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The constitutional issue is a complex one, involving the Appointments Clause of the Constitution, i.e. who can appoint government officials. “Principal Officers” of the United States have to be appointed by the President, while inferior officers can be appointed by the head of an executive department. Without going into the depths of the constitutional issues under consideration, there was much debate about whether the Copyright Royalty Judges (“CRJs”), who are appointed by the Librarian of Congress, are principal or inferior officers. And there was even some discussion of whether the Librarian is a head of an executive department, as the Library of Congress is theoretically part of the Congress – the legislative not the executive branch of government.

The argument also spent a significant amount of time discussing what would happen if the Court decided that the CRJ’s were in fact unconstitutionally appointed. As the Chief Judge asked, if the Court was to decide that the Judge’s appointment was unconstitutional, what would be the “least bad” remedy that they could order. In other words, they were looking to see what remedy they could order that was least disruptive to Copyright law. The discussion offered all sorts of alternatives – from ones where the Court could just decide that a very limited section of the law was unconstitutional and strike just those sections (e.g., the sections forbidding the Librarian from removing the Judges except for cause, or the section limiting the Copyright Office’s review of any final CRJ decision to an advisory one for future cases, not a binding review of the present case – attempts to make the Judges into inferior officers who could properly be appointed by someone other than the President), to the possibility that the CRJs appointment could simply be voided, leaving to Congress the question of what to do next. There did not seem to be any debate as to whether prior decisions of the CRJs, that were no longer under appeal, would remain binding on the parties to which they apply (e.g. rates already set would remain in place and binding).

One interesting aspect of the argument on potential remedies what the argument of counsel for SoundExchange who contended that any decision that the Court makes should be as limited as possible, as a decision overturning the CRB system would create “chaos”  as the statutory royalty is crucial to the effective functioning of the webcasting marketplace. This is interesting as SoundExchange, in CRB proceedings, always contends that the royalty is something that is forced on them and their members, and not something that they believe is necessary.

Look for a decision on this case in the next few months, which may help to once and for all resolve the question of the constitutionality of the CRB. Given that the CRJs are currently considering new royalties for satellite radio and new rates under Section 115, this is an important decision that could have important ramifications for many segments of the digital music industry and for Copyright law more generally. 

During the webinar, one of the issues that came up in the discussion of music use on the Internet was the provisions of Section 112 of the Copyright Act that allow broadcasters to make "ephemeral copies" of sound recordings to facilitate a broadcast or webcast transmission, but which require that any such copies be kept for no more than 6 months.  As discussed at the seminar, agreements entered into last year by the NAB and major record labels and A2IM, the association that represents that major independent labels, in connection with the NAB/SoundExchange settlement of the dispute over Internet radio royalties, contained provisions that agreed to waive that 6 month limit on the retention of ephemeral copies for broadcasters who signed the settlement agreement on webcasting royalties.  More details about the waiver of this aspect of the ephemeral royalty issue, and about the waivers of the performance complement which would otherwise restrict programming options of webcasters (including how many songs in a row by the same artist could be played) are contained in this post on our blog summarizing the waivers entered into in connection with the NAB/SoundExchange agreement.

The associations which co-sponsored the webinar were the state broadcast associations of the following states:  Illinois, Kansas, Pennsylvania, Missouri, Nebraska, Nevada, North Dakota, Oregon, Tennessee and Indiana. 

We will provide more details about these agreements when they are available, and we'll tell you about the fourth deal once that party is revealed.   With these settlements, SoundExchange has announced deals with many, but not all, of the parties who were to participate in the proceeding to determine Internet radio royalty rates for 2011-2015.  No deals have been announced with several large webcasters who are not "pureplays", i.e. they have substantial business outside of noninteractive webcasting.  NPR also filed to participate in the new proceeding, as their announced deal only covers the period from 2006-2010.  Whether any of these webcasters are the the "group to be named later" remains to be seen.

What groups remain who are not satisfied by the existing deals that offer some discount off of the CRB rates?  Noncommercial groups not affiliated with NPR, including religious broadcasters, are bound by the CRB rates, which give these webcasters up to 159,140 monthly aggregate tuning hours for $500 per year, but they have to pay the full commercial rates if they have larger audiences - rates that could end up being 10 times higher than those paid under the Small Webcaster Settlement Act provisions which expired in 2006.  Larger webcasters, including those that are part of portal sites or other sites that offer far more than webcasting, or those that offer an aggregator service providing hosting, bandwidth and other services to very small webcasters, also do not easily fit into any of the existing categories, as they will end up paying royalties on revenues not affiliated with their webcasting service. 

If no deal is reached by these groups, the CRB marches on with its proceeding to determine rates for 2011 to 2015.  Direct case exhibits for these webcasters are due at the end of September so, if no deals are reached, there will be more litigation next year to determine what the rates will be for webcasters not covered by any of these deals, or for ones who decide to opt out at a later date. 

First, the deal provides for different treatment for large and small pureplay webcasters. For the small pureplay webcasters, the ones with less than $1.25 million in revenue (the number that has seemingly become a magic number included in the microcasters deal as well as the proposed broadcast performance royalty to distinguish between large and small users of sound recordings), a webcaster who agrees to pay slightly higher royalties in 2009-2014 than required under the microcaster deal (12% on the first $250,000 of revenue and 14%, as opposed to 10-12%), gets the following benefits:

• An aggregate tuning hour limit of 8 million monthly ATH for 2009, 8.5 million for 2010, 9 million for 2011, and 10 million for 2012-2014, instead of the 5 million monthly ATH under the microcaster deal
• A recapture provision that requires that the webcaster, upon sale of the webcasting business to an entity that would not qualify as a small pureplay webcaster, repay the difference between what he would have owed under this deal had he not elected to be a “small entity”, but the recapture is limited to 4 years, not a potential 10 years as required by the microcaster deal. In addition, under the terms of this deal, the webcaster has the option of paying 30% of the consideration from the sale to SoundExchange in lieu of the per performance recapture, a percentage which very well may be smaller than the per performance calculation. Under this deal, if the webcaster pays under the "per performance" option outlined below for one full year, no recapture requirement exists. This recapture provision is to avoid the LastFM issue that SoundExchange has expressed concern about in public statements (see our post here).
• A transition period, for a small pureplay webcaster who grows its revenues beyond $1.25 million, that allows it to continue to pay at a percentage of revenue royalty for the remainder of the year in which it exceeds $1.25 million, and the entire following year. The webcaster would have to pay 25% of its revenues to SoundExchange, but would not have to make per performance payments for as much as two years, if it times its transition beyond the $1.25 million threshold properly. This is in contrast to the 6 month transition under the microcaster deal.
• This deal gives the webcaster the ability to delay the transition to the per performance royalty, if its revenues go over $1.25 million, then drop back below that number. Only after a webcaster has revenues in excess of $1.25 million for 2 calendar years will it be required to pay at the per performance rates.

