801

CRB oral arguments on SiriusXM rates veer away from 801(b) and toward "marketplace" evidence

Thursday, November 1, 2012 - 1:30pm

Satellite radio provider SiriusXM, cable radio provider Music Choice, and music industry royalty administrator SoundExchange recently made their oral arguments before the U.S. Copyright Royalty Board on the matter of sound recording royalties for their next 5 year term (more in RAIN here). And while the law mandates that the rate-setting for royalties for these media is to be governed by the "801(b)" standard, industry legal expert David Oxenford reports the actual argument that took place "focused on the value of music in a marketplace -– essentially the 'willing buyer, willing seller' question."

Oxenford reports that "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."

SiriusXM themselves used as evidence the direct licensing deals it has negotiated with dozens of record labels and artists as a benchmark for "the true marketplace value of music," Oxenford notes. "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)."

What Oxenford is pointing out here is that even when the 801(b) standard is mandated for royalty-setting, there's no guarantee that judges won't use the marketplace precendents of "willing buyers and willing sellers" in their determinations.

Here's why this is important: Currently, the law requires copyright judges, when determining royalty rates for all forms of digital radio except Internet radio (and HD Radio, which pays no such royalty), base their decisions on the objectives of the 801(b) standard (named for its location in the Copyright Act). Those objectives 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.

As Oxenford has explained (here), "In setting royalties, 801(b) assesses not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music."

Judges use a different standard when they set rates for Internet radio. Instead of 801(b), the Digital Millennium Copyright Act requires judges to determine a rate based on what a "willing buyer" and "willing seller" might agree to in the marketplace. But no significant real-world examples of "willing buyer willing seller" agreements between webcasters and copyright owners exist. So judges are compelled to imagine a hypothetical marketplace based on the arguments of advocates for copyright owners and users to determine a rate. They do not (and in fact, are instructed to not) consider how their decisions affect the return on players' investments in the industry, or the public's access to creative works, only the perceived economic value of the right.

The bottom line result of using these two different standards: while royalties for SiriusXM are currently about 8% of its revenue, Internet radio royalty rates amount to 50%-100% of revenue (Pandora's latest finances would have them paying 70% of their revenue) or more.

The Internet Radio Fairness Act (more in RAIN here), a bill in both houses of Congress, would attempt to address this discrepancy by changing the Internet radio rate standard from "willing buyer willing seller" to "801(b)," the same standard used for satellite- and cable-radio royalties. 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.

But, as Oxenford notes, "the (SiriusXM) 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."

Read Oxenford's report in the Broadcast Law Blog here. David Oxenford is a Washington, D.C.-based partner at Wilkinson Barker Knauer, LLP. He represents digital media companies, including a number of Internet radio companies, before the Copyright Office, the Copyright Royalty Board, and other government agencies. He advises them on music royalty issues as well as other general business and regulatory matters. He's a regular expert speaker at RAIN Summit events, and a regular contributor to this publication.

IRFA would remove controversial "willing buyer willing seller" standard in webcast royalty determinations

Friday, September 21, 2012 - 11:25am

As expected (see RAIN here), Congressmen Jason Chaffetz (R-UT) (left) and Jared Polis (D-CO) this morning introduced to the House of Representatives a bill they hope will create a more level playing field for Internet radio concerning sound recording royalties. An accompanying bill has been introduced to the Senate by Sen. Ron Wyden (D-OR) (right). 

The Internet Radio Fairness Act would change the legal standard by which judges determine the statutory rate for streaming radio. The royalty rates for most other, related uses of copyright sound recordings use the standards set in section 801(b) of the Copyright Act. The 1998 Digital Millennium Copyright Act made an exception for Internet radio, requiring rates to be set to what the judges felt a hypothetical "willing buyer and willing seller" would agree. The bills would bring Internet radio in line with media like cable- and satellite radio, requiring rates to be set along 801(b) guidelines.

Proponents of the bills argue that the current standards discrepancy creates a competitive environment in which broadcast-, cable-, and satellite radio can flourish, while Internet radio operators are faced with royalty obligations equal to or greater than their annual gross revenue. It's interesting to note that the royalties that record labels (who've already come out in opposition to this bill) pay to publishers and songwriters to record their music are also based on 801(b).

Consider that satellite radio operator SiriusXM pays around 8% of its revenues for the right to use copyright sound recordings in its broadcasts, based on a determination using the 801(b) standard. Pandora, on the other hand, says nearly 70% of its total revenue (based on its Q1 FY 2013) will go to royalty payments (and that's per a deal Pandora struck that actually decreased its obligation (again, here, under "Pureplay Webcasters") from the CRB decision -- a decision based on "willing buyer/willing seller").

