discount on Internet radio royalties.  Sound recordings are the recordings by a particular recording artist of a particular song.  These royalties would be in addition to the payments to the composers of the music that are already made by broadcasters through the royalties collected by ASCAP, BMI and SESAC.   Congressman Boucher heads the Commerce Committee subcommittee in charge of broadcast regulation, and he has been sympathetic to the concerns of Internet radio operators who have complained about the high royalty rates for the use of sound recordings.  Having the Congressman acknowledge that broadcasters needed to cut a deal demonstrated how seriously this issue is really being considered on Capitol Hill.

The NAB was quick to respond, issuing a press release, highlighting Congressional opposition to the Performance royalty (or performance tax as the NAB calls it) that has been shown by support for the Local Radio Freedom Act - an anti-performance royalty resolution that currently has over 150 Congressional supporters.  The press release also highlights the promotional benefits of radio airplay for musicians, citing many musicians who have thanked radio for launching and promoting their careers.   The controversy was also discussed in an article on Bloomberg.com.  In the article, the central issue of the whole controversy was highlighted.  If adopted, how much would the royalty be?  I was quoted on how the royalty could be very high for the industry (as we've written here, using past precedent, the royalty could exceed 20% of revenue for large music-intensive stations).  An RIAA spokesman responded by saying that broadcasters were being alarmists, and the royalty would be "reasonable."  But would it?

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As we have written, by April 2, broadcasters who are streaming need to file with SoundExchange a written election in order to take advantage of the SoundExchange-NAB settlement.  For broadcasters who make the election, the settlement agreement will set Internet radio royalty rates through 2015.  One aspect of this agreement that has not received much attention is the waiver from the major record labels of certain aspects of the performance complement that dictates how webcasters can use music and remain within the limits of the statutory license.  When Section 114 of the Copyright Act, the section that created the performance royalty in sound recordings, was first written in the 1990s, there were limits placed on the number of songs from the same CD that could be played in a row, or within a three hour period, as well as limits on the pre-announcing of when songs were played.  These limits were placed seemingly to make it more difficult for listeners to copy songs, or for Internet radio stations to become a substitute for music sales.  In conjunction with the NAB-SoundExchange settlement, certain aspects of these rules were waived by the 4 major record labels and by A2IM, the association representing most of the major independent labels.  These waivers which, for antitrust reasons, were entered into with each label independently, have not been published in the Federal Register or elsewhere.  But I have had the opportunity to review these agreements and, as broadcasters will get the benefit of the agreements, I can provide some information about the provisions of those agreements.

First, it is important to note that each of the 5 agreements is slightly different.  In particular, one has slightly more restrictive terms on a few issues.  To prevent having to review each song that a station is playing to determine which label it is on, and which restrictions apply, it seems to me that a station has to live up to the most restrictive of the terms.  In particular, the agreements generally provide for a waiver of the requirement that stations have in text, on their website, the name of the song, album and artist of a song that is being streamed, so that the listener can easily identify the song.  While most of the labels have agreed to waive that requirement for broadcasters - one label has agreed to waive only the requirement that the album name be identified in text - thus still requiring that the song and artist name be provided.  To me, no station is going to go to the trouble of providing that information for only the songs of one label - so effectively this sets the floor for identifying all songs played by the station and streamed on the Internet.

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With all the recent discussion of the NAB-SoundExchange settlement (see our post here) and the recent Court of Appeals argument on Copyright Royalty Board decision on Internet Radio royalties, we have not summarized the "settlement" that SoundExchange agreed to with a few very small webcasters.  That agreement would essentially extend through 2015 the terms that SoundExchange unilaterally offered to small webcasters in 2007, and make these terms a "statutory" rate that would be binding on all copyright holders.  The deal comes with caveats - that an entity accepting the offer would be prevented from continuing in any appeal of the 2006-2010 royalties and from assisting anyone who is challenging the rates in the CRB proceeding for rates for 2011-2015, even if the webcaster grows out of the rates and terms that SoundExchange proposes.  Once it signs the deal, it cannot have any role before the court or CRB in trying to shape the rates that his or her company would be subject to once they are no longer a small webcaster until after 2015.  Even with these caveats, the deal does provide the very small webcaster the right to pay royalties based on a percentage of their revenue, and even provides some recordkeeping relief to "microcasters", the smallest of the small webcasters.  Parties currently streaming and interested in taking this deal must elect it by April 30 by submitting to SoundExchange forms available on its website for "small webcasters" (here) and "microcasters" (here).

The Small Commercial Webcasters that I represented in the Copyright Royalty Board proceeding did not negotiate this deal.  In fact, no party who participated in the CRB case signed the "settlement", yet it has become a deal available to the industry under the terms of the Webcaster Settlement Act as SoundExchange and some webcasters agreed to it.  My clients have been arguing for a rate that allows their businesses to grow beyond the limits of $1.25 million in revenue and 5 million monthly aggregate tuning hours set forth in this agreement.  But for very small webcasters not interested or able to participate in regulatory efforts to change the rules, and who do not expect their businesses to grow significantly between now and 2015, this deal may provide some opportunities.  The webcaster pays 10% of all revenues that it receives up to $250,000, and 12% of revenues above that threshold up to $1.25 million.  If it exceeds the $1.25 million revenue threshold, it can continue to pay at the percentage of revenue rates for 6 months, and then it would transition to paying full per performance royalty rates as set out by the CRB.   A service would also have to pay for all streaming in excess of 5 million monthly ATH at full CRB rates.  Microcasters, defined as those who make less than $5000 annually and stream less than 18,067 ATH per year (essentially an audience averaging just over 2 concurrent listeners, 24 hours a day 7 days a week), need pay only $500 a year and, for an additional $100 a year, they can be exempted from all recordkeeping requirements.

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In the last 5 days, the US Court of Appeals in Washington, DC has held two oral arguments on appeals from decisions of the Copyright Royalty Board - one from the Board's decision on Internet Radio Royalties and the other on the royalties applicable to satellite radio.  The decisions were different in that, in the Internet Radio decision, the appellants (including the group known as the "Small Commercial Webcasters" that I represented in the case) challenged the Board's decision, arguing that the rates that were arrived at were too high.  In contrast, at the second argument, SoundExchange was the appellant, arguing that the Board's decision set royalties for satellite radio  that were too low.  But, in both arguments, an overriding question was whether the Judges on the CRB were constitutionally appointed and thus whether any decisions of the Board had any validity.  While the question was expected and specifically raised in the webcasting proceeding (see our post here when that issue was first raised), the discussion at the satellite radio argument was somewhat of a surprise, as the issue had not been raised by either party, and the Appeals Court judges were not even the same judges who had heard the Internet radio argument.  Yet one of the Judges raised the issue, unprompted by any party, by asking if the Copyright Royalty Judges were properly appointed and indirectly asking if their decision would have any validity if the constitutional issue was found to exist.

Will the Court decide the constitutionality issue, and what would it mean?  No one knows for sure.  One of the issues raised by the Court in the Internet radio case was whether the issue had been raised in a timely fashion.  In both cases, the possibility of requiring additional briefing on the issue was also raised by the Court, though no such briefing has been ordered - yet.  Even if the Court was to find that the Board was not properly appointed, there are questions as to whether the existing decisions should nevertheless be allowed to stand, while blocking new decisions until a new appointment scheme is found.  Alternatively, Congress might have to intervene to resolve the whole issue and, if it was to do that, would Congress simply ratify the current decision, or would there be new considerations that would affect any Congressional resolution?  The issue raises many questions, and we'll just have to wait to see what the resolution will be.

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We reported on the settlement under the Webcaster Settlement Act between the NAB and SoundExchange on Internet Radio Royalties. As provided in the Webcaster Settlement Act, that settlement has now been published in the Federal Register, and thus it is available for broadcasters who are streaming their signal on the Internet, or who are streaming other programming on the Internet, to claim coverage under that settlement. To do so, broadcasters who are already streaming must file a notice of Intent to Rely on this settlement, available here, with SoundExchange, by April 2, 2009 – thirty days after the Federal Register publication occurred. Broadcasters who are not now streaming, but who start in the future, must file the election notice within 30 days of the start of their streaming, or they will be bound by the rates established by the Copyright Royalty Board in their 2007 decision (see our post here). The publication sets out several other details of the settlement, set forth below.

The rates: The rates, which represent some savings under the CRB rate for the years between 2007 and 2011, are set forth below.  These rates are "per performance", meaning that the rate is paid on a per song, per listener basis.  If you play 10 songs in an hour, and each song is heard by 10 people, you have 100 performances.  There are companies that provide services to track and report on performances.  See our post, here, for details.  There are also limited exceptions to the full "per performance" reporting, summarized below.  The rates under this agreement are as follows:

 

2006 ...................................... $0.0008

2007 ...................................... 0.0011

2008 ...................................... 0.0014

2009 ...................................... 0.0015

2010 ...................................... 0.0016

2011 ...................................... 0.0017

2012 ...................................... 0.0020

2013 ...................................... 0.0022

2014 ...................................... 0.0023

   2015 ...................................... 0.0025

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While all the details are not out yet, the trade press has been filled with announcements this evening reporting that SoundExchange and the National Association of Broadcasters have reached a deal on Internet Radio Royalties.  This deal will apparently settle the royalty dispute between broadcasters and SoundExchange for royalties covering 2006-2010 which arose from the 2007 Copyright Royalty Board decision, as well as the upcoming proceeding for the royalties for 2011-2015.  According to the press reports, the royalties are slightly reduced from those decided by the CRB for the remainder of the current period, and continue to rise for the period 2011-2015 until they reach $.0025 per performance in 2015.  According to the press release issued by the parties, there was also an agreement between the NAB and the four major labels that would waive the limits on the use of music by broadcasters that are imposed by the Digital Millennium Copyright Act.

These limits, referred to as the performance complement, set out requirements on how many songs from the same artist or same CD can be played within given time periods which, if not observed, can disqualify a webcast from qualifying for the statutory license.  If a webcaster cannot rely on the statutory license, it would have to negotiate with each copyright holder for the rights to use the music that it plays.  The performance complement imposed requirements including:

• No preannouncing when a song will play
• No more than 3 songs in a row by the same artist
• Not more than 4 songs by same artist in a 3 hour period
• No more than 2 songs from same CD in a row
• Identify song, artist and CD title in writing on the website as the song is being played

It will be interesting to see the details of this agreement setting out what aspects of these rules are being waived.

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The oral argument on the Webcasting appeal of the March 2007 Copyright Royalty Board decision setting Internet radio sound recording royalty rates for 2006-2010 has now been set for March 19.  So, if no settlement under the Webcaster Settlement Act (about which we wrote here) is reached before the February 15 deadline set out in that act, the case will go on to the argument, though apparently without NPR, which benefits from the settlement that the Corporation for Public Broadcasting has reached with SoundExchange.  Even with a settlement with all of the webcasters, SoundExchange is still being challenged by Royalty Logic, which wants to be an alternative collection agency for music royalties, so the case will probably go forward.  Royalty Logic is the party which raised the issue of whether the Copyright Royalty Board was properly appointed under the Appointments Clause of the Constitution, an issue that looks to invalidate the entire CRB decision.  Even thought the Court's argument will be held in March, a final decision will likely not be released for several months after the argument.

The royalty case that resulted in the much lower royalties for Sirius XM is also scheduled for argument in March, the week after the webcasters case. That decision, about which we wrote here, was decided under the 801(b) standard, which takes into account not only the perceived economic value of the music (the "willing buyer, willing seller" standard used in the webcasting case), but also factors involving the public's interest in receiving music, and the impact on the industry that the royalties will have.  If these cases both go forward, after hearing them in short order, the US Court of Appeals will become the center of the digital music royalty world - at least for a short period of time.  Watch for more as these cases develop.

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The Corporation for Public Broadcasting and SoundExchange have reached an agreement on the Internet radio royalty rates applicable to stations funded by CPB.  While the actual agreement has not yet been made public, a summary has been released.  The deal will cover 450 public radio webcasters including CPB supported stations, NPR, NPR members, National Federation of Community Broadcasters members, American Public Media, the Public Radio Exchange, and Public Radio International stations.  All are covered by a flat fee payment of $1.85 million - apparently covering the full 5 years of the current royalty period, 2006-2010.  This deal is permitted as a result of the Webcaster Settlement Act (about which we wrote here), and will substitute for the rates decided by the Copyright Royalty Board back in 2007.

 The deal also requires that NPR drop its appeal of the CRB's 2007 decision which is currently pending before the US Court of Appeals in Washington DC (see summary here and here), though that appeal will continue on issues raised by the other parties to the case unless they, too, reach a settlement.  CPB is also required to report to SoundExchange on the music used by its members.  In some reports, the deal is described as being based on "consumption" of music, and implies that, if music use by covered stations increases, then the royalties will increase.  It is not clear if this increase means that there will be an adjustment to the one time payment made by CPB, or if the increase will simply lead to adjustments in future royalty periods. 

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The press was abuzz yesterday with the news that Julius Genachowski is apparently the pick of the Obama Administration for the position of FCC Chairman.  Mr. Genachowski was at the FCC during the Reed Hundt Administration, and has since worked in the private sector in the telecommunications industry, including work with Barry Diller and running a DC-based venture capital fund.  From the positive reactions that the appointment has received from all quarters, the choice would seem to be a great one.  But, in looking at some of the reactions, you have to question whether everyone has to be reading what they want to see into the new Commission.  For instance, while the NAB has praised the choice of Genachowski (stating  that he "has a keen intellect, a passion for public service, and a deep understanding of the important role that free and local broadcasting plays in American life"), so too did media-reform organization Free Press ("This moment calls for bold and immediate steps to spur competition, foster innovation and breathe new life into our communications sector. With his unique blend of business and governmental experience, Genachowski promises to provide the strong leadership we need.")  What will this appointment really mean for broadcasters?

In short - who knows?  When Kevin Martin was appointed Chairman of the FCC, few would have imagined that a former communications attorney, a person deeply involved in the Bush campaign, and a former staffer of FCC Commissioner Harold Furtchgott-Roth (perhaps the most free market Commissioner ever) would have supported sustained, wide-reaching inquiries into the underbrush of FCC regulation - e.g. localism, embedded advertising, indecency.  So we can't really know what a Chairman will do until he does it.  The Washington Post and the Wall Street Journal both suggest that the new chairman will be focused on Internet issues, and may be less interested in indecency - but who knows?

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2009 - a new year, and a whole new cycle of regulatory requirements.  We wrote last week about the potential for changes in regulations that may be forthcoming but, like death and taxes, there are certain regulatory dates each year that broadcasters need to note and certain deadlines that must be met.  Those dates are set out in our advisory - Important Dates For Broadcasters in 2009 - a calendar of the year's regulatory filings.  Dates include the deadlines for routine FCC filings - ownership reports, children's television reports, quarterly issues programs lists, EEO Public File reports, etc.  Dates for the payment of royalties for Internet radio streaming operations are also included, as well as the lowest unit rate windows for upcoming gubernatorial races in New Jersey and Virginia.  And the all-important DTV deadlines are also listed.  So, to keep track of your regulatory obligations, check out our broadcaster's calendar, here. 

