Posted on December 17, 2012 by David Oxenford

Copyright Royalty Board Releases New Rates for Sirius XM and Cable Radio - They are Going Up, Full Reasoning of the Decision to Come

The Copyright Royalty Board has announced the royalties that will be paid for the public performance of sound recordings by Sirius XM for the period 2013-2017. The decision also covers the "Preexisting Subscription Services", i.e. Music Choice in connection with its cable radio service delivered with listener's cable television packages. The full text of the decision is not released yet, as the parties have an opportunity to request that certain portions be redacted to protect private business and competitive information. The parties can request such redactions through December 19, so the decision may be Christmas reading for many. However, the Board did announce the rates as follows:

Section 112 Rates: The Judges adopted the Parties' Stipulation regarding the rates and terms for the Section 112 rates, which will require a minimum fee advance payment of $100,000 per year, with royalties accruing during the year recoupable against the advance. The parties agreed that the value of the royalties allocated to the Section 112 license holders is 5% of the total royalty obligation, with the remaining 95% going to the Section 114 license holders.

Section 114 Rates: The Judges determined that the appropriate Section 114(f)(1) rates for Preexisting Subscription Services for 2013-2017 are 8% of Gross Revenues for 2013 and 8.5% for 2014 through 2017.

The Judges determined that the appropriate Section 114(f)(1) rates for Preexisting Satellite Digital Audio Radio Services for 2013-2017 are 9% of Gross Revenues for 2013, 9.5% for 2014, 10.0% for 2015, 10.5% for 2016 and 11.0% for 2017.

Both decisions represent modest, incremental raises in the current rates (see the description of the last CRB decisions on satellite radio rates here, and on cable radio here).  These decisions are made under the 801(b) factors, from Section 801(b) of the Copyright Act, that Internet radio currently is seeking, through the Internet Radio Fairness Act ("IRFA"), to have applied to the decisions as to the royalties paid by webcasters (see our summary here). We will not know how the standard was applied in reaching the decision to raise rates, and what guidance this decision provides for webcasters and their rates, until the full decision is released (see our summary of the arguments of the parties in this case, here).

The decision mentions both Section 112 and Section 114 royalties.  In a digital world, as digital copies are made in the transmission process, it has been presumed that parties need both royalties to operate - the "ephemeral copy" licensed under Section 112 (see our discussion here) and the public performance right licensed under Section 114.  As both are needed, both are covered by the royalty rate set by the Board.  Why bother setting a specific amount for the ephemeral right?  That is a question asked many times - but as that right is paid directly to the copyright holder (usually the record label), not shared with the artists as is the Section 114 royalty, it is one with economic impact. 

 

These services are entitled to a decision under 801(b) as Congress made a determination, at the time that the Digital Millennium Copyright Act was passed in 1998, that these services were either already in existence (cable audio) or were sufficiently advanced in deployment (satellite radio) that the traditional standard for deciding statutory royalties, used in other contexts under the Copyright Act, would be applied. 801(b), for instance, is used to decide the royalties paid by the record companies to the publishers for the use of their compositions when making a sound recording, and are also used in the determination of rates paid by noncommercial broadcasters in the public performance of musical compositions (a rate recently set by the Board).  Internet radio, on the other hand, was given a new "willing buyer, willing seller" standard that has led to much controversy, as is evident from the current IRFA debate. The application of the standard apparently makes a difference, as other music services similar to Music Choice, that were not in existence at the time of the adoption of the DMCA, pay approximately twice what Music Choice will pay under this decision (see our article here).

 

We will write more about the decision once the full text is released.
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Posted on November 8, 2011 by David Oxenford

The Debate Over Sirius' Attempt to Directly License Music - SoundExchange Once Said A Marketplace Negotiation to Adjust for High Rates "Was to Be Expected"

There have been many reports about the attempts by Sirius XM Radio to license music directly from record labels, bypassing any royalty rates set by the Copyright Royalty Board.  Direct licensing would have Sirius pay the record labels or copyright holders for the rights to use music, avoiding any dealings with SoundExchange, which normally collects the royalties for the public performance of sound recordings under the statutory license.  The most recent report about Sirius' efforts was in the New York Times, here.  Sirius, like webcasters, pays royalties set by the CRB (if they cannot be negotiated among the parties) that cover the public performance of all legally released sound recordings.  While webcasters currently have royalties that are in place through 2015, the royalties for Sirius end in 2012, and are being litigated now (see our story here on the last royalties set by the CRB for Sirius).  To avoid the uncertainty of litigation, with which webcasters are very familiar, Sirius has been attempting to license music directly from the copyright holders.  This is not a new story - Rhapsody reportedly tried the same thing earlier this year, and Clear Channel tried to get royalty waivers from independent artists several years ago in exchange for more exposure for their music (see our stories, here and here).  Each time a music service suggests that it might want to license music directly to try to recognize some savings over the rates established through CRB litigation, the music community objects - see, for instance, the statements of unions AFTRA and AFM here, that of SoundExchange here, and that of A2IM (the association of independent record labels), here.  But what is really wrong with the efforts of services to negotiate lower royalties?  If you believe the testimony of SoundExchange's own witness in the Copyright Royalty Board proceedings - nothing at all.  In fact it is to be expected. 

