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After an exhaustive analysis of the process that Launchcast goes through to create a stream for a listener, the Court focused on several facts.  First, the Court found that much of the music in any stream delivered by Launchcast was not music selected by the user in their list of preferred artists and songs, but was instead picked by Launchcast from its vast library of songs using a number of factors. The Court also made clear that listeners had no ability to game the system to make it play more favorites of the listener.  While a listener could skip some songs, and pause a song in the middle of its play, it could not go backwards to replay songs or otherwise make particular songs play more frequently. In short, the Court found that the system was set up so that it would not substitute for the purchase of music as listeners could not get songs or even particular artists when they wanted. The Court used the term “predictability” – and found that the user had no predictability in determining whether or when any specific song would play during any listening session, and thus the service was not a substitute for a purchase of a song.

This was important in the Court’s analysis. First, the Court determined that the phrase in the statute defining an interactive stream to be “a transmission specially created for the recipient” was not a model of clarity, and was capable of many interpretations. While the record companies argued that any stream that was created specifically for a user based on the user’s preferences was, by definition, “specially created for the recipient”, the Court found that such a simplistic view could not be sustained.  Instead, the language of the statute has to be interpreted in light of the intent of Congress in the adoption of the statute. The Court went through a thorough analysis of the history of the sound recording royalty and how the DMCA provision at issue here came to be in the 1998 Act. The Court noted that the sound recording performance right was first adopted in the US in 1995 and was intended to be a narrow right, initially being applied only to subscription services. After its adoption, upon fears of piracy on the Internet, the right was expanded three years later to include noninteractive streams. In enacting the broader performance royalty, the DMCA broadened the definition of an interactive stream to include the phrase at issue here, focusing primarily on the issue of digital piracy and the fear that a predictable stream of music would allow digital copying. The Court cites specific language of the House of Representatives report on the DMCA where the House stated that you have an interactive stream “if a transmission recipient is permitted to select particular sound recordings in a prerecorded or predetermined program.”

After looking at the history and the way the service functioned, the Court focused on the language of the statute that said that there had to be a “transmission of a program” that was specially created for the user before the program was deemed to be interactive. The definition of a "transmission of a program" looked at the transmission of a program as a whole – to find that there was an interactive transmission of a program one has to look at the entire transmission to see if the entire transmission was created specially for the user. The Court determined that, given the way the Launchcast system was set up, the user was really able to specifically influence only a small number of songs that were played in his or her stream. The vast majority of the songs were selected by Launchcast and would be of the same genre as the listener's preferences, but what the songs would be was not at all predictable. Finding that the user thus had no predictability in the entirety of the program that was transmitted, the Court found that the streams would not significantly substitute for the purchase of specific music, and thus should not be considered interactive in the meaning that Congress intended.

The decision is very interesting in the depth of its specific analysis of the methodology for the formation of a playlist by Launchcast, and in its examples of music references sprinkled throughout (references to U2's Joshua Tree CD, to Gordon Lightfoot and the Beatles, and to “‘special requests’ [on AM radio which] represented love-struck adolescents’ attempts to communicate their feelings to that ‘special friend.’” The judges also candidly acknowledge that they are “appointed for life” and thus have varying degrees of familiarity with the technology which they are discussing.

What is the impact of the case? It undoubtedly helps solidify the position long taken by webcasters that some degree of user influence is permissible by a service that relies on the statutory license for noninteractive webcasting.  However, the decision was very fact dependent, with few clear boundaries as to what percentage of a stream can be user influenced and what degree that influence can be exercised to remain within the statutory license. Moreover, this is the decision of a single Court of Appeals – albeit an important one sitting in New York, covering the Northeast, and very active on copyright issues. But other cases in other circuits would not be bound by this decision, though they will no doubt find it to be instructive.  But, with other facts, any court might not reach the same decision. Thus, the question of which streams are interactive requiring that a service get a negotiated license from each copyright holder to perform the sound recordings, and which are noninteractive and can be streamed simply by paying SoundExchange the statutory royalty (and I say “simply” with a grain of salt given the multiplicity of options for paying the statutory royalty), will no doubt not be put to rest by this one decision. 

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. 

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. 

One reason for the confusion about SESAC may be that the other performing rights organizations representing composers, ASCAP and BMI, cover the costs of streaming a broadcast station on the Internet as part of the same process that broadcast stations use to pay their over-the-air royalties.  Thus, broadcasters do not see a separate invoice for their streaming royalties due to these organizations.  SESAC, on the other hand, has determined that streaming (and HD radio channels) are potentially independent revenue sources, so they charge a separate royalty for the music used by broadcasters providing these services.  However, it should be noted that both the ASCAP and BMI agreements with broadcasters are up for renewal this year, so these issues could conceivably be up for consideration in the negotiations about the new royalties to be paid by broadcasters in the future.

But for now, broadcasters who are streaming their signals on the Internet should understand that the rights covered by ASCAP, BMI and SESAC are different from those covered by the SoundExchange royalty, and thus there are obligations to all of these organizations for music royalties.  Thus, don't ignore that letter from SESAC asking for Internet radio royalties.

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. 

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....

These are the basic provisions of the bill.  There are lots of issues and ramifications that we have written about before, and which we will cover in a subsequent post.  But, for now, radio broadcasters should know that the challenge from the recording industry has now been issued, and there will be a major fight ahead that could very well dictate the future operations of many broadcast radio stations.

The Petitions to Participate can be filed either by individual parties interested in participating in the case, or jointly by parties with common interests.  Section 351.1 of the CRB rules require specific contact information for the participant, and a statement of the interest of the party filing the request in the proceeding.  A filing fee of $150 per petition is also required.  In the next month, there may be the formation of various interest groups ready to participate in this next proceeding.  These proceedings are long and expensive, so the formation of groups to jointly participate are often the only way for Internet music services can afford to participate in these proceedings. 

