Posted on July 8, 2009 by David Oxenford

Court Upholds Copyright Royalty Board Decision on Satellite Radio Royalties, But Questions Board's Constitutionality

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.

The Court decision rejected SoundExchange's challenges to the decision of the Board to apply the 801(b) factor which instructed it to take into account the impact of the royalty on the stability of the industry.  The application of this factor resulted in a royalty that grows from 6 to 8%, reducing what might have been a royalty in the range of 13% had the Board relied solely on its assessment of fair market value.  Among other issues, the Court rejected SoundExchange's claim that the XM-Sirius merger should have been taken into account to mitigate against any need for this factor to be taken into account.  The Court also rejected the Board's decision to exclude from revenues subject to the royalty those revenues that came from non-music services, like revenue from advertising on non-music channels or from equipment purchases. 

The only issue that the Court did not resolve was the value of the Section 112 ephemeral royalty - the royalty that is to compensate copyright holders for the temporary transitory copies made in the streaming process, such as those made on servers.  The Board found that no one had shown any value for those transitory copies, and thus the royalty had no real market value, so any residual value was subsumed entirely within the Section 114 royalty.  After the Board issued its decision, the Copyright Office issued an opinion that the Board needed to set a separate royalty for the ephemeral right.  While the satellite radio companies suggested the value was zero, and SoundExchange argued that it should be 8.8% of the total royalty, the Court could find no evidence supporting either position.  So the Court remanded this issue to the Board to determine what percentage of the royalty, if any, should be allocated to the ephemeral rights.

This decision, coming as it does on the date that webcasters announce a settlement with royalties that range from 12% of gross revenues to 25% or more of such revenues, demonstrates again the difference that a standard can make.  The 801(b) standard, taking into account the public interest factors, produces a rate that the music users can actually support (as the satellite companies did here, not appealing the decision of the CRB, but instead arguing in support of it), while the "wiling buyer, willing seller" standard produces royalties which, even after a settlement substantially reducing the royalty, brings only grudging relief.  This issue should be assessed by Congress when it reviews the Copyright Royalty Board's status if, as suggested by this Court, the webcasting court finds the CRB to be unconstitutional. 
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Posted on July 7, 2009 by David Oxenford

Pureplay Webcasters and SoundExchange Enter Into Deal Under Webcaster Settlement Act to Offer Internet Radio Royalty Rate Alternative for 2006-2015

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.

First, the deal provides for different treatment for large and small pureplay webcasters. For the small pureplay webcasters, the ones with less than $1.25 million in revenue (the number that has seemingly become a magic number included in the microcasters deal as well as the proposed broadcast performance royalty to distinguish between large and small users of sound recordings), a webcaster who agrees to pay slightly higher royalties in 2009-2014 than required under the microcaster deal (12% on the first $250,000 of revenue and 14%, as opposed to 10-12%), gets the following benefits:

 

  • An aggregate tuning hour limit of 8 million monthly ATH for 2009, 8.5 million for 2010, 9 million for 2011, and 10 million for 2012-2014, instead of the 5 million monthly ATH under the microcaster deal
  • A recapture provision that requires that the webcaster, upon sale of the webcasting business to an entity that would not qualify as a small pureplay webcaster, repay the difference between what he would have owed under this deal had he not elected to be a “small entity”, but the recapture is limited to 4 years, not a potential 10 years as required by the microcaster deal. In addition, under the terms of this deal, the webcaster has the option of paying 30% of the consideration from the sale to SoundExchange in lieu of the per performance recapture, a percentage which very well may be smaller than the per performance calculation. Under this deal, if the webcaster pays under the "per performance" option outlined below for one full year, no recapture requirement exists. This recapture provision is to avoid the LastFM issue that SoundExchange has expressed concern about in public statements (see our post here).
  • A transition period, for a small pureplay webcaster who grows its revenues beyond $1.25 million, that allows it to continue to pay at a percentage of revenue royalty for the remainder of the year in which it exceeds $1.25 million, and the entire following year. The webcaster would have to pay 25% of its revenues to SoundExchange, but would not have to make per performance payments for as much as two years, if it times its transition beyond the $1.25 million threshold properly. This is in contrast to the 6 month transition under the microcaster deal.
  • This deal gives the webcaster the ability to delay the transition to the per performance royalty, if its revenues go over $1.25 million, then drop back below that number. Only after a webcaster has revenues in excess of $1.25 million for 2 calendar years will it be required to pay at the per performance rates.

