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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. 

Spectrum conflicts with radio will also be on the table. There have been proposals for the reallotment of TV Channel 6, and perhaps even Channel 5, to radio uses. Particularly given the issues that many major market television stations had with the digital conversion of VHF stations, and the demand by more and more entities for radio spectrum, this proposal has already been advanced for public comment by the FCC in several proceedings, and could theoretically be ripe for action. More likely is further consideration, as there are many issues that would need to be resolved – like who would pay for the few remaining TV stations on these channels to move elsewhere on the TV band, plus questions of how the spectrum, if reallocated to radio use, would be divided. More on that below in the radio discussion.

The FCC will also have to complete the digital transition of TV translators and LPTV stations, which were not bound by the June 2009 DTV 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. This transition may also bring to the fore questions about the use of LPTV stations on Channel 6 for quasi-radio stations broadcasting audio that can be received on 87.7 or 87.9 on most radio receivers as analog television audio signals are just below the bottom of the FM dial. This use of channel 6 stations for Fm broadcasting would disappear if LPTV stations go digital, and thus there may be resistance to the transition from that element of the LPTV community.

Another carryover issue from 2009 is the status of the SHVERA extension, authorizing DirecTV and DISH Networks to rebroadcast local broadcast television signals to satellite TV subscribers in their markets. That authorization expired at the end of 2009, and has been extended by Congress, but only until March. While everyone seems to agree that a further extension is appropriate, many parties are trying to load up the bill with all sorts of goodies from the wish lists of various industries – everything from a mandatory extension of local-into-local service into every television market (as urged by TV interests), to changes in must-carry and retransmission consent schemes and rules on the importation of distant network affiliates (sought by various multichannel video providers), to issues about allowing the carriage of in-state TV stations in markets with counties that currently receive their television service from stations in adjoining states. These and other issues will need to be resolved before a more permanent extension can be granted.

Radio Issues

The most fundamental issue for radio broadcasters is the potential for the broadcast performance royalty – which would require that radio stations pay not only the composers for the use of music on the radio (which they currently do through ASCAP, BMI and SESAC payments), but also to pay performers (and the record companies, as the copyright holders in these performances) for the use of their recordings on the air. Radio has never paid such royalties, though digital cousins of radio – satellite radio, Internet radio and cable radio – have paid these royalties for the last decade. While broadcaster representatives have thus far been able to beat back attempts impose this performance royalty for the use of sound recordings, both the House and Senate Judiciary Committees passed forms of this legislation in 2009, and proponents of the royalty will be pushing for a vote on these bills this year. With the potential for a crippling new cost to be imposed on radio if these royalties are adopted and imposed on top of the royalties already paid to ASCAP, BMI and SESAC (which are themselves in negotiation for new royalty rates as old rate agreements expired at the end of 2009), music radio could be dealt a severe blow if the proposal was to be adopted in this time of decreasing revenue. While the new NAB President has seemingly taken a somewhat more conciliatory tone in dealing with this issue (no more claims that the royalty will only be discussed at knifepoint), it is difficult to see where the revenue to pay such royalties would come from. But it will be an issue that will be fought hard this coming year.

The digital transition in radio will also need to be addressed. While many stations are already operating with digital over-the air streams of programming, the Commission is still 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. While a compromise proposal to allow for IBOC power increases has been offered to the Commission, it has not yet been adopted. Watch for action on that front soon.

LPFM stations may become more common this year, as legislation to remove a ban on those stations causing third-adjacent channel interference to full-power FM stations may well be removed by Congress this year. A bill to do so has passed the House, and will likely be considered soon in the Senate. The House Bill did protect some full power stations from real cases of interference, and certain existing services like existing translators and stations proving reading services for the blind. But the bill must also be addressed by the Senate, and we will have to see what will be in the final legislation.

The related issues of the relationship between LPFM stations and other FM users also remain to be resolved at the FCC. A new LPFM window has been held up by issues on how to process the thousands of FM translator stations that remain pending from the 2003 translator window.  Similarly, issues remain to be resolved on whether LPFM stations, which were authorized as secondary services, should be able to be protected from increases in power or other facility changes by full-power stations. Perhaps the removal of third-adjacent channel protections will alleviate some of the conflicts, but others are bound to remain.

The proposals discussed above to recapture some of the television spectrum, including Channel 6 and possibly Channel 5, and to use that spectrum for new radio stations, may provide a further outlet for LPFM stations to remove some of the conflict with translators and full-power stations. Proposals are already pending to immediately allow LPFM stations on 87.5, 87.7 and 87.9 – all parts of channel 6 that can be heard on most FM radio receivers. But a longer term solution could result from this reallocation, giving LPFM stations places to operate without restricting FM upgrades or endangering FM translators. 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 further serious consideration this year.

 Finally, the FCC under Interim Chairman Copps, suggested rules that could limit the ability of FM stations to change city of license to move toward larger communities, undoing some of the flexibility accorded to stations in recent years to change city of license to reach larger audiences. Action on this proceeding might be forthcoming, or will perhaps be rolled into the localism proceeding discussed below. 

