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One reason for the confusion about SESAC may be that the other performing rights organizations representing composers, ASCAP and BMI, cover the costs of streaming a broadcast station on the Internet as part of the same process that broadcast stations use to pay their over-the-air royalties.  Thus, broadcasters do not see a separate invoice for their streaming royalties due to these organizations.  SESAC, on the other hand, has determined that streaming (and HD radio channels) are potentially independent revenue sources, so they charge a separate royalty for the music used by broadcasters providing these services.  However, it should be noted that both the ASCAP and BMI agreements with broadcasters are up for renewal this year, so these issues could conceivably be up for consideration in the negotiations about the new royalties to be paid by broadcasters in the future.

But for now, broadcasters who are streaming their signals on the Internet should understand that the rights covered by ASCAP, BMI and SESAC are different from those covered by the SoundExchange royalty, and thus there are obligations to all of these organizations for music royalties.  Thus, don't ignore that letter from SESAC asking for Internet radio royalties.

Other changes to the bill would apparently delay the effective date of the royalties - delaying the date 3 years for stations making less than $5 million in revenue, and a year for those stations making more than $5 million.  It will be interesting to see the exact language of this provision - as it will likely take several years for the Copyright Royalty Board to issue a decision setting the royalty rates.  Thus, even if the effective date is delayed for broadcasters so they can prepare for the new royalty, they won't know what to prepare for, as they will not know much the royalty will be until well into that period - certainly after the 1 year delay proposed for the larger broadcasters, if the one year period runs from the adoption of the legislation as opposed to running from the date on which the royalty rate is established by the CRB.

From the statements made at the hearing, the standard for deciding cases has also been changed from the original bill - moving away from the "willing buyer, willing seller" standard used in setting the royalties for Internet radio companies toward the 801(b) standard that has been used for setting satellite radio royalties.  We wrote about the difference that standard made in the satellite radio proceeding.  However, importantly, from the comments made by one Congressman, the entire 801(b) set of criteria has not been incorporated in the new bill.  Specifically, the new criteria omit the one factor that was the most important in cutting the satellite radio royalties from what probably would have been 14% of revenue had a "willing buyer, willing seller" analysis been used, down to 6-8% of revenues.  That factor, the potential for disruption of the industry, has apparently been omitted from the criteria to be applied to broadcasters.  The 801(b) criteria were applied to satellite radio and digital cable radio at the time the sound recording performance royalty was first adopted in the late 1990s as these services already existed, and it was felt that the criteria that were being used had to help make sure that these existing businesses were not severely affected by the implementation of the royalty.  Using that same logic, one would think that this factor that has apparently been omitted would be crucial in setting a fair and workable royalty for radio - an industry that has existed for far longer than satellite or cable radio, and which could most certainly be adversely affected by the new royalty.

The committee discussion repeatedly highlighted the Committee members desire to not imperil broadcasters by adopting a royalty - including statement that the CRB would be instructed to take into account, in setting royalties, the impact the royalties would have on minority and female radio operators, small broadcasters, and religious and community stations.  But it was not clear how this expression was to be conveyed to the Board.  The exact wording used is crucial as, from their analysis in the satellite radio decision, the CRB takes its direction from the precise words in the legislation, and applies the standards of 801(b) in a very narrow way.  In fact, the Board found that most of the 801(b) considerations were immaterial in reaching to their decision - only taking into account the potential impact on the stability of the industry as having any decisional impact.  Thus, the wording of the instructions to the Board will be crucial.

There is much to be learned from the precise wording of the Bill, and we will address those issues in coming days, and address in more depth some of the issues raised at the hearing.  But it is clear that we have not seen the last of this debate that will continue to evolve over this Congressional session.  But, from today's decision, it is clear that there is a real prospect that a performance royalty could become a reality, and radio broadcasters must consider that potential in developing their business plans for the future, and in their interactions with their elected representatives in the next weeks and months.

Congressman Howard Berman chairs the subcommittee, and he opened the hearing with a summary of the issues - indicating that he expected that the committee would move legislation this year to impose a performance royalty on broadcasters.  Congressman Berman pointed to the lack of equality between performers and composers in getting royalties (when both contribute to the popularity of a song), the fact that most other Western nations collect royalties on the public performance of both the composition and the sound recording, and platform equality (the fact that satellite radio, digital cable radio and Internet radio all pay royalties while broadcasters do not), as justification for the imposition of a new royalty on broadcasters.  Congressman Berman indicated that the royalty that he was seeking to impose would cover only broadcasters - and not be extended to commercial establishments like bars, restaurants and retail stores, which also currently pay a performance royalty to the composers of music.  He also said that he wanted to insure that any royalty would not hurt the ability of radio stations (especially smaller stations) to cover the news, and he would consider the possibility of special provisions to protect smaller stations.  He also made clear that he did  not want any sound recording royalty to decrease the amount currently paid to composers.

