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These two judges join Chief Judge Suzanne Barnett, appointed just over a year ago, who recently presided over the royalty decisions for satellite and cable radio (see our summary here). Thus, for the next webcasting proceeding, there will be an entirely new Board, none of whom have presided over a case to set Internet Radio royalties. Certainly, the Chief Judge will be familiar with many of the arguments about the valuation of music rights (see our post here on the differing perceptions of the value of music) which would have come up in the recent satellite radio case. But, as webcasting has a different legal standard that applies to the determination of the royalty rates (see our explanation of the different standards here), we will all have to see how the case develops.

The next webcasting royalty proceeding, to set royalties for internet radio for 2016-2020, will begin early in 2014, when participating parties will need to file an expression of interest in participating in the proceeding. After these petitions to participate are filed, the CRB will schedule a period during which the parties are to try to settle the case. If there is no settlement, under current rules, direct case exhibits (setting out the evidence that each party advances to support the rates that they think should be charged), would be filed in late 2014, with the actual litigation over the evidence presented – and the decision – coming before the end of 2015. Of course, this could all change should there be any action on the Internet Radio Fairness Act. To be continued….

As soon as IRFA was introduced, DC players started to choose up sides – with Internet radio operators, the Consumer Electronic Association, and others supporting the Act, and most record labels and artists opposing it. The opposition also recruited some unlikely supporters, including the NAACP, the National Music Publishers Association and Grover Norquist of the "no tax increase" pledge fame. Why do these groups oppose the act – whose principal purpose is to make the decisions as to royalties for Internet radio the same standard (the 801b standard about which we wrote here) as that used to determine the royalties for other digital music services (such as Sirius XM) subject to a statutory royalty?

As noted in these pages before, I represent Internet radio companies on royalty issues, so I want that potential bias to be on the table as I explore the differences in positions in this article.  But, from my perspective, the real issue is the differing perception of the value of music, and the relative contribution to the value of digital media companies. Musicians, seeing music as the backbone of many digital entertainment services, feel that it is their content that is the reason that a service even exists, much less is successful. Services, on the other hand, believe that there is much more that governs success in the media universe, and that presentation, technology, promotion and many other factors lead to that success. Where that value lies, and what the relative contributions of the parties are, is at the heart of the disagreement over royalties.

In the last year, there have been more and more stories about musicians claiming that the payouts that they get from digital music services – even the interactive services that pay rates negotiated with the copyright holders at levels substantially higher than those paid by webcasters - are not sufficient. Sometime, the argument seems to be based on the belief that the royalties are not sufficient to compensate them for the loss of revenue that they expected to get from the sale of music. Other times, the concern seems to be grounded in a belief that the royalties don’t allow more musicians to achieve musical success – the elusive “musical middle class” – where musicians can make enough money from their art to support themselves and their families without resorting to holding two or three jobs. And there seem to be yet other times that musicians see the apparent success of certain Internet entrepeneurs, and wonder why they can’t make substantial money off the Internet too.

On the other hand, supporters of change in the royalty system point to the fact that there simply has not been a long-term successful, profitable music service developed under the current royalties. The world of interactive music services is littered with the remnants of abandoned services. Last year, Last FM, which had been a "success" story as it was sold to CBS for about $270 million about 5 years ago, is almost invisible in the US music universe, and is now cutting back on its services because of royalty demands. Pandora, by far the most successful of the noninteractive services, still has not announced a profitable year, or even any sustained profitable quarters, as the “content acquisition costs” (i.e. royalties) continue to eat up a more than half of their revenues. And, under the Pureplay Settlement Act, Pandora pays royalties at half the rate that most other webcasters do. In recent months, we’ve seen stories of other web giants – including Apple – delay the start of their music services while, thus far unsuccessfully, trying to negotiate a smaller royalty than they would otherwise pay – perhaps even lower than that paid under the Pureplay Settlement. Seemingly, these established Internet companies see a streaming music service as a losing proposition unless they can get lower royalties.

