One of the fundamental questions that surrounds the proposed broadcast performance royalty for the use of sound recordings by over-the-air (or the "performance tax" as it has been labeled by the NAB) is how much it could it cost a broadcaster?  Right now, that question is difficult to determine, as the pending bills do not themselves provide any details as to what the fees would be, except for noncommercial entities and for small broadcasters for whom fixed yearly fees are proposed.  For a broadcaster with a station having over $1.25 million in yearly revenues, the current Congressional bills leave the amount of the royalty to be determined by the Copyright Royalty Board.  In the current Senate draft of the bill, the amount to be paid would be based on the "willing buyer willing seller" standard that has been so controversial for Internet Radio companies. But the hearing to be held by the Senate Judiciary Committee tomorrow will address, among other issues, the question of "platform parity," i.e whether all companies subject to the sound recording performance royalty should pay a comparable rate, so we may see that proposal change as it did in the House version, to some form of the 801(b) standard (about which we wrote here and here).

We will write about the differing rates paid by differing music services in the next few days, especially as it becomes clear as to what rates for Internet radio royalties were agreed to under the most recent settlements with webcasters pursuant to the Webcaster Settlement Act.   But even without a detailed analysis of all of the rates that have been agreed to, certain trends can be seen as to what SoundExchange, on behalf of the artists and copyright holders, believes to be a fair royalty for the use of their music.  And that number is likely to be a "Substantial" one, as suggested by a recent Congressional Budget Office review of the cost to broadcasters of the proposed performance royalty.

We have written before how, using the Copyright Royalty Board decision that was reached for XM and Sirius in 2007 (and recently upheld by the Court of Appeals), it could be concluded that the "willing buyer willing seller" standard could lead to a broadcast performance royalty as much as 25% of gross revenues.  We reached that conclusion by looking at the CRB decision which set a royalty for XM and Sirius (at that point separate companies) of 6% growing over a six year period to 8% of gross revenues (with some adjustments subtracting those revenues clearly attributable solely to non-music programming).  The CRB reached that decision after finding that a fair market rate (essentially what the willing buyer willing seller standard is supposed to determine) would be approximately 14% of the XM/Sirius revenues (principally their subscription revenues as their music streams were commercial free).  This value was adjusted down to the final royalty to preserve the stability of the industry, a factor required to be taken into account by the 801(b) standard that applies to the determination of the satellite radio (but a factor left out of the House version of the broadcast performance royalty bill).  That 14% of revenue was computed on the assumption that about half of the subscription revenue could be attributed to non-music programming (e.g. news, sports, Howard Stern and Oprah, etc).  So, if the perceived market value of the music in Sirius XM programming was 14% of the total subscription revenue, and half of that value came from non-music programs, then the value of a pure music service would be double that number, or something in the vicinity of 25%.

At the House hearing on the performance royalty held in March, an RIAA witness seemingly implied that the royalty would actually end up being closer to the 6-8% of revenue that Sirius XM now pays.  But recent royalty decisions give one pause about such a claim.  Look, for instance, at the recent settlement between the Pureplay webcasters (some of whom I represent) and SoundExchange, where the percentage of revenue royalties range between 12 and 14% of revenue for small webcasters to 25% of revenue (at a minimum) for large pureplay webcasters.  And this rate is deemed an experimental rate, reached as a compromise and not reflecting the true value of music, according to the SoundExchange press release.

In other services where there is no adjustment made for the preservation of the industry subject to the royalty, the royalty has been high – though perhaps not quite as high as in the webcasters’ case.  For instance, in connection with "new subscription services", the audio services provided with DISH and DirecTV video services, the parties planning to provide those services and SoundExchange reached an agreement for a royalty rate of 15% to avoid a CRB hearing.  Even in connection with Business Establishment Services (like Muzak) that do not pay for the public performance of music, but only for the ephemeral copies made in the digital transmission process (the most insignificant part of the webcaster royalty – assumed to be about 8% of the total royalty), the parties agreed to pay a royalty of 10% of gross revenues.  In no case of which I am aware has the royalty for the public performance of sound recordings been set at less than 10% of gross revenues, and then only in connection with "small webcasters," who have revenues similar to those of radio broadcasters who would pay a flat fee under the pending legislation for the broadcaster performance royalty. 

Thus, the conclusion of the CBO, that the broadcast performance royalty would be substantial, seems right on target, unless the new legislation adopts the full 801(b) factors. These factors would have to include the factor looking at the preservation of the stability of the industry which was so important in the Sirius XM decision – the one factor omitted from the standard proposed in the revised House bill. 

Of course, even at 6-8% of revenues, broadcasters will probably find the royalty significant).  But at 25%, in today’s economic climate, it would virtually drain the radio industry of its profit margins.  We will be interested in seeing if these factors are discussed in tomorrow’s Judiciary Committee hearing.