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This week, several notices of the intent to audit the records of several webcasters and other digital music services were published in the Federal Register, indicating that SoundExchange was planning on having the royalty payment records of these services reviewed.  Notices were sent to services including Live365, iHeartMedia and CBS).  Those notices have prompted several calls asking what this is all about.  We have written before about these audits (see our article here).  It is a somewhat routine process, where each year SoundExchange picks several webcasters whose records it will have reviewed.  Under the rules adopted by the Copyright Royalty Board, SoundExchange can elect to audit a webcaster (or other digital music service – and some of the notices this week were for services that were not webcasters – one to a background music provider or what is referred to as a “business establishment service”, here).  SoundExchange can, and usually does, elect to review three years of records.  They can only review any service once for the same time period, so effectively a service can be audited only once every three years.

Under the rules, an independent CPA is to do the audit.  Once the audit is complete, it must be provided to the music service for comment.  Then, it is up to SoundExchange and the service to work out what to do if there are discrepancies identified by the audit with which the service does not agree.  The rules do not provide for any independent adjudicator to referee what happens if there is a disagreement.  SoundExchange pays for the audit, unless the audit determines that the service underpaid by 10% or more, in which case the costs can be transferred to the service.
Continue Reading SoundExchange to Audit iHeart, CBS and Other Webcasters and Digital Music Services

A decision by the US Court of Appeals on the appeal of the Copyright Royalty Board decision as to the Sirius XM and Music Choice royalties for the public performance of sound recordings is one of the many year-end decisions important to broadcasters and digital media companies that seems to be flooding out from Courts and agencies in DC and elsewhere. The Court of Appeals rejected the appeal of SoundExchange, which was arguing that the royalties for both services should have been set higher by the CRB, and the Court also rejected the appeal of Music Choice, which argued that the royalties that were set by the CRB should have been lower.  We wrote about the CRB’s decision, here, when it was initially released about 2 years ago.

The proceeding involved the Preexisting Subscription Services (“PSS”) and the Preexisting Satellite Digital Audio Services (“SDARS”), services that were singled out when Congress adopted the Digital Millennium Copyright Act in 1998 by applying a different standard to those services for use by the CRB in determining the amount of sound recording performance royalties.  Instead of using the “willing buyer, willing seller” standard that applies to webcasters and any other digital music service that was not in existence in 1998, these services are evaluated under the 801(b) standard of the Copyright Act, which looks at a variety of factors including the market rate expressed by the willing buyer willing seller standard, but also at the relative financial contributions of the parties to bringing the music to the public, and the effect of royalty changes on the stability of the industries involved (see our articles here, here and here about the differences between these standards)  Using this 801(b) standard, most observers believe that royalties have been set at rates lower than have prevailed in the cases involving services subject the willing buyer willing seller standard.
Continue Reading Court of Appeals Upholds Copyright Royalty Board Decision on Sirius XM and Music Choice Royalties

The proposals for the royalty rates to be paid by webcasters to SoundExchange for the public performance of sound recordings for 2016-2020 are now on file with the Copyright Royalty Board, and they represent two differing perspectives on the state of the industry and how much Internet radio companies can and should pay to record companies and recording artists.  As we wrote many months ago, the CRB initiated its proceeding to set these royalties back in January, and earlier this month, participating parties, including internet music services and SoundExchange, were required to file their “direct case exhibits” – written witness statements setting out the arguments to justify the proposals of each side, and their proposed royalty rates.  These direct cases (with certain confidential information redacted) are now available on the CRB website. So what are the parties proposing?

