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In fact, several trade press articles today suggest that the NAB is at least talking to record company executives about a way to resolve the issue in a "revenue neutral" manner.  This would presumably mean that broadcasters would pay no more for music than they are currently paying - seemingly meaning that ASCAP, BMI and SESAC would have to take less than they are currently.  As the current broadcaster negotiations with ASCAP and BMI may well be headed toward a trial, this may be a difficult negotiation.  But, in the world of copyright law, the negotiations all seem difficult, as the users of copyrighted materials and the copyright owners quite often seem to have vastly different views on the value of copyrighted materials, and their relative contributions toward the value of that material.  In the broadcast debate, broadcasters contend that copyright owners would have less value in their copyrighted material without the promotional value conveyed by broadcast airplay, while the copyright owners contend that broadcasters could not profitably operate their stations without the use of the copyrighted music.  Music composers and publishers (represented by ASCAP, BMI and SESAC) also would argue with those who own the copyrights in the sound recordings (usually the record companies) about whether it is the song or the performance of that song that conveys more value.  These debates are not easy ones to resolve. 

We have also seen articles in trade publications that suggest that the broadcast performance royalty issue is dead for this Congressional session, given the other issues that Congress has to deal with, and the over 255 signatures in the House of Representatives on a resolution opposing the royalty.  But, as we have written before, there is still the fear that the bill could be added as a rider to some other piece of unrelated legislation that must pass Congress and against which some of the resolution's signers could not vote.  Clearly, given the Times article, and the continuing push given this issue by the Music First Coalition supporting the imposition of the royalty, broadcasters cannot sit back and assume that the issue is dead.  That was one reason why this was such an important issue on the agenda of broadcasters who visited Congress last week during the NAB's Leadership Conference in Washington, and behind ads that have run on stations over the last month bringing the issue to the attention of the public.  It is an issue that cannot be overlooked. 

But, beyond the question of whether the parties are even willing to participate, could these sorts of negotiations actually be successful?  Copyright issues, as they are so detailed and technical given the complexity of the mechanics of the Copyright laws, are often resolved through negotiations - often at the urging of Congress.  Congress tends to believe that a negotiated solution is more likely to anticipate the issues that could arise than is an imposed legislative solution where one side totally prevails over the other.  But here, there are many parties involved who may not see eye to eye on the kinds of issues that might be discussed in any negotiation. 

Congress has called on the parties to bring people who can make decisions to participate in the sessions, yet who would that be?  On the recording industry side, it would seem that the 4 major labels, the association of independent labels, and the artist union representatives would be able to easily fit into a room to negotiate.  On the other side, while it might seem that the NAB is the appropriate party, the NAB itself does not pay royalties - its members do.  And its members are a diverse group.  There are many public companies that own stations, and hundreds of private ones. There are large market stations and small market ones - differing constituencies that have differed on performance rights issues in the past.  And, perhaps most importantly, there are many stations with differing interests as to what might be included in any negotiations.  Some groups have evolved digital operations while others are still focused almost solely on their broadcast operations.  Some have interests in waivers of the performance complement (which was an issue in the NAB-SoundExchange agreement on Internet radio royalties) while others don't.  Some do significant amounts of talk or news, while others are much more music intensive.  All these diverse interests would have to be taken into account in reaching any deal that would cover broadcasters - and two weeks with Thanksgiving in between does not seem to provide the time to reach a deal.  In fact, given that broadcasters for the most part believe that the issue is all but dead given the majority of the Congress signing on to the anti-performance royalty resolution, how do you then convince broadcasters nationwide that a deal is in their best interests when they have been so adamant against even talking about a deal.  Given all these obstacles, it simply does not look possible to have a deal in this time period - even were the parties to actually sit down and try to work something out.