Webcasters who elect this deal must do so on a yearly basis. As the deal offers no small pureplay webcaster percentage of revenue option for 2015, this ability to opt out is important for the smaller webcaster who has not reached the $1.25 million cap by that time, as they can opt for the microcaster deal for 2015 if they cannot afford the pureplay per performance royalties set forth below in 2015. Or, if another settlement should be reached, or the CRB should set lower rates for 2011-2015, a webcaster could opt out of this deal and choose any better arrangement that comes along at the end of the calendar year in which it is operating.

The small pureplay deal also has minimum fees. Webcasters have a minimum fee of the greater of  $25,000 or 7% of expenses.  The 7% of expenses is also required under the microcaster deal. As it will be mostly larger “small” webcasters, ones with concerns about the $1.25 million dollar cap or the 5 million aggregate tuning hour limit under the microcaster deal, who elect this deal, most will have revenues in excess of $250,000, and thus would owe the $25,000 minimum fee in any event.  That minimum can be paid in quarterly installments.

For larger pureplay webcasters, the deal offers a substantial advantage over the CRB rates. The rates for large pureplay webcasters are the greater of 25% of revenue or a per performance royalty that is far lower than that required by the CRB – even through 2015. As set forth below, the per performance royalty for 2015 will be the same rate that webcasters were charged for 2008 under the CRB decision – and far less than that agreed to by the broadcasters in their settlement with SoundExchange. As most large webcasters claimed that the CRB-determined royalties would total 75% or more of their revenues, this new rate represents a substantial savings. The pureplay per performance royalties (with a per ATH royalty rate for 2006-2008) are as follows:

Year                 Per Performance      Per Aggregate Tuning Hour

2006                $0.00080                     1.2¢

2007                $0.00084                     1.26¢

2008                $0.00088                     1.32¢

2009                $0.00093

2010                $0.00097

2011                $0.00102

2012                $0.00110

2013                $0.00120

2014                $0.00130

2015                $0.00140

Either large or small pureplay webcasters, who offer a white label or syndicated service to some third party, where the service is offered to the public under the name of the third party and not the webcaster, or for those who offer a subscription service, will have to pay at higher rates. Presumably, the theory is that such services do not make their revenues from advertising, but instead from payments by third parties or from the subscriptions by the public, and can factor in these higher costs in the amounts that they charge for such services. Essentially, royalties for those services would be paid at the same per performance rate as the broadcasters are currently paying under their settlement with SoundExchange (see our post here on those rates).

In sum, while far from a perfect deal that webcasters would have selected on their own, this deal does provide another option for webcasters with substantial advantages in many area to those that qualify for treatment under this deal. While no doubt the fight will continue over the standards that should be used to determine royalties in future proceedings, so that parties don’t need to enter into these after-the-fact settlements when one party has a substantial bargaining advantage with a favorable decision already in hand, SoundExchange should be credited for agreeing to reach this deal when there was no compulsion that they do so. This deal presents certainty for many webcasters – eliminating further litigation and negotiation costs while setting rates at which a class of webcasters can go on with their operations. 

The MusicFirst claim is that this case is different in that broadcasters have a self-interest in the topic.  Yet, seemingly, that argument goes too far, as a restriction on broadcasters editorializing on topics in which they have some interest could very well eviscerate the First Amendment rights that they have now had for so many years.  For instance, editorials on tax policy, health insurance, utility rate hikes, and even local bond issues may well have a direct impact on the broadcaster, but no one suggests that these topics are off limits.  Even an editorial supporting or opposing a political candidate, the heart of the editorial right for newspaper publishers and now enjoyed by broadcasters, could be seen as potentially having a financial impact on the broadcaster.  The MusicFirst petition does not address why these issues are somehow different from the performance rights issue, or why artists are entitled to more rights than supporters of positions that may be contrary to the broadcaster's position on other issues.

Moreover, it was clear even before the abolition of the Fairness Doctrine that broadcasters are not "common carriers," meaning that they do not have to accept every ad or message that anyone wants to put on their airwaves (Common carriers, like telephone companies, have to transmit every message that is given to them).  The broadcaster can serve as an editor or journalist, picking and choosing the message that it wants to convey to its listeners.  The only exception is for Federal political candidates, who have legislated a right of "reasonable access" - legislation that has not been challenged in the Courts in recent memory.  But regardless of the rights of political candidates, this exception is in no way relevant to the MusicFirst Coalition.

The MusicFirst petition also suggests that broadcasters may be improperly characterizing spots that they run against a performance royalty as Public Service Announcements ("PSAs").  Yet that also is not a relevant criticism, as the FCC did away with all of its mandatory program logging requirements back in the 1980s.  Thus, whether broadcasters characterize the announcements are PSAs, or Entertainment or News or anything else has no current significance for regulatory purposes.  Note that the localism rules adopted but not yet effective for TV, and those proposed for radio, would bring back the mandatory classification of broadcast programs and give the PSA classification regulatory significance if and when these proposed rules become effective.  But it is certainly not an objection at this point.

The PSA suggestion is tied into another claim that the radio broadcasters running these announcements may not be meeting their public file issues under the Bipartisan Campaign Reform Act ("BCRA") which requires that a broadcaster who runs advertising discussing "Federal issues" put information into their public files similar to that which is maintained for political candidates (see our post, here, for details on that requirement).  While we have advised our clients to comply with these rules, especially if anything of value has been provided to the station in connection with the ads (including scripts or pre-produced spots), where the station airs its own editorial message on the issue, the spots do not seem to fall into the BCRA requirements as they are not sponsored programming, which is essentially what those requirements address.

Ignoring other procedural and substantive issues in the petition (including its failure to name names - in most cases omitting information about the stations which supposedly engaged in the complained of conduct and of the artists who were discriminated against), the issue seems to boil down to a First Amendment issue.  No one would suggest that performers be required to allow broadcasters to attend their concerts to speak against the royalty, so why should broadcasters be compelled to give voice to a position to which they are fundamentally opposed?  We will see what the FCC does with the MusicFirst petition in coming months.  Given the recent statements of the proposed new Chair of the FCC at his confirmation hearing that he has no intention of reviving the Fairness Doctrine, the prospects are that this petition will be simply one more publicity volley in a protracted war over the broadcast performance royalty.

