Posted on July 8, 2009 by David Oxenford

Court Upholds Copyright Royalty Board Decision on Satellite Radio Royalties, But Questions Board's Constitutionality

The US Court of Appeals for the District of Columbia Circuit today issued a decision basically upholding the royalty rates set by the Copyright Royalty Board due under Section 114 of the Copyright Act by satellite radio operators for the public performance of sound recordings.  The CRB decision, setting royalties for the years of 2007 to 2012, established rates that grew from 6% to 8% over the six year term. As we explained in our post, here, the Board looked at the the public interest factors set out by Section 801(b) of the Copyright Act, factors not applicable to Internet Radio royalties, in reaching the determination these royalties.  Particularly important was the factor which took into account the potential impact of the royalties on the stability of the businesses that would be subject to the royalty, resulting in a reduction of the perceived fair market value of the royalty from what the board determined to be about 13% of gross revenues to the 6-8% final royalty set by the Board.  The Court upheld the Board's reasoning, rejecting SoundExchange's challenge to the decision, though the Court did remand the case to the Board to decide the proper allocation of the royalty to the ephemeral rights covered by Section 112 of the Copyright Act.

What was perhaps most interesting about the Court's decision was the concurring opinion of one of the three Judges, who stated that the fact that the Board's judges were appointed by the Librarian of Congress, and not by the President, "raises a serious constitutional issue."   This was the same issue raised by Royalty Logic in challenging the constitutionality of the CRB in the webcasting proceeding (see our posts here and here).  The Judge concurred in the majority decision as none of the parties to the satellite radio case raised the constitutional issue, but this very question was squarely raised in the webcasting proceeding, and thus may well be resolved in the decision on that appeal.

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. 
Tags: , , , , , , , , , , , , , , , , , , ,
Posted on January 12, 2008 by David Oxenford

Satellite Radio Music Royalty Reconsideration Denied By Copyright Royalty Board - What a Difference A Standard Makes

This week, the Copyright Royalty Board issued an Order denying a request by SoundExchange for rehearing of certain aspects of the decision released last month setting the royalties for satellite radio - XM and Sirius.  These are the royalties for the use of sound recordings by these services on their digital systems.  The decision, which set royalties at 6 to 8% of revenues of these services, and the denial of the rehearing motion, provide examples of how the CRB applies the 801(b) standard of the Copyright Act.  In setting royalties, that standard assesses not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music.  The satellite radio decision sets a royalty far lower than that assessed on Internet radio - where the royalty is set using a "willing buyer, willing seller" standard looking only at the perceived economic value of the sound recording.  That willing buyer, willing seller standard is also proposed for broadcast radio in the recently introduced performance royalty bills now pending before Congress (see our summary here) - so it could be expected that any royalty set using that standard would be higher than that set for satellite radio. 

The initial Copyright Royalty Board decision, the full text of which is available here, first made a determination of how to compute the royalty.  While both the satellite radio companies and SoundExchange initially suggested a percentage of revenue royalty given that satellite radio can't count specific listeners, the parties later amended their proposals (after the Internet radio decision) to include a computation based on the frequency of a song's play, to try to more closely approximate the Internet radio performance-based model (about which we wrote here).  In addition to the suggestion that this metric more closely approximated that used in the Internet radio decision, the satellite radio companies suggested that a metric based on the songs played would give them the opportunity to adjust their use of music to reduce their royalty obligation.  The satellite companies suggested that, if the royalty was too high, they could reduce the number of different songs that they played.  While not specifically referenced in the decision, it is possible that they also considered the possibility of getting waivers from artists to encourage playing particular songs, which could further reduce a royalty based on a per song computation.  The Board declined to provide that option, finding that the percentage of revenue option best took into account the business of the companies.  The Board also suggested that it doubted that satellite radio really had the ability to lessen the use of music in reaction to a high royalty rate.  (The Board does not discuss the possibility of royalty waivers, which are essentially worth nothing in a situation where the royalties are based on a percentage of a service's entire revenue). 

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?
Tags: , , , , , , , , , , , , , ,