So, if the parties are not sure to negotiate, and if the prospects of a deal in two weeks in late November are so slight, why bother with the letter?  One thought is that the letter is another well-orchestrated publicity move by royalty proponents.  Just like the MusicFirst petition filed at the FCC complaining about broadcasters supposedly boycotting musicians who supported the royalty (with little or no evidence of any real boycott by any commercial station), this letter has already generated press attention putting a spotlight back on the issue - attention that has perhaps flagged somewhat since the NAB had signed up its majority of the House of Representatives onto the resolution opposing the royalty.  Perhaps by trying to make the NAB look bad, the supporters of the royalty are trying to pry some of the legislators off their positions in favor of the NAB and against the performance royalty (see our post here about the potential for ways that the bill could move even with a majority now signed onto the anti-performance royalty resolution).

So, will any of this work?  Watch and see, as we should know whether negotiations take place very soon.

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. 

Broadcast representatives are also afraid of another tactic being used - tacking this bill onto some other legislation making its way through Congress.  Often riders are added to major pieces of legislation having nothing to do with the subject of the rider, as the sponsors know that some controversial issues may never pass if considered on their own.  But, if attached to major legislation that the majority of the Congress supports and the President will not veto, the controversial legislation can be enacted.  Some broadcast representatives fear that the performance royalty can be slipped into some pending legislation and cleared by Congress without ever being subject to an up or down vote on its own merits.

The hearing on Tuesday is but one more demonstration that the issue is not dead yet.  The Senate would not be wasting its time if there was not still an active attempt to get the legislation through the current Congress.  The hearing will feature singer Shelia E on behalf of the royalty proponents (continuing a parade of artists visiting Congress on behalf of the royalty), a representative of Rounder Records (a small record label - rarely have major label representatives testified on behalf of the royalty though they will get the lions share of the benefit - perhaps because NAB supporters would ask about past record contracts and whether they were fair to artists), Steve Newberry (a radio broadcaster and the Chair of the NAB's joint board), and Jim Winston (counsel to the National Association of Black Owned Broadcasters - a major opponent of the royalty because of its potential impact on minority-owned stations).  The hearing will also examine whether all music platforms should have parity in their rates, presumably why a Vice President of Real Networks is testifying.  Finally, Ralph Oman, a law professor and former Register of the Copyrights, will be on the panel appearing before the committee.  The current Copyright Office chief has testified in favor of the performance royalty in past proceedings.

With the hearing coming up, both sides of the issue are gearing up for the fight, soliciting expressions of support for their positions.  During the upcoming Congressional recess, the sides will also be exerting local pressure on their legislators.  Broadcasters who fear the royalty will need to solidify their Congressional support, and make sure that their advocates are careful to insure that no end around is attempted in the upcoming Congressional session.

We'll write about some of the issues likely to be raised at the hearing, and about the hearing itself, in coming days.

The departure of David Rehr does not mean that the NAB will not be dealing with these issues.  Much will depend on what other changes occur in the Association as a result of his departure, and the degree to which the change at the top will distract the remainder of the staff when there are so many other pressing issues that need their focus.  The NAB's Legal team dealing with FCC issues is experienced, and many members were there before Rehr started in his position, and they are likely to remain in place dealing with the fires burning at the FCC.  The Government Relations staff, dealing with Congress, includes several newer recruits, but they are professionals who can hopefully mind the store on the Hill and address the issues while the NAB leadership transition is under way. 

And what will a new leader for the NAB need to bring to his or her position?   They will need to remind Washington of the continuing importance of broadcasters to the communities that they serve. They will need to convince Washington to treat broadcasters like a grown-up medium entitled to its full First Amendment rights to exercise its own journalistic judgment on how to best to serve the public interest - judgment derived from broadcaster's own experience in their communities and from marketplace realities, not by dictates from Washington. They will need to be able to remind the music industry that musicians were and are begging radio stations for the airplay of their music.   Washington needs to be reminded of the amazing broadcast service that has grown up in this country, that serves almost every corner of the country with radio and television service, which cannot be allowed to be nitpicked by needless regulation at a time that the industry is facing the biggest competitive challenges that it has ever faced. Let’s hope that the new head of the NAB can sufficient convey to Washington the magic of radio and TV - magic that cause these media to still be the most used media in the country - essential to most people in their day-to-day lives - so that legislators remember just how important the medium is.

