Congressman Mel Watt from North Carolina this week introduced his long-awaited bill proposing that over-the-air radio broadcasters pay a royalty to sound recording copyright holders (usually the record label) and to artists. As we have written many times, currently, royalties on sound recordings are paid only by companies that make digital performances, including webcasters (see our summary of the current webcasting rates here) and satellite radio (see our summary of the recent decision on satellite radio rates here). While the bill’s proposals for a broadcast royalty has been covered in many other news reports, few note that the Watt bill, called the Free Market Royalty Act, goes far beyond past proposals for a royalty on over-the-air broadcasters. In addition to the over-the-air royalty, the bill proposes that the Copyright Royalty Board be taken out of the equation in setting royalties.  And the removal of the CRB from the process applies not just to the proposed new performance royalty on broadcasters, but also to the setting of royalties for all other noninteractive commercial digital music services. Instead of a CRB proceeding to set rates, commercial music users, including webcasters and satellite radio, would need to negotiate a royalty with copyright holders – principally with SoundExchange – a royalty not subject to review as to the reasonableness of the rates by the CRB or by the Courts.

And the proposal goes further than simply designating SoundExchange as the party with whom all noninteractive digital audio services would go to negotiate royalties. In addition, the bill provides that any copyright holder could opt out of the rates negotiated by SoundExchange, after they are set, and negotiate direct licenses for its music with music services, including radio broadcasters. Seemingly, a popular band, or a label with a number of hit acts, that thought that it could get more from its music than any rate to which SoundExchange agreed, could withdraw from any "deal" with SoundExchange, and negotiate on their own for what would presumably be higher royalties.  If the copyright holder withdraws its music from the SoundExchange royalty, broadcasters and other music services could not play that music unless and until a license deal was reached.

While direct licensing has allowed some digital music users to negotiate what seem to be ‘better" deals on digital music royalties, those have been one-on-one deals between a company and a record label or copyright holder, not an industry-wide deal where the user either reaches a deal with SoundExchange or it is essentially forbidden from using music. Moreover, the alternative to the direct licenses is the rate set by the CRB.  Copyright holders cannot refuse to make their music available to noninteractive services willing to pay the royalty set by the CRB (see our article on why Internet radio had the Beatles before interactive services, which must negotiate direct licenses, did). 

Under the Watt bill, while users are allowed to collectively negotiate (as they are in current CRB proceedings), the ultimate decision as to the rates has to be made by SoundExchange, and the reasonableness of their rates would not, under the statute, be subject to review by the CRB or seemingly by anyone else. So if music companies want to use music, they would have to agree to whatever SoundExchange offered in a negotiation, or stop playing music.

That is an unusual situation for the public performance of music, as there is usually some oversight of the reasonableness of royalties – especially where there is collective negotiation going on. For instance, in connection with the musical compositions, the rates set by ASCAP and BMI have for decades been subject to court review under antitrust consent decrees that require that they make music available to similarly situated users at the same rates, and that these rates be reasonable. Only SESAC, as the smallest licensing organization, has been free from antitrust scrutiny, though (as we wrote here) there are currently court cases brought by both radio and TV broadcasters seeking to bring SESAC under an antitrust consent review. The Watt Bill does not address the issue of the reasonableness of the rates, instead it simply establishes SoundExchange as the one-stop, unregulated shop for all music licensing for noninteractive services. 

The bill goes on to provide that, even where direct deals could be negotiated, 50% of all money paid in direct deals be paid to SoundExchange to be distributed to artists. While that may sound like a good deal as it preserves the artist share of the royalties, it, in some instances, it could work out to be a detriment to the artist. An independent artist who owns its own masters could negotiate a direct license with a music service, yet would seemingly have to pay half of its royalties to SoundExchange, incurring servicing fees and other operating cost deductions, before it gets the other half of its royalties as a performer on its own songs. There does not seem to be any opt-out of using SoundExchange as the agent for the distribution of the 50% share.  This seemingly could actually deter such direct licensing efforts, and any economies that can be achieved by direct licensing.

The bill does make one exception from this system, allowing noncommercial music users to ask the CRB to start a proceeding to set rates. So, for instance, noncommercial broadcasters would not have to be part of the SoundExchange negotiations.  Noncommercial rates would be set by the CRB using the current “willing buyer, willing seller standard” used for webcasting royalties, not the 801(b) standard (about which we wrote here), which takes into account other public interest factors, and is currently used in other CRB proceedings to set noncommercial royalties in connection with the rates that they pay to ASCAP, BMI and SESAC. 

As with any other bill dealing with controversial copyright issues, this seems like a first step – staking out an extreme position far to one side in the debate. As Congress seemingly has a few things on its current agenda (like perhaps getting the government open again), it remains to be seen as to whether this is the opening salvo of a debate to be joined by other parties, or merely a proposal that will fade into the background in the crush of other pressing matters.