At the same time, the CRB noticed the start of a proceeding for the royalty for "new subscription services."  These services include subscription digital music services not provided over the Internet, and not in existence in 1998 when the Digital Millennium Copyright Act was adopted.  Services that were in existence (like the satellite radio services that were authorized by the FCC when the DMCA was adopted and certain cable music services) are referred to as the "pre-existing subscription services" and are not governed by the "willing buyer, willing seller" standard that govern webcasting royalties.  These services, unlike Internet radio, cannot measure exact listenership.  Services that came later, such as music services provided by XM and Sirius to the satellite television systems, are the "new subscription services."  In 2007, they negotiated a 15% royalty to cover the period through 2010. If they cannot reach an agreement on a new rate, they, too, would have to participate in a new proceeding to determine the royalties that they will pay for 2011-2015. The filing date for these services to partipate in the proceeding to set rates is also February 4.

So the fun starts again - get ready to litigate.

The action also seems to emphasize the need for a separate deal for small Internet radio companies.  While the operation of Launchcast and AOL by CBS will probably be good news for enhancing the perception of Internet radio as a viable advertising medium as a traditional broadcaster with significant advertising relationships has decided to invest in the medium (see the analysis here), it does further demonstrate that the high royalties, which preclude the successful operation of small independent webcasters, undercuts the very purpose of the statutory license for the use of music by Internet radio stations.  The statutory license administered by the Copyright Royalty Board was established to minimize transactional costs and make it easier for small companies to pay one fee to one entity (now SoundExchange) and have access to all the music that is publicly available.  If that royalty under the statutory license did not exist, each service would have to individually negotiate with each individual copyright holder for the rights to use the sound recordings featured in their transmissions.  It was felt that such negotiations would be impossible for smaller entities, both because they lacked the bargaining power to negotiate with the large record companies, and because they lacked the resources to locate and negotiate with all of the smaller labels and individual copyright holders.  Yet, by setting rates so high that only very well established media companies like CBS can survive in the industry, the goals of the DMCA have been undercut. 

Thus, to preserve the promise of Internet radio, that it will allow the flowering of diverse music sources that will play the great diversity of music that exists in this country, a royalty arrangement that permits such independent services to operate and make a profit (as this transaction demonstrates that even the largest Internet companies will not operate Internet radio stations without a profit) must be adopted.  Let's hope that, before the February 15 deadline of the Webcasters Settlement Act, such a deal will be adopted and the promise of the statutory royalty preserved. 

If and when the settlement is reached, the next major question will be how the Internet radio service will be monetized.  A recent New York Times article asks that question, interviewing a number of operators about the difficulties in attracting advertisers to the service.  A new blog, Audio4cast, covering the business side of the Internet radio and digital music industry, looks at the question of how the industry can benefit from the current economic crisis.  The New York Post has run an article highlighting the fact that, more and more, Internet-only webcasters are cutting back on their services due to the high royalties, while broadcasters are able to grow their on-line listeners by subsidization from their over-the-air business.  Recognizing that the industry still has not figured out how to make money from their operations is an important issue in any discussion of royalties, as royalties have to be realistic in light of the real-world business conditions for a vital Internet radio business to exist.  We will all have to see if any settlements which do result from the Webcaster Settlement Act recognize these realities and set rates that allow the Internet radio industry to survive and thrive.

In 2002, faced with a similar issue when the RIAA and a group of small webcasters with which I worked tried to reach a deal, Congress stepped in and passed the Small Webcaster Settlement Act.  SWSA allowed a settlement to bypass what was then the Copyright Arbitration Royalty Panel (the "CARP") and go into effect simply upon submission of the settlement to the Library of Congress by a set deadline, and the Copyright Office publishing it in the Federal Register.  The Webcasting Settlement Act adopts that same system. If any group reaches a settlement with SoundExchange by February 15, 2009, they need only submit it to the CRB, which will then publish it in the Federal Register, and it will become effective and binding on all copyright holders as part of the statutory royalty. Unlike pre-hearing settlements, no notice and public comment is necessary on this settlement. 

The bill allows for settlements to be entered into for an 11 year period, starting with the end of 2005 when the last set of rates expired.  This would allow the settlement to displace the CRB decision from last year, and eliminate the need for a CRB proceeding for the next 5 years (the current CRB decision is to run through the end of 2010).

But such a settlement must be reached by February 15 ( the date was December 15 in the original draft of the bill, but it seems to have been changed in later versions).  Why wouldn't the period be unlimited?  Already, there was some unease with the adoption of this bill by broadcasters - as they have argued that they have not been involved in any settlement discussions with SoundExchange in a long period of time.  While that seems to have dissipated, perhaps others would object to an unlimited ability of copyright holders and webcasters to reach a deal without any opportunity to comment on a deal.   Yet why not?  If a group of webcasters and SoundExchange want to enter into a deal that would be available to any similarly situated webcaster, why do you need notice and comment?  If other webcasters don't like the deal, they can call for a CRB proceeding at the next opportunity to determine a rate for that objecting group.

In any event, the Webcaster Settlement Act makes it easy for settlements to go into effect - now we need to see if the hard part - actually entering into those settlements - will occur.

