The Copyright Royalty Board has announced the royalties that will be paid for the public performance of sound recordings by Sirius XM for the period 2013-2017. The decision also covers the "Preexisting Subscription Services", i.e. Music Choice in connection with its cable radio service delivered with listener's cable television packages. The full text of the decision is not released yet, as the parties have an opportunity to request that certain portions be redacted to protect private business and competitive information. The parties can request such redactions through December 19, so the decision may be Christmas reading for many. However, the Board did announce the rates as follows:

Section 112 Rates: The Judges adopted the Parties' Stipulation regarding the rates and terms for the Section 112 rates, which will require a minimum fee advance payment of $100,000 per year, with royalties accruing during the year recoupable against the advance. The parties agreed that the value of the royalties allocated to the Section 112 license holders is 5% of the total royalty obligation, with the remaining 95% going to the Section 114 license holders.

Section 114 Rates: The Judges determined that the appropriate Section 114(f)(1) rates for Preexisting Subscription Services for 2013-2017 are 8% of Gross Revenues for 2013 and 8.5% for 2014 through 2017.

The Judges determined that the appropriate Section 114(f)(1) rates for Preexisting Satellite Digital Audio Radio Services for 2013-2017 are 9% of Gross Revenues for 2013, 9.5% for 2014, 10.0% for 2015, 10.5% for 2016 and 11.0% for 2017.

Both decisions represent modest, incremental raises in the current rates (see the description of the last CRB decisions on satellite radio rates here, and on cable radio here).  These decisions are made under the 801(b) factors, from Section 801(b) of the Copyright Act, that Internet radio currently is seeking, through the Internet Radio Fairness Act ("IRFA"), to have applied to the decisions as to the royalties paid by webcasters (see our summary here). We will not know how the standard was applied in reaching the decision to raise rates, and what guidance this decision provides for webcasters and their rates, until the full decision is released (see our summary of the arguments of the parties in this case, here).

The decision mentions both Section 112 and Section 114 royalties.  In a digital world, as digital copies are made in the transmission process, it has been presumed that parties need both royalties to operate - the "ephemeral copy" licensed under Section 112 (see our discussion here) and the public performance right licensed under Section 114.  As both are needed, both are covered by the royalty rate set by the Board.  Why bother setting a specific amount for the ephemeral right?  That is a question asked many times - but as that right is paid directly to the copyright holder (usually the record label), not shared with the artists as is the Section 114 royalty, it is one with economic impact. 

These services are entitled to a decision under 801(b) as Congress made a determination, at the time that the Digital Millennium Copyright Act was passed in 1998, that these services were either already in existence (cable audio) or were sufficiently advanced in deployment (satellite radio) that the traditional standard for deciding statutory royalties, used in other contexts under the Copyright Act, would be applied. 801(b), for instance, is used to decide the royalties paid by the record companies to the publishers for the use of their compositions when making a sound recording, and are also used in the determination of rates paid by noncommercial broadcasters in the public performance of musical compositions (a rate recently set by the Board).  Internet radio, on the other hand, was given a new "willing buyer, willing seller" standard that has led to much controversy, as is evident from the current IRFA debate. The application of the standard apparently makes a difference, as other music services similar to Music Choice, that were not in existence at the time of the adoption of the DMCA, pay approximately twice what Music Choice will pay under this decision (see our article here).

We will write more about the decision once the full text is released.

The royalties that Sirius XM will pay to SoundExchange for the next 5 years will be decided by the Copyright Royalty Board ("CRB") in December. To summarize the hearings that have been held over the last year, the CRB held an oral argument last week, where Sirius XM and SoundExchange presented their arguments as to what those royalties should be. Sirius argued that the rates should be decreased, while SoundExchange contended that the rates should go up significantly from the 8% of revenue that the service now pays (see our summary of the current Sirius XM rates here). How can these parties have such different perspectives on the value of music, and what did this argument say about the application of the 801(b) standard that applies to Sirius?  This standard is the standard that webcasters are seeking to apply to Internet Radio services through the Internet Radio Fairness Act which we wrote about here.  If the IRFA is adopted, it would apply when the CRB next reviews webcasting rates in a case that will be decided by the end of 2015.

Sirius XM and cable music provider Music Choice, which was also part of the proceeding, are both governed by the 801(b) standard rather than the “willing buyer, willing seller” standard that applies to Internet Radio. The oral argument made clear that the adoption of the 801(b) standard is not in and of itself a panacea for the concerns about the royalties that have been set by the Copyright Royalty Board. Last week’s argument focused on the value of music in a marketplace – essentially the “willing buyer, willing seller” question. While other 801(b) factors were discussed, they were seemingly passed over quickly, with most of the focus being on the questions of the marketplace value of the music.

XM summarized two arguments that it raised as to the value of music. One argument was based on an economic analysis done by an expert witness who looked at the royalties paid by customized noninteractive webcasting companies (including Slacker and LastFM) for music used in their services, and made adjustments that led to the conclusion that, when you take out the value of the talk programming included in the Sirius package, and the value of the hardware necessary to listen to the station (something that webcasters don’t supply as the “hardware” to listen to a webcast is usually equipment that the listener already has, e.g. a computer or smart phone), the effective rate paid by such webcasters justified a lower royalty rate of between 5 and 7% of revenues.

But perhaps more interesting was their argument that relied on the direct licensing deals that Sirius was able to negotiate with over 90 record labels or artists, which all provided for a royalty at rates less than those at which Sirius currently pays. Sirius argued that these deals showed the true marketplace value of music, as they were negotiated outside of the royalty process by a willing buyer (Sirius XM) and willing sellers (the labels).

SoundExchange of course opposed the Sirius’ conclusions that rates should decease. SoundExchange had its own expert witness who performed the same kind of economic regression analysis that had been used in past webcasting proceedings – taking the royalties paid by interactive digital music services (which are negotiated agreements not subject to a statutory royalty and not governed by the CRB or any other government agency), and doing an economic analysis to determine the value of the interactivity. By subtracting that perceived value of the interactivity, SoundExchange came up with a figure for a substantially higher royalty for Sirius than it currently pays.

SoundExchange argued that the direct licensing deals did not make for an appropriate benchmark as these deals represented a small part of all sound recordings that are available in the marketplace, and did not include deals with any of the major labels. Sirius of course responded that this was because the labels were encouraged not to negotiate with it (see this article on the lawsuit that Sirius has filed against SoundExchange for interfering with the private negotiations that it was having with other labels).

