The recent introduction of a bill by Congressman Jason Chaffetz offers proposals for reform of the operations of the Copyright Royalty Board – reforms that many in the Internet Radio industry have hailed as promising real change in the way that royalty decisions for webcasters have been made. While some webcasters seem to think that relief is at hand, in fact, the bill has simply been introduced into Congress co-sponsored by four congressmen, so it has a long way to go before it can be adopted by Congress and become the law of the land. But it is worth looking at the many issues that the Bill addresses so that webcasters know what it says so that they can rationally argue for its passage.
Most webcasters have focused on the provisions of the bill that would substitute the standards set out in Section 801(b) of the Copyright Act for the standard that currently applies – "the willing buyer, willing seller" standard. 801(b) sets out five factors to be considered in determining the rates to be set for a statutory royalty. These 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.
In contrast, the current “willing buyer, willing seller” standard looks only at one question – what a willing buyer and willing seller would agree to in a marketplace transaction. What is the difference between these two standards?
We’ve written about the difference that they can make as a practical matter, here and here, as the differing standards have led to dramatically lower rates for music royalties paid by satellite radio and digital cable radio when compared to those paid by Internet radio. In the Internet radio world, as there usually are no true marketplace deals for non-interactive radio other than those that are directly influenced by the desire to avoid a protracted and expensive royalty proceeding, the CRB decisions have been influenced by rates set based on extrapolations from other deals. Recent decisions have started from deals in the interactive marketplace (with expert witnesses testifying on their estimation of the amount by which the interactive royalty should be adjusted, using an economic regression analysis, to remove the value of the interactivity – a very subjective evaluation at best). In the last webcasting royalty case (about which we wrote here), the standard that the CRB looked to in setting rates was the NAB deal with SoundExchange (summarized here), giving almost full weight to the royalties paid by broadcasters for their streaming, despite the fact that the deal had been negotiated after the prior CRB decision and resulted in substantial discounts off the CRB rates for streaming done in the prior royalty term. This deal that the CRB relied on was one negotiated in the face of, and to reduce, the already high royalties imposed in the prior proceeding, the one based on the regression analysis applied to the interactive rates (a decision summarized here) . The Chaffetz bill specifically states that interactive rates should not be used as the basis of setting the rates for noninteractive services (i.e. webcasting).
The Chaffetz bill would also make other more subtle changes in how these standards are applied. The bill would remove the precedential effect of past royalty decisions. It would also explicitly put the burden of proof on the parties seeking a royalty that the royalty they seek is reasonable – a standard that is common in ASCAP and BMI rate court litigation, but is not at all addressed in the current Copyright Act addressing the sound recording performance royalties set by the CRB.
Finally, the bill would amend the law to specifically remove any suggestions that certain aspects of recent royalty decisions were in fact the preferred way of reaching a royalty decision. Specifically, these issues include the following:
· Taking into account that the services using music need to make a return on their investments in setting up and operating their services
· Not disfavoring a percentage of revenue royalty, as opposed to the per song, per listener royalties now in effect for most royalties
· Allowing for a carve-out based on songs that are directly licensed (already allowed under a per performance royalty, but a more difficult concept to deal with when the royalty is based on a percentage of revenues)
· Any decision should give full-value to:
o The promotional value of the playing of music by the service
o The costs of the digital music service in putting together the programming that it features
Finally, the bill suggests that rates set by Webcaster Royalty Act settlements that are to expire in 2014 be extended through 2015. This would seem to include the rates for “small pureplay” webcasters whose percentage of revenue rates are to expire at the end of 2014, leaving them to convert to another type of service (the “small commercial webcaster” service that limits their listening hours) or to pay per song per listener rates that may well put them out of business as their royalties would, in most cases, exceed their revenues.
This bill also covers other issues which we will address in another article later this week, including changes to the law on ephemeral royalties. It is also bound to be opposed by the music labels and some artist groups. We’ll explain that opposition in yet another article coming up. Watch for those articles, and keep your eyes on the progress of this bill that may be very important to the survival of the Internet radio industry as we know it.