As we wrote on Friday, the Copyright Royalty Board released to the parties their decision setting the sound recording music royalties for Internet radio for the years 2006-2010 – and the rates will be increasing significantly (absent success on appeal or in settlement discussions). The rates and appeal process are set out in our post on Friday.  The parties have until Monday, March 5 at noon, to request that the Board keep portions of the decision that contain confidential proprietary information out of the public record. Thus, the text of the decision is not yet public. Nevertheless, many parties are asking for more specific information about the decision and its impact. Certainly, when the decision is public, everyone will want to make their own judgments. But, until that time (which should be soon as the Board was careful to avoid using any significant amount of confidential information), I offer some observations about the decision (from my vantage point as a party who represented some of the webcasters involved in the proceeding), as well as thoughts on some of the questions that I have seen posted on various discussion boards this weekend.

First, it is essential to understand exactly what this decision covers. The Board’s decision covers only non-interactive webcasters operating pursuant to the statutory license. Our memo, here, discusses the statutory licensing scheme, and what a webcasting service must do to qualify to pay the royalties due under this statutory license. Essentially, a webcaster covered by this decision is one which operates like a radio station – where no listener can dictate which artists or songs he or she will hear (some limited degree of consumer influence is permitted, but a webcaster must comply with the restrictions set out in our memo).  Also, the webcaster cannot notify their listeners when any specific song will play. The decision does cover the Internet transmissions of the over-the-air content of most broadcast stations. 

The royalties are paid to SoundExchange – a nonprofit corporation with a Board made up of representatives of artists and the record companies. The royalties go to the copyright holders in Sound Recordings and the performers on those recordings ( the copyright holder is usually the record label. Royalties are split 50/50 – and the artist royalties are further divided 45% to the featured artist and 5% to any background musicians featured on the recording). 

The decision by the Board was the result of a long proceeding – which began in 2005. A summary of the proceeding can be found in our posting, hereSatellite radio also has to pay similar royalties, as do services that provide background music to businesses ("business establishment services"). Separate proceedings are underway to determine rates for these services.

With that background – here are some more thoughts on the decision – obviously in very summary form. The Board is charged with determining the royalty rates that would be determined by a willing buyer and a willing seller in a marketplace transaction. The Board was clear in the decision that it would look simply for evidence of what such a deal would be – it would not look at policy reasons why certain groups of webcasters (including small commercial webcasters or noncommercial webcasters) should get some special rate.

In setting the rate, the Board looked to proposed benchmarks by which it could determine what a hypothetical buyer and seller would agree to in the marketplace. It rejected the proposals advanced by the commercial webcasters that the appropriate benchmark was what was paid by the services for the underlying composition (i.e. the fees paid to ASCAP, BMI and SESAC). Instead, the Board adopted a benchmark rate derived by one of SoundExchange’s expert witnesses by taking the rate paid by certain interactive webcast services (ones which do not qualify for the statutory license and which thus must negotiate private deals with the record labels for use of their music), and adjusting those rates to take into account the differences in the statutory services (including the lesser value to consumers as they do not have the ability to select songs when using a service subject to the statutory license).  The Board concluded that the rapidly escalating rate was justified as it brought the statutory services closer to the interactive services as the advertising market grows over the next few years.

The reliance on this benchmark lead to the numbers that we reported on Friday.  In its decision, the Board also set out terms for payments.  The terms are essentially those that are now in place for large webcasters, with a few changes.  The Board approved an increase in the late fee on monthly payments – to a fee of 1.5% of the unpaid royalty per month.  The late fee would also be imposed on late filings of Statements of Account – the monthly reports as to how much a service owes and the computations used to reach that conclusion.  The Board also concluded that copyright holders and artist could review the statements of account filed by services that played their music, though such information could not be revealed to the public.

So what does this all mean?  Immediately, it creates issues for webcasters who were paying under the provisions of the Small Webcasters Settlement Act.  While the law is very confusing as the effective date of the decision, one reading is that the rates go into effect immediately, even while an appeal is pending.  Thus, services would be obligated to begin to pay at the rate decided by the Board (though past due amounts for 2006 and the first two months of 2007 would appear to not be due until the appeal is resolved).  But, as these new fees will exceed the total revenues of many smaller webcasters (see the report in the Radio and Internet Newsletter, here), this would impose an incredible hardship – probably an impossible burden – on these services.

Larger noncommercial webcasters, who exceed the usage limitation covered by the flat $500 fee, would also face huge new royalties, as all overages would be at more than four times the rate that they pay for such overages now. 

For all these services, a new obligation to track performances – how many listeners heard each and every song played by a service – is one that many small services will find difficult to meet.  While some technical companies may be able to track that information, many smaller webcasters do not use services provided by those companies.  And, as many Internet radio operators have been paying their royalties for 2006 and thus far in 2007 on a percentage of revenue or on Aggregate Tuning Hour basis, will they have any basis to determine their obligations for the fees that are retroactive to January 1, 2006?

The other type of service that could be hard hit by the decision would be the services that generate individual streams for each listener, or services that have many individual streams or channels.  As the decision places a $500 minimum fee on each station or channel, and does not clearly define what is meant by a "channel" or "station," an argument could be made that services that generate an individual stream for each listener would have a $500 obligation for each stream they generate – even if that stream played just one song. 

There are many other issues that will arise once the decision is released and reviewed by the public.  But this decision is sure to have impact far beyond the streaming world.  In the recently proposed XM/Sirius merger, about which we wrote here, the satellite radio services were arguing that competition from Internet Radio lessened any anticompetitive threat from the anticipated combination of the companies.  Similarly, broadcasters have argued that webcasters provided competition that justified a relaxation of the multiple ownership rules.  If many Internet radio stations disappear after this decision, these two proceedings may well be affected.  Also, if the Internet does not provide an outlet for new broadcast entrants, will there be a greater clamor for more Low Power FM stations?  These issues and other ramifications of the decision are sure to follow. 

We will have more on the decision as questions arise and once the full text is made public.