SoundExchange provided expert testimony and exhibits from record company executives to contend that there are many new entrants into the streaming industry and that the industry is healthy and growing.  Looking at deals that have been done in the marketplace, including deals for “interactive streaming” (deals negotiated directly between services and copyright holders, and not subject to CRB oversight and review – see our article here), SoundExchange suggests that the royalties should increase from their current rate of $.0023 per performance (e.g. per song per listener).  Their rate proposal is to go from $.0025 in 2016 to $.0029 in 2020. But, in a new wrinkle, they propose that the CRB should adopt a new “greater of” formulation, suggesting that all commercial Internet radio services should pay the greater of the suggested per performance royalty or 55% of revenue related to their streaming.  This greater of formulation is partially justified by SoundExchange based on their witnesses claim that such “greater of’ formulations are common in interactive streaming agreements.
Continue Reading Webcasting Rate Proposals for 2016-2020 Now Public – What Will The Copyright Royalty Board Be Considering in Setting Royalty Rates for Internet Radio?

As the summer of copyright comes to an end, the music licensing issues which arose causing me to repeatedly write about this extremely contentious season in copyright law are by no means finished (see the most recent of our Summer of Copyright articles here).  In fact, on the first full day of autumn, we received a very interesting decision out of a US District Court in California on the lawsuit brought by Flo and Eddie against Sirius XM, finding that the music service improperly failed to pay royalties for the public performance of pre-1972 sound recordings from the duo’s former band, the Turtles (a copy of the decision can be found in this Billboard article).  As we have written before, Flo and Eddie brought suit against Sirius XM, arguing that the service needs to get permission to make public performances of these recordings and, by not doing so, it violated their California state law copyrights. 

Pre-1972 sound recordings first registered in the US are not covered by Federal law, so the current mechanism for Sirius XM to pay for the digital public performance of sound recordings (paying a royalty, set by the Copyright Royalty Board, to SoundExchange) does not exist.  To the surprise of many (including this author) the Court concluded that there is in fact a public performance right in pre-1972 sound recordings under California state law, and went on to conclude that Sirius XM violated its obligations under the law to pay for the use of music.  This decision, on a summary decision motion, may quite well be appealed.  The issue is also before many other courts, both in California and elsewhere.  But this decision is certainly worth review, as it could have an impact not only on digital services, but also on any other company that publicly performs such recordings – including other digital music services, bars and restaurants, stadiums, and potentially even broadcasters.
Continue Reading Court Rules in Favor of Flo & Eddie in California Suit Against Sirius XM for Public Performance of Pre-1972 Sound Recordings – What Does This Decision Mean for Broadcasters, Digital Media Companies and Other Music Users?

The full decision of the Copyright Royalty Board setting the royalty rates to be paid to SoundExchange by Sirius XM and Music Choice from 2013 through 2017 has now been released.  We wrote about the initial release of the summary of the decision before Christmas.  The final decision is interesting in many respects. First, it is the first decision to be released since two of the original three Copyright Royalty Judges left the bench. The decision, as released was actually two decisions – one signed by the new Chief Judge and an acting judge who filled in for Judge Wisniewski, the Board’s economic expert, when he had to retire for health reasons. The second decision, reaching the same result but based on different reasoning, was signed by the Board’s lone holdover, Judge Roberts, a long-time fixture at the Copyright Office before joining the Board. In addition, the decision seems to reject some premises that had long been used to justify royalty rates in other proceedings – and thus may give some insights on approaches to be used in the webcasting royalty proceeding that will begin in 2014 and conclude in 2015. The majority decision also, for the first time, gives at least some weight to direct licensing deals for the public performance of sound recordings by a noninteractive service. Finally, the decision provides explicitly for carve-outs from the established royalties for music on which no royalties need to be paid, including music that is directly licensed, and for pre-1972 sound recordings.

Before looking at the decision, it needs to be noted that these royalties are theoretically decided not just for Sirius XM and for Music Choice, but also for other services that fit into their class of service as defined by Sections 112 and 114 of the Copyright Act. Thus, the Music Choice decision applied theoretically to all "Preexisting Subscription Services" (or a "PSS") and the Sirius XM decision to all "preexisting satellite digital audio services" (or, as used in the decision, "SDARS" – satellite digital audio services). The "pre-existing language means that these services were either in existence or authorized by the FCC (for the SDARS services) at the time of the adoption of the Digital Millennium Copyright Act in 1998.  Of course, since 1998, all of Music Choices then-existing competitors in the cable audio business have gone out of business with one exception, and the second SDARS service – XM Radio – has merged with Sirius. So, effectively, these rates apply only to very few companies.Continue Reading Full Text of Copyright Royalty Board Decision on Sirius XM and Music Choice Royalties Released – The Basics of the Decision