The disconnect over Internet radio was evident not only in the discussions of the revenues, but in the discussion of the meaning of Internet radio to artists.  Simpson started his testimony talking about three heirs of deceased musicians who were thrilled by their SoundExchange royalty checks as the musician they represented had not made any money during their lifetimes from their recording and touring careers.  He used this introduction to launch into a discussion of the need for this compensation to reward artists for their  performances as the world moves from a culture of possessing music to one where music is not owned but merely listened to through various platforms.  As musicians will no longer be compensated through the sale of the their records, they need to make up the revenue from lost sales through performance licensees such as those reflected by the CRB-imposed royalties.  Musician John Ondrasik of Five for Fighting echoed Simpson's points, contending that compensation through royalties puts food on the table of musicians, and was necessary to avoid discouraging new artists, thereby hurting the country's economic and cultural life.  Ondrasik stated that he had received about $9,000 in royalties from SoundExchange the prior year which, while it might not seem like much, had made a difference.

In counterpoint to these witnesses, musician Matt Nathanson stated that, while he does not mind getting money from royalties, the promotional effects of Internet radio was so great that he would prefer to give up some royalties to insure that Internet radio can become profitable and grow.  He stated that Internet digital delivery of music had changed the economics of the music industry, leveling the playing field for artists.  No longer are musicians required to be dependent on the record companies for their livelihoods.  Nathanson made the following points:

• Blogs, email, viral marketing, and on-line listening have allowed musicians to keep in touch with their fans, without the need for a record label promotions department
• The digital delivery of music ends the fight for shelf space in record stores, allows musicians to audition their music directly to the consumer (on their websites, MySpace pages or through Internet radio) so that they can build an audience on-line
• In this new system, promotion is the key way to make an audience to grow, and Internet radio is an important component of that promotion given its diverse programming
• Digital delivery makes sales and promotions opportunities more equal - by getting rid of scarcity you don't give limited power to a handful of broadcasters, nor are there necessarily a handful of major artists who get all the promotion through airplay
• The new system favors new artists and, if the growth of Internet radio is limited because of royalties, it will most hurt the small and developing artists who are promoted through the multiple channels of Internet radio

Kennedy of Pandora made the point that Internet radio democratizes radio, suggesting that if lower royalties are not agreed to, only broadcasters who can subsidize their operations through their broadcast operations would be left on the Internet.  Diversity would be lost.  Nathanson stated that such consolidation would be a "huge step back" for artists.  Senators on the panel remarked that Nathanson's view was a different perspective that they had not heard before (they obviously don't read this blog, as we remarked on some of these same points in posts including one here - mentioning that points made by one of SoundExchange's own witnesses at the hearings before the CRB talked about how new artists would probably benefit from promotion when more established artists might be more hurt by any substitutional effects of Internet radio).  After his testimony, there was much discussion of the real debate being between the new and old ways of doing things. 

In response, Simson of SoundExchange, trying to refute Nathanson's position, said that the benefits that he suggests were not available to the estates of artists who had died.  But Nathanson, in perhaps the most telling line of the hearing, said that the it wasn't Internet radio that put the artists in that position - it was the record companies and their contracts with the artists.  Nathanson concluded that Simson was proposing to right the wrongs of the past by crushing a new industry that had nothing to do with creating those wrongs in the first place.

Obviously, these differing perspectives - even among artists themselves - do not make settlement easy.  And there were other issues that were discussed at the hearing - stream-ripping, the broadcast performance royalty and the fear of "subsidizing" technologies that will be discussed in the third part of summary, to be posted in a few days. 

The second bill that was being discussed was that of Senators Brownback and Wyden (who were both at the hearing, the former asking questions and the later as a witness) - the Internet Radio Equality Act (about which we have written here and here) which would lower Internet radio royalties to 7.5% of revenue and adopt the 801b standard for future proceedings.  As the bills propose different standards for music royalties, one area of disagreement was immediately evident.  Yet, as Senator Feinstein pushed the parties to find a compromise, a glimmer of hope actually appeared.  

The record company representative on the panel, Jeffery Harleston of Geffen Records, held firm for the "fair market value standard," arguing that if artists and labels are forced to license their product through a compulsory license, it is only "fair" that they receive the value that their work would have brought had they been able to license it in the marketplace - so a "fair market value" rate was appropriate to provide that compensation.  While the issue was not raised in the hearing, one wonders why, if the record companies believe that this standard is the only "fair" one when a compulsory license is involved, they don't advocate a change in Section 115 of the Act - the compulsory license that record companies rely on to get rights to reproduce the composition of a song when making a recording of that song.  Record companies and artists do not need to negotiate with music publishers for the rights to use a composition, but instead they can get that right through a compulsory license - and the royalty to be paid by the record companies under that license is set using the 801b standard.  So if record companies and artists use 801b when it benefits them, shouldn't the same standard be used when their product is the one subject to the license?

On the other hand, Joe Kennedy of digital music service Pandora, testified that the 801b standard, as used for all other royalties under the Copyright Act, should also be applied to the performance royalty in a sound recording.  Kennedy argued that, given the difficulty of the application of the "willing buyer, willing seller" standard to Internet radio (stating that the royalty currently takes 75% of Pandora's gross revenues and, if not changed, will definitely force the company out of business as the royalty increases over the next two years), it seemed difficult to justify the adoption of yet another new standard - "fair market value" - which has never been used in the past.  What Kennedy did not specifically state, but which seems evident from the fact that the recording industry is supporting this new standard, is that this new standard is likely to be interpreted much like the "willing buyer, willing seller" standard which already purports to assess the economic value of  music in an arms-length negotiation in an open marketplace.  That would seemingly be the same thing as "fair market value" of the music.

One point that was lost in the discussion was the meaning of the 801b standard, with some of the Senators in attendance admitting that they did not understand that standard and how it was applied.  What is the 801b standard?  The standard looks at a number of factors in assessing what the proper royalty should be.  Those factors are:

(A) To maximize the availability of creative works to the public.

(B) To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions.

(C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication.

