In one week this month, Apple announced that it will get into Internet Radio, and Pandora, the biggest player in that space, announced that it will be buying a traditional, over-the-air radio station. What do these two big announcements say about the state of music royalties for digital music services? Apple’s struggles to get its service launched were well chronicled, as it was working to get an agreement for its new service from the record labels. What was less reported was its simultaneous negotiations with the music publishing community. Pandora’s radio station purchase, on the other hand, was admittedly a simple deal to take advantage of a blanket license available to all similarly situated companies owning radio stations. We’ll explain why these two deals were so different, and what impact the deals may have on other digital music services below.

The Apple deal is one negotiated with the copyright holders for the simple reason that the service that it is offering appears to be an interactive one, unlikely to be completely covered by any statutory (compulsory) or other blanket license. As we’ve written before, a statutory or compulsory license is one where the copyright holder, by law, cannot refuse to make available his or her copyrighted work. But, in return, the copyright holder receives a royalty set by the government – in the US, usually the Copyright Royalty Board. In the music world, the two most common compulsory licenses are the ones that allow webcasters and other digital music services to publicly perform sound recordings (the royalties paid by webcasters, satellite radio and digital cable radio companies to the record companies and artists), and the royalty that allows users (including record companies) to make reproductions of musical compositions in connection with the making of a sound recording, downloads, ringtones, and probably on-demand streaming services. This royalty is commonly referred to as the mechanical royalty, and is paid to songwriters and composers or their publishing companies. To qualify for these compulsory licenses, a company must follow certain rules. If they don’t, then they have to negotiate directly for the licenses from the copyright holder – which appears to be what Apple did.

Apple’s service seems to not be a true Internet radio service that qualifies for the compulsory licenses under Sections 112 and 114 of the Copyright Act. These sections of the Copyright Act give webcasters and other digital music providers a compulsory license to publicly perform sound recordings (a sound recording being the recording of a musical composition by a particular singer, band or other artist). To qualify for the license available under these sections of the Act, a service can’t be “interactive”, and it generally must observe the performance complement (limiting the number of songs from a given artist in a given period of time – see the details here). Interactivity is not been fully defined by the Act. While some user-direction is allowed (see the Yahoo Launchcast case about which we wrote here), unlimited skipping of songs, or the ability to replay a song, would probably make the service interactive. As Apple’s service will seemingly have these attributes, they apparently had to negotiate with the record labels for the public performance rights.

The Section 115 mechanical royalty also comes into play as there are reproductions of the songs seemingly being made (e.g. in connection with the ability to replay a song). The compulsory license under Section 115, developed originally to simply allow a musician to be able to record a song that had already been recorded by another artist without having to find the composer and negotiate with him or her for the right to record the song, has all sorts of very specific notice and record-keeping obligations that really don’t work well in a digital music service environment. To avoid those obligations (and to get better rates), services usually negotiate with big publishing companies and services like the Harry Fox agency to get the rights to make these reproductions – again something that Apple appears to have done.

So the Apple deal appears to just be the result of business negotiations for non-statutory royalties. For those relying on the statutory rights, do they have any impact? It really is difficult to tell, as the royalty rates are not at this point public. But there were some press reports that indicated that Apple’s royalties for sound recordings were going to be about half again the amount paid to SoundExchange for these same rights by Pandora. If that is literally true, those rates may be less than the rates set by the CRB for webcasters who do not qualify for the Pureplay deal under the Webcasters Settlement Agreement that governs Pandora’s rates (see our summary of webcasters’ SoundExchange rates here). If you take into account the value of the interactive features of the Apple service, such rates might give webcasters some argument that the true value of music should be less than what has previously been set by the CRB when the next rate setting proceeding comes around – to be litigated in 2014 and 2015 for webcasting royalties that become effective in 2016. However, there may also be other added value that Apple is giving the copyright holders – like a percentage of advertising revenue (see this Wall Street Journal article that suggests that artists get 50% of ads sold in connection with a song) or other considerations which may make any comparison of the rate they are actually paying to the rates to be charged webcasters difficult to determine in an apples to apples comparison (pardon the pun).

