Posted on December 4, 2008 by David Oxenford

CBS to Run Yahoo Launchcast Internet Radio - How It Impacts the Royalty Debate

Yesterday, it was announced that CBS would be operating Yahoo's Launchcast Internet Radio operations.  This is ironic as the industry seems to have now come full circle, as Yahoo's Internet Radio operations include the interests that they received when they purchased Mark Cuban's Broadcast.com, which had a substantial part of its business in the streaming of terrestrial radio stations.  While Yahoo long ago stopped streaming the broadcast signals retransmitted by Broadcast.com, it is ironic that a traditional broadcast company has now taken much of the control of not only the Internet radio operations of Yahoo, but also those of AOL and Last.FM (see our post on the AOL deal here).  Explicitly blamed for Yahoo's decision to turn its Internet radio operations over to CBS was, according to press reports, its concerns over the Internet radio royalties as set by the Copyright Royalty Board last year, a decision about which we have written extensively.  How will this transaction affect the debate over those royalties?

Initially, this action once again shows that assumptions about the state of the Internet radio industry that colored the perception of the Copyright Royalty Judges in their determination of the royalty rates were incorrect.  While not explicitly part of the grounds of the CRB decision on the webcaster's royalty, there was much testimony in the CRB proceeding that suggested that Internet radio brought customers to portal sites, and that higher royalties were justified by the value that these visitors added to the portals when the listeners engaged in other activities at the portal.   Yet, that model now seems in tatters, as both AOL and Yahoo have turned their operations over to CBS.  This seems to emphatically demonstrate that the economics of Internet radio operations, whether stand-alone or as part of portals, simply do not justify the royalties that were imposed (see our discussion of the Pandora economic and the royalties here).

The action also seems to emphasize the need for a separate deal for small Internet radio companies.  While the operation of Launchcast and AOL by CBS will probably be good news for enhancing the perception of Internet radio as a viable advertising medium as a traditional broadcaster with significant advertising relationships has decided to invest in the medium (see the analysis here), it does further demonstrate that the high royalties, which preclude the successful operation of small independent webcasters, undercuts the very purpose of the statutory license for the use of music by Internet radio stations.  The statutory license administered by the Copyright Royalty Board was established to minimize transactional costs and make it easier for small companies to pay one fee to one entity (now SoundExchange) and have access to all the music that is publicly available.  If that royalty under the statutory license did not exist, each service would have to individually negotiate with each individual copyright holder for the rights to use the sound recordings featured in their transmissions.  It was felt that such negotiations would be impossible for smaller entities, both because they lacked the bargaining power to negotiate with the large record companies, and because they lacked the resources to locate and negotiate with all of the smaller labels and individual copyright holders.  Yet, by setting rates so high that only very well established media companies like CBS can survive in the industry, the goals of the DMCA have been undercut. 

Thus, to preserve the promise of Internet radio, that it will allow the flowering of diverse music sources that will play the great diversity of music that exists in this country, a royalty arrangement that permits such independent services to operate and make a profit (as this transaction demonstrates that even the largest Internet companies will not operate Internet radio stations without a profit) must be adopted.  Let's hope that, before the February 15 deadline of the Webcasters Settlement Act, such a deal will be adopted and the promise of the statutory royalty preserved. 
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Posted on September 19, 2007 by David Oxenford

SoundExchange Announces 24 Agreements - But Not One a Settlement With Small Webcasters

SoundExchange yesterday announced that it had signed agreements with 24 small commercial webcasters.  Contrary to what many press reports have stated, this is not a settlement with Small Commercial Webcasters.  In truth, what was announced was that 24 small webcasters had signed on to the unilateral offer that SoundExchange made to small webcasters, about which we wrote here.  Essentially, this is the same offer that SoundExchange made in May, which was rejected by many independent webcasters as being insufficient to allow for the hoped for growth of  these companies, and insufficient to encourage investment in these companies.  These larger Small Commercial webcasters, including those that participated in the Copyright Royalty Board proceeding, rejected that offer and instead have sought to negotiate a settlement with SoundExchange that would meet their needs.  Instead of reaching a true settlement with these companies that had participated throughout the CRB proceeding and now have an appeal pending before the Court of Appeals, SoundExchange instead announced that their unilateral proposal was accepted by 24 unnamed webcasters.  Thus, rather than negotiating a settlement, if anything this announcement shows that SoundExchange has not been willing to negotiate - as it has not moved substantively off the proposal they announced over 4 months ago.

