Posted on October 25, 2010 by David Oxenford

NAB Radio Board Adopts Proposal for Settlement of Performance Tax Issue - Where Do We Go From Here?

The NAB Radio Board today voted to adopt a Terms Sheet to offer to the musicFirst Coalition which, if agreed to by musicFirst and adopted by Congress, will settle the contentious issue of whether to impose a sound recording performance royalty (the "performance tax") on over-the-air broadcasters.  If adopted, that will mean that broadcasters in the United States, for the first time, will pay a royalty to artists and record labels, in addition to the royalties paid to ASCAP, BMI and SESAC that go to the composers of the music.  What does the Term Sheet provide, and what will this mean for broadcasters, webcasters and others who pay music royalties?

The Term Sheet sets out a number of points, including the following:

  • A 1% of gross revenue sound recording royalty to be paid to SoundExchange
  • A phase-in period for the 1% royalty, that will be tied to the number of mobile phones that contain an FM chip.  A royalty of one-quarter of one percent would take effect immediately upon the effective date of the legislation adopting it.  The royalty would rise in proportion to the number of mobile phones with enabled FM chips.  Once the percentage of phones with FM chips reached 75%, the full royalty would take effect.
  • The 1% royalty could only be changed by Congressional action.
  • The royalty would be lower for noncommercial stations and stations with less than $1.25 million in revenue - from a flat $5000 for stations making between $500,000 and $1.25 million in revenue down to $100 for those making less than $50,000 per year.
  • Broadcasters would also get a reduction in their streaming rates - but only when FM chips in mobile phones exceed 50% penetration.  The reduction would be tied to the rates paid by "pureplay webcasters" (see our summary of the Pureplay webcasters deal here), but would be set at a level significantly higher than pureplay webcasters, rising from $.001775 in 2011 (if FM chips were quickly deployed) to $.0021575.
  • Future streaming royalties would not be set by the Copyright Royalty Board but by a legislatively ordered rate court - presumably a US District Court similar to that which hears royalty disputes for ASCAP and BMI.
  • An acknowledgment by AFTRA that broadcasters can stream their signal on the Internet in their entirety - apparently agreeing to relieve broadcasters from any liability for the additional amounts due to union artists when commercials featuring union talent are streamed
  • An agreement that broadcasters can directly license music from artists and reduce their  liability for the new royalty by the percentage of music that the broadcasters is able to directly license
  • Agreements to "fix" issues in Sections 112 and 114 of the Copyright Act in making the provisions of these laws regarding ephemeral copies and the performance complement consistent with the waivers that major record labels gave to broadcasters when the NAB reached its settlement with SoundExchange on streaming royalties last year.  See our post here on the provisions of those waivers.
  • musicFirst would need to acknowledge the promotional effect of radio in promoting new music, and would need to work with radio in attempting to secure legislation mandating the FM chip in mobile phones.

[Clarification - 10/26/2010 - Upon a close reading of the Terms Sheet, it looks like the phase in of the 1% royalty and the delay in the streaming discount only kick in if Congress does not mandate active FM chips in cell phones.  If the mandate is enacted, then the full 1% royalty and streaming discount is effective immediately. Given the opposition of much of the wireless industry to a mandated FM chip, this may represent a recognition that the legislation requiring the active FM chip will not be enacted in the near future]

What does this all mean?

First, this is but an offer to musicFirst, which has to be accepted.  Today, musicFirst issued a cautious statement, saying that they were still studying the proposal, but expressing disappointment that the NAB did not accept the proposal that "both parties agreed upon in July."  That in itself is an interesting statement, as the NAB has been very clear to state that it has never agreed to anything in July - but that it instead needed to vet the musicFirst proposal with its members before agreeing to anything.  Presumably, musicFirst itself had to seek approval for any deal.  As any deal would need the blessing of Congress to become effective and binding on broadcasters and copyright holders, each party would need broad approval for any deal from all affected parties.  So how could the NAB member involved in the discussions and those representing musicFirst have "agreed" to any proposal back in July, when no such broad approval had been received for a deal that was not yet public?

And what has really changed in this Term Sheet from what was discussed in July?  Seemingly, very little.  While this Terms Sheet proposes a phase in of the 1% royalty depending on how many phones are FM enabled, the July proposal made the whole deal contingent on mandated FM chips in cellphones.  In effect, this proposal is more favorable to copyright holders than was the proposal on the table in July, as at least some royalty would be paid even without that mandate.  So how could the labels complain about that provision?

The only other substantive change appears to be the provision that allows direct licensing of music to reduce the liability of broadcasters.  But this too seems to be noncontroversial.  How can musicFirst, which claims to be standing up for the rights of copyright holders and musicians to be compensated for the use of their work, turn around and say that those copyright holders that want to exercize their rights by waiving the royalty be denied that right?

Other changes from the proposals set out in July seem cosmetic and insubstantial. 