SoundExchange also attacked these deals by contending that they should not affect the CRB royalty decision as the deals were with the copyright holders, where all the royalty payments would go to the copyright holder, unlike the CRB royalties which, by law, half go directly to the artists. This argument seemed to gain some attention from the Judges, even though, were this logic to be followed, SoundExchange’s own evidence as to the rates would have to be rejected, as the royalties paid in the interactive marketplace also go to the labels. It seems to us that, if you are looking at a marketplace, you are looking at what buyers and sellers are agreeing to when they negotiate deals – no matter who those buyers and sellers are. In the real marketplace, the sellers usually are the copyright holders, not the artists, as the copyright holders are the ones authorized to negotiate such deals. If you reject those deals because the artists are not directly paid, you would never be able to find a marketplace deal to use as a benchmark, even though the Copyright Act specifically says that direct licenses should be considered. Moreover, as argued by Sirius XM, in such direct deals, the artists are in fact paid through the contracts that they have with the labels.  We will be very interested to see how the CRB resolves this issue.

Beyond the debate over the marketplace value of the music, there was some discussion of the other 801(b) factors, including the promotional value provided by the plays on Sirius and Music Choice, and on the stability of the industry factor, looking at the financial stability of each of these companies and what impact a change in royalties would have on their businesses. Both Sirius and Music Choice provided studies that showed that their services promoted music - studies that SoundExchange rejected without offering its own studies to the contrary.  SoundExchange argued that, as Sirius was now more economically stable than it was during the last rate proceeding, the rates needed to go up.  The cost of Sirius providing the satellites and hardware to deliver their service was also discussed in the context of the “relative investment” 801(b) factor. But in the oral arguments, these issued seemed to be a sideshow to the principal issue of putting a marketplace value on the music.  We'll see how they are considered in the final decision, as these matters were important in the last satellite royalty proceeding.

Oral arguments are often misleading, so we can't make predictions based on the questions that were asked.  Decisions in this case are supposed to be rendered by mid-December, even though there has been another change in the Board’s composition in recent weeks, as Judge Wisniewski, the economist on the CRB, was forced to retire due to health reasons. So the CRB that will be making the decision in this case will be one where 2 of its 3 members have not previously ruled on a music royalty payment scheme. It should be an interesting decision released in December - one that may give some indication of how the Board will treat webcasting royalties when they come up for adjustment in 2015.

The royalties that Sirius XM will pay to SoundExchange for the next 5 years will be decided by the Copyright Royalty Board ("CRB") in December. To summarize the hearings that have been held over the last year, the CRB held an oral argument last week, where Sirius XM and SoundExchange presented their arguments as to what those royalties should be. Sirius argued that the rates should be decreased, while SoundExchange contended that the rates should go up significantly from the 8% of revenue that the service now pays (see our summary of the current Sirius XM rates here). How can these parties have such different perspectives on the value of music, and what did this argument say about the application of the 801(b) standard that applies to Sirius?  This standard is the standard that webcasters are seeking to apply to Internet Radio services through the Internet Radio Fairness Act which we wrote about here.  If the IRFA is adopted, it would apply when the CRB next reviews webcasting rates in a case that will be decided by the end of 2015.

Sirius XM and cable music provider Music Choice, which was also part of the proceeding, are both governed by the 801(b) standard rather than the “willing buyer, willing seller” standard that applies to Internet Radio. The oral argument made clear that the adoption of the 801(b) standard is not in and of itself a panacea for the concerns about the royalties that have been set by the Copyright Royalty Board. Last week’s argument focused on the value of music in a marketplace – essentially the “willing buyer, willing seller” question. While other 801(b) factors were discussed, they were seemingly passed over quickly, with most of the focus being on the questions of the marketplace value of the music.

XM summarized two arguments that it raised as to the value of music. One argument was based on an economic analysis done by an expert witness who looked at the royalties paid by customized noninteractive webcasting companies (including Slacker and LastFM) for music used in their services, and made adjustments that led to the conclusion that, when you take out the value of the talk programming included in the Sirius package, and the value of the hardware necessary to listen to the station (something that webcasters don’t supply as the “hardware” to listen to a webcast is usually equipment that the listener already has, e.g. a computer or smart phone), the effective rate paid by such webcasters justified a lower royalty rate of between 5 and 7% of revenues.

But perhaps more interesting was their argument that relied on the direct licensing deals that Sirius was able to negotiate with over 90 record labels or artists, which all provided for a royalty at rates less than those at which Sirius currently pays. Sirius argued that these deals showed the true marketplace value of music, as they were negotiated outside of the royalty process by a willing buyer (Sirius XM) and willing sellers (the labels).

SoundExchange of course opposed the Sirius’ conclusions that rates should decease. SoundExchange had its own expert witness who performed the same kind of economic regression analysis that had been used in past webcasting proceedings – taking the royalties paid by interactive digital music services (which are negotiated agreements not subject to a statutory royalty and not governed by the CRB or any other government agency), and doing an economic analysis to determine the value of the interactivity. By subtracting that perceived value of the interactivity, SoundExchange came up with a figure for a substantially higher royalty for Sirius than it currently pays.

SoundExchange argued that the direct licensing deals did not make for an appropriate benchmark as these deals represented a small part of all sound recordings that are available in the marketplace, and did not include deals with any of the major labels. Sirius of course responded that this was because the labels were encouraged not to negotiate with it (see this article on the lawsuit that Sirius has filed against SoundExchange for interfering with the private negotiations that it was having with other labels).

SoundExchange also attacked these deals by contending that they should not affect the CRB royalty decision as the deals were with the copyright holders, where all the royalty payments would go to the copyright holder, unlike the CRB royalties which, by law, half go directly to the artists. This argument seemed to gain some attention from the Judges, even though, were this logic to be followed, SoundExchange’s own evidence as to the rates would have to be rejected, as the royalties paid in the interactive marketplace also go to the labels. It seems to us that, if you are looking at a marketplace, you are looking at what buyers and sellers are agreeing to when they negotiate deals – no matter who those buyers and sellers are. In the real marketplace, the sellers usually are the copyright holders, not the artists, as the copyright holders are the ones authorized to negotiate such deals. If you reject those deals because the artists are not directly paid, you would never be able to find a marketplace deal to use as a benchmark, even though the Copyright Act specifically says that direct licenses should be considered. Moreover, as argued by Sirius XM, in such direct deals, the artists are in fact paid through the contracts that they have with the labels.  We will be very interested to see how the CRB resolves this issue.