(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.

As is evident, those factors not only look at the economic value of the use of the work, but also assess the public interest in the distribution of artistic and literary works and the impact that the royalty will have on the industry that has to pay it.  Just as the impact of the Section 115 royalty would have on the record companies must be assessed in looking at that royalty, the impact on the digital music businesses would have to be assessed in determining a rate decided under this standard.  In using the 801b factors in assessing the satellite radio royalties, for instance, the CRB reduced a willing buyer willing seller determination of 14% to a rate climbing from 6% to 8% of revenues over a 5 year period, justifying the reduction on the impact that the royalty would have on the business of the satellite radio companies if it were not so adjusted (see our previous post for more details). 

So - where was that glimmer of hope?  As Senator Feinstein pushed the parties on the panel to find a compromise standard so that the legislation could be moved this session, John Simson, the President of SoundExchange (the collective which collects the royalties and distributes them to artists and labels), actually broke ranks and stated that he did not rule out the use of the 801b standard.  However, he said that he thought that the standard would need to be tweaked to reflect current marketplace realities.  His specific example of where that tweaking could occur was in assessing the "substitution" issue - whether the use of the copyrighted work by the digital service would be a substitute for its purchase, thereby diminishing the income that the artist might receive from the use of the sound recording.  Of course, it would seem that the existing factors already take that into account in assessing the "risks" to various parties under consideration (C) above, the impact on the structure of the businesses that are involved in the proceeding under consideration (D), and the fair return under clause (B).

The purpose of the Copyright laws, under the Constitution, is "To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries."  Many commentators (see this article, for instance) state that the meaning of "science" at the time of the Constitution was much broader than it is today meaning, more generally, "knowledge and learning."  While creators are given limited exclusive rights, those rights are for purposes of promoting general knowledge within the community - not exclusively for the protection of the copyright holders.  If this interpretation is the correct one, then it seems like the Section 801b factors are exactly what is meant by the purpose of Copyright - insuring a fair return, but also allowing for the reasonable distribution of the copyrighted material so as to benefit the knowledge of the general population.  This, of course, leads into the discussion of the differing views of the purpose of the statute and of the state of the industry - issues both discussed in detail at the hearing - and to be covered in subsequent posts on this blog.

As you may remember, in the CRB proceeding itself, SoundExchange had proposed that there actually be a higher fee for performances that take place over wireless networks, alleging that these performances were somehow more valuable.  The Board rejected that argument, finding that insufficient evidence had been provided to reach that conclusion.  But, with the increase in wireless access to Internet radio that we are bound to see through the iPhone and competing devices, that argument will no doubt be raised again in the CRB proceeding to set the rates for 2011-2015, which will actually begin next year.  When one thinks about the nature of the wireless experience, one must wonder whether that experience is in fact more valuable than the experience of listening to Internet radio when sitting in front of your computer.  Certainly, the wireless service reaches people where they have not been reached before, making Internet radio more of a competitor to traditional radio, and more like traditional radio.  But one of the arguments that Internet radio might actually be more valuable than traditional radio - its interactivity - actually suffers from mobility.  When you are in front of a computer and an ad comes over the Internet radio stream, you can immediately act on that ad, especially when it's linked to a banner on the website.  When you are in a mobile environment, driving or jogging or otherwise on the move, it seems to me that you are less likely to react to any commercial message that you may receive.  Thus, the value of the advertising is more for purposes of reinforcing brand recollection, like over-the-air radio, rather than for driving immediate action, like on-line advertising. 

Certainly, this issue will be debated in the future.  But, once again, it raises the question of whether music has an independent value that can be quantified on a per song, per listener basis, or if the value of music depends more on the situation in which it is experienced and whether compensation for the use of that music is not more appropriately tied to a percentage of revenue of the user, as we've discussed in previous posts.  In a percentage of revenue scheme, the music user benefits when the service does well, and does not receive as much when the service is not a success.  But, as there is no penalty for the use of more music, more services are attempted, so more successful applications are likely to be discovered, benefiting both the creator and the user of the music.  When there is a per use fee, there is a cost for using each and every piece of music, seemingly discouraging new services and new innovations.  These are no doubt issues that will be debated endlessly into the future, but something to consider as Internet radio becomes untethered from the computer. 

One question that, to me, looms large is whether most artists would in fact be better off with a performance royalty. In many cases, the very artists who are testifying in support of the royalties would receive minimal revenue from the royalty, and that royalty may well end up hurting many of these same acts. How many times are Nitty Gritty Dirt Band songs played on the radio? When was the last time that you heard “These Boots Are Made for Walking” on the radio?  The imposition of a performance royalty (or performance tax, as the NAB has called it) could encourage stations with niche music formats to abandon those formats. Already stations are abandoning 60s and even 70s based oldies formats (less airplay for Nancy Sinatra), and if they have to pay more for the use of those recordings, will these stations keep playing them? Similarly, there are few bluegrass stations, and the likelihood of more developing will not be helped by the introduction of a performance royalty. If a station could make roughly equivalent amounts from airing news-talk programming and not paying a royalty or some niche format where a royalty would be due, which choice do you think a station will make? Instead, it seems that stations will play the music that their audience may demand – the most popular and safest music - or abandon or severely limit the playing of music to avoid the royalty.

While the proponents of the royalty have downplayed the promotional benefits of radio airplay, even arguing that airplay harms artists as listeners substitute radio listening for the need to buy a CD or download, even the music industry’s own expert testified before the Copyright Royalty Board that the net promotional value was probably greatest for up and coming bands, while that negative impact might only occur for well-known acts who have other avenues through which to promote their music. Thus, the imposition of the royalty would seemingly make the rich get richer, while limiting the avenues for promotion for lesser known acts.

