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Interactive services, where the listeners have the ability to set up playlists or otherwise direct which songs will be heard, or a download service, where the pick specific songs to add to their music library, are not covered by the statutory royalty.  That means that the operator of a service that wants to provide listeners the ability to direct the songs that can be played, must first secure the permission of the copyright holders (usually, for major label releases, the record companies).  And the copyright holders are free to refuse to provide permission for the use of some of their catalog for some or all interactive purposes - such limitations sometimes set out in the record company's agreements with some of their artists.  Not only can the record company withhold permission for the use of certain sound recordings, but the company can also charge different amounts for different songs - effectively letting a "must have" band like the Beatles withhold their music until their terms are met.

These are only some of the issues that come up in setting up a digital music service.  The line between an interactive service and a non-interactive service is not a clear one, as shown by the arguments in the case we summarized last year.  In addition, non-interactive services must meet the performance complement (or get a waiver, as broadcasters have done for simulcast streaming) or, to some extent, they don't qualify for the statutory royalty.  And we're dealing here only with the sound recording copyrights - and there are a whole different set of rules for the copyright in the musical composition.  Obviously - it's not easy to operate a digital music service - much less a profitable one.  For more information about some of these issues, see our guide to the Basics of Music Licensing in Digital Media, here.  

But any settlement talk raises important questions about the details contained in any settlement proposal -  like whether the record companies, after getting their nose under the proverbial tent, to a place where they can start munching on the revenues of radio stations, will be satisfied with just 1% of the pie.  Will they be back in a few years looking for more?  How can that level of royalty be guaranteed for the long term?  

And what will radio really get in return?  A reduction in the streaming royalties of 25% would be nice - especially for those broadcasters who have already built up substantial audiences at the current high rates.  But will the many broadcast stations who are not now streaming because of the high per performance royalty see this discount as enough of a benefit to start their streaming operations?  And what about the proposal to push for getting activated FM chips in cell phones?  How likely is that to happen?  Will it be a mandatory part of the deal - so that there is no deal unless this requirement is adopted? 

There are many questions that will no doubt be debated tomorrow at the NAB Board meeting.  Individuals involved in the negotiations will no doubt provide details on many of the questions that we have asked here, and information to which we are not privy, which may answer some of the concerns that broadcasters have about any possible settlement.  And there are no doubt many details to be worked with out with the other side even if the Board approves continuing down this settlement path at its meeting tomorrow.  We will all have to wait to see what the next steps are - and what the ultimate impact will be on the future of the broadcast radio industry.

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.

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. 

These rates are two one-hundredths of a penny per performance lower than the CRB rates in 2009 and 2010, but one one-hundredth of a penny higher than the rates agreed to by the NAB for these years.  The CRB has yet to set what is in effect the default rate - the rate that a party pays if they don't elect to be covered by one of the other available deals - for 2011-2015.  Under the NAB deal, the rates remain one one-hundredth of a penny cheaper than this Sirius XM deal in 2011.  The NAB rates are identical to this deal in 2012, but the NAB rates are one one-hundredth of a penny more expensive than under this settlement for 2013-2015.  Seemingly, webcasters electing this deal trade a slightly higher royalty now for one slightly lower in the future.

The deal also requires a yearly $500 per channel minimum fee, capped at $50,000. As in all other deals, this minimum fee is applied to the per performance royalties that the service incurs.

The deal must be elected by a webcaster currently in operation within 15 days of the date that this Agreement is published in the Federal Register - a shorter period than allowed under some of the previous deals.  Once it is elected, a webcaster is bound for the remainder of the period through 2015, and not able to opt out should some lower rates be available under a future CRB decision  (note that this is different than under the Pureplay deal, where a webcaster can opt out at the end of any year).  Any party making the election to be covered by this deal must drop out of any litigation over the rates for 2011-2015.  As is becoming standard on many of these deals, royalty payments and reports of use are due 45 days after the end of each month of operation. 