Beyond the debate over the marketplace value of the music, there was some discussion of the other 801(b) factors, including the promotional value provided by the plays on Sirius and Music Choice, and on the stability of the industry factor, looking at the financial stability of each of these companies and what impact a change in royalties would have on their businesses. Both Sirius and Music Choice provided studies that showed that their services promoted music - studies that SoundExchange rejected without offering its own studies to the contrary.  SoundExchange argued that, as Sirius was now more economically stable than it was during the last rate proceeding, the rates needed to go up.  The cost of Sirius providing the satellites and hardware to deliver their service was also discussed in the context of the “relative investment” 801(b) factor. But in the oral arguments, these issued seemed to be a sideshow to the principal issue of putting a marketplace value on the music.  We'll see how they are considered in the final decision, as these matters were important in the last satellite royalty proceeding.

Oral arguments are often misleading, so we can't make predictions based on the questions that were asked.  Decisions in this case are supposed to be rendered by mid-December, even though there has been another change in the Board’s composition in recent weeks, as Judge Wisniewski, the economist on the CRB, was forced to retire due to health reasons. So the CRB that will be making the decision in this case will be one where 2 of its 3 members have not previously ruled on a music royalty payment scheme. It should be an interesting decision released in December - one that may give some indication of how the Board will treat webcasting royalties when they come up for adjustment in 2015.

The royalties that Sirius XM will pay to SoundExchange for the next 5 years will be decided by the Copyright Royalty Board ("CRB") in December. To summarize the hearings that have been held over the last year, the CRB held an oral argument last week, where Sirius XM and SoundExchange presented their arguments as to what those royalties should be. Sirius argued that the rates should be decreased, while SoundExchange contended that the rates should go up significantly from the 8% of revenue that the service now pays (see our summary of the current Sirius XM rates here). How can these parties have such different perspectives on the value of music, and what did this argument say about the application of the 801(b) standard that applies to Sirius?  This standard is the standard that webcasters are seeking to apply to Internet Radio services through the Internet Radio Fairness Act which we wrote about here.  If the IRFA is adopted, it would apply when the CRB next reviews webcasting rates in a case that will be decided by the end of 2015.

Sirius XM and cable music provider Music Choice, which was also part of the proceeding, are both governed by the 801(b) standard rather than the “willing buyer, willing seller” standard that applies to Internet Radio. The oral argument made clear that the adoption of the 801(b) standard is not in and of itself a panacea for the concerns about the royalties that have been set by the Copyright Royalty Board. Last week’s argument focused on the value of music in a marketplace – essentially the “willing buyer, willing seller” question. While other 801(b) factors were discussed, they were seemingly passed over quickly, with most of the focus being on the questions of the marketplace value of the music.

XM summarized two arguments that it raised as to the value of music. One argument was based on an economic analysis done by an expert witness who looked at the royalties paid by customized noninteractive webcasting companies (including Slacker and LastFM) for music used in their services, and made adjustments that led to the conclusion that, when you take out the value of the talk programming included in the Sirius package, and the value of the hardware necessary to listen to the station (something that webcasters don’t supply as the “hardware” to listen to a webcast is usually equipment that the listener already has, e.g. a computer or smart phone), the effective rate paid by such webcasters justified a lower royalty rate of between 5 and 7% of revenues.

But perhaps more interesting was their argument that relied on the direct licensing deals that Sirius was able to negotiate with over 90 record labels or artists, which all provided for a royalty at rates less than those at which Sirius currently pays. Sirius argued that these deals showed the true marketplace value of music, as they were negotiated outside of the royalty process by a willing buyer (Sirius XM) and willing sellers (the labels).

SoundExchange of course opposed the Sirius’ conclusions that rates should decease. SoundExchange had its own expert witness who performed the same kind of economic regression analysis that had been used in past webcasting proceedings – taking the royalties paid by interactive digital music services (which are negotiated agreements not subject to a statutory royalty and not governed by the CRB or any other government agency), and doing an economic analysis to determine the value of the interactivity. By subtracting that perceived value of the interactivity, SoundExchange came up with a figure for a substantially higher royalty for Sirius than it currently pays.

SoundExchange argued that the direct licensing deals did not make for an appropriate benchmark as these deals represented a small part of all sound recordings that are available in the marketplace, and did not include deals with any of the major labels. Sirius of course responded that this was because the labels were encouraged not to negotiate with it (see this article on the lawsuit that Sirius has filed against SoundExchange for interfering with the private negotiations that it was having with other labels).

SoundExchange also attacked these deals by contending that they should not affect the CRB royalty decision as the deals were with the copyright holders, where all the royalty payments would go to the copyright holder, unlike the CRB royalties which, by law, half go directly to the artists. This argument seemed to gain some attention from the Judges, even though, were this logic to be followed, SoundExchange’s own evidence as to the rates would have to be rejected, as the royalties paid in the interactive marketplace also go to the labels. It seems to us that, if you are looking at a marketplace, you are looking at what buyers and sellers are agreeing to when they negotiate deals – no matter who those buyers and sellers are. In the real marketplace, the sellers usually are the copyright holders, not the artists, as the copyright holders are the ones authorized to negotiate such deals. If you reject those deals because the artists are not directly paid, you would never be able to find a marketplace deal to use as a benchmark, even though the Copyright Act specifically says that direct licenses should be considered. Moreover, as argued by Sirius XM, in such direct deals, the artists are in fact paid through the contracts that they have with the labels.  We will be very interested to see how the CRB resolves this issue.

Beyond the debate over the marketplace value of the music, there was some discussion of the other 801(b) factors, including the promotional value provided by the plays on Sirius and Music Choice, and on the stability of the industry factor, looking at the financial stability of each of these companies and what impact a change in royalties would have on their businesses. Both Sirius and Music Choice provided studies that showed that their services promoted music - studies that SoundExchange rejected without offering its own studies to the contrary.  SoundExchange argued that, as Sirius was now more economically stable than it was during the last rate proceeding, the rates needed to go up.  The cost of Sirius providing the satellites and hardware to deliver their service was also discussed in the context of the “relative investment” 801(b) factor. But in the oral arguments, these issued seemed to be a sideshow to the principal issue of putting a marketplace value on the music.  We'll see how they are considered in the final decision, as these matters were important in the last satellite royalty proceeding.