SoundExchange, which collects the digital royalties, has itself suggested in a recent press release that the fees that the royalties they seek, like those imposed on Internet Radio, are reasonable. SoundExchange points to predictions as to the revenue that Internet radio will received by 2020 and claims that more and more services are signing up to provide Internet radio service under the royalties set by the CRB.. They make much of the “AOL-CBS partnership”, when instead what appears to have happened is that one of the biggest Internet radio companies has essentially left the business, surrendering their service to CBS. As we just wrote, MSN has also abandoned the business, Yahoo has been decreasing their listening hours, and Pandora has been repeatedly been stating that they cannot operate under the current royalties. The Internet radio-like services that have been getting the most recent promotion and press coverage – services like Last.FM and Imeem, have negotiated their own private deals as they provide interactive services not subject to the royalty. If not for small webcasters paying under the special terms for those stations, or for larger broadcasters who may have different on-line economics (i.e. they essentially have no programming costs as they repurpose their existing content on the web, though even there most small broadcasters are petrified of developing a large on-line audience that could bankrupt them), the Internet radio industry would be crashing.

The recent discussion has also turned to parity in royalties. The record labels argue that broadcasters don’t pay a royalty as other digital services do because of an historical "loophole" in the Copyright Act. But this argument could just as easily be reversed.   The record companies only get the royalty because of the provisions of the Copyright Act created only in the late 1990s, for the first time creating a public performance right in a sound recording. If the RIAA/SoundExchange position were to be accepted, it would seem clear that the same “loophole” would also apply to other public performances of sound recordings – like the playing of records in bars and restaurants, stores, stadiums, and in other public places. While the current bill does not provide for such an extension, isn’t that the logical extension? The performance royalty paid to composers is paid by these venues so, using the Music First logic that there should be "parity", wouldn’t these venues be next?

The argument of parity simply does not ring true  As we have written, here, the SoundExchange proposal embodied in the initial bill for small broadcasters is a flat fee of $5000 per year if the broadcaster has less than $1.25 million in revenue. Yet under SoundExchange’s special deal for small webcasters, a webcaster making $1.25 million would be paying over $150,000 in royalties. Where is the fairness and parity there? Is SoundExchange wiling to support a similar limitation in the royalties paid by small webcasters?  Similarly, if SoundExchange is seeking the same royalty as has been determined “fair” by earlier CRB proceedings, the royalty on broadcasters could exceed 20% of their gross revenues for a music station (see our computations here). In this day of declining radio profits, such a royalty would be crushing for most stations, perhaps ensuring the demise of over-the-air broadcasting (as reportedly predicted by Steve Ballmer of Microsoft), making issues of the digital divide incredibly acute. The news, information and entertainment provided by radio broadcaster would disappear, and music entertainment would be available only to those who have access to wireless high-speed Internet connections. That will not be the same as the ubiquitous service offered by free over the air radio currently.

While the subcommittee reportedly wanted to make some changes in the bill before it advances to the full Committee, these fundamental issues need to be considered. Essentially, while it is very easy to say that musicians should be compensated for the use of their work, the unintended consequences of the royalty are great. Congress and even the artists and labels need to carefully consider these issues before moving on the enactment of any performance royalty.

In an order released last week, the Court permitted Royalty Logic to brief the issue, and gave the DOJ the right to respond.  However, the Court specifically did not make any determination as to whether it will consider the issue, as both the DOJ and SoundExchange have opposed the Royalty Logic motion as having been filed too late to be considered in this proceeding.

Obviously, if the Court does decide to hear the issue, and does decide that the CRB was not properly appointed, the results may fundamentally change the argument  - potentially requiring the re-hearing of the recently decided CRB cases or a legislative solution to provide a new process or even to set the rates.  And if Congress gets involved, who knows what else could happen?

In fact, recently, in connection with an unrelated bill in Congress on a matter having nothing to do with music royalties, The Internet Radio Equality Act, about which we wrote here, resurfaced as a potential rider. Eventually, as it threatened to derail the bill, the rider was withdrawn.  The new CRB royalties have now been effective for almost eleven months (see our reminder, here). While the recent action on IREA was predictably been greeted with skepticism by SoundExchange, it should not come as a shock that the bill is being revived as there have been no announced mutually-negotiated settlements of the royalty dispute over the past year, even though there have been discussions, and even though most Internet radio companies have claimed that there businesses are in jeopardy should these royalties continue to be in effect, and as they continue to substantially increase over the next two years. 

Unless there is legislative intervention, the appeal will go on.  Not only will the briefs be filed on the question of the CRB's status, but SoundExchange will also be filing a brief in support of the CRB decision later this month.  The webcasters will respond in July, and oral arguments will be held at a date to be set later in the year.  A decision is probably on tap for 2009 - just in time for the commencement of the next proceeding for royalties for 2011-2015.

Also, this rate covers only these three Internet services, and only covers ASCAP.  Of course, the decision may be instructive as to the rates that would apply to other similar companies (and potentially for BMI rates in the future, as they also are subject to a consent decree - though SESAC is not).  However, most Internet companies, especially smaller companies that cannot afford expensive rate court litigation, are paying royalties under the "experimental licenses" that ASCAP posted on its website (and which have rates somewhat lower than the decision here for non-interactive services, and somewhat higher for interactive services), and should not, for the time-being, be affected by this decision. 

