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As soon as IRFA was introduced, DC players started to choose up sides – with Internet radio operators, the Consumer Electronic Association, and others supporting the Act, and most record labels and artists opposing it. The opposition also recruited some unlikely supporters, including the NAACP, the National Music Publishers Association and Grover Norquist of the "no tax increase" pledge fame. Why do these groups oppose the act – whose principal purpose is to make the decisions as to royalties for Internet radio the same standard (the 801b standard about which we wrote here) as that used to determine the royalties for other digital music services (such as Sirius XM) subject to a statutory royalty?

As noted in these pages before, I represent Internet radio companies on royalty issues, so I want that potential bias to be on the table as I explore the differences in positions in this article.  But, from my perspective, the real issue is the differing perception of the value of music, and the relative contribution to the value of digital media companies. Musicians, seeing music as the backbone of many digital entertainment services, feel that it is their content that is the reason that a service even exists, much less is successful. Services, on the other hand, believe that there is much more that governs success in the media universe, and that presentation, technology, promotion and many other factors lead to that success. Where that value lies, and what the relative contributions of the parties are, is at the heart of the disagreement over royalties.

In the last year, there have been more and more stories about musicians claiming that the payouts that they get from digital music services – even the interactive services that pay rates negotiated with the copyright holders at levels substantially higher than those paid by webcasters - are not sufficient. Sometime, the argument seems to be based on the belief that the royalties are not sufficient to compensate them for the loss of revenue that they expected to get from the sale of music. Other times, the concern seems to be grounded in a belief that the royalties don’t allow more musicians to achieve musical success – the elusive “musical middle class” – where musicians can make enough money from their art to support themselves and their families without resorting to holding two or three jobs. And there seem to be yet other times that musicians see the apparent success of certain Internet entrepeneurs, and wonder why they can’t make substantial money off the Internet too.

On the other hand, supporters of change in the royalty system point to the fact that there simply has not been a long-term successful, profitable music service developed under the current royalties. The world of interactive music services is littered with the remnants of abandoned services. Last year, Last FM, which had been a "success" story as it was sold to CBS for about $270 million about 5 years ago, is almost invisible in the US music universe, and is now cutting back on its services because of royalty demands. Pandora, by far the most successful of the noninteractive services, still has not announced a profitable year, or even any sustained profitable quarters, as the “content acquisition costs” (i.e. royalties) continue to eat up a more than half of their revenues. And, under the Pureplay Settlement Act, Pandora pays royalties at half the rate that most other webcasters do. In recent months, we’ve seen stories of other web giants – including Apple – delay the start of their music services while, thus far unsuccessfully, trying to negotiate a smaller royalty than they would otherwise pay – perhaps even lower than that paid under the Pureplay Settlement. Seemingly, these established Internet companies see a streaming music service as a losing proposition unless they can get lower royalties.

For webcasting companies, what is perhaps most frustrating is that the statutory royalties on noninteractive webcasting rise each year under the rates set by the CRB and under the various settlement acts, while revenues have not risen at the same rate. At the same time, the performing rights organizations (PROs) who collect on behalf of the publishing companies for the public performance of musical compositions, have traditionally been paid based on a percentage of revenue. They are watching digital royalties for sound recordings being paid on a per song per listener basis, and have started asking why they can’t be paid in the same manner. And some new agreements seem to propose that royalty basis, at the same time as other publishers start to pull their music from the PROs to negotiate separately, making the already difficult process of royalty negotiation that much harder.

While some services, most notably the Clear Channel properties, have managed to directly license music, lowering digital royalties substantially in exchange for a share of over-the-air broadcast revenues, this is not an option for pureplay webcasters or most other digital services. And, even for small broadcasters, the potential for them to have the leverage to negotiate such deals is small. So the royalty universe simply gets more complicated, with no easy solution in sight.