Oral arguments are often misleading, so we can't make predictions based on the questions that were asked.  Decisions in this case are supposed to be rendered by mid-December, even though there has been another change in the Board’s composition in recent weeks, as Judge Wisniewski, the economist on the CRB, was forced to retire due to health reasons. So the CRB that will be making the decision in this case will be one where 2 of its 3 members have not previously ruled on a music royalty payment scheme. It should be an interesting decision released in December - one that may give some indication of how the Board will treat webcasting royalties when they come up for adjustment in 2015.

Last week, the Radio Music License Committee (“RMLC” – see our article about the RMLC), filed a complaint in US District Court for the Southern District of New York 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.

A second concern claimed by RMLC is that it is effectively impossible to avoid a SESAC license. According to the complaint, SESAC does not make available a complete and accurate inventory of all of its music so that a user can try to weed all SESAC music out of its playlist to avoid paying its fees. In addition, there are claims that SESAC licenses music that it is impossible for stations to avoid playing – like music in commercials (music in McDonald’s commercials was given as an example). Given that stations can’t reasonably avoid all SESAC music, they cannot avoid having to deal with its licensing demands (or face the potential statutory liability of up to $150,000 for each violation, i.e. each musical selection they play without a license).

The RMLC action is not the first time that an antitrust law suit has been filed against SESAC. Very similar allegations have been raised by several television companies and documented on the website of the Television Music Licensing Committee. These issues were raised in an antitrust complaint filed in 2010. While a Judge denied SESAC’s motion to dismiss the complaint in 2011, there still is much litigation to go on that law suit. So, with the TV case still not even having gone to trial despite a two and a half year head start, don’t expect a fast resolution to the claims made in the RMLC proceeding. But stations should monitor this action and any updates on its status from the RMLC, as this proceeding may well have an impact on station’s licensing obligations in the future.

The recent introduction of a bill by Congressman Jason Chaffetz offers proposals for reform of the operations of the Copyright Royalty Board – reforms that many in the Internet Radio industry have hailed as promising real change in the way that royalty decisions for webcasters have been made. While some webcasters seem to think that relief is at hand, in fact, the bill has simply been introduced into Congress co-sponsored by four congressmen, so it has a long way to go before it can be adopted by Congress and become the law of the land. But it is worth looking at the many issues that the Bill addresses so that webcasters know what it says so that they can rationally argue for its passage.

Most webcasters have focused on the provisions of the bill that would substitute the standards set out in Section 801(b) of the Copyright Act for the standard that currently applies – "the willing buyer, willing seller" standard. 801(b) sets out five factors to be considered in determining the rates to be set for a statutory royalty. These factors are:

(A) To maximize the availability of creative works to the public.

(B) To afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions.

(C) To reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication.

(D) To minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices. 

In contrast, the current “willing buyer, willing seller” standard looks only at one question – what a willing buyer and willing seller would agree to in a marketplace transaction.   What is the difference between these two standards?

We’ve written about the difference that they can make as a practical matter, here and here, as the differing standards have led to dramatically lower rates for music royalties paid by satellite radio and digital cable radio when compared to those paid by Internet radio. In the Internet radio world, as there usually are no true marketplace deals for non-interactive radio other than those that are directly influenced by the desire to avoid a protracted and expensive royalty proceeding, the CRB decisions have been influenced by rates set based on extrapolations from other deals.  Recent decisions have started from deals in the interactive marketplace (with expert witnesses testifying on their estimation of the amount by which the interactive royalty should be adjusted, using an economic regression analysis, to remove the value of the interactivity – a very subjective evaluation at best). In the last webcasting royalty case (about which we wrote here), the standard that the CRB looked to in setting rates was the NAB deal with SoundExchange (summarized here), giving almost full weight to the royalties paid by broadcasters for their streaming, despite the fact that the deal had been negotiated after the prior CRB decision and resulted in substantial discounts off the CRB rates for streaming done in the prior royalty term. This deal that the CRB relied on was one negotiated in the face of, and to reduce, the already high royalties imposed in the prior proceeding, the one based on the regression analysis applied to the interactive rates (a decision summarized here) . The Chaffetz bill specifically states that interactive rates should not be used as the basis of setting the rates for noninteractive services (i.e. webcasting).

The Chaffetz bill would also make other more subtle changes in how these standards are applied. The bill would remove the precedential effect of past royalty decisions. It would also explicitly put the burden of proof on the parties seeking a royalty that the royalty they seek is reasonable – a standard that is common in ASCAP and BMI rate court litigation, but is not at all addressed in the current Copyright Act addressing the sound recording performance royalties set by the CRB.

Finally, the bill would amend the law to specifically remove any suggestions that certain aspects of recent royalty decisions were in fact the preferred way of reaching a royalty decision. Specifically, these issues include the following:

· Taking into account that the services using music need to make a return on their investments in setting up and operating their services

· Not disfavoring a percentage of revenue royalty, as opposed to the per song, per listener royalties now in effect for most royalties

· Allowing for a carve-out based on songs that are directly licensed (already allowed under a per performance royalty, but a more difficult concept to deal with when the royalty is based on a percentage of revenues)

· Any decision should give full-value to:

o The promotional value of the playing of music by the service

o The costs of the digital music service in putting together the programming that it features

Finally, the bill suggests that rates set by Webcaster Royalty Act settlements that are to expire in 2014 be extended through 2015. This would seem to include the rates for “small pureplay” webcasters whose percentage of revenue rates are to expire at the end of 2014, leaving them to convert to another type of service (the “small commercial webcaster” service that limits their listening hours) or to pay per song per listener rates that may well put them out of business as their royalties would, in most cases, exceed their revenues.

This bill also covers other issues which we will address in another article later this week, including changes to the law on ephemeral royalties. It is also bound to be opposed by the music labels and some artist groups. We’ll explain that opposition in yet another article coming up. Watch for those articles, and keep your eyes on the progress of this bill that may be very important to the survival of the Internet radio industry as we know it.

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.

Based on our summary last week, it seems that the potential for savings by the broadcaster on their digital operations are evident, but why would the record companies agree to such a deal? There are several benefits that are evident. First, the royalties on the over-the-air revenues, even though smaller percentage-wise, are probably larger in absolute terms than the drop in the digital royalties, as digital revenues are, at the current time, a small fraction of over-the-air revenues. But this may well change in the future. For now, though the absolute dollars are probably greater for the record company that signs a deal like this.

But there may be other benefits to the record companies as well.  If the cost of playing the music by a particular label is less than the music from other labels, wouldn’t it be natural for that music to be played more often by the broadcaster? If so, the label benefits by giving its artists more promotional exposure to its artists. Potentially, the deals could have also provided other promotional consideration that we will see rolled out in the future.

