Posted on April 25, 2011 by David Oxenford

SoundExchange Seeks Permission to Distribute Royalties Based on Proxy Information

What should SoundExchange do with money that it collects for the performance of sound recordings, when it does not know what sound recordings were played by a particular service?  As we've written many times on this blog, SoundExchange collects royalties from digital music services , including satellite radio, cable radio and webcasters, for the performance of sound recordings (i.e. a recording of a song by a particular artist).  It is charged with the obligation to distribute these royalties one-half to those who hold of the copyright to the sound recording and one-half to the artists who perform on those recordings.  However, SoundExchange, according to a filing recently made with the Copyright Royalty Board, does not always know which songs were played by a particular music service.  Thus, it has had difficulty distributing all of the money it collects - currently holding $28 Million in royalties from the period 2004 to 2009 that have not been distributed.  Why?  According to SoundExchange much of the problem is that not all services report what they played and how often, and other information that is submitted is sometimes inaccurate or otherwise does not adequately identify the music that was played.  To deal with this problem, SoundExchange has asked that the Copyright Royalty Board authorize it to use proxy information to distribute these funds from 2004-2009.  The CRB has asked for comments on that proposal.  Comments are due on May 19.

What is proxy information?  Basically, SoundExchange plans to infer from the information that it does have what music was played by the services for which it has no information.  According to the SoundExchange filing, they would make these assumptions based on the type of service.  Thus, information from webcasters would be used to estimate what other webcasters were playing.  Information from background music services who did report would be used to determine what other background music services played, and so on.  The CRB, in its request for comments, asks if the proxy should be further broken down so that, for instance, noncommercial webcasters would serve as a proxy for other noncommercial webcasters, and commercial webcasters would serve as a proxy for other commercial webcasters.  The Copyright Royalty Judges are also seeking to assess whether SoundExchange has done all that it can do to get the required information, and if the proxy system is a fair way of determining distributions for the money that has not yet been awarded to rightsholders and artists. 

Does this proposal have any impact on the services themselves?  Apparently not, as SoundExchange is at this point only looking for this authority in order to distribute money collected for royalties that came in from 2004 to 2009.  It does not appear to be looking at imposing any new restrictions on webcasters or other digital music services.  Instead, it is only looking for the authority to distribute the money that it has already collected based on the information that it has available.  What should music services take away from this request?

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

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

Clearly, no one wants musicians to go unpaid - especially when the royalties have already been collected.  In the past, there has been talk of developing monitoring systems that would be easy and inexpensive to use.  Many streaming service providers already provide some type of reporting system.  But virtually all still require human input - identifying the songs correctly in a service's music scheduling software, and that sometimes is not easy, as information from record companies and other music suppliers is not always available and consistent. Automating such systems, making them ubiquitous, foolproof, easy to use and inexpensive, should be the priority of SoundExchange and webcasters and other music services, so that those who deserve to get paid are paid, but avoiding systems that are so hard to use that they make streaming or other digital music use difficult or impossible. 
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Posted on August 16, 2008 by David Oxenford

Washington Post on Internet Radio Royalties - Settlment Discussions Ongoing, But Can an Agreement be Reached?

The Washington Post today ran an article on the continuing Internet radio royalty battle - highlighting the service Pandora and the fact that it will likely go out of business if the current dispute about royalties is not resolved.  We wrote (here and here) about many of these same issues in our coverage of the recent Senate Judiciary Committee hearings.  What is notable about the article is its mention of settlement discussions that are being conducted under the supervision of Congressman Berman of the House Judiciary Committee.  But the article also makes clear that the disconnect continues between the perception of the recording industry and of the Internet radio industry on the revenue potential of Internet radio.  The differing perception continues to make settlement difficult, as the recording industry keeps complaining that the industry has not done enough to monetize their operations - and the Internet radio companies express frustration at that attitude.  If there was some way of making more money from Internet radio operations, doesn't the recording industry think that the webcasters would take advantage of those practices?  Why would they leave money on the table if they could figure out a way to make it?  If they could make money, they would - though the recording industry seems not to believe it.

The other issue that the article overlooks is that the settlement discussions that are going on are apparently the same settlement discussions referenced at the Senate Judiciary Committee hearing - those between the recording industry and the large webcasters.  But there are many other groups involved in webcasting - the small commercial webcasters that I have worked with in the Copyright Royalty Board proceeding, the broadcasters who also stream their programs, and noncommercial webcasters (including NPR affiliates, religious broadcasters and other noncommercial entities).  There is no discussion in the article of any talks with them and, as set out in the written testimony at the Judiciary Committee of Kurt Hanson of Accuradio, the small commercial webcasters have heard nothing from SoundExchange in months.  A resolution by the large webcasters, unless it is all encompassing and on terms that all parties can live with (which seems unlikely given the diverse interests involved), will not resolve the dispute over the CRB decision.  So the battle continues.