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The Copyright Royalty Board today published a notice in the Federal Register announcing the start of its next proceeding to set the royalties to be paid by Internet radio operators for the performance rights to use "sound recordings" (a particular recording of a song as performed by a particular performer) pursuant to the statutory royalty.  As we've written extensively on this blog, the statutory royalty allows an Internet radio station to use any publicly released recording of a song without the permission of the copyright owner (usually the record company) or the artist who is recorded, as long as the station's owner pays the royalty - currently collected by SoundExchange.  In 2007, the Copyright Royalty Board set the royalties for 2006-2010, a decision which prompted much controversy and is still under appeal.  In the Notice released today, the CRB set February 4 as the deadline for filing a Petition to Participate in the proceeding to set the royalties for the next 5 year period.

The 2006-2010 royalties are currently the subject of negotiations as the parties to the last proceeding attempt to come to a voluntary settlement to set royalties that are different than those established by the CRB decision.  The Webcasting Settlement Act (which we summarized here) gives webcasters until February 15 to reach an agreement as to rates that would become an alternative to the rates that the CRB established.  The Act also permits parties to reach deals that are available not only for the 2006-2010 period, but also allows the deals to cover the period from 2011-2016.  Thus, theoretically, webcasters could all reach agreements with SoundExchange to establish rates that cover the next royalty period, obviating the need for the proceeding of which the CRB just gave notice.  But, as is so often the case, those settlements may not be reached (if they are) until the last minute - so parties may need to file their Petitions to Participate before they know whether a settlement has been achieved.

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Come the New Year, we all engage in speculation about what’s ahead in our chosen fields, so it’s time for us to look into our crystal ball to try to discern what Washington may have in store for broadcasters in 2009. With each new year, a new set of regulatory issues face the broadcaster from the powers-that-be in Washington. But this year, with a new Presidential administration, new chairs of the Congressional committees that regulate broadcasters, and with a new FCC on the way, the potential regulatory challenges may cause the broadcaster to look at the new year with more trepidation than usual. In a year when the digital television transition finally becomes a reality, and with a troubled economy and no election or Olympic dollars to ease the downturn, who wants to deal with new regulatory obstacles? Yet, there are potential changes that could affect virtually all phases of the broadcast operations for both radio and television stations – technical, programming, sales, and even the use of music – all of which may have a direct impact on a station’s bottom line that can’t be ignored. 

With the digital conversion, one would think that television broadcasters have all the technical issues that they need for 2009. But the FCC’s recent adoption of its “White Spaces” order, authorizing the operation of unlicensed wireless devices on the TV channels, insures that there will be other issues to watch. The White Spaces decision will likely be appealed. While the appeal is going on, the FCC will have to work on the details of the order’s implementation, including approving operators of the database that is supposed to list all the stations that the new wireless devices will have to protect, as well as “type accepting” the devices themselves, essentially certifying that the devices can do what their backers claim – knowing where they are through the use of geolocation technology, “sniffing” out signals to protect, and communicating with the database to avoid interference with local television, land mobile radio, and wireless microphone signals.

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 Just when you think that the year will come to a quiet end, something always seems to pop up.  Today, the Copyright Royalty Board announced a Notice of Proposed Rulemaking that would change the reporting requirements for services that pay royalties for the use of sound recordings to SoundExchange.  The proposed new rules would require that Reports of Use submitted by services relying on the statutory royalty contain "full census reporting" of all songs played by any service.  Services would include all users of music who pay royalties due under Sections 112 or 114 of the Copyright Act - including Internet Radio, satellite radio, digital cable radio, digitally transmitted business establishment services, and radio-like services delivered by other digital means, including deliveries to cell phones. This reporting requirement would replace the current system, about which we wrote here, that only requires reporting for two weeks each quarter.  Under the new rules, an Internet radio service would have to submit the name of every song that they play to SoundExchange, along with information as to how many times that song played, the name of the featured artist, and either the recording's ISRC code or both the album title and label.  Comments on this proposal are due by January 29.

Currently, the quarterly reports are filed electronically using an ASCII format and using either an Excel or Quattro Pro spreadsheet template as created by SoundExchange.  The Board asks for comments as to whether there are technological impediments to providing this information in this manner, and if other changes should be made to more easily facilitate the delivery of this information.  The Copyright Royalty Judges who make up the CRB expressed their opinion that the full census reporting is preferable to the limited information now provided, so that SoundExchange does not need to rely on estimates or projections to insure that all artists are fairly compensated when their works are played.  Using census reporting, all artists can be paid based on how often their songs are actually played.

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Yesterday, it was announced that CBS would be operating Yahoo's Launchcast Internet Radio operations.  This is ironic as the industry seems to have now come full circle, as Yahoo's Internet Radio operations include the interests that they received when they purchased Mark Cuban's Broadcast.com, which had a substantial part of its business in the streaming of terrestrial radio stations.  While Yahoo long ago stopped streaming the broadcast signals retransmitted by Broadcast.com, it is ironic that a traditional broadcast company has now taken much of the control of not only the Internet radio operations of Yahoo, but also those of AOL and Last.FM (see our post on the AOL deal here).  Explicitly blamed for Yahoo's decision to turn its Internet radio operations over to CBS was, according to press reports, its concerns over the Internet radio royalties as set by the Copyright Royalty Board last year, a decision about which we have written extensively.  How will this transaction affect the debate over those royalties?

Initially, this action once again shows that assumptions about the state of the Internet radio industry that colored the perception of the Copyright Royalty Judges in their determination of the royalty rates were incorrect.  While not explicitly part of the grounds of the CRB decision on the webcaster's royalty, there was much testimony in the CRB proceeding that suggested that Internet radio brought customers to portal sites, and that higher royalties were justified by the value that these visitors added to the portals when the listeners engaged in other activities at the portal.   Yet, that model now seems in tatters, as both AOL and Yahoo have turned their operations over to CBS.  This seems to emphatically demonstrate that the economics of Internet radio operations, whether stand-alone or as part of portals, simply do not justify the royalties that were imposed (see our discussion of the Pandora economic and the royalties here).

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The Webcaster Settlement Act, about which we write here, has been signed into law by President Bush, giving parties to the Internet Radio royalty dispute until February 15 to enter into a settlement and have it become effective, without the need for any public comment or any further government approvals.  Several recent articles have indicated that a settlement is close - for at least some of the webcasters.  In several recent statements, Tim Westergrin of Pandora has indicated that the webcasters in DiMA (the Digital Media Association), in their negotiations with SoundExchange and the record labels, were getting very close to results.  At a the Digital Music Conference held in Los Angeles last month, Jon Potter, the President of DiMA, seemed to echo that sentiment.  However, neither could state with absolute certainty when the deal would come, or what its terms would be, though in Westergrin's comments at that conference, available here, he stated that webcasters probably would not be happy with the likely outcome of the settlement, implying that there would be a high rate that would be agreed to by the parties, though it would be one less than what the Copyright Royalty Board ordered (and one which would allow companies like his to survive).  However, he indicated that perhaps not all webcasters would be able to survive at the rate being discussed, and some might have to try to enter into their own agreements to fit other types of webcast operations.  In fact, the Webcasters Settlement Act is not limited to a single settlement, so various other parties who participated in the CRB proceeding - including broadcasters who stream their signals online, small commercial webcasters, and NPR and other noncommercial groups - could negotiate settlements as well, though there have not been any recent public statements that these negotiations were close to bearing fruit.

At a panel that I moderated at the CMJ Music Marathon later in October, which included a SoundExchange representative and a member of its Board, there was a suggestion that further settlements with groups other than DiMA might follow if and when the deal with the large webcasters is concluded.  This approach may make some sense as the copyright holders don't want any deals that they cut with small webcasters or noncommercial parties that could affect their negotiations with larger webcasters, from whom the vast bulk of their revenues are derived.  Copyright holders naturally want to address the interests that will be the most lucrative.  However, this approach does put smaller parties, who are often most worried about potential liabilities and most sensitive to uncertainty, into a very uncomfortable position. As we've written before, the statutory license that is administered by SoundExchange was granted by Congress at least partially to make access to music possible, especially to smaller parties with little bargaining power and little ability to cut deals with thousands of copyright holders, which would be required without this license.  Yet these are the parties most in need of relief from the rates imposed by the Copyright Royalty Board, so we hope that the talks of future settlements in fact are accurate.

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We’ve previously written about the value of music in connection with the royalties to be paid by Internet Radio and the performance royalty (or "performance tax" as it's labeled by the NAB) proposed for broadcasters. One of the questions that has always been raised in any debate about royalties, and one often dismissed by the record industry, is to what extent is there a promotional value of having music played on the radio or streamed by a webcaster.  In discussions of the broadcast performance royalty, record company representatives have suggested that, whether or not there is promotional value of the broadcast of music, that should have no impact on whether the royalty is paid. Instead, argue the record companies, the creator of music deserves to be paid whether or not there is some promotional value. The analogy is often made to sports teams – that the teams get promotional value by having their games broadcast but are nevertheless paid by stations for the rights to such games. The argument is that music should be no different. That contention, that the artist deserves to be paid whether or not there is promotional value may be tested in connection with what was once thought to be an unlikely source of promotional value for music – the video game Guitar Hero.

Guitar Hero, in its various versions released over the last few years, has proven to be a very effective tool for the promotion of music – with various classic rock bands experiencing significant sales growth whenever their songs are featured on a new version of the game. The use of a sound recording in a video game is not subject to any sort of statutory royalty – the game maker must receive a license negotiated with the copyright holder of the recording – usually the record company.  In previous editions of the game, Guitar Hero has paid for music rights. However, now that the game has proved its value in promoting the sale of music, the head of Activision, the company that owns the game, has suggested in a Wall Street Journal interview that it should be the record companies that are paying him to include the music in the game – and no doubt many artists would gladly do so for the promotional value they realize from the game. 

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Both the House and the Senate have now approved the Webcaster Settlement Act of 2008, which will become law when it is signed by the President. Just what does this bill do? It does not announce a settlement of the contentious Internet Radio royalty dispute, about which we have extensively written here. It does not change the standard for judging Internet radio royalties, as had been proposed in the Internet Radio Equality Act, introduced last year and now seemingly dead in the waning days of this Congress, and in the Perform Act, about which we wrote here (the IREA and the Perform Act proposed different standards – the first more favorable to webcasters and the second more favorable to SoundExchange). These issues will seemingly be left to be disputed in a future Congress. Instead, the Webcaster Settlement Act seems to only adopt a simplified process for the approval of settlements that may be reached by the parties on or before February 15, 2009 – a settlement process that had been previously used in the Small Webcaster Settlement Act (the language of which this bill amends).

What is the significance of these new settlement processes? Under current law, any settlement between any group of webcasters and SoundExchange could only be binding on the entire universe of sound recording copyright holders if that settlement was approved by the Copyright Royalty Board. If an agreement is not binding on all copyright holders, then the reason for the statutory royalty - being able to pay one entity and get access to all the music in the world - would not be met.  The current procedures for approving settlements seem to contemplate such settlements only before a decision on royalties is reached by the CRB.   While some have speculated that the Court of Appeals that is currently considering the CRB appeal could remand the case to the CRB to effectuate a settlement and force the CRB to address it, that is by no means certain. For instance, the large webcasters, through their organization DiMA, reached a settlement with SoundExchange to cap minimum fees at $50,000 per webcaster. In their briefs filed with the Court of Appeals, both DiMA and SoundExchange have asked the Court to remand that aspect of the case to the CRB for adoption – yet that request has been opposed by the Department of Justice acting on behalf of the CRB. Thus, voluntary settlements may not be easy to obtain.

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Today, the National Music Publishers Association ("NMPA"), DiMA, the RIAA and other music publishing groups issued a press release announcing a settlement of certain aspects of the current Copyright Royalty Board proceeding to determine the royalties due under Section 115 of the Copyright Act for the mechanical royalty for the reproduction and distribution of the musical work (i.e. the composition - the words and music of a song).  According to the Press Release issued by the parties, this agreement covers interactive streaming and limited-time downloads, setting a royalty of 10.5% of revenue, less any amounts due for performance royalties (to ASCAP, BMI and SESAC, which also reimburse composers of music).  While many press reports (at least some of which have already been pulled) have concluded that this is a settlement of the Internet Radio royalties proceeding - that is wrong.  The Internet radio royalty proceeding involves Section 114, not Section 115, of the Copyright Act.  Section 114 deals with a royalty paid to the performers, not the composers.  Section 114 compensates performers and the copyright holders in the performance for the public performance of their works, not for the mechanical royalty for reproduction and distribution covered by Section 115.  And Section 114 covers non-interactive streaming - where users cannot dictate the songs that they want to hear - unlike the services, on-demand streams and limited time downloads, involved in this settlement which allow users to select the songs that they want to hear.  So don't believe what you read - the Internet radio royalties are still very much a subject of dispute, and services like Pandora are not yet saved by any sort of settlement. 

According to the press release, the one benefit to Internet radio under this agreement is that the parties conclude that there is no royalty due to the music publishers for any copies made in the transmission of non-interactive streaming.  The Copyright Office recently began a proceeding to ask if such royalties were due (about which we wrote here).  So, even  were the Copyright Office to determine that there was a Digital Phonorecord Delivery (a "DPD") made during the Internet radio streaming process, at least for the length of this agreement (assuming that it is approved by the Copyright Royalty Board), no royalty will be assessed.  We will write more about this settlement once we have seen the full terms - but wanted to post this notice to alert readers that, contrary to press reports, the Internet Radio proceeding has not been settled. 

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In a recent article in Silicon Valley Insider, TargetSpot's CEO, Doug Perlson, suggests that the financial savior of Internet Radio might be payola - taking money from record companies or artists to play their songs.  Putting aside any issues of the financial benefits of such a plan, and the creative and aesthetic issues that pay for play may raise, and since this is a blog written by lawyers, we'll deal with the legal implications.  And as lawyers, we're forced to play the spoilsport.  As set forth below, such a scheme can be done legally (just as it could be on terrestrial radio with the proper disclosures).  But, while there has been no legal enforcement of such activities, careful Internet radio operators would best be advised to be careful about just taking the money and playing songs, but instead should make some disclosure of the nature of the service that they are providing.

The payola statute, 47 USC Section 508, applies to radio stations and their employees, so by its terms it does not apply to Internet radio (at least to the extent that Internet Radio is not transmitted by radio waves - we'll ignore questions of whether Internet radio transmitted by wi-fi, WiMax or cellular technology might be considered a "radio" service for purposes of this statute).  But that does not end the inquiry.  Note that neither the prosecutions brought by Eliot Spitzer in New York state a few years ago nor the prosecution of legendary disc jockey Alan Fried in the 1950s were brought under the payola statute.  Instead, both were based on state law commercial bribery statutes on the theory that improper payments were being received for a commercial advantage.  Such statutes are in no way limited to radio, but can apply to any business.  Thus, Internet radio stations would need to be concerned.