Webcasters who elect this deal must do so on a yearly basis. As the deal offers no small pureplay webcaster percentage of revenue option for 2015, this ability to opt out is important for the smaller webcaster who has not reached the $1.25 million cap by that time, as they can opt for the microcaster deal for 2015 if they cannot afford the pureplay per performance royalties set forth below in 2015. Or, if another settlement should be reached, or the CRB should set lower rates for 2011-2015, a webcaster could opt out of this deal and choose any better arrangement that comes along at the end of the calendar year in which it is operating.

 

The small pureplay deal also has minimum fees. Webcasters have a minimum fee of the greater of  $25,000 or 7% of expenses.  The 7% of expenses is also required under the microcaster deal. As it will be mostly larger “small” webcasters, ones with concerns about the $1.25 million dollar cap or the 5 million aggregate tuning hour limit under the microcaster deal, who elect this deal, most will have revenues in excess of $250,000, and thus would owe the $25,000 minimum fee in any event.  That minimum can be paid in quarterly installments.

 

For larger pureplay webcasters, the deal offers a substantial advantage over the CRB rates. The rates for large pureplay webcasters are the greater of 25% of revenue or a per performance royalty that is far lower than that required by the CRB – even through 2015. As set forth below, the per performance royalty for 2015 will be the same rate that webcasters were charged for 2008 under the CRB decision – and far less than that agreed to by the broadcasters in their settlement with SoundExchange. As most large webcasters claimed that the CRB-determined royalties would total 75% or more of their revenues, this new rate represents a substantial savings. The pureplay per performance royalties (with a per ATH royalty rate for 2006-2008) are as follows:

 

Year                 Per Performance      Per Aggregate Tuning Hour

2006                $0.00080                     1.2¢

2007                $0.00084                     1.26¢

2008                $0.00088                     1.32¢

2009                $0.00093

2010                $0.00097

2011                $0.00102

2012                $0.00110

2013                $0.00120

2014                $0.00130

2015                $0.00140

 

Either large or small pureplay webcasters, who offer a white label or syndicated service to some third party, where the service is offered to the public under the name of the third party and not the webcaster, or for those who offer a subscription service, will have to pay at higher rates. Presumably, the theory is that such services do not make their revenues from advertising, but instead from payments by third parties or from the subscriptions by the public, and can factor in these higher costs in the amounts that they charge for such services. Essentially, royalties for those services would be paid at the same per performance rate as the broadcasters are currently paying under their settlement with SoundExchange (see our post here on those rates).

 

In sum, while far from a perfect deal that webcasters would have selected on their own, this deal does provide another option for webcasters with substantial advantages in many area to those that qualify for treatment under this deal. While no doubt the fight will continue over the standards that should be used to determine royalties in future proceedings, so that parties don’t need to enter into these after-the-fact settlements when one party has a substantial bargaining advantage with a favorable decision already in hand, SoundExchange should be credited for agreeing to reach this deal when there was no compulsion that they do so. This deal presents certainty for many webcasters – eliminating further litigation and negotiation costs while setting rates at which a class of webcasters can go on with their operations. 
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Posted on July 17, 2008 by David Oxenford

Internet Radio on the iPhone - Remember the CRB Royalties Apply

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.

As you may remember, in the CRB proceeding itself, SoundExchange had proposed that there actually be a higher fee for performances that take place over wireless networks, alleging that these performances were somehow more valuable.  The Board rejected that argument, finding that insufficient evidence had been provided to reach that conclusion.  But, with the increase in wireless access to Internet radio that we are bound to see through the iPhone and competing devices, that argument will no doubt be raised again in the CRB proceeding to set the rates for 2011-2015, which will actually begin next year.  When one thinks about the nature of the wireless experience, one must wonder whether that experience is in fact more valuable than the experience of listening to Internet radio when sitting in front of your computer.  Certainly, the wireless service reaches people where they have not been reached before, making Internet radio more of a competitor to traditional radio, and more like traditional radio.  But one of the arguments that Internet radio might actually be more valuable than traditional radio - its interactivity - actually suffers from mobility.  When you are in front of a computer and an ad comes over the Internet radio stream, you can immediately act on that ad, especially when it's linked to a banner on the website.  When you are in a mobile environment, driving or jogging or otherwise on the move, it seems to me that you are less likely to react to any commercial message that you may receive.  Thus, the value of the advertising is more for purposes of reinforcing brand recollection, like over-the-air radio, rather than for driving immediate action, like on-line advertising. 

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. 

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