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

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.

Certainly, this issue will be debated in the future.  But, once again, it raises the question of whether music has an independent value that can be quantified on a per song, per listener basis, or if the value of music depends more on the situation in which it is experienced and whether compensation for the use of that music is not more appropriately tied to a percentage of revenue of the user, as we've discussed in previous posts.  In a percentage of revenue scheme, the music user benefits when the service does well, and does not receive as much when the service is not a success.  But, as there is no penalty for the use of more music, more services are attempted, so more successful applications are likely to be discovered, benefiting both the creator and the user of the music.  When there is a per use fee, there is a cost for using each and every piece of music, seemingly discouraging new services and new innovations.  These are no doubt issues that will be debated endlessly into the future, but something to consider as Internet radio becomes untethered from the computer. 

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?

A “digital phonorecord delivery” is each individual delivery of a phonorecord by digital transmission of a sound recording which results in a specifically identifiable reproduction by or for any transmission recipient of a phonorecord of that sound recording, regardless of whether the digital transmission is also a public performance of the sound recording or any nondramatic musical work embodied therein. A digital phonorecord delivery does not result from a real-time, non-interactive subscription transmission of a sound recording where no reproduction of the sound recording or the musical work embodied therein is made from the inception of the transmission through to its receipt by the transmission recipient in order to make the sound recording audible. 
 

From that definition, the Copyright Office in its NPRM goes through a detailed analysis of the meanings of various words and phrases in coming to the conclusion that DPDs encompass not just digital downloads but also on-demand and noninteractive streams (noninteractive streams meaning Internet radio).  The Office first concludes that there is a "delivery" when a person receives a digital transition - seemingly pretty straightforward.

Then it looks at the language that seems to exclude noninteractive streams from the definition of a DPD.  However, the Copyright Office states in its NPRM that it believes that the exclusion only applies where there is no "reproduction" of the sound recording.  The Copyright Office looked at the buffer and RAM copies necessary to make the stream audible, and determined that these were in fact reproductions.  Thus, as the exclusion covered only services that did not make reproductions, Internet radio-type services that stream their music programming to their listeners were not within that exclusion.  .

The Office also looked to determine if these buffer copies were "specifically identifiable."  Essentially, the Office concludes tentatively that the computer being used by the ultimate recipient of the transmission (the listener) can decipher the buffer copies, so those copies must be specifically identifiable.  Essentially, the Office decided that, as the transmission can be heard, the copies must be specifically identifiable.

While the Office claims to be reading the plain language of the statute, one has to wonder if this is what was meant by Congress when the statute was adopted.  Seemingly, the statutory structure of the Copyright Act as amended to cover digital services was trying to equate real time, noninteractive streaming with radio type services, and creating a public performance royalty under Section 114 for the sound recordings and allowing the Performing Rights Organizations (ASCAP, BMI and SESAC) to take care of the composition rights for this real time streaming.  It would seem as if the concept of the DPD was meant to cover the digital equivalent of the pressing of a record or a CD - i.e. a download or similar one-to-one transmission that resulted in a fixed copy that could be used and re-used by the recipient.  To me, the concept of "specifically identifiable" would mean one that can be pointed to and identified, so that a listener can go find the song that they want when they want it, just as I can go to my CD collection, and find a Rolling Stones CD when I want it by looking at the label.  When I want to hear a particular song that is being streamed, I certainly can't go to my buffer copies to find that song (as, even if it played on an Internet radio station an hour before, it is not there now if I want to hear it again).  But certainly these are issues that will be debated. 

We have written about the recent Court decision that determined that ASCAP had no public performance right in connection with a digital download, as it was not a "public" performance.  Only the music publishers would collect for the composition used in the song being downloaded to avoid double-dipping.  Here, applying Section 115 to noninteractive streaming would seem to be the mirror image of the ASCAP case, yet the Office is reaching a decision that is exactly the opposite of the one reached by the Court.  Of course, that ASCAP case may be appealed, so these issues, too, are unresolved. 