In the CRB proceeding that was held in 2005-2006 (and from which, most of the settlements arose that now govern the royalties for sound recordings played by Internet radio stations), SoundExchange relied on a number of witnesses, including one expert, Michael Pelcovits, an economist whose model was the principal testimony relied on by the CRB in establishing the rates they determined to be reasonable.  In his written testimony, Mr. Pelcovits stated as follows:

...a rate that is set too low may have serious economic dangers.  By setting a rate too low, inefficient entry may be encouraged, and inefficient levels of production will be encouraged, which can hinder the development of an efficient market.  It is also worth noting that setting the statutory rate too high will not necessarily be harmful to the market.  If the price is too high, parties can (and are almost certain to) negotiate agreements for rates lower than the statutory standard.  Thus, a rate that is set too high is likely to "self-adjust" because of the sellers' natural incentive to meet the market. 

(Emphasis added).  The statutory rate referred to in this quote is the rate that is set by the CRB.  What this quote says is that, if that rate is set too high, then parties will naturally negotiate after-the-fact to try to find what the real market rate should be, and that such negotiations should be expected - not feared as many seem to be claiming as these attempts to cut deals come to light.  In other words, the music community seemed to favor (and expect) such negotiations, before they were against them it in their statements today. 

In fact, it is quite clear that the negotiation of lower rates has already happened.  In the many settlements that came about after the CRB decision on Internet radio rates was released after the 2006 proceeding, while the parties were fighting appeals and pursuing Congressional redress, rates lower than those that were set by the CRB were negotiated by many parties, including the Pureplay webcasters (on which Pandora relies), small webcasters, noncommercial webcasters, and even broadcasters (see our summary of the rates under all these deals, here).  All of these settlements were deals that were negotiated, as Dr. Pelcovits put it, "to self-adjust....to meet the market."  Clearly, the CRB rates are not sacred.  So what is the difference between these deals done pursuant to the Webcaster Settlement Acts, and the deals that have been tried now and have been condemned by so many in the music community? 

One possible difference is the loss of control. The settlement deals that were done under the Webcaster Settlement Acts all provided SoundExchange with the opportunity to decide which deals were precedential in future CRB proceedings, and which could be excluded from future rate-setting cases.  So, as we've written before (here and here), the deals that set relatively low rates, like those with the Pureplay Webcasters and the small webcasters, were deemed non-precedential, while those deals with higher rates, like the agreement with the Broadcasters, were considered precedential - and in fact contributed to the CRB decision in 2010 setting the rates for 2011-2015 for those webcasters not covered by one of the WSA settlements.  Deals that are marketplace deals would not be afforded the non-precedential status afforded the WSA deals absent some new act of Congress.

In establishing the statutory royalty, Congress envisioned that the CRB would base its decision on the rates set by the marketplace for similar rights.  In previous cases, because there were no freely negotiated marketplace rates (except for those recently done under the WSA and deemed "precedential"), the Copyright Royalty Judges had to rely on economic analysis of royalty schemes for other types of service and to come up with proper "adjustment factors" so as to determine the hypothetical rate that would be negotiated had these parties been negotiating rates for noninteractive webcasting.  Obviously, this is an inexact science, and has led to some results that many have argued are too high (though, as the SoundExchange press release indicates, some in the music community believe that the rates are too low).  Having freely negotiated rates may well provide some "real" basis for determining what a willing buyer and willing seller really would pay for music in a real marketplace.  But we will see if any such rates can in fact be negotiated by Sirius or any of the other parties that have attempted such negotiations. 
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Posted on January 12, 2008 by David Oxenford

Satellite Radio Music Royalty Reconsideration Denied By Copyright Royalty Board - What a Difference A Standard Makes

This week, the Copyright Royalty Board issued an Order denying a request by SoundExchange for rehearing of certain aspects of the decision released last month setting the royalties for satellite radio - XM and Sirius.  These are the royalties for the use of sound recordings by these services on their digital systems.  The decision, which set royalties at 6 to 8% of revenues of these services, and the denial of the rehearing motion, provide examples of how the CRB applies the 801(b) standard of the Copyright Act.  In setting royalties, that standard assesses not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music.  The satellite radio decision sets a royalty far lower than that assessed on Internet radio - where the royalty is set using a "willing buyer, willing seller" standard looking only at the perceived economic value of the sound recording.  That willing buyer, willing seller standard is also proposed for broadcast radio in the recently introduced performance royalty bills now pending before Congress (see our summary here) - so it could be expected that any royalty set using that standard would be higher than that set for satellite radio. 