Broadcasters obviously already pay for music that they play – to ASCAP, BMI and SESAC. And the rates that are being paid to these organizations may well be going up in the coming year, as both the ASCAP and BMI deals with the radio industry are to be re-negotiated this year. Of course, this money goes to the composers of the music, not to the performers (and the copyright holders in the performances – the record companies) who would be receiving the proposed new performance royalty on sound recordings. The proposed legislation states that the imposition of the performance royalty on sound recordings is not to have any effect on the amount that broadcasters pay to ASCAP, BMI and SESAC. Thus, the money would by necessity have to come from other station operations. Some broadcasters have suggested that one way of paying a sound recording royalty would be to simply pay what they are paying now to ASCAP, BMI and SESAC into a pot, and let the artists, composers and labels fight for it. This, of course, is opposed by the composers who rightly see the royalty as one of the principal ways in which they are compensated, as they do not share in the profits from the sale of CDs and downloads, but instead get a flat fee for a “mechanical royalty” established under Section 115 of the Copyright Act, and the composers do not typically get money from concert tickets or merchandise receipts that performers may enjoy.

This is not, as suggested by royalty proponents, a simple matter of broadcasters getting more money to pay for any royalty. It is a zero sum game, and if the money can’t come from the composer’s royalty, it has to come from station operations. Given the high fees sought (and received) by the recording industry for the performance royalty in sound recordings from digital services (where the least that has been paid is 6-8% of gross revenues by satellite radio, and that was only after the computed "willing buyer willing seller" royalty was found to be twice that amount but adjusted down to preserve the stability of the industry, and after having been initially adjusted based on the finding that half of the gross revenues of satellite radio were the result of talk programming not subject to the royalty), broadcasters could be asked to pay a huge bill (see our post here on computing that bill). And, with the FCC poised to potentially impose new localism requirements on broadcasters that would entail even more operational costs, something has got to give. Broadcasters hope that it is not their economic viability that is the thing that does the giving. 

The FCC will also have to complete the digital transition of TV translators and LPTV stations, which are not bound by the February 2009 conversion deadline. The FCC will need to set a digital conversion deadline – a conversion that many translator and low power licensees are not looking forward to paying for, but which may be necessary to preserve their over-the-air viewership as the analog tuner becomes an historical relic.

Radio, too, has its own technical issues to deal with. The Commission will be faced with resolving proposals for increased power for HD Radio operations (In-Band On Channel or IBOC digital radio), which some broadcasters have opposed as holding the potential for adjacent channel interference. The Commission will also be faced with resolving proposals for making the measurement of AM antenna patterns easier but, on a most fundamental level, it has also been asked to recapture some of the television spectrum, including Channel 6 and possibly Channel 5, and to use that spectrum for new radio stations. While some worry about the increased competition that new radio channels could bring, others see the expanded FM band as a way to eliminate congestion on the current band – giving LPFM stations places to operate without restricting FM upgrades or endangering FM translators – and others have even suggested that some or all AM stations could be moved onto these channels. This is likely to be a long-term project, but one that may get serious consideration this year.

Programming, too, may come in for more review this year. The Commission’s rules, adopted a full year ago, requiring TV stations to document in minute detail their public interest programming on Form 355, has never been implemented, as the form has never been approved by the Office of Management and Budget as being in compliance with the Paperwork Reduction Act. As this form required so much new information, for no appreciable purpose, it seems unlikely that it could survive such a review. Thus, the Form may be revised before being implemented, or it may wait for new FCC programming rules to be adopted as part of the FCC’s localism proceeding, mandating some form of public interest programming, which could then be used to justify the collection of some data requested by the questions on Form 355.

Other aspects of the localism proceeding seem likely to be resolved in 2009. The proposal for a fully manned main studio during all hours of operation, located in the station’s city of license, seems to be less likely to be adopted as regulators realize the costs that such a requirement would impose. Yet requirements for some form of mandatory ascertainment of community needs, plus some enhanced disclosure of public interest programming, seem more likely. Some of the proposals rumored to be on the table include requiring that broadcasters be judged by whether they perform certain tasks set out on a menu of options by which they would demonstrate their service of the public interest. One would hope that any set of menu options would be broad enough to recognize all the diverse ways that broadcasters serve their communities, and not so restrictive as to make every station meet the public interest in the same cookie-cutter way, and thus eliminating diversity in approaches that has allowed the broadcast industry to flourish.

