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Clearly, digital music services should understand that the actions taken here are taken only because SoundExchange did not get full reporting.  In some of the webcaster settlement agreements (see, e.g. the settlement with broadcasters, summarized here), and in the CRB's own record keeping rulemaking proceeding, it was recognized that certain classes of webcasters could not be expected to provide full census reporting, i.e. reporting that lists all of the songs played by the service and how many listeners heard each song.  This reporting process can be expensive, especially for groups like noncommercial webcasters and even some small broadcasters and other small companies.  In some cases, the cost of reporting would be greater than the royalties collected or certainly the revenue produced by the streaming.  In many of these cases, SoundExchange is already authorized to distribute proceeds based on some proxy methodology.

But other webcasters, who are supposed to be reporting on a census basis, should do so.  The Copyright Royalty Board has asked whether SoundExchange has exhausted all its avenues to collect information about what is being played.  SoundExchange, in its pleading, notes that many services simply have lost past data, and some services are no longer in business.  So getting that information is difficult or impossible.  But in the future, SoundExchange will no doubt be looking to develop stronger enforcement capabilities against webcasters and others who do not meet reporting requirements.  But, even then, there will no doubt be gaps, as there will be computer malfunctions, inaccurate data that is entered, and companies that go out of business withou having met all of their obligations. 

Clearly, no one wants musicians to go unpaid - especially when the royalties have already been collected.  In the past, there has been talk of developing monitoring systems that would be easy and inexpensive to use.  Many streaming service providers already provide some type of reporting system.  But virtually all still require human input - identifying the songs correctly in a service's music scheduling software, and that sometimes is not easy, as information from record companies and other music suppliers is not always available and consistent. Automating such systems, making them ubiquitous, foolproof, easy to use and inexpensive, should be the priority of SoundExchange and webcasters and other music services, so that those who deserve to get paid are paid, but avoiding systems that are so hard to use that they make streaming or other digital music use difficult or impossible. 

First, this is but an offer to musicFirst, which has to be accepted.  Today, musicFirst issued a cautious statement, saying that they were still studying the proposal, but expressing disappointment that the NAB did not accept the proposal that "both parties agreed upon in July."  That in itself is an interesting statement, as the NAB has been very clear to state that it has never agreed to anything in July - but that it instead needed to vet the musicFirst proposal with its members before agreeing to anything.  Presumably, musicFirst itself had to seek approval for any deal.  As any deal would need the blessing of Congress to become effective and binding on broadcasters and copyright holders, each party would need broad approval for any deal from all affected parties.  So how could the NAB member involved in the discussions and those representing musicFirst have "agreed" to any proposal back in July, when no such broad approval had been received for a deal that was not yet public?

And what has really changed in this Term Sheet from what was discussed in July?  Seemingly, very little.  While this Terms Sheet proposes a phase in of the 1% royalty depending on how many phones are FM enabled, the July proposal made the whole deal contingent on mandated FM chips in cellphones.  In effect, this proposal is more favorable to copyright holders than was the proposal on the table in July, as at least some royalty would be paid even without that mandate.  So how could the labels complain about that provision?

The only other substantive change appears to be the provision that allows direct licensing of music to reduce the liability of broadcasters.  But this too seems to be noncontroversial.  How can musicFirst, which claims to be standing up for the rights of copyright holders and musicians to be compensated for the use of their work, turn around and say that those copyright holders that want to exercize their rights by waiving the royalty be denied that right?

Other changes from the proposals set out in July seem cosmetic and insubstantial. 

So what comes next?  Obviously, musicFirst must formally respond.  Then the details of a deal must be worked out.  While the Terms Sheet may, at first glance, seem detailed and thorough, in fact it is but an outline of a deal.  Any deal will need to be written into statutory language and offered to Congress.  And this will not be easy, as each term will need to be defined, and the language will need to be carefully reviewed to make sure that there are no unintended consequences.  Many questions will need to be fleshed out.  How are the percentages of FM-enabled cell phone penetration measued?  What standard would a rate court use to determine the streaming royalty if that royalty is not set by the CRB?  How is gross revenue defined?  How are stations that are part talk and part music treated?  Issues that will need resolution.

