Posted on October 25, 2010 by David Oxenford

NAB Radio Board Adopts Proposal for Settlement of Performance Tax Issue - Where Do We Go From Here?

The NAB Radio Board today voted to adopt a Terms Sheet to offer to the musicFirst Coalition which, if agreed to by musicFirst and adopted by Congress, will settle the contentious issue of whether to impose a sound recording performance royalty (the "performance tax") on over-the-air broadcasters.  If adopted, that will mean that broadcasters in the United States, for the first time, will pay a royalty to artists and record labels, in addition to the royalties paid to ASCAP, BMI and SESAC that go to the composers of the music.  What does the Term Sheet provide, and what will this mean for broadcasters, webcasters and others who pay music royalties?

The Term Sheet sets out a number of points, including the following:

  • A 1% of gross revenue sound recording royalty to be paid to SoundExchange
  • A phase-in period for the 1% royalty, that will be tied to the number of mobile phones that contain an FM chip.  A royalty of one-quarter of one percent would take effect immediately upon the effective date of the legislation adopting it.  The royalty would rise in proportion to the number of mobile phones with enabled FM chips.  Once the percentage of phones with FM chips reached 75%, the full royalty would take effect.
  • The 1% royalty could only be changed by Congressional action.
  • The royalty would be lower for noncommercial stations and stations with less than $1.25 million in revenue - from a flat $5000 for stations making between $500,000 and $1.25 million in revenue down to $100 for those making less than $50,000 per year.
  • Broadcasters would also get a reduction in their streaming rates - but only when FM chips in mobile phones exceed 50% penetration.  The reduction would be tied to the rates paid by "pureplay webcasters" (see our summary of the Pureplay webcasters deal here), but would be set at a level significantly higher than pureplay webcasters, rising from $.001775 in 2011 (if FM chips were quickly deployed) to $.0021575.
  • Future streaming royalties would not be set by the Copyright Royalty Board but by a legislatively ordered rate court - presumably a US District Court similar to that which hears royalty disputes for ASCAP and BMI.
  • An acknowledgment by AFTRA that broadcasters can stream their signal on the Internet in their entirety - apparently agreeing to relieve broadcasters from any liability for the additional amounts due to union artists when commercials featuring union talent are streamed
  • An agreement that broadcasters can directly license music from artists and reduce their  liability for the new royalty by the percentage of music that the broadcasters is able to directly license
  • Agreements to "fix" issues in Sections 112 and 114 of the Copyright Act in making the provisions of these laws regarding ephemeral copies and the performance complement consistent with the waivers that major record labels gave to broadcasters when the NAB reached its settlement with SoundExchange on streaming royalties last year.  See our post here on the provisions of those waivers.
  • musicFirst would need to acknowledge the promotional effect of radio in promoting new music, and would need to work with radio in attempting to secure legislation mandating the FM chip in mobile phones.

[Clarification - 10/26/2010 - Upon a close reading of the Terms Sheet, it looks like the phase in of the 1% royalty and the delay in the streaming discount only kick in if Congress does not mandate active FM chips in cell phones.  If the mandate is enacted, then the full 1% royalty and streaming discount is effective immediately. Given the opposition of much of the wireless industry to a mandated FM chip, this may represent a recognition that the legislation requiring the active FM chip will not be enacted in the near future]

What does this all mean?

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. 
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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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