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In fact, it is quite clear that the negotiation of lower rates has already happened.  In the many settlements that came about after the CRB decision on Internet radio rates was released after the 2006 proceeding, while the parties were fighting appeals and pursuing Congressional redress, rates lower than those that were set by the CRB were negotiated by many parties, including the Pureplay webcasters (on which Pandora relies), small webcasters, noncommercial webcasters, and even broadcasters (see our summary of the rates under all these deals, here).  All of these settlements were deals that were negotiated, as Dr. Pelcovits put it, "to self-adjust....to meet the market."  Clearly, the CRB rates are not sacred.  So what is the difference between these deals done pursuant to the Webcaster Settlement Acts, and the deals that have been tried now and have been condemned by so many in the music community? 

One possible difference is the loss of control. The settlement deals that were done under the Webcaster Settlement Acts all provided SoundExchange with the opportunity to decide which deals were precedential in future CRB proceedings, and which could be excluded from future rate-setting cases.  So, as we've written before (here and here), the deals that set relatively low rates, like those with the Pureplay Webcasters and the small webcasters, were deemed non-precedential, while those deals with higher rates, like the agreement with the Broadcasters, were considered precedential - and in fact contributed to the CRB decision in 2010 setting the rates for 2011-2015 for those webcasters not covered by one of the WSA settlements.  Deals that are marketplace deals would not be afforded the non-precedential status afforded the WSA deals absent some new act of Congress.

In establishing the statutory royalty, Congress envisioned that the CRB would base its decision on the rates set by the marketplace for similar rights.  In previous cases, because there were no freely negotiated marketplace rates (except for those recently done under the WSA and deemed "precedential"), the Copyright Royalty Judges had to rely on economic analysis of royalty schemes for other types of service and to come up with proper "adjustment factors" so as to determine the hypothetical rate that would be negotiated had these parties been negotiating rates for noninteractive webcasting.  Obviously, this is an inexact science, and has led to some results that many have argued are too high (though, as the SoundExchange press release indicates, some in the music community believe that the rates are too low).  Having freely negotiated rates may well provide some "real" basis for determining what a willing buyer and willing seller really would pay for music in a real marketplace.  But we will see if any such rates can in fact be negotiated by Sirius or any of the other parties that have attempted such negotiations. 

First, this is but an offer to musicFirst, which has to be accepted.  Today, musicFirst issued a cautious statement, saying that they were still studying the proposal, but expressing disappointment that the NAB did not accept the proposal that "both parties agreed upon in July."  That in itself is an interesting statement, as the NAB has been very clear to state that it has never agreed to anything in July - but that it instead needed to vet the musicFirst proposal with its members before agreeing to anything.  Presumably, musicFirst itself had to seek approval for any deal.  As any deal would need the blessing of Congress to become effective and binding on broadcasters and copyright holders, each party would need broad approval for any deal from all affected parties.  So how could the NAB member involved in the discussions and those representing musicFirst have "agreed" to any proposal back in July, when no such broad approval had been received for a deal that was not yet public?

And what has really changed in this Term Sheet from what was discussed in July?  Seemingly, very little.  While this Terms Sheet proposes a phase in of the 1% royalty depending on how many phones are FM enabled, the July proposal made the whole deal contingent on mandated FM chips in cellphones.  In effect, this proposal is more favorable to copyright holders than was the proposal on the table in July, as at least some royalty would be paid even without that mandate.  So how could the labels complain about that provision?

The only other substantive change appears to be the provision that allows direct licensing of music to reduce the liability of broadcasters.  But this too seems to be noncontroversial.  How can musicFirst, which claims to be standing up for the rights of copyright holders and musicians to be compensated for the use of their work, turn around and say that those copyright holders that want to exercize their rights by waiving the royalty be denied that right?

Other changes from the proposals set out in July seem cosmetic and insubstantial. 