One other important aspect of this agreement is that it can be used as precedent in the upcoming CRB proceeding for rates for 2011-2015.  The NAB deal also has a similar provision, allowing it to be considered to be of precedential value.  On the other hand, lower rates agreed to in the Pureplay and Microcasters deals are specifically labeled nonprecedential.  We wrote about the concerns expressed to the Senate Judiciary committee about the ability of SoundExchange to dictate which deals are precedential and which are not, here.

Finally, it is important to note that this deal covers Sirius XM's Internet streaming of its programming, not its satellite delivered music programming from which it received the bulk of its revenues.  Royalties for the use of music in that programming is paid on a percentage of revenue basis of between 6 and 8% of revenues - a rate set by the CRB and recently upheld by the Court of Appeals.  As we have written, the difference in these royalties is due to the difference in the standard applied under the Copyright statute to the determination of royalty rates for different services - leading to calls for "platform parity", as considered by the Senate last week.

All in all, for those webcasters who are not broadcasters and not pureplay webcasters, and don't qualify as small webcasters under the Microcaster or Pureplay deals, this agreement may present some options for the future.  Watch for its publication in the Federal Register in the near future. 

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.

What groups remain who are not satisfied by the existing deals that offer some discount off of the CRB rates?  Noncommercial groups not affiliated with NPR, including religious broadcasters, are bound by the CRB rates, which give these webcasters up to 159,140 monthly aggregate tuning hours for $500 per year, but they have to pay the full commercial rates if they have larger audiences - rates that could end up being 10 times higher than those paid under the Small Webcaster Settlement Act provisions which expired in 2006.  Larger webcasters, including those that are part of portal sites or other sites that offer far more than webcasting, or those that offer an aggregator service providing hosting, bandwidth and other services to very small webcasters, also do not easily fit into any of the existing categories, as they will end up paying royalties on revenues not affiliated with their webcasting service. 

If no deal is reached by these groups, the CRB marches on with its proceeding to determine rates for 2011 to 2015.  Direct case exhibits for these webcasters are due at the end of September so, if no deals are reached, there will be more litigation next year to determine what the rates will be for webcasters not covered by any of these deals, or for ones who decide to opt out at a later date. 

This decision really just delays the consideration of the issue of the constitutionality of the CRB.  Now that this issue is on the table, it is bound to be raised by other parties in other CRB proceedings.  Thus, as the CRB embarks on its consideration of the webcasting royalty rates for 2011-2015, there is a cloud hanging over its existence - one that may take another Court decision, or some corrective action by Congress, to remedy. 

The Court decision rejected SoundExchange's challenges to the decision of the Board to apply the 801(b) factor which instructed it to take into account the impact of the royalty on the stability of the industry.  The application of this factor resulted in a royalty that grows from 6 to 8%, reducing what might have been a royalty in the range of 13% had the Board relied solely on its assessment of fair market value.  Among other issues, the Court rejected SoundExchange's claim that the XM-Sirius merger should have been taken into account to mitigate against any need for this factor to be taken into account.  The Court also rejected the Board's decision to exclude from revenues subject to the royalty those revenues that came from non-music services, like revenue from advertising on non-music channels or from equipment purchases. 

The only issue that the Court did not resolve was the value of the Section 112 ephemeral royalty - the royalty that is to compensate copyright holders for the temporary transitory copies made in the streaming process, such as those made on servers.  The Board found that no one had shown any value for those transitory copies, and thus the royalty had no real market value, so any residual value was subsumed entirely within the Section 114 royalty.  After the Board issued its decision, the Copyright Office issued an opinion that the Board needed to set a separate royalty for the ephemeral right.  While the satellite radio companies suggested the value was zero, and SoundExchange argued that it should be 8.8% of the total royalty, the Court could find no evidence supporting either position.  So the Court remanded this issue to the Board to determine what percentage of the royalty, if any, should be allocated to the ephemeral rights.

