Last week, the Copyright Royalty Board asked for comments on a proposed settlement agreement between Sirius XM and SoundExchange, and some articles about that announcement have not been entirely clear about what the deal covers. It has nothing to do with webcasting royalties for 2016-2020, which are still being litigated (see our article here about the proposals of the parties in that case). Nor does it have to do with the royalties payable for Sirius’ primary satellite radio service, which were just upheld by the Court of Appeals (see our article here). Instead, these royalties have to do with a very narrow part of Sirius’ business – providing music channels packaged and sold to consumers along with video services like cable and satellite TV.
Some who closely follow these issues (and the coverage of CRB issues on this blog) may think that the rates for these services were set at the same time as the Sirius rates for their satellite music service, as the CRB at that time set the rates that were applicable to Music Choice, which also offers a music service bundled with cable or satellite video programming (see our articles on the recent decision on the appeal of the rates, and the article on the CRB decision itself here). Even though Music Choice offers pretty much the same service, their rates are different – as Music Choice was classified as a “preexisting subscription service” in the Digital Millennium Copyright Act, while the service that Sirius provides is classified as a “new subscription service” paying at a different royalty rate set by the CRB using a different royalty standard. How did this happen?
In 1998, when the DMCA was adopted, services that existed at the time (or, like Sirius and XM that were authorized and in the process of constructing an launching their satellites) were considered “preexisting services.” The preexisting services, under the DMCA, have royalties to be set using the “801(b) standard,” referring to a section of the Copyright Act setting out evaluation standards that had historically been used to judge other royalties (like the royalties that record companies or artists pay to composers for the use of their compositions in making recordings). As we have written before, this standard looks not only at the theoretical market rate for the use of music, but also at other factors, including the relative investments of the services and copyright holder in the distribution of the music, and the effect of the royalties to be set on the stability of the industry.
In contrast, services that didn’t exist or who did not focus on the standard issue at the time of the adoption of the DMCA, have their royalties set using a “willing buyer, willing seller” standard, where the Judges setting the rates try to determine the rates that would be agreed to in a competitive marketplace by a willing buyer and a willing seller of somewhat equal market power. Because real marketplace rates don’t generally exist for these services (as parties fear to enter into them as they could affect the rates set in the next royalty proceeding), Judges need to try to compute those rates from using other benchmarks. The royalties addressed by the settlement on which the CRB is now seeking comments is for a service that didn’t exist at the time of the adoption of the DMCA (only the companies providing cable radio at that time were grandfathered as a Preexisting Subscription Service), so their rates are set using the willing buyer, willing seller standard.
Can we see the practical impact of these differences between these standards by the rates that Sirius and Music Choice pay in connection with essentially their version of what is essentially the same service? The rates agreed to by SoundExchange and Sirius XM in this agreement are all based on a per subscriber fee, while the rates set for Music Choice were based on a percentage of revenue, so that makes the direct comparison somewhat difficult. But, in the rates that Sirius had been paying for this service in the prior 5 years, the fees were set at the greater of a per subscriber fee or 15% of revenue (see our article here). By contrast, the Music Choice rates top out, in 2017, at 8.5% of revenue in the recent CRB decision. Is this difference all a result of the standard being used, or are there business differences in the services provided? While we can’t know without being in the negotiations, it is certainly worth considering.
The impact of standards and rate-setting is one that has been much debated (see for instance our posts here on the proposed Internet Radio Fairness Act, and this post on other hearings held by Congress on the Perform Act and other issues about rate-setting procedures). But, as we wait for decisions on Internet Radio Royalties, and look at copyright reform proposals from Congress (see our article about the so-called “Music Bus” legislation that certain members of Congress have been considering), the Copyright Office (see our articles on their review of music rights), and the DOJ’s review of the antitrust consent decrees that govern ASCAP and BMI, we can expect that there will be more discussion of these issues in the very near future.