Posted on August 5, 2010 by David Oxenford

NAB Board Comes to DC to Discuss Radio Performance Royalties - Is There a Deal in the Works?

The debate over the proposed performance royalty (or "performance tax") on over-the-air radio is once again front page news in all of the broadcast trade press, as radio executives who make up the NAB Radio Board reportedly are making their way to Washington, DC to decide on whether to pursue a settlement with those seeking to impose the royalty.  What's on the table?  Reportedly a very low (perhaps 1% of revenue as reported in some of the trades) royalty for terrestrial radio, a royalty set in legislation for at least a several year period.  In exchange, broadcasters would get a break on streaming royalties and a push towards getting working FM chips into cell phones - a potentially big audience boost for radio operators.  But from all we have heard, this is not, by any means, a done deal.  What will happen?

We wrote just a few weeks ago about a proposed settlement and why it might or might not be a good idea, and received many comments on our post.  As was clear from the comments, many are not sure why a settlement of any sort makes sense at this point, when the NAB has so far bottled up the royalty in Congress, and where the next Congress is, at least in the eyes of many, going to be far more Republican and, in some people's eyes, a lot less likely to impose the royalty.  Proponents of a settlement respond that the royalty is not necessarily a partisan issue, with Republicans such as Senator Hatch of Utah, Congressman Issa of California, and many members of the Tennessee delegation taking strong positions in favor of the royalty.  So, just because there is a change in Congress (if it in fact occurs) does not necessarily mean that the current Performance Rights Act or some other version of the royalty proposal would be dead.  Moreover, as we wrote in our recent post, there still is the remainder of the current Congress to get through, including the "lame duck" session after the election, when Congressmen who may no longer have jobs will be voting on much legislation, including many big budget bills in which a performance royalty rider can get hidden. 

But any settlement talk raises important questions about the details contained in any settlement proposal -  like whether the record companies, after getting their nose under the proverbial tent, to a place where they can start munching on the revenues of radio stations, will be satisfied with just 1% of the pie.  Will they be back in a few years looking for more?  How can that level of royalty be guaranteed for the long term?  

And what will radio really get in return?  A reduction in the streaming royalties of 25% would be nice - especially for those broadcasters who have already built up substantial audiences at the current high rates.  But will the many broadcast stations who are not now streaming because of the high per performance royalty see this discount as enough of a benefit to start their streaming operations?  And what about the proposal to push for getting activated FM chips in cell phones?  How likely is that to happen?  Will it be a mandatory part of the deal - so that there is no deal unless this requirement is adopted? 

There are many questions that will no doubt be debated tomorrow at the NAB Board meeting.  Individuals involved in the negotiations will no doubt provide details on many of the questions that we have asked here, and information to which we are not privy, which may answer some of the concerns that broadcasters have about any possible settlement.  And there are no doubt many details to be worked with out with the other side even if the Board approves continuing down this settlement path at its meeting tomorrow.  We will all have to wait to see what the next steps are - and what the ultimate impact will be on the future of the broadcast radio industry.
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Posted on August 3, 2009 by David Oxenford

Broadcast Performance Royalty - What Would It Cost? The Congressional Budget Office Says A "Substantial" Amount

One of the fundamental questions that surrounds the proposed broadcast performance royalty for the use of sound recordings by over-the-air (or the "performance tax" as it has been labeled by the NAB) is how much it could it cost a broadcaster?  Right now, that question is difficult to determine, as the pending bills do not themselves provide any details as to what the fees would be, except for noncommercial entities and for small broadcasters for whom fixed yearly fees are proposed.  For a broadcaster with a station having over $1.25 million in yearly revenues, the current Congressional bills leave the amount of the royalty to be determined by the Copyright Royalty Board.  In the current Senate draft of the bill, the amount to be paid would be based on the "willing buyer willing seller" standard that has been so controversial for Internet Radio companies. But the hearing to be held by the Senate Judiciary Committee tomorrow will address, among other issues, the question of "platform parity," i.e whether all companies subject to the sound recording performance royalty should pay a comparable rate, so we may see that proposal change as it did in the House version, to some form of the 801(b) standard (about which we wrote here and here).