There may be other long-term benefits for the record companies. If this were to become a widespread model, the US might come into accord with much of the rest of the world in paying artists and labels for the use of music by over-the-air broadcasters. If that were to happen, overseas royalties that have been withheld (or made harder to retrieve) from overseas collection organizations could start to be released to US artists and labels. Those collection agencies don't always pay US artists without some machinations as these countries’ artists get no royalties from over-the-air performances the US.

Many have also suggested that should these deals spread and become standard, there might actually be more total royalties paid to the artists and labels as more webcasters launch services, encouraged that they might actually be able to make a profit. In recent years, publishing companies that receive royalties from the use of music but charge far less than the labels for their interest in the music have been among the bright spots in the music industry. Could this be a template for a change in the way that business is done by the labels as well? (We’ll write more on this topic in coming days in connection with legislation introduced the week before last by Congressman Chaffitz on digital music royalty parity in the US and in connection with other digital music royalty issues).

But even if the deal does not have an impact on the performance royalty, could the agreement otherwise change the equation on royalties for the use of music by broadcasters? While this deal is but one agreement between one broadcaster and one record company, it is an example of a broader trend toward direct music licensing for digital uses. In 1998, Congress provided a one-stop shop for music licensing for non-interactive digital music services including webcasters and satellite radio (that “stop” being SoundExchange). These royalties are paid to SoundExchange, and set by the Copyright Royalty Board (“CRB”). Broadcasters and others are accustomed to paying for the public performance of musical compositions (through royalties paid to ASCAP, BMI and SESAC) – with the combined amount of those royalties usually in the neighborhood of 5% of revenue. In the digital realm, the royalties paid to SoundExchange for the use of the sound recording (for which over-the-air broadcasters pay nothing) have been extremely high. For services like Pandora, that royalty is a minimum of 25% of the company’s revenue. For most webcasters, including broadcasters who are streaming their over-the-air signals, the per-song, per-listener fees can eat up all of the revenues of their digital services (see our summary of the royalty rates here). These royalties have caused many to re-evaluate their Internet radio strategies – with some broadcasters abandoning streaming altogehter.

A deal like the Big Machine agreement, if it spread to other services and labels, could well lead to a new royalty model. In setting rates, the CRB looks to establish rates that reflect what a willing buyer and a willing seller pay in the marketplace. In past royalty proceedings, that willing-buyer, willing-seller price had to be estimated, as there were no real deals to use as a benchmark. And the estimates all went against webcasters. With a deal like that with Big Machine, and the deals that Sirius XM negotiated with certain independent record labels (which Sirius argued was impeded by those representing the royalty-collectors who feared the precedent), the pro-record company outcome of the CRB proceedings may well be changed if these deals can be shown to be representative of the real value of the public performance of the sound recording.

All in all, the deal between Clear Channel and Big Machine may not be what broadcasters feared – a concession on the over-the-air royalty – but instead may have positive benefits for all broadcasters in the digital world, setting a precedent for lower royalties in future proceedings. Of course, we’ll all have to wait to see what details emerge on this deal and any other similar agreements that may be in the works. But, with the next round of proceedings to set webcasting royalties starting in 2014 and running through 2015 (to set the rates for 2016-2020), the time is now for these deals to be made. The digital future for broadcasters may what is negotiated.

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.

Based on our summary last week, it seems that the potential for savings by the broadcaster on their digital operations are evident, but why would the record companies agree to such a deal? There are several benefits that are evident. First, the royalties on the over-the-air revenues, even though smaller percentage-wise, are probably larger in absolute terms than the drop in the digital royalties, as digital revenues are, at the current time, a small fraction of over-the-air revenues. But this may well change in the future. For now, though the absolute dollars are probably greater for the record company that signs a deal like this.

But there may be other benefits to the record companies as well.  If the cost of playing the music by a particular label is less than the music from other labels, wouldn’t it be natural for that music to be played more often by the broadcaster? If so, the label benefits by giving its artists more promotional exposure to its artists. Potentially, the deals could have also provided other promotional consideration that we will see rolled out in the future.

There may be other long-term benefits for the record companies. If this were to become a widespread model, the US might come into accord with much of the rest of the world in paying artists and labels for the use of music by over-the-air broadcasters. If that were to happen, overseas royalties that have been withheld (or made harder to retrieve) from overseas collection organizations could start to be released to US artists and labels. Those collection agencies don't always pay US artists without some machinations as these countries’ artists get no royalties from over-the-air performances the US.

Many have also suggested that should these deals spread and become standard, there might actually be more total royalties paid to the artists and labels as more webcasters launch services, encouraged that they might actually be able to make a profit. In recent years, publishing companies that receive royalties from the use of music but charge far less than the labels for their interest in the music have been among the bright spots in the music industry. Could this be a template for a change in the way that business is done by the labels as well? (We’ll write more on this topic in coming days in connection with legislation introduced the week before last by Congressman Chaffitz on digital music royalty parity in the US and in connection with other digital music royalty issues).

But even if the deal does not have an impact on the performance royalty, could the agreement otherwise change the equation on royalties for the use of music by broadcasters? While this deal is but one agreement between one broadcaster and one record company, it is an example of a broader trend toward direct music licensing for digital uses. In 1998, Congress provided a one-stop shop for music licensing for non-interactive digital music services including webcasters and satellite radio (that “stop” being SoundExchange). These royalties are paid to SoundExchange, and set by the Copyright Royalty Board (“CRB”). Broadcasters and others are accustomed to paying for the public performance of musical compositions (through royalties paid to ASCAP, BMI and SESAC) – with the combined amount of those royalties usually in the neighborhood of 5% of revenue. In the digital realm, the royalties paid to SoundExchange for the use of the sound recording (for which over-the-air broadcasters pay nothing) have been extremely high. For services like Pandora, that royalty is a minimum of 25% of the company’s revenue. For most webcasters, including broadcasters who are streaming their over-the-air signals, the per-song, per-listener fees can eat up all of the revenues of their digital services (see our summary of the royalty rates here). These royalties have caused many to re-evaluate their Internet radio strategies – with some broadcasters abandoning streaming altogehter.