Then, any agreement must be presented to Congress.  Adoption of the deal as proposed may not be all that simple, as there may well be attempts by other interested groups to latch on to any bill to attempt to remedy other problems with the royalty process.  Why should Internet radio pay royalties that are a minimum of 25% of gross revenues for large pureplay webcasters like Pandora, if radio is paying but 1%.  Why should smaller webcasters with revenues between $500,000 and $1.25 million be paying 12 or 14% of revenues, when a small radio station pays only $5000, less than a tenth of what the webcaster with the same revenues would pay?  Expect that others will attempt to use the process to raise issues such as these, so the Congressional process will not necessarily be quick and easy.

All in all, while this may seem like the beginning of the end of the performance royalty dispute, we will no doubt hear much more about these issues in the weeks to come.  We will write more about the issues in the days to come, especially as reactions to this proposal are made public by various parties either involved in the discussions, or from those that are affected by their outcome.  A no doubt very interesting debate is sure to play out in the coming days and weeks. 

This is not to say that the broadcasters will not keep the issue bottled up in Congress for the rest of the year, as there are many vocal broadcast supporters on the Hill who will fight to keep the language out of any bill.  But this issue will keep coming up in future Congressional sessions, and broadcasters will need to continue to use precious political capital to keep the issue bottled up.  Broadcasters, having very good arguments why they should not pay the royalty (some of which we have summarized in the past), should not accept any settlement that is offered just because something might happen in Congress in the future.  With the future of the industry riding on the issue, that would be crazy.  But, because the future of the industry is riding on the outcome of this debate, shouldn't broadcasters consider a settlement which brings certainty to the issue, and which may bring benefits as well?

What benefits could a settlement bring?  As digital operations become more and more important to broadcasters, there could be concessions from the record labels on the streaming royalties and other digital uses of music that relieve broadcasters from some of the concerns that hold back many broadcasters from fully exploiting the potential of their Internet and mobile applications.  This has long been discussed by many in the digital side of broadcast operations as being an outcome that could be, in the long run, advantageous to broadcasters, provided that what they have to give up to get the benefits is a manageable fee that is capped by law - and one where there are serious commitments made by all parties that the royalties that are set will stay in place.  Are such commitments possible, or will they just be the "camel's nose under the tent"?  That would be an important issue to work out, as it was only 12 years ago that the DMCA was adopted, setting sound recording performance royalties for digital transmissions, with the explicit agreement that over-the-air broadcasters would be exempt.  Now, this negotiated exemption is labeled an historical anomaly by performance royalty supporters.  The "nose under the tent" concern has always been the fear of small and noncommercial broadcasters who are already offered special deals under the terms of the pending Performance Rights Act, but who look at similarly situated Internet radio companies who are paying royalties 10 times as high as those proposed for small broadcasters and wonder if the promised low rates are going to be there in the long term.  As we have written before, SoundExchange, who would collect any fee that is agreed to, has been very aggressive in other services in collecting high fees - 15% of revenue or greater - so agreeing to any lower fee now would have to come with a guarantee that this lower rate would not be characterized as an anomaly in the next decade.

And broadcasters would have to decide if even these kinds of concessions would make it worth doing a deal, while the representatives of the record labels and artists would need to decide to make concessions.  Who knows if either side could get to a point where the parties they represent would be happy with a deal to which the other side would agree.  We've written before about the issues that broadcasters would face in arriving at a one-size-fits-all solution, and the controversy in the press this week illustrates the differing views of broadcasters.  There is without a doubt a major gulf between where each side started in any discussions of a possible compromise, if meaningful discussions have even taken place.  Stay tuned for further developments, as these recent press reports are certainly not the last ones that you will read on this topic. 