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Posted on June 1, 2008 by David Oxenford

Does the Copyright Royalty Board Exist - Internet Radio Appeal Proceeds and New Issues Arise

The appeals of last year's Copyright Royalty Board decision on the royalties paid for the use of sound recordings by Internet radio stations continue on, and one recent filing raises interesting questions of whether or not the CRB was properly appointed.  Last week, the Department of Justice, which represents the CRB in defending its decision in the Court of Appeals, filed its brief in opposition to the briefs of the webcasters, which we summarized here.  The DOJ brief essentially argued that the webcasters' briefs were insufficient to satisfy the requirement for a successful appeal - that the CRB decision was arbitrary and capricious or otherwise contrary to law.  Essentially, a Court need not revisit the decision and substitute its judgment as to whether the it believes that the decision was correct, but instead, to overturn a decision, the Court must find that the CRB (the expert agency) either violated the law or could not, on the fact, have logically come up with the decision that it did.  Thus, the DOJ brief made arguments that there was enough factual evidence for the CRB to decide in the way that it did, and made arguments that the webcasters had not offered contrary arguments or evidence on certain points during the CRB proceeding and were therefore barred from raising those arguments now.  Just before the DOJ brief was filed, another pleading raised the fundamental question of whether the Copyright Royalty Board was properly appointed and, if not, whether it has the constitutional authority to decide the cases that it has been considering.

This new argument about the CRB’s authority comes in a request filed with the Court of Appeals by Royalty Logic, a party to the CRB proceeding.  Royalty Logic is not a webcaster, but instead is seeking to be an alternative collection agency to SoundExchange.  Its pleading seeks supplemental briefing on the question of whether the Copyright Royalty Judges are “inferior officers” of the Federal government who, under the Constitution, can only be appointed by the President, by the Courts or by the head of a Department of the government. In a recent Supreme Court case, the Court found that certain tax court judges, who were appointed by a chief judge and not by a cabinet-level officer (the head of a “department”) violated this Appointments Clause of the Constitution. There has been much press coverage in the past few weeks as to whether this decision also applies to patent judges, and whether it could invalidate hundreds of patents approved by these judges (see the NY Times article on this issue, and listen to an NPR piece about the controversy). Royalty Logic contends that the same logic should apply to the appointment of the Copyright Royalty Judges who make up the CRB.  The Copyright Royalty Judges are appointed by the Librarian of Congress.  One question would be whether the Librarian is the equivalent to the head of a department though, technically, the Library of Congress is not even in the Executive Branch of government, but instead part of Congress.  In any event, Royalty Logic notes that the Copyright Royalty Tribunal, a predecessor agency done away with during the Clinton administration as part of their "Reinventing Government" program (one of the few agencies that was "reinvented"), had members appointed by the President.

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.
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Posted on March 15, 2008 by David Oxenford

A Year After the Webcasting Royalty Decision - No Settlement, Appeal Briefs Filed

A full year ago, the Copyright Royalty Board released its decision setting royalties for the use of sound recordings by Internet Radio webcasters (see various posts on the subject here).  As an article this week in the Boston Globe sets out, despite much talk of a post-decision settlement to lower the royalties set by the CRB that many Internet Radio operators claim will put their stations out of business, no such settlement has yet been announced.  And, in a week that brought about the transfer of the operations of one of the largest webcaster's operations to a traditional radio company (as CBS took over operations of AOL's Internet Radio service), appeals of the decision were filed with the US Court of Appeals for the District of Columbia.  A busy week, but still no resolution of the Internet radio controversy.

Four separate appeals briefs were submitted to the Court.  One was a combined brief of the large Webcasters (represented by DiMA, the Digital Media Association) and the Small Webcasters(Accuradio, Radioio, Digitally Imported Radio, Radio Paradise), another was submitted by several commercial broadcast groups (Bonneville, the NAB and the National Religious Broadcasters Association) and a third by several noncommercial groups (including college broadcasters, NPR, and noncommercial religious broadcasters).  A final brief was submitted by Royalty Logic, a company that wants to become an alternative to SoundExchange as the collection agent for performers.  These briefs will be answered by the Department of Justice (defending the CRB and its decision before the Court) and SoundExchange.  The briefing process will continue for several months, with an oral argument to follow, quite possibly not until the Fall.  Thus, a decision in the case may well not be reached until 2009. 