So our discussion at the RAIN Summit next Sunday should be a most interesting one. If you can’t be there, there will be an audio feed. But if you are in Las Vegas, this is but one of the many interesting sessions at the summit, and one of many that will be held at the greater NAB Show itself. The place to be next week

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

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

2013     8%

2014     8.5 %

2015     8.5%

2016     8.5%

2017     8.5%

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

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

2013   9%

2014   9.5%

2015   10%

2016   10.5%

2017   11%

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

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

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

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

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

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

The decision mentions both Section 112 and Section 114 royalties.  In a digital world, as digital copies are made in the transmission process, it has been presumed that parties need both royalties to operate - the "ephemeral copy" licensed under Section 112 (see our discussion here) and the public performance right licensed under Section 114.  As both are needed, both are covered by the royalty rate set by the Board.  Why bother setting a specific amount for the ephemeral right?  That is a question asked many times - but as that right is paid directly to the copyright holder (usually the record label), not shared with the artists as is the Section 114 royalty, it is one with economic impact. 

These services are entitled to a decision under 801(b) as Congress made a determination, at the time that the Digital Millennium Copyright Act was passed in 1998, that these services were either already in existence (cable audio) or were sufficiently advanced in deployment (satellite radio) that the traditional standard for deciding statutory royalties, used in other contexts under the Copyright Act, would be applied. 801(b), for instance, is used to decide the royalties paid by the record companies to the publishers for the use of their compositions when making a sound recording, and are also used in the determination of rates paid by noncommercial broadcasters in the public performance of musical compositions (a rate recently set by the Board).  Internet radio, on the other hand, was given a new "willing buyer, willing seller" standard that has led to much controversy, as is evident from the current IRFA debate. The application of the standard apparently makes a difference, as other music services similar to Music Choice, that were not in existence at the time of the adoption of the DMCA, pay approximately twice what Music Choice will pay under this decision (see our article here).

We will write more about the decision once the full text is released.

XM summarized two arguments that it raised as to the value of music. One argument was based on an economic analysis done by an expert witness who looked at the royalties paid by customized noninteractive webcasting companies (including Slacker and LastFM) for music used in their services, and made adjustments that led to the conclusion that, when you take out the value of the talk programming included in the Sirius package, and the value of the hardware necessary to listen to the station (something that webcasters don’t supply as the “hardware” to listen to a webcast is usually equipment that the listener already has, e.g. a computer or smart phone), the effective rate paid by such webcasters justified a lower royalty rate of between 5 and 7% of revenues.

But perhaps more interesting was their argument that relied on the direct licensing deals that Sirius was able to negotiate with over 90 record labels or artists, which all provided for a royalty at rates less than those at which Sirius currently pays. Sirius argued that these deals showed the true marketplace value of music, as they were negotiated outside of the royalty process by a willing buyer (Sirius XM) and willing sellers (the labels).

SoundExchange of course opposed the Sirius’ conclusions that rates should decrease. SoundExchange had its own expert witness who performed the same kind of economic regression analysis that had been used in past webcasting proceedings – taking the royalties paid by interactive digital music services (which are negotiated agreements not subject to a statutory royalty and not governed by the CRB or any other government agency), and doing an economic analysis to determine the value of the interactivity. By subtracting that perceived value of the interactivity, SoundExchange came up with a figure for a substantially higher royalty for Sirius than it currently pays.

SoundExchange argued that the direct licensing deals did not make for an appropriate benchmark as these deals represented a small part of all sound recordings that are available in the marketplace, and did not include deals with any of the major labels. Sirius of course responded that this was because the labels were encouraged not to negotiate with it (see this article on the lawsuit that Sirius has filed against SoundExchange for interfering with the private negotiations that it was having with other labels).

SoundExchange also attacked these deals by contending that they should not affect the CRB royalty decision as the deals were with the copyright holders, where all the royalty payments would go to the copyright holder, unlike the CRB royalties which, by law, half go directly to the artists. This argument seemed to gain some attention from the Judges, even though, were this logic to be followed, SoundExchange’s own evidence as to the rates would have to be rejected, as the royalties paid in the interactive marketplace also go to the labels. It seems to us that, if you are looking at a marketplace, you are looking at what buyers and sellers are agreeing to when they negotiate deals – no matter who those buyers and sellers are. In the real marketplace, the sellers usually are the copyright holders, not the artists, as the copyright holders are the ones authorized to negotiate such deals. If you reject those deals because the artists are not directly paid, you would never be able to find a marketplace deal to use as a benchmark, even though the Copyright Act specifically says that direct licenses should be considered. Moreover, as argued by Sirius XM, in such direct deals, the artists are in fact paid through the contracts that they have with the labels.  We will be very interested to see how the CRB resolves this issue.