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The Washington Post today ran an article on the continuing Internet radio royalty battle - highlighting the service Pandora and the fact that it will likely go out of business if the current dispute about royalties is not resolved.  We wrote (here and here) about many of these same issues in our coverage of the recent Senate Judiciary Committee hearings.  What is notable about the article is its mention of settlement discussions that are being conducted under the supervision of Congressman Berman of the House Judiciary Committee.  But the article also makes clear that the disconnect continues between the perception of the recording industry and of the Internet radio industry on the revenue potential of Internet radio.  The differing perception continues to make settlement difficult, as the recording industry keeps complaining that the industry has not done enough to monetize their operations - and the Internet radio companies express frustration at that attitude.  If there was some way of making more money from Internet radio operations, doesn't the recording industry think that the webcasters would take advantage of those practices?  Why would they leave money on the table if they could figure out a way to make it?  If they could make money, they would - though the recording industry seems not to believe it.

The other issue that the article overlooks is that the settlement discussions that are going on are apparently the same settlement discussions referenced at the Senate Judiciary Committee hearing - those between the recording industry and the large webcasters.  But there are many other groups involved in webcasting - the small commercial webcasters that I have worked with in the Copyright Royalty Board proceeding, the broadcasters who also stream their programs, and noncommercial webcasters (including NPR affiliates, religious broadcasters and other noncommercial entities).  There is no discussion in the article of any talks with them and, as set out in the written testimony at the Judiciary Committee of Kurt Hanson of Accuradio, the small commercial webcasters have heard nothing from SoundExchange in months.  A resolution by the large webcasters, unless it is all encompassing and on terms that all parties can live with (which seems unlikely given the diverse interests involved), will not resolve the dispute over the CRB decision.  So the battle continues.

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The Copyright Office today issued an Order extending the dates for comments on the Notice of Proposed Rulemaking to determine if, in addition to royalties to ASCAP, BMI and SESAC for the public performance of a musical composition, a royalty is also be due for reproductions of the composition made by real-time webcasting such as Internet radio.  Comments are now due on Thursday, August 28, and Replies on Monday, September 15.  This proceeding, about which we wrote here, is to determine if the statutory royalty of Section 115, dealing with the creation of Digital Phonographic Deliveries ("DPD") is implicated by the RAM and buffer copies made by real-time streaming.  The Order also announces that the Copyright Office will hold a hearing on the issue on September 19.

The Order states that the principal reason for the extension was the very recent decision of the US Court of Appeals for the Second Circuit in the case Cartoon Network v. CSC Holdings, finding that Cablevision's proposal for a "remote DVR," providing the same services as a DVR but located at the cable headend, did not infringe on the program producers' copyrights.  That decision addressed many of the same issues raised by the Copyright Office in its NPRM as to whether "copies" are made, for purposes of Copyright Laws, by RAM and buffer copies.  The Second Circuit essentially determined that no copies are made as there is no "fixation" of copies in the RAM and buffers, essentially the opposite conclusion reached by the Copyright Office in its NPRM in this proceeding.  If fixed copies are made, then a Copyright holder has the right to receive royalties for the reproduction of its copyrighted work.  The seemingly contradictory conclusions of the Second Circuit and the Copyright Office demonstrate the complexity of issues in Copyright law, and we will no doubt see many further proceedings before this issue is finally resolved.

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Last week, we wrote about one issue that was addressed at last week's Senate Judiciary Committee hearing on music royalties - the standards used to derive the royalties, and expressed hope that there was at least some interest in compromise on behalf of the Senators and industry representatives.  However, another issue which came out of those hearings suggests that compromise may not be so easy if the parties really believe what they say - as there is a fundamental distinction in both how the parties view the health of the Internet radio business, and how they view the relationship between royalties and the music business generally.  One can only hope that the gulf that was evident was just due to public posturing as, if it was not, there may well be an insurmountable differences between the parties that cannot be bridged in any settlement negotiations over the royalties that Internet radio pays for the use of sound recordings.

The gap became evident from the opening statements of the first panel - comprised of two Senators interested in the issue- Senator Wyden on behalf of the Internet Radio Equality Act stating that it was necessary to avoid having the high royalties decided by the Copyright Royalty Board destroy a fledgling technology, while Senator Corker of Tennessee talked about the importance of music to radio and the exhaustive process that the CRB had gone through in arriving at the royalties that it approved.  But in the day's principal panel, the issues became crystal clear, as John Simson of SoundExchange talked about the "vibrant" business of Internet radio, citing an analyst's report that Internet radio would be a $20 billion advertising market by 2020, and the statement of an employee of CBS that Internet radio was a great business and that CBS was going to "own it."  Speaking next, Joe Kennedy, CEO of Internet radio company Pandora had a dramatically different perspective - talking about an industry analyst who stated that the royalties that would result from the CRB royalties would exceed the revenue of the Internet Radio industry, and that, for Pandora, the failure to find a compromise solution to the CRB-imposed royalties would mean that his service would "die."  He pointed to Pandora's position as the largest of the Internet radio companies in terms of listenership, the $25 million in revenue that it expects to make this year, and how $18,000,000 of that would go just to the SoundExchange royalties - 75% of its revenue to this one expense. 

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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 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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Once again, the extension of the sound recording performance royalty to broadcasters has become a hot topic in Washington. The subcommittee on Courts, the Internet and Intellectual Property of the  House Judiciary Committee yesterday approved the bill introduced by Congressman Berman (about which we first reported here).  That bill would include broadcasters in the Section 114 sound recoding royalty currently applicable to digital music users including Internet radio, satellite radio and cable radio. Under the bill, the Copyright Royalty Board would be charged with the responsibility of determining what a royalty would be using the "willing buyer, willing seller" standard. Following this subcommittee approval, the bill would next be considered by the full committee. To become law, the Committee and the full House of Representatives would have to approve it, and similar legislation would need to be enacted by the Senate. As the NAB has garnered the support of a majority of the members of the House on a non-binding resolution opposing the imposition of the royalty on broadcasters, and as there is not much time remaining in the legislative session before the election and the end of this Congress, the whole process may well have to start fresh in 2009 (bills have to be reintroduced after the end of each two-year Congressional session). Yet, with all of the controversy over the issue in recent weeks, it appears certain that the issue will arise again, so it is important to look at some of the recent action.

Two weeks ago, the House subcommittee held a hearing on the issue. Prior to the hearing, the MusicFirst Coalition (principally supported by the RIAA and the affiliated record companies as 50% of any royalty goes to the copyright holders who are usually the labels) had Nancy Sinatra and the Nitty Gritty Dirt Band making the rounds on Capitol Hill in support of the royalty. These appearances follow the precedent set in earlier Capitol Hill proceedings, where the Coalition has brought in niche or oldies artists to address Congress - not major popular current acts. The artists who have testified (who have included Judy Collins, Sam Moore, Lyle Lovett, and Alice Peacock) have argued that the additional income that they would receive from a performance royalty would supplement their incomes which, in some cases, has either never been great or has declined as the demand or ability to tour has declined. The argument is always made that the royalty will encourage musicians to produce their music – though it is rarely if ever claimed that music wouldn’t be made if the royalty is not adopted, as songs have been written and sung for time immemorial, well before any royalty existed, merely for the pleasure or to fulfill the need for self-expression. The question is not one of ensuring the availability of music, but instead it is one about who should get how much of whatever money is made, directly or indirectly, from the use of that music. 

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We recently wrote about the challenge to appointment of the Copyright Royalty Board's judges filed by Royalty Logic as part of the appeal of the Board's decision on Internet Radio royalties.  Royalty Logic argued that the appointment of the Copyright Royalty Judges was improper, as the Librarian of Congress was not the "head of a department" who can appoint lesser government officials under the Appointments Clause of the Constitution.  Thus, Royalty Logic contends that the decision reached by the Board as to Internet radio royalties was a nullity, as the Board effectively does not legally exist.  Earlier this week, the Board and SoundExchange filed their replies to the Royalty Logic motion, arguing that, in fact, the Librarian is the head of a department, as he is appointed by the President and approved by Congress and runs a government "department," i.e. the Library of Congress, of which the Copyright Office is a part.  In demonstrating that the Library is a department, the briefs reach back to the creation of the Library by Thomas Jefferson, and look at the legislative history of legislation modifying the powers of the Library and the process for the appointment of the Librarian - legislation passed in 1870 and 1897.  Essentially, the very technical argument about why the Board was not properly constituted was met with an equally technical one that says it was properly formed.  Clearly, arguments only lawyers could love.

While Royalty Logic will have the opportunity to respond, the litigation process continues on the main portion of the appeal, as SoundExchange filed its intervenor's brief the week before last, defending the decision of the Copyright Royalty Board.  In one notable departure, SoundExchange, while contending that the Board was correct in determining the minimum fees that would be required of webcasters, it said that, because of the agreement that it reached with certain webcasters that would cap minimum fees at $50,000  no matter how many channels a service might have (see our discussion of the agreement here), it asked that the Court remand that one limited matter back to the Board for adoption of the limitation on minimum fees so that it would apply to all webcasters and not just those who signed the agreement.  In all other respects, SoundExchange opposed the briefs of the webcasters.

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The appeals of last year's Copyright Royalty Board decision on the royalties paid for the use of sound recordings by Internet radio stations continue on, and one recent filing raises interesting questions of whether or not the CRB was properly appointed.  Last week, the Department of Justice, which represents the CRB in defending its decision in the Court of Appeals, filed its brief in opposition to the briefs of the webcasters, which we summarized here.  The DOJ brief essentially argued that the webcasters' briefs were insufficient to satisfy the requirement for a successful appeal - that the CRB decision was arbitrary and capricious or otherwise contrary to law.  Essentially, a Court need not revisit the decision and substitute its judgment as to whether the it believes that the decision was correct, but instead, to overturn a decision, the Court must find that the CRB (the expert agency) either violated the law or could not, on the fact, have logically come up with the decision that it did.  Thus, the DOJ brief made arguments that there was enough factual evidence for the CRB to decide in the way that it did, and made arguments that the webcasters had not offered contrary arguments or evidence on certain points during the CRB proceeding and were therefore barred from raising those arguments now.  Just before the DOJ brief was filed, another pleading raised the fundamental question of whether the Copyright Royalty Board was properly appointed and, if not, whether it has the constitutional authority to decide the cases that it has been considering.

This new argument about the CRB’s authority comes in a request filed with the Court of Appeals by Royalty Logic, a party to the CRB proceeding.  Royalty Logic is not a webcaster, but instead is seeking to be an alternative collection agency to SoundExchange.  Its pleading seeks supplemental briefing on the question of whether the Copyright Royalty Judges are “inferior officers” of the Federal government who, under the Constitution, can only be appointed by the President, by the Courts or by the head of a Department of the government. In a recent Supreme Court case, the Court found that certain tax court judges, who were appointed by a chief judge and not by a cabinet-level officer (the head of a “department”) violated this Appointments Clause of the Constitution. There has been much press coverage in the past few weeks as to whether this decision also applies to patent judges, and whether it could invalidate hundreds of patents approved by these judges (see the NY Times article on this issue, and listen to an NPR piece about the controversy). Royalty Logic contends that the same logic should apply to the appointment of the Copyright Royalty Judges who make up the CRB.  The Copyright Royalty Judges are appointed by the Librarian of Congress.  One question would be whether the Librarian is the equivalent to the head of a department though, technically, the Library of Congress is not even in the Executive Branch of government, but instead part of Congress.  In any event, Royalty Logic notes that the Copyright Royalty Tribunal, a predecessor agency done away with during the Clinton administration as part of their "Reinventing Government" program (one of the few agencies that was "reinvented"), had members appointed by the President.

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A decision by a US District Court in New York was just released, setting the rates to be paid to ASCAP for the use of their composers' music by Yahoo!, AOL and Real Networks.  The decision set the ASCAP rates at 2.5% of the revenues that were received by these services in connection with the music portions of their websites.  These rates were set by the Court, acting as a rate court under the antitrust consent decree that was originally imposed on ASCAP in 1941.  Under the Consent Decree, if a new service and ASCAP cannot voluntarily agree to a rate for the use of the compositions represented by ASCAP, the rates will be set by the rate court.  The Court explained that they used a "willing buyer, willing seller" model to determine the rates that parties would have negotiated in a marketplace transaction  - essentially the same standard used by the Copyright Royalty Board in setting the rates to be paid to SoundExchange for the use of sound recordings by non-interactive webcasters (see our post here for details of the CRB decision).  The ASCAP decision, if nothing else, is interesting for the contrasts between many of the underlying assumptions of the Court in this rate-setting proceeding and the assumptions used by the Copyright Royalty Board in setting sound recording royalty rates.

First, some basics on this decision.  ASCAP represents the composers of music (as do BMI and SESAC) in connection with the public performance of any composition.  This decision covered all performances of music by these services - not just Internet radio type services.  Thus, on-demand streams (where a listener can pick the music that he or she wants to hear), music videos, music in user-generated content, karaoke type uses, and music in the background of news or other video programming, are all covered by the rate set in this decision.  Note that the decision does not cover downloads, presumably based on a prior court decision that concluded that downloads do not involve a public performance (see our post here).  In contrast, the CRB decision covered the use of the "sound recording" - the song as actually recorded by a particular artist - and covers only "non-interactive services," essentially Internet radio services where users cannot pick the music that they will be hearing.

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While US webcasters may think that they have legal issues - whether it be the Internet radio music royalties that have been such a concern (see our coverage, here) or the copyright and other liability issues that surround user-generated content on various websites (see our story here), they face nothing like new rules that were recently adopted for webcasters in China.  The new rules require government permits from two separate Chinese government agencies before webcasting operations can begin.  In addition, the rules appear to require ownership and control of webcasting operations by state-owned companies.  A memo on these new rules, prepared by attorneys from Davis Wright Tremaine's Shanghai office, can be found here.

These rules apply to streaming audio and video delivered to mobile and wireless devices.  The rules also require yet another permit for sites that contain news content, and require taping of programs (a proposal made by our own FCC in connection with broadcast programs to monitor for indecency) to monitor for program content that may offend government requirements.  Clearly, it's a different system than that in place in the US - one which website operators interested in an operation in China should study carefully.  Again, details can be found in the memo prepared by the attorneys in our Shanghai office.

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Under the compulsory license for the use of sound recordings - the license which allows Internet radio services to use all legally recorded sound recordings by paying a royalty set by the Copyright Royalty Board - the designated collection agency can, once each year, audit a licensee to assess its compliance with the royalty requirements.  Under the law, when the collective decides to audit a company, it must notify the Copyright Royalty Board, who then gives public notice of the fact that an audit is to take place.  The Copyright Royalty Board has just announced that SoundExchange has decided to audit Last.FM.  Based on a number of public statements, SoundExchange has been citing Last.FM as an example of problems with royalties - contending that Last.FM had paid royalties of only a couple of thousand dollars a year, under the Small Webcasters Settlement Act, just before selling out to CBS for over $200 million.  Given SoundExchange's tough talk about Last.FM, this notice of an audit is not surprising.  SoundExchange's focus on this company illustrates the difficulty of valuing music use, and the different perceptions of music users and copyright holders as to what that value should be.