For webcasting companies, what is perhaps most frustrating is that the statutory royalties on noninteractive webcasting rise each year under the rates set by the CRB and under the various settlement acts, while revenues have not risen at the same rate. At the same time, the performing rights organizations (PROs) who collect on behalf of the publishing companies for the public performance of musical compositions, have traditionally been paid based on a percentage of revenue. They are watching digital royalties for sound recordings being paid on a per song per listener basis, and have started asking why they can’t be paid in the same manner. And some new agreements seem to propose that royalty basis, at the same time as other publishers start to pull their music from the PROs to negotiate separately, making the already difficult process of royalty negotiation that much harder.

While some services, most notably the Clear Channel properties, have managed to directly license music, lowering digital royalties substantially in exchange for a share of over-the-air broadcast revenues, this is not an option for pureplay webcasters or most other digital services. And, even for small broadcasters, the potential for them to have the leverage to negotiate such deals is small. So the royalty universe simply gets more complicated, with no easy solution in sight.

So our discussion at the RAIN Summit next Sunday should be a most interesting one. If you can’t be there, there will be an audio feed. But if you are in Las Vegas, this is but one of the many interesting sessions at the summit, and one of many that will be held at the greater NAB Show itself. The place to be next week

Indecency: After the Supreme Court decision in June, upholding the FCC's right to regulate indecency but questioning the current procedure for doing so, the FCC's regulation of indecency is up in the air. Many license renewal applications for both radio and television stations are held up because of pending complaints, and many sales of stations happen only when the seller's agree to escrow funds to cover any indecency fine that may occur at some point in the future – when the Commission decides what standards to apply to the pending complaints. With so many applications held up, it would seem that the FCC should deal with this issue soon.

EEO Rules: There are fundamental issues about the FCC's EEO policies that have not been addressed in the 9 years since these rules were first adopted. Proposals to extend the rules to part-time employees, and to require the filing of FCC Form 395 (the form that classifies all employees by race and gender), are still pending from that long-ago proceeding. Also pending are proposals sought in requests for reconsideration of the adoption of the EEO rules that would make the EEO rules comport with today's reality - such as the proposals to allow Internet-based EEO recruiting. Maybe this will be the year that some of these outstanding issues are finally resolved.

Privacy Issues: As the digital operations of broadcasters become more and more important, they will face many of the same issues that trouble many of the pure digital media companies. Chief among these issues is that of privacy. Congress, the FTC and other government agencies all are looking at issues as to how to protect the privacy interests of individuals while still allowing digital media companies to use information that allow the functioning of the digital systems, including the placement of advertising targeted to particular individuals based on their interests, as shown through their online habits. The FTC recently issued a report looking to update its enforcement of the Children's Online Privacy Protection Act, and expect that this will be but one of many attempts to impose new regulation on online services in an effort to protect the privacy of individuals.

Political Rules: In the recent election, we saw the effects of the Citizens United case in the significant political spending on broadcast commercials by third-party organizations. While there have been calls for more regulation on such ads, we don't expect action in that area this year. Instead, though, there may be some minor tweaking of the political broadcasting rules, as there are outstanding issues remaining before the FCC – including appeals of the decision of the FCC, issued just before the election, holding that TV stations have to give candidates equal access to certain single-issue candidates – even though such candidates are qualified only in the distant reaches of the station's coverage area, and even when such candidates are "running" for office not with any expectation that they will be elected, but instead simply so that they can get access to television stations to run some controversial commercials not primarily intended to promote their candidacy, but instead to promote their position on some other issue. In an "off-year", this might be the time to address some of these outstanding issues.

Public Interest Programming Reports: At the same time as it began its proceeding to adopt an Online Public File, the FCC began a proceeding to look at the adoption of a new form on which broadcasters would report the public interest programming that they do. This form would replace the Quarterly Issues Programs list, and the Form 355 adopted 5 years ago for television but never implemented. The proposal released in 2011 was simply a Notice of Inquiry, meaning that the FCC would need to adopt a Notice of Proposed Rulemaking to move further on this proposal. While we have not heard much about the status of this proposal lately, with some of the complaints about the usefulness of the Online Public File, this proceeding could bubble up at some point this year although, as no Notice of Proposed Rulemaking has yet to be released, before any new rules were adopted a whole new set of comments would need to be received. So don't expect a new form this year.

