Posted on October 3, 2008 by David Oxenford

Will Guitar Hero Show the Promotional Value of Music and Change the Music Royalty Outlook?

We’ve previously written about the value of music in connection with the royalties to be paid by Internet Radio and the performance royalty (or "performance tax" as it's labeled by the NAB) proposed for broadcasters. One of the questions that has always been raised in any debate about royalties, and one often dismissed by the record industry, is to what extent is there a promotional value of having music played on the radio or streamed by a webcaster.  In discussions of the broadcast performance royalty, record company representatives have suggested that, whether or not there is promotional value of the broadcast of music, that should have no impact on whether the royalty is paid. Instead, argue the record companies, the creator of music deserves to be paid whether or not there is some promotional value. The analogy is often made to sports teams – that the teams get promotional value by having their games broadcast but are nevertheless paid by stations for the rights to such games. The argument is that music should be no different. That contention, that the artist deserves to be paid whether or not there is promotional value may be tested in connection with what was once thought to be an unlikely source of promotional value for music – the video game Guitar Hero.

Guitar Hero, in its various versions released over the last few years, has proven to be a very effective tool for the promotion of music – with various classic rock bands experiencing significant sales growth whenever their songs are featured on a new version of the game. The use of a sound recording in a video game is not subject to any sort of statutory royalty – the game maker must receive a license negotiated with the copyright holder of the recording – usually the record company.  In previous editions of the game, Guitar Hero has paid for music rights. However, now that the game has proved its value in promoting the sale of music, the head of Activision, the company that owns the game, has suggested in a Wall Street Journal interview that it should be the record companies that are paying him to include the music in the game – and no doubt many artists would gladly do so for the promotional value they realize from the game. 

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.
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Posted on December 19, 2007 by David Oxenford

Bill Seeking Broadcast Performance Royalty Introduced In Congress

In a pre-Christmas surprise that most broadcasters could do without, identical bills were introduced in Congress on Tuesday proposing to impose a performance royalty on the use of sound recordings by terrestrial radio stations.  Currently, broadcasters pay only for the right to use the composition (to ASCAP, BMI and SESAC) and do not pay for the use of sound recordings in their over-the-air operations of the actual recording.  This long-expected bill (see our coverage of the Congressional hearing this summer where the bill was discussed) will no doubt fuel new debate over the need and justification for this new fee, 50% of which would go to the copyright holder of the sound recording (usually the record label) and 50% to the artists (45% to the featured artist and 5% to background musicians).  The proponents of the bill have contended that it is necessary to achieve fairness, as digital music services pay such a fee.  To ease the shock of the transition, the bill proposes flat fees for small and noncommercial broadcasters - fees which themselves undercut the notion of fairness, as they are far lower than fees for comparable digital services.   

While, at the time that this post was written, a complete text of the decision does not seem to be online, a summary can be found on the website of Senator Leahy, one of the bills cosponsors.  The summary states that commercial radio stations with revenues of less than $1.25 million (supposedly over 70% of all radio stations) would pay a flat $5000 per station fee.  Noncommercial stations would pay a flat $1000 annual fee.  The bill also suggests that the fee not affect the amount paid to composers under current rules - so it would be one that would be absorbed by the broadcaster. 

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]
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Posted on June 24, 2007 by David Oxenford

Musicians Trade Waiver of Royalty Rights in Exchange for Exposure - Maybe Not Such a Bad Idea

Should artists waive their rights to performance royalties in order to get airplay on broadcast or Internet radio stations? That questions has come to the fore based on a click-through agreement that Clear Channel included on a website set up to allow independent bands to upload their music for consideration for airplay by its stations. While artist groups, including the Future of Music Coalition, condemned that action, there are always two sides to the story, as was made clear in a segment broadcast on NPR’s Morning Edition, in which I offered some comments. As set forth in that segment, artists may be perfectly willing to allow unrestricted use of a song or two in order to secure the promotional value that may result from the airplay that might be received. For the broadcaster or Internet site seeking such permission, getting all rights upfront may well be an important consideration in deciding whether or not to feature a song – especially in the digital media.

Critics of the waiver made much of the fact that the site was set up at least partially to meet Clear Channel’s informal commitment made as part of the FCC payola settlement to feature more independent music, even though that commitment was not a formal part of the settlement agreement.  (See our summary of the payola settlement, here).  Even to the extent that the informal commitments made by the big broadcasters encompassed making time available to more independent musicians, the critics ignore the fact that the companies do not need any waiver of any sound recording performance royalty in connection with the over-the-air broadcast of those songs, as there currently is no public performance right in a sound recording for over the air broadcasting (though artists and record lables are now pushing for such a royalty, see our story here). Thus, the use of the waiver was only for the digital world – which was not covered by the FCC's jurisdiction over payola promises or the promises to increase the use of independent music. So, effectively, the company is being chastised for trying to minimize their costs on giving the music even greater circulation through their digital platforms than they initially promised.