So what comes next?  Obviously, musicFirst must formally respond.  Then the details of a deal must be worked out.  While the Terms Sheet may, at first glance, seem detailed and thorough, in fact it is but an outline of a deal.  Any deal will need to be written into statutory language and offered to Congress.  And this will not be easy, as each term will need to be defined, and the language will need to be carefully reviewed to make sure that there are no unintended consequences.  Many questions will need to be fleshed out.  How are the percentages of FM-enabled cell phone penetration measued?  What standard would a rate court use to determine the streaming royalty if that royalty is not set by the CRB?  How is gross revenue defined?  How are stations that are part talk and part music treated?  Issues that will need resolution.

Then, any agreement must be presented to Congress.  Adoption of the deal as proposed may not be all that simple, as there may well be attempts by other interested groups to latch on to any bill to attempt to remedy other problems with the royalty process.  Why should Internet radio pay royalties that are a minimum of 25% of gross revenues for large pureplay webcasters like Pandora, if radio is paying but 1%.  Why should smaller webcasters with revenues between $500,000 and $1.25 million be paying 12 or 14% of revenues, when a small radio station pays only $5000, less than a tenth of what the webcaster with the same revenues would pay?  Expect that others will attempt to use the process to raise issues such as these, so the Congressional process will not necessarily be quick and easy.

All in all, while this may seem like the beginning of the end of the performance royalty dispute, we will no doubt hear much more about these issues in the weeks to come.  We will write more about the issues in the days to come, especially as reactions to this proposal are made public by various parties either involved in the discussions, or from those that are affected by their outcome.  A no doubt very interesting debate is sure to play out in the coming days and weeks. 
Tags: , , , , , , , , , , , , , ,
Posted on July 21, 2010 by David Oxenford

Talk of A Settlement on the Terrestrial Radio Performance Royalty - What Would Broadcasters Get?

The broadcast trade press has recently been full of talk of the possibility of reaching a settlement with the recording industry on the adoption of a Performance Royalty for broadcast stations -paying performers and record companies for the use of music by radio stations (on top of the fees already paid through ASCAP, BMI and SESAC to composers).  The latest controversy was set off by comments made at the Conclave Radio Conference by Bonneville Radio's CEO Bruce Reese, who has also been prominent in NAB activities, who suggested that broadcasters were on the defensive in Congress, and that a good settlement was better than a bad legislative outcome.  Other broadcasters have disagreed with Reese's assessment, asking why broadcasters would be willing to settle when they have a majority of Congress on their side, having signed the NAB-supported resolution opposing the royalty.  Which side is right?

It should be emphasized that, even though broadcast groups have done an amazing job rounding up support for their opposition to the "performance tax" - signing up far more than a majority of the House of Representatives on a resolution opposing the royalty - that resolution is non-binding.  Congressmen can change their mind, and of even more concern, the proposed performance royalty can end up getting tagged on to some must-pass legislation that Congress needs to adopt before the end of the year.  Congress has many budget bills that need to pass to fund the government's operation, and these huge bills have a way of attracting all sorts of unrelated matters being folded into their provisions.  With leaders of many important committees in the House and Senate being supporters of the royalty, its easy to imagine that one of these bills can end up with performance royalty language included.  While one broadcast trade publication suggests that NAB lobbyists are paid to stop this sort of thing from happening, it is unrealistic to believe that the NAB is invincible, as provisions on unrelated bills can pop up seemingly out of nowhere and surprise everyone, especially when pushed through by powerful congressional leaders who less committed representatives are unwilling to challenge (especially when to do so might mean voting against some important legislation to which the performance royalty is attached).  Congressman simply will not vote down the defense appropriations bill just because there is a performance tax attached.  This kind of maneuver is of particular concern given that many of these bills may well be considered after the election in November, during a "lame duck" session of Congress when, especially this year, there will be many representatives who may not be around again in January to face the wrath of voters (or of broadcasters) who may be disappointed by their final votes.

This is not to say that the broadcasters will not keep the issue bottled up in Congress for the rest of the year, as there are many vocal broadcast supporters on the Hill who will fight to keep the language out of any bill.  But this issue will keep coming up in future Congressional sessions, and broadcasters will need to continue to use precious political capital to keep the issue bottled up.  Broadcasters, having very good arguments why they should not pay the royalty (some of which we have summarized in the past), should not accept any settlement that is offered just because something might happen in Congress in the future.  With the future of the industry riding on the issue, that would be crazy.  But, because the future of the industry is riding on the outcome of this debate, shouldn't broadcasters consider a settlement which brings certainty to the issue, and which may bring benefits as well?

