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

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. 

One question which the Copyright Office letter raises is that of who the copyright laws are intended to protect.  We have touched on this issue before.  Some have advocated the position that the Copyright Laws are intended to protect the public by encouraging the dissemination of artistic and literary creations.  They are not necessarily meant to protect the copyright holder, especially where that copyright holder is not in fact the creator of the work in question.  The Copyright Office's letter focuses primarily on the interests of the record companies, without considering the impact on the creators of the sound recordings - the musicians themselves.  Are the musicians served by the imposition of a performance royalty?  While the Copyright Office suggests that broadcasters no longer have the promotional impact on the sales of music that they once had, as sales of music have so dramatically decreased and as there are other sources of music discovery, there is no assessment of whether artists themselves still value radio play for the exposure of their music to mass audiences, or whether the performance royalty will have any impact on the creation and dissemination of new musical works.  The NAB has argued that broadcast airplay is still very important to artists, in separating their music from the tens of  thousands of recorded songs released every year.  Some statistics have suggested that there is now more recorded music available than ever before - even without a broadcast performance royalty - and it is often radio that still has a significant impact on those who become mass-appeal artists, and those who are ignored.

The Copyright Office also suggests that the GAO be careful in estimates that they are supposed to be deriving as to how much the royalty would cost broadcasters if it was imposed, based on the Copyright Royalty Board decisions for other services.  The Copyright Office suggests that the GAO note, in any such estimate, that it is being provided without the benefit of any hearing testimony before the Copyright Royalty Judges from broadcasters or the recording industry as to how much that royalty should be.  Obviously, as there is no law yet adopted, and unless and until there is a law and the final rules for the administration of any new royalty are adopted, there will be no hearings before the CRJs.  However, from past Copyright Royalty Board decisions, an estimate of what those royalties might be, using the standards set out in the pending bill, can be made.  As we have written before, only in cases using a standard different than that proposed here, has the recording industry been satisfied with a royalty of less than 15% of gross revenues.

Obviously, this is the Broadcast Law Blog, and the author of this piece represents broadcasters.  But it is clear that the Copyright Offices letter demonstrates how polarizing this issue can be, as even a government agency can seemingly end up taking sides in the debate.  This issue is not one which is going away, so broadcasters need to continue to be engaged and vigilant in this debate.  Moreover, as we have written before, it is possible that there will be attempts to voluntarily resolve the issue before any final Congressional resolution - so watch as this matter plays out in coming months. 

The 15% of revenue charged in this royalty is the lowest royalty for the sound recording public performance right of any royalty set by the Copyright Royalty Judges which is subject to the "willing buyer, willing seller standard."  While the proposed broadcast performance royalty no longer uses the "willing buyer, willing seller" standard that was proposed in the original legislation, the legislation still proposes a standard that looks to the market value of the public performance of the sound recordings, using what is referred to as a "modified Section 801(b) standard", section 801(b) being the section of the Copyright Act that sets out this standard.  Section 801(b) looks at other factors, besides just the market value of the use the music, in setting the royalty.  Factors considered include the relative contributions of the service and the record companies in creating value, and the interests of the public in receiving access to copyrighted music.  However, in the only prior case decided by the Copyright Royalty Judges using the 801(b) standard, the case dealing with satellite radio, the Judges determined that none of these factors were quantifiable.  Instead, the only 801(b) factor taken into account in that case to lower the royalty below the market value that would be established by the "willing buyer, willing seller" standard was the factor that assessed the impact that the royalty would have on the stability of the industry to which the royalty applies.  Application of that factor cut the satellite radio royalty in half (see our post on that case here).  However, in the modified 801(b) standard currently proposed in the Performance Rights Act setting out the broadcast performance royalty, the factor assessing the stability of the industry on which the royalty will be applied is omitted from the test that would be used by the Copyright Royalty Board to determine the royalty for broadcasters (see our summary of the Senate bill here). 

Thus, the 15% royalty agreed to for the new subscription services should serve as a warning to broadcasters as to what they may have to pay if the proposed performance royalty is adopted.  As we wrote in our summary of the satellite radio case, the royalty could even be much higher (as the CRB decision in that case found that the market value of the royalty, before the 801(b) adjustment was about 14% of the satellite services' gross revenues, but that gross revenue includes revenues from non-music programming not subject to the royalty, which the Judges concluded made up about half of the satellite services' revenues - meaning that the Judges perceived the market value of the music to be about 25% of the revenue attributable to the music programming).  Whether the royalty is 15% or 25% of gross revenues, it would clearly be a matter of great concern to music broadcasters. 

