Broadcast Performance Royalty

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.


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No one ever claimed that music royalties are easy to understand, especially in the digital age when nice, neat definitions that had grown up over many years in the physical world no longer necessarily make sense. The complexity of the world of digital music licensing is clear from many sources, but the Commerce Department’s “Green Paper” on Copyright Policy, Creativity, and Innovation in the Digital Economy does a good job discussing many of the music royalty issues that have arisen in the last 20 years that make copyright so confusing for professionals, and pretty much incomprehensible for those not immersed in the intricacies of copyright law on a regular basis. The Green Paper discusses some of the issues in music policy that make this area so confusing, and highlights where interested parties and lawmakers should focus their efforts to reform current rules to make them workable in the digital age. The Paper also discusses other areas of copyright policy that we will try to address in other articles.  You can find the Green Paper here (though note that it is about 120 pages and will take some time to download).

One of the most controversial issues that it addresses is the concept of a general performance right for sound recordings. As did Register of Copyrights Maria Pallante in the speech we summarized here, the Commerce Department puts the current administration on record as supporting the creation of such a right – a right that has not existed in the United States, except for a limited sound recording performance royalty for performances by digital audio companies like webcasters (see our summary of the royalty rates paid by different types of Internet Radio services here) and satellite radio (see our summary of the royalties to be paid by Sirius XM under the most recent Copyright Royalty Board decision). While the most controversial aspect of the creation of a broad sound recording performance royalty has been in connection with the extension of that royalty to broadcasters, the adoption of a general royalty, as advocated by the Green Paper would extend payment obligations to others who publicly perform sound recordings – including bars, restaurants, stadiums and other retail establishments.


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Every year, about this time, I dust off the crystal ball to offer a look at the year ahead to see what Washington has in store for broadcasters. This year, like many in the recent past, Washington will consider important issues for both radio and TV, as well as issues affecting the growing on-line presence of broadcasters. The FCC, Congress, and other government agencies are never afraid to provide their views on what the industry should be doing but, unlike other members of the broadcasters’ audience, they can force broadcasters to pay attention to their views by way of new laws and regulations. And there is never a shortage of ideas from Washington as to how broadcasters should act. Some of the issues discussed below are perennials, coming back over and over again on my yearly list (often without resolution), while others are unique to this coming year.

Last week, we published a calendar of regulatory deadlines for broadcasters.  This article looks ahead, providing a preview of what other changes might be coming for broadcasters this year – but these are delivered with no guarantees that the issues listed will in fact bubble up to the top of the FCC’s long list of pending items, or that they will be resolved when we predict. But at least this gives you some warning of what might be coming your way this year. Issues unique to radio and TV, and those that could affect the broadcast industry generally, are addressed below.

General Broadcast Issues

 

There are numerous issues before the FCC that affect both radio and television broadcasters, some of which have been pending for many years and are ripe for resolution, while others are raised in proceedings that are just beginning. These include:

 

Multiple Ownership Rules Review: The FCC is very close to resolving its Quadrennial review of its multiple ownership proceeding, officially begun in 2011 with a Notice of Proposed Rulemaking. The rumors were that the FCC was ready to issue an order at the end of 2012 relaxing the rules against the cross-ownership of broadcast stations and newspapers, as well as the radio-television cross-interest prohibitions, while leaving most other rules in place. TV Joint Sales Agreements were also rumored to be part of the FCC’s considerations – perhaps making some or all of these agreements attributable. But even these modest changes in the rules are now on hold, while parties submit comments on the impact of any relaxation of the ownership rules on minority ownership. Still, we would expect that some decision on changes to the ownership rules should be expected at some point this year – probably early in the year. 


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Last week, the Radio Music License Committee (“RMLC” – see our article about the RMLC), filed a complaint in US District Court in Pennsylvania against SESAC, arguing that SESAC is a monopoly and should be treated like ASCAP and BMI.  RMLC is asking that SESAC be subject to an antitrust consent decree as are these two bigger collection societies. As we have written before, SESAC is not a non-profit organization like ASCAP and BMI, and is not subject to consent decrees like these other performing rights organizations (“PROs”). Instead, it is a private company, owned by venture funds which, up to now, has set its own prices for licenses subject only to negotiations with the rights holders. So what is this suit all about, and will broadcasters see any changes in SESAC licensing in the short-term? 