While this decision involves a different right than does the CRB decision for somewhat different types of services, the rights are similar, yet the approaches taken by the Court here and the CRB in the setting the sound recording royalty were quite different.  For instance, one of the criticisms of the CRB decision, especially by the small webcasters that I represented in the proceeding, was that the CRB refused to adopt a percentage of revenue royalty, finding it difficult to compute what revenue was to be included as being subject to the royalty and because it did not represent a payment for all of the music used.  The CRB found that a per performance (e.g. per song, per listener) rate was more appropriate as it insured a fair return to the copyright holder in the sound recording even by a service that did not maximize its revenue.  Under a percentage of revenue royalty, the CRB determined, there might be minimal payments for the use of music.  Here, however, the Court found almost exactly the opposite,  concluding that a percentage of revenue rate appropriate for the following reasons:

• It was economically efficient, as it did not provide any disincentive to a service not to use music as might be the case for a royalty that demanded a per performance fee
• It adapts to changing conditions, as it will collect more when a service makes more revenue and less when a service has hard economic times, thus taking into account changing economic and competitive conditions, variations in financial fortunes and changes in technology and other unforeseen changes in the circumstances of the services that may occur over time
• Revenues were simple to verify as information about total revenues were routinely collected by a service
• That these royalties provided the kinds of efficiencies expected for a blanket license - easy administration, that covered all rights to all the music represented by ASCAP, and gave the service certainty as to its music costs so that it did not need to take royalties into account in deciding how to introduce any new aspect of its service

By contract, the new CRB rates require many services to pay based on performances, a metric that many services don't currently track, and which many may not be able to accurately count (see our post here).  The CRB royalties also are such that they the webcaster must carefully consider them in making any decision as to whether or not to launch any new service as, if that service attracts listeners but not revenue, the service could owe significant fees without having earned the revenue to pay for the music use.  The per performance royalty does not adjust to changing economic conditions, either, as it remains at the level set by the CRB, regardless of the ability of the service to monetize the use of music or changing economic and competitive conditions.  In effect, the per performance royalty does not encourage the use of music, as evidenced by many of the larger services that are reportedly limiting their listening or (as in the case of AOL), getting out of the Internet radio industry entirely (see our post here).

The Court in the ASCAP case stated that deciding the marketplace value of music under a blanket license like the one at issue here is a difficult process, as there really are few if any real examples of what a willing buyer and willing seller would agree to.  The existence of the blanket license and the threat of a rate court proceeding itself distorts the market, and contributes to results of any voluntary deal that is negotiated for similar rights.  And the consideration of benchmark royalties negotiated for other services (a number of which were considered here) all have some differences with the situation at hand, meaning that some sort of inexact and hypothetical adjustment must be done to use the benchmark to determine the rate applicable in the pending case.  Regardless of whether or not one thinks that the decision reached in this case was the correct one, the considerations that went into reaching the rate are ones that might be instructive for future cases involving the CRB's decision on the sound recording royalty. 

The complaint of the sound recording copyright holders (primarily the record companies), is that services like Last.FM use sound recordings as the building blocks of their business, and can amass large audiences based on the use of the sound recordings, yet the record companies don't get a share of the "windfall" that may result when these businesses are sold.  Of course, this argument assumes that the value of these services is primarily in their use of the music.  Under their theory, it would seem that all a service needs to do is start playing music, and audiences (and eventually riches) will result.  Instead, most digital media companies will argue that there is far more to creating a successful Internet service than simply starting to play music online.  If you just had to provide the music and watch the audiences roll in, Internet radio would be a huge business that anyone could enter - and the litany of failed or struggling Internet radio and digital music delivery companies should not exist.  To me, it seems that a service, to be successful, must offer something more than just music, whether it is the community aspects of a Last.Fm or iMeem, or the sophisticated music selection software provided by a service like Pandora.  These sorts of services take much investment and much time to develop audiences, and even longer to develop significant revenue.   And, while these companies may eventually be sold to a company that may better develop and monetize their audience, as happened with Last.FM, the record companies will receive significant royalty revenue if the new owners are successful in the development of the potential of the service.  If they are not successful, one wonder whether there really was any significant value received from the use of the music, and if there was no real value, should there be significant royalties?

The complexity of questions such as these, and the differing perception of the value of music (whether it has intrinsic value on a per performance basis, or whether it really only has value to the extent that it leads to the development of revenue) lead to the debates over the appropriate royalties that the services should pay - such as the debate over the Internet radio royalties that has been going on for the last year.  Given the inherently conflicting views of the value of the music, and the contribution of the other elements of a service, the arguments are difficult to resolve, as there may be no common ground on which agreement can be reached.  Nevertheless, as the industry matures, and there is more and more evidence as to how these services can monetize their use of music, perhaps more rational royalty models can arise - or so one would hope.

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

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

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

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

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

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

Several companies including Ando Media, Abacast and Liquid Compass offer services that will count the number of listeners to a stream and synchronize those numbers with the songs that are being served by a station's music scheduling software to compute a number of performances.  Reports of use for filing with SoundExchange are also prepared.  We have not tested these services and cannot endorse them, but are providing this list for informational purposes for webcasters to explore further.  (There may well be other such services available that readers may suggest).  However, as I understand it (and perhaps some readers can correct me if I am not correct), not all of these systems are foolproof.   One of the biggest issues is what happens when music does not run through a station's music scheduling software?  For instance, if a station is picking up syndicated programming where the syndicator selects the music and the music does not run through the station's scheduling software, some of these services may not be able to track the performances that result from such the webcast of such programs.  Other glitches may also exist, e.g. for a radio station where the on-air announcer picks his own music that is never run through any scheduling software. 

These and other ambiguities will hopefully be remedied over time.  However, with the deadline so close, stations should be aware of the change in the rules, and make plans to comply as fully as possible by the new deadlines - which would mean planning right now, if they have not already done so.   

