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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. 

Note that this deal also imposes a new restriction on webcasters who agree to be bound by it.  If they ever accept a deal to sell to a company that would not qualify as a small webcaster under these terms, the entire benefit that they receive from being a small webcaster gets "recaptured" from the purchase price, i.e. they have to pay to SoundExchange all the money they would have owed were they subject to the CRB rates back to January 1 2006.  If they cannot compute that amount, they have to pay as if they had 5 million ATH for the entire period that they were operating pursuant to the small webcaster agreement.  

This deal may provide some opportunity for small webcasters to operate though, once they hit the revenue or ATH limits, the significant CRB royalties kick in.  So this is a deal that only makes sense for companies for a limited period of time and, if they outgrow it, they must be prepared to jump off a steep cliff as they fall into the CRB-imposed rates.  This deal also raises questions about fairness and equality as, if the performance royalty that  SoundExchange seeks to impose on broadcasters gets Congressional traction, small webcasters under this deal would be paying more than twenty times the amount that small broadcasters with a similar amount of revenue would pay.  Is this a fair deal?  Maybe not but, unless the appeals of the CRB decision are successful or unless some other deal comes along, for small webcasters, this may be the only way that some may be able to stay in business.  Small webcasters will need to surrender some rights to fight the royalties, and will have to live with the other provisions of the deal, and weigh those downsides against the opportunity to continue streaming in deciding whether to sign on to this deal by April 30.

In the webcasting case, there were also numerous arguments about the appropriateness of the decision on the rates.  The large webcasters argued that the Board used flawed reasoning to arrive at the rates that were determined, the Small Commercial webcasters contended that the Board should have adopted a percentage of revenue royalty rate as they would otherwise be put out of business, while noncommercial webcasters submitted that a flat fee was the appropriate royalty.  SoundExchange and the Department of Justice lawyers who represent the CRB of course disputed the contentions.  Broadcasters and NPR were absent from the appeal given their recent settlements with SoundExchange on Internet radio royalties (see our posts here and here). 

The satellite radio argument was in many ways the opposite of the Internet radio case, with SoundExchange contending that the rates that were arrived at by the Board should have been higher, while the Department of Justice defended the CRB decision, and Sirius XM arguing in support of the DoJ.   One of the interesting aspects of this case was that the argument did not focus on what a willing buyer and a willing seller would agree was the proper price of music (the argument in the Internet radio case), but instead whether the CRB adjusted that rate too greatly to protect the economic viability of the satellite radio industry.  As we've written before, the satellite radio case was judged by the 801(b) standard of the Copyright Act, which considers not only the perceived "value" of the music, but also the impact that any royalty would have on the service paying that royalty and on the public's interest in receiving the music.  Internet radio, in contrast, while paying for the same right to publicly perform the sound recording, is judged by a different standard - the willing buyer, willing seller standard that looks only at the economic value of the music.

The decision of the Court in these cases may be many months away.  Many interested parties may be looking at that decision - not only the parties to these cases, but also all others subject to the CRB's jurisdiction (and those who may be subject to it - like broadcasters should a performance royalty on over-the-air broadcasts be adopted).  Stay tuned....