 In past years, SoundExchange has audited a number of webcasters - usually large webcasters.  As SoundExchange must bear the cost of the audit unless a significant underpayment is discovered, it is unlikely that more than a few companies will be audited each year.  However, as SoundExchange has made such a big deal of Last.FM, with witnesses on performance royalty issues mentioning it at Congressional hearings, and representatives mentioning it on various industry conferences (including SoundExchange President John Simson's reference to the company on a panel on which we jointly appeared at Canadian Music Week earlier this month), many expected that an audit would be forthcoming.

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A full year ago, the Copyright Royalty Board released its decision setting royalties for the use of sound recordings by Internet Radio webcasters (see various posts on the subject here).  As an article this week in the Boston Globe sets out, despite much talk of a post-decision settlement to lower the royalties set by the CRB that many Internet Radio operators claim will put their stations out of business, no such settlement has yet been announced.  And, in a week that brought about the transfer of the operations of one of the largest webcaster's operations to a traditional radio company (as CBS took over operations of AOL's Internet Radio service), appeals of the decision were filed with the US Court of Appeals for the District of Columbia.  A busy week, but still no resolution of the Internet radio controversy.

Four separate appeals briefs were submitted to the Court.  One was a combined brief of the large Webcasters (represented by DiMA, the Digital Media Association) and the Small Webcasters(Accuradio, Radioio, Digitally Imported Radio, Radio Paradise), another was submitted by several commercial broadcast groups (Bonneville, the NAB and the National Religious Broadcasters Association) and a third by several noncommercial groups (including college broadcasters, NPR, and noncommercial religious broadcasters).  A final brief was submitted by Royalty Logic, a company that wants to become an alternative to SoundExchange as the collection agent for performers.  These briefs will be answered by the Department of Justice (defending the CRB and its decision before the Court) and SoundExchange.  The briefing process will continue for several months, with an oral argument to follow, quite possibly not until the Fall.  Thus, a decision in the case may well not be reached until 2009. 

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As more and more broadcasters create and use websites (and, to some extent, are required to post more information on those sites by the FCC, see our post here), they should be cautious about the legal liabilities that arise from these sites.  For instance, as websites are used to gather personal information for listener's clubs, news alerts or for e-commerce purposes, the site owners need to be concerned about privacy issues. Many states are now requiring privacy policies to be posted on websites that gather personal information.  In a recent decision, the Federal Trade Commission entered into a consent decree with a website owner who had not abided by the privacy policy that it posted, requiring that the site owner hire security consultants and regularly file reports, for the next 20 years, with the FTC on its efforts to comply with its policies.  This case is a demonstration that website owners should not casually adopt privacy policies without fully understanding and adhering to their terms.

Davis Wright Tremaine's Privacy and Security blog features a summary of this consent decree and explains the ramifications of the decision.  Broadcasters and other website owners should learn from this decision that they should not blindly copy a privacy policy that they find on some other website and adopt it as their own.  Instead, they need to carefully craft a privacy disclosure that honestly discloses their policies and practices.  In this case, the website owner promised that personal information would be maintained in a secure fashion, yet the FTC found that simple hacking techniques were able to get access to that information.  For website owners who are collecting private information, and promising privacy and security, to avoid legal issues in the future, make sure that you are living up to your promises. 

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Last week, the Copyright Royalty Board published an order seeking comments on a proposed settlement establishing the royalties for "Business Establishment Services."  Essentially, this is the royalty paid by a service which digitally delivers music to businesses to be played in stores, restaurants, retail establishments, offices and similar establishments (sometimes referred to as "background" or "elevator" music, though it comes in many formats and flavors, and may sometime include the rebroadcast of programming produced for other digital services).  The proposed settlement would essentially carry the current rates forward for the period 2009-2013.  These rates require the payment of 10% of a services revenue (essentially what they are paid by the businesses for the delivery of the music) with a minimum annual payment of $10,000.

Some might wonder how a royalty of 10% royalty can be justified - and why it shouldn't set some sort of precedent for the Internet radio services about which we have written so much here.  Once again, as we've written before, the Digital Millennium Copyright Act sets different standards for different kinds of music use.  For many consumer-oriented services (like satellite radio, digital cable radio and Internet radio), there are different standards used to determine the royalty rate.  For Business Establishment Services, it's not the standard that is different - it's the royalty itself.  Under the DMCA, there is no performance royalty paid either by the business or the service provider.  Instead, under the statute, the royalty is paid only for the "ephemeral copies" - those transitory copies made in the digital transmission process.  That is different than the royalty for all of the other digital services, where fees are paid for both the performance (under Section 114 of the Copyright Act) and the ephemeral copies (under Section 112).

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Here we are, almost a full month into the new year, and a number of important dates for broadcasters are already upon us.  As we wrote here, for instance, the payment of a minimum fee to SoundExchange by radio stations streaming their signals on the Internet is due today.  Lowest unit rates are in effect in many states for upcoming Presidential and even some Congressional primaries (see our post announcing the beginning of the LUR period for Super Tuesday).  FCC filing deadlines for Annual Ownership Reports for a number of states are due on February 1, as are EEO Public File Reports for several states.  And, on February 18, full power television stations must file with the FCC a Form 387 Status Report detailing where they are in their transition to digital television in time for the February 2009 transition deadline.  How is a broadcaster to keep all these dates straight?  Check out our advisory on the Important Dates for Broadcasters in 2008, available here, which tracks many of the deadlines that will occur this year - including the dates of routine FCC filings, lowest unit rate windows for political broadcasting purposes, and digital television transition milestones.

And a reminder about February 1 deadlines.  Radio stations in Arkansas, Louisiana, Mississippi, New Jersey, and New York, and television stations in Kansas, Nebraska, and Oklahoma must prepare and file electronically an FCC Form 323 Biennial Ownership Report with the FCC.  Our Advisory on completing and filing the Ownership Report can be found, here.  And radio and television Station Employment Units in Arkansas, Kansas, Louisiana, Mississippi, Nebraska, New Jersey, New York, and Oklahoma must place in their Public Inspection File and post on their website, if they have a website, their FCC Annual EEO Public File Report.   In addition, radio stations in Arkansas, Louisiana, and Mississippi with eleven or more full-time employees must also prepare and file electronically with the Commission an FCC Form 397 Mid-Term EEO Report.  Our Advisory on these filing requirements can be found here.  Stay on top of all these deadlines with our advisory on Important Dates for Broadcasters for 2008.

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Each year, Internet radio stations must pay a minimum fee to SoundExchange, and that fee is due by January 31.  These minimum fees are applied against  the obligations of a Internet radio service to pay royalties for the use of sound recordings on their stations.  SoundExchange does not send bills, so webcasters must remember, on their own, to make the payments.  For commercial webcasters (including broadcasters who stream their signals on the Internet), under the Copyright Royalty Board decision released last March, a minimum fee of $500 per channel is due.  While SoundExchange and certain large webcasters agreed to cap this minimum fee liability at $50,000 no matter how many channels a webcaster transmits (see our post here), this agreement has yet to be submitted to the CRB for approval.  Minimum payments are also due from noncommercial and small webcasters.

Under the CRB decision, noncommercial webcasters also owe a minimum fee of $500 per channel.  Small webcasters, who earlier this year accepted the SoundExchange offer about which we wrote here, owe a minimum fee of $2000 if they had 2007 revenues of less than $50,000, and minimum fees of $5000 if their 2007 revenues exceeded $50,000.  Note that details about these minimums are difficult to locate on the SoundExchange website.  Nevertheless, the current rules require that these payments be made.  Future settlement negotiations may adjust some of these minimums but, as of this moment, the failure to pay the minimum fees could, at a minimum, subject an Internet radio service to penalty fees and interest payments. 

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This week, the Copyright Royalty Board issued an Order denying a request by SoundExchange for rehearing of certain aspects of the decision released last month setting the royalties for satellite radio - XM and Sirius.  These are the royalties for the use of sound recordings by these services on their digital systems.  The decision, which set royalties at 6 to 8% of revenues of these services, and the denial of the rehearing motion, provide examples of how the CRB applies the 801(b) standard of the Copyright Act.  In setting royalties, that standard assesses not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music.  The satellite radio decision sets a royalty far lower than that assessed on Internet radio - where the royalty is set using a "willing buyer, willing seller" standard looking only at the perceived economic value of the sound recording.  That willing buyer, willing seller standard is also proposed for broadcast radio in the recently introduced performance royalty bills now pending before Congress (see our summary here) - so it could be expected that any royalty set using that standard would be higher than that set for satellite radio. 

The initial Copyright Royalty Board decision, the full text of which is available here, first made a determination of how to compute the royalty.  While both the satellite radio companies and SoundExchange initially suggested a percentage of revenue royalty given that satellite radio can't count specific listeners, the parties later amended their proposals (after the Internet radio decision) to include a computation based on the frequency of a song's play, to try to more closely approximate the Internet radio performance-based model (about which we wrote here).  In addition to the suggestion that this metric more closely approximated that used in the Internet radio decision, the satellite radio companies suggested that a metric based on the songs played would give them the opportunity to adjust their use of music to reduce their royalty obligation.  The satellite companies suggested that, if the royalty was too high, they could reduce the number of different songs that they played.  While not specifically referenced in the decision, it is possible that they also considered the possibility of getting waivers from artists to encourage playing particular songs, which could further reduce a royalty based on a per song computation.  The Board declined to provide that option, finding that the percentage of revenue option best took into account the business of the companies.  The Board also suggested that it doubted that satellite radio really had the ability to lessen the use of music in reaction to a high royalty rate.  (The Board does not discuss the possibility of royalty waivers, which are essentially worth nothing in a situation where the royalties are based on a percentage of a service's entire revenue). 

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With 2008 almost upon us, webcasters streaming music on the Internet need to remember that the way of computing and paying royalties to SoundExchange will shift on January 1- a change that may be especially important for broadcast stations.  Under the Copyright Royalty Board decision reached last March, webcasters must pay royalties computed on a per "performance" basis.  A performance is a per song, per listener computation.  In other words, if an Internet radio station plays a song and 15 listeners are logged into the station at the time that the song plays, there would be 15 performances on which the royalty would need to be paid.  While broadcasters objected that they did not (and in many cases could not) track the number of performances that were made by their stations on the Internet, the CRB, on reconsideration of their initial decision, only went so far as the give stations an interim rate based on the number of  "Aggregate tuning hours" that a station served (e.g. one listener listening for one hour, or two for a half hour each would both be the equivalent of one aggregate tuning hour).   See our post, here, on the CRB's reconsideration decision.  The aggregate tuning hour (or ATH) metric is one that is more readily obtain from a content delivery network or other bandwidth provider, and a metric that has been used since the first royalties were established in 2002.  Yet as of January 1, as the interim ATH rate applied only to 2006 and 2007, that method of payment will no longer be available, and many webcasters are wondering what to do to compute the per performance royalty.

Neither the CRB decision nor SoundExchange, which collects the royalties, explained what a webcaster who cannot count performances is to do when the option to pay based on aggregate tuning hours disappears.   The royalty for January performances is due to be paid to SoundExchange on March 16 (45 days after the end of the month), and a webcaster preparing to file its royalty statement on that day will need to have a performance count to include on its statement.  Many Internet radio companies have been trying to determine how to count performances and, while there are some services that offer to provide software to do so, it is my understanding that none are foolproof and, in some cases, they may not be able to get a complete count of performances.  And many smaller stations may not be able to afford such systems.

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In a pre-Christmas surprise that most broadcasters could do without, identical bills were introduced in Congress on Tuesday proposing to impose a performance royalty on the use of sound recordings by terrestrial radio stations.  Currently, broadcasters pay only for the right to use the composition (to ASCAP, BMI and SESAC) and do not pay for the use of sound recordings in their over-the-air operations of the actual recording.  This long-expected bill (see our coverage of the Congressional hearing this summer where the bill was discussed) will no doubt fuel new debate over the need and justification for this new fee, 50% of which would go to the copyright holder of the sound recording (usually the record label) and 50% to the artists (45% to the featured artist and 5% to background musicians).  The proponents of the bill have contended that it is necessary to achieve fairness, as digital music services pay such a fee.  To ease the shock of the transition, the bill proposes flat fees for small and noncommercial broadcasters - fees which themselves undercut the notion of fairness, as they are far lower than fees for comparable digital services.   

While, at the time that this post was written, a complete text of the decision does not seem to be online, a summary can be found on the website of Senator Leahy, one of the bills cosponsors.  The summary states that commercial radio stations with revenues of less than $1.25 million (supposedly over 70% of all radio stations) would pay a flat $5000 per station fee.  Noncommercial stations would pay a flat $1000 annual fee.  The bill also suggests that the fee not affect the amount paid to composers under current rules - so it would be one that would be absorbed by the broadcaster. 

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The US Court of Appeal for the District of Columbia has set the briefing dates on the appeal filed by various webcasting groups seeking review of the decision of the Copyright Royalty Board setting Internet radio royalties for the period 2006-2010 for the use of sound recordings (see our coverage of this controversy here, and a detailed summary of the CRB decision here).  The briefs of the various webcasting groups who appealed are due on February 25.  The brief for the CRB (represented by the Department of Justice) is due on April 25, and that of SoundExchange (the "Intervenor) will be filed on May 15. Reply briefs are due on June 12, and oral arguments are yet to be scheduled. As the Court usually takes a summer break in July and August, the argument is likely to be held in the Fall of 2008, and a decision would likely not come until very late in the year or, more likely, in 2009.

Appeals were filed by the a number of groups including large webcasters (including AOL, Yahoo and DiMA), the small commercial webcasters (who I have represented), various noncommercial groups (including two collegiate broadcasting groups and the National Religious Broadcasters Noncommercial Music Licensing Committee), and various commercial broadcasters who also stream their signals on the Internet.  A group called Royalty Logic, which is seeking to become a collective that is competitive with SoundExchange, also filed an appeal of the CRB decision. 

Already, there has been a settlement announced on one narrow aspect of the case, the minimum fees for companies that stream multiple channels, limiting the per company minimum fee to $50,000.  Obviously, if there are other settlements, these appeals could become unnecessary in whole or in part.  See our summary of the remaining issues to be resolved here.