Issues for Both Radio and Television

The FCC’s Localism proceeding remains on the table, proposing a whole host of requirements to assure that broadcasters are serving their communities and the “public interest”. While comments have been filed and the proceeding ready for resolution for over two years, there are so many controversial issues raised by the proposals that coming to any resolution will not be easy. Some proposals seem to be dead – like that for a fully manned main studio during all hours of operation, located in the station’s city of license, as regulators realize the costs that such a requirement would impose, and the likely impact that the requirement would have on new entrants and on the 24 hour operations of some stations. 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 difficulty with localism issues is illustrated by the Commission’s rules, adopted over two years ago, requiring TV stations to document in minute detail their public interest programming on Form 355. This rule has never become effective, 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. Broadcasters argued that the information required to be documented would require the hiring of new staff whose only role would be to fill out this form. In an era of declining revenues for broadcasters, hiring a person to deal with these issues would, of necessity, require cutbacks in other areas, possibly compromising service to the public. 

While that would seem to be an issue, in recent hearings on the FCC multiple ownership rules, which will come up for a full review in 2010, certain public interest group representatives suggested that gathering detailed information about a station’s public service should be seen as a cost of doing business, and that owners who did not want to shoulder this burden should simply get out of the business. With views such as that being advanced in the multiple ownership proceeding, questions of how to modify the Commission’s ownership rules will not be easily resolved. The FCC’s 2007 modest relaxation of the broadcast-newspaper cross ownership rules has never been fully implemented, causing us to wonder if the restrictions may well outlive the newspaper itself.  Broadcasters, especially small market TV operators, have also been looking for the ability to combine operations under more flexible rules – an issue to be examined by the FCC in this upcoming 2010 proceeding (though don’t expect any final resolution this year).

The troubles of the newspaper industry, and of some broadcast stations, in funding their news operations, has given the FCC and the FTC pause, with both agencies conducting reviews of how the government may be able to facilitate good journalism in the 21^st century. The FCC has gone so far as to appoint a Special Advisor to the Chairman to look at the issues of how the media should best serve their local audiences and how to assure that service is forthcoming to local communities.  One wonders what the government can do to mandate what are essentially business decisions.  But some fear that any review of content issues, whether it be in the guise of community service or localism or some other form could be a backdoor way to bring back the Fairness Doctrine, which many conservative pundits have predicted.  Certainly, many of these proposal would face constitutional and practical problems in implementation. Yet these will be matters which broadcasters will need to continue to monitor. 

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. We’ve also written about the FTC’s recent actions on sponsorship identification (especially for the new media) and celebrity endorsements, obligations that are only now being fully implemented.

There is also real concern that the Congressional committees which oversee the FCC may well push proposals for content regulations. Issues on limits on prescription drug advertising have been raised both independently and as part of the health care debate. Proposals on restrictions on violent programming and on advertising directed to children are also possible, especially in connection with ads for food considered unhealthy (however that may be defined). Congress also seems poised to pass a law regulating loud commercials – mandating that the volume on commercials be kept the same as that in programming, no matter how hard (and in some cases subjective) that may be to assure in reality.

Protecting children from violent or other potentially harmful content has also been the subject of both FCC and FTC proceedings, which may spur further actions this year.  Indecency issues will also continue to be litigated in the Courts, as both the Janet Jackson clothing malfunction and the Golden Globes fleeting expletive cases are considered after their remand by the Supreme Court.  The constitutional issues left unresolved by the Supreme Court may well be considered by the Courts of Appeals rehearing these cases, though an ultimate decision on the constitutional issues are probably several years down the road when these cases finally make their way back to the Supreme Court (so look for indecency on our list of issues next year).

And 2010 will be a big political broadcasting year.  While the political broadcasting rules have for the most part remained unchanged for almost two decades, there are aspects of the rules that need to be addressed as the technology has changed since the current rules were adopted. The FCC has a long-outstanding proceeding to decide how on-line sales of broadcast inventory by various advertising clearinghouses and aggregators affect a station’s lowest unit rate. It’s interesting that the proceeding itself has outlasted most of the companies that were offering the on-line sales of broadcast inventory.  Also, as both radio and TV are now multicasters in the digital world, the FCC has not yet addressed how reasonable access and other political rules apply to multicasting.  Are a station's multiple streams each considered a separate “station” for reasonable access purposes, or can a station decide that candidates can be accommodated on one or more streams and kept off of others.  While this may not be a big issue in this election as most multicast audiences are small, the issue will no doubt grow in significance in future elections. 

Copyright issues could also impact the broadcast industry this year. We discussed the performance royalty above.  But both radio and television have outstanding issues on their ASCAP and BMI royalties that could lead to rate court proceedings to decide what should be paid to composers for the use of their music.  And TV broadcasters have brought a suit against SESAC to try to bring it under the antitrust laws, a suit that radio broadcasters may well consider joining at some point in the future, 

Conclusion 

Just a cursory look at the broadcast issues to be dealt with by Washington this year is enough to give any broadcaster pause about the future.  And these are just some of the issues that could impact broadcasters.  Broadband rollout, network neutrality, and regulation of wireless and wired carriers can fundamentally affect the competitive landscape for the media in general.  And there are a whole host of other regulatory issues that we have not addressed here, including some that we have no idea are on the agenda but which are nevertheless bound to arise. In an industry rapidly adapting to new media competition and changes in the economy, broadcasters cannot afford to face the heavy hand of government regulation.  Broadcasters need the freedom to adapt to marketplace changes and to address the new realities of the advertising supported media. One can only hope that Washington recognizes these new realities and regulates with a realistic hand, not one based on the realities of a totally different time and place.  Stayed tuned to these pages to see what develops in this new year.

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.

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.

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

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.