While recent press reports talk about the growth of Internet Radio and the increasing presence of terrestrial radio companies on the net, the amount of the music royalties that will have to be paid by Internet radio companies for the 2006-2010 period remains unresolved.  The trial phase of the proceeding to set the rates, held before the Copyright Royalty Board, is now completed, and the upcoming decision of the Board may have a profound impact on the economics of the Internet radio industry.  Final briefs in the case were filed with the Board in December, and an oral argument was held on Thursday, December 21.  With the completion of the argument, the decision is now in the Board’s hands, and the amount of the royalties for the use of the sound recordings will be decided by the Board on or before March 4. 

In the on-line world, and in most digital communications channels other than over-the-air digital broadcasts, a royalty for the use of the "sound recording" (the actual recording made by a particular artist) must be paid in addition to the royalty for the use of the composition (i.e. the underlying words and music) that is paid to ASCAP, BMI and SESAC.  Our summary of the royalty rates that Internet radio stations should currently be paying can be found on our firm’s website, here.  As we make clear in that memo, the rates that are currently being paid expired at the end of 2005, so the rates that are adopted in the current proceeding will be retroactive to January 1, 2006.

The proceeding to determine the new rates has been underway for more than a year.  Written cases were filed by the parties in October 2005.  Discovery, including depositions and document discovery, took place in the early part of 2006.  A trial began in May and lasted through the first week in August, with a rebuttal phase that ended the week after Thanksgiving.

The Copyright Royalty Judges will be left with a choice between two vastly different positions.  The Recording Industry (represented by its collective SoundExchange) has suggested that the rates essentially triple, to a rate that would be the higher of 30% of gross revenue or a per song rate that would grow over the 5 year royalty period from .08 cents per song per listener to .19 cents per song per listener (plus a CPI increase).  SoundExchange has also suggested a 25% surcharge for performances which are received by a wireless receiver.  Essentially, SoundExchange argued that Internet Radio confers little promotional benefit to most performers, and that there was a large risk of "stream ripping" which would result in lessened sales of CDs and legal downloads.  Moreover, the Recording Industry argued that the economics of webcasting are improving and that this higher royalty should be able to be paid by an "efficient" webcaster.  In their proposal, no distinction is made between large or small webcasters, or between commercial and noncommercial entities.

Seven different groups of webcasters participated in the proceeding.  Four represent noncommercial interests (NPR, the National Religious Broadcasters Noncommercial Licensing Committee, and two groups of college broadcasters).  Three groups of commercial webcasters also participated – one representing the large commercial webcasters (including AOL and Yahoo), one representing broadcasters who stream their over-the-air signal on the Internet, and a third group representing "small commercial webcasters" (independent webcasting companies such as AccuRadio, RadioIO and Digitally imported Radio).  I represented the last group in this proceeding.

Each of the webcasting groups asked for a royalty that was similar in amount to what they pay to ASCAP, BMI and SESAC for the right to stream music on the Internet, reasoning that the sound recording and the musical composition have equal value to the webcaster as, without both rights, a song cannot legally be played on a webcaster’s station.  The services all took issue with the Recording Industry’s contention that there was little promotional benefit from webcasting.  All argued that the current rate was already too high given the current economics of webcasting, and that the rate proposed by the SoundExchange would put the services out of business.  This was especially true for the small commercial webcasters and the noncommercial entities, which currently pay at rates different (and almost always far lower) than the standard rate, as these entities have been covered by rates negotiated pursuant to the Congressionally-enacted Small Webcasters Settlement Act.

The Board will have to reconcile these starkly contrasting views of the webcasting industry and come up with a rate that represents the rate required by statute – the one that "a willing buyer and willing seller" would agree to in a marketplace transaction.  In the next two months, we will know where the future of the Internet radio industry lies.