Beyond the debate over the marketplace value of the music, there was some discussion of the other 801(b) factors, including the promotional value provided by the plays on Sirius and Music Choice, and on the stability of the industry factor, looking at the financial stability of each of these companies and what impact a change in royalties would have on their businesses. Both Sirius and Music Choice provided studies that showed that their services promoted music - studies that SoundExchange rejected without offering its own studies to the contrary.  SoundExchange argued that, as Sirius was now more economically stable than it was during the last rate proceeding, the rates needed to go up.  The cost of Sirius providing the satellites and hardware to deliver their service was also discussed in the context of the “relative investment” 801(b) factor. But in the oral arguments, these issued seemed to be a sideshow to the principal issue of putting a marketplace value on the music.  We'll see how they are considered in the final decision, as these matters were important in the last satellite royalty proceeding.

Oral arguments are often misleading, so we can't make predictions based on the questions that were asked.  Decisions in this case are supposed to be rendered by mid-December, even though there has been another change in the Board’s composition in recent weeks, as Judge Wisniewski, the economist on the CRB, was forced to retire due to health reasons. So the CRB that will be making the decision in this case will be one where 2 of its 3 members have not previously ruled on a music royalty payment scheme. It should be an interesting decision released in December - one that may give some indication of how the Board will treat webcasting royalties when they come up for adjustment in 2015.

The 15% of revenue charged in this royalty is the lowest royalty for the sound recording public performance right of any royalty set by the Copyright Royalty Judges which is subject to the "willing buyer, willing seller standard."  While the proposed broadcast performance royalty no longer uses the "willing buyer, willing seller" standard that was proposed in the original legislation, the legislation still proposes a standard that looks to the market value of the public performance of the sound recordings, using what is referred to as a "modified Section 801(b) standard", section 801(b) being the section of the Copyright Act that sets out this standard.  Section 801(b) looks at other factors, besides just the market value of the use the music, in setting the royalty.  Factors considered include the relative contributions of the service and the record companies in creating value, and the interests of the public in receiving access to copyrighted music.  However, in the only prior case decided by the Copyright Royalty Judges using the 801(b) standard, the case dealing with satellite radio, the Judges determined that none of these factors were quantifiable.  Instead, the only 801(b) factor taken into account in that case to lower the royalty below the market value that would be established by the "willing buyer, willing seller" standard was the factor that assessed the impact that the royalty would have on the stability of the industry to which the royalty applies.  Application of that factor cut the satellite radio royalty in half (see our post on that case here).  However, in the modified 801(b) standard currently proposed in the Performance Rights Act setting out the broadcast performance royalty, the factor assessing the stability of the industry on which the royalty will be applied is omitted from the test that would be used by the Copyright Royalty Board to determine the royalty for broadcasters (see our summary of the Senate bill here). 

Thus, the 15% royalty agreed to for the new subscription services should serve as a warning to broadcasters as to what they may have to pay if the proposed performance royalty is adopted.  As we wrote in our summary of the satellite radio case, the royalty could even be much higher (as the CRB decision in that case found that the market value of the royalty, before the 801(b) adjustment was about 14% of the satellite services' gross revenues, but that gross revenue includes revenues from non-music programming not subject to the royalty, which the Judges concluded made up about half of the satellite services' revenues - meaning that the Judges perceived the market value of the music to be about 25% of the revenue attributable to the music programming).  Whether the royalty is 15% or 25% of gross revenues, it would clearly be a matter of great concern to music broadcasters. 