The summary of the bill says that it would make other broadcasters not covered by these flat fees subject to Section 114 of the Copyright Act -meaning that their royalties would be set by the Copyright Royalty Board.  But the summary does not make clear what standard would be used.  Would it be the "willing buyer, willing seller" standard that is used for (and produced such controversially high rates for webcasters - see the various discussions of those issues, here), or the more lax 801(b) standard that just resulted in a 6-8% of revenue royalty for satellite radio and has resulted in a 7% royalty for cable audio services (see our post here)?  That may well be a crucial issue.

Already, opponents of the performance royalty have signaled their opposition, suggesting that the low, introductory rates for small and noncommercial broadcasters are just that - an opening rate that will allow the royalty to be imposed, but will quickly be raised.  They point to a similar experience in Canada, where there was a low starting rate for smaller broadcasters that grew over time at the request of the recipients of the fees.  In fact, when one compares the proposed royalties for small broadcasters with those paid by small webcasters, even those paying under some form of the Small Webcaster Settlement Act, an Internet radio station with $1.25 million in revenue would pay over $130,000 in royalties for sound recordings - which would seemingly raise questions either of fairness (why is the Internet radio company paying so much if a similar broadcaster only pays $5000), or suggests that SoundExchange will try to have the rates raised in the future.  And imagine what a $130,000 royalty would do to a small broadcaster's business.

SoundExchange and the Music First coalition have also issued their own press release supporting the bill.  With a bill finally introduced, the battle will really begin.  Watch for the fireworks in 2008.

[Update - December 19, 2007 - see our update, here, prepared after we reviewed a copy of the Bills introduced in Congress]

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

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

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

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

Some commenters have suggested that the 7.5% royalty rate should be viewed as a precedent for the controversial Internet Radio royalties.  As SoundExchange has argued for "parity" and "fairness" in royalties in connection with its push for a performance royalty on broadcast stations, this argument certainly has an emotional appeal.  If, as SoundExchange claims, broadcasters should pay a royalty to insure "fairness" with other audio service providers, then Internet Radio should pay a rate that is equivalent to that of the Preexisting Subscription Services.  However, the decision will not provide any legal support, as the standard that applies to to Preexisting Services is different from that which applies to Internet Radio.  As we've written before, under the DMCA, the CRB is to use a "willing buyer, willing seller" standard to evaluate what the royalty should be for Internet radio.  Essentially, the willing buyer, willing seller standard evaluates a strict economic model of what two theoretical parties negotiating arms-length contracts would pay in a rational, competitive marketplace.  No public interest evaluation is considered - one of the reasons that the Copyright Royalty Judges felt constrained not to offer any special rate for small webcasters.

By contrast, the Preexisting Services (both cable and satellite radio) are evaluated under a different standard - the so-called 801(b) standard, which looks at a number of factors in determining the royalty.  Not only does this standard look at insuring a "fair return" to the copyright holder, but it also looks to maximize the availability of copyrighted works to the public, and to insure stability in the industries involved by minimizing the disruptive impact of royalty changes.  Finally, this standard looks to the relative roles and contributions of the parties in bringing the copyrighted materials to the public in terms of their "creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication."  One can easily see how this standard, if applied to Internet radio, would have resulted in a decision different than that which the CRB reached, and why Internet Radio companies have asked for the adoption of that standard as part of the Internet Radio Equality Act.

 The role that the comments that the CRB is seeking on the Music Choice settlement is limited, as only parties to the proceeding can "object" to a settlement under the terms of the statute governing CRB proceedings.  Other affected companies can offer comments, though the legal impact of those comments has yet to be tested.  Watch this space for information about the satellite radio royalty decision when it is released.

SoundExchange's press release announcing the agreements claimed that other small webcasters did not sign the agreement because aggregators would pay their royalties or because their  business models more appropriately fit with the CRB rates.  The press release does not mention that many webcasters did not sign because their business models include growing their businesses without going bankrupt, which does not seem to fit under the SoundExchange proposal.  If this is the only deal that  SoundExchange offers to small independent webcasters, SoundExchange will effectively do away with the independent webcaster who is serious about growing a business, but to whom a per performance royalty creates a situation where royalties exceed revenues. This would leave us with an industry essentially made up of hobbyists and big companies that subsidize their webcasting with their other lines of business - essentially crushing the hopes of those who saw the Internet as a way to build an independent radio business.

Small webcasters are not the only ones that are having settlement problems.  According to a letter released by NAB President David Rehr, after over 3 months of waiting, SoundExchange rejected a proposal from broadcasters to reach a compromise on their streaming royalties.  The Rehr letter claims that the rejection from SoundExchange, which is not public, did not seem to understand the broadcaster proposal.  SoundExchange President John Simson was also been quoted as saying that he expected to reach a settlement with NPR over their streaming royalties by the end of September.  With 12 days to go before the end of  the month, we will see whether this is really a deal come true, or another settlement without substance.

The new restriction added in this offer by SoundExchange, one that requires a small webcaster to pay at the CRB rate for all listening that exceeds 5,000,000 aggregate monthly tuning hours, would already have some SCWs paying substantial sums in addition to the percentage of revenue royalty. And, at the growth rates projected for some SCWs, the amount necessary to pay such overages could exceed the $1.25 million revenue threshold – exceeding the amount of revenue that a small webcaster is allowed to earn under the SWSA provisions.

Even more importantly, it must be noted that the offer by SoundExchange does not allow a webcaster to play all music for their 10-12% of revenue as did the Small Webcaster Settlement Act – it only allows them to play music of SoundExchange members. For all music from artists who are not SoundExchange members, the full CRB-determined royalty would have to be paid. Thus, a webcaster will have to assess its music choices, and play only the songs released by SoundExchange members (principally the major labels and some independent labels) rather than the diversity of music from small labels and independent artists, the kinds of music that the statutory royalty was supposed to make easier to play through the “one-stop shop” that a statutory license provides to an Internet radio service.