A deal like the Big Machine agreement, if it spread to other services and labels, could well lead to a new royalty model. In setting rates, the CRB looks to establish rates that reflect what a willing buyer and a willing seller pay in the marketplace. In past royalty proceedings, that willing-buyer, willing-seller price had to be estimated, as there were no real deals to use as a benchmark. And the estimates all went against webcasters. With a deal like that with Big Machine, and the deals that Sirius XM negotiated with certain independent record labels (which Sirius argued was impeded by those representing the royalty-collectors who feared the precedent), the pro-record company outcome of the CRB proceedings may well be changed if these deals can be shown to be representative of the real value of the public performance of the sound recording.

All in all, the deal between Clear Channel and Big Machine may not be what broadcasters feared – a concession on the over-the-air royalty – but instead may have positive benefits for all broadcasters in the digital world, setting a precedent for lower royalties in future proceedings. Of course, we’ll all have to wait to see what details emerge on this deal and any other similar agreements that may be in the works. But, with the next round of proceedings to set webcasting royalties starting in 2014 and running through 2015 (to set the rates for 2016-2020), the time is now for these deals to be made. The digital future for broadcasters may what is negotiated.

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.  

So just how do these deals work, and what do these percentages mean in real terms? While specific details of the deal have not been disclosed, all indications are that these broadcasters obtained the right to perform on their digital properties recordings from Big Machine artists (including many country artists such as Taylor Swift and Rascal Flatts ), in exchange for a share of the revenues from both the broadcaster’s digital and over-the-air operations. While the royalty on the over-the-air revenues would be a new cost, as digital becomes more popular with consumers and more important to the company, these companies appeared to feel that a reduction in their digital royalties was worth the price. Of course, there may well be other facets to the agreement adding incentives to the parties that we just don’t know. 

A deal with a single record company probably doesn’t in reality mean that much economically, but it could be significant if these deals become more wide-spread and include major labels.  The percentages agreed to in these deals are, in reality, likely not percentages of either companies’ revenues, but instead a pro rata share of those revenues, computed based on the amount of Big Machine music played by the Clear Channel or Entercom stations. Let’s run some numbers to illustrate the savings. Assuming hypothetically that Big Machine artists comprise 10% of the songs played by a specific country radio station, Big Machine would likely receive one-tenth of one percent of the station’s total over-the-air revenues, and three tenths of the station’s total digital revenue (deriving those figures from the 1%/3% royalty rates mentioned at the Radio Show times the assumption that 10% of the total songs played on the station come from Big Machine artists). 

On the digital side, the station would reduce its obligations to SoundExchange for all of the music that it has played by Big Machine artists – no longer having to pay on a per song per listener basis for that music (in effect, the broadcaster has directly licensed that music – see our posts on direct licensing here and here). If that station had been paying SoundExchange 60% of its digital revenues for the use of recorded music, the royalty on the Big Machine artists would have gone from 6% of the digital revenue of the station (10% of the 60%) to just .3%, a dramatic drop providing immediate tangible benefits to the station.

Why would the parties enter into these deals, and what impact will they have on webcasting and over-the-air royalties?  More on those issues tomorrow. 

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.

The vast majority of commercial radio stations will elect to be covered by these settlement agreements. While there were a few commercial religious broadcasters that elected to separately negotiate with ASCAP and BMI, other commercial stations either must accept the agreements or negotiate or litigate with ASCAP and BMI over the terms of the agreements on their own – a very expensive proposition.  And not only would litigation be expensive, it would be hard to reach a deal that reduced royalties beyond the reduction reached by the RMLC negotiations.  The RMLC deals even resulted in credits against future royalties for overpayments by broadcasters in the past - BMI's reductions being built into the current royalty, ASCAP's being paid as a yearly credit against future royalties (causing many recent Asset Purchase Agreements in connection with the sale of radio stations to build in a clause asking for future credits to the seller for past "prepayments" of these fees). 

Broadcasters hate to pay for anything that they don’t think confers a benefit on them. This fee, while seemingly a little obscure, indeed pays real, tangible benefits to most stations in helping to control royalty costs.  Paying RMLC should not be viewed as an imposition by the vast majority of stations – as the payments provide funding for the RMLC to negotiate or litigate future royalty issues – including potentially with SESAC, which is currently not covered by any antitrust decree (see our article on SESAC here). Without guaranteed funding, the RMLC would not be as effective as it has been in rolling back the royalty fees that had been in place before the new agreements, and and it would not be as effective in fighting increases in the royalties in the future.

Last month, we wrote about the proposed settlement on "mechanical royalties" under Section 115 of the Copyright Act. These royalties are paid when "reproductions" are made of a musical composition.  In the analog world, these were most commonly paid by a record company to a music publisher for the rights to use a musical composition when one of its bands records the song controlled by the publisher. The recent settlement, entered into between the music publishers' representatives, the recording industry, and a digital media industry association, covers everything from physical recordings, to digital downloads, ringtones, and other "digital phonorecord deliveries" made by on-demand and other digital music services.  The text of the settlement agreement, giving all of the details of the proposed rates for the various types of digital services, is now available for public review, as it has been published in the Federal Register as part of the request for comments by the Copyright Royalty Board.  Comments on these proposals are due on June 18.

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.

Both ASCAP and BMI had agreements in place with the radio industry that expired at the end of 2009.  Negotiations with the RMLC have been ongoing since the last agreements expired (see our article here).  The settlement just announced with BMI, and that announced a few months ago with ASCAP, were voluntary agreements to avoid the rate court proceeding.  Those proceedings can be very expensive, take a long time and, as with any litigation, the outcome can be unpredictable

SESAC, on the other hand, has never been subject to any antitrust consent decrees.  They were never thought to be large enough to merit antitrust scrutiny.  While some TV stations have brought an antitrust action against SESAC, seeking to have some kind of relief from what the TV stations claim is prohibited collusive behavior, that case is still progressing, will likely take a long time and, like any litigation, the outcome is uncertain.

Unless and until some court rules otherwise, SESAC is not subject to any rate review.  They are a for-profit company.  And like any for-profit company, they can negotiate rates and charge essentially what they want for their product.  Like any other commercial transaction, stations can decide not to play SESAC music, and not pay them.  But if they play any SESAC music, and don’t have a direct license from the publisher for the rights to use the music, they need to get an agreement with SESAC.  While SESAC has general licenses for broadcasters and most pay roughly the same amounts, as this is a commercial transaction, the deals can be negotiated by the user and by SESAC to fit particular circumstances.  And SESAC tends to charge separately for streaming, HD and other music uses, so there may be some opportunity to negotiate blanket deals covering all of these services.  But their rates are currently up to them, not subject to court review. See our article here for more information about SESAC. 