This decision, coming as it does on the date that webcasters announce a settlement with royalties that range from 12% of gross revenues to 25% or more of such revenues, demonstrates again the difference that a standard can make.  The 801(b) standard, taking into account the public interest factors, produces a rate that the music users can actually support (as the satellite companies did here, not appealing the decision of the CRB, but instead arguing in support of it), while the "wiling buyer, willing seller" standard produces royalties which, even after a settlement substantially reducing the royalty, brings only grudging relief.  This issue should be assessed by Congress when it reviews the Copyright Royalty Board's status if, as suggested by this Court, the webcasting court finds the CRB to be unconstitutional. 

First, the deal provides for different treatment for large and small pureplay webcasters. For the small pureplay webcasters, the ones with less than $1.25 million in revenue (the number that has seemingly become a magic number included in the microcasters deal as well as the proposed broadcast performance royalty to distinguish between large and small users of sound recordings), a webcaster who agrees to pay slightly higher royalties in 2009-2014 than required under the microcaster deal (12% on the first $250,000 of revenue and 14%, as opposed to 10-12%), gets the following benefits:

• An aggregate tuning hour limit of 8 million monthly ATH for 2009, 8.5 million for 2010, 9 million for 2011, and 10 million for 2012-2014, instead of the 5 million monthly ATH under the microcaster deal
• A recapture provision that requires that the webcaster, upon sale of the webcasting business to an entity that would not qualify as a small pureplay webcaster, repay the difference between what he would have owed under this deal had he not elected to be a “small entity”, but the recapture is limited to 4 years, not a potential 10 years as required by the microcaster deal. In addition, under the terms of this deal, the webcaster has the option of paying 30% of the consideration from the sale to SoundExchange in lieu of the per performance recapture, a percentage which very well may be smaller than the per performance calculation. Under this deal, if the webcaster pays under the "per performance" option outlined below for one full year, no recapture requirement exists. This recapture provision is to avoid the LastFM issue that SoundExchange has expressed concern about in public statements (see our post here).
• A transition period, for a small pureplay webcaster who grows its revenues beyond $1.25 million, that allows it to continue to pay at a percentage of revenue royalty for the remainder of the year in which it exceeds $1.25 million, and the entire following year. The webcaster would have to pay 25% of its revenues to SoundExchange, but would not have to make per performance payments for as much as two years, if it times its transition beyond the $1.25 million threshold properly. This is in contrast to the 6 month transition under the microcaster deal.
• This deal gives the webcaster the ability to delay the transition to the per performance royalty, if its revenues go over $1.25 million, then drop back below that number. Only after a webcaster has revenues in excess of $1.25 million for 2 calendar years will it be required to pay at the per performance rates.

Webcasters who elect this deal must do so on a yearly basis. As the deal offers no small pureplay webcaster percentage of revenue option for 2015, this ability to opt out is important for the smaller webcaster who has not reached the $1.25 million cap by that time, as they can opt for the microcaster deal for 2015 if they cannot afford the pureplay per performance royalties set forth below in 2015. Or, if another settlement should be reached, or the CRB should set lower rates for 2011-2015, a webcaster could opt out of this deal and choose any better arrangement that comes along at the end of the calendar year in which it is operating.

The small pureplay deal also has minimum fees. Webcasters have a minimum fee of the greater of  $25,000 or 7% of expenses.  The 7% of expenses is also required under the microcaster deal. As it will be mostly larger “small” webcasters, ones with concerns about the $1.25 million dollar cap or the 5 million aggregate tuning hour limit under the microcaster deal, who elect this deal, most will have revenues in excess of $250,000, and thus would owe the $25,000 minimum fee in any event.  That minimum can be paid in quarterly installments.