One reason for the confusion about SESAC may be that the other performing rights organizations representing composers, ASCAP and BMI, cover the costs of streaming a broadcast station on the Internet as part of the same process that broadcast stations use to pay their over-the-air royalties.  Thus, broadcasters do not see a separate invoice for their streaming royalties due to these organizations.  SESAC, on the other hand, has determined that streaming (and HD radio channels) are potentially independent revenue sources, so they charge a separate royalty for the music used by broadcasters providing these services.  However, it should be noted that both the ASCAP and BMI agreements with broadcasters are up for renewal this year, so these issues could conceivably be up for consideration in the negotiations about the new royalties to be paid by broadcasters in the future.

But for now, broadcasters who are streaming their signals on the Internet should understand that the rights covered by ASCAP, BMI and SESAC are different from those covered by the SoundExchange royalty, and thus there are obligations to all of these organizations for music royalties.  Thus, don't ignore that letter from SESAC asking for Internet radio royalties.

The Petitions to Participate can be filed either by individual parties interested in participating in the case, or jointly by parties with common interests.  Section 351.1 of the CRB rules require specific contact information for the participant, and a statement of the interest of the party filing the request in the proceeding.  A filing fee of $150 per petition is also required.  In the next month, there may be the formation of various interest groups ready to participate in this next proceeding.  These proceedings are long and expensive, so the formation of groups to jointly participate are often the only way for Internet music services can afford to participate in these proceedings. 

At the same time, the CRB noticed the start of a proceeding for the royalty for "new subscription services."  These services include subscription digital music services not provided over the Internet, and not in existence in 1998 when the Digital Millennium Copyright Act was adopted.  Services that were in existence (like the satellite radio services that were authorized by the FCC when the DMCA was adopted and certain cable music services) are referred to as the "pre-existing subscription services" and are not governed by the "willing buyer, willing seller" standard that govern webcasting royalties.  These services, unlike Internet radio, cannot measure exact listenership.  Services that came later, such as music services provided by XM and Sirius to the satellite television systems, are the "new subscription services."  In 2007, they negotiated a 15% royalty to cover the period through 2010. If they cannot reach an agreement on a new rate, they, too, would have to participate in a new proceeding to determine the royalties that they will pay for 2011-2015. The filing date for these services to partipate in the proceeding to set rates is also February 4.

So the fun starts again - get ready to litigate.

If this stratagem were to succeed, there may be an impact far beyond this particular game. In any decision of the Copyright Royalty Board as to the value of music in assessing what a willing buyer and a willing seller would agree to in a marketplace, the Board has always assumed that there would be some agreed upon value of music, as interactive or on-demand providers of music, such as video game makers, have traditionally paid for the use of the music they feature. Were this paradigm to change, music services could well argue that Internet radio and other services that are subject to the royalty should pay little or nothing for that royalty given the promotional value that they deliver. Of course, part of any such analysis would be proof. In the case of Guitar Hero, which features a limited selection of music, Activision can show that the sale of the featured music climbs coincident with a new release of a version of the game that features that music. Internet radio, on the other hand, which features a wide variety of music over a prolonged period, music that may also be featured on other services, has a harder time demonstrating the direct connection between airplay and music sales. But tests could be conducted (see RAIN’s proposal for the Three Dog Night test, here). It may very well benefit companies to conduct such tests before the next CRB proceeding, scheduled to begin next year.

In 2002, faced with a similar issue when the RIAA and a group of small webcasters with which I worked tried to reach a deal, Congress stepped in and passed the Small Webcaster Settlement Act.  SWSA allowed a settlement to bypass what was then the Copyright Arbitration Royalty Panel (the "CARP") and go into effect simply upon submission of the settlement to the Library of Congress by a set deadline, and the Copyright Office publishing it in the Federal Register.  The Webcasting Settlement Act adopts that same system. If any group reaches a settlement with SoundExchange by February 15, 2009, they need only submit it to the CRB, which will then publish it in the Federal Register, and it will become effective and binding on all copyright holders as part of the statutory royalty. Unlike pre-hearing settlements, no notice and public comment is necessary on this settlement. 

The bill allows for settlements to be entered into for an 11 year period, starting with the end of 2005 when the last set of rates expired.  This would allow the settlement to displace the CRB decision from last year, and eliminate the need for a CRB proceeding for the next 5 years (the current CRB decision is to run through the end of 2010).

But such a settlement must be reached by February 15 ( the date was December 15 in the original draft of the bill, but it seems to have been changed in later versions).  Why wouldn't the period be unlimited?  Already, there was some unease with the adoption of this bill by broadcasters - as they have argued that they have not been involved in any settlement discussions with SoundExchange in a long period of time.  While that seems to have dissipated, perhaps others would object to an unlimited ability of copyright holders and webcasters to reach a deal without any opportunity to comment on a deal.   Yet why not?  If a group of webcasters and SoundExchange want to enter into a deal that would be available to any similarly situated webcaster, why do you need notice and comment?  If other webcasters don't like the deal, they can call for a CRB proceeding at the next opportunity to determine a rate for that objecting group.

In any event, the Webcaster Settlement Act makes it easy for settlements to go into effect - now we need to see if the hard part - actually entering into those settlements - will occur.

The disconnect over Internet radio was evident not only in the discussions of the revenues, but in the discussion of the meaning of Internet radio to artists.  Simpson started his testimony talking about three heirs of deceased musicians who were thrilled by their SoundExchange royalty checks as the musician they represented had not made any money during their lifetimes from their recording and touring careers.  He used this introduction to launch into a discussion of the need for this compensation to reward artists for their  performances as the world moves from a culture of possessing music to one where music is not owned but merely listened to through various platforms.  As musicians will no longer be compensated through the sale of the their records, they need to make up the revenue from lost sales through performance licensees such as those reflected by the CRB-imposed royalties.  Musician John Ondrasik of Five for Fighting echoed Simpson's points, contending that compensation through royalties puts food on the table of musicians, and was necessary to avoid discouraging new artists, thereby hurting the country's economic and cultural life.  Ondrasik stated that he had received about $9,000 in royalties from SoundExchange the prior year which, while it might not seem like much, had made a difference.