These themes were presented throughout the hearing - echoed by most of the witnesses and most of the committee members.  Testifying for the royalty were performers Judy Collins and Sam Moore, and New Hampshire Congressman Paul Hodes - who also enjoyed a pre-Congressional career as a recording artist.  Marybeth Peters, Register of Copyrights, also testified in favor of a performance royalty to be imposed on broadcasters, echoing the themes of Congressman Berman, and restating a position that has long been taken by the Copyright Office.  The Broadcasters were represented by a sole witness - Charles Warfield, President of ICBC Broadcast Holdings, a broadcaster with stations in New York and several other radio markets.

The artists made the argument that the current system was unfair, as they made significant money for composers whose songs they made hits on the radio - but they received nothing from the radio play of these songs.  Of course, neither mentioned what they received from the increased sales of their recordings that resulted from the increased airplay of their music.  Both also argued that the need for the revenue from these royalties was acute, as artists are forced to keep touring for their entire lives to make money, and the royalties would provide a safety net for them.  While Mr. Warfield suggested that the record companies, who stand to profit the most from the royalty and who already profit the most from the sale of recorded music, should better compensate artists so that they did not find themselves in these dire financial positions, his arguments seemed to fall largely on deaf ears.

On the issue of international royalties, the artists contended that foreign broadcasters, who do pay royalties on the public performance of recorded music, do not pay American artists for the performance of their music on these foreign stations as there is no reciprocal right in the US to pay foreign artist for US airplay.  The artists envision a pool of money waiting in the hands of foreign performing rights organizations that should start flowing to US artists.  No distinction was made between the US and foreign markets, nor was there discussion of how the royalty in foreign markets serves as a subsidy for local talent to develop in these smaller music markets in various international jurisdictions - to avoid having American music become the standard worldwide. 

The disparity between digital media and broadcasters was also explored in depth.  Many of the witnesses and the committee members made the point that it was unfair that the digital competition to broadcasters paid royalties, but broadcasters themselves did not.  Some even suggested that, given this competition, the broadcasters no longer provided the amount of promotional benefit they once did (Ms. Peters going so far as to suggest that they provided no promotional benefit that would outweigh the need for a royalty).  In response, Mr. Warfield pointed to the continuing vast reach of radio - reaching over 230,000,000 US residents each week, and the fact that record companies still constantly hound broadcasters seeking the airplay of recorded music - belying the claims that radio performance hurts record sales.  By the end of the hearing, even Mr. Berman acknowledged that radio does provide promotional exposure to artists, but he still questioned whether that alone justified the exemption from sound recording royalties.  The unique obligations of broadcasters to provide public interest programming was also cited as a reason for the different treatment of broadcast and digital services.

In fact, the concern that the imposition of a royalty could harm the local news and information services provided by local radio stations was the one ray of hope for the broadcaster in the hearing.  Virtually all of the committee members were concerned about the possibility that small stations would be hurt by royalty increases.  Especially at small stations, there was a recognition that there is a limited pool of money that is available and, if an additional expense is added, then broadcasters have to find the money some place, and cutting service to the community is not a desired result.  Several committee members suggested that broadcasters could just raise their advertising rates to handle the increased fees.  That, to this observer, seemed a bit naive - if broadcasters could simply raise their rates to bring in more revenue - wouldn't they have already done that?  Most broadcasters are businesses out to maximize their profits and - if they could get greater profits from increased advertising rates - they would have already raised those rates.  The reality is that broadcasters compete for advertising dollars in an ever-expanding media pool.  By raising rates, other forms of advertising - print, direct mail, billboards, TV, digital media and others - become more attractive to the advertiser.  If a broadcaster has a new significant fee to pay, with fixed revenue, the money to pay the new cost has to come from cutting funds used for other purposes.

From recent experience of smaller broadcasters complaining about the relatively modest increases in the past few years in royalties paid to BMI and ASCAP, one can only wonder how these broadcasters could deal with an entirely new royalty.  While Ms. Peters suggested that the "willing buyer, willing seller" standard of Section 114 of the Copyright Act would allow for the distinction between rates paid by large and small broadcasters, small webcasters can testify that this standard doesn't always produce the desired result, as the recent Copyright Royalty Board decision on Internet radio  royalties shows (where the Board found that public interest concerns - like the preservation of diverse sources of media outlets, did not factor into the economic analysis of a willing buyer, willing seller standard). 

