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The agreements for the interim rates are not currently available for public review, and there is no press release about either deal evident on the ASCAP or BMI websites.  Thus, it is unclear if the agreements will be applied to all broadcasters, or only those that have elected to be part of the RMLC negotiating group.  As we have written before, ASCAP and BMI have previously tried to get an indication from stations as to whether they are part of the RMLC negotiating group, or whether they will try to negotiate their own agreements.  We have also heard that at least one other group, the National Religious Broadcasters Music Licensing Committee, has indicated that they would represent commercial broadcasters in negotiations over new royalties.  However, it still seems to us that any other negotiating group will look first to the outcome of the RMLC process to set the royalties, and most likely will not be negotiating or litigating their own agreements, unless they have a business model that would make any RMLC deal unworkable.  This is both because ASCAP and BMI are prohibited from negotiating different royalty rates for similarly situated music users, and as the royalty litigation is very expensive and time consuming, and it is unlikely that any group would try to re-litigate any decision that RMLC reached.

 Does the decrease in rates, even if on a temporary basis, signal that there will be a permanent decrease in the rates?  In short, it should not be viewed as a guarantee.  While the fact that the Performing Rights Organizations agreed to these decreases might be seen as a sign that these companies recognize that there is a different radio economy that needs to be reflected in lower royalty rates, it could also be seen as a recognition that even a hearing on temporary rates is an expensive process.  The PROs recognize that RMLC will be holding out for a decrease in rates, and that they would be arguing for that decreased rate even on an interim basis.  Thus, to avoid the costs of litigation, and since any interim decrease in rates would be recaptured if a higher permanent rate is set, the PROs could have agreed to these rates simply to avoid the costs of litigation.  So don't start counting on these reductions being permanent - that will take significant litigation (or extensive negotiations) to accomplish.

So this is by no means the end of the story.  Watch as these events develop over time.

So what do broadcasters need to know in making a decision about which of the options offered in the ASCAP and BMI letters should be selected? First, under the antitrust consent decrees which govern the operation of ASCAP and BMI, once an entity that wants to use music notifies the PRO that it is ready to negotiate a deal, it can use the music without infringement, though the royalties ultimately adopted will apply retroactively. The process for setting a royalty starts with a negotiation period. If no deal can be reached, the parties go to rate court – usually a long, expensive hearing before a US District Court judge, which will set rates retroactively to the first use of the music.   After receiving the letters from ASCAP and BMI, some broadcasters have thought that they might negotiate their own deals.  Theoretically, that is possible.  However, most radio operators won’t be able to negotiate a separate royalty, as ASCAP and BMI are forbidden from negotiating a royalty that treats similar music users in a different manner. So these PROs cannot grant to one radio station a deal that is different than the royalty they charge to another, unless there are substantial differences in the way the stations use music that would justify a different type of royalty. Thus, if a deal is reached with RMLC, or if it arrived at through litigation, that deal will probably end up being applied industry-wide to all stations which fit within the classes of stations covered by the RMLC deal.

In the BMI letter, they offer a 4% discount off of current rates for stations who do not sign up to be included in the RMLC negotiating group.  That may be attractive to some radio operators.  Note, however, that the discount will be subject to retroactive adjustment (either as a credit or as additional liability) should the RMLC end up with different rates.  So it may be that this deal would afford only a temporary discount, but for that period it may be of some assistance to stations suffering cash flow issues.  Why was the proposed discount offered if it is only temporary and there will be a true up to whatever is arrived at by RMLC?  Perhaps the deal is intended to be used, if many stations select it, as evidence before the District Court as to what an interim rate should be if there is no voluntary agreement between the parties. The Court is charged under the consent decrees, if there is no voluntary agreement, with adopting an interim rate which stations will pay while the litigation over the permanent rate is proceeding.  While the Court can accept evidence as to what the interim rate should be, there is a presumption that the prior rate should continue to apply. So, while RMLC may argue that, because of the change in the health of the radio industry the current rate structure should be abandoned even for the interim period, the PROs might be able to use the agreement of many broadcasters to the interim deals they have offered as evidence of the continuing reasonableness of the current rates as an interim rate.

And then there is the option of signing up with RMLC to be considered part of their negotiating group.  Practically speaking, as we stated above, most commercial broadcasters will end up being bound by the outcome of the RMLC actions, unless they have some unique attributes of their business that would allow them to claim that they are not similarly situated to other radio stations and thus entitled to a different rate.  Some broadcasters have been concerned about signing on to the RMLC group, worrying that RMLC will assess them a fee.  Many broadcasters remember that there is an RMLC assessment as part of the current ASCAP and BMI agreements.  But that fee was agreed to by the Court and assessed on all stations that were subject to the settlement (essentially all commercial stations), so it was not a "voluntary" fee that came from designating RMLC as a station's agent for purposes of negotiation.  Practically speaking, the RMLC is every broadcaster's agent, as virtually every commercial station will be bound by the deal that they either negotiate or litigate.

