Copyright Royalty Board

Pandora shifts royalty focus away from Internet Radio Fairness Act

Tuesday, November 26, 2013 - 12:25pm

According to a report in Billboard, Pandora will no longer lobby for passage of the Internet Radio Fairness Act (IRFA). Instead, according to Billboard’s source, the Internet radio company will concentrate on the upcoming statutory royalty period, the rates for which are set by the Copyright Royalty Board. This shift of focus would re-allocate Pandora’s resources from one part of government to another, abandoning congressional solutions for arbitration and possibly market negotiation.

At stake is the cost of content for Pandora (and all digital music services), and the business conditions in which Internet radio will thrive or not. Royalty rates -- the payments to music owners for the right to broadcast or stream music recordings -- represent the wholesale cost of music. Unlike suppliers in most other industries, labels/artists (owners of recorded masters) and composers/publishers (owners of intellectual property), do not always use market negotiation to determine their prices. In the U.S., laws and arbitration processes form the basis of statutes which determine prices. Private negotiation can occur alongside that basis. 

The Internet Radio Fairness Act was introduced to address unevenness is statutory rates. Kurt Hanson, CEO of AccuRadio and Founding Editor of this site, wrote when the IRFA was introduced, “The current confusing mix of royalty-rate setting standards for digital radio is the result of piecemeal legislation enacted as each new technology was invented. The result is a system significantly out-of-sync with the realities of the 21st century marketplace.”

In the current system, cost of content differs in percentage terms across different distribution mediums. The biggest rate disparity is between broadcast radio and Internet streaming: Broadcast is not required by law to pay labels and recording artists for the use of recordings, but Internet radio is required to. This irregularity has been addressed to a limited extent by private deals between label groups, radio groups, and Internet music services.

By swiveling its spotlight from congress to the Copyright Royalty Board (CRB), Pandora is placing a new bet. Current statutory royalty rates run through 2015. Next year begins a rate-setting process for the following five-year period. For each cycle, the CRB is mandated to determine cost-of-content prices that reflect open-market realities. The difference in the upcoming cycle is that there is a more substantial open market than in previous cycles, and therefore more reference points with which to frame arguments. For example, Apple hammered out the content costs of its iTunes Radio streaming business via negotiated deal-making with music owners. Likewise, Clear Channel’s proprietary agreements with Warner Music and many smaller label groups provide open-market examples. Same with the alliance of the Cumulus radio group with Internet pureplay Rdio.

Pandora might also explore the direct-negotiation path, though it has not made private deals in the past. The company is fairly cash-rich, with about a half-billion dollars in the bank, thanks in part to a secondary stock offering completed this year. When asked about direct music licensing in last week’s earnings call, CEO Brian McAndrews replied, “[The public offering] puts us in a better position to have the right conversations."

Whatever Pandora’s future cost-management strategy, David Oxenford, author of the Broadcast Law Blog, observes that Pandora’s prioritizing is sensible: “It does make sense for all webcasters to start to focus on the CRB proceeding, as the notices of intent to participate in the next webcasting case will probably be due in January.” Oxenford also notes that we are still two years away from a decision regarding new rates, which will be announced in December, 2015, for the 2016-2020 royalty period. 

Like presidential opponents, royalty bill foes rail against "burdensome regulation" and "cheating the middle class"

Monday, November 5, 2012 - 12:05pm

An article in yesterday's New York Times likens the conflict over Internet radio royalties to the presidential race: business suffering under government-inflicted costs vs. wealthy industrialists cheating the middle class.

What the different players are saying sure makes the comparison apt.

Pandora founder Tim Westergren told journalist Ben Sisario, "This adversarial reaction toward Internet radio is counterproductive. It’s causing other businesses to sit on the sidelines, and that is hurting musicians. Ultimately, you want to have many boats in the harbor."

But MusicFirst Coalition, the record industry group that's the main face in the fight against proposed royalty reform, "says it believes that if Pandora gets everything it wants, it could cut its royalty bill by up to 85%," writes Sisario.

The Internet Radio Fairness Act, co-sponsored in the House of Representatives by Republican Congressman Jason Chaffetz of Utah (more here), would require Copyright Judges who determine Internet radio's royalty rates to make their decisions using the "801(b)" standard of Copyright Law, instead of the controversial "willing buyer willing seller." Webcasters like Pandora support the bill, as all other forms of digital radio have their royalties set using 801(b). The music industry is firmly against the bill.