The 15% of revenue charged in this royalty is the lowest royalty for the sound recording public performance right of any royalty set by the Copyright Royalty Judges which is subject to the "willing buyer, willing seller standard."  While the proposed broadcast performance royalty no longer uses the "willing buyer, willing seller" standard that was proposed in the original legislation, the legislation still proposes a standard that looks to the market value of the public performance of the sound recordings, using what is referred to as a "modified Section 801(b) standard", section 801(b) being the section of the Copyright Act that sets out this standard.  Section 801(b) looks at other factors, besides just the market value of the use the music, in setting the royalty.  Factors considered include the relative contributions of the service and the record companies in creating value, and the interests of the public in receiving access to copyrighted music.  However, in the only prior case decided by the Copyright Royalty Judges using the 801(b) standard, the case dealing with satellite radio, the Judges determined that none of these factors were quantifiable.  Instead, the only 801(b) factor taken into account in that case to lower the royalty below the market value that would be established by the "willing buyer, willing seller" standard was the factor that assessed the impact that the royalty would have on the stability of the industry to which the royalty applies.  Application of that factor cut the satellite radio royalty in half (see our post on that case here).  However, in the modified 801(b) standard currently proposed in the Performance Rights Act setting out the broadcast performance royalty, the factor assessing the stability of the industry on which the royalty will be applied is omitted from the test that would be used by the Copyright Royalty Board to determine the royalty for broadcasters (see our summary of the Senate bill here). 

Thus, the 15% royalty agreed to for the new subscription services should serve as a warning to broadcasters as to what they may have to pay if the proposed performance royalty is adopted.  As we wrote in our summary of the satellite radio case, the royalty could even be much higher (as the CRB decision in that case found that the market value of the royalty, before the 801(b) adjustment was about 14% of the satellite services' gross revenues, but that gross revenue includes revenues from non-music programming not subject to the royalty, which the Judges concluded made up about half of the satellite services' revenues - meaning that the Judges perceived the market value of the music to be about 25% of the revenue attributable to the music programming).  Whether the royalty is 15% or 25% of gross revenues, it would clearly be a matter of great concern to music broadcasters. 

Webcasters can find much information about the royalties on the SoundExchange website.  We have also written extensively on the subject.  Some of our posts of particular interest include the following:

• A summary of the meaning of these royalties, here.  Note that this summary was written before many of the settlement agreements listed below were arrived at, so it mentions only the royalties set by the Copyright Royalty Judges in their 2007 decision. 
• A summary of the provisions of the broadcaster-SoundExchange settlement setting special royalty rates for broadcasters who stream, with additional posts about the waiver of the "performance complement", allowing broadcasters to play more songs from an album or by the same artist than might otherwise be permitted,here, and a summary of recordkeeping obligations, here and here.
• A summary of the provisions of the Small Webcaster deal, an option for companies who, with all of their affiliates, have less than $1.25 million in annual gross revenues, allowing payments based on a percentage of revenue.
• A summary of the royalties for noncommercial operators, here, and special royalties for stations affiliated with the Corporation for Public Broadcasting (including NPR affiliates), here. 
• Summaries of deals for "Pureplay webcasters", those whose only business is streaming, here, and another deal for other webcasters who do not fit these categories, here.
• A reminder about annual election requirements and minimum fee obligations, with links to SoundExchange forms.

Check out these posts, and other items that we have written about the SoundExchange royalties for Internet radio, here, and make sure that, if you are streaming, you are paying what you owe.  SoundExchange now seems to be looking for those who have not paid, so to avoid any unpleasant legal surprises, don't get caught not being in compliance. 

But, beyond the question of whether the parties are even willing to participate, could these sorts of negotiations actually be successful?  Copyright issues, as they are so detailed and technical given the complexity of the mechanics of the Copyright laws, are often resolved through negotiations - often at the urging of Congress.  Congress tends to believe that a negotiated solution is more likely to anticipate the issues that could arise than is an imposed legislative solution where one side totally prevails over the other.  But here, there are many parties involved who may not see eye to eye on the kinds of issues that might be discussed in any negotiation. 