The initial Copyright Royalty Board decision, the full text of which is available here, first made a determination of how to compute the royalty.  While both the satellite radio companies and SoundExchange initially suggested a percentage of revenue royalty given that satellite radio can't count specific listeners, the parties later amended their proposals (after the Internet radio decision) to include a computation based on the frequency of a song's play, to try to more closely approximate the Internet radio performance-based model (about which we wrote here).  In addition to the suggestion that this metric more closely approximated that used in the Internet radio decision, the satellite radio companies suggested that a metric based on the songs played would give them the opportunity to adjust their use of music to reduce their royalty obligation.  The satellite companies suggested that, if the royalty was too high, they could reduce the number of different songs that they played.  While not specifically referenced in the decision, it is possible that they also considered the possibility of getting waivers from artists to encourage playing particular songs, which could further reduce a royalty based on a per song computation.  The Board declined to provide that option, finding that the percentage of revenue option best took into account the business of the companies.  The Board also suggested that it doubted that satellite radio really had the ability to lessen the use of music in reaction to a high royalty rate.  (The Board does not discuss the possibility of royalty waivers, which are essentially worth nothing in a situation where the royalties are based on a percentage of a service's entire revenue). 

In the denial of the rehearing motion, the Board rejected SoundExchange's request that the royalty adopted by the Board excluded too much of the revenue of the services.  In the decision, the Board determined that advertising and other revenues specifically tied to those channels with no music, or where music was just incidental to the service provided, could be excluded.  As much of the music programming provided by these services is commercial free, much of the advertising revenue could be excluded from the revenue computation.  However, the Board pointed out in its decision that the advertising revenues constitute but a very small part of all revenues of the services (by far the largest coming from subscriptions), so the exclusion of this revenue would not make a significant difference in the royalty.  The Board also alludes to an argument that, as the non-music services do not rely on sound recordings, and as it could not be said that listeners come to these non-music services only because of the use of sound recordings on other music channels provided by the services, there was no reason to include the revenues that come specifically from the non-music channels in the base from which the royalty for the use of music is assessed.

In the initial decision, the Judges distinguished the percentage of revenue royalty used in satellite radio from that used in the Webcaster decision, finding that in the Webcaster case, there was difficulty in determining what revenue would be subject to the royalty.  In doing so, the CRB ignored the formulation offered by the Small Webcasters in the Internet radio case who had proposed a more inclusive royalty than that adopted in this case - a royalty on the entire amount of revenue that a service generated.  The satellite radio companies offer different lines of business not subject to the royalty (selling equipment, data services, and music services to satellite television companies) and have the issue of many channels that do not feature music, requiring the rate adjustments discussed above, while the Small Webcasters generally do not offer such other lines of business.

The rate that was set for the satellite radio services was based on a process similar to that which they used for setting the Internet radio royalty - the Board looked for comparable marketplace transactions on which to base a rate.  In assessing the rates that would be charged to the services in a marketplace transaction, the Board came up with a 13% rate.  That rate would be higher - probably over 20% - if it was based on just music programming.  But as a significant part of the satellite radio programming is not music oriented, the percentage of revenue (principally the subscription revenue) was adjusted to conclude that the sound recordings were worth about 13% of the services gross subscription revenues in a marketplace transaction.  However, as Section 801(b) applied to this case, the Board looked at the possible disruption to the satellite radio services that would occur if that rate was to be applied.  As the Board found that a 13% royalty would cause substantial disruption, it adjusted the rate to one that begins at 6% and increases to 8% over the term of the royalty.

This computation has significant implications for broadcasters who may be concerned about a potential performance royalty on over-the-air radio for its use of sound recordings.  The currently pending performance royalty bills recently introduced in Congress propose a willing buyer, willing seller model.  If those bills were adopted, and the same methodology were applied to broadcast radio as was used here, music radio might well end up with a 20% royalty (which we suggested was what SoundExchange might seek, see our post, here).  Imagine what such a royalty would do to the business of terrestrial radio - if 20% of music radio revenues were skimmed off the top to go to pay a performer's royalty.