In counterpoint to these witnesses, musician Matt Nathanson stated that, while he does not mind getting money from royalties, the promotional effects of Internet radio was so great that he would prefer to give up some royalties to insure that Internet radio can become profitable and grow.  He stated that Internet digital delivery of music had changed the economics of the music industry, leveling the playing field for artists.  No longer are musicians required to be dependent on the record companies for their livelihoods.  Nathanson made the following points:

• Blogs, email, viral marketing, and on-line listening have allowed musicians to keep in touch with their fans, without the need for a record label promotions department
• The digital delivery of music ends the fight for shelf space in record stores, allows musicians to audition their music directly to the consumer (on their websites, MySpace pages or through Internet radio) so that they can build an audience on-line
• In this new system, promotion is the key way to make an audience to grow, and Internet radio is an important component of that promotion given its diverse programming
• Digital delivery makes sales and promotions opportunities more equal - by getting rid of scarcity you don't give limited power to a handful of broadcasters, nor are there necessarily a handful of major artists who get all the promotion through airplay
• The new system favors new artists and, if the growth of Internet radio is limited because of royalties, it will most hurt the small and developing artists who are promoted through the multiple channels of Internet radio

Kennedy of Pandora made the point that Internet radio democratizes radio, suggesting that if lower royalties are not agreed to, only broadcasters who can subsidize their operations through their broadcast operations would be left on the Internet.  Diversity would be lost.  Nathanson stated that such consolidation would be a "huge step back" for artists.  Senators on the panel remarked that Nathanson's view was a different perspective that they had not heard before (they obviously don't read this blog, as we remarked on some of these same points in posts including one here - mentioning that points made by one of SoundExchange's own witnesses at the hearings before the CRB talked about how new artists would probably benefit from promotion when more established artists might be more hurt by any substitutional effects of Internet radio).  After his testimony, there was much discussion of the real debate being between the new and old ways of doing things. 

In response, Simson of SoundExchange, trying to refute Nathanson's position, said that the benefits that he suggests were not available to the estates of artists who had died.  But Nathanson, in perhaps the most telling line of the hearing, said that the it wasn't Internet radio that put the artists in that position - it was the record companies and their contracts with the artists.  Nathanson concluded that Simson was proposing to right the wrongs of the past by crushing a new industry that had nothing to do with creating those wrongs in the first place.

Obviously, these differing perspectives - even among artists themselves - do not make settlement easy.  And there were other issues that were discussed at the hearing - stream-ripping, the broadcast performance royalty and the fear of "subsidizing" technologies that will be discussed in the third part of summary, to be posted in a few days. 

The second bill that was being discussed was that of Senators Brownback and Wyden (who were both at the hearing, the former asking questions and the later as a witness) - the Internet Radio Equality Act (about which we have written here and here) which would lower Internet radio royalties to 7.5% of revenue and adopt the 801b standard for future proceedings.  As the bills propose different standards for music royalties, one area of disagreement was immediately evident.  Yet, as Senator Feinstein pushed the parties to find a compromise, a glimmer of hope actually appeared.  

The record company representative on the panel, Jeffery Harleston of Geffen Records, held firm for the "fair market value standard," arguing that if artists and labels are forced to license their product through a compulsory license, it is only "fair" that they receive the value that their work would have brought had they been able to license it in the marketplace - so a "fair market value" rate was appropriate to provide that compensation.  While the issue was not raised in the hearing, one wonders why, if the record companies believe that this standard is the only "fair" one when a compulsory license is involved, they don't advocate a change in Section 115 of the Act - the compulsory license that record companies rely on to get rights to reproduce the composition of a song when making a recording of that song.  Record companies and artists do not need to negotiate with music publishers for the rights to use a composition, but instead they can get that right through a compulsory license - and the royalty to be paid by the record companies under that license is set using the 801b standard.  So if record companies and artists use 801b when it benefits them, shouldn't the same standard be used when their product is the one subject to the license?

On the other hand, Joe Kennedy of digital music service Pandora, testified that the 801b standard, as used for all other royalties under the Copyright Act, should also be applied to the performance royalty in a sound recording.  Kennedy argued that, given the difficulty of the application of the "willing buyer, willing seller" standard to Internet radio (stating that the royalty currently takes 75% of Pandora's gross revenues and, if not changed, will definitely force the company out of business as the royalty increases over the next two years), it seemed difficult to justify the adoption of yet another new standard - "fair market value" - which has never been used in the past.  What Kennedy did not specifically state, but which seems evident from the fact that the recording industry is supporting this new standard, is that this new standard is likely to be interpreted much like the "willing buyer, willing seller" standard which already purports to assess the economic value of  music in an arms-length negotiation in an open marketplace.  That would seemingly be the same thing as "fair market value" of the music.

One point that was lost in the discussion was the meaning of the 801b standard, with some of the Senators in attendance admitting that they did not understand that standard and how it was applied.  What is the 801b standard?  The standard looks at a number of factors in assessing what the proper royalty should be.  Those factors are:

(A) To maximize the availability of creative works to the public.

(B) To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions.

(C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication.

(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

As is evident, those factors not only look at the economic value of the use of the work, but also assess the public interest in the distribution of artistic and literary works and the impact that the royalty will have on the industry that has to pay it.  Just as the impact of the Section 115 royalty would have on the record companies must be assessed in looking at that royalty, the impact on the digital music businesses would have to be assessed in determining a rate decided under this standard.  In using the 801b factors in assessing the satellite radio royalties, for instance, the CRB reduced a willing buyer willing seller determination of 14% to a rate climbing from 6% to 8% of revenues over a 5 year period, justifying the reduction on the impact that the royalty would have on the business of the satellite radio companies if it were not so adjusted (see our previous post for more details). 

So - where was that glimmer of hope?  As Senator Feinstein pushed the parties on the panel to find a compromise standard so that the legislation could be moved this session, John Simson, the President of SoundExchange (the collective which collects the royalties and distributes them to artists and labels), actually broke ranks and stated that he did not rule out the use of the 801b standard.  However, he said that he thought that the standard would need to be tweaked to reflect current marketplace realities.  His specific example of where that tweaking could occur was in assessing the "substitution" issue - whether the use of the copyrighted work by the digital service would be a substitute for its purchase, thereby diminishing the income that the artist might receive from the use of the sound recording.  Of course, it would seem that the existing factors already take that into account in assessing the "risks" to various parties under consideration (C) above, the impact on the structure of the businesses that are involved in the proceeding under consideration (D), and the fair return under clause (B).