The bill does not, as some critics point out, address the fact that AM/FM broadcasters do not pay royalties on the sound recordings they play on the air (which in sense, makes the competitive burden to Internet radio that much heavier). New York Congressman Jerrold Nadler (D) plans to introduce a bill in opposition to the Chaffetz/Wyden bill, the Interim FIRST Act (see RAIN here). That bill would raise the royalties broadcasters pay to stream online to a level that would, in effect, equal what they'd pay for an over-the-air royalty. It would also impose the "willing buyer willing seller" standard to royalty rate settings for media currently using 801(b). 

Currently, under the "willing buyer/willing seller" standard, when CRB judges determine the royalty rate at which webcasters pay copyright owners and performers for the use of sound recordings, they do not (and in fact, are instructed to not) consider the "real world" ramifications of their determination, only the perceived economic value of the right.

"In setting royalties, (801(b)) assesses not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music," explains attorney David Oxenford (here).

The 801(b) standard is a set of four criteria the U.S. Copyright Office has historically used to determine a royalty rate. They are:

  • Maximize the availability of creative works to the public;
  • Insure a fair return for copyright owners and a fair income for copyright users;
  • Reflect relative roles of capital investment, cost, and risk, and;
  • Minimize disruptive impact on the industries involved.

Read 801(b) of the Copyright Act here.

More, including commentary, coming soon in RAIN.

SiriusXM, SoundExchange make opening offers for 2013-2017 royalty rates

Friday, September 14, 2012 - 12:55pm

Stock and financial analysis site Seeking Alpha is reporting that, for its upcoming royalty renewal, satellite radio outlet SiriusXM is offering to pay 5%-7% of its gross revenues to use copyright sound recordings, while SoundExchange is asking for 13% -- rising to 20% -- over the 2013-2017 term.

The Copyright Royalty Board set satellite's 2007 royalty rate at 6% of gross revenues, rising each year to 8% this year. 

Note that the CRB's determination (a) concerns SiriusXM's satellite transmissions, not its streams, for which it pays a separate royalty at a dramatically higher rate; and (b) this rate, in stark contrast to online streaming rates, is determined using the 801(b)(1) standard.

"With the survival of (SiriusXM) no longer at stake (as it was during the last determination) and lower capital expenditures required during the next license period, future rates that could be set by the CRB could easily be higher and much closer to, or even above, the 13% rate," predicts Seeking Alpha. Read more here.

While we're on the topic, Internet radio royalty determinations are currently based not on 801(b)(1) standards, but solely on the controversial, DMCA-mandated "willing buyer willing seller standard," which many industry experts agree is the key reason streaming royalties are so much higher than those for satellite and cable radio in the U.S. Congressman Jason Chaffetz in July announced he hopes to introduce to Congress the Internet Radio Fairness Act that would move Internet radio royalty determinations to use the 801(b)(1) standard that's used for most other royalty decisions (see coverage here). Industry legal expert David Oxenford explains the importance of 801(b)(1) here. Oxenford, a D.C.-base partner at Wilkinson, Barker, Knauer will moderate the "Music Licensing Roundtable" panel at RAIN Summit Dallas on Tuesday.

Brookings wants a law to make 801(b)(1) the standard for all non-interactive digital radio

Wednesday, August 15, 2012 - 1:30pm

A new paper from a Washington, D.C. think tank clearly recounts how entrenched interests crafted copyright law to establish copyright royalty obligations that put webcasters at a severe disadvantage to other forms of radio -- and calls on Congress to fix it.

The highly-regarded Brookings Institution last week published "Digital Music Broadcast Royalties: The Case for a Level Playing Field" in which it calls for Congress to enact legislation requiring the use of a consistent legal standard for royalties when it comes to "all non-interactive digital audio broadcasting."

We've often discussed (such as here) -- as have leading experts in the field, such as attorney David Oxenford -- the fact that sound recording performance royalties for Internet radio are determined using a significantly different (and, as it's been demonstrated, dramatically unfavorable) legal standard than those for other forms of radio. 

The bottom-line result of the different legal standard can be seen in recent Copyright Royalty Board determinations. For instance, the CRB, based on the widely-used "801(b)(1)" standard in copyright law, "concluded in a December 2007 ruling that the satellite radio royalty rates should start at 6% of gross revenue for 2006, rising gradually to 8% in 2012." The same group of judges, using the significantly different "willing buyer/willing seller" standard (instead of 801(b)(1)), determined a royalty rate for Internet radio of $.0021 "per performance" (songs x listeners) for 2012. Pandora, had it been paying this rate instead of its special discounted agreement rate with SoundExchange, "its payments to SoundExchange for sound recording performance licenses would likely have... approach(ed) or exceed(ed) its revenue of $80.1 million."

