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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. 

We have written before how, using the Copyright Royalty Board decision that was reached for XM and Sirius in 2007 (and recently upheld by the Court of Appeals), it could be concluded that the "willing buyer willing seller" standard could lead to a broadcast performance royalty as much as 25% of gross revenues.  We reached that conclusion by looking at the CRB decision which set a royalty for XM and Sirius (at that point separate companies) of 6% growing over a six year period to 8% of gross revenues (with some adjustments subtracting those revenues clearly attributable solely to non-music programming).  The CRB reached that decision after finding that a fair market rate (essentially what the willing buyer willing seller standard is supposed to determine) would be approximately 14% of the XM/Sirius revenues (principally their subscription revenues as their music streams were commercial free).  This value was adjusted down to the final royalty to preserve the stability of the industry, a factor required to be taken into account by the 801(b) standard that applies to the determination of the satellite radio (but a factor left out of the House version of the broadcast performance royalty bill).  That 14% of revenue was computed on the assumption that about half of the subscription revenue could be attributed to non-music programming (e.g. news, sports, Howard Stern and Oprah, etc).  So, if the perceived market value of the music in Sirius XM programming was 14% of the total subscription revenue, and half of that value came from non-music programs, then the value of a pure music service would be double that number, or something in the vicinity of 25%.

At the House hearing on the performance royalty held in March, an RIAA witness seemingly implied that the royalty would actually end up being closer to the 6-8% of revenue that Sirius XM now pays.  But recent royalty decisions give one pause about such a claim.  Look, for instance, at the recent settlement between the Pureplay webcasters (some of whom I represent) and SoundExchange, where the percentage of revenue royalties range between 12 and 14% of revenue for small webcasters to 25% of revenue (at a minimum) for large pureplay webcasters.  And this rate is deemed an experimental rate, reached as a compromise and not reflecting the true value of music, according to the SoundExchange press release.

In other services where there is no adjustment made for the preservation of the industry subject to the royalty, the royalty has been high - though perhaps not quite as high as in the webcasters' case.  For instance, in connection with "new subscription services", the audio services provided with DISH and DirecTV video services, the parties planning to provide those services and SoundExchange reached an agreement for a royalty rate of 15% to avoid a CRB hearing.  Even in connection with Business Establishment Services (like Muzak) that do not pay for the public performance of music, but only for the ephemeral copies made in the digital transmission process (the most insignificant part of the webcaster royalty - assumed to be about 8% of the total royalty), the parties agreed to pay a royalty of 10% of gross revenues.  In no case of which I am aware has the royalty for the public performance of sound recordings been set at less than 10% of gross revenues, and then only in connection with "small webcasters," who have revenues similar to those of radio broadcasters who would pay a flat fee under the pending legislation for the broadcaster performance royalty. 

Thus, the conclusion of the CBO, that the broadcast performance royalty would be substantial, seems right on target, unless the new legislation adopts the full 801(b) factors. These factors would have to include the factor looking at the preservation of the stability of the industry which was so important in the Sirius XM decision - the one factor omitted from the standard proposed in the revised House bill. 

Of course, even at 6-8% of revenues, broadcasters will probably find the royalty significant).  But at 25%, in today's economic climate, it would virtually drain the radio industry of its profit margins.  We will be interested in seeing if these factors are discussed in tomorrow's Judiciary Committee hearing.

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.

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.