The return of the Fairness Doctrine, which many conservative pundits have predicted, is unlikely because of the constitutional and practical problems of implementation. Yet some fear that  mandated political coverage and issue-responsive programming, which is more likely,  may effectively take the place of the Doctrine. Restrictions on violent programming could also be at the top of the Congressional agenda, as Senator Rockefeller, the new head of the Senate Commerce Committee, has supported such regulation in the past. . 

In the advertising world, the FCC will be resolving its embedded advertising and product placement proceeding, where some “public interest” groups have advocated a total ban on such advertising, while others have suggested immediate sponsorship identification, through a crawl or superimposed caption, of any product for which consideration has been paid for its inclusion. The related issue of video news releases – whether stations have to identify on-air anything given them at no charge (e.g. a script, video footage, etc.) before its inclusion into a news report – will also likely be resolved. Some have also suggested that the Commission may be planning some adjustments to its payola rules, though what those changes would be, and how they would improve on the current rules, is hard to fathom.

There is also real concern that the Congressional committees which oversee the FCC may well push proposals for limits on prescription drug advertising. The new chairman of the House Energy and Commerce Committee, Henry Waxman, has favored a moratorium on such advertising while the industry works out rules that restrict various perceived abuses. If industry voluntary agreements don’t satisfy Congress, new restrictions on advertising directed to children are also possible, especially in connection with ads for food considered unhealthy (however that may be defined).

Copyright issues could also impact the broadcast industry this year – perhaps in ways more fundamental than any of those other issues listed above. For radio, we may see the webcasting royalties issue be resolved one way or the other. Congress has given webcasters and the recording industry until February 15 to settle the webcasting royalty issues and, if that doesn’t result in a resolution of the issue, the pending appeals will be argued this year and perhaps resolved by the end of the year. 

2009 will also bring about a renewed attempt by the recording industry to impose a performance royalty on broadcasters for their over-the-air signals, the “performance tax” as it has been labeled by the NAB. That performance royalty would require broadcasters to pay the recording industry and recording artists royalties for the use of music over the air – in addition to the ASCAP, BMI and SESAC royalties that are already paid to the composers. The recording industry was able to get that proposal through the House Judiciary Committee last year, and will make a renewed attempt to have it adopted by Congress. If such an attempt is successful, this could potentially result in the transfer of billions of dollars from broadcasting to the recording industry.

TV has its own copyright issues, as the law permitting Dish and DirecTV to import local broadcast stations into local markets must be renewed, and some have suggested that this might be the time to reexamine the must-carry and retransmission consent process for both cable and satellite. While nothing firm is on the table, this issue could arise just as retransmission consent fees are beginning to offer television broadcasters a meaningful new revenue stream.

All of these issues seem like plenty - but we haven't even discussed the resolution of the indecency cases currently pending before the Supreme Court that should come this year.  The Commission ended 2008 with several large EEO fines, and this year may bring the resolution of long-pending petitions for reconsideration of the current EEO rules, as well as resolution of whether the Form 395 Annual Employment Report  will make its reappearance and whether the information on the form should be available to the public to judge the EEO performance of broadcasters or should the information be used simply for industry profiling.  Commissioner Adelstein suggested that the information should be public in his concurring opinion on these recent fines.  The FCC's change in its multiple ownership rules to allow some broadcast-newspaper combinations is still on appeal as it becomes increasingly irrelevant (as newspaper companies don't have the money to buy broadcast station, and broadcasters probably don't want to buy newspapers), and other issues as to the local radio ownership rules and the attribution of TV JSAs are still pending and may be resolved one day - perhaps this year.  Even political rules may be revisited in 2009 - as the Commission has never issued rules implementing the BCRA requirements, and it also has a long-pending proceeding to determine how to assess spots sold by on-line auctions for lowest unit rate purposes. 