We will write about the differing rates paid by differing music services in the next few days, especially as it becomes clear as to what rates for Internet radio royalties were agreed to under the most recent settlements with webcasters pursuant to the Webcaster Settlement Act.   But even without a detailed analysis of all of the rates that have been agreed to, certain trends can be seen as to what SoundExchange, on behalf of the artists and copyright holders, believes to be a fair royalty for the use of their music.  And that number is likely to be a "Substantial" one, as suggested by a recent Congressional Budget Office review of the cost to broadcasters of the proposed performance royalty.

We have written before how, using the Copyright Royalty Board decision that was reached for XM and Sirius in 2007 (and recently upheld by the Court of Appeals), it could be concluded that the "willing buyer willing seller" standard could lead to a broadcast performance royalty as much as 25% of gross revenues.  We reached that conclusion by looking at the CRB decision which set a royalty for XM and Sirius (at that point separate companies) of 6% growing over a six year period to 8% of gross revenues (with some adjustments subtracting those revenues clearly attributable solely to non-music programming).  The CRB reached that decision after finding that a fair market rate (essentially what the willing buyer willing seller standard is supposed to determine) would be approximately 14% of the XM/Sirius revenues (principally their subscription revenues as their music streams were commercial free).  This value was adjusted down to the final royalty to preserve the stability of the industry, a factor required to be taken into account by the 801(b) standard that applies to the determination of the satellite radio (but a factor left out of the House version of the broadcast performance royalty bill).  That 14% of revenue was computed on the assumption that about half of the subscription revenue could be attributed to non-music programming (e.g. news, sports, Howard Stern and Oprah, etc).  So, if the perceived market value of the music in Sirius XM programming was 14% of the total subscription revenue, and half of that value came from non-music programs, then the value of a pure music service would be double that number, or something in the vicinity of 25%.

At the House hearing on the performance royalty held in March, an RIAA witness seemingly implied that the royalty would actually end up being closer to the 6-8% of revenue that Sirius XM now pays.  But recent royalty decisions give one pause about such a claim.  Look, for instance, at the recent settlement between the Pureplay webcasters (some of whom I represent) and SoundExchange, where the percentage of revenue royalties range between 12 and 14% of revenue for small webcasters to 25% of revenue (at a minimum) for large pureplay webcasters.  And this rate is deemed an experimental rate, reached as a compromise and not reflecting the true value of music, according to the SoundExchange press release.

In other services where there is no adjustment made for the preservation of the industry subject to the royalty, the royalty has been high - though perhaps not quite as high as in the webcasters' case.  For instance, in connection with "new subscription services", the audio services provided with DISH and DirecTV video services, the parties planning to provide those services and SoundExchange reached an agreement for a royalty rate of 15% to avoid a CRB hearing.  Even in connection with Business Establishment Services (like Muzak) that do not pay for the public performance of music, but only for the ephemeral copies made in the digital transmission process (the most insignificant part of the webcaster royalty - assumed to be about 8% of the total royalty), the parties agreed to pay a royalty of 10% of gross revenues.  In no case of which I am aware has the royalty for the public performance of sound recordings been set at less than 10% of gross revenues, and then only in connection with "small webcasters," who have revenues similar to those of radio broadcasters who would pay a flat fee under the pending legislation for the broadcaster performance royalty. 

Thus, the conclusion of the CBO, that the broadcast performance royalty would be substantial, seems right on target, unless the new legislation adopts the full 801(b) factors. These factors would have to include the factor looking at the preservation of the stability of the industry which was so important in the Sirius XM decision - the one factor omitted from the standard proposed in the revised House bill. 

Of course, even at 6-8% of revenues, broadcasters will probably find the royalty significant).  But at 25%, in today's economic climate, it would virtually drain the radio industry of its profit margins.  We will be interested in seeing if these factors are discussed in tomorrow's Judiciary Committee hearing.
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Posted on April 4, 2009 by David Oxenford

Congressman Boucher to NAB - Accept Performance Royalty - How Much Would It Cost?