For larger pureplay webcasters, the deal offers a substantial advantage over the CRB rates. The rates for large pureplay webcasters are the greater of 25% of revenue or a per performance royalty that is far lower than that required by the CRB – even through 2015. As set forth below, the per performance royalty for 2015 will be the same rate that webcasters were charged for 2008 under the CRB decision – and far less than that agreed to by the broadcasters in their settlement with SoundExchange. As most large webcasters claimed that the CRB-determined royalties would total 75% or more of their revenues, this new rate represents a substantial savings. The pureplay per performance royalties (with a per ATH royalty rate for 2006-2008) are as follows:

Year                 Per Performance      Per Aggregate Tuning Hour

2006                $0.00080                     1.2¢

2007                $0.00084                     1.26¢

2008                $0.00088                     1.32¢

2009                $0.00093

2010                $0.00097

2011                $0.00102

2012                $0.00110

2013                $0.00120

2014                $0.00130

2015                $0.00140

Either large or small pureplay webcasters, who offer a white label or syndicated service to some third party, where the service is offered to the public under the name of the third party and not the webcaster, or for those who offer a subscription service, will have to pay at higher rates. Presumably, the theory is that such services do not make their revenues from advertising, but instead from payments by third parties or from the subscriptions by the public, and can factor in these higher costs in the amounts that they charge for such services. Essentially, royalties for those services would be paid at the same per performance rate as the broadcasters are currently paying under their settlement with SoundExchange (see our post here on those rates).

In sum, while far from a perfect deal that webcasters would have selected on their own, this deal does provide another option for webcasters with substantial advantages in many area to those that qualify for treatment under this deal. While no doubt the fight will continue over the standards that should be used to determine royalties in future proceedings, so that parties don’t need to enter into these after-the-fact settlements when one party has a substantial bargaining advantage with a favorable decision already in hand, SoundExchange should be credited for agreeing to reach this deal when there was no compulsion that they do so. This deal presents certainty for many webcasters – eliminating further litigation and negotiation costs while setting rates at which a class of webcasters can go on with their operations. 

Other changes to the bill would apparently delay the effective date of the royalties - delaying the date 3 years for stations making less than $5 million in revenue, and a year for those stations making more than $5 million.  It will be interesting to see the exact language of this provision - as it will likely take several years for the Copyright Royalty Board to issue a decision setting the royalty rates.  Thus, even if the effective date is delayed for broadcasters so they can prepare for the new royalty, they won't know what to prepare for, as they will not know much the royalty will be until well into that period - certainly after the 1 year delay proposed for the larger broadcasters, if the one year period runs from the adoption of the legislation as opposed to running from the date on which the royalty rate is established by the CRB.

From the statements made at the hearing, the standard for deciding cases has also been changed from the original bill - moving away from the "willing buyer, willing seller" standard used in setting the royalties for Internet radio companies toward the 801(b) standard that has been used for setting satellite radio royalties.  We wrote about the difference that standard made in the satellite radio proceeding.  However, importantly, from the comments made by one Congressman, the entire 801(b) set of criteria has not been incorporated in the new bill.  Specifically, the new criteria omit the one factor that was the most important in cutting the satellite radio royalties from what probably would have been 14% of revenue had a "willing buyer, willing seller" analysis been used, down to 6-8% of revenues.  That factor, the potential for disruption of the industry, has apparently been omitted from the criteria to be applied to broadcasters.  The 801(b) criteria were applied to satellite radio and digital cable radio at the time the sound recording performance royalty was first adopted in the late 1990s as these services already existed, and it was felt that the criteria that were being used had to help make sure that these existing businesses were not severely affected by the implementation of the royalty.  Using that same logic, one would think that this factor that has apparently been omitted would be crucial in setting a fair and workable royalty for radio - an industry that has existed for far longer than satellite or cable radio, and which could most certainly be adversely affected by the new royalty.

The committee discussion repeatedly highlighted the Committee members desire to not imperil broadcasters by adopting a royalty - including statement that the CRB would be instructed to take into account, in setting royalties, the impact the royalties would have on minority and female radio operators, small broadcasters, and religious and community stations.  But it was not clear how this expression was to be conveyed to the Board.  The exact wording used is crucial as, from their analysis in the satellite radio decision, the CRB takes its direction from the precise words in the legislation, and applies the standards of 801(b) in a very narrow way.  In fact, the Board found that most of the 801(b) considerations were immaterial in reaching to their decision - only taking into account the potential impact on the stability of the industry as having any decisional impact.  Thus, the wording of the instructions to the Board will be crucial.