Westergren said, "No one has yet explained to us why Internet radio is under a different standard. No one responds to that fundamental premise."

Naturally, for RIAA CEO Cary Sherman, it's really a matter of companies like Pandora trying to cheat the "entire music community" out of "a fair return on the creative works that are the reason companies like Pandora exist."

Clear Channel CEO Bob Pittman is largely credited with making his company a major online radio force with its launch of the iHeartRadio platform. He says the record industry is wrong to focus on rates. With lower rates, more companies will stream more music, and lead to more income. "If the rate suppresses the volume, there’s less money. If it encourages volume, there’s more money."

Of everyone siding with Internet radio services, it was Rep. Chaffetz himself who stood out with a shot at the music industry establishment: "The old-school dinosaurs are trying to help, but they’re stuck in the tar. They can go talk to the pterodactyls."

Read the New York Times article here.

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.

RAIN examines restrictions and waivers for web streams that play small number of artists

Tuesday, August 28, 2012 - 9:35am

iHeartRadio's All Beatles & Stones Radio station

Clear Channel's iHeartRadio has launched a new non-customizable stream called "All Beatles & Stones Radio." As its name suggests, the stream plays only music by The Beatles and The Rolling Stones.

Inside Radio reports the station is a part of iHeartRadio's "Back To School" line-up of stations, one for every letter of the alphabet. "All Beatles & Stones" represents the letter A. Other featured artists will apparently include Passion Pit ("P"), Bananarama and the Bangles ("B"), Lupe Fasco ("L") and others. RAIN could not find these other stations on iHeartRadio's website (besides the custom radio stations for each artist). Inside Radio refers to them as iHeartRadio Original stations, but they do not appear at time of publication on iHeartRadio's Originals page (here).

iHeartRadio recently playedThe "All Beatles & Stones" stream -- which does not allow the user to skip songs -- includes nothing but Beatles and Rolling Stones music, sometimes with songs by the same artist back-to-back. The music is only broken-up by an occassional short identifier.

But most webcasters aren't allowed to do this. After all, the Digital Millennium Copyright Act (DMCA) imposes limits on the use of music within Internet radio streams for webcasters that intend to use the statutory license. For example, webcasters are not allowed to play more than 4 songs by the same artist in a 3 hour period -- a rule iHeartRadio's Beatles/Stones stream broke several times just during the composition of this article.

"These limits were placed seemingly to make it more difficult for listeners to copy songs, or for Internet radio stations to become a substitute for music sales," writes industry attorney David Oxenford (pictured below), now a partner with Wilkinson Barker Knauer. He outlines some of the other DMCA restrictions in the Broadcast Law Blog here.

However, it turns out the NAB negotiated with the four major music labels and A2IM in 2009 to waive some of these limits, including that 4-songs-by-the-same-artist rule. Those agreements were a part of the NAB's settlement with SoundExchange which set royalty rates through 2015 at a discount from what was decided by the Copyright Royalty Board (as was permitted by the Webcaster Settlement Acts; read more in RAIN here).

David Oxenford

However, as Oxenford wrote in 2009 (here) after reviewing each agreement between the NAB and labels, these waivers apply to web streams of over-the-air and HD-2 stations. They "do not cover Internet-only channels that a broadcaster may program on its website." It's possible Clear Channel is broadcasting the "All Beatles & Stones Radio" channel as an HD-2 or over-the-air station somewhere, in which case the DMCA restrictions would most likely not apply.

Additionally though, the DMCA's restrictions are only waived "insofar as the broadcaster does not 'depart materially from today's range of typical over-the-air radio programming practices,' citing specifically the practices of having DJs talk between songs and stations running commercials and PSAs between songs." Does the "Beatles & Stones" station's back-to-back music line-up, with only ocassional short identifiers, "depart materially" from today's "typical over-the-air radio programming practices"?

Other restrictions in some of the agreements, such as not streaming more than half the songs from an album or CD at any time within a 3 hour period, would make stations focusing on new artists with relatively small discographies like Passion Pit potentially difficult.