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The Copyright Royalty Board today announced that it is taking comments on a settlement to establish royalties for the use of sound recordings to be paid by companies that are planning to provide audio services to be delivered with satellite and cable programming.  In contrast to the "preexisting subscription services" who were in existence at the time of the adoption of the Digital Millennium Copyright Act in 1998, who recently reached a settlement agreeing to pay 7 to 7.5% of gross revenues for royalties (see our post, here), this settlement is with "New Subscription Services" which did not offer these kinds of subscription services in 1998.  This settlement does not apply to subscription services provided through the Internet.  The covered "new subscription services" have agreed to pay the greater of 15% of revenue or a per subscriber fee that will escalate over the 5 years that the agreement is in effect.  Given that these new services will be providing essentially the same service as the Preexisting Services, why the difference in rate?  Perhaps, it is because the difference in the law.

As we wrote earlier this week, the Preexisting Satellite Service pay royalties set based on the standards of Section 801(b) of the Copyright Act, which takes into account a number of factors including the interest of the public in getting access to copyrighted material, the relative contributions and financial risks of the parties in distributing the copyrighted material, the stability of the industry, and the right of the copyright holder to get a fair return on their intellectual property.  By contrast, the new subscription services who entered into the settlement just announced, who weren't around at the time of the drafting of the DMCA, use the "willing buyer, willing seller" standard also used for Internet radio.  And, because of the applicability of the willing buyer willing seller standard and the apparent uncertainties of the litigation process using it, these new services apparently decided to agree to a royalty double that of the preexisting services, even though they provide essentially the same service.

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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.

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Website operators planning to allow visitors to post their own "user generated content" can, for the most part, take solace that they will not be held liable for third-party posts if they meet certain criteria.  The Communications Decency Act provides protection against liability for torts (including libel, slander and other forms of defamation) for website operators for third-party content posted on their site.  The Digital Millennium Copyright Act provides protection against copyright infringement claims for the user-generated content, if the site owner observes certain "safe harbor" provisions set out by the law.  The requirements for protection under these statutes, and other cautions for website operators, are set out in detail in our firm's First Amendment Law Letter, which can be found here.

 As detailed in the Law Letter, the Communications Decency Act has been very broadly applied to protect the operator of a website from liability for the content of the postings of third parties.  Only recently have courts begun to chip away at those protections, finding liability in cases where it appeared that the website operator in effect asked for the offending content - as in a case where the owner of a roommate-finder site gave users a questionnaire that specifically prompted them to indicate a racial preference for a roommate - something which offends the Fair Housing Act.  However, as set forth in the Law Letter, absent such a specific prompt for offending information, the protections afforded by this statute still appear quite broad.

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SoundExchange yesterday announced that it had signed agreements with 24 small commercial webcasters.  Contrary to what many press reports have stated, this is not a settlement with Small Commercial Webcasters.  In truth, what was announced was that 24 small webcasters had signed on to the unilateral offer that SoundExchange made to small webcasters, about which we wrote here.  Essentially, this is the same offer that SoundExchange made in May, which was rejected by many independent webcasters as being insufficient to allow for the hoped for growth of  these companies, and insufficient to encourage investment in these companies.  These larger Small Commercial webcasters, including those that participated in the Copyright Royalty Board proceeding, rejected that offer and instead have sought to negotiate a settlement with SoundExchange that would meet their needs.  Instead of reaching a true settlement with these companies that had participated throughout the CRB proceeding and now have an appeal pending before the Court of Appeals, SoundExchange instead announced that their unilateral proposal was accepted by 24 unnamed webcasters.  Thus, rather than negotiating a settlement, if anything this announcement shows that SoundExchange has not been willing to negotiate - as it has not moved substantively off the proposal they announced over 4 months ago.

While 24 webcasters may have signed on, it would seem that these must be entities that don't expect to grow their revenues to $1.25 million, or grow audiences that reach the 5,000,000 tuning hour limit at which, under the SoundExchange-imposed agreement, the webcaster needs to start paying at the full CRB-imposed royalty rate.  Moreover, the agreements only cover music from SoundExchange members, excluding much independent music that many webcasters play.  For music from companies that are not SoundExchange members, a webcaster has to pay at full CRB rates.  For a small service playing major label music, the agreement may cover their needs, but for the larger companies playing less mainstream music, a different deal is needed. 

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With summer and the August Congressional recess drawing to a close, will consideration of the Internet Radio controversy over royalties be on the agenda when the September legislative session begins?  In recent weeks, there has been a settlement between the Digital Media Association (DiMA), representing the largest webcasters, and SoundExchange on the issue of the minimum royalty fee - agreeing that the $500 per channel minimum fee imposed by the Copyright Royalty Board ("CRB"), which might have by itself driven many webcasters like Pandora or Live 365 out of business had it not been resolved, would be capped at $50,000.  SoundExchange has also extended a unilateral offer to small commercial webcasters allowing them to continue to pay a percentage of revenue royalty of 10-12% for use of the music produced by SoundExchange members - but limiting the offer to webcasters with under $1.2 million in annual revenue, and requiring that any webcaster with over 5,000,000 tuning hours in any month to pay at the CRB rates for all listening in excess of that limit.  We wrote about that deal, and some of the concerns that larger small webcasters have, here.  These adjustments to the CRB rates may resolve some issues for some webcasters, but they leave open many other issues as set forth below - but will these tweaks to the CRB decision be enough to take the Congressional heat, in the form of the Internet Radio Equality Act, off of SoundExchange?

What issues remain?  There are still many.  These include:

• The issues of the larger independent webcasters who may currently fit under the Small Webcaster Settlement ("SWSA") Act caps - but may well go over those caps before 2010, and could not afford to pay royalties at the CRB-mandated rates if they exceed the SWSA limits.
• The CRB mandated rates are themselves problematic for virtually all commercial webcasters - and DiMA made clear that the settlement of the minimum fee issue was the first step in resolving the issues that preclude a vibrant webcasting industry under the CRB rates (see the DiMA press release on the settlement, here)
• Noncommercial webcasters have not announced any settlement with SoundExchange - even though many expressed concerns over the fees for large noncommercial webcasters  which will, by the end of the royalty period, increase about 9 times over the rates that they had been paying (and more for larger NPR affiliates), and over recordkeeping and reporting requirements.
• Broadcasters who stream their over-the-air signal over the Internet have not been involved in any of the tweaks to the CRB decision, nor has SoundExchange responded to the NAB's settlement offer made in June (according to the clock on the NAB homepage, the NAB settlement offer has been outstanding without response for 84 days at the time this post is being written). 

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Yesterday, SoundExchange sent to many small webcasters an agreement that would allow many to continue to operate under the terms of the Small Webcaster Settlement Act as crafted back in 2002, with modifications that would limit the size of the audience that would be covered by the percentage of revenue royalties that a small webcaster would pay. A press release from SoundExchange about the offer can be found on their website by clicking on the "News" tab.  This is a unilateral offer by SoundExchange, and does not reflect an agreement with the Small Commercial Webcasters (the “SCWs”) who participated in the Copyright Royalty Board proceeding to set the rates for 2006-2010 and who are currently appealing the CRB decision to the US Court of Appeals (see our notes on the appeal, here). The SoundExchange offer, while it may suffice for some small operators who do not expect their businesses to grow beyond the limits set out in the SWSA (and who only play music from SoundExchange artists - see the limitations described below), still does not address many of the major issues that the SCWs raised when SoundExchange first made a similar proposal in May, and should not be viewed by Congress or the public as a resolution of the controversy over the webcasting royalties set out by the CRB decision (see our summary of the CRB decision here).

The proposal of SoundExchange simply turns their offer made in May, summarized here, into a formal proposal.  It does not address the criticisms leveled against the offer when first made in May, that the monetary limits on a small webcaster do not permit small webcasters to grow their businesses – artificially condemning them to be forever small, at best minimally profitable operations, in essence little more than hobbies. The provisions of the Small Webcasters Settlement Act were appropriate in 2002 when they were adopted to cover streaming for the period from 1998 through 2005, as the small webcasters were just beginning to grow their businesses in a period when streaming technologies were still new to the public and when these companies were still exploring ways to make money from their operations. Now that the public has begun to use streaming technologies on a regular basis, these companies are looking to grow their businesses into real businesses that can be competitive in the vastly expanding media marketplace. The rates and terms proposed by SoundExchange simply do not permit that to occur. 

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If you are a broadcaster, you know that it's not going to be a good day when you walk into a hearing on the possible extension of the performance royalty in sound recordings to over-the-air broadcasters and see buttons saying "I Support a Performance Right NOW" on the lapels of every other witness on the panel - including the Register of Copyrights, Marybeth Peters.  But that was the scene in Washington, as the House Judiciary Committee's subcommittee on Courts, the Internet and Intellectual Property held a hearing as to whether the right to collect a royalty for the public performance of a sound recording (the actual song as sung by a particular artist, as opposed to the underlying musical composition) should be paid by broadcasters.  Broadcasters in the United States have paid only a royalty on the public performance of the composition (to ASCAP, BMI and SESAC), and have never paid a royalty for the public performance of the sound recording.  The lack of a sound recording royalty has always been justified in the past on the theory that the artists and copyright holders in the sound recording benefit more than composers through the airplay of the sound recording, as they receive the bulk of the proceeds from CD sales, and the performers benefit from the promotion of live performances.  As they benefit from the promotion provided by the airplay of the song, there is no need for any sort of performance royalty.  As the music and radio businesses have both thrived in the United States - more so than anywhere else in the world - it seemed that this arrangement was mutually beneficial.

But, in recent years, the consensus over this mutually beneficial arrangement seems to have broken down.  Starting in 1995, a performance right in sound recordings has been imposed on digital services, including the royalty on Internet radio which has recently been so controversial (and about which we have written so much, here).  And, with the recent downturn in the record companies' business, additional sources of revenue are being sought - thus the RIAA and SoundExchange, the collective that receives sound recording performance royalties, have started a Congressional push to require the collection of royalties from over-the-air radio.  And that push was reflected in the hearing held on Tuesday before a House Committee that seemed clearly to favor the imposition of this royalty on broadcasters.

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As reported in Digital Music News and other publications on Friday, Clear Channel Communications dropped its waiver of music royalties from its on-line agreement signed by musicians submitting songs to the Company in hopes that their music would be played on the Company's radio stations.  In writing about this decision, most publications attribute the decision to the petition filed with the FCC by the Future of Music Coalition and other public interest groups arguing that the waiver requests constituted a form of payola - the giving of something of value (the waiver of the right to receive a royalty) in exchange for the playing of music.  However, on close inspection, that would appear to be a misunderstanding of the royalty, as there would seem to be no royalty that would be affected by the waiver in connection with the playing of this music by radio stations, and therefore there would be no payola over which the FCC has any jurisdiction.

According to the Future of Music petition, Clear Channel's promise to play new music was made in connection with the payola settlement that it and other companies entered into with the FCC, and was apparently contained in a side letter filed with the FCC, as it was not spelled out in the settlement agreements themselves. See our analysis of the settlement agreements, here.  The side letter promised that the Company would dedicate a certain amount of radio airplay on the Company's radio stations to new local music.  However, such play would not implicate any music royalties - so a waiver of royalties would not confer any benefit on the Company.  Broadcast stations pay no royalty for the use of a sound recording - thus the waiver that Clear Channel requested was without any value as there was no royalty to waive.  While broadcast stations do pay a royalty for the composition (the underlying words and music of a song), stations play flat fees to ASCAP and BMI that are a function of the station's market size and power - not a function of how many songs are played.  Thus, as there is no sound recording royalty and a flat fee for the composition royalty unaffected by any waivers, the waiver did not confer any benefit to the Company in connection with its broadcast operations.  Thus, there where would appear to be no payola issue over which the FCC would have any jurisdiction.

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Monday, July 16th is the first business day after the effective date of the new Internet Radio royalties set by the Copyright Royalty Board.  As we wrote earlier this week, the Court of Appeals has denied the requested stay of the effective date.  And, while a bill was introduced in Congress this week to provide for a legislative stay, that will not be acted on by Monday, nor will action occur on the broader Internet Radio Equality Act.  Thus, many webcasters are asking what they should do on July 16.  Some have suggested that they should stop streaming, while others have wondered what will happen if they don't pay the higher royalties.  This decision is one that each webcaster should make carefully, in consultation with their counsel and business advisers.  But there are some practical considerations that should be taken into account when making the decision as to what should be done on Monday.

First, it should be noted that not all webcasters are equally affected by the royalty rate increase.  Larger commercial webcasters, including most broadcasters who are streaming their signals on the Internet, should have been paying royalties up to now that, while lower than those adopted by the CRB, have increased by "only" about 40%  - from $.00076 per performance (per song per listener) to $.0011 per performance.  These rates will continue to increase between now and 2010 so that they eventually will reach $.0019 per song per listener.  But for now, the increase is relatively modest (as compared with some of the other increases discussed below).  While there are reportedly at least some conversations going on between SoundExchange and groups representing broadcasters and large webcasters about reaching some sort of accommodation on royalties, there is no certainty that any deal will be reached, so these webcasters probably should be paying the higher royalties (and hoping for a credit against future royalties should there be an agreement reached in the future to reduce these royalties, a successful appeal, or future legislative action reducing the royalties).

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Yesterday, a three judge panel of the US Court of Appeals in Washington, D.C. denied the Emergency Motion for a Stay of the Internet Radio Royalty rates set earlier this year by the Copyright Royalty Board.  Our coverage of the stay motion can be found here and here.  Coverage of the entire royalty issue and the surrounding controversy can be found in various posts on our blog, here.  The denial of the stay means that, absent Congressional action or some voluntary agreement of the parties, the new rates will go into effect with payments for the period since the CRB decision being due on Monday, July 16.

The Court's decision was very brief - in essence three sentences which merely stated that the moving parties had not met the high legal burden necessary for the Court to impose a stay.  A stay is an extraordinary legal action, taken by a Court as part of its equitable powers to insure that justice is carried out.  In order to justify a stay, a party must show the Court that there is a likelihood of success on the merits of the case (in other words, it must prove in a 20 page stay motion the likelihood that it will eventually win its appeal after full briefing and oral argument), plus it must prove that there will be irreparable harm if the stay is not issued (more than simply a loss of money - but harm that cannot be remedied if the appeal is eventually successful).  Weighing those factors, and balancing the competing interests of the parties and the public interest, the Court decides whether or not to issue a Stay.  In this case, as there was no more than the pro forma Order, we do not know what shortcomings the Court perceived in the Motion seeking the Stay, but no reasons are required as the Court can merely decide not to exercise its equitable discretion in a case.

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Last week brought more action, and not much in the way of  results, as we count down to the July 15 effective date of the new Internet Radio Royalties.  The actions that received the largest amount of press coverage were the hearing before the US House of Representatives Small Business Committee, and the offer by SoundExchange suggesting that the minimum $500 per channel fee be capped at $2500 per service. While both initially seemed to offer the prospect of some resolution of the dispute over the Internet Radio royalties that were adopted by the Copyright Royalty Board, in fact neither ultimately resulted in much.