The purpose of the Copyright laws, under the Constitution, is "To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."  Many commentators (see this article, for instance) state that the meaning of "science" at the time of the Constitution was much broader than it is today meaning, more generally, "knowledge and learning."  While creators are given limited exclusive rights, those rights are for purposes of promoting general knowledge within the community - not exclusively for the protection of the copyright holders.  If this interpretation is the correct one, then it seems like the Section 801b factors are exactly what is meant by the purpose of Copyright - insuring a fair return, but also allowing for the reasonable distribution of the copyrighted material so as to benefit the knowledge of the general population.  This, of course, leads into the discussion of the differing views of the purpose of the statute and of the state of the industry - issues both discussed in detail at the hearing - and to be covered in subsequent posts on this blog.

Another interesting issue that apparently figured into the decision was a commitment of the companies not to use program tiers that they promise to create to reduce the music royalties that they pay to SoundExchange to compensate artists and labels for the use of their music.  This decision was apparently insisted on by Commissioner Tate, according to her statement released last Friday.  We wrote about the Copyright Royalty Board decision on satellite radio royalties here.  While that decision was based on a percentage of revenue of the service, specific exemptions were included in the decision for revenues specifically attributable to categories of programming that made only incidental uses of music.  Perhaps the record companies feared that the satellite companies would set up tiers that would exclude music programming.  But why that issue should be part of an FCC decision-making process is unclear, when there is another agency, the Copyright Royalty Board, to review such issues.

In any event, the decision is out, and the larger impact of the decision will be seen when the full text is released. 

As you may remember, in the CRB proceeding itself, SoundExchange had proposed that there actually be a higher fee for performances that take place over wireless networks, alleging that these performances were somehow more valuable.  The Board rejected that argument, finding that insufficient evidence had been provided to reach that conclusion.  But, with the increase in wireless access to Internet radio that we are bound to see through the iPhone and competing devices, that argument will no doubt be raised again in the CRB proceeding to set the rates for 2011-2015, which will actually begin next year.  When one thinks about the nature of the wireless experience, one must wonder whether that experience is in fact more valuable than the experience of listening to Internet radio when sitting in front of your computer.  Certainly, the wireless service reaches people where they have not been reached before, making Internet radio more of a competitor to traditional radio, and more like traditional radio.  But one of the arguments that Internet radio might actually be more valuable than traditional radio - its interactivity - actually suffers from mobility.  When you are in front of a computer and an ad comes over the Internet radio stream, you can immediately act on that ad, especially when it's linked to a banner on the website.  When you are in a mobile environment, driving or jogging or otherwise on the move, it seems to me that you are less likely to react to any commercial message that you may receive.  Thus, the value of the advertising is more for purposes of reinforcing brand recollection, like over-the-air radio, rather than for driving immediate action, like on-line advertising. 

Certainly, this issue will be debated in the future.  But, once again, it raises the question of whether music has an independent value that can be quantified on a per song, per listener basis, or if the value of music depends more on the situation in which it is experienced and whether compensation for the use of that music is not more appropriately tied to a percentage of revenue of the user, as we've discussed in previous posts.  In a percentage of revenue scheme, the music user benefits when the service does well, and does not receive as much when the service is not a success.  But, as there is no penalty for the use of more music, more services are attempted, so more successful applications are likely to be discovered, benefiting both the creator and the user of the music.  When there is a per use fee, there is a cost for using each and every piece of music, seemingly discouraging new services and new innovations.  These are no doubt issues that will be debated endlessly into the future, but something to consider as Internet radio becomes untethered from the computer. 

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. 

In an order released last week, the Court permitted Royalty Logic to brief the issue, and gave the DOJ the right to respond.  However, the Court specifically did not make any determination as to whether it will consider the issue, as both the DOJ and SoundExchange have opposed the Royalty Logic motion as having been filed too late to be considered in this proceeding.

Obviously, if the Court does decide to hear the issue, and does decide that the CRB was not properly appointed, the results may fundamentally change the argument  - potentially requiring the re-hearing of the recently decided CRB cases or a legislative solution to provide a new process or even to set the rates.  And if Congress gets involved, who knows what else could happen?

In fact, recently, in connection with an unrelated bill in Congress on a matter having nothing to do with music royalties, The Internet Radio Equality Act, about which we wrote here, resurfaced as a potential rider. Eventually, as it threatened to derail the bill, the rider was withdrawn.  The new CRB royalties have now been effective for almost eleven months (see our reminder, here). While the recent action on IREA was predictably been greeted with skepticism by SoundExchange, it should not come as a shock that the bill is being revived as there have been no announced mutually-negotiated settlements of the royalty dispute over the past year, even though there have been discussions, and even though most Internet radio companies have claimed that there businesses are in jeopardy should these royalties continue to be in effect, and as they continue to substantially increase over the next two years. 

Unless there is legislative intervention, the appeal will go on.  Not only will the briefs be filed on the question of the CRB's status, but SoundExchange will also be filing a brief in support of the CRB decision later this month.  The webcasters will respond in July, and oral arguments will be held at a date to be set later in the year.  A decision is probably on tap for 2009 - just in time for the commencement of the next proceeding for royalties for 2011-2015.

The complaint of the sound recording copyright holders (primarily the record companies), is that services like Last.FM use sound recordings as the building blocks of their business, and can amass large audiences based on the use of the sound recordings, yet the record companies don't get a share of the "windfall" that may result when these businesses are sold.  Of course, this argument assumes that the value of these services is primarily in their use of the music.  Under their theory, it would seem that all a service needs to do is start playing music, and audiences (and eventually riches) will result.  Instead, most digital media companies will argue that there is far more to creating a successful Internet service than simply starting to play music online.  If you just had to provide the music and watch the audiences roll in, Internet radio would be a huge business that anyone could enter - and the litany of failed or struggling Internet radio and digital music delivery companies should not exist.  To me, it seems that a service, to be successful, must offer something more than just music, whether it is the community aspects of a Last.Fm or iMeem, or the sophisticated music selection software provided by a service like Pandora.  These sorts of services take much investment and much time to develop audiences, and even longer to develop significant revenue.   And, while these companies may eventually be sold to a company that may better develop and monetize their audience, as happened with Last.FM, the record companies will receive significant royalty revenue if the new owners are successful in the development of the potential of the service.  If they are not successful, one wonder whether there really was any significant value received from the use of the music, and if there was no real value, should there be significant royalties?