There is much to be learned from the precise wording of the Bill, and we will address those issues in coming days, and address in more depth some of the issues raised at the hearing.  But it is clear that we have not seen the last of this debate that will continue to evolve over this Congressional session.  But, from today's decision, it is clear that there is a real prospect that a performance royalty could become a reality, and radio broadcasters must consider that potential in developing their business plans for the future, and in their interactions with their elected representatives in the next weeks and months.

These are not statistics that can be easily gathered in-house by most webcasters.  Instead, most broadcasters or webcasters need to make sure they have a service that can provide this information.  Many content delivery networks now bundle this information with their services, and stand-alone services like that provided by Ando Media can track this information.  Some of these services will prepare all the reports of use that are required by SoundExchange and, for broadcasters, the statements of account that compute the number of performances that are necessary to determine the monthly fees that are now due from broadcasters - to be paid 45 days after the end of each month.  So broadcasters should make sure that they are using such a service to track their listening, so that they can be ready to pay their fees for streaming done in March by May 15. 

Lots of detailed information is required, and lots of statistics - so be sure that you are ready to comply. 

Last month, the House Judiciary Committee held a hearing on the broadcast performance royalty.    The hearing demonstrated the seriousness with which the House Committee viewed the prospect of a royalty being imposed on over-the-air broadcasters, with several Congressmen issuing warnings similar to that conveyed by Congressman Boucher, warning broadcaster representatives to sit down and work out a royalty with the recording industry, or Congress would impose one on the broadcasters which they might not like.  At the same time, broadcaster representatives emphasized an issue that, while important before, has become more crucial now -the economy and the financial health of the broadcast industry.  With broadcasters suffering from the poor economy, a royalty could be crippling to many.  But on the question of how much the royalty would be, RIAA President Mitch Bainwol echoed the line from the RIAA spokesperson in the Bloomberg article, saying that it would be "reasonable."  When asked what that meant, he said the it would be a bit more than is currently paid by broadcasters to ASCAP, BMI and SESAC (approximately 4-5% of revenues), saying that something in the area of 6-8% might be normal in these sorts of situations.

That range of numbers - the first numbers that I have heard from a representative of the recording industry - is somewhat surprising.  Two weeks ago, the recording industry was in the Court of Appeals arguing that a Copyright Royalty Board decision setting a royalty of 6-8% of revenues for satellite radio was too low.  In the Internet radio world, SoundExchange asked for more than 30% of gross revenues, and ended up with a per performance royalty that most webcasters have said works out to 75% or more of their revenues.  Yet the recording industry is saying that 6-8% would be reasonable?  It will be interesting to see if that number is repeated in other forums as evidence of their reasonableness, or if this was a one-time statement of this individual, not adopted by the industry as the benchmark for what they seek.

The back and forth at the hearing may provide some indication as to the next steps in the process of trying to impose these royalties.  There was significant discussion of an independent study to assess the impact any royalties would have on radio operators and musicians.  While no party publicly objected to a study, there has seemingly been no follow up to authorize that study since the hearing.  And, as the recording industry said that the study should not slow the adoption of the royalty, one questions why a study would be authorized if Congress was planning to go ahead and authorize a royalty before the results of the study were available.  Why let the facts get in the way of legislation? 

While Congress heading for their Spring recess, look for more action on the royalty in May after they have returned.

Note that this deal also imposes a new restriction on webcasters who agree to be bound by it.  If they ever accept a deal to sell to a company that would not qualify as a small webcaster under these terms, the entire benefit that they receive from being a small webcaster gets "recaptured" from the purchase price, i.e. they have to pay to SoundExchange all the money they would have owed were they subject to the CRB rates back to January 1 2006.  If they cannot compute that amount, they have to pay as if they had 5 million ATH for the entire period that they were operating pursuant to the small webcaster agreement.  