You can listen to iHeartRadio's "All Beatles & Stones Radio" station here. You can subscribe to Inside Radio's daily newsletter here.

$50k spent on lobbying in Q1 alone shows "they've grown up Washington-style"

Tuesday, July 10, 2012 - 11:45am

National Journal's Influence Alley blog has put an eye towards the lobbying efforts of Pandora and its efforts to reform the way webcasting royalty rates are set by the U.S. Copyright Royalty Board.

In 2007, when the webcaster fought for its very survival against a royalty determination that would have it paying 70% of its revenue in royalties, Pandora relied on the crowd-sourced power of its listeners to bombard lawmakers with calls, e-mails, and faxes. Now, they're a little more sophisticated, a little more "establishment." Columnist Elahe Izadi writes, "They've grown up Washington-style."

Pandora founder Tim Westergren has reportedly been a frequent visitor to Washington, D.C. Pandora's secured the public relations services of Story Partners, and two lobbying firms (Wheat Government Relations and TwinLogic Strategies). In fact, Pandora's lobbying spend from January 2011 through March of this year reportedly totals $230 thousand (according to OpenSecrets.org here, which is where we got the chart).

"We're looking for greater parity, specifically in the language in the way our rates our set. We're not looking for a specific rate," Westergren is quoted. And it's not necessarily parity with broadcasters (which, you may know, do not pay royalties for the use of copyright sound recordings).

Izadi writes, "The U.S. Copyright Royalty Board is tasked with setting rates for Internet and satellite radio companies, but they use different rules to determine those rates. Satellite companies such as Sirius XM can argue for lower than-market-value rates." Sirius will pay somewhere between 7% and 8% of its revenue for these royalties this year. Westergren says he's simply trying to get "the same leeway to advocate for lower royalties."

Read National Journal's Influence Alley here.

Forbes: Digital music industry innovation and progress "impeded by the current copyright system"

Friday, May 25, 2012 - 11:35am

Editor's note: RAIN will return on Tuesday, May 29. Have a great Memorial Day weekend!

Music royalties"To say that copyright law is complex would be an understatement," writes Forbes contributor John Villasenor. Few RAIN readers likely need to be told that. Nor should they be surprised by Villasenor's comment that the Copyright Royalty Board's "willing buyer/willing seller" model for setting Internet radio royalty rates "has not worked ideally." 

Former SoundExchange general counsel Gary Greenstein, now a copyright attorney with Wilson, Sonsini, Goodrich & Rosati, tells Forbes that "the willing buyer/willing seller standard, as it has been applied by the CRB, has resulted in rates that would likely drive many nonsubscription, Internet-based digital music services out of business."

Congress had to pass two Webcaster Settlement Acts (in 2008 and 2009, RAIN coverage here, here and here) to "temporarily grant SoundExchange, a non-government entity, with the extraordinary power to negotiate lower rates." You can read more about those negotiated rates in RAIN here. And, as Villasenor writes, even "those 'lower' rates can still be very high when measured with respect to revenue."

For example, Pandora paid nearly 70% of revenues to content acquisition costs -- which include royalties -- according to their Q1 2013 fiscal results (RAIN coverage here).

Forbes pullquote"So where does all of this leave things?" ponders Villasenor. "The short answer: in need of repair."

He argues that "some of the policy objectives enshrined in copyright laws of the United States may stifle innovation and impede new business opportunities… America’s status as a global technology leader is due in large part to disruptive advances that upend prevailing industry practices, and in doing so, often interfere with streams of revenue flowing to less innovative incumbents. Yet this is precisely the sort of progress that is impeded by the current copyright system as it applies to certain digital music services."

Rightsholders -- songwriters, recording artists, record labels -- are absolutely entitled to "be fairly paid for their work, and deserve the protections of a well-designed copyright royalty framework," writes Villasenor.

"But it’s also important not to lose sight of the public’s interest in having access, under reasonable terms, to copyrighted material." Villasenor quotes the Supreme Court from a 1975 ruling: "The immediate effect of our copyright law is to secure a fair return for an 'author's' creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good."

"That [public] interest is no less valid if it happens to be served using non-traditional business models such as Internet radio," concludes Villasenor. You can find his article in Forbes here.

Do you agree with Villasenor's argument? Disagree? Let us know in the comment section!

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