The text of the Copyright Royalty Board decision on Internet Radio Royalties for 2016-2020 was released last Friday. While it is 203 pages long, the basis for the decision is relatively simple. As required by the Copyright Act, the Copyright Royalty Judges looked at all of the evidence presented to determine what rate a willing buyer and a willing seller would agree to in a marketplace transaction. In looking at that evidence, they decided that the best evidence for that rate was two deals actually done in the marketplace – one deal between Pandora and the independent record label organization Merlin and another between iHeartRadio and Warner Music. As these were deals for the very rates to be decided by the Judges – the rates for the public performance of sound recordings by noninteractive streaming companies – the Judges determined that these two deals best evidenced the value put on streaming royalties by actual players in the marketplace. Looking at the per song per listener rates specified in those deals, and making a few adjustments based on other consideration included in the deals (particularly in the iHeart deal), the Judges arrived at a per song per listener rate for each deal, and determined that they set the bounds of the reasonable rates for nonsubscription webcasting. Taking into account that approximately 2/3 of the music played by webcasters is from major labels like Warner as opposed to that from the independent labels such as those that were part of the Merlin group, the Judges gave the rates from the iHeart deal greater weight in determining where within the zone of reasonableness the rates should fall. Thus, the Board determined that the rate for nonsubscription, noninteractive services should be $.0017 per performance (i.e. per song per listener). This is the rate that they published back in December (about which we wrote here).
While the basis for the decision seems relatively simple, the process to get to that decision was not – and it took 203 pages for the Judges to discuss all of the issues that they weighed in coming to their conclusions. While some of those pages were dedicated to discussions of the rates for noncommercial webcasters and the terms of the payments to be made by webcasters (topics we will try to cover in a later post), the bulk of the decision was a discussion of how the Judges weighed the arguments of the parties in the case in reaching their conclusion. While no summary can cover all of the issues that went into this consideration, some of the issues covered in this decision are discussed below.
Rejection of different rates for music from major labels and indies. The first issue that the Judge tackled was whether they should set two rates for nonsubscription streaming – one for independent artists and one for major label artists given that the two benchmark deals on which they relied represented these two different groups of performers and labels. Prior to making its decision, the Board had asked for legal guidance from the Copyright Office, asking for a legal opinion as to whether the setting a bifurcated rate was legally permissible under the provisions of the Copyright Act. The CRB read the Copyright Office’s decision on the certified question as one that did not actually answer the question the question that was posed. Instead, the Copyright Office had determined that there was no real legal issue for it to resolve as no party in the case had suggested such a bifurcated rate. In its decision, the Board wrote that, as the Copyright Office had not reached a legal conclusion on the issue presented, the Judges were free to make their own decision on the issue. The CRB decided that it would not do adopt differing rates, as setting two rates would be capricious (meaning that it would likely be overturned on appeal) as the possibility of two separate rates was not argued by the parties and no evidence on whether to set a bifurcated rate had been presented during the case. In order to set a bifurcated rate, the Board would need more evidence that could only come through further time-consuming hearings. As the deadline for reaching their decision has passed, the Board decided instead that the two benchmark deals provided evidence of the bounds of a reasonable rate, and decided to go with the weighted average based on the CRB’s finding that there were greater plays given to major label artists.
Steering. The decision weighed various challenges to the use of these deals as benchmarks, but rejected most of them. One of the more interesting discussions was on the use of “steering” as an incentive for the labels to enter into the deals – the services promised to give consideration to playing more of the music made by artists from labels that entered into deals in return for lower rates. SoundExchange argued that the use of these incentives meant that the rates could not be benchmarks, as all willing sellers could never agree to deals that included the benefit of steering, as at some point the service would reach 100% of its music and further favorable treatment would not be possible. The Judges rejected this argument, finding that the mere threat of steering was enough to cause willing sellers to enter into marketplace deals. The deals would be constrained by the fact that labels needed to receive a price that covered their costs of providing their music and a reasonable return. In effect, the rate that factored in the potential for steering reflected what would be the rate in a competitive marketplace, where competing sellers look to reduce prices to the levels at which they can attract buyers.
Competitive Marketplace. That question of whether the Judges should assume that the “willing buyer willing seller” standard to be used by the Judges demanded that the Judges assume that there was a competitive marketplace was another issue discussed in the decision. SoundExchange had argued that the Judges should not be looking at a competitive market, but instead the market as it is, with a limited number of sellers who can, in real marketplace deals, defeat steering through most-favored-nations clauses in licensing contracts and similar devices. These kinds of agreements can limit the ability of a music service to favor the music of one label over another. But the Judges rejected this contention, looking at precedent and the statutory language to determine that Congress had intended that they should be assuming a competitive marketplace and looking for rates that would be set in such a marketplace, not rates set in a market that was a constructive oligopoly.