So what comes next?  Obviously, musicFirst must formally respond.  Then the details of a deal must be worked out.  While the Terms Sheet may, at first glance, seem detailed and thorough, in fact it is but an outline of a deal.  Any deal will need to be written into statutory language and offered to Congress.  And this will not be easy, as each term will need to be defined, and the language will need to be carefully reviewed to make sure that there are no unintended consequences.  Many questions will need to be fleshed out.  How are the percentages of FM-enabled cell phone penetration measued?  What standard would a rate court use to determine the streaming royalty if that royalty is not set by the CRB?  How is gross revenue defined?  How are stations that are part talk and part music treated?  Issues that will need resolution.

Then, any agreement must be presented to Congress.  Adoption of the deal as proposed may not be all that simple, as there may well be attempts by other interested groups to latch on to any bill to attempt to remedy other problems with the royalty process.  Why should Internet radio pay royalties that are a minimum of 25% of gross revenues for large pureplay webcasters like Pandora, if radio is paying but 1%.  Why should smaller webcasters with revenues between $500,000 and $1.25 million be paying 12 or 14% of revenues, when a small radio station pays only $5000, less than a tenth of what the webcaster with the same revenues would pay?  Expect that others will attempt to use the process to raise issues such as these, so the Congressional process will not necessarily be quick and easy.

All in all, while this may seem like the beginning of the end of the performance royalty dispute, we will no doubt hear much more about these issues in the weeks to come.  We will write more about the issues in the days to come, especially as reactions to this proposal are made public by various parties either involved in the discussions, or from those that are affected by their outcome.  A no doubt very interesting debate is sure to play out in the coming days and weeks. 

The question of what is and what is not interactive is not an easy one, as we wrote in connection with the recent court decision determining that the Yahoo! Launchcast service was not interactive within the meaning of the statute, despite having some degree of user influence.  But some services are clearly interactive - where a user can designate the song or artist that is to be played, or set up his or her own playlist, or otherwise specify what they want to hear when they want to hear it.  Services that allow this kind of on-demand listening, including many of the so-called "subscription services" where you can effectively order up the music that you want to hear, must directly negotiate with the copyright holders for the rights to use the music that they play.  And because they must get specific permission from the copyright holder, they may not necessarily get all the access to all the music that a user might want to hear.  Sometimes a label will restrict access, sometimes a band will require in their label agreements that no digital access be provided.  That's one of the reasons that some of these services don't feature all the music that a user might want to hear - no Beatles, no Metallica, and other gaps in the music that they provide.  Thus, if Warner or any other record company decided that they didn't want to provide access to the music to which they have the rights, they could do so.

So, while non-interactive Internet radio services would not, in the US, be affected by such a decision, some on-demand services may well be affected, if the press reports about this decision are true (and applicable world-wide).  And we'll leave the debate about the wisdom of any such decision to others to debate.

After an exhaustive analysis of the process that Launchcast goes through to create a stream for a listener, the Court focused on several facts.  First, the Court found that much of the music in any stream delivered by Launchcast was not music selected by the user in their list of preferred artists and songs, but was instead picked by Launchcast from its vast library of songs using a number of factors. The Court also made clear that listeners had no ability to game the system to make it play more favorites of the listener.  While a listener could skip some songs, and pause a song in the middle of its play, it could not go backwards to replay songs or otherwise make particular songs play more frequently. In short, the Court found that the system was set up so that it would not substitute for the purchase of music as listeners could not get songs or even particular artists when they wanted. The Court used the term “predictability” – and found that the user had no predictability in determining whether or when any specific song would play during any listening session, and thus the service was not a substitute for a purchase of a song.

This was important in the Court’s analysis. First, the Court determined that the phrase in the statute defining an interactive stream to be “a transmission specially created for the recipient” was not a model of clarity, and was capable of many interpretations. While the record companies argued that any stream that was created specifically for a user based on the user’s preferences was, by definition, “specially created for the recipient”, the Court found that such a simplistic view could not be sustained.  Instead, the language of the statute has to be interpreted in light of the intent of Congress in the adoption of the statute. The Court went through a thorough analysis of the history of the sound recording royalty and how the DMCA provision at issue here came to be in the 1998 Act. The Court noted that the sound recording performance right was first adopted in the US in 1995 and was intended to be a narrow right, initially being applied only to subscription services. After its adoption, upon fears of piracy on the Internet, the right was expanded three years later to include noninteractive streams. In enacting the broader performance royalty, the DMCA broadened the definition of an interactive stream to include the phrase at issue here, focusing primarily on the issue of digital piracy and the fear that a predictable stream of music would allow digital copying. The Court cites specific language of the House of Representatives report on the DMCA where the House stated that you have an interactive stream “if a transmission recipient is permitted to select particular sound recordings in a prerecorded or predetermined program.”

