Posted on February 25, 2009 by David Oxenford

Rallies on Capitol Hill on the Performance Royalty - Who Will Pay?

In the last two weeks, we have seen Capitol Hill rallies by the Free Radio Alliance, opposing what they term the “performance tax” on radio, and yesterday by the Music First Coalition, trying to persuade Congress to adopt a performance royalty on the use of sound recordings for the over-the-air signal of broadcast stations. We’ve written about the theories as to why a performance royalty on sound recordings should or should not be paid by broadcasters, but one question that now seems to be gaining more significance is the most practical of all questions – if a performance royalty is adopted, how would broadcasters pay for it?

 The recording industry and some Congressional supporters have argued in the past that, if the royalty was adopted, stations could simply raise their advertising rates to get the money to pay for the royalty. While we’ve always questioned that assumption (as, if broadcasters could get more money for their advertising spots, why wouldn’t they be doing so now simply to maximize revenues?), that question is even harder to answer in today’s radio environment. With the current recession, radio is reporting sales declines of as much as 20% from the prior year. Layoffs are hitting stations in almost every market. In this environment, it is difficult to imagine how any significant royalty could be paid by broadcasters without eating into their fundamental ability to serve the public – and perhaps to threaten the very existence of many music-intensive stations. And the structure of the royalty, as proposed in the pending legislation, makes the question of affordability even harder to address.

Broadcasters obviously already pay for music that they play – to ASCAP, BMI and SESAC. And the rates that are being paid to these organizations may well be going up in the coming year, as both the ASCAP and BMI deals with the radio industry are to be re-negotiated this year. Of course, this money goes to the composers of the music, not to the performers (and the copyright holders in the performances – the record companies) who would be receiving the proposed new performance royalty on sound recordings. The proposed legislation states that the imposition of the performance royalty on sound recordings is not to have any effect on the amount that broadcasters pay to ASCAP, BMI and SESAC. Thus, the money would by necessity have to come from other station operations. Some broadcasters have suggested that one way of paying a sound recording royalty would be to simply pay what they are paying now to ASCAP, BMI and SESAC into a pot, and let the artists, composers and labels fight for it. This, of course, is opposed by the composers who rightly see the royalty as one of the principal ways in which they are compensated, as they do not share in the profits from the sale of CDs and downloads, but instead get a flat fee for a “mechanical royalty” established under Section 115 of the Copyright Act, and the composers do not typically get money from concert tickets or merchandise receipts that performers may enjoy.

 

This is not, as suggested by royalty proponents, a simple matter of broadcasters getting more money to pay for any royalty. It is a zero sum game, and if the money can’t come from the composer’s royalty, it has to come from station operations. Given the high fees sought (and received) by the recording industry for the performance royalty in sound recordings from digital services (where the least that has been paid is 6-8% of gross revenues by satellite radio, and that was only after the computed "willing buyer willing seller" royalty was found to be twice that amount but adjusted down to preserve the stability of the industry, and after having been initially adjusted based on the finding that half of the gross revenues of satellite radio were the result of talk programming not subject to the royalty), broadcasters could be asked to pay a huge bill (see our post here on computing that bill). And, with the FCC poised to potentially impose new localism requirements on broadcasters that would entail even more operational costs, something has got to give. Broadcasters hope that it is not their economic viability that is the thing that does the giving. 
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Posted on September 23, 2008 by David Oxenford

Settlement Reached on Certain Aspects of Section 115 Royalty - Contrary to Press Reports, This Has Nothing to Do With Internet Radio Royalty Dispute

Today, the National Music Publishers Association ("NMPA"), DiMA, the RIAA and other music publishing groups issued a press release announcing a settlement of certain aspects of the current Copyright Royalty Board proceeding to determine the royalties due under Section 115 of the Copyright Act for the mechanical royalty for the reproduction and distribution of the musical work (i.e. the composition - the words and music of a song).  According to the Press Release issued by the parties, this agreement covers interactive streaming and limited-time downloads, setting a royalty of 10.5% of revenue, less any amounts due for performance royalties (to ASCAP, BMI and SESAC, which also reimburse composers of music).  While many press reports (at least some of which have already been pulled) have concluded that this is a settlement of the Internet Radio royalties proceeding - that is wrong.  The Internet radio royalty proceeding involves Section 114, not Section 115, of the Copyright Act.  Section 114 deals with a royalty paid to the performers, not the composers.  Section 114 compensates performers and the copyright holders in the performance for the public performance of their works, not for the mechanical royalty for reproduction and distribution covered by Section 115.  And Section 114 covers non-interactive streaming - where users cannot dictate the songs that they want to hear - unlike the services, on-demand streams and limited time downloads, involved in this settlement which allow users to select the songs that they want to hear.  So don't believe what you read - the Internet radio royalties are still very much a subject of dispute, and services like Pandora are not yet saved by any sort of settlement. 

According to the press release, the one benefit to Internet radio under this agreement is that the parties conclude that there is no royalty due to the music publishers for any copies made in the transmission of non-interactive streaming.  The Copyright Office recently began a proceeding to ask if such royalties were due (about which we wrote here).  So, even  were the Copyright Office to determine that there was a Digital Phonorecord Delivery (a "DPD") made during the Internet radio streaming process, at least for the length of this agreement (assuming that it is approved by the Copyright Royalty Board), no royalty will be assessed.  We will write more about this settlement once we have seen the full terms - but wanted to post this notice to alert readers that, contrary to press reports, the Internet Radio proceeding has not been settled. 