Senator Feinstein also identified another issue.  Under the manager's amendment (as in the House version of the bill), a provision of the law would prohibit any use of these royalties as evidence in any proceeding to set the royalties for ASCAP and BMI in a way that would reduce the royalty paid to those organizations to compensate songwriters for the public performance of the musical composition or musical work (the sound recording royalties addressed in this bill go to the performers and the copyright holders in the recordings - usually the record companies).  Presumably, the songwriters' organizations are concerned that high performance royalties for sound recordings could be used by broadcasters or other companies that pay these royalties (webcasters, satellite radio, cable radio or other digital music services) to argue that they could not afford to pay ASCAP and BMI royalties at the levels at which they are currently paid (see our article here, about the potential for contentious proceedings to determine new ASCAP and BMI royalties for broadcasters, where the sound recording royalty is not even a factor yet ).  However, the provision that is now in the bill could be read as prohibiting music services from introducing any evidence about the sound recording royalties to argue that the composer's royalties should be reduced, but would allow such evidence to be introduced by the songwriters to argue that the royalties should be increased.  In other words, the songwriters could argue that, as the sound recording royalties were higher than the composition royalty, and that the composition royalty should be increased - while the music service would be helpless to defend themselves against such evidence as the use of such evidence by the services would be prohibited by the law.  Senator Feinstein suggested that this one way street might constitute a denial of due process to the services, and that a more even-handed provision should be worked out before the final bill is adopted.  There is currently a provision in Section 114 of the Copyright Act, the section that first extended the sound recording royalty to digital services, that prohibits either party from introducing evidence of the sound recording royalty in proceedings dealing with the musical works royalty.

Senator Specter raised another issue.  At Senator Feinstein's urging, the bill proposes to use a single standard to set royalty rates for all services - whether they be broadcasters, webcasters, satellite radio or cable radio.  As we've written before, webcasters have had to pay under a "willing buyer, willing seller" standard, while satellite and cable radio have ended up with far lower royalties because their royalties were decided based on the standards of Section 801(b) of the Copyright Act.  The bill proposes to extend the coverage of 801(b) to all services but, like in the House Bill, the entire 801(b) standard would not be adopted.  As Senator Specter observed, the last of the four factors set out in 801(b) is omitted in the bill - the factor that looks at the royalties to determine if they at levels that will preserve the stability of the industries involved.  That factor was the factor relied on by the Copyright Royalty Board to cut the royalties that would otherwise have applied to satellite radio by half (see our analysis, here).  As we wrote, if the broadcast royalty were adopted, this would be a very important factor to take into consideration in setting a royalty rate for broadcasters.  According to Senator Feinstein at today's session, the record companies objected to the inclusion of this fourth factor, and certain webcast groups agreed to the 801(b) standard without the fourth factor.  Obviously, broadcasters and other services concerned about the lack of the final 801(b) factor will need to push to have this factor included in any final legislation that may be adopted.

Two amendments to the bill were offered by Texas Senator Cornyn, who said that the revisions to the bill with the small broadcaster provisions were a move in the right direction, but he was still concerned with whether the bill went far enough.  One amendment proposed to postpone the effective date of any royalty until the FCC held a rulemaking proceeding and determined that the royalty would not decrease diversity in the broadcast media.  This amendment was rejected by the committee with little discussion. 

The second amendment  proposed that, instead of the royalty, the FCC should establish a "do not play list", a list of artists who did not want their music played without a royalty.  This would address the claims of the royalty supporters that artists are exploited, as they have no right to tell broadcasters that they don't want their music played without a royalty.  Senator Leahy objected to this proposal, saying that it did not provide that artists who were included on this list could negotiate for compensation to be played - that instead it was an all or nothing proposal - either the artist could have its music played for free, or it would not be played at all.  Leahy did acknowledge that the idea was an interesting one that he would work with Senator Cornyn to modify.  The amendment was rejected without much further discussion, but should be considered for the future as debate over this issue progresses, as it may present a potential alternative to the royalty.

All of the Senators who spoke at the session urged the broadcasters to come to the table to negotiate the royalty.  This has been a common refrain at all of the hearings held on the bills in both the House and the Senate.  With a new NAB leader, will the broadcasters actually come to the table?  Time will tell.  But, there is no need to look into the crystal ball to determine that this issue is a real one that the proponents of this royalty will continue to aggressively push forward.   Broadcasters need to stay on the alert, and stay in touch with their Congressional representatives, to counterbalance this aggressive push on a bill that has cleared committees in both Houses of Congress, and may one day come to a vote which will finally resolve whether these bills will become law.

In the actual discussions of the royalty, several issues were repeatedly raised, which we try to deal with in more detail in subsequent posts.  These include the following:

