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Senator Feinstein also identified another issue.  Under the manager's amendment (as in the House version of the bill), a provision of the law would prohibit any use of these royalties as evidence in any proceeding to set the royalties for ASCAP and BMI in a way that would reduce the royalty paid to those organizations to compensate songwriters for the public performance of the musical composition or musical work (the sound recording royalties addressed in this bill go to the performers and the copyright holders in the recordings - usually the record companies).  Presumably, the songwriters' organizations are concerned that high performance royalties for sound recordings could be used by broadcasters or other companies that pay these royalties (webcasters, satellite radio, cable radio or other digital music services) to argue that they could not afford to pay ASCAP and BMI royalties at the levels at which they are currently paid (see our article here, about the potential for contentious proceedings to determine new ASCAP and BMI royalties for broadcasters, where the sound recording royalty is not even a factor yet ).  However, the provision that is now in the bill could be read as prohibiting music services from introducing any evidence about the sound recording royalties to argue that the composer's royalties should be reduced, but would allow such evidence to be introduced by the songwriters to argue that the royalties should be increased.  In other words, the songwriters could argue that, as the sound recording royalties were higher than the composition royalty, and that the composition royalty should be increased - while the music service would be helpless to defend themselves against such evidence as the use of such evidence by the services would be prohibited by the law.  Senator Feinstein suggested that this one way street might constitute a denial of due process to the services, and that a more even-handed provision should be worked out before the final bill is adopted.  There is currently a provision in Section 114 of the Copyright Act, the section that first extended the sound recording royalty to digital services, that prohibits either party from introducing evidence of the sound recording royalty in proceedings dealing with the musical works royalty.

Senator Specter raised another issue.  At Senator Feinstein's urging, the bill proposes to use a single standard to set royalty rates for all services - whether they be broadcasters, webcasters, satellite radio or cable radio.  As we've written before, webcasters have had to pay under a "willing buyer, willing seller" standard, while satellite and cable radio have ended up with far lower royalties because their royalties were decided based on the standards of Section 801(b) of the Copyright Act.  The bill proposes to extend the coverage of 801(b) to all services but, like in the House Bill, the entire 801(b) standard would not be adopted.  As Senator Specter observed, the last of the four factors set out in 801(b) is omitted in the bill - the factor that looks at the royalties to determine if they at levels that will preserve the stability of the industries involved.  That factor was the factor relied on by the Copyright Royalty Board to cut the royalties that would otherwise have applied to satellite radio by half (see our analysis, here).  As we wrote, if the broadcast royalty were adopted, this would be a very important factor to take into consideration in setting a royalty rate for broadcasters.  According to Senator Feinstein at today's session, the record companies objected to the inclusion of this fourth factor, and certain webcast groups agreed to the 801(b) standard without the fourth factor.  Obviously, broadcasters and other services concerned about the lack of the final 801(b) factor will need to push to have this factor included in any final legislation that may be adopted.

Two amendments to the bill were offered by Texas Senator Cornyn, who said that the revisions to the bill with the small broadcaster provisions were a move in the right direction, but he was still concerned with whether the bill went far enough.  One amendment proposed to postpone the effective date of any royalty until the FCC held a rulemaking proceeding and determined that the royalty would not decrease diversity in the broadcast media.  This amendment was rejected by the committee with little discussion. 

The second amendment  proposed that, instead of the royalty, the FCC should establish a "do not play list", a list of artists who did not want their music played without a royalty.  This would address the claims of the royalty supporters that artists are exploited, as they have no right to tell broadcasters that they don't want their music played without a royalty.  Senator Leahy objected to this proposal, saying that it did not provide that artists who were included on this list could negotiate for compensation to be played - that instead it was an all or nothing proposal - either the artist could have its music played for free, or it would not be played at all.  Leahy did acknowledge that the idea was an interesting one that he would work with Senator Cornyn to modify.  The amendment was rejected without much further discussion, but should be considered for the future as debate over this issue progresses, as it may present a potential alternative to the royalty.

All of the Senators who spoke at the session urged the broadcasters to come to the table to negotiate the royalty.  This has been a common refrain at all of the hearings held on the bills in both the House and the Senate.  With a new NAB leader, will the broadcasters actually come to the table?  Time will tell.  But, there is no need to look into the crystal ball to determine that this issue is a real one that the proponents of this royalty will continue to aggressively push forward.   Broadcasters need to stay on the alert, and stay in touch with their Congressional representatives, to counterbalance this aggressive push on a bill that has cleared committees in both Houses of Congress, and may one day come to a vote which will finally resolve whether these bills will become law.

In the 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?