But, for now and the foreseeable future, SESAC is not likely to be “next” for the radio industry.  As for BMI and radio, we should see what the rates are there in a few weeks. 

Broadcasters beware - podcasts with music may be dangerous to your economic health.  In recent weeks, I've come upon more than one incident where a broadcaster was providing podcasts containing music on their website, or allowing listeners to download or stream on-demand some new, hot song.  I've even seen certain articles in the trade press advocating that stations do podcasts of their morning shows, or otherwise provide some sort of programming containing music on their websites in a manner in which the listener can listen over and over again to the same program or song.  Broadcasters need to know that they are asking for trouble when they provide services like podcasts, downloads and on-demand streams containing music without getting specific permission from copyright holders to do so, as these uses are not covered by the SoundExchange royalties paid for webcasting, nor (in most cases) by your ASCAP, BMI and SESAC royalties.  

The royalties paid to SoundExchange are for the right to publicly perform sound recordings in a noninteractive manner.  In other words, they only cover streams where the user cannot get a specific song when they want it, and where listeners do not know the order in which songs will be played.  ASCAP, BMI and SESAC (the "PROs") also cover public performances, but of the underlying musical compositions (the words and music of the song, as opposed to its recording by a particular singer or band).  By contrast, “podcasts,” ( and here I mean an on-demand program that can be downloaded onto a digital device for later replay, and which can also usually be played immediately on someone’s computer) are much like downloads - and involve a different right in music - the right to reproduce and distribute the music.  The rights of reproduction and distribution are different from the public performance right, and the permission to make reproductions and distributions are granted by different groups than are the public performance right.  SoundExchange and the PROs have nothing to do with granting this reproduction and distribution right (with the limited exception of ephemeral rights in streaming granted through the SoundExchange royalty - a concept too technical to be discussed here, and one that does not affect this warning.  But, if you are interested in these rights, you can see our article that discussed ephemeral rights in a bit more detail, here).  Podcasts, downloads and on-demand streams require a specific grant of rights from the copyright holders of the sound recordings and the musical compositions for each piece of music that is being used. 

Rights to the sound recording of most popular recorded music will typically come from the record label. And, for these sorts of on-demand uses, the rights to most recorded music will not be cheap and easy to obtain. It will come easily only for specific songs that the labels want to promote – sometimes referred to as “podcast safe” music.  This music is usually a song from a new artist, or an alternate take of a new song by an established artist, meant to be used to promote a new release.  Getting rights to the full catalog of music typically played by a music intensive radio station will require a negotiation with each record label and the payment of significant money - the kind of negotiation that has delayed the introduction of services like Spotify in the US for so long.

Rights to reproduction and distribution of the musical composition typically come from the music publishing company (or sometimes music publishing companies where there is more than one writer of a song).  These licenses—known as “mechanical licenses”— can be obtained through a statutory license, setting out payments to the copyright holders of any musical work that has been publicly released, but only if some strict procedures set out by law are followed.   These rights can also be obtained directly from the publishers or songwriters or, in many instances, through the Harry Fox Agency, which licenses compositions on behalf of many copyright holders. There are also a number of private companies that will help in getting the necessary licenses to use the musical composition.   Depending on the use that you have in mind, the record companies may themselves have already cleared the right to the musical composition, and that right will come with the right to the sound recording when you negotiate for that right.  But needless to say, it is not an easy process that will allow routine podcasts or downloads of music programming. 

Even the podcast of the performance of a local artist, with his permission, may require a mechanical license from the songwriter or music publisher if the artist has been singing “cover” songs.  So be careful when recording local artists - you may think that you are getting their music royalty free, and you may be avoiding the sound recording royalty and a negotiation with a record label, but you may still have the musical composition to deal with if the local performer has not written their own songs.

There are lots of other caveats and exceptions that may apply in certain circumstances.  But these don't allow the routine podcast of music programs or the other types of uses described above.   So be careful - or you may have the music industry knocking at your door demanding an unexpected payment.  For more information about these topics, check out our Advisory on the Basics of Music Licensing in Digital Media. 

Just as webcasters thought that they had their royalty obligations figured out, there comes news that the already complicated world of digital media royalties may well become more complicated.  Last week, EMI, which in addition to being a record label is a significant music publishing company, has reportedly decided to withdraw portions of its publishing catalog from ASCAP - which had been licensing the public performance of these songs. The withdrawal from ASCAP applies only to "New Media" licensing.  What is the impact?  As of today, webcasters pay ASCAP, BMI and SESAC for the rights to play virtually the entire universe of "musical compositions" or "musical works" (the words and musics of the song).  By withdrawing from ASCAP, EMI will now license its musical compositions itself, adding one more place that webcasters will need to go to get all the rights necessary to play music on an Internet radio type of service.  In addition to royalties paid for the musical composition, webcasters also pay SoundExchange for public performance rights to the sound recordings (the song as recorded by a particular singer or band) - and by paying this one organization, they get rights to perform all sound recordings legally released in the US.   But any Internet radio operation needs both the musical composition (except for those compositions that have fallen into the public domain) and the sound recording performance rights cleared before they can legally play the music.

The news reports quote EMI as talking about the efficiencies that will be created by its licensing the musical compositions directly - in conjunction with the licensing of other rights - like the rights to make reproductions of its compositions, or the rights to publicly perform sound recordings to which its record label holds the copyright. But the whole idea of a performing rights organization with collective licensing is that it provides to digital music services the efficiencies offered by a one-stop shop for the purchase of rights to all a very large set of musical compositions.  Up to now, a digital music service knew that, by entering into licensing agreements with ASCAP, BMI and SESAC (the "performing rights organizations, or "PROs"), it had rights to virtually all the musical compositions that it would normally use (i.e. they received a "blanket license").  If these rights are balkanized, so that each significant publisher licenses their own music, the webcaster will have to make multiple stops to license all the music they need - which always leads to confusion.  The more places they have to go to license music, the more possibility that they will overlook a necessary rightsholder.  But there is even a bigger potential issue for webcasters - price.

ASCAP and BMI, which are the largest of the performing rights organizations - together controlling an estimated 85 or 90 per cent of the musical compositions - are subject to antitrust consent decrees.  They can't discriminate between music rights holders, and must offer the same licenses to similarly situated services, i.e. they must charge all webcasters according to set formulas - they can't cut deals with individual webcasters and offer them better deals, unless such deals are open to all that have similar qualifications.  Moreover, the rates that they charge are subject to government oversight by a "rate court" - a Federal District Court judge who can hold a trial to determine the reasonableness of any proposed rate.  This oversight is required by the antitrust consent decrees that govern both ASCAP and BMI.