Television Issues

Spectrum issues have been the dominant TV concerns in past years, first with the digital transition, and more recently with the "white spaces" rulemaking and the proposals advanced as part of the FCC's Broadband Plan to reclaim part of the TV spectrum for wireless broadband uses. As in past years, these issues remain on the FCC's agenda, as do issues dealing with the carriage of television stations by cable and satellite television providers. Issues about accessibility to video programming and the implementation of other consumer protection issues are also on the agenda. Specific issues for TV include:

Spectrum reclamation: The FCC has issued its Notice of Proposed Rulemaking, proposing methods to implement a "reverse auction," where certain TV stations would bid to be able to sell their spectrum to wireless companies and either go out of business or move to a VHF channel or share spectrum with another station. This proposal has been a high priority of the FCC, and FCC staffers have been spending significant time working to convince broadcasters that there are real opportunities for some broadcasters in this proposal. Much consideration will be given to this proposal this year, and there will be a push to move toward finalizing these rules, as the Commission would like to actually hold the auction in 2014. Part of this process will also involve the "re-packing" of the current TV band, by trying to squeeze the remaining TV stations into less of the TV band, in order to provide more contiguous spectrum to the wireless companies. Look for more details on those proposals as the year rolls on.

Retransmission Consent Reform: There has been much talk in Congress, and a proceeding initiated at the FCC, to determine if the rules governing the negotiation of retransmission consent agreements should be changed. Some multichannel video programming distributors and some public interest groups argue that the FCC should protect viewers who may have their broadcast TV service disappear if a TV station does not reach a deal with a MVPD, while the broadcasters argue that the ability to remove the station from an MVPD is the heart of the negotiation, and removing the risk of the MVPD losing the right to carry the station would hobble the negotiation process. MVPDs also object to TV stations operating through a JSA or Shared Services agreement negotiating jointly, while TV broadcasters see that as a way to equalize their bargaining position, especially for stations not affiliated with the Top 4 networks. Look for some movement in this very controversial proceeding later in the year.

Accessibility: Each year, accessibility issues play a more and more important role in video transmissions – with this year bringing further obligations for video providers to caption television programming that has been repurposed for the Internet, including mobile applications. We would also expect that the FCC will rule on many of the waiver requests that are on file from independent programmers who had received closed-captioning waivers that were revoked when the FCC decided that it had been using the wrong standard for such waivers. The Commission also has a proceeding in which comments have recently been filed that seeks to impose rules requiring that TV broadcasters provide a second audio channel to convey to the blind emergency information that is presented visually on-screen. This would be to aid the blind, in the same way that the current requirements for on-air video captioning is required to aid the hearing-impaired. Look for more action in this area later this year.

White Spaces: The FCC has authorized the operation of wireless devices in the television spectrum, and permitted these operations throughout portions of the east coast of the United States. Expect that the roll-out of authorizations for full-implementation of white spaces to continue this year.

LPTV/Class A TV: As these stations look toward a mandatory digital conversion in 2015, expect that there will be more examination of the qualifications of Class A TV stations to retain their protected status. As the FCC looks to the spectrum auctions, Class A TV stations may tie up spectrum that will otherwise be available for the repacking of the TV band or auction to wireless companies. Thus, expect the FCC's scrutiny of these stations to continue through 2013 – especially with the license renewals of many of these stations coming due.

Radio Issues

Radio has fewer unique issues on the front burner in Washington, but something always comes up. Here are some of the issues we see coming to the fore in 2013 for radio broadcasters:

Performance Royalty: Even though things were relatively quiet on the performance royalty in the last Congress, we would not be surprised to see the issue resurface in 2013. SoundExchange, for the first time in a long time, will not be directly fighting a royalty proceeding at the Copyright Royalty Board. As, as described below, the issue of the streaming royalty rates will likely be in front of Congress, giving more opportunities for this issue to be considered.

