The Copyright Royalty Board today announced that it is taking comments on a settlement to establish royalties for the use of sound recordings to be paid by companies that are planning to provide audio services to be delivered with satellite and cable programming.  In contrast to the "preexisting subscription services" who were in existence at the time of the adoption of the Digital Millennium Copyright Act in 1998, who recently reached a settlement agreeing to pay 7 to 7.5% of gross revenues for royalties (see our post, here), this settlement is with "New Subscription Services" which did not offer these kinds of subscription services in 1998.  This settlement does not apply to subscription services provided through the Internet.  The covered "new subscription services" have agreed to pay the greater of 15% of revenue or a per subscriber fee that will escalate over the 5 years that the agreement is in effect.  Given that these new services will be providing essentially the same service as the Preexisting Services, why the difference in rate?  Perhaps, it is because the difference in the law.

As we wrote earlier this week, the Preexisting Satellite Service pay royalties set based on the standards of Section 801(b) of the Copyright Act, which takes into account a number of factors including the interest of the public in getting access to copyrighted material, the relative contributions and financial risks of the parties in distributing the copyrighted material, the stability of the industry, and the right of the copyright holder to get a fair return on their intellectual property.  By contrast, the new subscription services who entered into the settlement just announced, who weren’t around at the time of the drafting of the DMCA, use the "willing buyer, willing seller" standard also used for Internet radio.  And, because of the applicability of the willing buyer willing seller standard and the apparent uncertainties of the litigation process using it, these new services apparently decided to agree to a royalty double that of the preexisting services, even though they provide essentially the same service.

This settlement applies only to subscription services of a particular type.  This proceeding was begun when XM, Sirius and MTV all announced plans to offer audio services that are provided  as an add-on to a subscription to multichannel video providers (essentially cable and Direct Broadcast satellite television providers).  As these services cannot technologically track individual performances or listeners, they cannot pay according to the Internet radio decision.  Thus, a new proceeding was begun by the CRB to determine the rates to be paid by these services. 

Internet-based subscription services are not covered by this decision, but instead pay the royalties that apply to Internet radio services that were decided in March – if the subscription service is non-interactive (i.e. a listener cannot pick what songs he wants to hear) and otherwise meets the rules that apply under the statutory license (see our memo, here, for the details of those requirements).  Internet-based services that are interactive or otherwise don’t meet the requirements of the statutory license must obtain clearances directly from the copyright owners, paying a privately negotiated rate. 

The fact that two settlements, one providing rates that are double the amount of the other when the only effective difference between the services was whether they were in existence at the time the governing statute was written fuels complaints about the arbitrary nature of the Copyright Royalty process.  While SoundExchange and other copyright holders have asked for "fairness" in seeking a performance royalty on broadcasters (who currently do not pay such a royalty), they benefit from the unfairness in circumstances such as this, when identical services pay royalties that are twice that paid by existing services.  And, to the extent that all services are deemed to be part of a single broad market for audio services, as some have argued, is there really justification for different treatment between subscription, nonsubscription, Internet and non-Internet based services?  When the rates that apply to satellite radio are decided in the next month, will we see these differences manifest themselves yet again?

These are not questions for the Copyright Royalty Board to decide – they only need to approve this agreement and are not charged with the broader responsibility of assessing the difference in policy between similar services.   Comments on this settlement are due on December 10.