In the actual discussions of the royalty, several issues were repeatedly raised, which we try to deal with in more detail in subsequent posts.  These include the following:

• Supporters of the royalty contended that fears of the royalty's impact on small broadcasters and noncommercial operators were dealt with by the House of Representatives' version of the legislation by imposing a small, flat yearly fee as low as $500 per year on these stations.  Senator Leahy made the point that this royalty was probably less than most stations were paying for their NAB dues to lobby against the royalty.  Steve Newberry, Chair of the NAB Joint Board and the owner of a group of small market radio stations, submitted that, while $500 today seemed like a small amount, these numbers have a way of going up.  After all, 10 years ago when the sound recording performance royalty for digital operators was first adopted by Congress, radio was supposed to be totally exempt - yet here we are, arguing for a change in that exemption.
• Supporters of the royalty constantly made the argument that broadcasters were using their "property" without compensation, or agreement.  Newberry argued that they were getting fair compensation through the promotion of their work by broadcast stations - a partnership that has produced the most significant music industry in the world.  Senator Durbin of Illinois suggested that there was no longer any agreement to the partnership between broadcasters and artists, as the artists were no longer agreeing to allow their music to be used without compensation.  Yet the system being proposed by Congress - a statutory royalty - would still deprive artists of choice - a choice to opt out of the royalty and allow their music to be played for free to promote airplay, especially if broadcasters have to pay a percentage of revenue for the royalty (if the percentage is not reduced by playing music where the royalty is waived, broadcasters will have no incentive to play that royalty free music, so artists do not have the choice to try to increase airplay through a royalty waiver)
• Supporters of the royalty argued that most industrialized nations had the royalty, and that US artists were not getting their share of royalties when US music was played in overseas markets.  Performing rights organizations in those countries do not pay US artists for the performance of their works since the US will not pay foreign artists for the performance of their works on over-the-air radio.  Newberry pointed to the differing copyright standards in other countries (such as a 50 year protection for copyrighted works, rather than the 99 year copyright in the US).  His written testimony also pointed to efforts in several countries to reform their royalty system, as the system inhibited the playing of new music.   The written testimony also made the point that, as the US will still have not adopted a full performance royalty (as performances in bars and restaurants, stadiums and concert halls, and other public venues still will not be covered), there still will be no full performance royalty, so foreign countries may still withhold their payments to US artists. 

An interesting suggestion was raised by Texas Senator Cornyn that has perhaps been dismissed by too many parties too quickly.  Cornyn suggested that, rather than compelling a performance royalty, Congress should set up a "Do Not Play" list, similar to a do not call list.  The list would be made up of those artists who do not give their consent to radio stations playing their music without the payment of a royalty.  Thus, radio stations would have to negotiate with artists on this list to get the rights to play their music.  Stations could play the music of all other artists without a royalty.  This proposal was dismissed by some in attendance at the hearing for a number of reasons.  It was argued that small market radio stations might have a problem negotiating for carriage of major stars and, as suggested by Senator Durbin, that it would set artists and composers against each other, as the composer might want the song played, while the artist might not.  Finally, Ralph Oman, the former registrar of Copyrights, suggested that it would harm small artists that felt that they needed to give up their rights to get airplay.  We will address these arguments in a subsequent post.  But the idea is interesting in that many Internet radio operators have discussed the potential for getting artist waivers to reduce their SoundExchange fees (see our post here).  Issues with setting up a pool of royalty-free music include concerns over assuring that artists who waive fees have the right to do so, and also the simple logistics of contacting enough artists to make such a waiver system worthwhile.  If the government were to set it up, with appropriate safeguards, these issues might be eliminated. 