With these (and other) possible changes in the regulatory landscape, one can only hope that the government regulates with a light touch. While the Democrats who have been on the FCC during the Bush years have advocated tough, detailed regulatory mandates, the Obama administration has offered the hope of a less doctrinaire, more inclusive regulatory process. Given the economic outlook for the coming year, and the costs and likely disruptions of the digital transition, an administration that promises hope should deliver some to broadcasters simply by taking a break from excessive regulation to give everyone a chance to adjust to the new realities of 2009. But stayed tuned to these pages to see what develops in this new year. 

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.

Second, the FTC has in the last few years expressed concerns about viral marketing and other advertising schemes where the consumer is not aware that he or she is being subjected to advertising.  Whether it be the stranger in the bar who is paid to brag about the taste of some brand of beer or the chain email that endorses some product without revealing that the testimonial was bought and paid for, the FTC has been concerned that these techniques are false and deceptive trade practices.  Again, an all-payola channel would seem to trigger these concerns.

So is the idea a non-starter?  Not at all.  Just as in the broadcast world, the key is disclosure (see our Advisory on avoiding payola issues).  On a radio station, the FCC's payola rules are not violated if the fact that the plays are paid for is disclosed to the audience.  So disclosure that the "following 15 minutes of programming has been paid for by the Universal Music Group" and the playing of only UMG songs during that period would be fine under the FCC rules.  Under the NY State prosecutions, concerns were also expressed about notifications to automatic airplay monitoring services, so notice to such services might also be required.  The same would seemingly hold true for Internet radio.  If you wanted to create the Sony Music channel sponsored by Sony, and it was branded that way, it would seem as if it would be difficult to argue that there was any deceptive practice.  Disclosure in writing on the website in a manner where that disclosure was clear and conspicuous could also suffice.

The Silicon Alley article does make one good point - that a pay for play scheme would limit royalties that a digital music service would pay - as it is likely that any service that is getting paid to play songs would also get a waiver of the royalties for those songs (see our post on waivers here).  When confronted with a proposal where artist would waive royalties in exchange for airplay, artist groups complained that the waiver of royalties without disclosure, in and of itself, constituted consideration for airplay and would be "payola" if not disclosed.  We'll save discussion of that issue for another day, but disclosure solves any issue that may exist.

This proposal for "payola radio" is not so far-fetched, even being suggested at a Congressional hearing on the broadcast performance royalty (or, as the NAB refers to it, the "performance tax").  In that hearing, a Congressman suggested that, if artists and labels really wanted a market system, it should be a full market system, where some artists may be able to hold out for payment for the playing of their songs, while others would have to pay to get on the air.  Broadcasters have had concerns about such a system, as small market stations might never get paid for play and might be forced to pay, while large market stations could be important enough to the promotion of a song to demand payment for its airplay.  For artists, small artists on independent labels would also be losers, as they could be cut out of the broadcast world if they couldn't afford to pay (see our post here about the Congressional hearing and the concerns about this issue).

Payola radio - an interesting idea - but be careful to execute it carefully.

One question that, to me, looms large is whether most artists would in fact be better off with a performance royalty. In many cases, the very artists who are testifying in support of the royalties would receive minimal revenue from the royalty, and that royalty may well end up hurting many of these same acts. How many times are Nitty Gritty Dirt Band songs played on the radio? When was the last time that you heard “These Boots Are Made for Walking” on the radio?  The imposition of a performance royalty (or performance tax, as the NAB has called it) could encourage stations with niche music formats to abandon those formats. Already stations are abandoning 60s and even 70s based oldies formats (less airplay for Nancy Sinatra), and if they have to pay more for the use of those recordings, will these stations keep playing them? Similarly, there are few bluegrass stations, and the likelihood of more developing will not be helped by the introduction of a performance royalty. If a station could make roughly equivalent amounts from airing news-talk programming and not paying a royalty or some niche format where a royalty would be due, which choice do you think a station will make? Instead, it seems that stations will play the music that their audience may demand – the most popular and safest music - or abandon or severely limit the playing of music to avoid the royalty.