The Committee hearing featured webcasters and musicians - equally divided between those who believed that the royalties were fairly decided, and those who believed that the rates were too high.  The one thing on which most of the witnesses seemed to agree was that some rate adjustment was warranted for small webcasters, though no one was able to quantify how such a settlement should be reached.  The Congressional representatives, on the other hand, were cautious to act, asking again and again whether the parties were going to be able to settle the case between themselves.  While Congressman Jay Inslee testified in favor of his Internet Radio Equality Act, the members of the committee seemed hesitant to act while there were judicial avenues of relief still pending, and the possibility of settlement.

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As the clock ticks down to the July 15 effective date of the royalty rates for Internet Radio as determined by the Copyright Royalty Board, webcasters held a Day of Silence today, June 26, to demonstrate to listeners what may well happen if the rates go into effect, and to galvanize their listeners to ask Congress for relief. With the Day of Silence bringing publicity to the Congressional efforts to put the webcasting royalties on hold and to change the standard applied by the Copyright Royalty Board so that it is not focused completely on a hypothetical "willing buyer, willing seller" model, it's worth looking at some of the other issues that have arisen in the royalty battle in the last few days - including further pleadings filed in connection with the Motion for Stay currently pending in the US Court of Appeals, and the Congressional hearing that will occur on Thursday. 

As we've written before, there is currently pending a Motion for Stay of the CRB decision which was submitted jointly by the large and small webcasters and NPR.  Last week, the Department of Justice, acting on behalf of the Copyright Royalty Board to defend the royalty decision, and SoundExchange, each filed oppositions to the Motion for Stay. Each raised many of the same arguments. First, they argued that the large webcasters had procedurally forfeited their rights to challenge the question of the $500 per channel minimum fee by not raising their objection early enough in the CRB proceeding. The DOJ also argued that the damage from the minimum fee was speculative as there was no way to know how that minimum fee would be interpreted. The DOJ contended that, as it was unclear that SoundExchange would prevail on any claim that those Internet Radio services that produced a unique stream for each listener would have to pay $500 for each such stream, the question might end up in a lawsuit – but wouldn’t inevitably lead to the irreparable harm that is necessary for a stay to be issued.

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Should artists waive their rights to performance royalties in order to get airplay on broadcast or Internet radio stations? That questions has come to the fore based on a click-through agreement that Clear Channel included on a website set up to allow independent bands to upload their music for consideration for airplay by its stations. While artist groups, including the Future of Music Coalition, condemned that action, there are always two sides to the story, as was made clear in a segment broadcast on NPR’s Morning Edition, in which I offered some comments. As set forth in that segment, artists may be perfectly willing to allow unrestricted use of a song or two in order to secure the promotional value that may result from the airplay that might be received. For the broadcaster or Internet site seeking such permission, getting all rights upfront may well be an important consideration in deciding whether or not to feature a song – especially in the digital media.

Critics of the waiver made much of the fact that the site was set up at least partially to meet Clear Channel’s informal commitment made as part of the FCC payola settlement to feature more independent music, even though that commitment was not a formal part of the settlement agreement.  (See our summary of the payola settlement, here).  Even to the extent that the informal commitments made by the big broadcasters encompassed making time available to more independent musicians, the critics ignore the fact that the companies do not need any waiver of any sound recording performance royalty in connection with the over-the-air broadcast of those songs, as there currently is no public performance right in a sound recording for over the air broadcasting (though artists and record lables are now pushing for such a royalty, see our story here). Thus, the use of the waiver was only for the digital world – which was not covered by the FCC's jurisdiction over payola promises or the promises to increase the use of independent music. So, effectively, the company is being chastised for trying to minimize their costs on giving the music even greater circulation through their digital platforms than they initially promised.

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Just when Internet music companies were starting to understand one set of royalties applicable to the use of music on the Internet through the controversy over the Copyright Royalty board decision on royalties for the public performance of sound recordings in a digital delivery system, the Copyright Office held a hearing on Friday to discuss an entirely different royalty - the "mechanical" royalty for the use of the "musical work" in making a "phonorecord."  In plain English, the copyright holder in the publishing rights in a musical composition (the underlying words and music in a song) is entitled to a royalty when a copy of a song using that composition is made.  While that doesn't sound too complicated, when copies are made in the digital transmission of music over the Internet (and even in other digital media), all sorts of questions arise.  And in the conversations on Friday, questions were raised as to whether the obligation to pay a royalty for making a digital copy even applied to the streaming of a song on the Internet or possibly even the playing of a song on an HD Radio station.  These stations already pay (to ASCAP, BMI and SESAC) for the public performance of a musical composition, but the mechanical royalty is for a different right, and is collected by a different group, and the question being raised was whether a different royalty is also due when music is used a digital context.  This is also different than the SoundExchange royalty that is paid for the public performance of a sound recording (a particular song as recorded by a particular artist).

The Copyright Office held this Roundtable to update the record in a proceeding begun by a Notice of Inquiry issued in 2001 to try to determine how to apply in a digital world the mechanical royalty and the compulsory license for that royalty under Section 115 of the Copyright Act.  That section applies to the use of a composition in the making of a record or CD.  The artist or record company would have to pay the publishing company a flat fee per copy to obtain the rights to use the underlying song.  That fee is currently about 9 cents per copy, though the Copyright Royalty Board is is in the midst of a proceeding that is to determine whether that royalty should be changed.  When applied to the making of a physical copy, that concept is not hard to understand (though, as set forth below, it is not easy to administer).  But, in a digital world, questions arise as to when the obligation to pay a royalty arises.

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With July 15 now less than a month away, the new Internet Radio music royalties are still scheduled to go into effect.  Congressional legislation is slowly being considered, and a Motion for Stay to put the regulations on hold pending appeal has been filed (see our post here).  Some discussions on settlement have also taken place, though no deals have been done.  Without some action, payments under the new rules will soon be due.  See our memo, here, for more details on the CRB decision, and all of our posts on this issue, here.  While the legal and legislative actions are still proceeding, and the clock is counting down, the coverage in the popular media continues to grow.  In two recent discussions of the issue, SoundExchange spokesmen seem to blame Internet Radio for the current woes of the recording industry and to justify the high royalty rates through comparisons to the illegal pirating of copyrighted music.  All of these issues will be discussed at a seminar that I am moderating later this week at the Digital Media Conference in the Washington DC area.

One example of SoundExchange's recent claims can be found in a series of articles found on the Los Angeles Times website featuring a "Dust-up" exchange of viewpoints on the Internet radio issue,  between Kurt Hanson, owner of Internet radio broadcaster Accuradio and the publisher of the Radio and Internet newsletter, and Jay Rosenthal, a Board member of SoundExchange.  Mr. Rosenthal, in attacking the value of Internet radio as a promotional tool, said that while webcasters might excite people about new music, most new music is now illegally downloaded so that the promotion doesn't actually help the artists.  But, as Kurt Hanson points out, that would essentially be an excuse for never promoting any music in any venue - in fact it seemingly would be an excuse for shutting down the recording industry.  If music promotion just leads to illegal file sharing sites, and little or no music is ever to be sold again, why bother?  Does the recording industry really expect to make up for lost sales by receiving royalties from Internet radio?  Yet the same point seems to be made by SoundExchange President John Simson in a piece done by the PBS program NOW.  That program focused on the Internet Radio station Radio Paradise and how its popular, eclectic music mix will be silenced if the new royalties go into effect.  In that story, Simson also points to illegal downloading as causing the woes of the music industry, seemingly implying that this justifies outrageous royalties - yet offers nothing to tie downloading to Internet radio.

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The past few days have been eventful ones in the battle over Internet radio royalties.  Appeals from the decision of the Copyright Royalty Board decision (see our memo explaining that decision, as well as our coverage of the history of this case) were submitted by virtually all of the parties to the case.  In addition, the National Association of Broadcasters, which had not previously been a party to the case, filed a request to intervene in the appeal to argue that the CRB decision adversely affects its members.  Also in Court, a Motion for Stay of the decision was submitted, asking that the CRB decision be held in abeyance while the appeal progresses.  The "appeals" that were filed last week are simply notices that parties dispute the legal basis for the decision, and that they are asking that the Court review that decision.  These filings don't contain any substantive arguments.  Those come later, once the Court sets up a briefing schedule and a date for oral arguments - all of which will occur much later in the year.  As the CRB decision goes into effect on July 15, absent a Stay, the appeal would have no effect on the obligations to begin to pay royalties at the new rates.

The Stay was filed by the large webcasters represented by DiMA, the smaller independent webcasters that I have represented in this case, and NPR.  To be granted a stay, the Court must look at a number of factors.  These include the likelihood that the party seeking the stay will be successful on appeal, the fact that irreparable harm will occur if the stay is not granted, the harm that would be caused by the grant of a stay, and the public interest benefits that would be advanced by the stay.  The Motion filed last week addressed these points.  It raised a number of substantive issues including the minimum per channel fee  set by the CRB decision, the lack of a percentage of revenue fee for smaller webcasters, and issues about the ability of NPR stations to track the metrics necessary to comply with the CRB decision.  The Motion raised the prospect of immediate and irreparable harm that would occur if the decision was not stayed, as several webcasters stated that enforcement of the new rates could put them out of business.

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Much has been made in the press in the last day about SoundExchange "extending" the Small Webcasters Settlement Act and allowing small webcasters to pay their royalties on a percentage of revenue basis.  However, these reports overstate what happened yesterday. SoundExchange simply made a preliminary, conditional offer to settle the case to the group of independent commercial webcasters that I represented in the Copyright Royalty Board proceeding . The offer is to extend the SWSA with some "tweaks" that are yet to be negotiated. Unless and until a full agreement is reached regarding these "tweaks," and as to other issues that have been raised by the independent webcasters, the rates set out by the Copyright Royalty Board remain unchanged and will go into effect on July 15.

A simple extension of the SWSA through 2010 does raise some issues that have been reported elsewhere, including in the Radio and Internet Newsletter.  An SWSA extension would retain the caps on revenues of small webcasters - limiting their revenues to $1.2 million.  Up to that point, they would be paying 12% of their gross revenues.  But once they earned a dollar more than that cap - the percentage of revenue rate would disappear retroactively for the entire year in which they exceeded the cap and all of  their performances back to the beginning of the year would be subject to the CRB per performance royalties - effectively exceeding the total revenues of the independent webcaster by many multiples. While the $1.2 million cap was fine in 2002 when it was used in the agreement reached pursuant to the SWSA , that was when webcasting was a nascent industry and was simply looking for a way to survive.  It doesn't work in 2007. This cap on revenue would effectively limit the independent webcaster's growth and investment opportunities - as who would invest in an entity with an absolute cap on their financial growth?

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The Internet Radio Equality Act was introduced in the Senate today by Senators Wyden and Brownback.  The Bill tracks the substance of the Bill that was introduced in the House of Representatives by Congressmen Inslee and Manzullo.  The Senate Bill in addition includes broader provisions providing relief to large noncommercial webcasters who were not specifically addressed by the House legislation.

The Press release on the introduction of the bill can be found here.  In introducing the legislation, the Senators cite the webcasters, the listeners and the musicians who will benefit from the preservation of Internet radio.  Of course, the bill has a long way to go before it becomes law.  See our discussion offered when the House Bill was introduced discussing the process that a bill will follow before it becomes law. 

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In an action announced on the blog of popular Internet radio service Pandora, the service has decided to block Internet radio streams that are requested by users with IP addresses that are not in the United States or Canada.  This action highlights that fact that it is not only the Copyright Royalty Board decision on US royalties that is causing uncertainty for many Internet radio stations.  Royalty obligations for overseas listening also adds to the uncertainty and potential liabilities of these services.  Several US Internet radio stations have in the past received royalty notices from overseas collection agencies, asking for royalties for the use of sound recordings that are streamed to users in their countries.  This had caused other US streaming companies to block access to their services to foreign listeners. As the royalties that are paid to SoundExchange only cover US listening, until there is a reciprocal agreement between these collection agencies allowing one country's agency to collect for worldwide usage and then distribute the money to the appropriate rights holders worldwide, potential liabilities to multiple worldwide collection agencies will persist. 

At last week's Future of Music Policy Day in Washington, DC, SoundExchange President John Simson said that SoundExchange was hosting a meeting in Washington for representatives from a number of international collection agencies in efforts to work out an agreement that would provide a reciprocal collection and distribution agreement for Internet radio services.  In this instance, Internet radio operators should be on the same side as SoundExchange, rooting for its sucess in this negotiation to provide one-stop shopping for royalties for all of their listeners.

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On the same day that many webcasters were on Capitol Hill lobbying for the Internet Radio Equality Act, the Copyright Royalty Board issued its Final Determination of Rates and Terms today, and it was published in the Federal Register.  That action starts the clock ticking on appeals which must now be filed in 30 days.  In the Final Determination, the Board included a few revisions in its initial decision, reflecting the issues that it addressed in response to the Rehearing motions - including provisions adding a transitional period of two years during which webcasters can pay using an Aggregate Tuning Hour formula instead of paying based on each performance.  Surprisingly, the Board also amended the rules that it adopted governing the timing of the first payment under the new royalty rate, making the first payment due 45 days from the end of the month during which the Final Determination was issued.  As the decision was issued today, May 1, that would delay the due date for the first payments under the new royalties until July 15.

The statute governing the Copyright Royalty Board allowed the Library of Congress to review the CRB decision to determine if the Librarian (through the Copyright Office) saw any obvious errors of law.  Apparently, the Librarian found none (though that does not mean that there are not issues that can be raised on appeal), leading to the publication of the decision in the Federal Register.  Appeals are due 30 days after that publication.  On that date, parties file a Notice of Appeal, which provides notice to the Court of Appeals that parties believe that the decision was in error.  After those notices are filed, the Court will set briefing schedules and oral arguments.  The appeal process that can take a year or more before a decision is rendered.

Our previous coverage of the CRB proceeding can be found, here.

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The Internet Radio Equality Act was introduced in the House of Representatives today, proposing several actions - most significantly the nullification of the decision of the Copyright Royalty Board raising royalty rates for the use of sound recordings by Internet radio stations.  Our summary of the decision and its aftermath can be found here.  In addition to nullifying the decision of the Board, the Act does the following:

1. Changes the "willing buyer, willing seller" standard used to determine royalty rates for Internet radio to the "801(b)" standard - named after section 801(b) of the Copyright Act, which considers a variety of factors in determining royalties - factors including possible disruption to the industry of royalties, the maximization of the distribution of the copyrighted work to the public, the relative value of the contributions of the copyright holder and the service, and the determination of a fair rate of return to the copyright holder.  The 801(b) standard is the used for determining rates for satellite radio and digital cable radio.
2. Establishes an interim royalty rate for 2006-2010 of  (at the choice of the webcaster) either .33 cents per Aggregate Tuning Hour of listening or 7.5% of the service's revenues directly related to Internet radio
3. For noncommercial radio, places the royalty determination into Section 118 of the Copyright Act, which is where other noncommercial royalties (including the royalty for ASCAP and BMI for over-the-air use of musical compositions) are found, using the standards set forth in that section; and
4. Establishes a royalty for 2006-2010 for noncommercial entites at 150% of the fee that the service paid for the sound recording royalty during 2004.
5. Requires three studies to be conducted after the initiation of the next royalty proceeding, that will be submitted to the Copyright Royalty Board for their consideration in that case.  One study, by the National Telecommunications and Information Administration ("NTIA"), would study the economic impact of royalties on the competitiveness of the Internet radio marketplace.  A second, to be conducted by the FCC, would study the impact of royalties on local programming, diversity of programming (including foreign language programming), and the competitive barriers to entry into the Internet radio market.  A final study, by the Corporation for Public Broadcasting, would provide information to the CRB on the impact of the royalties on public radio operators. 