This deal may provide some opportunity for small webcasters to operate though, once they hit the revenue or ATH limits, the significant CRB royalties kick in.  So this is a deal that only makes sense for companies for a limited period of time and, if they outgrow it, they must be prepared to jump off a steep cliff as they fall into the CRB-imposed rates.  This deal also raises questions about fairness and equality as, if the performance royalty that  SoundExchange seeks to impose on broadcasters gets Congressional traction, small webcasters under this deal would be paying more than twenty times the amount that small broadcasters with a similar amount of revenue would pay.  Is this a fair deal?  Maybe not but, unless the appeals of the CRB decision are successful or unless some other deal comes along, for small webcasters, this may be the only way that some may be able to stay in business.  Small webcasters will need to surrender some rights to fight the royalties, and will have to live with the other provisions of the deal, and weigh those downsides against the opportunity to continue streaming in deciding whether to sign on to this deal by April 30.

In the webcasting case, there were also numerous arguments about the appropriateness of the decision on the rates.  The large webcasters argued that the Board used flawed reasoning to arrive at the rates that were determined, the Small Commercial webcasters contended that the Board should have adopted a percentage of revenue royalty rate as they would otherwise be put out of business, while noncommercial webcasters submitted that a flat fee was the appropriate royalty.  SoundExchange and the Department of Justice lawyers who represent the CRB of course disputed the contentions.  Broadcasters and NPR were absent from the appeal given their recent settlements with SoundExchange on Internet radio royalties (see our posts here and here). 

The satellite radio argument was in many ways the opposite of the Internet radio case, with SoundExchange contending that the rates that were arrived at by the Board should have been higher, while the Department of Justice defended the CRB decision, and Sirius XM arguing in support of the DoJ.   One of the interesting aspects of this case was that the argument did not focus on what a willing buyer and a willing seller would agree was the proper price of music (the argument in the Internet radio case), but instead whether the CRB adjusted that rate too greatly to protect the economic viability of the satellite radio industry.  As we've written before, the satellite radio case was judged by the 801(b) standard of the Copyright Act, which considers not only the perceived "value" of the music, but also the impact that any royalty would have on the service paying that royalty and on the public's interest in receiving the music.  Internet radio, in contrast, while paying for the same right to publicly perform the sound recording, is judged by a different standard - the willing buyer, willing seller standard that looks only at the economic value of the music.

The decision of the Court in these cases may be many months away.  Many interested parties may be looking at that decision - not only the parties to these cases, but also all others subject to the CRB's jurisdiction (and those who may be subject to it - like broadcasters should a performance royalty on over-the-air broadcasts be adopted).  Stay tuned....

Another issue that we did not address yesterday are the specific requirements imposed on digital music services that restrict their ability to pre-announce when a song is going to play, that prohibit them from making any efforts to encourage the recording of sound recordings, and require that they identify in text the song being played.  These requirements also mandate that services observe the "performance complement", i.e.the restrictions on playing more than a specified number of songs from the same CD or by the same artist within a given period of time (e.g. no more than 3 songs from the same CD in a 3 hour period, nor more than 2 in a row; no more than 4 songs by the same artist in a 3 hour period).  For details of these requirements, see our memo, here.  The question of whether or not to impose these requirements on broadcasters is where the House and Senate bills diverge - the Senate not requiring these efforts for broadcasters; the House proposing that they be observed.  Obviously, requiring some of these limitations could significantly change the way some broadcast stations are programmed.

