Webcasting IV: A royal(ty) mess [part 2 of 2] (cont.)

Friday, August 2, 2013 - 12:35pm

Continued from above, here.

(4) Will Pandora and broadcasters collaborate?
Expect to see Pandora and the National Association of Broadcasters (NAB) team-up in Webcasting IV, especially now that Pandora operates its own terrestrial radio station (in RAIN here).

As their online audiences grow, broadcasters' streaming royalties may become unsustainable for the future. By 2015, broadcasters will pay higher per-performance rates for their online streams -– $0.0025 (0.25 cents) per performance -– than any other type of webcaster. (By comparison, Pandora and other pureplay webcasters will pay $0.0014 (0.14 cents) per performance in 2015.) Meanwhile, Pandora will be doing everything it can to avoid paying rates anywhere approaching NAB's statutory rates.

Pandora and broadcasters are in the same boat when it comes to opposiing SoundExchange's inevitable proposal to continue raising statutory rates. (For what it's worth, my prediction is that SoundExchange in the upcoming proceeding will seek a rate increase to about three times higher than the $0.0012 (0.12 cents) per performance rate Pandora currently pays.)

(5) Will pre-1972 recordings be found exempt?
Finally, there's one other legal issue which could have a fairly significant effect on royalties -- an issue which may already have been decided. That is, whether to exclude pre-1972 sound recordings from statutory royalty obligations.

Pre-1972 sound recordings are not governed by federal laws. For many years, there has been some debate about whether webcasters owe royalties to SoundExchange for performances of sound recordings created before 1972. (Think of bands like the Beatles and the Beach Boys, and genres like ragtime, classic jazz, and folk music.)

These pre-1972 sound recordings might constitute 10%-15% (or more) of total performances, thereby representing a potential royalty savings of the same amount. But, due to some ambiguity in the law, webcasters have been paying royalties on those pre-1972 recordings.

However, last December, the CRB -– in its rate determination for Sirius XM and Music Choice -– for the first time acknowledged that "pre-1972 recordings are not licensed under the statutory royalty regime and should not factor into determining the statutory royalty obligation." (See p.77 of the CRB decision here.)

Though it's probably unnecessary, getting the CRB to reaffirm this proposition in Webcasting IV would give webcasters certainty about excluding a significant segment of recordings from statutory royalties.

The legal issues surrounding Webcasting IV are complex. Webcasters who are considering their possible participation in this proceeding should consult experienced attorneys well in advance of the commencement of Webcasting IV, as each party’s rate proposals and supporting evidence must be submitted near the opening of the case. Good luck to the Webcasting IV participants!

Angus M. MacDonald is a copyright and digital media attorney. The views expressed in this article are solely Mr. MacDonald’s and should not be attributed to his employer.

Webcasting IV: A royal(ty) mess [part 2 of 2]

Friday, August 2, 2013 - 12:35pm

The following is Part 2 of a two-part guest column by Angus M. MacDonald, a copyright and digital media attorney.

Last month in RAIN (here), we highlighted the cast of players who will likely play key roles in the next CRB webcasting rate case, known as Webcasting IV. This installment examines five "hot button" legal questions that will likely surface during the proceeding.

(1) Will Apple's rates serve as a "benchmark?"
Though Apple will likely remain on the sidelines for Webcasting IV (it secured direct deals with labels for iTunes Radio), it might still play a major role in the CRB case based on the royalty rates it will pay.

Based on publicly-available copies of Apple’s proposed agreements with independent record labels, for iTunes Radio's first year, Apple will pay a per-performance fee of $0.0013 (0.13 cents) and 15% of net advertising revenue. For the second year, the rates increase to $0.0014 (0.14 cents) per performance, plus 19% of ad revenue.

(According to reports, these rates for independent labels are nearly identical to the rates Apple will pay to the major record labels; however, unlike the indies, the majors will get sizable cash advances from Apple. More here.)