The Copyright Office seemed to recognize that this could be very controversial, and states that it takes no position as to the value of the Section 115 right that it finds to exist.  That would be left to the Copyright Royalty Board to determine royalty rates under Section 115  in its current proceeding - and that the Board could well determine that the copies made in the case of noninteractive streaming have no value at all.  However, one wonders if the issue was fully argued in the case as most parties seemed to acknowledge that the Section 115 royalty would not apply to such activities (the Board even citing in a footnote that the publishers supported such an exemption in a Section 115 reform bill that was introduced and passed by the Judiciary Committee but not adopted by the full Congress in the last Congressional session).

Comments in the Copyright Office proceeding are due on August 15, and Replies are due on September 2. This is a very important proceeding in which parties should make their views known. 

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

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

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

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

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

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

Thus, stations in these smaller markets have an even harder and more nuanced consumer education task ahead of them.  They must get viewers ready for the digital transition for the full-power stations in the market, but they must also let consumers know that only certain digital converter boxes will allow the reception of the translators and LPTV stations that are not making the conversion.  The Wilmington test (about which we wrote here) will provide one test of how this message will be received, as there is at least one LPTV station in that market that is not making the digital conversion in September.  But the real test as to how well the message gets out will be next February.  LPTV and translator  stations form an integral part of the television industry especially in western markets, and they cannot be abandoned.  Thus, the entire industry must join in efforts to recognize and ameliorate their issues to the extent possible, so that everyone is ready for next year's digital transition.

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

The Commission also questioned whether there was a need for sponsorship identifications in interview programs where there was consideration given to the program for the inclusion of broadcast material.  The FCC worried about "hidden commercials."  That discussion was most likely triggered by the concerns over Video News Releases ("VNRs") and by payments to spokesmen to plug government programs without disclosing that they had been paid (as in the Armstrong Williams program which was the subject of a fine about which we wrote here, and the recent controversy about ex-military officers who offered on-air opinions on the War on Terror without disclosing their financial connections to the Defense Department).  However, it would seemingly have a far greater impact.  In watching television programs in the last few days, I've been wondering how far the FCC's concern could go.  On virtually every talk program, from the late night programs like the Daily Show or the Leno or Letterman, to daytime TV programs like Oprah or the Today Show, one staple is the author who is plugging his or her book or the actor plugging his or her movie.  Could the provision of the guest on these programs for no payment by the TV show be construed as the receipt of valuable consideration by the book publishers or movie companies who are paying the costs of the promotional tour by the author or actor?  Watching another cable television talk program, I noted the presence of numerous coffee cups with a recognizable logo on the desk of the hosts.  Was that coffee paid for by the hosts, or was it provided by the coffee company just for the promotional value of having its cups appear on screen?  While FCC policy currently allows the provision of material used in a program at no charge if the material is not unnecessarily highlighted in the program (so the piano may be provided by Steinway and its logo may be seen when the focus is on the player's fingers, there is no tight focus on the logo nor is there a plug at the end of the concerto remarking on how amazing the piano was).  But would even the existing indirect plugs be permitted (without a sponsorship identification) if rules were adopted to address some of the concerns expressed by the FCC. 

The way that the advertising and broadcasting businesses work together could be profoundly affected by this proceeding.  Read our Advisory, read the FCC's Notice, and watch for the comment date.  Think about the concerns that should be addressed by the Commission before enacting any new rules in this area, and let them know of these concerns before any new rules are adopted. 

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

A copy of David's PowerPoint presentation used in the seminar can be found here. 

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. 

While the proponents of the royalty have downplayed the promotional benefits of radio airplay, even arguing that airplay harms artists as listeners substitute radio listening for the need to buy a CD or download, even the music industry’s own expert testified before the Copyright Royalty Board that the net promotional value was probably greatest for up and coming bands, while that negative impact might only occur for well-known acts who have other avenues through which to promote their music. Thus, the imposition of the royalty would seemingly make the rich get richer, while limiting the avenues for promotion for lesser known acts.