The Brookings paper is an excellent primer on the differences between U.S. Copyright Law's "801(b)(1)" standard (used for rate-setting for satellite radio and services like Music Choice) and the "willing buyer/willing seller" standard that 1998's Digital Millennium Copyright Act mandated for webcasting. It also very nicely recounts the history of webcasting royalties, CARP and CRB, the DMCA, and more. The author, Brookings nonresident senior fellow John Villasenor, has published articles in Forbes (covered in RAIN here and here) on this very topic.

Brookings has at least one ally in Congress already. In July we reported (here) that Utah Republican Congressman Jason Chaffetz has begun crafting a bill that would indeed replace the "willing buyer/willing seller" standard in webcast royalty determinations with the 801(b)(1) standard.

Download the Brookings paper here. Billboard.biz has also covered this story here.

Rep. Chaffetz's Internet Radio Fairness Act would require rates based on same Copyright Act standard

Thursday, July 19, 2012 - 12:40pm

Utah Republican Congressman Jason Chaffetz has reportedly begun crafting a bill aimed at bringing Internet radio royalty rates more in line with those of other radio platforms. The bill's key feature is a change from the controversial "willing buyer/willing seller" standard in webcast royalty determinations to the more prevalent "801(b)" standard.

Chaffetz says his Internet Radio Fairness Act of 2012 is still in draft form and isn't yet ready to be introduced. But he plans to determine his next steps by the end of this month.

When Copyright Royalty Board (CRB) judges determine the royalty rate at which webcasters pay copyright owners and performers for the use of sound recordings, they do so based on the standard -- mandated by the DMCA -- of what a "willing buyer" and a "willing seller" would agree to in a hypothetical marketplace. The judges do not (and in fact, are instructed to not) consider the "real world" ramifications of their determination, only the perceived economic value of the right. The Internet radio royalty process is unique in this way, as royalties for satellite and cable radio are based on the Copyright Act's more well-known 801(b) standard. Royalty determinations for what labels pay music publishers and songwriters are also based on 801(b).

"In setting royalties, (801(b)) assesses not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music," explains attorney David Oxenford (here). Among other objectives, judges using 801(b) are instructed to set rates that "minimize any disruptive impact on the... industries involved." (Read 801(b)(1) of the Copyright Act here.)

How much of a difference does this standard make? Consider that satellite radio operator SiriusXM pays around 8% of its revenues for the right to use copyright sound recordings in its broadcasts, based on a determination using the 801(b) standard. Pandora, on the other hand, says nearly 70% of its total revenue (based on its Q1 FY 2013) will go to royalty payments (and that's based on on a deal Pandora struck that actually decreased its obligation from the CRB decision -- a decision based on "willing buyer/willing seller").

"It seems screwy that royalty rates change so dramatically based on the platform," Chaffetz explained. "When you’re listening to music in your house or in your car, you may be listening to it on your iPhone, you may be listening on the satellite radio or the FM radio. Does that mean the royalties should be so vastly different? It doesn’t seem to make sense to me. We need to play catch-up here."

A summary of the bill (according to news source The Hill) says the legislation also aims to "improve the proceedings process for rate-making cases and ensure judges on the Copyright Royalty Board have the same legal background and expertise as federal court judges who consider copyright cases."

Chaffetz says he expects push-back from the recording industry, and remains open to labels' input. "We’ll flesh all that out. I have no doubt we’ll have a good, lively discussion on that. There’s plenty of money to be made by all the various interests, it’s just I think moving toward parity is an important principle," he said.

The "801(b) vs. 'willing buyer/willing seller'" issue has come up multiple times in the history of Internet radio. The Performance Rights Act, which would have imposed a sound recording performance royalty on broadcast radio, would have moved webcast rate determinations to 801(b) (see our coverage here). Attorney David Oxenford wrote about the inherent unfairness of using different standards by platform in early 2008 (see RAIN coverage here). That same year Senators Ron Wyden (D-OR) and Sam Brownback (R-KS) introduced their Internet Radio Equality Act, which would have, like the PRA and Chaffetz's new bill, given Internet radio the 801(b) standard. That effort stalled by July (see RAIN coverage here). We have tons more coverage and analysis about 801(b), here.

Read more from The Hill online here.

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