These are complex issues that every station should review with their attorney. But broadcasters should consider all of the implications of their actions, not just on themselves, but also on the industry as a whole.  For virtually every radio station, the deal negotiated (or litigated) by RMLC will be binding on them.  So whether or not radio broadcasters sign up to formally be part of their group, broadcasters need to follow their actions closely, as their actions will dictate what stations are paying to the PROs for the next several years.

Senator Feinstein also identified another issue.  Under the manager's amendment (as in the House version of the bill), a provision of the law would prohibit any use of these royalties as evidence in any proceeding to set the royalties for ASCAP and BMI in a way that would reduce the royalty paid to those organizations to compensate songwriters for the public performance of the musical composition or musical work (the sound recording royalties addressed in this bill go to the performers and the copyright holders in the recordings - usually the record companies).  Presumably, the songwriters' organizations are concerned that high performance royalties for sound recordings could be used by broadcasters or other companies that pay these royalties (webcasters, satellite radio, cable radio or other digital music services) to argue that they could not afford to pay ASCAP and BMI royalties at the levels at which they are currently paid (see our article here, about the potential for contentious proceedings to determine new ASCAP and BMI royalties for broadcasters, where the sound recording royalty is not even a factor yet ).  However, the provision that is now in the bill could be read as prohibiting music services from introducing any evidence about the sound recording royalties to argue that the composer's royalties should be reduced, but would allow such evidence to be introduced by the songwriters to argue that the royalties should be increased.  In other words, the songwriters could argue that, as the sound recording royalties were higher than the composition royalty, and that the composition royalty should be increased - while the music service would be helpless to defend themselves against such evidence as the use of such evidence by the services would be prohibited by the law.  Senator Feinstein suggested that this one way street might constitute a denial of due process to the services, and that a more even-handed provision should be worked out before the final bill is adopted.  There is currently a provision in Section 114 of the Copyright Act, the section that first extended the sound recording royalty to digital services, that prohibits either party from introducing evidence of the sound recording royalty in proceedings dealing with the musical works royalty.

Senator Specter raised another issue.  At Senator Feinstein's urging, the bill proposes to use a single standard to set royalty rates for all services - whether they be broadcasters, webcasters, satellite radio or cable radio.  As we've written before, webcasters have had to pay under a "willing buyer, willing seller" standard, while satellite and cable radio have ended up with far lower royalties because their royalties were decided based on the standards of Section 801(b) of the Copyright Act.  The bill proposes to extend the coverage of 801(b) to all services but, like in the House Bill, the entire 801(b) standard would not be adopted.  As Senator Specter observed, the last of the four factors set out in 801(b) is omitted in the bill - the factor that looks at the royalties to determine if they at levels that will preserve the stability of the industries involved.  That factor was the factor relied on by the Copyright Royalty Board to cut the royalties that would otherwise have applied to satellite radio by half (see our analysis, here).  As we wrote, if the broadcast royalty were adopted, this would be a very important factor to take into consideration in setting a royalty rate for broadcasters.  According to Senator Feinstein at today's session, the record companies objected to the inclusion of this fourth factor, and certain webcast groups agreed to the 801(b) standard without the fourth factor.  Obviously, broadcasters and other services concerned about the lack of the final 801(b) factor will need to push to have this factor included in any final legislation that may be adopted.

Two amendments to the bill were offered by Texas Senator Cornyn, who said that the revisions to the bill with the small broadcaster provisions were a move in the right direction, but he was still concerned with whether the bill went far enough.  One amendment proposed to postpone the effective date of any royalty until the FCC held a rulemaking proceeding and determined that the royalty would not decrease diversity in the broadcast media.  This amendment was rejected by the committee with little discussion. 

The second amendment  proposed that, instead of the royalty, the FCC should establish a "do not play list", a list of artists who did not want their music played without a royalty.  This would address the claims of the royalty supporters that artists are exploited, as they have no right to tell broadcasters that they don't want their music played without a royalty.  Senator Leahy objected to this proposal, saying that it did not provide that artists who were included on this list could negotiate for compensation to be played - that instead it was an all or nothing proposal - either the artist could have its music played for free, or it would not be played at all.  Leahy did acknowledge that the idea was an interesting one that he would work with Senator Cornyn to modify.  The amendment was rejected without much further discussion, but should be considered for the future as debate over this issue progresses, as it may present a potential alternative to the royalty.