On the musical composition side, the reported rate negotiated by Apple has been reported to be 10% of revenue – a seemingly steep increase over what broadcasters or other Internet users have paid in the past to ASCAP, BMI and SESAC for public performance rights to musical compositions (see this article in the Wall Street Journal about the rate being paid). But, here too, there are other factors to consider. If the Apple service really includes these interactive features, like the ability to replay a song, the fees paid to the music publishers would include the mechanical royalty, which under a recent proposed settlement of the Section 115 statutory royalty rates would have a royalty rate (all in, inclusive of the public performance rate) of substantially more than 10%(see articles here and here). If that is the case, then the Apple deal may actually represent a discount off of the statutory rate for the bundle of rights that they have acquired. But we are being a bit like the cable TV talking heads, talking about what might or might not be in a deal that we haven’t seen, so this is all just speculation.

What we can talk about with a bit more certainty is the royalty implications of Pandora’s announcement that it is buying an over-the-air radio station in the Rapid City, South Dakota radio market. As stated by company lawyer Christopher Harrison in an article in the Hill newsletter published in Washington, DC, the purchase was done so that Pandora could qualify as a broadcaster to take advantage of the agreement between the Radio Music Licensing Committee and ASCAP, setting the rates that broadcast companies pay for the right to publicly perform musical compositions in the repertoire of ASCAP (see our summary of that agreement here).   As we have written before, ASCAP is subject to antitrust consent decrees by which it must license to all music users in given categories on the same terms. Thus, for the most part, its agreements are public, and all similarly situated users can take advantage of the deals that it has already negotiated. The rates charged by ASCAP are subject to oversight by a US District Court judge, to make sure that these rates are reasonable. If a user feels that the rates that ASCAP is offering to it do not match up with those rates that it is offering to comparable users, the user can complain to the court, and the court will hold a trial to determine what the proper rates should be.

In Pandora’s case, it has commenced a rate court proceeding against ASCAP, alleging that ASCAP has been seeking to move away from the traditional percentage of revenue royalty rates that have been standard for music users in the past (see an article on its complaint and a copy of portions of the complaint, here). The complaint also alleges that ASCAP refused to allow a standard deduction from revenues similar to other services (a deduction that takes into account costs of collection, including commissions). Such a royalty rate would end up in a webcasting service paying significantly more in royalties than it has in the past. Yet, only last year (see our article here), ASCAP entered into a percentage of revenue deal with the Radio Music License Committee – a deal that to which all commercial broadcasters could become a party. That agreement is available on the ASCAP website (here). Pandora is taking advantage of the fact that, to take advantage of the agreement, its terms seem to require simply that a Licensee identify a single radio station that it owns, and once the Licensee has done so, the ASCAP license covers all of its performances, whether those performances are made over the air or in connection with the company’s New Media properties – which includes websites, mobile applications, and other digital properties. So, by buying a radio station (or even doing an LMA, as the agreement covers time brokers too), the literal terms of the agreement appear to cover Pandora’s digital properties, just as it does for any other broadcast station owner.

Of course, ASCAP has issued statements that say that they don’t believe that Pandora can take advantage of the language in the RMLC deal. And, soon afterward, BMI joined in the action by petitioning the rate court to begin its own proceeding to determine what rates Pandora should pay to it (see their petition to the rate court here). In the BMI request for the rate court proceeding, it specifically claims that the RMLC agreement that it has signed (similar in terms to that which ASCAP agreed to with the RMLC) should not apply to Pandora even if it does become an FCC licensee. It appears that ASCAP and BMI won’t just give up on their fight and concede that Pandora can take advantage of the language of the RMLC agreements that seemingly allows it to do so. 

So, in the always confusing world of digital music royalties, we can look forward to more fights about just what all these deals mean. 

Note: For the record, it should be made clear that my law firm is involved in the transaction by which Pandora is acquiring the radio station.