RMLC claims that SESAC, by effectively being the only way to license the public performance of compositions by thousands of different composers, effectively can get monopoly prices. Practically speaking, radio stations cannot individually license all the songs written by SESAC performers and, even if the stations were able to directly license some of the music from SESAC writers, SESAC still would not reduce their fees.  All SESAC licenses are blanket licenses that give stations the right to use all the music in the SESAC catalog, but are not reduced by any pro rata amount should any music be directly licensed. Thus, argues RMLC, stations cannot try to reduce their licensing liability through direct licenses with songwriters even if such deals could be negotiated.


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Last week, we wrote about the recently announced deal between Big Machine Records and Entercom Communications.  The day after we posted that article, Clear Channel announced another label deal – this time with Glassnote Entertainment Group, the home of bands including Mumford & Sons and Phoenix.  As with its Big Machine deal, the public releases suggest that the label agreed to lower digital performance royalties in exchange for a royalty on over-the-air performances by the company.  What impact do these deals have on the threat of a broadcast performance royalty, and why do the parties enter into these deals?

When the Entercom deal was discussed at the NAB Radio Show, the host of the session asked for a show of hands from broadcasters in the audience who were absolutely opposed to any performance royalty – and about a quarter of the hands in the room went up.  This is probably reflective of concerns that the break in the almost unanimous opposition of radio broadcasters to an over-the-air performance royalty for record labels and musicians could mean that the broadcast performance royalty (what used to be referred to as the "performance tax") would become inevitable. Will these deals embolden the recording industry to once again push Congress to move on the stalled effort to institute a performance royalty?  Perhaps not. At a Congressional hearing soon after the announcement of the original Big Machine-Clear Channel deal, Congressional Representatives were asking witnesses from the broadcast and music industries if the deal reflected a marketplace solution to the royalty issue, obviating the need for any government involvement. And that was certainly the message of the NAB at the Radio Show – these deals are unique deals by companies that can uniquely benefit from them as they have a large digital presence, not a template for universal extension to all broadcasters.


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A deal between Big Machine Records and a broadcaster, this time Entercom Communications, was announced at the NAB Radio Show giving the record company a royalty on the broadcaster’s revenue from over-the-air broadcasting in exchange for lower royalties on digital operations. This deal follows one announced by Clear Channel back in June. Talking to broadcasters around the country, many seem confused by the deals, not understanding why they were done, how they work, or what they accomplish. More than anything, many broadcasters fear that the deals will lead to a generally applicable royalty payable to sound recording copyright holders (i.e. the record companies) on over-the-air broadcasting.  Let’s start with an explanation of how these deals work. 

While the details of these deals are not public, a session at the NAB Radio Show shed a little more light on the subject.  The session also included a promise from a Clear Channel representative that more deals are on the way. Perhaps the biggest news was at least some indication of the parameters of the financial terms of the agreements, with the President of Big Machine saying, in response to the question of whether the deal was an agreement to pay 1% of over-the-air revenues in exchange for a 3% digital royalty, that these numbers were certainly in the ballpark. If those numbers are in fact accurate, the digital royalty is substantially smaller than that paid by most webcasters, where royalties computed on the usual per song per listener basis can range from 45% of revenue to several times the total revenue of most webcasters.  


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Radio broadcasters have been receiving invoices from the Radio Music License Committee (“RMLC”), and many are asking whether the invoice is “real.”  Some stations seem concerned that they are being asked to pay some fee that they really don’t owe. The truth is that this is one bill that most commercial stations in fact do owe, and it is a bill that they should actually be happy to pay. RMLC is the committee that represented radio broadcasters in the recent negotiations with ASCAP and BMI, leading to new agreements covering the royalties to be paid to these organizations through 2016. We wrote about the ASCAP agreement, here. The BMI agreement was announced recently, and we’ll try to get a summary of that agreement up on the blog sometime soon. These settlement agreements significantly reduced the amount of royalties that the radio industry as a whole pays to ASCAP and BMI for the public performance of musical compositions on over-the-air radio (and in connection with their digital uses of music as well).   As part of these settlement agreements, the Court overseeing the antitrust consent decrees with ASCAP and BMI, which had to approve the settlements, approved the fees to RMLC as well. 