While 24 webcasters may have signed on, it would seem that these must be entities that don't expect to grow their revenues to $1.25 million, or grow audiences that reach the 5,000,000 tuning hour limit at which, under the SoundExchange-imposed agreement, the webcaster needs to start paying at the full CRB-imposed royalty rate.  Moreover, the agreements only cover music from SoundExchange members, excluding much independent music that many webcasters play.  For music from companies that are not SoundExchange members, a webcaster has to pay at full CRB rates.  For a small service playing major label music, the agreement may cover their needs, but for the larger companies playing less mainstream music, a different deal is needed. 

SoundExchange's press release announcing the agreements claimed that other small webcasters did not sign the agreement because aggregators would pay their royalties or because their  business models more appropriately fit with the CRB rates.  The press release does not mention that many webcasters did not sign because their business models include growing their businesses without going bankrupt, which does not seem to fit under the SoundExchange proposal.  If this is the only deal that  SoundExchange offers to small independent webcasters, SoundExchange will effectively do away with the independent webcaster who is serious about growing a business, but to whom a per performance royalty creates a situation where royalties exceed revenues. This would leave us with an industry essentially made up of hobbyists and big companies that subsidize their webcasting with their other lines of business - essentially crushing the hopes of those who saw the Internet as a way to build an independent radio business.

Small webcasters are not the only ones that are having settlement problems.  According to a letter released by NAB President David Rehr, after over 3 months of waiting, SoundExchange rejected a proposal from broadcasters to reach a compromise on their streaming royalties.  The Rehr letter claims that the rejection from SoundExchange, which is not public, did not seem to understand the broadcaster proposal.  SoundExchange President John Simson was also been quoted as saying that he expected to reach a settlement with NPR over their streaming royalties by the end of September.  With 12 days to go before the end of  the month, we will see whether this is really a deal come true, or another settlement without substance.
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Posted on June 17, 2007 by David Oxenford

Copyright Office Holds a Roundtable Discussion of the Mechanical Royalty - Another Confusing Royalty for the Use of Music on the Internet

Just when Internet music companies were starting to understand one set of royalties applicable to the use of music on the Internet through the controversy over the Copyright Royalty board decision on royalties for the public performance of sound recordings in a digital delivery system, the Copyright Office held a hearing on Friday to discuss an entirely different royalty - the "mechanical" royalty for the use of the "musical work" in making a "phonorecord."  In plain English, the copyright holder in the publishing rights in a musical composition (the underlying words and music in a song) is entitled to a royalty when a copy of a song using that composition is made.  While that doesn't sound too complicated, when copies are made in the digital transmission of music over the Internet (and even in other digital media), all sorts of questions arise.  And in the conversations on Friday, questions were raised as to whether the obligation to pay a royalty for making a digital copy even applied to the streaming of a song on the Internet or possibly even the playing of a song on an HD Radio station.  These stations already pay (to ASCAP, BMI and SESAC) for the public performance of a musical composition, but the mechanical royalty is for a different right, and is collected by a different group, and the question being raised was whether a different royalty is also due when music is used a digital context.  This is also different than the SoundExchange royalty that is paid for the public performance of a sound recording (a particular song as recorded by a particular artist).

The Copyright Office held this Roundtable to update the record in a proceeding begun by a Notice of Inquiry issued in 2001 to try to determine how to apply in a digital world the mechanical royalty and the compulsory license for that royalty under Section 115 of the Copyright Act.  That section applies to the use of a composition in the making of a record or CD.  The artist or record company would have to pay the publishing company a flat fee per copy to obtain the rights to use the underlying song.  That fee is currently about 9 cents per copy, though the Copyright Royalty Board is is in the midst of a proceeding that is to determine whether that royalty should be changed.  When applied to the making of a physical copy, that concept is not hard to understand (though, as set forth below, it is not easy to administer).  But, in a digital world, questions arise as to when the obligation to pay a royalty arises.