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As we wrote earlier this week, the Copyright Royalty Board denied motions for rehearing of its decision raising royalty rates for the use of sound recordings by Internet Radio stations.  The full text of that decision has now been posted on the Copyright Royalty Board's website, here.  Our summary of this order can be found here.  We have also posted a more detailed summary of the Royalty decision on our law firm website, here.

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The Copyright Royalty Board today denied the Motions for Rehearing of their decision raising the royalty rate for the use of sound recordings on Internet radio stations for 2006-2010.  The Board found that the Rehearing requests did not demonstrate that there was any manifest error in the initial decision, and did not introduce any new evidence that could not have been introduced in the original hearings.  Finding that these standards for rehearing were not met, the motions were all denied.  The Board decision was brief, not addressing in any specifics the issues raised in the rehearing motions. 

The Board did, however, decide to issue two clarifications to its decision.  It decided that, for administrative convenience, they would permit royalties for a transition period to be paid on an aggregate tuning hour basis for 2006 and 2007.  For 2006, the ATH rate would be $.0123 per hour for Internet-only webcasters, $.0092 per hour for broadcasters who stream their over-the-air music programming, and $.0011 for broadcast stations which use only incidental music (e.g. news/talk and sports stations).  For 2007, those rates would rise to $.0169 for Internet-only webcasters, $.0127 for the simulcast of a terrestrial broadcast station's signal for a music station, and $.0014 for the simulcast of a talk radio station.  These numbers appear to assume 11.5 songs per hour for broadcasters, and 15.4 songs per hour for Internet-only stations.

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We have written much on the Copyright Royalty Board decision on Internet Radio Royalties, and have received many questions and comments on the decision.  To try to put all of the answers in one place, we have put together a comprehensive memo on the decision.  The entire memo can be found here. 

In the memo, we provide a background of the case, a summary of the decision, a discussion of what comes next, and answers to some commonly asked questions.  Those questions follow here, but for a full understanding of the case, we urge you to read the complete memo. 

 To whom does the decision apply? The Board’s decision covers only non-interactive webcasters operating pursuant to the statutory license. Essentially, a webcaster covered by this decision is one that 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 the Copyright statute). These restrictions forbid prior notification to the listeners of when any specific song will play, and restrict the number of songs by a specific artist that can be played. For more information on these restrictions, see our memo on Internet Radio – The Basics of Music Royalty Obligations.


Does the decision cover broadcasters who stream on the Internet? Yes, the decision does cover the Internet transmissions of the over-the-air content of broadcast stations.

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Last Monday, briefs were filed by the parties addressing the motions seeking rehearing of the Copyright Royalty Board's decision to dramatically raise the royalty rates paid for the use of a sound recording on an Internet radio station.  In its briefs opposing each of the webcasters' rehearing motions, SoundExchange took a very aggressive position challenging the very right of the webcasters to raise their rehearing points.  Following the filing, SoundExchange issued another press release, quoting its President John Simson, "just because you don' like the outcome of a fairly played game doesn't mean that you should ask the referee to order the game to be replayed."  In fact, what the webcasters are really doing is asking for an instant replay review of an alleged winning touchdown.  Webcasters are arguing that the "officials" were mistaken in their initial determination, including arguments that the principal basis of the CRB decision, reliance on a SoundExchange expert witness who derived a model for determining what the royalties for noninteractive Internet radio should be based on what parties pay for music use in the interactive marketplace, was a fundamentally flawed model contradicted by one of SoundExchange's own expert witnesses in the satellite radio royalty proceeding which is currently underway. 

SoundExchange spent much of its briefs challenging the right of the webcasters to raise their arguments - claiming that the webcasters should have raised their arguments at an earlier stage of the proceeding, that the webcasters' arguments lacked supporting evidence, and even suggesting that the Broadcasters had breached the "protective order" in the satellite radio proceeding against the use of confidential material when the Broadcasters offered the evidence of the conflicting expert in the satellite radio proceeding.  Each of the webcasting parties amplified their arguments about various aspects of the decision - small webcasters suggesting that the Board should have recognized an "opt-in" category of webcasters who would pay royalties based on a percentage of their total revenue (avoiding many of the issues that the Board found with trying to compute a percentage of revenue for an entity that had multiple business lines), all webcasters challenging the $500 minimum fee per channel, and each arguing that there needed to be an aggregate tuning hour metric on which to compute royalties.  And, as set forth above, most interestingly, there was a fundamental issue raised by the Broadcasters, who discovered that a witness presented by SoundExchange in the CRB proceeding involving the royalties for satellite radio contradicted the premises of the SoundExchange expert in this proceeding on which the Board placed its greatest reliance in reaching its decision.

 

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In a recent press release, Clear Channel Communications announced an agreement with mSpot Radio to provide the programming of over 100 Clear Channel radio stations to mobile phone users.  Interestingly, this announcement comes in he thick of the battle over the new royalty rates for the streaming of music on the Internet.  In recent pleadings seeking rehearing of  the decision of the Copyright Royalty Board setting those rates, SoundExchange (the collective that collects the royalties on behalf of Copyright owners and musicians) raised only one issue.  The sole issue on which SoundExchange requested clarification was whether the royalties that were recently adopted would apply to mobile phone transmissions of programming containing music. 

A brave move in light of the current royalty decision - one perhaps reflecting the desire to have radio programming everywhere a listener wants it, or one that foresees revenues from the wireless phone companies compensating the parties for the costs involved.  It will be interesting to see how this roll out of radio stations on mobile phones progresses.

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Two press releases on the Internet radio music royalty controversy were issued late last week from groups appealing to musicians  - and they couldn't have been more different in tone.  The Future of Music Coalition, a group dedicated to voicing the opinions of musicians and citizens on Washington policy decisions regarding copyright and technology issues, released a well considered  position statement finding that webcasters - especially small commercial webcasters and noncommercial entities - "represent a rich and diverse set of listening opportunities" which provide opportunities for musicians by exposing listeners to music that is not heard elsewhere.  FMC suggests that multiple tiers of licensing are necessary so that all kinds of webcasters can continue to exist (unlike the one size fits all scheme adopted by the Copyright Royalty Board).  FMC urges SoundExchange and the webcasters to come to a settlement that will preserve webcasting while fairly compensating musicians.

By contrast, SoundExchange argues in its press release that some webcasters are acting in bad faith in arguing that the rates are too high - and are "engaged in a campaign of misinformation about the process, the decision itself, and the impact of the decision on the participants."  The Press Release itself is subtitled "Suggests Some Webcasters Not Telling the Truth About the Royalty Process."  The release promises an attached summary of the Board's decision but, at the time of this posting, that summary was not apparent on the SoundExchange website.  The only misrepresentation cited by SoundExchange is the claim by webcasters that the process which arrived at the rates was unfair.  However, as pointed out by editor Kurt Hanson (a client of mine in this proceeding) on the Radio and Internet Newsletter site, here, a decision that overlooks its real world effects can fairly be characterized as being unfair.  Information about the real economics of the industry, which SoundExchange may not have appreciated, demonstrates that unfairness.

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Monday was the deadline for the filing of Motions for Rehearing of the decision of the Copyright Royalty Board decision on Internet radio music royalties for 2006-2010.  As we have written before, the decision proposes significant increases in the royalties, particularly for independent webcasters who have up to now paid royalties on a percentage of revenue basis, rather than on the per song per listener basis set out in the CRB decision.  In motions filed today, many of the webcasters challenged specific aspects of the CRB decision.  And at least one party raised an issue that seems to contradict the very foundation of the Board's decision.  Plus, in virtually all of the rehearing motions, the parties noted that additional issues may be raised on appeal to the US Court of Appeals, which do not need to be filed for several weeks.  

In the Motion filed by the Broadcasters' group, it was argued that an expert witness offered by SoundExchange in the proceeding which is now underway to determine royalty rates for satellite radio contradicted some of the basic assumptions used by SoundExchange's witness in this proceeding.  If the assumptions used by SoundExchange's expert in the satellite proceeding were to be applied in this case, the royalties would actually decrease from those that were in effect before the Board's decision. The assumptions used by the expert in the satellite proceeding seemed to confirm the claims offered by the webcaster's witnesses in this proceeding.  Could this be a smoking gun that could undermine the decision of the Board?  We'll have to see if the Board accepts this new evidence which seems to challenge the very foundation of the webcasting decision.

As the appeals are addressed to the CRB itself, asking that it reconsider or review its own decision, most of the other issues focused on limited matters that the parties thought that the Board might want to clarify as to avoid unintended consequences.  For instance, the appeals of the DiMA group, representing large webcasters, and the appeal that I worked on for the small commercial webcasters, both addressed the issue of the $500 per channel minimum fee which, if it was to be paid on literally every unique channel streamed by a service, could mean that some webcasters could pay hundreds of thousands or even millions of dollars as a minimum fee.  Some webcasters (like Pandora) serve up a unique stream for every listener.  Virtually all of the parties also addressed the question of whether most webcasters could even compute a royalty based on a per song per listener basis.  This is especially true for retroactive payments, when many webcasters did not keep such records (especially those small commercial webcasters paying on a percentage of revenue basis, or noncommercial webcasters who had payed on a flat fee basis). 

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We have been covering the controversy over the rise in the royalties for all those who are providing an Internet radio service, whether they be over-the-air broadcasters streaming their signals on the Internet or pure webcasters whose stations are only available on the web.  Our previous postings on the topic can be found here.  Today, National Public Radio's program, On the Media, is airing an interview that they did with me on this topic.  You can listen to the Interview, here. 

A number of major media sources are doing stories on the impact of these royalties on small webcasters.  The Wall Street Journal yesterday ran a story focusing on the impact on the royalties on small webcaster, WOXY.  That story can be found here (subscription required for full story).  The Boston Globe also ran a story focusing on two Boston area webcasters.  As those stories set forth, while all webcasters are hit hard by the royalty, small independent webcasters face the most immediate crisis, as their royalty obligations will exceed their total revenues.  The first royalty payment under the new royalty rates is due on May 15, so the clock is ticking for these webcasters.

Requests for rehearing to be filed with the Copyright Royalty Board will be filed on Monday, so coverage of this story will continue.

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For those of you tired of reading about the recent Copyright Royalty Board decision on Internet Radio royalties, you can instead listen to a discussion of those royalties.  An interview that I did with World Internet Radio is available to download and listen on their website, at http://www.wirnonline.com/downloads.php.  The interview covers questions about the royalties themselves, the process that went into their adoption, the likely effects of the new royalties if they are not modified, and the possible routes by which the royalties may be changed. 

And, if you are not tired of reading about the royalties, our stories and the dozens of comments that we have received are archived here.

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Following the recent Copyright Royalty Board decision, about which we have written several times this week, many individuals and companies have asked what can be done either to reverse the decision, or to operate in a world where the decision becomes effective.   While it is much too early to access all of the options, I thought that I would outline some of the possibilities.

First, Petitions for Rehearing of the Decision can be filed by the parties to the case within 15 days of the release of the decision – by March 19.   As such a Petition asks the Board to determine that the conclusions it reached after several months of deliberation were wrong, this is an uphill battle. There is, however, a much greater possibility that the Board will clarify some of the more onerous ambiguities of the decision – such as the issue of what constitutes a "channel" or "station" to which the minimum fee attaches. 

 After Petitions for Rehearing are dealt with, the Library of Congress must publish the decision in the Federal Register. Within 30 days of such publication, parties can appeal the case to the United States Court of Appeals for the District of Columbia. The filing of a Notice of Appeal by that deadline merely starts the appellate process. The Court will establish a schedule for the case – setting dates for the filing of full legal briefs and responses to those briefs. The Court will have an oral argument after the briefs are filed. A decision will follow. In appellate cases, this process can easily take a year to complete.   In order to overturn the decision, the court must find that the decision was arbitrary and capricious - in essence that, when presented with the facts, no there was no reasonable way for the decision to turn out the way it did.  This is a high standard that must be achieved, but not one so high that appeals are never successful.  So there is always hope.

 

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The Copyright Royalty Board decision is now posted on their website.  The decision can be found here.  We've written about this decision here and here, and will have more information on the site in the coming days.

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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.

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The Copyright Royalty Board decision on the royalties for to be paid by Internet Radio stations for streaming music during the years 2006-2010 was released to the participants in the proceeding today.  And the rates are going up significantly over the next few years.  More importantly, especially for smaller entities, there are no royalty rates based on a percentage of revenue as were in effect for small webcasters under the Small Webcasters Settlement Act.  Instead, all royalties are given as a per performance number, i.e. a payment for each song every time a listener hears that song

In a 100 page decision, the Board essentially adopted the royalty rate advanced by SoundExchange (the collective that receives the royalties and distributes the money to copyright holders and performers) in the litigation.  It denied all proposals for a percentage of revenue royalty (including a proposal that SoundExchange itself advanced).  The Board also rejected any premium for streams received by a wireless service, as SoundExchange had suggested.

The rates set by the Board for commercial webcasters, including broadcasters retransmitting their over-the-air signals on the Internet, are as follows:

2006 - $.0008 per performance

2007 - $.0011 per performance

2008 - $.0014 per performance

2009 - $.0018 per performance

2010 - $.0019 per performance

The minimum fee is $500 per channel per year. There is no clear definition of what a "channel" is for services that make up individualized playlists for listeners.

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At the NAB Broadcast Leadership Conference in Washington today, Congressman Ed Markey, Chairman of the House of Representatives Telecommunications and Internet Subcommittee of the Energy and Commerce Committee, announced that the subcommittee would hold hearings on the state of radio.  These hearings would examine not only over-the-air radio, but also Internet radio, HD radio, satellite radio and other related businesses.  This comprehensive review seems to be different from the previously announced hearing by the new Congressional task force on antitrust issues which had announced plans to review the proposed XM-Sirius merger.

While Congressional hearings often lead to nothing other than an airing of the issues and information for future legislative efforts, they do indicate areas of interest that could eventually mature into Congressional legislative proposals.  A comprehensive hearing on radio issues could end up providing Congress with the information that could send it in several directions - perhaps weighing in on multiple ownership issues or on the digital radio transition, and could even prompt Congress to review any action taken on Internet radio royalties.  As we've written before, the Copyright Royalty Board is expected to release its ruling on the royalties for 2006-2010 in the next week.  The direction of this Congressional hearing, when it occurs, will be worth watching.