SoundExchange has informally indicated that it will continue discussions as to the concerns of the SCWs.  The only way to resolve these issues is through meaningful negotiations, or through legislation like that proposed in the Internet Radio Equality Act. Unilateral proposals simply don’t address all the issues that have caused so much outrage over the CRB decision. In order for these independent companies to build profitable businesses that will promote music and be able to pay reasonable royalties, something more than what SoundExchange has offered must be available.

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.

The Copyright Office had recently issued a determination that ringtones and digital downloads were covered by this royalty, and could rely on the Section 115 compulsory copyright.  Again, in those contexts, copies were fairly easy to understand, as a copy is made when a ringtone or download is copied onto a phone or a computer, and when that happens, a specific fee is charged for the copy that is made.  The more difficult questions arise in cases of subscription services, limited time downloads, on-demand streaming, and even streaming done by a non-interactive service like an Internet radio station.  When is a "phonorecord" - a specifically identifiable copy of a recording that contains the musical work - made?  In the digital transmission process, multiple copies are made - on the servers of the music services, in transitory copies made by servers and routers on the Internet, and in the RAM and on the hard drive of the listener's computer.  Are these copies "specifically identifiable" such that a royalty should be paid?  In its Public Notice of this Roundtable, the Copyright Office raised many of these issues that formed the basis of the discussion on Friday.

 In 2003, the Recording Industry and the representatives of the music publishers entered into a settlement agreement that concluded that the non-interactive streaming did not involve copies that would give rise to a mechanical royalty, while interactive streaming and conditional downloads did.  However, as discussed at the Roundtable, the Harry Fox agency, the principal collection agent for the music publishing companies, represents less than 70% of the music publishers, so the agreement is not binding on all publishers.  Moreover, the Copyright Office representatives themselves asked at the Roundtable how they could draw a legal distinction between on-demand streaming and non-interactive streaming, when the technology involved was the same.  While the making of a copy in the streaming process may currently have no real value independent from the public performance (for which ASCAP, BMI and SESAC collect royalties for the musical composition), the Copyright Office asked if there should not at least be a recognition that a copy is made.  Questions even arose as to whether specifically identifiable copies are made in other digital transmissions that include buffer copies.

The question arose as to whether any copy made in a streaming process is specifically identifiable, and also whether the payment of such a royalty would be "double-dipping" - paying the composers twice for the use of their music.  In a recent decision in a Federal Court, a decision was rendered that ASCAP (and by implication BMI and SESAC) were not entitled to public performance royalties in connection with downloads, as no public performance was involved.  The question discussed on Friday was whether the reverse shouldn't also be true - that there is no mechanical royalty where there is a clear public performance.

Issues also exist as to the efficient operation of the statutory license.  The license requires notice to the copyright holder before it can be used, and as many of the copyright holders are difficult to find, and as there is no central database where the music publishers are identified, that is difficult.  In addition, as the Harry Fox agency, the one central licensing agency that exits, represents less than 70% of the copyright holders, a company that has a business model that doesn't allow for the per copy statutory royalty (e.g. a subscription service), doesn't have any group or groups with which it can negotiate to get blanket licenses for virtually the entire musical universe.  Thus,  licensing is difficult.

Everyone at the Roundtable agreed that the statutory language was ambiguous and did not cover all of the issues that arise in a digital world.  The Copyright Office itself has asked for legislative reform of the statutory license many times, to clarify these ambiguities.  In fact, at one point, the Register of Copyrights testified that she thought that one agency should collect all royalties for musical compositions, so that there would not be the issue of double dipping, and so that there would be organizations that would represent virtually all of the copyright holders for all purposes.   With the various entrenched stakeholders, that proposal didn't fly, thus we continue to have different groups representing composers for the public performance of music and for the mechanical royalty.  And, while we have had proposals for Section 115 reform floated in Congress for the last several years, the discussion on Friday was that Congressional action did not look imminent.  But all companies providing digital transmissions of musical compositions should continue to monitor these efforts, as the potential for problems arising from interpretations of who needs to get paid for digital services remains very high, and with the potential liabilities for copyright infringement being so great, the stakes are high. 

SoundExchange's recent discussions of the issues seem to accept the fact that the royalties will put much of the advertising-supported Internet radio industry out of business.  Initially, when the decision was first released, the public responses of SoundExchange seemed to be that the industry was crying wolf - that it could really afford these rates.  That claim is not heard as often any more.  As more evidence was advanced to show that the royalties would exceed the revenues of most ad-supported webcasters, the next argument advanced by SoundExchange seemed to be that it accepted that most webcasters would go out of business, but it was the webcasters' own fault because of their lousy business models.  That too seems to have quieted, as Congress seems to want there to be diversity among webcasters(see our article about the settlement offer made to small webcasters after Congressional pressure).  Now, it seems that illegal file sharing has become the principal justification for the rate - almost as if the claim is that if the record industry is suffering so should the Internet radio industry.

Of course, there are other justifications offered for the rate - that the decision is one that was legally arrived at and should therefore be followed, that big webcasters can indeed afford the high rates, that the copyright belongs to the artists and labels and they ought to be able to do what they want with it.  We will see in the next 30 days how all these arguments play out.  We will be exploring these issues on a panel I will be moderating at the Digital Media Conference in Silver Spring, Maryland on Friday, June 22.  The panel will feature representatives from SoundExchange, from NPR and DiMA, and Kurt Hanson from Accuradio and the Radio and Internet Newsletter.  If you plan to be in the DC area on Friday and are interested in this issue, you may want to attend.

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.