Streaming Royalties: In 2012, the Internet Radio Fairness Act  was introduced in Congress, looking to apply a single standard for deciding the royalties to be paid by all digital music services. With a new proceeding to determine Internet radio royalties to begin in 2014, we expect that this bill will be back on the table early in 2013, and there will be significant pushes to get it through Congress this year – and significant push-back from SoundExchange and the record labels.

SESAC Antitrust Action: Broadcasters affiliated with the Radio Music Licensing Committee has filed an antitrust lawsuit against SESAC, seeking to bring it under the same kind of consent decree as ASCAP and BMI so as to try to rein in the rates that SESAC is able to command. Expect lots of litigation on this case this year, but no resolution, as these cases are very long and complex.

LPFM/FM Translator Issues: At the end of 2012, the FCC issued its long-awaited order finally dealing with the processing of FM translators left over from the 2003 FM translator window, and setting up procedures for processing LPFM applications once the translators are dealt with. The FCC has already issued an order setting January deadlines for translator applicants to pick the translators that they will prosecute under the application processing limitations imposed in last month's order. Expect the FCC to push hard to deal with all 2003 translators this year, and to open an LPFM window at the end of the year (October being the projected time, but it could potentially slip to later in the year).

These are but some of the legal and regulatory issues that will be facing broadcasters in the upcoming year. Each year, we make these predictions, and there are always numerous other issues arise that we did not anticipate. So watch the trade press and the pages of this blog to see what other challenges may be coming from Washington for broadcasters as this year progresses.

The decision mentions both Section 112 and Section 114 royalties.  In a digital world, as digital copies are made in the transmission process, it has been presumed that parties need both royalties to operate - the "ephemeral copy" licensed under Section 112 (see our discussion here) and the public performance right licensed under Section 114.  As both are needed, both are covered by the royalty rate set by the Board.  Why bother setting a specific amount for the ephemeral right?  That is a question asked many times - but as that right is paid directly to the copyright holder (usually the record label), not shared with the artists as is the Section 114 royalty, it is one with economic impact. 

These services are entitled to a decision under 801(b) as Congress made a determination, at the time that the Digital Millennium Copyright Act was passed in 1998, that these services were either already in existence (cable audio) or were sufficiently advanced in deployment (satellite radio) that the traditional standard for deciding statutory royalties, used in other contexts under the Copyright Act, would be applied. 801(b), for instance, is used to decide the royalties paid by the record companies to the publishers for the use of their compositions when making a sound recording, and are also used in the determination of rates paid by noncommercial broadcasters in the public performance of musical compositions (a rate recently set by the Board).  Internet radio, on the other hand, was given a new "willing buyer, willing seller" standard that has led to much controversy, as is evident from the current IRFA debate. The application of the standard apparently makes a difference, as other music services similar to Music Choice, that were not in existence at the time of the adoption of the DMCA, pay approximately twice what Music Choice will pay under this decision (see our article here).

We will write more about the decision once the full text is released.

This act has been introduced in Congress, sponsored initially by Congressmen Jay Inslee of Washington (D) and Donald Manzullo of Illinois (R).  The introduction merely starts the Congressional process.  Additional sponsors will need to be gathered, the bill will need to be considered by a committee of Congress (where a "mark-up" usually occurs, allowing changes to be made before the bill is reported out of committee) , and then the bill would have to be approved by the full House.  Often, hearings will be held on the impact of the bill.  A similar process would need to occur in the Senate, and then the bill would have to be signed by the President before it becomes law.  Significant public support will need to be necessary for this process to be completed as, no doubt, the bill will be opposed by SoundExchange.  

This is but a first step toward resolving the issues that have arisen since the CRB has released its decision.  While there may questions that will arise as this bill is considered and debated, webcasters certainly welcome this first step in resolving the issues they have with the CRB decision  - both short term (the impending royalty obligations) and long term (the "willing buyer-willing seller" standard that the CRB had to use to resolve the case).