The Copyright Office had recently issued a determination that ringtones and digital downloads were covered by this royalty, and could rely on the Section 115 compulsory copyright.  Again, in those contexts, copies were fairly easy to understand, as a copy is made when a ringtone or download is copied onto a phone or a computer, and when that happens, a specific fee is charged for the copy that is made.  The more difficult questions arise in cases of subscription services, limited time downloads, on-demand streaming, and even streaming done by a non-interactive service like an Internet radio station.  When is a "phonorecord" - a specifically identifiable copy of a recording that contains the musical work - made?  In the digital transmission process, multiple copies are made - on the servers of the music services, in transitory copies made by servers and routers on the Internet, and in the RAM and on the hard drive of the listener's computer.  Are these copies "specifically identifiable" such that a royalty should be paid?  In its Public Notice of this Roundtable, the Copyright Office raised many of these issues that formed the basis of the discussion on Friday.

 In 2003, the Recording Industry and the representatives of the music publishers entered into a settlement agreement that concluded that the non-interactive streaming did not involve copies that would give rise to a mechanical royalty, while interactive streaming and conditional downloads did.  However, as discussed at the Roundtable, the Harry Fox agency, the principal collection agent for the music publishing companies, represents less than 70% of the music publishers, so the agreement is not binding on all publishers.  Moreover, the Copyright Office representatives themselves asked at the Roundtable how they could draw a legal distinction between on-demand streaming and non-interactive streaming, when the technology involved was the same.  While the making of a copy in the streaming process may currently have no real value independent from the public performance (for which ASCAP, BMI and SESAC collect royalties for the musical composition), the Copyright Office asked if there should not at least be a recognition that a copy is made.  Questions even arose as to whether specifically identifiable copies are made in other digital transmissions that include buffer copies.

The question arose as to whether any copy made in a streaming process is specifically identifiable, and also whether the payment of such a royalty would be "double-dipping" - paying the composers twice for the use of their music.  In a recent decision in a Federal Court, a decision was rendered that ASCAP (and by implication BMI and SESAC) were not entitled to public performance royalties in connection with downloads, as no public performance was involved.  The question discussed on Friday was whether the reverse shouldn't also be true - that there is no mechanical royalty where there is a clear public performance.

Issues also exist as to the efficient operation of the statutory license.  The license requires notice to the copyright holder before it can be used, and as many of the copyright holders are difficult to find, and as there is no central database where the music publishers are identified, that is difficult.  In addition, as the Harry Fox agency, the one central licensing agency that exits, represents less than 70% of the copyright holders, a company that has a business model that doesn't allow for the per copy statutory royalty (e.g. a subscription service), doesn't have any group or groups with which it can negotiate to get blanket licenses for virtually the entire musical universe.  Thus,  licensing is difficult.

Everyone at the Roundtable agreed that the statutory language was ambiguous and did not cover all of the issues that arise in a digital world.  The Copyright Office itself has asked for legislative reform of the statutory license many times, to clarify these ambiguities.  In fact, at one point, the Register of Copyrights testified that she thought that one agency should collect all royalties for musical compositions, so that there would not be the issue of double dipping, and so that there would be organizations that would represent virtually all of the copyright holders for all purposes.   With the various entrenched stakeholders, that proposal didn't fly, thus we continue to have different groups representing composers for the public performance of music and for the mechanical royalty.  And, while we have had proposals for Section 115 reform floated in Congress for the last several years, the discussion on Friday was that Congressional action did not look imminent.  But all companies providing digital transmissions of musical compositions should continue to monitor these efforts, as the potential for problems arising from interpretations of who needs to get paid for digital services remains very high, and with the potential liabilities for copyright infringement being so great, the stakes are high. 

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