Yesterday, SoundExchange sent to many small webcasters an agreement that would allow many to continue to operate under the terms of the Small Webcaster Settlement Act as crafted back in 2002, with modifications that would limit the size of the audience that would be covered by the percentage of revenue royalties that a small webcaster would pay. A press release from SoundExchange about the offer can be found on their website by clicking on the "News" tab. This is a unilateral offer by SoundExchange, and does not reflect an agreement with the Small Commercial Webcasters (the “SCWs”) who participated in the Copyright Royalty Board proceeding to set the rates for 2006-2010 and who are currently appealing the CRB decision to the US Court of Appeals (see our notes on the appeal, here). The SoundExchange offer, while it may suffice for some small operators who do not expect their businesses to grow beyond the limits set out in the SWSA (and who only play music from SoundExchange artists – see the limitations described below), still does not address many of the major issues that the SCWs raised when SoundExchange first made a similar proposal in May, and should not be viewed by Congress or the public as a resolution of the controversy over the webcasting royalties set out by the CRB decision (see our summary of the CRB decision here).
The proposal of SoundExchange simply turns their offer made in May, summarized here, into a formal proposal. It does not address the criticisms leveled against the offer when first made in May, that the monetary limits on a small webcaster do not permit small webcasters to grow their businesses – artificially condemning them to be forever small, at best minimally profitable operations, in essence little more than hobbies. The provisions of the Small Webcasters Settlement Act were appropriate in 2002 when they were adopted to cover streaming for the period from 1998 through 2005, as the small webcasters were just beginning to grow their businesses in a period when streaming technologies were still new to the public and when these companies were still exploring ways to make money from their operations. Now that the public has begun to use streaming technologies on a regular basis, these companies are looking to grow their businesses into real businesses that can be competitive in the vastly expanding media marketplace. The rates and terms proposed by SoundExchange simply do not permit that to occur.
To receive investment necessary to grow, the SCWs cannot be limited to $1.25 million in revenue. No investor will invest in a business which, when it reaches an artificial revenue threshold, essentially is forced to go bankrupt – as all projections show that the CRB royalties would exceed total revenue of a SCW even if it makes more than $1.25 million in revenue.
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.