As we have written before, SESAC, the smallest of the current PROs, is not subject to rate court review for its rates, nor is it restricted from "cutting deals" on the rates that it charges.  It is a private company, not subject to any antitrust consent decree.  Some music users have, from time to time, suggested that SESAC be brought under such decrees - including a group of TV stations that filed a lawsuit a year ago seeking to impose antitrust scrutiny on SESAC.  As SESAC is often able to require royalties from users that seem higher than those that would be due to it if it was paid on a strictly pro rata basis, these kinds of concerns arise from time to time.

But SESAC is still a fairly large organization, in business for a long time, and most media companies are accustomed to dealing with it.  EMI, and any other publisher that follows its lead, would seemingly be in a position similar to that of SESAC, and not be covered by the antitrust consent decrees.  Thus, any such publisher could charge what it wanted for the public performance right to the compositions that it controls, and even charge different services different amounts.  And it may be difficult for licensees to realize that they have to deal with a new organization or organizations to license music, and it will make it harder to determine which songs a music service has licensed or which ones it already has the rights to use.  Some webcasters are still are surprised that they have to pay SoundExchange, which has been around in one form or another for a decade, so how will they get the word that they now can't rely on ASCAP, BMI and SESAC for all their public performance needs for musical compositions?  While ASCAP's amended regulations (see Section 1.12 of those regulations dealing with this New Media opt-out) provide that ASCAP will must notify all New Media services when any publisher decides to avail itself of this New Media opt-out, and what songs will be licensed directly, as SoundExchange has itself found out, such notices often don't command the attention that one might think that they would. 

Collective licensing was developed to provide a one-stop shop to clear vast catalogs of music.  Many feel that it is necessary for those users - like a webcaster - who needs acceess to a broad array of music in order to operate its business.  When the sound recording performance royalty was first established in the 1990s, it came with a mandatory collective licensing approach (the "statutory license"), so that all users could easily determine how to pay for the music that they use, without needing to deal with every rights holder - perhaps having to negotiate a different deal with each one.  As we wrote here, that is why Internet radio has had the Beatles catalog for so long, even though interactive digital music services, which don't have a compulsory collective license only recently have been able to obtain such licenses.

If music publishers associated with record labels generally start to exercise their rights to withdraw their catalog from the PROs, it's possible that they could even exert more control over the use of the sound recordings.  If, for instance, they control both the publishing and the master recording (the sound recording) rights to a particular band's music, and they feel that the statutory sound recording performance royalties set by the Copyright Royalty Board are too low for a particular recording, they can effectively block the use of that sound recording by extracting a higher price for the musical composition the next time the license for that composition becomes due.  One could even see different prices being charged for the rights to different musical compositions (in fact, most Beatles compositions are held by EMI - so it is possible that every Internet radio operator will not have access to their recordings if this combined licensing scheme goes into effect).   While the efficiencies claimed by the publisher might exist in the case of some interactive services, or in cases where you are dealing with a very limited number of songs (e.g. negotiations to use the music in video productions), for traditional Internet radio services, the efficiencies seem to diminish, not increase.

Just what digital services are affected by this move?  Broadcasters do not seem to have to worry about this development, as the amendment to ASCAP's regulations allowing this partial withdrawal from its licensing system excluded them (and the definition of "broadcaster" under the antitrust conset decree (see Section II(f)), seems to exclude cable and direct broadcast satellite as well, as indicated in ASCAP's press release on the matter.  This exclusion would seemingly include broadcaster's Internet simulcast's of their over-the-air programming.  But other digital music services that are subject to Sections 114 (webcasters), 115 ("DPD", or "digital phonorecord deliveries", i.e. copies or reproductions of musical compositions made digitally) and 106(1) (other digital reproductions by audio services), are all covered. 

This is an evolving story.  There are many questions that remain.  One unanswered question is exactly which songs are covered by this opt-out.  Another is how it will affect the rates charged by ASCAP.  Finally, the practical effect remains to be seen.  It may well be that this new system will in fact prove more efficient, or will provide benefits to users and composers - or it may impose some of the burdens that I describe above.  Until this is all sorted out, music companies will need to watch carefully to ensure that they license the music they need - from the proper places.  More on some of the other issues involved in digital music licensing can be found in our advisory - The Basics of Music Licensing in a Digital World. 

NOTE:  Corrected 5/10/2011 to note that ASCAP, and not the music publishing company, sends out the notices to the services of a New Media opt out when a publisher decides to exercise it right to opt out of the normal ASCAP licensing scheme. 

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?

Clearly, digital music services should understand that the actions taken here are taken only because SoundExchange did not get full reporting.  In some of the webcaster settlement agreements (see, e.g. the settlement with broadcasters, summarized here), and in the CRB's own record keeping rulemaking proceeding, it was recognized that certain classes of webcasters could not be expected to provide full census reporting, i.e. reporting that lists all of the songs played by the service and how many listeners heard each song.  This reporting process can be expensive, especially for groups like noncommercial webcasters and even some small broadcasters and other small companies.  In some cases, the cost of reporting would be greater than the royalties collected or certainly the revenue produced by the streaming.  In many of these cases, SoundExchange is already authorized to distribute proceeds based on some proxy methodology.

But other webcasters, who are supposed to be reporting on a census basis, should do so.  The Copyright Royalty Board has asked whether SoundExchange has exhausted all its avenues to collect information about what is being played.  SoundExchange, in its pleading, notes that many services simply have lost past data, and some services are no longer in business.  So getting that information is difficult or impossible.  But in the future, SoundExchange will no doubt be looking to develop stronger enforcement capabilities against webcasters and others who do not meet reporting requirements.  But, even then, there will no doubt be gaps, as there will be computer malfunctions, inaccurate data that is entered, and companies that go out of business withou having met all of their obligations. 

Clearly, no one wants musicians to go unpaid - especially when the royalties have already been collected.  In the past, there has been talk of developing monitoring systems that would be easy and inexpensive to use.  Many streaming service providers already provide some type of reporting system.  But virtually all still require human input - identifying the songs correctly in a service's music scheduling software, and that sometimes is not easy, as information from record companies and other music suppliers is not always available and consistent. Automating such systems, making them ubiquitous, foolproof, easy to use and inexpensive, should be the priority of SoundExchange and webcasters and other music services, so that those who deserve to get paid are paid, but avoiding systems that are so hard to use that they make streaming or other digital music use difficult or impossible.