Clearly, these bills are but the opening salvo in a battle that is certain to intensify.  Already, there is a bill pending in the House of Representatives, the Local Radio Freedom Act, with over 130 co-sponsors, that rejects the idea of a performance royalty for broadcasters given the potential for disruption to their public service programming.  Just as the FCC is suggesting the re-imposition of more stringent and detailed public interest requirements (see our summary here), broadcasters cannot afford to be hit by a new cost of doing business that could in theory take a large percentage of their gross revenue.  As we've written before, in other proceedings, SoundExchange has requested royalties of 20 or 30 per cent of gross revenues.  Imagine what a royalty even half that would do to broadcasters.  Certainly, it is not the modest royalty that would not impact broadcaster's public service, as initially suggested by the supporters of this royalty.  With Congress about to recess for its Christmas vacation, we will all have time to ponder these issues before they are considered again next year. 

Congressman Howard Berman chairs the subcommittee, and he opened the hearing with a summary of the issues - indicating that he expected that the committee would move legislation this year to impose a performance royalty on broadcasters.  Congressman Berman pointed to the lack of equality between performers and composers in getting royalties (when both contribute to the popularity of a song), the fact that most other Western nations collect royalties on the public performance of both the composition and the sound recording, and platform equality (the fact that satellite radio, digital cable radio and Internet radio all pay royalties while broadcasters do not), as justification for the imposition of a new royalty on broadcasters.  Congressman Berman indicated that the royalty that he was seeking to impose would cover only broadcasters - and not be extended to commercial establishments like bars, restaurants and retail stores, which also currently pay a performance royalty to the composers of music.  He also said that he wanted to insure that any royalty would not hurt the ability of radio stations (especially smaller stations) to cover the news, and he would consider the possibility of special provisions to protect smaller stations.  He also made clear that he did  not want any sound recording royalty to decrease the amount currently paid to composers.

These themes were presented throughout the hearing - echoed by most of the witnesses and most of the committee members.  Testifying for the royalty were performers Judy Collins and Sam Moore, and New Hampshire Congressman Paul Hodes - who also enjoyed a pre-Congressional career as a recording artist.  Marybeth Peters, Register of Copyrights, also testified in favor of a performance royalty to be imposed on broadcasters, echoing the themes of Congressman Berman, and restating a position that has long been taken by the Copyright Office.  The Broadcasters were represented by a sole witness - Charles Warfield, President of ICBC Broadcast Holdings, a broadcaster with stations in New York and several other radio markets.

The artists made the argument that the current system was unfair, as they made significant money for composers whose songs they made hits on the radio - but they received nothing from the radio play of these songs.  Of course, neither mentioned what they received from the increased sales of their recordings that resulted from the increased airplay of their music.  Both also argued that the need for the revenue from these royalties was acute, as artists are forced to keep touring for their entire lives to make money, and the royalties would provide a safety net for them.  While Mr. Warfield suggested that the record companies, who stand to profit the most from the royalty and who already profit the most from the sale of recorded music, should better compensate artists so that they did not find themselves in these dire financial positions, his arguments seemed to fall largely on deaf ears.

On the issue of international royalties, the artists contended that foreign broadcasters, who do pay royalties on the public performance of recorded music, do not pay American artists for the performance of their music on these foreign stations as there is no reciprocal right in the US to pay foreign artist for US airplay.  The artists envision a pool of money waiting in the hands of foreign performing rights organizations that should start flowing to US artists.  No distinction was made between the US and foreign markets, nor was there discussion of how the royalty in foreign markets serves as a subsidy for local talent to develop in these smaller music markets in various international jurisdictions - to avoid having American music become the standard worldwide. 

The disparity between digital media and broadcasters was also explored in depth.  Many of the witnesses and the committee members made the point that it was unfair that the digital competition to broadcasters paid royalties, but broadcasters themselves did not.  Some even suggested that, given this competition, the broadcasters no longer provided the amount of promotional benefit they once did (Ms. Peters going so far as to suggest that they provided no promotional benefit that would outweigh the need for a royalty).  In response, Mr. Warfield pointed to the continuing vast reach of radio - reaching over 230,000,000 US residents each week, and the fact that record companies still constantly hound broadcasters seeking the airplay of recorded music - belying the claims that radio performance hurts record sales.  By the end of the hearing, even Mr. Berman acknowledged that radio does provide promotional exposure to artists, but he still questioned whether that alone justified the exemption from sound recording royalties.  The unique obligations of broadcasters to provide public interest programming was also cited as a reason for the different treatment of broadcast and digital services.