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Posted on July 16, 2008 by David Oxenford

Copyright Office Issues Notice of Proposed Rulemaking That Could Make Section 115 Royalty Applicable to Internet Radio

Broadcasters and other digital media companies have recently been focused on the royalties that are to be charged by the record labels for public performance of a sound recording in a digital transmission (under the Section 114 compulsory license administered by SoundExchange).  In a Notice of Proposed Rulemaking issued this week, the Copyright Office tentatively concludes that there could be yet another royalty due for streaming - a royalty to be paid to music publishers for the reproductions of the musical compositions being made in the streaming process under Section 115 of the Copyright Act.  This notice was released just as the Copyright Royalty Board is concluding its proceeding to determine the rates that are to be paid for the Section 115 royalty.  While there have been reports of a settlement of some portions of that proceeding, the details of any settlement is not public, so whether it even contemplated noninteractive streaming as part of the agreement is unknown.

How did the Copyright Office reach its tentative conclusion?  First, some background.  The Office for years has been struggling with the question of just what the section 115 royalty covered.  Traditionally, the royalty was paid by record companies to the music publishers for rights to use the compositions in the pressing of records.  This was referred to as the "mechanical royalty" paid for the rights to reproduce and distribute the composition used in a making copies of a sound recording (a record, tape or CD).  These copies were referred to as "phonorecords."  However, in the digital world, things get more complicated, as there is not necessarily a tangible copy being made when there is a reproduction of a sound recording.  Thus, Congress came up with the concept of a Digital Phonorecord Delivery (a "DPD") as essentially the equivalent of the tangible phonorecord.  But just what is a DPD?

Section 115 contains the following definition of a DPD (with my highlights of specific terms or phrases that the Copyright Office addresses in it NPRM in some detail):

A “digital phonorecord delivery” is each individual delivery of a phonorecord by digital transmission of a sound recording which results in a specifically identifiable reproduction by or for any transmission recipient of a phonorecord of that sound recording, regardless of whether the digital transmission is also a public performance of the sound recording or any nondramatic musical work embodied therein. A digital phonorecord delivery does not result from a real-time, non-interactive subscription transmission of a sound recording where no reproduction of the sound recording or the musical work embodied therein is made from the inception of the transmission through to its receipt by the transmission recipient in order to make the sound recording audible. 
 

From that definition, the Copyright Office in its NPRM goes through a detailed analysis of the meanings of various words and phrases in coming to the conclusion that DPDs encompass not just digital downloads but also on-demand and noninteractive streams (noninteractive streams meaning Internet radio).  The Office first concludes that there is a "delivery" when a person receives a digital transition - seemingly pretty straightforward.

Then it looks at the language that seems to exclude noninteractive streams from the definition of a DPD.  However, the Copyright Office states in its NPRM that it believes that the exclusion only applies where there is no "reproduction" of the sound recording.  The Copyright Office looked at the buffer and RAM copies necessary to make the stream audible, and determined that these were in fact reproductions.  Thus, as the exclusion covered only services that did not make reproductions, Internet radio-type services that stream their music programming to their listeners were not within that exclusion.  .

The Office also looked to determine if these buffer copies were "specifically identifiable."  Essentially, the Office concludes tentatively that the computer being used by the ultimate recipient of the transmission (the listener) can decipher the buffer copies, so those copies must be specifically identifiable.  Essentially, the Office decided that, as the transmission can be heard, the copies must be specifically identifiable.

While the Office claims to be reading the plain language of the statute, one has to wonder if this is what was meant by Congress when the statute was adopted.  Seemingly, the statutory structure of the Copyright Act as amended to cover digital services was trying to equate real time, noninteractive streaming with radio type services, and creating a public performance royalty under Section 114 for the sound recordings and allowing the Performing Rights Organizations (ASCAP, BMI and SESAC) to take care of the composition rights for this real time streaming.  It would seem as if the concept of the DPD was meant to cover the digital equivalent of the pressing of a record or a CD - i.e. a download or similar one-to-one transmission that resulted in a fixed copy that could be used and re-used by the recipient.  To me, the concept of "specifically identifiable" would mean one that can be pointed to and identified, so that a listener can go find the song that they want when they want it, just as I can go to my CD collection, and find a Rolling Stones CD when I want it by looking at the label.  When I want to hear a particular song that is being streamed, I certainly can't go to my buffer copies to find that song (as, even if it played on an Internet radio station an hour before, it is not there now if I want to hear it again).  But certainly these are issues that will be debated. 

We have written about the recent Court decision that determined that ASCAP had no public performance right in connection with a digital download, as it was not a "public" performance.  Only the music publishers would collect for the composition used in the song being downloaded to avoid double-dipping.  Here, applying Section 115 to noninteractive streaming would seem to be the mirror image of the ASCAP case, yet the Office is reaching a decision that is exactly the opposite of the one reached by the Court.  Of course, that ASCAP case may be appealed, so these issues, too, are unresolved. 

The Copyright Office seemed to recognize that this could be very controversial, and states that it takes no position as to the value of the Section 115 right that it finds to exist.  That would be left to the Copyright Royalty Board to determine royalty rates under Section 115  in its current proceeding - and that the Board could well determine that the copies made in the case of noninteractive streaming have no value at all.  However, one wonders if the issue was fully argued in the case as most parties seemed to acknowledge that the Section 115 royalty would not apply to such activities (the Board even citing in a footnote that the publishers supported such an exemption in a Section 115 reform bill that was introduced and passed by the Judiciary Committee but not adopted by the full Congress in the last Congressional session).

Comments in the Copyright Office proceeding are due on August 15, and Replies are due on September 2. This is a very important proceeding in which parties should make their views known. 

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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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