Congress has called on the parties to bring people who can make decisions to participate in the sessions, yet who would that be?  On the recording industry side, it would seem that the 4 major labels, the association of independent labels, and the artist union representatives would be able to easily fit into a room to negotiate.  On the other side, while it might seem that the NAB is the appropriate party, the NAB itself does not pay royalties - its members do.  And its members are a diverse group.  There are many public companies that own stations, and hundreds of private ones. There are large market stations and small market ones - differing constituencies that have differed on performance rights issues in the past.  And, perhaps most importantly, there are many stations with differing interests as to what might be included in any negotiations.  Some groups have evolved digital operations while others are still focused almost solely on their broadcast operations.  Some have interests in waivers of the performance complement (which was an issue in the NAB-SoundExchange agreement on Internet radio royalties) while others don't.  Some do significant amounts of talk or news, while others are much more music intensive.  All these diverse interests would have to be taken into account in reaching any deal that would cover broadcasters - and two weeks with Thanksgiving in between does not seem to provide the time to reach a deal.  In fact, given that broadcasters for the most part believe that the issue is all but dead given the majority of the Congress signing on to the anti-performance royalty resolution, how do you then convince broadcasters nationwide that a deal is in their best interests when they have been so adamant against even talking about a deal.  Given all these obstacles, it simply does not look possible to have a deal in this time period - even were the parties to actually sit down and try to work something out.

So, if the parties are not sure to negotiate, and if the prospects of a deal in two weeks in late November are so slight, why bother with the letter?  One thought is that the letter is another well-orchestrated publicity move by royalty proponents.  Just like the MusicFirst petition filed at the FCC complaining about broadcasters supposedly boycotting musicians who supported the royalty (with little or no evidence of any real boycott by any commercial station), this letter has already generated press attention putting a spotlight back on the issue - attention that has perhaps flagged somewhat since the NAB had signed up its majority of the House of Representatives onto the resolution opposing the royalty.  Perhaps by trying to make the NAB look bad, the supporters of the royalty are trying to pry some of the legislators off their positions in favor of the NAB and against the performance royalty (see our post here about the potential for ways that the bill could move even with a majority now signed onto the anti-performance royalty resolution).

So, will any of this work?  Watch and see, as we should know whether negotiations take place very soon.

There is another irony in the premise of the MusicFirst complaint.  They complain that stations are not playing the music of musicians that support the performance royalty.  But one of the premises of  supporters of the royalty is that broadcasters should not be playing the music of performers without paying a royalty.  But when a few noncommercial stations even suggest that they are planning to stop playing this music, MusicFirst comes running to the FCC to complain that broadcasters are not doing the very thing that MusicFirst supposedly doesn't want - playing music without a royalty. 

The whole complaint seems to be a way to generate a few headlines to shine on the issue - an issue where broadcast interests already have almost 250 members of the House of Representatives on record as being opposed to the new royalty.  But perhaps the publicity has generated some response, as rumors are that further consideration of the bill in the Senate may be forthcoming soon.  So broadcasters concerned about a potential royalty cannot relax.

For listening above the 159,140 monthly ATH level, a noncommercial webcaster electing the Religious broadcasters deal would pay at the following rates:  

  (i)   2006-2010:

             (a)        $0.0002176 per performance; or

(b)        $0.00251 per ATH , except in the case of channels or stations where substantially all of the programming is reasonably classified as news, talk, sports or business programming, in which case the royalty rate shall be $.0002 (.02¢) per aggregate tuning hour;

      (ii)        2011-2015:

For large noncommercial webcasters, these rates cut the payments for performances in excess of the 159,140 cap by 2/3 from the rates set by the Copyright Royalty Board in its 2007 decision.  These rates are more in line with the noncommercial rates set under the Small Webcasters Settlement Act, which were in effect prior to 2006 and set rates at 1/3 of the commercial rates for performances in excess of 200 average simultaneous listeners. 

The Educational deal, by contrast, while structured very similarly ($500 per channel minimum and a per performance fee above 159,140 monthly ATH), requires far higher per performance fees.  The fees for performances above the cap are essentially the fees agreed to by the NAB, and which SoundExchange seems to be trying to make the standard for per performance fees that they will use as a benchmark in the upcoming proceeding to set royalties for 2011-2015.  The rates under the Educational deal are deemed precedential (while those under the Religious broadcasters deal are not).  For streaming above 159,140 ATH per month, the Educational webcaster would pay the following per performance rates:

                      Year         Rate per Performance

2011                      $0.0017

2012                      $0.0020

2013                      $0.0022

2014                      $0.0023

                        2015                      $0.0025

With the Educational Webcaster paying 3 times what a noncommercial entity would pay under the Religious Broadcasters deal, why would anyone ever elect the Educational deal?  For one reason - its treatment of recordkeeping requirements for smaller webcasters.  Apparently, recognizing that many schools will have webcasting operations which may receive some degree of listening, but which may not get the large nationwide audiences of some religious or other nationally-focused nonprofit webcasters, the Educational webcasters seem to have traded higher per performance rates above the 159,140 cap to get a bigger break on recordkeeping requirements for smaller webcasters.