The final issue raised by SoundExchange's rehearing motion was the claim that the Board should have taken into account the planned merger of the satellite radio companies, and their potential for cost-savings and increased profitability, which should have been factored into a lessening of the adjustment made to account for the potential disruption.  The Board rejected this argument, finding that the savings (and the merger itself) were speculative, and could not be assessed at this time. 

A close reading of the decision and rehearing denial should be of interest to broadcasters interested in what a sound recording royalty could do to their businesses, to webcasters to see what a difference a standard makes in determining a royalty, and by those interested in fairness in music licensing.  While SoundExchange is arguing to Congress about the "unfairness" of radio not paying a royalty when digital services do, no one seems to recognize the inherent unfairness of differing standards as applied to different services.  Even the new broadcast performance royalty bills perpetuate that unfairness - allowing broadcasters with less than $1.25 million in revenue to pay a flat $5,000, while webcasters with the same revenue would pay royalties twenty-five times that amount, even under the small webcasters deal offered by SoundExchange (see our post here).  Where is the fairness in music licensing?
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Posted on November 9, 2007 by David Oxenford

Another Proposed Settlement of Another Copyright Royalty Board Proceeding - New Subscription Services

The Copyright Royalty Board today announced that it is taking comments on a settlement to establish royalties for the use of sound recordings to be paid by companies that are planning to provide audio services to be delivered with satellite and cable programming.  In contrast to the "preexisting subscription services" who were in existence at the time of the adoption of the Digital Millennium Copyright Act in 1998, who recently reached a settlement agreeing to pay 7 to 7.5% of gross revenues for royalties (see our post, here), this settlement is with "New Subscription Services" which did not offer these kinds of subscription services in 1998.  This settlement does not apply to subscription services provided through the Internet.  The covered "new subscription services" have agreed to pay the greater of 15% of revenue or a per subscriber fee that will escalate over the 5 years that the agreement is in effect.  Given that these new services will be providing essentially the same service as the Preexisting Services, why the difference in rate?  Perhaps, it is because the difference in the law.

As we wrote earlier this week, the Preexisting Satellite Service pay royalties set based on the standards of Section 801(b) of the Copyright Act, which takes into account a number of factors including the interest of the public in getting access to copyrighted material, the relative contributions and financial risks of the parties in distributing the copyrighted material, the stability of the industry, and the right of the copyright holder to get a fair return on their intellectual property.  By contrast, the new subscription services who entered into the settlement just announced, who weren't around at the time of the drafting of the DMCA, use the "willing buyer, willing seller" standard also used for Internet radio.  And, because of the applicability of the willing buyer willing seller standard and the apparent uncertainties of the litigation process using it, these new services apparently decided to agree to a royalty double that of the preexisting services, even though they provide essentially the same service.

This settlement applies only to subscription services of a particular type.  This proceeding was begun when XM, Sirius and MTV all announced plans to offer audio services that are provided  as an add-on to a subscription to multichannel video providers (essentially cable and Direct Broadcast satellite television providers).  As these services cannot technologically track individual performances or listeners, they cannot pay according to the Internet radio decision.  Thus, a new proceeding was begun by the CRB to determine the rates to be paid by these services. 

Internet-based subscription services are not covered by this decision, but instead pay the royalties that apply to Internet radio services that were decided in March - if the subscription service is non-interactive (i.e. a listener cannot pick what songs he wants to hear) and otherwise meets the rules that apply under the statutory license (see our memo, here, for the details of those requirements).  Internet-based services that are interactive or otherwise don't meet the requirements of the statutory license must obtain clearances directly from the copyright owners, paying a privately negotiated rate. 

The fact that two settlements, one providing rates that are double the amount of the other when the only effective difference between the services was whether they were in existence at the time the governing statute was written fuels complaints about the arbitrary nature of the Copyright Royalty process.  While SoundExchange and other copyright holders have asked for "fairness" in seeking a performance royalty on broadcasters (who currently do not pay such a royalty), they benefit from the unfairness in circumstances such as this, when identical services pay royalties that are twice that paid by existing services.  And, to the extent that all services are deemed to be part of a single broad market for audio services, as some have argued, is there really justification for different treatment between subscription, nonsubscription, Internet and non-Internet based services?  When the rates that apply to satellite radio are decided in the next month, will we see these differences manifest themselves yet again?

These are not questions for the Copyright Royalty Board to decide - they only need to approve this agreement and are not charged with the broader responsibility of assessing the difference in policy between similar services.   Comments on this settlement are due on December 10.
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