The issue of platform parity for the standards used to determine the royalties paid by various users of music was also raised at the hearing.  Bob Kimball, from Real Networks, argued that any bill addressing a performance royalty should also address the disparity in royalty rates and standards used in setting the sound recording performance royalty.  In this discussion, issues that were raised include:

• Whether it was fair that small broadcasters, with up to $1.25 million in revenue, would pay $5000 or less in sound recording performance royalties, while Internet radio companies with $1.25 million in revenue would pay $150,000 in royalties.  While some suggested that FCC licensees have greater costs imposed by FCC obligations that justified a lower fee, Kimball asked how that cost disparity could possibly justify royalties 30 times as high as proposed for small broadcasters.
• The question of whether the 801(b) standard (about which we wrote earlier this week) or some other standard was appropriate.  Shelia E, testifying for the MusicFirst coalition, seemed to agree that a modified 801(b) standard, as proposed in the House of Representatives bill on the broadcast performance royalty, made sense for all music users. 
• Kimball also raised the question of whether it was fair that some settlements on Internet radio royalties reached under the Webcasters Settlement Act were considered to be precedential for purposes of the next CRB proceeding, while other settlements were considered nonprecedential - seemingly at the choice of SoundExchange.  Kimball suggested that all should be precedential, or all should be excluded, but that private parties should not get to choose which settlements should be considered in setting future rates.

Finally, a question was raised as to the precedent that any sound recording royalty would set for the public performance royalty for the musical work - the right to the song's composition as paid to ASCAP, BMI and SESAC.  The ASCAP and BMI royalties, if they cannot be negotiated, are set by a rate court which acts somewhat like the Copyright Royalty Board in making a determination of what a fair rate for the royalty should be (see our story on one such decision, here).  At the hearing, Mr. Kimball suggested that there was language in the House version of the Performance Royalty bill that suggested that sound recording performance royalties could set a precedent for ASCAP and BMI to raise rates, but that they could not be used by music services to argue that the ASCAP and BMI rates be lowered.  This might be an important issue not just for digital music services, but also for broadcasters who are currently in negotiations about the ASCAP and BMI rates for periods after the end of this year.

Nothing was resolved at the hearing, though much was discussed. The Committee, like the Judiciary Committee in the House, seems ready to move on the legislation.  But whether the full Senate will act is perhaps as big of a question as whether the House will.  This issue is not over (as we wrote here), so keep watching and see what develops. 

We have written before how, using the Copyright Royalty Board decision that was reached for XM and Sirius in 2007 (and recently upheld by the Court of Appeals), it could be concluded that the "willing buyer willing seller" standard could lead to a broadcast performance royalty as much as 25% of gross revenues.  We reached that conclusion by looking at the CRB decision which set a royalty for XM and Sirius (at that point separate companies) of 6% growing over a six year period to 8% of gross revenues (with some adjustments subtracting those revenues clearly attributable solely to non-music programming).  The CRB reached that decision after finding that a fair market rate (essentially what the willing buyer willing seller standard is supposed to determine) would be approximately 14% of the XM/Sirius revenues (principally their subscription revenues as their music streams were commercial free).  This value was adjusted down to the final royalty to preserve the stability of the industry, a factor required to be taken into account by the 801(b) standard that applies to the determination of the satellite radio (but a factor left out of the House version of the broadcast performance royalty bill).  That 14% of revenue was computed on the assumption that about half of the subscription revenue could be attributed to non-music programming (e.g. news, sports, Howard Stern and Oprah, etc).  So, if the perceived market value of the music in Sirius XM programming was 14% of the total subscription revenue, and half of that value came from non-music programs, then the value of a pure music service would be double that number, or something in the vicinity of 25%.

At the House hearing on the performance royalty held in March, an RIAA witness seemingly implied that the royalty would actually end up being closer to the 6-8% of revenue that Sirius XM now pays.  But recent royalty decisions give one pause about such a claim.  Look, for instance, at the recent settlement between the Pureplay webcasters (some of whom I represent) and SoundExchange, where the percentage of revenue royalties range between 12 and 14% of revenue for small webcasters to 25% of revenue (at a minimum) for large pureplay webcasters.  And this rate is deemed an experimental rate, reached as a compromise and not reflecting the true value of music, according to the SoundExchange press release.