What benefits could a settlement bring?  As digital operations become more and more important to broadcasters, there could be concessions from the record labels on the streaming royalties and other digital uses of music that relieve broadcasters from some of the concerns that hold back many broadcasters from fully exploiting the potential of their Internet and mobile applications.  This has long been discussed by many in the digital side of broadcast operations as being an outcome that could be, in the long run, advantageous to broadcasters, provided that what they have to give up to get the benefits is a manageable fee that is capped by law - and one where there are serious commitments made by all parties that the royalties that are set will stay in place.  Are such commitments possible, or will they just be the "camel's nose under the tent"?  That would be an important issue to work out, as it was only 12 years ago that the DMCA was adopted, setting sound recording performance royalties for digital transmissions, with the explicit agreement that over-the-air broadcasters would be exempt.  Now, this negotiated exemption is labeled an historical anomaly by performance royalty supporters.  The "nose under the tent" concern has always been the fear of small and noncommercial broadcasters who are already offered special deals under the terms of the pending Performance Rights Act, but who look at similarly situated Internet radio companies who are paying royalties 10 times as high as those proposed for small broadcasters and wonder if the promised low rates are going to be there in the long term.  As we have written before, SoundExchange, who would collect any fee that is agreed to, has been very aggressive in other services in collecting high fees - 15% of revenue or greater - so agreeing to any lower fee now would have to come with a guarantee that this lower rate would not be characterized as an anomaly in the next decade.

And broadcasters would have to decide if even these kinds of concessions would make it worth doing a deal, while the representatives of the record labels and artists would need to decide to make concessions.  Who knows if either side could get to a point where the parties they represent would be happy with a deal to which the other side would agree.  We've written before about the issues that broadcasters would face in arriving at a one-size-fits-all solution, and the controversy in the press this week illustrates the differing views of broadcasters.  There is without a doubt a major gulf between where each side started in any discussions of a possible compromise, if meaningful discussions have even taken place.  Stay tuned for further developments, as these recent press reports are certainly not the last ones that you will read on this topic. 
Tags: , , , , , , , ,
Posted on February 4, 2009 by David Oxenford

Broadcast Performance Royalty Battle Begins Anew - Bills Introduced in the House and Senate

The battle over the broadcast performance royalty has begun anew, with the introduction of legislation to impose a performance royalty for the use of sound recordings on broadcast stations.  This royalty would be in addition to the royalties paid to ASCAP, BMI and SESAC (which go to compensate composers of music), as this royalty would be paid to the performers of the music (and the copyright holders in the recorded performance - usually the record companies).  The statement released by the sponsors of the bill cites numerous reasons for its adoption - including the facts that most other countries have such a royalty, that satellite and Internet radio have to pay the royalty, and that it will support musicians who otherwise do not get compensated for the use of their copyrighted material.  The NAB has countered with a letter from its CEO David Rehr, arguing that musicians do in fact get  compensation through the promotional value that they get from the exposure of their music on broadcast stations.  The 50 state broadcast associations also sent a resolution to Congress, taking issue with the premises of the sponsors - citing the differences in the broadcast systems of the US and that of other countries where there is a performance royalty, and arguing that broadcasting is different from the digital services who have a greater potential for substitution for the purchase of music.  What does this bill provide?

The bill introduced this year are very similar to the legislation proposed last year (which we summarized here); legislation that passed the House Judiciary Committee but never made it to the full House, nor to the Senate.  Some of the provisions of this year's version include:

  • Expansion of the public performance right applicable to sound recordings from digital transmissions to any transmission
  • Royalties for FCC-licensed noncommercial stations would be a flat $1000 per year
  • Royalties for commercial stations making less than $1.25 million in annual gross revenues would pay a flat $5000 per year.  There is no definition of what constitutes "gross revenues," and how a per station revenue figure could be computed in situations where stations are parts of broadcast clusters
  • Excludes royalties in connection with the use of music at religious services or assemblies and where the use of music is "incidental."  Incidental uses have been defined by Copyright Royalty Board regulations as being the use of "brief" portions of songs in transitions in and out of programs, or the brief use of music in news programs, or the use in the background of a commercial where the commercial is less than 60 seconds - all where an entire sound recording is not used and where the use is less than 30 seconds long
  • Allows for a per program license for stations that are primarily talk
  • Establishes that the rates established for sound recordings shall not have an adverse effect on the public performance right in compositions (i.e. they can't be used as justification for lowering the ASCAP, BMI and SESAC rates)
  • Requires that 1% of any fees paid by a digital music service (such as a webcaster, or satellite radio operator) for the direct licensing of music by a copyright owner (usually the record company) be deposited with the American Federation of Musicians to be distributed to non-featured performers (background musicians), while the distribution of any fees to the featured performer be governed by the contract between the performer and record company
  • Requires that any 50% of any fees paid by a radio station for direct licensing of music be paid to the agent for collection of fees (i.e. SoundExchange) for distribution in the same manner that the statutory license fees are distributed (45% to the featured performer, 2.5% to background musicians, and 2.5% to background vocalists)

These are the basic provisions of the bill.  There are lots of issues and ramifications that we have written about before, and which we will cover in a subsequent post.  But, for now, radio broadcasters should know that the challenge from the recording industry has now been issued, and there will be a major fight ahead that could very well dictate the future operations of many broadcast radio stations.
Tags: , , , , , , , ,
  • Email This
  • Print
  • Comments (2)
  • Share Link