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By now, everyone knows that XM and Sirius have announced plans to merge into a single nationwide satellite radio service provider.  This plan is, of course, subject to approval of the FCC.  The NAB has announced plans to oppose the merger, and Congress today scheduled hearings on the matter, to be held next week.  The obvious issues to be considered by the Department of Justice and the FCC will be whether the merger will be anti-competitive and whether it will serve the public interest.  But there are numerous other legal issues, possibly affecting other FCC proceedings, that may well come out of the consideration of this merger.

For instance, the merger raises the question of whether satellite radio is a unique market that should not be allowed to consolidate into a monopoly, or whether there is a broader "market" for audio programming encompassing not only satellite radio, but also traditional over-the-air radio, iPods, Internet radio, and other forms of audio entertainment.  While the opponents of the merger may argue that satellite radio is a unique market, such a finding may affect the broadcast multiple ownership proceeding, where some broadcasters are advancing arguments similar to the satellite companies in hopes that the FCC will loosen multiple ownership restrictions. 

Another issue that seemingly will be raised by the merger is how important a la carte programming is to FCC Chairman Martin.  The Chairman has been pushing both satellite and cable television companies to allow consumers to purchase only the channels that they want rather than whole packages of channels.  He has argued that consumers could save money by buying only the channels that they want, and consumers could also avoid programing that they don't want (like adult oriented content).  Service providers have countered that forcing the unbundling of program tiers will make it economically unfeasible to offer many of the more niche program channels.  Published reports indicate that part of the merger proposal to be advanced by the satellite companies may include a proposal for a la carte pricing.  Thus, this case may show how important the Chairman really believes such offerings are - and whether that offering may help tilt the public interest considerations in the proceeding.

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I've just returned from this year's Radio Advertising Bureau convention in Dallas.  In reflecting on the convention, and in discussing it with many who were in attendance, the consensus was that this was not your Father's RAB convention.  I was surprised by how little discussion there was of traditional radio at the conference.  The sessions weren't the typical ones about how to make the most money from selling your cluster of radio stations in combination, or how to compete against the newspaper or the Yellow Pages, or how to get the most out of your sales staff.  Instead, virtually every session talked about leveraging your digital assets.  There were discussions of using your website, streaming, podcasts, text messaging, and  audio on cell phones to increase the financial performance of broadcast stations.  There were discussions of HD Radio and some of the opportunities that service might offer if and when it starts getting consumer acceptance.  All in all, it seemed as if radio (or at least those planning the convention sessions) had received the message that the industry needs to take advantage of its ability to drive traffic to new technologies, and drive that traffic to new media sources that stations themselves create. 

In the past, there seemed to be a fear about discussing these new technologies.  It was almost as if the technologies weren't discussed, they'd go away.  But at the RAB, and at many of the conventions of the state broadcast associations that I have attended over the last year, broadcasters seemed to have decided that they need to embrace the new media.  While the old fear had been that these new media sources would cannibalize the current broadcast audience, everyone seems to now recognize that the audience is going to use these technologies no matter what - so the broadcaster might as well be the one cannibalizing its own audience.

While legal and regulatory issues do not tend to be the primary topic of discussion at the RAB Conference, as in almost any broadcast discussion, they do come up.  Here too, the discussion was digital.  For instance, in the speech by NAB President David Rehr outlining the priorities of the NAB for the year, only the effort to authorize FM translators for AM stations (which we wrote about here), was not a "digital" topic.  The other issues discussed by Mr. Rehr included pushing the FCC for final rules for digital radio, monitoring the actions of satellite radio companies XM and Sirius, and finally, the issues that arise out of the Perform Act.  The Perform Act is a copyright bill introduced in the Senate last month that would affect digital royalties for music used on the Internet, place restrictions on services promoting the promotion and sale by digital music providers of devices that disaggregate songs contained in a digital stream, and require copy protection technologies to be employed by digital music providers.  Hardly the exciting stuff that makes for an applause line in a convention speech.  While we will write more about the Perform Act in a separate posting, the major concern for broadcasters is that the sponsor, California Senator Diane Feinstein, suggested in her remarks that the performance royalty on sound recordings which now applies to satellite radio and webcasting (which we have written about many times including here), should also apply to broadcast radio.  And that is a big enough issue - one that could hit broadcasters directly in the pocketbook - that it demands the industry's attention in every forum. 

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The FCC yesterday adopted two orders approving the initiation of operations by Qualcomm of its MediaFLO wireless multimedia system on television channel 55 in the Richmond/Norfolk area of Virginia, and in St. Louis Missouri.  Qualcomm purchased the nationwide rights to use Channel 55 in an FCC spectrum auction several years ago.  At the end of the digital transition, channels 52 and above will no longer be used by television broadcasters, but instead will be used for wireless services (as well as some public safety users).  The channels between 52 and 59 have already been auctioned, and can be used if they don't cause interference to current television users.  In these two cases, Qualcomm was able to reach agreements with broadcasters in adjacent markets to agree to accept minimal amounts of interference so that Qualcomm could initiate its MediaFLO service.  The FCC found that the minimal interference to these stations would not significantly affect television viewers, and granted Qualcomm authority to commence operations.

According to the Qualcomm website, their MediaFLO service will provide interactive audio and video to handheld devices - essentially mobile phones optimized for multimedia content.  While the website seems to imply that this will be a closed system with content provided by a limited number of providers or partners, it will operate with a IP type technology, which could allow a more open system in the future.  Other users are apparently planning to use these channels for high speed wireless Internet services.  So, perhaps ironically, as free over-the-air TV abandons these channels in the next two years as the digital transition nears its end, a new subscription audio and video service will take its place.  Progress?

 

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About this time every year, predictions are offered as to what will happen in the coming year.  Since everyone else does it, we've offered our own predictions as to what Washington has in store for the broadcast industry in 2007.  Find a copy of our predictions in the memo on our firm website, here.  The advisory offers our thoughts on many of the regulatory issues affecting broadcasters that may well come out of Washington this year.  Our observations are offered on the status of considerations including multiple ownership, the digital television transition, payola, indecency, Internet radio and even the political broadcasting rules. 

Let us know if you think our crystal ball is a little cloudy.

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In a recent article from the Boston Globe, an interview with the new manger of WBZ-TV in Boston stressed the importance of the stations call letters.  The article talks about the connection that the local audience had to the well-known station call letters , and how the station had suffered to some degree by de-emphasizing those call letters while using other station branding.  That story, to me, raises the question of whether stations have taken the necessary steps to protect their brand by protecting the use of their call letters.

Since 1983, the FCC has left disputes about the use of confusingly similar call letters to local courts.  Thus, if a competitor picks a set of call letters that could confuse the public about the relationship of their station to yours, you may need to sue to stop that use.  And now, when stations often keep alive formats that have been dropped by moving the formats onto Internet Radio Stations or to HD Radio subchannels, the call sign may well live on even after it has been dropped from a primary on-air station.  Thus, it needs protections other than those provided by the FCC.

In 1983, the FCC stated that stations had a sufficient interest in call letters to obtain a service mark.  A service mark gives the call letters the protection of Federal law, and may impose penalties on a competitor who tries to infringe on those call letters.  To protect that brand, the investment of a few hundred dollars to file a service mark application may well be worth it, and something that more stations should consider.

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While recent press reports talk about the growth of Internet Radio and the increasing presence of terrestrial radio companies on the net, the amount of the music royalties that will have to be paid by Internet radio companies for the 2006-2010 period remains unresolved.  The trial phase of the proceeding to set the rates, held before the Copyright Royalty Board, is now completed, and the upcoming decision of the Board may have a profound impact on the economics of the Internet radio industry.  Final briefs in the case were filed with the Board in December, and an oral argument was held on Thursday, December 21.  With the completion of the argument, the decision is now in the Board's hands, and the amount of the royalties for the use of the sound recordings will be decided by the Board on or before March 4. 

In the on-line world, and in most digital communications channels other than over-the-air digital broadcasts, a royalty for the use of the "sound recording" (the actual recording made by a particular artist) must be paid in addition to the royalty for the use of the composition (i.e. the underlying words and music) that is paid to ASCAP, BMI and SESAC.  Our summary of the royalty rates that Internet radio stations should currently be paying can be found on our firm's website, here.  As we make clear in that memo, the rates that are currently being paid expired at the end of 2005, so the rates that are adopted in the current proceeding will be retroactive to January 1, 2006.

The proceeding to determine the new rates has been underway for more than a year.  Written cases were filed by the parties in October 2005.  Discovery, including depositions and document discovery, took place in the early part of 2006.  A trial began in May and lasted through the first week in August, with a rebuttal phase that ended the week after Thanksgiving.

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In a press release issued last week, Cambridge Consultants announced that it would be introducing at the Consumer Electronics Show a wireless Internet radio device that would cost less than $15 to manufacture, and would likely retail for around $50.  While several articles have hailed this device as signaling the demise of both satellite and over-the-air radio as consumers get inexpensive access to hundreds or thousands of Internet Radio stations, not one article that I've seen addresses the issue of whether these stations will be around to listen to, after the new royalties are announced for the use of sound recordings on the Internet.  Briefs are due to be filed with the Copyright Royalty Board this week, summarizing the evidence that has been received over the past year in the proceeding that has been ongoing to determine these rates.  By March 1, the Board should announce a decision.

We have summarized the rates on which Internet Radio companies should be paying royalties in our memo, here, but noted that these royalties actually expired as of the end of 2005.  Royalties for this year, and the upcoming years through 2010, will be decided by the Board in the current proceeding.  This proceeding, which could well determine the fate of many Internet Radio stations - and perhaps of the devices designed to listen to them - bears careful monitoring.

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The Copyright Royalty Board (CRB) has just announced the required recordkeeping format for Internet webcasters streaming on the Internet. The full text of the decision can be found at http://www.loc.gov/crb/fedreg/2006/71fr59010-9.html

Basically, the requirements set forth by the CRB obligate those streaming their signals on the Internet must keep track of the music that they play for at least two weeks of every quarter, and report that music to SoundExchange in an ASCII format. The CRB found that an ASCII formatted report could be generated by Excel or Quattro Pro spread sheets. The Board's decision also sets forth specifics as to format, headers and other details of the reported information.

SoundExchange had previously prepared model reports for recordkeeping using Excel and has been ordered by the CRB to develop one for Quattro Pro. The Excel model will presumably be modified to come into line with the CRB's decision. A copy of SoundExchange's model can be found at http://www.soundexchange.com/licensee/licensee_cws.html#reporting

Services have been required to keep information about the music that they play since an interim Order issued by the Copyright Office in April 2004. The new Order from the CRB contemplates that the information that has been retained by Internet services be provided using this newly mandated format.

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The NAB Radio Show held the week before last, in conjunction with the Radio and Records Convention, was notable in its attention to new media. It’s been years since the NAB has devoted so much time to new media issues (remember the Streaming at NAB sessions that were held at the radio show early in the decade?).  And the new media sessions have perhaps never been as central to the Convention. Sessions on streaming, podcasting, downloads, blogging and just generally dealing with the media competition abounded at the convention.

The emphasis on the new media was perhaps most evident and presented most starkly in a pre-convention Summit put on by Jacobs Media. There, one presenter, Gordon Borrell of Borrell Associates, Inc., talked about the reach of media and information on the Internet, and just how prevalent it has become – even in reaching fighting for local advertising dollars – perhaps the one place that over-the-air broadcasters thought was most securely their own. Mr. Borrell pointed to websites such as those run by the Cape May Herald and the Lawrence County Kansas Journal-World as ones which show the power of the Internet to contribute to or eclipse their traditional sponsoring media (he said that the Lawrence site did over a million dollars a year in on-line revenue),. Even sites with no traditional media  partner, like Hartford.com, were said to be generating hundreds of thousands of dollars in local advertising revenue. What was perhaps most surprising was his assertion that in 40% of markets, there is an on-line site that has greater advertising revenue that the most successful radio station in the market.

Another presenter, Jason Calacanis, CEO of Weblogs,  went so far as to suggest that the principal purpose of today’s radio station should be using the station to drive traffic to the station’s website before the station itself became obsolete. Videos of the Jacobs Media Summit are available on-line, here.  While many others found this view to be extreme (Jack Isquith of AOL Music, in a session on streaming held several days later, talked at one point of the “elegance” of radio’s ability to reach local mass audiences more efficiently than on-line media), the whole convention seemed to be in agreement that radio needs to concentrate on the new media and develop their web presence. 

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This week's Economist includes an interesting story on the competitive pressures being faced by newspapers.  One of the observations about successful newspapers in this competitive, digital world is the ability of the newspaper to exploit its on-line presence.  Successful newspapers were able to not only use their existing content on the Internet, but were also able to expand the reach of their paper and create compelling content to attract their readers and others to the website.  This includes the extensive use of audio and video.

On Friday, I participated in a live webcast, "Webcasting for Rookies" sponsored by the International Webcasters Association.  In a discussion with Michael Gordon of Limelight, the content delivery network, a similar observation was made - that newspapers are some of the biggest users of streaming media.  He observed that newspapers did not view on-line audio and video as competitive to their primary product, but instead as complementary, so they were more willing to promote their on-line product.  Conversely, broadcasters were reluctant to exploit the Internet, as it was seen as being more like broadcasting, and more threatening. 

Mr. Gordon's comments, and those of the other speakers including my discussion of legal issues for webcasters, can be accessed here (free registration required).  Broadcasters should take note.  As the Internet grows, they don't want others to steal their audiences by doing what broadcasters do best - audio and video.

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In recent months, SoundExchange has been reaching out to webcasters seeking to identify those who are delinquent in their royalty payments for music used on the Internet. Numerous broadcasters and webcasters have received calls or letters from SoundExchange seeking information about apparent underpayments or missing mandatory reports of royalty liability that should be filed regularly by webcasters.

Some webcasters may believe that, as the rates for Internet radio music use for 2006-2010 have not yet been established, they don’t have to pay anything until those rates are set. That is not correct, as the legislation adopted in 2005 which established the Copyright Royalty Board also specifically required that fees be paid at the old rates until a new rate structure is adopted. Some broadcasters have assumed that their ASCAP and BMI fees, which cover “streaming,” cover all costs of putting their signals on the Internet. Again, that is not the case, as the ASCAP and BMI cover only the use of the musical composition (the song) on the Internet.  The SoundExchange fee compensates the copyright holder in the actual performance of the music (the money that is collected goes to the copyright holder of the recording and the musicians who play on the recording).   The SoundExchange fee is entirely different from ASCAP and BMI, and is imposed only for non-broadcast digital transmissions of recorded music. Broadcasters do not pay a SoundExchange fee for their over-the-air broadcasts, and may not be familiar with this fee, but it is one that should not be overlooked, especially given SoundExchange’s recent attempts to identify noncompliant webcasters.

For those who may be unfamiliar with the royalties for use of music in an Internet radio broadcast, a memo outlining the requirements is available <here>

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