In other services where there is no adjustment made for the preservation of the industry subject to the royalty, the royalty has been high - though perhaps not quite as high as in the webcasters' case.  For instance, in connection with "new subscription services", the audio services provided with DISH and DirecTV video services, the parties planning to provide those services and SoundExchange reached an agreement for a royalty rate of 15% to avoid a CRB hearing.  Even in connection with Business Establishment Services (like Muzak) that do not pay for the public performance of music, but only for the ephemeral copies made in the digital transmission process (the most insignificant part of the webcaster royalty - assumed to be about 8% of the total royalty), the parties agreed to pay a royalty of 10% of gross revenues.  In no case of which I am aware has the royalty for the public performance of sound recordings been set at less than 10% of gross revenues, and then only in connection with "small webcasters," who have revenues similar to those of radio broadcasters who would pay a flat fee under the pending legislation for the broadcaster performance royalty. 

Thus, the conclusion of the CBO, that the broadcast performance royalty would be substantial, seems right on target, unless the new legislation adopts the full 801(b) factors. These factors would have to include the factor looking at the preservation of the stability of the industry which was so important in the Sirius XM decision - the one factor omitted from the standard proposed in the revised House bill. 

Of course, even at 6-8% of revenues, broadcasters will probably find the royalty significant).  But at 25%, in today's economic climate, it would virtually drain the radio industry of its profit margins.  We will be interested in seeing if these factors are discussed in tomorrow's Judiciary Committee hearing.

Other changes to the bill would apparently delay the effective date of the royalties - delaying the date 3 years for stations making less than $5 million in revenue, and a year for those stations making more than $5 million.  It will be interesting to see the exact language of this provision - as it will likely take several years for the Copyright Royalty Board to issue a decision setting the royalty rates.  Thus, even if the effective date is delayed for broadcasters so they can prepare for the new royalty, they won't know what to prepare for, as they will not know much the royalty will be until well into that period - certainly after the 1 year delay proposed for the larger broadcasters, if the one year period runs from the adoption of the legislation as opposed to running from the date on which the royalty rate is established by the CRB.

From the statements made at the hearing, the standard for deciding cases has also been changed from the original bill - moving away from the "willing buyer, willing seller" standard used in setting the royalties for Internet radio companies toward the 801(b) standard that has been used for setting satellite radio royalties.  We wrote about the difference that standard made in the satellite radio proceeding.  However, importantly, from the comments made by one Congressman, the entire 801(b) set of criteria has not been incorporated in the new bill.  Specifically, the new criteria omit the one factor that was the most important in cutting the satellite radio royalties from what probably would have been 14% of revenue had a "willing buyer, willing seller" analysis been used, down to 6-8% of revenues.  That factor, the potential for disruption of the industry, has apparently been omitted from the criteria to be applied to broadcasters.  The 801(b) criteria were applied to satellite radio and digital cable radio at the time the sound recording performance royalty was first adopted in the late 1990s as these services already existed, and it was felt that the criteria that were being used had to help make sure that these existing businesses were not severely affected by the implementation of the royalty.  Using that same logic, one would think that this factor that has apparently been omitted would be crucial in setting a fair and workable royalty for radio - an industry that has existed for far longer than satellite or cable radio, and which could most certainly be adversely affected by the new royalty.

The committee discussion repeatedly highlighted the Committee members desire to not imperil broadcasters by adopting a royalty - including statement that the CRB would be instructed to take into account, in setting royalties, the impact the royalties would have on minority and female radio operators, small broadcasters, and religious and community stations.  But it was not clear how this expression was to be conveyed to the Board.  The exact wording used is crucial as, from their analysis in the satellite radio decision, the CRB takes its direction from the precise words in the legislation, and applies the standards of 801(b) in a very narrow way.  In fact, the Board found that most of the 801(b) considerations were immaterial in reaching to their decision - only taking into account the potential impact on the stability of the industry as having any decisional impact.  Thus, the wording of the instructions to the Board will be crucial.

There is much to be learned from the precise wording of the Bill, and we will address those issues in coming days, and address in more depth some of the issues raised at the hearing.  But it is clear that we have not seen the last of this debate that will continue to evolve over this Congressional session.  But, from today's decision, it is clear that there is a real prospect that a performance royalty could become a reality, and radio broadcasters must consider that potential in developing their business plans for the future, and in their interactions with their elected representatives in the next weeks and months.