While the proponents of the royalty have downplayed the promotional benefits of radio airplay, even arguing that airplay harms artists as listeners substitute radio listening for the need to buy a CD or download, even the music industry’s own expert testified before the Copyright Royalty Board that the net promotional value was probably greatest for up and coming bands, while that negative impact might only occur for well-known acts who have other avenues through which to promote their music. Thus, the imposition of the royalty would seemingly make the rich get richer, while limiting the avenues for promotion for lesser known acts.

SoundExchange, which collects the digital royalties, has itself suggested in a recent press release that the fees that the royalties they seek, like those imposed on Internet Radio, are reasonable. SoundExchange points to predictions as to the revenue that Internet radio will received by 2020 and claims that more and more services are signing up to provide Internet radio service under the royalties set by the CRB.. They make much of the “AOL-CBS partnership”, when instead what appears to have happened is that one of the biggest Internet radio companies has essentially left the business, surrendering their service to CBS. As we just wrote, MSN has also abandoned the business, Yahoo has been decreasing their listening hours, and Pandora has been repeatedly been stating that they cannot operate under the current royalties. The Internet radio-like services that have been getting the most recent promotion and press coverage – services like Last.FM and Imeem, have negotiated their own private deals as they provide interactive services not subject to the royalty. If not for small webcasters paying under the special terms for those stations, or for larger broadcasters who may have different on-line economics (i.e. they essentially have no programming costs as they repurpose their existing content on the web, though even there most small broadcasters are petrified of developing a large on-line audience that could bankrupt them), the Internet radio industry would be crashing.

The recent discussion has also turned to parity in royalties. The record labels argue that broadcasters don’t pay a royalty as other digital services do because of an historical "loophole" in the Copyright Act. But this argument could just as easily be reversed.   The record companies only get the royalty because of the provisions of the Copyright Act created only in the late 1990s, for the first time creating a public performance right in a sound recording. If the RIAA/SoundExchange position were to be accepted, it would seem clear that the same “loophole” would also apply to other public performances of sound recordings – like the playing of records in bars and restaurants, stores, stadiums, and in other public places. While the current bill does not provide for such an extension, isn’t that the logical extension? The performance royalty paid to composers is paid by these venues so, using the Music First logic that there should be "parity", wouldn’t these venues be next?

The argument of parity simply does not ring true  As we have written, here, the SoundExchange proposal embodied in the initial bill for small broadcasters is a flat fee of $5000 per year if the broadcaster has less than $1.25 million in revenue. Yet under SoundExchange’s special deal for small webcasters, a webcaster making $1.25 million would be paying over $150,000 in royalties. Where is the fairness and parity there? Is SoundExchange wiling to support a similar limitation in the royalties paid by small webcasters?  Similarly, if SoundExchange is seeking the same royalty as has been determined “fair” by earlier CRB proceedings, the royalty on broadcasters could exceed 20% of their gross revenues for a music station (see our computations here). In this day of declining radio profits, such a royalty would be crushing for most stations, perhaps ensuring the demise of over-the-air broadcasting (as reportedly predicted by Steve Ballmer of Microsoft), making issues of the digital divide incredibly acute. The news, information and entertainment provided by radio broadcaster would disappear, and music entertainment would be available only to those who have access to wireless high-speed Internet connections. That will not be the same as the ubiquitous service offered by free over the air radio currently.

While the subcommittee reportedly wanted to make some changes in the bill before it advances to the full Committee, these fundamental issues need to be considered. Essentially, while it is very easy to say that musicians should be compensated for the use of their work, the unintended consequences of the royalty are great. Congress and even the artists and labels need to carefully consider these issues before moving on the enactment of any performance royalty.

The answer - given by both artists - was "fairness."  Lovett pointed to the fact that, even though he may benefit from radio airplay because more of his CDs are sold and more people attend his concerts, the background musicians on his recordings don't get the benefit of such publicity (if the royalty is paid in the same manner as are the royalties on Internet radio and other digital audio services, then background nonfeatured performers would receive 5% of the royalties, contributed to a fund and distributed by the musician's unions).  Peacock pointed to the fact that it was unfair that other digital services (like Internet and satellite radio) paid the royalty and broadcasters did not.  She made the point that, even though radio might have some promotional value, that alone did not excuse the industry from paying royalties.  She pointed to other performances that have promotional value for the sale of CDs, yet still pay her for performing (pointing to a live concert where she said that it would be crazy to expect that a club owner would not pay her because of the promotional benefit of her singing in his club).