The complexity of questions such as these, and the differing perception of the value of music (whether it has intrinsic value on a per performance basis, or whether it really only has value to the extent that it leads to the development of revenue) lead to the debates over the appropriate royalties that the services should pay - such as the debate over the Internet radio royalties that has been going on for the last year.  Given the inherently conflicting views of the value of the music, and the contribution of the other elements of a service, the arguments are difficult to resolve, as there may be no common ground on which agreement can be reached.  Nevertheless, as the industry matures, and there is more and more evidence as to how these services can monetize their use of music, perhaps more rational royalty models can arise - or so one would hope.

The briefs filed by the parties raised a number of issues about the CRB decision including the following:

• The failure of the CRB to even address the proposal for broadcasters to pay a flat fee for streaming, similar to the flat fee that they pay to ASCAP and BMI
• The failure of the Board to adopt a flat fee for noncommercial stations, similar to that which had previously been negotiated between SoundExchange and NPR
• The determination by the Board that the Small Commercial Webcasters were not really concerned about a percentage of revenue royalty, despite consistent testimony that the fee was necessary to their survival
• The adoption of a $500 per channel minimum fee in spite of the lack of evidence that this fee in any way reflected SoundExchange's costs of collection.
• The determination of the royalty rate using a model derived from on-demand services, even though the model used an adjustment factor between the two types of services was abandoned by SoundExchange in the Satellite Radio proceeding, and despite the fact that there was an agreement between the record companies and Yahoo for certain streaming with limited amount of interactivity that provided an analogy much closer to the non-interactive streaming at issue here, that was never mentioned by the Board (though a similar Yahoo deal formed the basis of the royalty decision in 2002).
• The decision by the CRB that it had to adopt a proposal that was advanced by the parties, and could not split the difference by adopting a rate that it derived from the totality of the evidence - resulting in the Board essentially adopting the SoundExchange proposal.

While the appeal process progresses, the Boston Globe article made clear that the negotiations about a voluntary settlement are also still dragging on without any resolution.  The Court briefs had been delayed for two weeks in expectation that a settlement between SoundExchange and certain noncommercial webcasters might be reached, thereby obviating the need for the preparation of the briefs for those parties.  Yet the two weeks went by, and no settlement was reached.

The AOL-CBS deal may well reflect the determination by many Internet-only webcasters that they cannot make a business out of webcasting under the current economic conditions.  Note that the Globe article also mentions the efforts made by other webcasters, such as Live 365, to reduce their streaming in order to reduce their royalty obligations.  Rumors are that other Internet radio companies are also limiting their audiences, as appears evident by the Average Quarter Hour listening of Yahoo! which, according to Arbitron measurements, have decreased from over 300,000 to approximately 220,000 between May and June and December, the last numbers available on the Arbitron website.

Without an adjustment in the royalties, the promise of Internet radio, to provide diverse sources of programming to the public, may well have come to an end.  If even the largest of Internet radio companies are either abandoning the business or limiting their streams, how will small start-up companies deliver music to the public?  Will the predictions of the Globe article, that terrestrial broadcasters will be the only services that can survive in this environment, come to pass?  Will the record companies, that have contended that Internet (and terrestrial radio) do not provide promotional benefits to music, get their wish and end up having to promote their music in secret?  Over the next few months, these questions may well be answered. 

Several companies including Ando Media, Abacast and Liquid Compass offer services that will count the number of listeners to a stream and synchronize those numbers with the songs that are being served by a station's music scheduling software to compute a number of performances.  Reports of use for filing with SoundExchange are also prepared.  We have not tested these services and cannot endorse them, but are providing this list for informational purposes for webcasters to explore further.  (There may well be other such services available that readers may suggest).  However, as I understand it (and perhaps some readers can correct me if I am not correct), not all of these systems are foolproof.   One of the biggest issues is what happens when music does not run through a station's music scheduling software?  For instance, if a station is picking up syndicated programming where the syndicator selects the music and the music does not run through the station's scheduling software, some of these services may not be able to track the performances that result from such the webcast of such programs.  Other glitches may also exist, e.g. for a radio station where the on-air announcer picks his own music that is never run through any scheduling software. 

These and other ambiguities will hopefully be remedied over time.  However, with the deadline so close, stations should be aware of the change in the rules, and make plans to comply as fully as possible by the new deadlines - which would mean planning right now, if they have not already done so.   

Another issue that we did not address yesterday are the specific requirements imposed on digital music services that restrict their ability to pre-announce when a song is going to play, that prohibit them from making any efforts to encourage the recording of sound recordings, and require that they identify in text the song being played.  These requirements also mandate that services observe the "performance complement", i.e.the restrictions on playing more than a specified number of songs from the same CD or by the same artist within a given period of time (e.g. no more than 3 songs from the same CD in a 3 hour period, nor more than 2 in a row; no more than 4 songs by the same artist in a 3 hour period).  For details of these requirements, see our memo, here.  The question of whether or not to impose these requirements on broadcasters is where the House and Senate bills diverge - the Senate not requiring these efforts for broadcasters; the House proposing that they be observed.  Obviously, requiring some of these limitations could significantly change the way some broadcast stations are programmed.

Clearly, these bills are but the opening salvo in a battle that is certain to intensify.  Already, there is a bill pending in the House of Representatives, the Local Radio Freedom Act, with over 130 co-sponsors, that rejects the idea of a performance royalty for broadcasters given the potential for disruption to their public service programming.  Just as the FCC is suggesting the re-imposition of more stringent and detailed public interest requirements (see our summary here), broadcasters cannot afford to be hit by a new cost of doing business that could in theory take a large percentage of their gross revenue.  As we've written before, in other proceedings, SoundExchange has requested royalties of 20 or 30 per cent of gross revenues.  Imagine what a royalty even half that would do to broadcasters.  Certainly, it is not the modest royalty that would not impact broadcaster's public service, as initially suggested by the supporters of this royalty.  With Congress about to recess for its Christmas vacation, we will all have time to ponder these issues before they are considered again next year. 

The summary of the bill says that it would make other broadcasters not covered by these flat fees subject to Section 114 of the Copyright Act -meaning that their royalties would be set by the Copyright Royalty Board.  But the summary does not make clear what standard would be used.  Would it be the "willing buyer, willing seller" standard that is used for (and produced such controversially high rates for webcasters - see the various discussions of those issues, here), or the more lax 801(b) standard that just resulted in a 6-8% of revenue royalty for satellite radio and has resulted in a 7% royalty for cable audio services (see our post here)?  That may well be a crucial issue.

