A decision by a US District Court in New York was just released, setting the rates to be paid to ASCAP for the use of their composers’ music by Yahoo!, AOL and Real Networks. The decision set the ASCAP rates at 2.5% of the revenues that were received by these services in connection with the music portions of their websites. These rates were set by the Court, acting as a rate court under the antitrust consent decree that was originally imposed on ASCAP in 1941. Under the Consent Decree, if a new service and ASCAP cannot voluntarily agree to a rate for the use of the compositions represented by ASCAP, the rates will be set by the rate court. The Court explained that they used a "willing buyer, willing seller" model to determine the rates that parties would have negotiated in a marketplace transaction – essentially the same standard used by the Copyright Royalty Board in setting the rates to be paid to SoundExchange for the use of sound recordings by non-interactive webcasters (see our post here for details of the CRB decision). The ASCAP decision, if nothing else, is interesting for the contrasts between many of the underlying assumptions of the Court in this rate-setting proceeding and the assumptions used by the Copyright Royalty Board in setting sound recording royalty rates.
First, some basics on this decision. ASCAP represents the composers of music (as do BMI and SESAC) in connection with the public performance of any composition. This decision covered all performances of music by these services – not just Internet radio type services. Thus, on-demand streams (where a listener can pick the music that he or she wants to hear), music videos, music in user-generated content, karaoke type uses, and music in the background of news or other video programming, are all covered by the rate set in this decision. Note that the decision does not cover downloads, presumably based on a prior court decision that concluded that downloads do not involve a public performance (see our post here). In contrast, the CRB decision covered the use of the "sound recording" – the song as actually recorded by a particular artist – and covers only "non-interactive services," essentially Internet radio services where users cannot pick the music that they will be hearing.
Also, this rate covers only these three Internet services, and only covers ASCAP. Of course, the decision may be instructive as to the rates that would apply to other similar companies (and potentially for BMI rates in the future, as they also are subject to a consent decree – though SESAC is not). However, most Internet companies, especially smaller companies that cannot afford expensive rate court litigation, are paying royalties under the "experimental licenses" that ASCAP posted on its website (and which have rates somewhat lower than the decision here for non-interactive services, and somewhat higher for interactive services), and should not, for the time-being, be affected by this decision.
While this decision involves a different right than does the CRB decision for somewhat different types of services, the rights are similar, yet the approaches taken by the Court here and the CRB in the setting the sound recording royalty were quite different. For instance, one of the criticisms of the CRB decision, especially by the small webcasters that I represented in the proceeding, was that the CRB refused to adopt a percentage of revenue royalty, finding it difficult to compute what revenue was to be included as being subject to the royalty and because it did not represent a payment for all of the music used. The CRB found that a per performance (e.g. per song, per listener) rate was more appropriate as it insured a fair return to the copyright holder in the sound recording even by a service that did not maximize its revenue. Under a percentage of revenue royalty, the CRB determined, there might be minimal payments for the use of music. Here, however, the Court found almost exactly the opposite, concluding that a percentage of revenue rate appropriate for the following reasons:
- It was economically efficient, as it did not provide any disincentive to a service not to use music as might be the case for a royalty that demanded a per performance fee
- It adapts to changing conditions, as it will collect more when a service makes more revenue and less when a service has hard economic times, thus taking into account changing economic and competitive conditions, variations in financial fortunes and changes in technology and other unforeseen changes in the circumstances of the services that may occur over time
- Revenues were simple to verify as information about total revenues were routinely collected by a service
- That these royalties provided the kinds of efficiencies expected for a blanket license – easy administration, that covered all rights to all the music represented by ASCAP, and gave the service certainty as to its music costs so that it did not need to take royalties into account in deciding how to introduce any new aspect of its service
By contract, the new CRB rates require many services to pay based on performances, a metric that many services don’t currently track, and which many may not be able to accurately count (see our post here). The CRB royalties also are such that they the webcaster must carefully consider them in making any decision as to whether or not to launch any new service as, if that service attracts listeners but not revenue, the service could owe significant fees without having earned the revenue to pay for the music use. The per performance royalty does not adjust to changing economic conditions, either, as it remains at the level set by the CRB, regardless of the ability of the service to monetize the use of music or changing economic and competitive conditions. In effect, the per performance royalty does not encourage the use of music, as evidenced by many of the larger services that are reportedly limiting their listening or (as in the case of AOL), getting out of the Internet radio industry entirely (see our post here).
The Court in the ASCAP case stated that deciding the marketplace value of music under a blanket license like the one at issue here is a difficult process, as there really are few if any real examples of what a willing buyer and willing seller would agree to. The existence of the blanket license and the threat of a rate court proceeding itself distorts the market, and contributes to results of any voluntary deal that is negotiated for similar rights. And the consideration of benchmark royalties negotiated for other services (a number of which were considered here) all have some differences with the situation at hand, meaning that some sort of inexact and hypothetical adjustment must be done to use the benchmark to determine the rate applicable in the pending case. Regardless of whether or not one thinks that the decision reached in this case was the correct one, the considerations that went into reaching the rate are ones that might be instructive for future cases involving the CRB’s decision on the sound recording royalty.