The week, Congressman Rick Boucher, a member of both the House of Representatives Commerce and Judiciary Committees, told an audience of broadcasters at the NAB Leadership Conference that they should accept that there will be a performance royalty for sound recordings used in their over-the-air programming and negotiate with the record companies about the amount of a such a royalty.  He suggested that broadcasters negotiate a deal on over-the-air royalties, and get a discount on Internet radio royalties.  Sound recordings are the recordings by a particular recording artist of a particular song.  These royalties would be in addition to the payments to the composers of the music that are already made by broadcasters through the royalties collected by ASCAP, BMI and SESAC.   Congressman Boucher heads the Commerce Committee subcommittee in charge of broadcast regulation, and he has been sympathetic to the concerns of Internet radio operators who have complained about the high royalty rates for the use of sound recordings.  Having the Congressman acknowledge that broadcasters needed to cut a deal demonstrated how seriously this issue is really being considered on Capitol Hill.

The NAB was quick to respond, issuing a press release, highlighting Congressional opposition to the Performance royalty (or performance tax as the NAB calls it) that has been shown by support for the Local Radio Freedom Act - an anti-performance royalty resolution that currently has over 150 Congressional supporters.  The press release also highlights the promotional benefits of radio airplay for musicians, citing many musicians who have thanked radio for launching and promoting their careers.   The controversy was also discussed in an article on Bloomberg.com.  In the article, the central issue of the whole controversy was highlighted.  If adopted, how much would the royalty be?  I was quoted on how the royalty could be very high for the industry (as we've written here, using past precedent, the royalty could exceed 20% of revenue for large music-intensive stations).  An RIAA spokesman responded by saying that broadcasters were being alarmists, and the royalty would be "reasonable."  But would it?

Last month, the House Judiciary Committee held a hearing on the broadcast performance royalty.    The hearing demonstrated the seriousness with which the House Committee viewed the prospect of a royalty being imposed on over-the-air broadcasters, with several Congressmen issuing warnings similar to that conveyed by Congressman Boucher, warning broadcaster representatives to sit down and work out a royalty with the recording industry, or Congress would impose one on the broadcasters which they might not like.  At the same time, broadcaster representatives emphasized an issue that, while important before, has become more crucial now -the economy and the financial health of the broadcast industry.  With broadcasters suffering from the poor economy, a royalty could be crippling to many.  But on the question of how much the royalty would be, RIAA President Mitch Bainwol echoed the line from the RIAA spokesperson in the Bloomberg article, saying that it would be "reasonable."  When asked what that meant, he said the it would be a bit more than is currently paid by broadcasters to ASCAP, BMI and SESAC (approximately 4-5% of revenues), saying that something in the area of 6-8% might be normal in these sorts of situations.

That range of numbers - the first numbers that I have heard from a representative of the recording industry - is somewhat surprising.  Two weeks ago, the recording industry was in the Court of Appeals arguing that a Copyright Royalty Board decision setting a royalty of 6-8% of revenues for satellite radio was too low.  In the Internet radio world, SoundExchange asked for more than 30% of gross revenues, and ended up with a per performance royalty that most webcasters have said works out to 75% or more of their revenues.  Yet the recording industry is saying that 6-8% would be reasonable?  It will be interesting to see if that number is repeated in other forums as evidence of their reasonableness, or if this was a one-time statement of this individual, not adopted by the industry as the benchmark for what they seek.

The back and forth at the hearing may provide some indication as to the next steps in the process of trying to impose these royalties.  There was significant discussion of an independent study to assess the impact any royalties would have on radio operators and musicians.  While no party publicly objected to a study, there has seemingly been no follow up to authorize that study since the hearing.  And, as the recording industry said that the study should not slow the adoption of the royalty, one questions why a study would be authorized if Congress was planning to go ahead and authorize a royalty before the results of the study were available.  Why let the facts get in the way of legislation? 

While Congress heading for their Spring recess, look for more action on the royalty in May after they have returned.

 
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