Under the Educational Webcaster deal, stations streaming up to 55,000 ATH per month can pay an additional $100 yearly fee to SoundExchange and be exempt from recordkeeping and reporting requirements on the songs that they play.  The $100 fee is supposed to be used by SoundExchange to develop alternate methods of sampling and reporting the music played by these smaller webcasters.  55,000 monthly ATH is approximately 76 average simultaneous listeners 24 hours a day, 7 days a week. 

In contrast, while there is a "Noncommercial Microcaster" option under the Religious Broadcasters settlement which allows for a similar recordkeeping exemption, it applies to stations with up to 44,000 ATH per year, meaning a station can average only 5 simultaneous listeners on a 24 hour a day, seven day a week basis to qualify for the recordkeeping exemption under that deal.

Under both deals, webcasters agree to provide census reporting (reporting to SoundExchange each song played and how many times it was listened to), but only for larger webcasters exceeding the 159,140 ATH per month cap.  Here, again, there is slightly more flexibility for the Educational webcaster, not having to report on the number of listeners for each song, instead only having to report how often the song was played.  Large webcasters under the Religious Broadcasters deal do need to report on the number of listeners (though that information can be provided by ATH rather than on a per performance basis).  Under both deals, webcasters with less than 159,140 need only report for two weeks each quarter.

Parties deciding to elect the Religious Broadcasters deal must do so by September 15.  There is no comparable deadline for the Educational deal, as it covers only the periods after January 1, 2011, except for stations wishing to take advantage of the recordkeeping benefits, which can be elected immediately for 2009, and in January for 2010.  Under both deals, elections must be made every year, by January 31, as to whether or not a webcaster wants to continue to be covered by one of these deals.  The Educational deal is open only to those webcasters who are affiliated with educational institutions.

Thus, there are now two options (in addition to a third option for stations eligible for funding by the Corporation for Public Broadcasting, and to the option the Copyright Royalty Board adopted for 2006-2010 and any option that they may adopt for 2011-2015) for the noncommercial webcaster.  One option provides more recordkeeping breaks for Educational institutions that stream a moderate amount, while the other provides price breaks for the largest noncommercial webcasters.  Read these deals carefully when they are published in the Federal Register, and carefully choose the option that best meets your needs. 

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.

Recently, the radio industry has been fighting the perception that it is an industry with declining growth and increasing competition, leading some publicly owned radio companies into stock doldrums as investors seek sexier investments. If a performance royalty was added to the costs of operating terrestrial radio stations, what impact would that have on the performance of these companies? And, for some of the smaller stations in big markets, or ones serving very small rural markets, how would another hit to the bottom line be handled, especially if it were a significant one (like the one that was just imposed on Internet radio)? It could be a real concern – one that all broadcasters will want to vigorously oppose.

Broadcasters need to be aware that such legislation is being planned, and should discuss the matter with their legislative representatives.  If legislation was introduced and adopted, broadcasters might be subject to a process similar to the one that webcasters just went through, with the amount of the royalty uncertain until after a royalty proceeding.  Knowing the concerns of webcasters after the decision that was rendered in their proceeding, where the sound recording royalty was valued at several times the royalty that webcasters pay to ASCAP, BMI and SESAC, broadcasters need to think about what that would do to their business and act accordingly. 

Supplemental Note - 5-10-2007 - Apparently, the NAB is already engaged on the issue, sending a letter to each Congressional representative setting out its reasons for opposing any effort to impose a sound recording performance royalty on broadcasters.  You can read a copy of the NAB's letter here.