Broadcast Law Blog : Broadcast Lawyer & Attorney : Davis Wright Tremaine Law Firm : Broadcast Law Blog : Seattle, Los Angeles, Washington D.C., New York, San Francisco, Shanghai

There is another irony in the premise of the MusicFirst complaint.  They complain that stations are not playing the music of musicians that support the performance royalty.  But one of the premises of  supporters of the royalty is that broadcasters should not be playing the music of performers without paying a royalty.  But when a few noncommercial stations even suggest that they are planning to stop playing this music, MusicFirst comes running to the FCC to complain that broadcasters are not doing the very thing that MusicFirst supposedly doesn't want - playing music without a royalty. 

The whole complaint seems to be a way to generate a few headlines to shine on the issue - an issue where broadcast interests already have almost 250 members of the House of Representatives on record as being opposed to the new royalty.  But perhaps the publicity has generated some response, as rumors are that further consideration of the bill in the Senate may be forthcoming soon.  So broadcasters concerned about a potential royalty cannot relax.

Also, this rate covers only these three Internet services, and only covers ASCAP.  Of course, the decision may be instructive as to the rates that would apply to other similar companies (and potentially for BMI rates in the future, as they also are subject to a consent decree - though SESAC is not).  However, most Internet companies, especially smaller companies that cannot afford expensive rate court litigation, are paying royalties under the "experimental licenses" that ASCAP posted on its website (and which have rates somewhat lower than the decision here for non-interactive services, and somewhat higher for interactive services), and should not, for the time-being, be affected by this decision. 

While this decision involves a different right than does the CRB decision for somewhat different types of services, the rights are similar, yet the approaches taken by the Court here and the CRB in the setting the sound recording royalty were quite different.  For instance, one of the criticisms of the CRB decision, especially by the small webcasters that I represented in the proceeding, was that the CRB refused to adopt a percentage of revenue royalty, finding it difficult to compute what revenue was to be included as being subject to the royalty and because it did not represent a payment for all of the music used.  The CRB found that a per performance (e.g. per song, per listener) rate was more appropriate as it insured a fair return to the copyright holder in the sound recording even by a service that did not maximize its revenue.  Under a percentage of revenue royalty, the CRB determined, there might be minimal payments for the use of music.  Here, however, the Court found almost exactly the opposite,  concluding that a percentage of revenue rate appropriate for the following reasons:

• It was economically efficient, as it did not provide any disincentive to a service not to use music as might be the case for a royalty that demanded a per performance fee
• It adapts to changing conditions, as it will collect more when a service makes more revenue and less when a service has hard economic times, thus taking into account changing economic and competitive conditions, variations in financial fortunes and changes in technology and other unforeseen changes in the circumstances of the services that may occur over time
• Revenues were simple to verify as information about total revenues were routinely collected by a service
• That these royalties provided the kinds of efficiencies expected for a blanket license - easy administration, that covered all rights to all the music represented by ASCAP, and gave the service certainty as to its music costs so that it did not need to take royalties into account in deciding how to introduce any new aspect of its service

By contract, the new CRB rates require many services to pay based on performances, a metric that many services don't currently track, and which many may not be able to accurately count (see our post here).  The CRB royalties also are such that they the webcaster must carefully consider them in making any decision as to whether or not to launch any new service as, if that service attracts listeners but not revenue, the service could owe significant fees without having earned the revenue to pay for the music use.  The per performance royalty does not adjust to changing economic conditions, either, as it remains at the level set by the CRB, regardless of the ability of the service to monetize the use of music or changing economic and competitive conditions.  In effect, the per performance royalty does not encourage the use of music, as evidenced by many of the larger services that are reportedly limiting their listening or (as in the case of AOL), getting out of the Internet radio industry entirely (see our post here).

The Court in the ASCAP case stated that deciding the marketplace value of music under a blanket license like the one at issue here is a difficult process, as there really are few if any real examples of what a willing buyer and willing seller would agree to.  The existence of the blanket license and the threat of a rate court proceeding itself distorts the market, and contributes to results of any voluntary deal that is negotiated for similar rights.  And the consideration of benchmark royalties negotiated for other services (a number of which were considered here) all have some differences with the situation at hand, meaning that some sort of inexact and hypothetical adjustment must be done to use the benchmark to determine the rate applicable in the pending case.  Regardless of whether or not one thinks that the decision reached in this case was the correct one, the considerations that went into reaching the rate are ones that might be instructive for future cases involving the CRB's decision on the sound recording royalty. 

Some commenters have suggested that the 7.5% royalty rate should be viewed as a precedent for the controversial Internet Radio royalties.  As SoundExchange has argued for "parity" and "fairness" in royalties in connection with its push for a performance royalty on broadcast stations, this argument certainly has an emotional appeal.  If, as SoundExchange claims, broadcasters should pay a royalty to insure "fairness" with other audio service providers, then Internet Radio should pay a rate that is equivalent to that of the Preexisting Subscription Services.  However, the decision will not provide any legal support, as the standard that applies to to Preexisting Services is different from that which applies to Internet Radio.  As we've written before, under the DMCA, the CRB is to use a "willing buyer, willing seller" standard to evaluate what the royalty should be for Internet radio.  Essentially, the willing buyer, willing seller standard evaluates a strict economic model of what two theoretical parties negotiating arms-length contracts would pay in a rational, competitive marketplace.  No public interest evaluation is considered - one of the reasons that the Copyright Royalty Judges felt constrained not to offer any special rate for small webcasters.

By contrast, the Preexisting Services (both cable and satellite radio) are evaluated under a different standard - the so-called 801(b) standard, which looks at a number of factors in determining the royalty.  Not only does this standard look at insuring a "fair return" to the copyright holder, but it also looks to maximize the availability of copyrighted works to the public, and to insure stability in the industries involved by minimizing the disruptive impact of royalty changes.  Finally, this standard looks to the relative roles and contributions of the parties in bringing the copyrighted materials to the public in terms of their "creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication."  One can easily see how this standard, if applied to Internet radio, would have resulted in a decision different than that which the CRB reached, and why Internet Radio companies have asked for the adoption of that standard as part of the Internet Radio Equality Act.

 The role that the comments that the CRB is seeking on the Music Choice settlement is limited, as only parties to the proceeding can "object" to a settlement under the terms of the statute governing CRB proceedings.  Other affected companies can offer comments, though the legal impact of those comments has yet to be tested.  Watch this space for information about the satellite radio royalty decision when it is released.