Tuesday, the Senate Judiciary Committee held a hearing on the sound recording performance royalty, titling the hearing "Music and Radio in the 21st Century: Assuring Fair Rates and Rules Across Platforms" (a webcast of which can be accessed here). While the hearing was ostensibly to search for a way to come up with a uniform system of determining music royalties across various digital media platforms (though the broadcast analog performance royalty snuck into the discussion from time to time), in reality it appeared to be two things – a search for compromise and a demonstration of the dramatically different perspectives from which the recording industry and the digital radio industry approach the topic. While one might assume that the dramatically different approaches would mean that no compromise was possible, there were a few areas of commonality that perhaps reflect the potential that, at some point, common ground can be found. We will review the hearing’s discussions in multiple parts – today dealing with the issue of the standard to be used in assessing royalties for the public performance of sound recordings and, in a subsequent post, we will summarize the differing world views of the participants and why the dramatically different ways that they see the business make for difficulty in compromise.
But first, a summary of the issues that were to be discussed at the hearing. Essentially, the hearing was to discuss two bills addressing different aspects of the royalty issues. Senator Feinstein of California, who chaired the hearing, was looking for any common ground that might exist that would allow for movement on the Perform Act that she has introduced. That act would attempt to do two things – (1) assure that a common standard was used to assess sound recording royalties in all digital media and (2) adopt standards that would require digital services to use some form of security or encryption that would make "stream ripping" more difficult. The first goal of her bill, looking for a common standard, was an attempt to avoid some of the problems that have been evident in the royalty proceedings that have thus far been held before the Copyright Royalty Board which have resulted in dramatically different royalties – ranging from 6 to 8% of revenue for satellite radio companies and a similar royalty for digital cable music services (see our posts on those rates here and here) derived under an "801(b) standard" (after section 801b of the Copyright Act) , and the royalty for Internet radio that has been estimated to range between 75% and 300% of gross revenues of those services, derived from a "willing buyer, willing seller" royalty standard. The Perform Act would subject all to a single standard – and it currently proposes a new standard – "fair market value."
The second bill that was being discussed was that of Senators Brownback and Wyden (who were both at the hearing, the former asking questions and the later as a witness) – the Internet Radio Equality Act (about which we have written here and here) which would lower Internet radio royalties to 7.5% of revenue and adopt the 801b standard for future proceedings. As the bills propose different standards for music royalties, one area of disagreement was immediately evident. Yet, as Senator Feinstein pushed the parties to find a compromise, a glimmer of hope actually appeared.
The record company representative on the panel, Jeffery Harleston of Geffen Records, held firm for the "fair market value standard," arguing that if artists and labels are forced to license their product through a compulsory license, it is only "fair" that they receive the value that their work would have brought had they been able to license it in the marketplace – so a "fair market value" rate was appropriate to provide that compensation. While the issue was not raised in the hearing, one wonders why, if the record companies believe that this standard is the only "fair" one when a compulsory license is involved, they don’t advocate a change in Section 115 of the Act – the compulsory license that record companies rely on to get rights to reproduce the composition of a song when making a recording of that song. Record companies and artists do not need to negotiate with music publishers for the rights to use a composition, but instead they can get that right through a compulsory license – and the royalty to be paid by the record companies under that license is set using the 801b standard. So if record companies and artists use 801b when it benefits them, shouldn’t the same standard be used when their product is the one subject to the license?
On the other hand, Joe Kennedy of digital music service Pandora, testified that the 801b standard, as used for all other royalties under the Copyright Act, should also be applied to the performance royalty in a sound recording. Kennedy argued that, given the difficulty of the application of the "willing buyer, willing seller" standard to Internet radio (stating that the royalty currently takes 75% of Pandora’s gross revenues and, if not changed, will definitely force the company out of business as the royalty increases over the next two years), it seemed difficult to justify the adoption of yet another new standard – "fair market value" – which has never been used in the past. What Kennedy did not specifically state, but which seems evident from the fact that the recording industry is supporting this new standard, is that this new standard is likely to be interpreted much like the "willing buyer, willing seller" standard which already purports to assess the economic value of music in an arms-length negotiation in an open marketplace. That would seemingly be the same thing as "fair market value" of the music.
One point that was lost in the discussion was the meaning of the 801b standard, with some of the Senators in attendance admitting that they did not understand that standard and how it was applied. What is the 801b standard? The standard looks at a number of factors in assessing what the proper royalty should be. Those factors are:
(A) To maximize the availability of creative works to the public.
(B) To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions.
(C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication.
(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.
As is evident, those factors not only look at the economic value of the use of the work, but also assess the public interest in the distribution of artistic and literary works and the impact that the royalty will have on the industry that has to pay it. Just as the impact of the Section 115 royalty would have on the record companies must be assessed in looking at that royalty, the impact on the digital music businesses would have to be assessed in determining a rate decided under this standard. In using the 801b factors in assessing the satellite radio royalties, for instance, the CRB reduced a willing buyer willing seller determination of 14% to a rate climbing from 6% to 8% of revenues over a 5 year period, justifying the reduction on the impact that the royalty would have on the business of the satellite radio companies if it were not so adjusted (see our previous post for more details).
So – where was that glimmer of hope? As Senator Feinstein pushed the parties on the panel to find a compromise standard so that the legislation could be moved this session, John Simson, the President of SoundExchange (the collective which collects the royalties and distributes them to artists and labels), actually broke ranks and stated that he did not rule out the use of the 801b standard. However, he said that he thought that the standard would need to be tweaked to reflect current marketplace realities. His specific example of where that tweaking could occur was in assessing the "substitution" issue – whether the use of the copyrighted work by the digital service would be a substitute for its purchase, thereby diminishing the income that the artist might receive from the use of the sound recording. Of course, it would seem that the existing factors already take that into account in assessing the "risks" to various parties under consideration (C) above, the impact on the structure of the businesses that are involved in the proceeding under consideration (D), and the fair return under clause (B).
The purpose of the Copyright laws, under the Constitution, is "To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries." Many commentators (see this article, for instance) state that the meaning of "science" at the time of the Constitution was much broader than it is today meaning, more generally, "knowledge and learning." While creators are given limited exclusive rights, those rights are for purposes of promoting general knowledge within the community – not exclusively for the protection of the copyright holders. If this interpretation is the correct one, then it seems like the Section 801b factors are exactly what is meant by the purpose of Copyright – insuring a fair return, but also allowing for the reasonable distribution of the copyrighted material so as to benefit the knowledge of the general population. This, of course, leads into the discussion of the differing views of the purpose of the statute and of the state of the industry – issues both discussed in detail at the hearing – and to be covered in subsequent posts on this blog.