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.  Continue Reading A Deal Between Entercom and Big Machine Records To Give the Record Company a Royalty on Over-the-Air Broadcasting

SiriusXM announced that is has filed a legal action, including antitrust claims, against SoundExchange and A2IM (the American Association of Independent Music – the association of independent record labels), charging, according to a press release, these two organizations "with unlawfully interfering in SiriusXM’s efforts to secure, through a competitive market, copyrights critical to its business. The complaint contends that the conduct violates federal antitrust, as well as New York state law." The claim is essentially that these defendants conspired to prevent SiriusXM from negotiating direct licenses with musicians, licenses that could take music out of the royalty scheme administered by the Copyright Royalty Board, where royalties are paid to SoundExchange.  We wrote about the attempts by SiriusXM to negotiate such direct licenses, and the opposition of music groups to these agreements, last year. 

Why would SoundExchange and A2IM oppose direct music licensing?  One reason is that music licenses that are directly negotiated between music users and rights holders are traditionally the best evidence of the value of music.  In recent rate court cases involving performing rights organizations, direct licenses formed crucial evidence of the value of music rights.  In cases dealing with ASCAP and BMI royalties for "business establishment" or "background music" services, evidence of direct licenses at rates significantly lower than previously established resulted in court decisions dropping rates by as much as two-thirds from the rates that ASCAP and BMI had previously been charging.  Were SiriusXM to be successful in its suit, and if it is in fact able to negotiate direct music licenses for substantial catalogs of music at rates lower than what it has paid under previous rate decisions, it would presumably introduce such evidence in proceedings before the Copyright Royalty Board (which is now in the process of setting the rates for the public performance of sound recordings by SiriusXM over its satellite service for the next 5 years), and argue that these direct deals are the best evidence of what a willing buyer and willing seller would agree to in a competitive marketplace. While the rates set by the CRB for SiriusXM are not like Internet radio rates and established solely based on a willing buyer, willing seller test, the question of marketplace rates is still a very important component to any CRB decision setting those rates (see our article here on the rates that SiriusXM currently pays to SoundExchange and the standard used to set such rates). Continue Reading Sirius XM Brings Law Suit Against SoundExchange Alleging Collusion to Stop Direct Licensing of Music – Impact on Royalties?

There have been many reports about the attempts by Sirius XM Radio to license music directly from record labels, bypassing any royalty rates set by the Copyright Royalty Board.  Direct licensing would have Sirius pay the record labels or copyright holders for the rights to use music, avoiding any dealings with SoundExchange, which normally collects the royalties for the public performance of sound recordings under the statutory license.  The most recent report about Sirius’ efforts was in the New York Times, here.  Sirius, like webcasters, pays royalties set by the CRB (if they cannot be negotiated among the parties) that cover the public performance of all legally released sound recordings.  While webcasters currently have royalties that are in place through 2015, the royalties for Sirius end in 2012, and are being litigated now (see our story here on the last royalties set by the CRB for Sirius).  To avoid the uncertainty of litigation, with which webcasters are very familiar, Sirius has been attempting to license music directly from the copyright holders.  This is not a new story – Rhapsody reportedly tried the same thing earlier this year, and Clear Channel tried to get royalty waivers from independent artists several years ago in exchange for more exposure for their music (see our stories, here and here).  Each time a music service suggests that it might want to license music directly to try to recognize some savings over the rates established through CRB litigation, the music community objects – see, for instance, the statements of unions AFTRA and AFM here, that of SoundExchange here, and that of A2IM (the association of independent record labels), here.  But what is really wrong with the efforts of services to negotiate lower royalties?  If you believe the testimony of SoundExchange’s own witness in the Copyright Royalty Board proceedings – nothing at all.  In fact it is to be expected. 