Already, opponents of the performance royalty have signaled their opposition, suggesting that the low, introductory rates for small and noncommercial broadcasters are just that - an opening rate that will allow the royalty to be imposed, but will quickly be raised.  They point to a similar experience in Canada, where there was a low starting rate for smaller broadcasters that grew over time at the request of the recipients of the fees.  In fact, when one compares the proposed royalties for small broadcasters with those paid by small webcasters, even those paying under some form of the Small Webcaster Settlement Act, an Internet radio station with $1.25 million in revenue would pay over $130,000 in royalties for sound recordings - which would seemingly raise questions either of fairness (why is the Internet radio company paying so much if a similar broadcaster only pays $5000), or suggests that SoundExchange will try to have the rates raised in the future.  And imagine what a $130,000 royalty would do to a small broadcaster's business.

SoundExchange and the Music First coalition have also issued their own press release supporting the bill.  With a bill finally introduced, the battle will really begin.  Watch for the fireworks in 2008.

[Update - December 19, 2007 - see our update, here, prepared after we reviewed a copy of the Bills introduced in Congress]

This settlement applies only to subscription services of a particular type.  This proceeding was begun when XM, Sirius and MTV all announced plans to offer audio services that are provided  as an add-on to a subscription to multichannel video providers (essentially cable and Direct Broadcast satellite television providers).  As these services cannot technologically track individual performances or listeners, they cannot pay according to the Internet radio decision.  Thus, a new proceeding was begun by the CRB to determine the rates to be paid by these services. 

Internet-based subscription services are not covered by this decision, but instead pay the royalties that apply to Internet radio services that were decided in March - if the subscription service is non-interactive (i.e. a listener cannot pick what songs he wants to hear) and otherwise meets the rules that apply under the statutory license (see our memo, here, for the details of those requirements).  Internet-based services that are interactive or otherwise don't meet the requirements of the statutory license must obtain clearances directly from the copyright owners, paying a privately negotiated rate. 

The fact that two settlements, one providing rates that are double the amount of the other when the only effective difference between the services was whether they were in existence at the time the governing statute was written fuels complaints about the arbitrary nature of the Copyright Royalty process.  While SoundExchange and other copyright holders have asked for "fairness" in seeking a performance royalty on broadcasters (who currently do not pay such a royalty), they benefit from the unfairness in circumstances such as this, when identical services pay royalties that are twice that paid by existing services.  And, to the extent that all services are deemed to be part of a single broad market for audio services, as some have argued, is there really justification for different treatment between subscription, nonsubscription, Internet and non-Internet based services?  When the rates that apply to satellite radio are decided in the next month, will we see these differences manifest themselves yet again?

These are not questions for the Copyright Royalty Board to decide - they only need to approve this agreement and are not charged with the broader responsibility of assessing the difference in policy between similar services.   Comments on this settlement are due on December 10.

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.

Congressman Howard Berman chairs the subcommittee, and he opened the hearing with a summary of the issues - indicating that he expected that the committee would move legislation this year to impose a performance royalty on broadcasters.  Congressman Berman pointed to the lack of equality between performers and composers in getting royalties (when both contribute to the popularity of a song), the fact that most other Western nations collect royalties on the public performance of both the composition and the sound recording, and platform equality (the fact that satellite radio, digital cable radio and Internet radio all pay royalties while broadcasters do not), as justification for the imposition of a new royalty on broadcasters.  Congressman Berman indicated that the royalty that he was seeking to impose would cover only broadcasters - and not be extended to commercial establishments like bars, restaurants and retail stores, which also currently pay a performance royalty to the composers of music.  He also said that he wanted to insure that any royalty would not hurt the ability of radio stations (especially smaller stations) to cover the news, and he would consider the possibility of special provisions to protect smaller stations.  He also made clear that he did  not want any sound recording royalty to decrease the amount currently paid to composers.

These themes were presented throughout the hearing - echoed by most of the witnesses and most of the committee members.  Testifying for the royalty were performers Judy Collins and Sam Moore, and New Hampshire Congressman Paul Hodes - who also enjoyed a pre-Congressional career as a recording artist.  Marybeth Peters, Register of Copyrights, also testified in favor of a performance royalty to be imposed on broadcasters, echoing the themes of Congressman Berman, and restating a position that has long been taken by the Copyright Office.  The Broadcasters were represented by a sole witness - Charles Warfield, President of ICBC Broadcast Holdings, a broadcaster with stations in New York and several other radio markets.

The artists made the argument that the current system was unfair, as they made significant money for composers whose songs they made hits on the radio - but they received nothing from the radio play of these songs.  Of course, neither mentioned what they received from the increased sales of their recordings that resulted from the increased airplay of their music.  Both also argued that the need for the revenue from these royalties was acute, as artists are forced to keep touring for their entire lives to make money, and the royalties would provide a safety net for them.  While Mr. Warfield suggested that the record companies, who stand to profit the most from the royalty and who already profit the most from the sale of recorded music, should better compensate artists so that they did not find themselves in these dire financial positions, his arguments seemed to fall largely on deaf ears.

On the issue of international royalties, the artists contended that foreign broadcasters, who do pay royalties on the public performance of recorded music, do not pay American artists for the performance of their music on these foreign stations as there is no reciprocal right in the US to pay foreign artist for US airplay.  The artists envision a pool of money waiting in the hands of foreign performing rights organizations that should start flowing to US artists.  No distinction was made between the US and foreign markets, nor was there discussion of how the royalty in foreign markets serves as a subsidy for local talent to develop in these smaller music markets in various international jurisdictions - to avoid having American music become the standard worldwide. 

The disparity between digital media and broadcasters was also explored in depth.  Many of the witnesses and the committee members made the point that it was unfair that the digital competition to broadcasters paid royalties, but broadcasters themselves did not.  Some even suggested that, given this competition, the broadcasters no longer provided the amount of promotional benefit they once did (Ms. Peters going so far as to suggest that they provided no promotional benefit that would outweigh the need for a royalty).  In response, Mr. Warfield pointed to the continuing vast reach of radio - reaching over 230,000,000 US residents each week, and the fact that record companies still constantly hound broadcasters seeking the airplay of recorded music - belying the claims that radio performance hurts record sales.  By the end of the hearing, even Mr. Berman acknowledged that radio does provide promotional exposure to artists, but he still questioned whether that alone justified the exemption from sound recording royalties.  The unique obligations of broadcasters to provide public interest programming was also cited as a reason for the different treatment of broadcast and digital services.