• Supporters of the royalty contended that fears of the royalty's impact on small broadcasters and noncommercial operators were dealt with by the House of Representatives' version of the legislation by imposing a small, flat yearly fee as low as $500 per year on these stations.  Senator Leahy made the point that this royalty was probably less than most stations were paying for their NAB dues to lobby against the royalty.  Steve Newberry, Chair of the NAB Joint Board and the owner of a group of small market radio stations, submitted that, while $500 today seemed like a small amount, these numbers have a way of going up.  After all, 10 years ago when the sound recording performance royalty for digital operators was first adopted by Congress, radio was supposed to be totally exempt - yet here we are, arguing for a change in that exemption.
• Supporters of the royalty constantly made the argument that broadcasters were using their "property" without compensation, or agreement.  Newberry argued that they were getting fair compensation through the promotion of their work by broadcast stations - a partnership that has produced the most significant music industry in the world.  Senator Durbin of Illinois suggested that there was no longer any agreement to the partnership between broadcasters and artists, as the artists were no longer agreeing to allow their music to be used without compensation.  Yet the system being proposed by Congress - a statutory royalty - would still deprive artists of choice - a choice to opt out of the royalty and allow their music to be played for free to promote airplay, especially if broadcasters have to pay a percentage of revenue for the royalty (if the percentage is not reduced by playing music where the royalty is waived, broadcasters will have no incentive to play that royalty free music, so artists do not have the choice to try to increase airplay through a royalty waiver)
• Supporters of the royalty argued that most industrialized nations had the royalty, and that US artists were not getting their share of royalties when US music was played in overseas markets.  Performing rights organizations in those countries do not pay US artists for the performance of their works since the US will not pay foreign artists for the performance of their works on over-the-air radio.  Newberry pointed to the differing copyright standards in other countries (such as a 50 year protection for copyrighted works, rather than the 99 year copyright in the US).  His written testimony also pointed to efforts in several countries to reform their royalty system, as the system inhibited the playing of new music.   The written testimony also made the point that, as the US will still have not adopted a full performance royalty (as performances in bars and restaurants, stadiums and concert halls, and other public venues still will not be covered), there still will be no full performance royalty, so foreign countries may still withhold their payments to US artists. 

An interesting suggestion was raised by Texas Senator Cornyn that has perhaps been dismissed by too many parties too quickly.  Cornyn suggested that, rather than compelling a performance royalty, Congress should set up a "Do Not Play" list, similar to a do not call list.  The list would be made up of those artists who do not give their consent to radio stations playing their music without the payment of a royalty.  Thus, radio stations would have to negotiate with artists on this list to get the rights to play their music.  Stations could play the music of all other artists without a royalty.  This proposal was dismissed by some in attendance at the hearing for a number of reasons.  It was argued that small market radio stations might have a problem negotiating for carriage of major stars and, as suggested by Senator Durbin, that it would set artists and composers against each other, as the composer might want the song played, while the artist might not.  Finally, Ralph Oman, the former registrar of Copyrights, suggested that it would harm small artists that felt that they needed to give up their rights to get airplay.  We will address these arguments in a subsequent post.  But the idea is interesting in that many Internet radio operators have discussed the potential for getting artist waivers to reduce their SoundExchange fees (see our post here).  Issues with setting up a pool of royalty-free music include concerns over assuring that artists who waive fees have the right to do so, and also the simple logistics of contacting enough artists to make such a waiver system worthwhile.  If the government were to set it up, with appropriate safeguards, these issues might be eliminated. 

The issue of platform parity for the standards used to determine the royalties paid by various users of music was also raised at the hearing.  Bob Kimball, from Real Networks, argued that any bill addressing a performance royalty should also address the disparity in royalty rates and standards used in setting the sound recording performance royalty.  In this discussion, issues that were raised include:

• Whether it was fair that small broadcasters, with up to $1.25 million in revenue, would pay $5000 or less in sound recording performance royalties, while Internet radio companies with $1.25 million in revenue would pay $150,000 in royalties.  While some suggested that FCC licensees have greater costs imposed by FCC obligations that justified a lower fee, Kimball asked how that cost disparity could possibly justify royalties 30 times as high as proposed for small broadcasters.
• The question of whether the 801(b) standard (about which we wrote earlier this week) or some other standard was appropriate.  Shelia E, testifying for the MusicFirst coalition, seemed to agree that a modified 801(b) standard, as proposed in the House of Representatives bill on the broadcast performance royalty, made sense for all music users. 
• Kimball also raised the question of whether it was fair that some settlements on Internet radio royalties reached under the Webcasters Settlement Act were considered to be precedential for purposes of the next CRB proceeding, while other settlements were considered nonprecedential - seemingly at the choice of SoundExchange.  Kimball suggested that all should be precedential, or all should be excluded, but that private parties should not get to choose which settlements should be considered in setting future rates.

Finally, a question was raised as to the precedent that any sound recording royalty would set for the public performance royalty for the musical work - the right to the song's composition as paid to ASCAP, BMI and SESAC.  The ASCAP and BMI royalties, if they cannot be negotiated, are set by a rate court which acts somewhat like the Copyright Royalty Board in making a determination of what a fair rate for the royalty should be (see our story on one such decision, here).  At the hearing, Mr. Kimball suggested that there was language in the House version of the Performance Royalty bill that suggested that sound recording performance royalties could set a precedent for ASCAP and BMI to raise rates, but that they could not be used by music services to argue that the ASCAP and BMI rates be lowered.  This might be an important issue not just for digital music services, but also for broadcasters who are currently in negotiations about the ASCAP and BMI rates for periods after the end of this year.

Nothing was resolved at the hearing, though much was discussed. The Committee, like the Judiciary Committee in the House, seems ready to move on the legislation.  But whether the full Senate will act is perhaps as big of a question as whether the House will.  This issue is not over (as we wrote here), so keep watching and see what develops. 

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.