SoundExchange, which collects the digital royalties, has itself suggested in a recent press release that the fees that the royalties they seek, like those imposed on Internet Radio, are reasonable. SoundExchange points to predictions as to the revenue that Internet radio will received by 2020 and claims that more and more services are signing up to provide Internet radio service under the royalties set by the CRB.. They make much of the “AOL-CBS partnership”, when instead what appears to have happened is that one of the biggest Internet radio companies has essentially left the business, surrendering their service to CBS. As we just wrote, MSN has also abandoned the business, Yahoo has been decreasing their listening hours, and Pandora has been repeatedly been stating that they cannot operate under the current royalties. The Internet radio-like services that have been getting the most recent promotion and press coverage – services like Last.FM and Imeem, have negotiated their own private deals as they provide interactive services not subject to the royalty. If not for small webcasters paying under the special terms for those stations, or for larger broadcasters who may have different on-line economics (i.e. they essentially have no programming costs as they repurpose their existing content on the web, though even there most small broadcasters are petrified of developing a large on-line audience that could bankrupt them), the Internet radio industry would be crashing.

The recent discussion has also turned to parity in royalties. The record labels argue that broadcasters don’t pay a royalty as other digital services do because of an historical "loophole" in the Copyright Act. But this argument could just as easily be reversed.   The record companies only get the royalty because of the provisions of the Copyright Act created only in the late 1990s, for the first time creating a public performance right in a sound recording. If the RIAA/SoundExchange position were to be accepted, it would seem clear that the same “loophole” would also apply to other public performances of sound recordings – like the playing of records in bars and restaurants, stores, stadiums, and in other public places. While the current bill does not provide for such an extension, isn’t that the logical extension? The performance royalty paid to composers is paid by these venues so, using the Music First logic that there should be "parity", wouldn’t these venues be next?

The argument of parity simply does not ring true  As we have written, here, the SoundExchange proposal embodied in the initial bill for small broadcasters is a flat fee of $5000 per year if the broadcaster has less than $1.25 million in revenue. Yet under SoundExchange’s special deal for small webcasters, a webcaster making $1.25 million would be paying over $150,000 in royalties. Where is the fairness and parity there? Is SoundExchange wiling to support a similar limitation in the royalties paid by small webcasters?  Similarly, if SoundExchange is seeking the same royalty as has been determined “fair” by earlier CRB proceedings, the royalty on broadcasters could exceed 20% of their gross revenues for a music station (see our computations here). In this day of declining radio profits, such a royalty would be crushing for most stations, perhaps ensuring the demise of over-the-air broadcasting (as reportedly predicted by Steve Ballmer of Microsoft), making issues of the digital divide incredibly acute. The news, information and entertainment provided by radio broadcaster would disappear, and music entertainment would be available only to those who have access to wireless high-speed Internet connections. That will not be the same as the ubiquitous service offered by free over the air radio currently.

While the subcommittee reportedly wanted to make some changes in the bill before it advances to the full Committee, these fundamental issues need to be considered. Essentially, while it is very easy to say that musicians should be compensated for the use of their work, the unintended consequences of the royalty are great. Congress and even the artists and labels need to carefully consider these issues before moving on the enactment of any performance royalty.

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.

First, the case was about "indecency" not "obscenity."  Many of this morning's newscasts referred to the Pacifica decision as being an Obscenity decision.  Obscenity is speech that can be banned no matter what the time and place, as it is speech that is deemed to have no socially redeeming value.  Indecency, on the other hand, is a far more limited concept.  Indecent speech is speech that is constitutionally protected - it has some social significance such as the social commentary clearly conveyed by the Carlin routine.  It cannot be constitutionally banned.  But the Supreme Court upheld the FCC's decision in the Pacifica case that, because of the intrusive nature of the broadcast media, it can be limited to hours where children are not likely to be in the audience.  Hence, the FCC has a "safe harbor" that allows indecent programming between the hours of 10 PM and 6 AM, when "obscene" programming is never allowed on the air.

Yet, despite the fact that the FCC never adopted a list of Seven Words that You Can Never Say On TV, many broadcasters believe that they have, and we probably have Mr. Carlin to thank for that belief.  Perhaps there will be Carlin retrospectives on broadcast stations in coming days - but they are unlikely to run during the middle of the day.