Negotiations in the Shadow of the Statutory Royalty. The Judges were also asked to reject these benchmarks as they were negotiated “in the shadow” of the statutory rates. In other words, the Judges were asked to disregard these benchmark deals, as the only reason that the rates were set where they were was because they were based on rates that already existed and were binding on the parties through licenses issued under the Copyright Act. Specifically, SoundExchange argued that the Merlin rates only existed because, for Pandora, there was the Pureplay rate (about which we wrote here), and for iHeart the existing royalty rates for broadcasters who stream. The discounts provided by the proposed benchmark deals relied on the existence of these base rates set under legal authority, not marketplace negotiation, argued SoundExchange. While the Judges wrote extensively on this issue, one of the points that they made was that the parties knew that this CRB proceeding was coming up, and that any rates that they entered into would be presented as evidence in this proceeding. In fact, the Judges noted various terms that appeared to be included in these deals (or which were suggested in the negotiations) specifically to provide arguments that these deals should not be considered to be benchmarks when this CRB rate-setting case was argued. Despite the fact that everyone knew that the deals would likely be offered as benchmarks, the parties nevertheless believed that they made business sense and entered into them. This knowing decision to enter into the deals despite the fact that they would likely be used as evidence in this proceeding demonstrated to the Judges that the deals had value to the parties, and thus the deals themselves had marketplace significance and were appropriate benchmarks.
Interactive Benchmarks. SoundExchange had also offered its own benchmarks to which the Judge gave only limited significance. Its principal expert offered a benchmark based on deals agreed to in the interactive marketplace – where music services cannot rely on a statutory license for the music that they play but instead must directly negotiate deals with record companies. A host of arguments were raised against the benchmarks offered by the expert – which took the rates arrived at in the direct deals in the interactive marketplace and adjusted the price associated with the deals downward to reflect the lower value attributed to the noninteractive streams at issue in this case. The SoundExchange expert assumed that the ratio of the prices paid to copyright holders for the rights to play music would have the same ratio to the subscription price paid to the services by the consumer in both the interactive and noninteractive markets. Because subscription prices tend to be lower in the noninteractive market, the price paid for the music would be lower. The Judges looked at a number of arguments against this assumption, and concluded that they would give some weight to the value determined by SoundExchange’s expert through this process, but only in connection with a rate paid by music services for music served to consumers paying a subscription fee. The number that was arrived at through these calculations and the rate specified for subscription services in the Merlin deal with Pandora were essentially the same, leading to a rate of $.0022 per performance for subscription plays, the rate adopted by the Board in December.
SoundExchanage also offered a number of other deals as potential benchmarks – arguing that rates paid by certain interactive services for portions of their services that closely resembled the services offered by noninteractive webcasters should be a benchmark for those noninteractive rates. The Judges rejected the one deal that received the greatest amount of discussion – the Apple deal – as there were other financial elements to that deal, and the judges could not conclude which parts of the consideration paid by Apple were attributable to the webcasting service and which were attributable to other parts of the Apple music service. Other deals by interactive companies were rejected as the Judges concluded that these other music services were not really analogous to webcasting as they in fact had significantly more interactivity.
Rejection of Analysis of Profitability of Services. During the course of the hearing, various music services offered evidence as to their ability to make a profit at various royalty rate levels. The Judges determined that this was not a productive avenue for them to pursue, as they assume that the potential for profitability was baked into the decisions of the parties to enter into the benchmark deals. In the Judges’ opinion, rational economic actors would consider profitability in deciding whether or not to enter into deals that formed the benchmarks that the Judges used in deciding the case. The Judges observed that this was not a utility hearing with rate of return guaranteed to either the services or the copyright holders, and thus looking at marketplace benchmarks was the way in which they would determine the rates to which willing buyers and willing sellers would agree.
No separate rate for simulcasters. The Board rejected setting a separate rate for simulcasters, despite NAB’s arguments that the lesser degree of interactivity in simulcasting , plus the promotional value of the broadcast exposure, warranted a lesser royalty than that paid by services like Pandora where users had some ability to influence the music that they here. The judges found that there were no benchmark deals that were reliable indicators of a willingness of copyright holders to provide a lower rate to broadcast simulcasts. Finding that the other distinctions offered by broadcaster witnesses were mostly speculation not backed up by marketplace deals, the Board rejected a separate rate for broadcast simulcasts.
No percentage of revenue royalty. Both SoundExchange and Pandora had proposed that the royalty set by the Board be the greater of a per-song per-listener royalty and one based on a percentage of revenue. Pandora suggested that the percentage of revenue be 25% while SoundExchange suggested 55%. The judges rejected these proposals, finding that many of the interactive marketplace deals offered as evidence for SoundExchange’s proposed rates did not have such a percentage of revenue formula and, even in the deals where it was included, it apparently never was applicable, as the per song per listener rate was always higher. This was also the case with Pandora. Thus, even where that percentage was included, it was essentially meaningless. Moreover, determining what revenue was subject to the fee could be difficult. Thus, the proposals were rejected, and the rates are simply based on a per-song, per-listener formulation.
This is but a very high level review of issues discussed in the decision. But, in effect, it all came down to benchmarks selected by the Judges. We have written about the importance of benchmarks in CRB decision-making before (see, for instance, our articles here and here). When the rate proposals of the parties came in (about which we wrote here), it was clear that benchmarks were being offered as a basis of each case. Here, the Judges have reached a conclusion as to which benchmarks best approximated the rates that they were trying to determine – and selected the two deals between major webcasters and significant copyright owners.
While we now know the basis for the CRB decision, this may not end the argument. Once the decision has been finalized and published in the Federal Register, parties can appeal to the US Court of Appeals. We will have to wait to see whether that happens in this case but, in the interim, these rates are in effect and payments under the new rates will be due in March. There are many decisions still to be made, and some additional controversies that may need to be resolved outside of the context of this case (some of which we wrote about here). So keep watching as these matters develop.