In the CRB proceeding that was held in 2005-2006 (and from which, most of the settlements arose that now govern the royalties for sound recordings played by Internet radio stations), SoundExchange relied on a number of witnesses, including one expert, Michael Pelcovits, an economist whose model was the principal testimony relied on by the CRB in establishing the rates they determined to be reasonable.  In his written testimony, Mr. Pelcovits stated as follows:

…a rate that is set too low may have serious economic dangers.  By setting a rate too low, inefficient entry may be encouraged, and inefficient levels of production will be encouraged, which can hinder the development of an efficient market.  It is also worth noting that setting the statutory rate too high will not necessarily be harmful to the market.  If the price is too high, parties can (and are almost certain to) negotiate agreements for rates lower than the statutory standard.  Thus, a rate that is set too high is likely to "self-adjust" because of the sellers’ natural incentive to meet the market. 

(Emphasis added).  The statutory rate referred to in this quote is the rate that is set by the CRB.  What this quote says is that, if that rate is set too high, then parties will naturally negotiate after-the-fact to try to find what the real market rate should be, and that such negotiations should be expected – not feared as many seem to be claiming as these attempts to cut deals come to light.  In other words, the music community seemed to favor (and expect) such negotiations, before they were against them it in their statements today. Continue Reading The Debate Over Sirius’ Attempt to Directly License Music – SoundExchange Once Said A Marketplace Negotiation to Adjust for High Rates “Was to Be Expected”

What does SoundExchange do when it collects royalties from an Internet radio operator, but the operator doesn’t provide complete information about the songs that were played?  That question was raised by the Copyright Royalty Board in a Notice of Proposed Rulemaking on a proposal by SoundExchange for the distribution of such royalties, about which we wrote here…

What should SoundExchange do with money that it collects for the performance of sound recordings, when it does not know what sound recordings were played by a particular service?  As we’ve written many times on this blog, SoundExchange collects royalties from digital music services , including satellite radio, cable radio and webcasters, for the performance of sound recordings (i.e. a recording of a song by a particular artist).  It is charged with the obligation to distribute these royalties one-half to those who hold of the copyright to the sound recording and one-half to the artists who perform on those recordings.  However, SoundExchange, according to a filing recently made with the Copyright Royalty Board, does not always know which songs were played by a particular music service.  Thus, it has had difficulty distributing all of the money it collects – currently holding $28 Million in royalties from the period 2004 to 2009 that have not been distributed.  Why?  According to SoundExchange much of the problem is that not all services report what they played and how often, and other information that is submitted is sometimes inaccurate or otherwise does not adequately identify the music that was played.  To deal with this problem, SoundExchange has asked that the Copyright Royalty Board authorize it to use proxy information to distribute these funds from 2004-2009.  The CRB has asked for comments on that proposal.  Comments are due on May 19.

What is proxy information?  Basically, SoundExchange plans to infer from the information that it does have what music was played by the services for which it has no information.  According to the SoundExchange filing, they would make these assumptions based on the type of service.  Thus, information from webcasters would be used to estimate what other webcasters were playing.  Information from background music services who did report would be used to determine what other background music services played, and so on.  The CRB, in its request for comments, asks if the proxy should be further broken down so that, for instance, noncommercial webcasters would serve as a proxy for other noncommercial webcasters, and commercial webcasters would serve as a proxy for other commercial webcasters.  The Copyright Royalty Judges are also seeking to assess whether SoundExchange has done all that it can do to get the required information, and if the proxy system is a fair way of determining distributions for the money that has not yet been awarded to rightsholders and artists. 

Does this proposal have any impact on the services themselves?  Apparently not, as SoundExchange is at this point only looking for this authority in order to distribute money collected for royalties that came in from 2004 to 2009.  It does not appear to be looking at imposing any new restrictions on webcasters or other digital music services.  Instead, it is only looking for the authority to distribute the money that it has already collected based on the information that it has available.  What should music services take away from this request?Continue Reading SoundExchange Seeks Permission to Distribute Royalties Based on Proxy Information