Under the terms of the Court approval, all stations that either elected to be represented by RMLC in the negotiations (see our article on that election here), or those who elect to be covered by the settlement by signing an agreement with ASCAP and BMI under the terms that RMLC negotiated, are required to pay the fee to RMLC.  The fee funds RMLC operations in the future, and pays for the cost of the litigation and negotiations that led to the settlements.


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The Radio Music Licensing Committee has announced a settlement with BMI over music royalties for the public performance of musical compositions for the period from 2010-2016.  Terms have not been announced, so we can’t provide the details, yet.  But as we wrote recently when the RMLC announced the terms of its agreement with ASCAP, we would assume that the terms would be somewhat similar to the ASCAP deal.  If no settlement had been reached with BMI, the case would have gone to a "rate court" in Federal District Court to see what the fair market value of the performance right was.  As analogous rates often form the basis for rate court determinations of fair market value, the settlement with ASCAP would no doubt have been an issue for BMI, as it would appear to set a benchmark rate for the public performance of musical compositions.  But, we will have to wait to see what the filings say before we can determine if, for sure, the rates will decrease relative to prior rates to the same extent that they did for ASCAP.

It is worth reflecting on how RMLC came to reach deals with ASCAP and BMI, and to explain why there is no reference to a SESAC deal.  I’ve already heard or seen several people suggesting that an agreement with SESAC may be next – when in fact that is not something that is imminent, as can be explained by the differences between ASCAP and BMI on one hand, and SESAC on the other.  ASCAP and BMI are both governed by anti-trust consent decrees that have been in place for over 50 years.  Under both decrees, these organizations have to enter into agreements to set royalties for all similarly-situated users of music in various categories of businesses – categories including radio, TV, websites, background music, restaurants, bars, hotels, performance venues and practically every other place where music is performed for the public.  If no agreement can be reached on a voluntary license, a “rate court” decides on the royalties. Essentially, that means that a US District Court in New York has a trial to set the rates.


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ASCAP and the Radio Music Licensing Committee have reached a settlement on the amount that radio stations will pay to ASCAP for the use of music for the period through the end of 2016. The agreement was approved last week by the US District Court in the Southern District of New York acting as a “rate court” to consider those fees. We reported that a settlement had been reached in early December, and now we’ve seen the actual documents and can provide some details of this agreement between the commercial radio broadcast industry and ASCAP. It should result in significant savings for broadcasters from rates that they had been paying prior to January 1, 2010.

As we wrote in 2010 when RMLC and ASCAP were first trying to reach a deal on new rates, the biggest problem with the old rates was the payment structure. Rather than making ASCAP a partner of the broadcaster by cutting them in for a percentage of the broadcaster’s revenue, under the deal that ended in 2009, ASCAP was to receive a set fee each year from the broadcast industry.  That set fee was divided among all commercial radio stations not based on station revenues, but instead based on the market size and technical coverage of each station. So all similarly powered stations in a market paid the same ASCAP fee, whether they were big revenue producers or not.  And the agreement was entered into during a period where radio broadcasters thought that revenues would be ever-increasing, so that set fee to be paid to ASCAP increased each year. As the economy and broadcast revenues fell during the later years of the deal, while the set fee kept increasing,broadcasters were paying an ever-increasing percentage of their revenues to ASCAP – far more than would have been paid had the industry stuck to a percentage of revenue formula.

Well, the experiment is over, as the new deal returns to a traditional percentage of revenue deal. Music radio pays ASCAP 1.7% of “revenues subject to fee from radio broadcasting." Essentially, that is all the revenue that a station receives from advertising and promotions, less a 12% deduction (presumably to cover commissions and costs of collection). Barter revenues, and payments made to networks (as opposed to the stations themselves), are excluded from the gross revenue calculation. All revenues from HD programming (including any amounts received for brokered programming) is also included (at least for the time being – subject to reevaluation should HD revenues account for 25% of radio revenues by 2015). New Media revenues, if the arise exclusively from streaming your station on the Internet, are also included in this gross revenue calculation.


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New ASCAP royalties are on their way to radio broadcasters. ASCAP and the Radio Music Licensing Committee (RMLC) have just announced that they have reached an agreement in principal to return to the percentage of revenue royalties that for so long were paid by radio stations to ASCAP and BMI – a system that