And even in the digital world, the releases gives the company the opportunity to provide even more exposure to music through services that the existing compulsory royalty for Internet radio doesn't cover.  For instance, the current royalties do not allow digital sites to feature any of that music in any sort of podcast or interactive service without specific permission from the artist.  Would a big broadcaster want to go through the extra trouble of securing such rights for a few plays on an interactive service or for inclusion of such music in a podcast?  Probably not for a new, unknown act.  When looking to expose new bands or those with limited exposure, it would seem that a waiver of whatever limited royalty an independent artist would receive from the statutory royalty (at the rate of approximately one-tenth of a penny per play, less the artist’s share of SoundExchange’s operating costs) would be a good deal in exchange for the possibility that the Company would feature the song on multiple digital platforms.

It would seem to me that the problem here was not the concept of a waiver of rights, but perhaps was due more to the execution through the click-through license. With all of the focus recently put on music rights by the Interent radio royalty controversy and other recent proceedings, more artists are becoming familiar with their rights and many would generally understand the language of that agreement.  Maybe the fact that the waiver was "discovered" by artist groups led to their surprise, and surprise often leads to the public outcry. But, when you look at the details of the controversy, there may be less fire than smoke in this case.
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Posted on May 9, 2007 by David Oxenford

Lobbying Effort to Make Broadcasters Pay Sound Recording Royalties in the Works?

A story in the Hollywood Reporter indicates that a coalition of record companies and associations representing performing artists are preparing to initiate a Congressional lobbying effort to push for a royalty for performance rights in sound recordings that would apply to broadcasters' over-the-air transmissions, not just their Internet streams.  Broadcasters currently pay performance royalties  to ASCAP, BMI and SESAC for their over-the-air music programming - royalties that are paid to composers (or music publishing companies) for the use of the underlying musical composition.  Digital operators (satellite radio, Internet radio, digital cable radio) pay royalties for the composition and also pay royalties for the sound recording, i.e. the actual performance as recorded on a record, CD, or digital download.  The copyright for the sound recording is usually held by a record company.  The performance right in a sound recording did not exist in the United States until 1995, and still applies only to digital transmissions.  Obviously, if extended to broadcasting, this could result in huge expenses to broadcasters - amounts for which they probably have not planned.

This is not the first time that such a royalty has been mentioned.  In introducing the PERFORM Act earlier this year, Senator Feinstein of California suggested that this legislation, which makes certain changes in the digital royalty standards that apply to various services as well as to other copyright license provisions, was only a first step in clarifying royalty issues.  In statements made at the time, there were indications that she favored further legislation to adopt a sound recording performance right for broadcasters.  At last week's Future of Music Conference, David Carson, General Counsel of the Copyright Office, also spoke in favor of such a right - suggesting that if SoundExchange collected money from broadcasters they might not need to seek so much from Internet Radio companies (see our coverage of the Internet radio royalty issues, here).

 

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.
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Posted on April 29, 2007 by David Oxenford

District Court Finds No Public Performance In Download - Could Affect Fees on Podcasts and Video Downloads

In a ruling released last week, a US District Court Judge issued a ruling finding that a download of a recorded musical work does not give rise to a "public performance" requiring a payment to ASCAP, BMI or SESAC.  If this decision is upheld on appeal, it could mean that one less fee would have to be paid in connection with on-demand downloads - which would also affect podcasts and video downloads made available by broadcasters on their websites.  However, there are many issues that must be understood about this ruling, so broadcasters should not impetuously rush to provide downloads and podcasts without first securing the bundle of rights necessary for such performances.

First, it is important to understand the issue that was presented in this case.  The case did not involve streaming of programming - so it has no effect on Internet radio royalties.  It involves only downloads - where a copy of a specific work is downloaded to a single consumer's computer at the request of that consumer.  This is what happens when a consumer buys a song from iTunes, or downloads a podcast made available by a broadcaster.  There is no question that, to provide such a download or podcast containing music, a service needs to get permission from the copyright holder in the "sound recording," the song as recorded by a particular artist.  This is typically received from the record company which holds the copyright.  In addition, there is a requirement that the rights to the composition must be obtained for purposes of the making of the making of a "reproduction" and a "distribution" of the underlying composition.  This is typically obtained from the publishing company or a clearinghouse such as the Harry Fox agency.  A service that provides downlaods of music can alternatively pay a statutory royalty for the composition, though that requires following a somewhat cumbersome process of filings set out by the Copyright Office and requiring specific notice to the copyright holder in the publication.

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.
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