The Senators, while conceding the fairness point, asked if that was enough to carry the day.  Senators made the point that radio promotion was so important that some artists seemed to be willing to pay for it - apparently an allusion to the payola issues of recent years.  An interesting question was asked of the commercial broadcaster witness, Steve Newberry of  Commonwealth Broadcasting - whether broadcasters might favor a system where broadcasters would pay artists who wanted to hold out for a royalty, but be able to take money (without payola issues) from other artists who were willing to pay for their music to be aired on the radio (though see our post on the issues that arose when Clear Channel tried to get royalty waivers from new artists).  While Newberry declined that offer, it is an intriguing one - though one with many adverse consequences. First, as some of the Senators themselves pointed out, it would hurt new artists who could not pay for play (and certainly couldn't demand payment for being played).  And, as Mr. Newberry pointed out, smaller radio stations outside of major metropolitan markets would not benefit from such a system, as promotional payments would probably be targeted to large market stations.  And it would be those very same smaller radio stations with tighter operating margins which would be most impacted by any new royalty.

This discussion then flowed into a very brief discussion of the one issue that tends to get overlooked in these proceedings - that it is not the small struggling artist versus big corporate radio that really is at issue here.  Instead, it is the broadcaster versus the big artist and record labels who are rarely, if ever, asked to testify at these hearings.  But, as Senator Hatch, himself a music performer and writer, pointed out, most artist would get nothing out of such a royalty, as the vast majority of musicians don't have their music played on the radio.  In fact, he worried that a new royalty might make radio stations reluctant to take a chance on a new artists knowing that they had to pay for the performance, causing the station to instead opt to play an established hit or some form of non-music programming.   And, as with any new government imposed-obligation on broadcasters, it would probably be the smaller broadcasters who would be most affected by any new performance royalty.  When the BMI royalties on small stations rose by only a few dollars four of five years ago when a new royalty system to compensate BMI's composers was adopted, I had dozens of calls from small market stations complaining about the impact that the minor rise in expenses had on their operations.  A whole new royalty imposing what would probably be a larger  obligation on these stations would no doubt be greeted with similar outcries.

In fact, one wonders how much artists like Ms. Peacock and Mr. Lovett would themselves receive from a new royalty - as neither are staples of most hit-driven radio stations.  The bulk of any performance royalty - 50% (assuming that these royalties are structured in the same manner as Internet or satellite radio royalties)- goes to the copyright holder in a performance, i.e. the record company (in most cases).  45% goes to the featured performer and, as the royalties are distributed based on airplay, one would assume that Britney, U2, Carrie Underwood and other artists who already are very much in the public eye and who already receive substantial compensation from their performances through music sales and concerts would receive the great bulk of any royalty pool. 

The Committee did not get into the debate over semantics - whether this should be referred to as a "performance royalty" or a "performance tax."  In contrast to the substantive discussion had by the Committee, the NAB and the Coalition pushing for the new royalty engaged in some theatrics in the last week - the Coalition sending the NAB a dictionary highlighting the passage that says a tax is the collection of revenue for use by the government, while the NAB sent each Congressman a stuffed duck, arguing that the proposed royalty sure looked like a tax to the broadcaster (see the NAB ad in Washington publications directed to Congress explaining the duck, here).  As with so much else in these copyright debates, there is an element of truth in both sides arguments - the revenue from the royalty does not go to the government for the government's use - at least not directly.  But it sure does smell like a government-imposed redistribution of wealth as millions (or perhaps billions depending on the royalty rate) would move from the broadcast industry to the pockets of the record companies and, for the most part, the established recording artists.

The Committee meeting adjourned without any real indication where the royalty would go in the Senate - again unlike the House where the passage of a bill through committee seemed certain after the hearing there (though we are still waiting for a public draft, several months after the expected early September release).  About the only thing that seemed certain was that the issue was not going away - and would certainly be the subject of more debate and theatrics in the future. 

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.