All of the Senators who spoke at the session urged the broadcasters to come to the table to negotiate the royalty.  This has been a common refrain at all of the hearings held on the bills in both the House and the Senate.  With a new NAB leader, will the broadcasters actually come to the table?  Time will tell.  But, there is no need to look into the crystal ball to determine that this issue is a real one that the proponents of this royalty will continue to aggressively push forward.   Broadcasters need to stay on the alert, and stay in touch with their Congressional representatives, to counterbalance this aggressive push on a bill that has cleared committees in both Houses of Congress, and may one day come to a vote which will finally resolve whether these bills will become law.

The problem with the ASCAP and BMI royalties stem from the agreements with these organizations which broadcasters reached about 5 years ago.  These deals provide for set yearly fees to be paid to ASCAP and BMI by the radio industry as a whole (over $230,000,000 to each organization this year).  The fees are divided among all broadcast stations based on formulas set out in the agreements.  The agreed upon fee grew in each year of the agreement (from about 150 million dollars in 2001 to the current levels).  These agreements were entered into in an economic climate where it was thought that radio revenues would continue to grow, and broadcasters did not want to cut the PROs in for a "piece of the action", i.e. a percentage of the revenue that they make (which was the formula before the current deals).  But, as radio revenue has not continued to climb, but has in fact fallen in recent years, the fixed industry fee has caused the ASCAP and BMI fees to constitute far higher percentages of radio revenue than ever before.  At the same time, ASCAP and BMI and the composers that they represent have become accustomed to receiving an established, growing pot of money each year.  With two sets of differing expectations, conflict could arise. 

In addition to amount of the royalty, there are also questions of what the royalty will cover.  In the old days, it was simple - the royalty would cover the over-the-air signal of the station.  Now, broadcasters are interested in covering streaming, music-on-hold, music sent to mobile devices, and other uses.  These issues can become difficult, too, as it is not always clear where ASCAP and BMI's rights end and where a broadcaster must deal directly with music publishers.  For instance, there is a question of whether a podcast is a public performance of a song or the making of a reproduction of that song - a different copyright licensed by the publishers, not the PROs (a topic we'll discuss in another post).  This may present another difficulty in the royalty negotiations.

With all these issues, there are questions of whether a voluntary deal can be reached between the RMLC and ASCAP and BMI.  What happens if there is no agreement?  These two organizations are subject to antitrust consent decrees entered into with the Department of Justice over 50 years ago.  As such, the rates are set by a "rate court", a US District Court judge who hears evidence from the broadcasters and from ASCAP or BMI in a trial-type hearing (each organization traditionally being considered in a separate proceeding).  These can be long and expensive hearings.  Like any litigation, the ultimate decision cannot be easily forecast.  Thus, the current negotiations are important, so broadcasters should carefully watch as this case progresses to see what impact these royalties may have on their operations in the future. 

Broadcasters obviously already pay for music that they play – to ASCAP, BMI and SESAC. And the rates that are being paid to these organizations may well be going up in the coming year, as both the ASCAP and BMI deals with the radio industry are to be re-negotiated this year. Of course, this money goes to the composers of the music, not to the performers (and the copyright holders in the performances – the record companies) who would be receiving the proposed new performance royalty on sound recordings. The proposed legislation states that the imposition of the performance royalty on sound recordings is not to have any effect on the amount that broadcasters pay to ASCAP, BMI and SESAC. Thus, the money would by necessity have to come from other station operations. Some broadcasters have suggested that one way of paying a sound recording royalty would be to simply pay what they are paying now to ASCAP, BMI and SESAC into a pot, and let the artists, composers and labels fight for it. This, of course, is opposed by the composers who rightly see the royalty as one of the principal ways in which they are compensated, as they do not share in the profits from the sale of CDs and downloads, but instead get a flat fee for a “mechanical royalty” established under Section 115 of the Copyright Act, and the composers do not typically get money from concert tickets or merchandise receipts that performers may enjoy.

This is not, as suggested by royalty proponents, a simple matter of broadcasters getting more money to pay for any royalty. It is a zero sum game, and if the money can’t come from the composer’s royalty, it has to come from station operations. Given the high fees sought (and received) by the recording industry for the performance royalty in sound recordings from digital services (where the least that has been paid is 6-8% of gross revenues by satellite radio, and that was only after the computed "willing buyer willing seller" royalty was found to be twice that amount but adjusted down to preserve the stability of the industry, and after having been initially adjusted based on the finding that half of the gross revenues of satellite radio were the result of talk programming not subject to the royalty), broadcasters could be asked to pay a huge bill (see our post here on computing that bill). And, with the FCC poised to potentially impose new localism requirements on broadcasters that would entail even more operational costs, something has got to give. Broadcasters hope that it is not their economic viability that is the thing that does the giving.