After looking at the history and the way the service functioned, the Court focused on the language of the statute that said that there had to be a “transmission of a program” that was specially created for the user before the program was deemed to be interactive. The definition of a "transmission of a program" looked at the transmission of a program as a whole – to find that there was an interactive transmission of a program one has to look at the entire transmission to see if the entire transmission was created specially for the user. The Court determined that, given the way the Launchcast system was set up, the user was really able to specifically influence only a small number of songs that were played in his or her stream. The vast majority of the songs were selected by Launchcast and would be of the same genre as the listener's preferences, but what the songs would be was not at all predictable. Finding that the user thus had no predictability in the entirety of the program that was transmitted, the Court found that the streams would not significantly substitute for the purchase of specific music, and thus should not be considered interactive in the meaning that Congress intended.

The decision is very interesting in the depth of its specific analysis of the methodology for the formation of a playlist by Launchcast, and in its examples of music references sprinkled throughout (references to U2's Joshua Tree CD, to Gordon Lightfoot and the Beatles, and to “‘special requests’ [on AM radio which] represented love-struck adolescents’ attempts to communicate their feelings to that ‘special friend.’” The judges also candidly acknowledge that they are “appointed for life” and thus have varying degrees of familiarity with the technology which they are discussing.

What is the impact of the case? It undoubtedly helps solidify the position long taken by webcasters that some degree of user influence is permissible by a service that relies on the statutory license for noninteractive webcasting.  However, the decision was very fact dependent, with few clear boundaries as to what percentage of a stream can be user influenced and what degree that influence can be exercised to remain within the statutory license. Moreover, this is the decision of a single Court of Appeals – albeit an important one sitting in New York, covering the Northeast, and very active on copyright issues. But other cases in other circuits would not be bound by this decision, though they will no doubt find it to be instructive.  But, with other facts, any court might not reach the same decision. Thus, the question of which streams are interactive requiring that a service get a negotiated license from each copyright holder to perform the sound recordings, and which are noninteractive and can be streamed simply by paying SoundExchange the statutory royalty (and I say “simply” with a grain of salt given the multiplicity of options for paying the statutory royalty), will no doubt not be put to rest by this one decision. 

As we wrote, the royalty waiver only confers a benefit in the on-line world, especially in on-demand services such as downloads and podcasts, not subject to the statutory royalty set by the Copyright Royalty Board.  Over these services, the FCC has no jurisdiction.  Moreover, the impact of any proposal to limit these waivers, as suggested by the Future of Music petition and by a letter written to the parties to the payola settlement by Senator Russ Feingold investigating how the settlement was being implemented, presents some real issues in for services such as Internet Radio that are looking to these waivers as a possible means of reducing their royalties.

Since the decision of the Copyright Royalty Board on Internet Radio, it has always been assumed that one way some services could reduce their royalties was to get direct licenses from musicians.  SoundExchange has made much of the fact that artists were free to waive the collection of royalties if they felt that this was in their best interest by encouraging Internet Radio stations to play their music.  There have even been discussions by several parties of setting up  clearinghouses for music that could be played royalty-free as a way of encouraging the use of that music - and allowing Internet Radio stations to reduce their obligations and survive under the new royalties.  For instance, see a report, here, that Polka musicians are setting up their own system for giving Internet Radio stations rights to play their music without royalties.  If providing royalty-free music to Internet Radio stations constitutes some sort of legal issue, such exchanges could be imperiled.

While the Future of Music Coalition has suggested that the FCC petition continue even though Clear Channel has withdrawn their waiver, some consideration should be given as to whether the waiver policy is really contrary to the public interest  - or if such waivers may actually promote the widespread use of new and otherwise underexposed new music.  And for more than just polka music....