In fact, the concern that the imposition of a royalty could harm the local news and information services provided by local radio stations was the one ray of hope for the broadcaster in the hearing.  Virtually all of the committee members were concerned about the possibility that small stations would be hurt by royalty increases.  Especially at small stations, there was a recognition that there is a limited pool of money that is available and, if an additional expense is added, then broadcasters have to find the money some place, and cutting service to the community is not a desired result.  Several committee members suggested that broadcasters could just raise their advertising rates to handle the increased fees.  That, to this observer, seemed a bit naive - if broadcasters could simply raise their rates to bring in more revenue - wouldn't they have already done that?  Most broadcasters are businesses out to maximize their profits and - if they could get greater profits from increased advertising rates - they would have already raised those rates.  The reality is that broadcasters compete for advertising dollars in an ever-expanding media pool.  By raising rates, other forms of advertising - print, direct mail, billboards, TV, digital media and others - become more attractive to the advertiser.  If a broadcaster has a new significant fee to pay, with fixed revenue, the money to pay the new cost has to come from cutting funds used for other purposes.

From recent experience of smaller broadcasters complaining about the relatively modest increases in the past few years in royalties paid to BMI and ASCAP, one can only wonder how these broadcasters could deal with an entirely new royalty.  While Ms. Peters suggested that the "willing buyer, willing seller" standard of Section 114 of the Copyright Act would allow for the distinction between rates paid by large and small broadcasters, small webcasters can testify that this standard doesn't always produce the desired result, as the recent Copyright Royalty Board decision on Internet radio  royalties shows (where the Board found that public interest concerns - like the preservation of diverse sources of media outlets, did not factor into the economic analysis of a willing buyer, willing seller standard). 

The Internet radio experience, where SoundExchange requested royalties of 30% of revenues - 6 times more than the royalties paid for the rights to play the composition, should frighten all broadcasters.  And, while the current proposal is for royalties only on broadcasters, Ms. Peters made clear that she saw no theoretical reason why that royalty should not also extend to other performances of music - like in retail stores.  With hundreds of millions of dollars or more at stake in yearly broadcast royalties, and potentially more from retail outlets, this is sure to be a major battle in coming months.  The proponents of the new royalty have made a facially attractive case for imposing this new obligation on broadcasters.  Broadcasters must pay attention to this issue now , and explain to their Congressional representatives the impact that such a royalty would have, as this is currently the single most direct threat to their bottom line and, if the tenor of the conversation at the hearing is any indication, the threat is real.

As we wrote, the royalty waiver only confers a benefit in the on-line world, especially in on-demand services such as downloads and podcasts, not subject to the statutory royalty set by the Copyright Royalty Board.  Over these services, the FCC has no jurisdiction.  Moreover, the impact of any proposal to limit these waivers, as suggested by the Future of Music petition and by a letter written to the parties to the payola settlement by Senator Russ Feingold investigating how the settlement was being implemented, presents some real issues in for services such as Internet Radio that are looking to these waivers as a possible means of reducing their royalties.

Since the decision of the Copyright Royalty Board on Internet Radio, it has always been assumed that one way some services could reduce their royalties was to get direct licenses from musicians.  SoundExchange has made much of the fact that artists were free to waive the collection of royalties if they felt that this was in their best interest by encouraging Internet Radio stations to play their music.  There have even been discussions by several parties of setting up  clearinghouses for music that could be played royalty-free as a way of encouraging the use of that music - and allowing Internet Radio stations to reduce their obligations and survive under the new royalties.  For instance, see a report, here, that Polka musicians are setting up their own system for giving Internet Radio stations rights to play their music without royalties.  If providing royalty-free music to Internet Radio stations constitutes some sort of legal issue, such exchanges could be imperiled.

While the Future of Music Coalition has suggested that the FCC petition continue even though Clear Channel has withdrawn their waiver, some consideration should be given as to whether the waiver policy is really contrary to the public interest  - or if such waivers may actually promote the widespread use of new and otherwise underexposed new music.  And for more than just polka music....

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. 

Recently, the radio industry has been fighting the perception that it is an industry with declining growth and increasing competition, leading some publicly owned radio companies into stock doldrums as investors seek sexier investments. If a performance royalty was added to the costs of operating terrestrial radio stations, what impact would that have on the performance of these companies? And, for some of the smaller stations in big markets, or ones serving very small rural markets, how would another hit to the bottom line be handled, especially if it were a significant one (like the one that was just imposed on Internet radio)? It could be a real concern – one that all broadcasters will want to vigorously oppose.

Broadcasters need to be aware that such legislation is being planned, and should discuss the matter with their legislative representatives.  If legislation was introduced and adopted, broadcasters might be subject to a process similar to the one that webcasters just went through, with the amount of the royalty uncertain until after a royalty proceeding.  Knowing the concerns of webcasters after the decision that was rendered in their proceeding, where the sound recording royalty was valued at several times the royalty that webcasters pay to ASCAP, BMI and SESAC, broadcasters need to think about what that would do to their business and act accordingly. 

Supplemental Note - 5-10-2007 - Apparently, the NAB is already engaged on the issue, sending a letter to each Congressional representative setting out its reasons for opposing any effort to impose a sound recording performance royalty on broadcasters.  You can read a copy of the NAB's letter here.

The question in this case was whether there was also an obligation to pay ASCAP (and, by extension, BMI or SESAC) for the right to "publicly perform" the composition.  The public performance right is the one that is implicated when a musical work is played to the public at large, as is the case if a song is played on the radio, streamed by an Internet radio station, played over the loudspeaker at a football stadium or played by a DJ at a dance club. The Performing Rights Organizations (ASCAP, BMI, SESAC) had claimed that the digital download of a composition was like the streaming of an Internet radio station (as the consumer could usually begin to immediately listen to the song that was being downloaded) and thus included a public performance just as streaming does, while the Internet service companies involved in the case argued that a download was just an electronic way of making a record or CD, which involve the reproduction right, but not a public performance.  These services argued that, in effect, the publishing companies would be paid twice (once for the reproduction right and then again for the performance) if the position of the PROs was adopted.  The Judge sided with the services.

Whether or not there is a public performance in a download has been a long debate.  Representatives of the Copyright Office have testified before Congress that they did not see the public performance, but the statutory language was ambiguous, so the debate has raged on.  Various legislative remedies have been proposed, though none had passed.  Even with the controversy, the PROs have made available license agreements for downloads and podcasts despite the dispute, and some services have signed them thinking that a royalty was due.  This Judge's decision may not end the dispute, as it would seem that an appeal would be likely, but the decision does at least bring this issue closer to an ultimate resolution.