The Internet radio experience, where SoundExchange requested royalties of 30% of revenues - 6 times more than the royalties paid for the rights to play the composition, should frighten all broadcasters.  And, while the current proposal is for royalties only on broadcasters, Ms. Peters made clear that she saw no theoretical reason why that royalty should not also extend to other performances of music - like in retail stores.  With hundreds of millions of dollars or more at stake in yearly broadcast royalties, and potentially more from retail outlets, this is sure to be a major battle in coming months.  The proponents of the new royalty have made a facially attractive case for imposing this new obligation on broadcasters.  Broadcasters must pay attention to this issue now , and explain to their Congressional representatives the impact that such a royalty would have, as this is currently the single most direct threat to their bottom line and, if the tenor of the conversation at the hearing is any indication, the threat is real.

The Copyright Office had recently issued a determination that ringtones and digital downloads were covered by this royalty, and could rely on the Section 115 compulsory copyright.  Again, in those contexts, copies were fairly easy to understand, as a copy is made when a ringtone or download is copied onto a phone or a computer, and when that happens, a specific fee is charged for the copy that is made.  The more difficult questions arise in cases of subscription services, limited time downloads, on-demand streaming, and even streaming done by a non-interactive service like an Internet radio station.  When is a "phonorecord" - a specifically identifiable copy of a recording that contains the musical work - made?  In the digital transmission process, multiple copies are made - on the servers of the music services, in transitory copies made by servers and routers on the Internet, and in the RAM and on the hard drive of the listener's computer.  Are these copies "specifically identifiable" such that a royalty should be paid?  In its Public Notice of this Roundtable, the Copyright Office raised many of these issues that formed the basis of the discussion on Friday.

 In 2003, the Recording Industry and the representatives of the music publishers entered into a settlement agreement that concluded that the non-interactive streaming did not involve copies that would give rise to a mechanical royalty, while interactive streaming and conditional downloads did.  However, as discussed at the Roundtable, the Harry Fox agency, the principal collection agent for the music publishing companies, represents less than 70% of the music publishers, so the agreement is not binding on all publishers.  Moreover, the Copyright Office representatives themselves asked at the Roundtable how they could draw a legal distinction between on-demand streaming and non-interactive streaming, when the technology involved was the same.  While the making of a copy in the streaming process may currently have no real value independent from the public performance (for which ASCAP, BMI and SESAC collect royalties for the musical composition), the Copyright Office asked if there should not at least be a recognition that a copy is made.  Questions even arose as to whether specifically identifiable copies are made in other digital transmissions that include buffer copies.

The question arose as to whether any copy made in a streaming process is specifically identifiable, and also whether the payment of such a royalty would be "double-dipping" - paying the composers twice for the use of their music.  In a recent decision in a Federal Court, a decision was rendered that ASCAP (and by implication BMI and SESAC) were not entitled to public performance royalties in connection with downloads, as no public performance was involved.  The question discussed on Friday was whether the reverse shouldn't also be true - that there is no mechanical royalty where there is a clear public performance.

Issues also exist as to the efficient operation of the statutory license.  The license requires notice to the copyright holder before it can be used, and as many of the copyright holders are difficult to find, and as there is no central database where the music publishers are identified, that is difficult.  In addition, as the Harry Fox agency, the one central licensing agency that exits, represents less than 70% of the copyright holders, a company that has a business model that doesn't allow for the per copy statutory royalty (e.g. a subscription service), doesn't have any group or groups with which it can negotiate to get blanket licenses for virtually the entire musical universe.  Thus,  licensing is difficult.

Everyone at the Roundtable agreed that the statutory language was ambiguous and did not cover all of the issues that arise in a digital world.  The Copyright Office itself has asked for legislative reform of the statutory license many times, to clarify these ambiguities.  In fact, at one point, the Register of Copyrights testified that she thought that one agency should collect all royalties for musical compositions, so that there would not be the issue of double dipping, and so that there would be organizations that would represent virtually all of the copyright holders for all purposes.   With the various entrenched stakeholders, that proposal didn't fly, thus we continue to have different groups representing composers for the public performance of music and for the mechanical royalty.  And, while we have had proposals for Section 115 reform floated in Congress for the last several years, the discussion on Friday was that Congressional action did not look imminent.  But all companies providing digital transmissions of musical compositions should continue to monitor these efforts, as the potential for problems arising from interpretations of who needs to get paid for digital services remains very high, and with the potential liabilities for copyright infringement being so great, the stakes are high.