In fact, the concern that the imposition of a royalty could harm the local news and information services provided by local radio stations was the one ray of hope for the broadcaster in the hearing.  Virtually all of the committee members were concerned about the possibility that small stations would be hurt by royalty increases.  Especially at small stations, there was a recognition that there is a limited pool of money that is available and, if an additional expense is added, then broadcasters have to find the money some place, and cutting service to the community is not a desired result.  Several committee members suggested that broadcasters could just raise their advertising rates to handle the increased fees.  That, to this observer, seemed a bit naive - if broadcasters could simply raise their rates to bring in more revenue - wouldn't they have already done that?  Most broadcasters are businesses out to maximize their profits and - if they could get greater profits from increased advertising rates - they would have already raised those rates.  The reality is that broadcasters compete for advertising dollars in an ever-expanding media pool.  By raising rates, other forms of advertising - print, direct mail, billboards, TV, digital media and others - become more attractive to the advertiser.  If a broadcaster has a new significant fee to pay, with fixed revenue, the money to pay the new cost has to come from cutting funds used for other purposes.

From recent experience of smaller broadcasters complaining about the relatively modest increases in the past few years in royalties paid to BMI and ASCAP, one can only wonder how these broadcasters could deal with an entirely new royalty.  While Ms. Peters suggested that the "willing buyer, willing seller" standard of Section 114 of the Copyright Act would allow for the distinction between rates paid by large and small broadcasters, small webcasters can testify that this standard doesn't always produce the desired result, as the recent Copyright Royalty Board decision on Internet radio  royalties shows (where the Board found that public interest concerns - like the preservation of diverse sources of media outlets, did not factor into the economic analysis of a willing buyer, willing seller standard). 

The Internet radio experience, where SoundExchange requested royalties of 30% of revenues - 6 times more than the royalties paid for the rights to play the composition, should frighten all broadcasters.  And, while the current proposal is for royalties only on broadcasters, Ms. Peters made clear that she saw no theoretical reason why that royalty should not also extend to other performances of music - like in retail stores.  With hundreds of millions of dollars or more at stake in yearly broadcast royalties, and potentially more from retail outlets, this is sure to be a major battle in coming months.  The proponents of the new royalty have made a facially attractive case for imposing this new obligation on broadcasters.  Broadcasters must pay attention to this issue now , and explain to their Congressional representatives the impact that such a royalty would have, as this is currently the single most direct threat to their bottom line and, if the tenor of the conversation at the hearing is any indication, the threat is real.

SoundExchange will have the opportunity to respond to the Motion, and the Court will then consider its merits. Watch to see a decision on the Motion by July 15.

In addition to the actions in Court, SoundExchange publicized an offer of settlement made to noncommercial webcasters, an offer which was similar to that made to small webcasters (summarized here) - extend the provisions of the Small Webcaster Settlement Act until 2010, with a few tweaks.  The SWSA for noncommercial webcasters required fees of between $250 and $500 per year for each noncommercial webcaster, as long as the webcaster had less than 146,000 aggregate monthly tuning hours of listening.  If the webcaster exceeded that listening, it would pay at the rate of .251 cents ($0.00251) per aggregate tuning hour over the limit.  The SoundExchange offer suggested a few tweaks, including requiring that noncommercial webcasters provide records of use of sound recordings - something not required under the SWSA.  The current requirements for Internet radio recordkeeping are summarized here.

The offer was made to a number of noncommercial webcasting groups, so there will need to be negotiations before any deal is final.  And as NPR had its own deal arrived at outside of the SWSA framework (a deal that is not public), they may well have concerns with this proposal which requires the same sort of recordkeeping about which its has expressed concerns in the Motion for Stay.

With all of these developments, the situation remains fluid, and changing on a daily basis.  Watch for further actions as the July 15 deadline approaches.