The briefs filed by the parties raised a number of issues about the CRB decision including the following:

  • The failure of the CRB to even address the proposal for broadcasters to pay a flat fee for streaming, similar to the flat fee that they pay to ASCAP and BMI
  • The failure of the Board to adopt a flat fee for noncommercial stations, similar to that which had previously been negotiated between SoundExchange and NPR
  • The determination by the Board that the Small Commercial Webcasters were not really concerned about a percentage of revenue royalty, despite consistent testimony that the fee was necessary to their survival
  • The adoption of a $500 per channel minimum fee in spite of the lack of evidence that this fee in any way reflected SoundExchange's costs of collection.
  • The determination of the royalty rate using a model derived from on-demand services, even though the model used an adjustment factor between the two types of services was abandoned by SoundExchange in the Satellite Radio proceeding, and despite the fact that there was an agreement between the record companies and Yahoo for certain streaming with limited amount of interactivity that provided an analogy much closer to the non-interactive streaming at issue here, that was never mentioned by the Board (though a similar Yahoo deal formed the basis of the royalty decision in 2002).
  • The decision by the CRB that it had to adopt a proposal that was advanced by the parties, and could not split the difference by adopting a rate that it derived from the totality of the evidence - resulting in the Board essentially adopting the SoundExchange proposal.

While the appeal process progresses, the Boston Globe article made clear that the negotiations about a voluntary settlement are also still dragging on without any resolution.  The Court briefs had been delayed for two weeks in expectation that a settlement between SoundExchange and certain noncommercial webcasters might be reached, thereby obviating the need for the preparation of the briefs for those parties.  Yet the two weeks went by, and no settlement was reached.

The AOL-CBS deal may well reflect the determination by many Internet-only webcasters that they cannot make a business out of webcasting under the current economic conditions.  Note that the Globe article also mentions the efforts made by other webcasters, such as Live 365, to reduce their streaming in order to reduce their royalty obligations.  Rumors are that other Internet radio companies are also limiting their audiences, as appears evident by the Average Quarter Hour listening of Yahoo! which, according to Arbitron measurements, have decreased from over 300,000 to approximately 220,000 between May and June and December, the last numbers available on the Arbitron website.

Without an adjustment in the royalties, the promise of Internet radio, to provide diverse sources of programming to the public, may well have come to an end.  If even the largest of Internet radio companies are either abandoning the business or limiting their streams, how will small start-up companies deliver music to the public?  Will the predictions of the Globe article, that terrestrial broadcasters will be the only services that can survive in this environment, come to pass?  Will the record companies, that have contended that Internet (and terrestrial radio) do not provide promotional benefits to music, get their wish and end up having to promote their music in secret?  Over the next few months, these questions may well be answered. 

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Posted on September 19, 2007 by David Oxenford

SoundExchange Announces 24 Agreements - But Not One a Settlement With Small Webcasters

SoundExchange yesterday announced that it had signed agreements with 24 small commercial webcasters.  Contrary to what many press reports have stated, this is not a settlement with Small Commercial Webcasters.  In truth, what was announced was that 24 small webcasters had signed on to the unilateral offer that SoundExchange made to small webcasters, about which we wrote here.  Essentially, this is the same offer that SoundExchange made in May, which was rejected by many independent webcasters as being insufficient to allow for the hoped for growth of  these companies, and insufficient to encourage investment in these companies.  These larger Small Commercial webcasters, including those that participated in the Copyright Royalty Board proceeding, rejected that offer and instead have sought to negotiate a settlement with SoundExchange that would meet their needs.  Instead of reaching a true settlement with these companies that had participated throughout the CRB proceeding and now have an appeal pending before the Court of Appeals, SoundExchange instead announced that their unilateral proposal was accepted by 24 unnamed webcasters.  Thus, rather than negotiating a settlement, if anything this announcement shows that SoundExchange has not been willing to negotiate - as it has not moved substantively off the proposal they announced over 4 months ago.

While 24 webcasters may have signed on, it would seem that these must be entities that don't expect to grow their revenues to $1.25 million, or grow audiences that reach the 5,000,000 tuning hour limit at which, under the SoundExchange-imposed agreement, the webcaster needs to start paying at the full CRB-imposed royalty rate.  Moreover, the agreements only cover music from SoundExchange members, excluding much independent music that many webcasters play.  For music from companies that are not SoundExchange members, a webcaster has to pay at full CRB rates.  For a small service playing major label music, the agreement may cover their needs, but for the larger companies playing less mainstream music, a different deal is needed. 

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.
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