Will Apple’s rates have a role in setting the statutory rates for the industry? Probably. Based on its prior determinations, the CRB prefers to use actual marketplace agreements as "benchmarks" for what would be agreed upon by between a "willing buyer and willing seller," the standard governing Webcasting proceedings. In its previous proceedings, the CRB relied significantly on direct deals by on-demand services as benchmarks for rates that non-interactive Internet radio services should pay (subject to certain adjustments)... because that's all they had to go on at the time.

But since iTunes Radio -– a semi-interactive, but not on-demand service -– will operate with direct deals with the vast majority of record labels, it will be interesting to see if webcasters attempt to enter Apple's rates into evidence as an appropriate benchmark.

(2) Might the CRB revisit percentage-of-revenue rates? 
The CRB and its predecessor rate panels traditionally set statutory rates for webcasters as "per-performance" fees (a flat fee for every time a single listener hears a single song). As webcasters and commentators have noted, the problem with per-performance rates is that successful Internet radio services -– unlike most other online companies -– feel "punished" by their growth. In most industries, scaling up tends to decrease costs as a percentage of revenue. But that does not happen in a per-performance paradigm, which often leads successful webcasters to inhibit (or at least control) their growth in listening hours (as Pandora recently did by imposing listening caps (more here)).

The time, however, may be ripe for the CRB to revisit a percentage-of-revenue royalty. After all, most marketplace agreements for Internet radio now include percentage-of-revenue as a basis for royalty payments. This includes Apple's deals with labels, as well as direct deals entered into by major terrestrial broadcasters –- such as Clear Channel, Entercom and Beasley -– for their online streaming (see here).

Moreover, SoundExchange already accepts percentage-of-revenue royalties for numerous types of services, including small commercial webcasters, satellite radio, cable television music services, and business establishment services. If SoundExchange and the record labels are willing to accept percentage-of-revenue deals for most other services, there doesn't seem to be compelling reasons why non-interactive webcasters should only be allowed to pay on a per-performance basis.

(3) Waiver for performances under 30 seconds?
Webcasters should strongly consider pursuing royalty exemptions for any performances that last 20 to 30 seconds or less. This is an issue that rarely has been discussed, but given the agreements for iTunes Radio, this idea merits serious consideration in Webcasting IV.

It appears that Apple has successfully obtained an exemption for performances that last 20 seconds or less. Similarly, many direct deals between on-demand music services and record labels (including publicly-available agreements submitted as "benchmark" deals by SoundExchange), typically include royalty waivers for performances 30 seconds or less in duration.

Since the CRB has repeatedly determined that rates paid by on-demand services can serve as appropriate benchmarks for non-interactive rates, it seems appropriate to waive a royalty obligation when a listener tunes out or skips ahead before 30 seconds of a song has elapsed.

Continued after the jump here.

Webcasting IV: A royal(ty) mess [part 1 of 2]

Thursday, July 18, 2013 - 7:00am

This week in RAIN we're featuring contributions from various industry executives, journalists, and experts on the state and future of Internet radio.

The Copyright Royalty Board (CRB) proceeding to set non-interactive webcasting rates for 2016 through 2020 (known as Webcasting IV) commences next year. But it’s not too early for webcasters to start making preparations for this significant rate-setting process now.

Since it’s unlikely that settlements will occur as broadly as they did in 2009 (shortly before the last proceeding, Webcasting III, got underway), most of the largest U.S. webcasters probably will, in some way, be involved in the upcoming CRB case. It’s bound to be a royal(ty) mess!

Here’s a quick preview of several key players that could have a great influence in Webcasting IV. (This article's second installment will cover some of the important legal issues that will likely arise in the proceeding.)

Congress: In the last go-around, the vast majority of webcasters settled prior to Webcasting III, due to the non-precedential royalty agreements between SoundExchange and various groups of webcasters. These deals occurred only through Congressional authorization under the Webcaster Settlement Acts of 2008 and 2009. (Pandora, for example, obtained the so-called "Pureplay" rates under the 2009 Act.)

However, it is unlikely that Congress will again intervene on behalf of the webcasting industry in this next proceeding. The fact that Congress can't seem to agree on anything these days aside -- more importantly, webcasting appears to be a more “mature" industry now compared to 2009. Four years ago, Pandora and other webcasters were seemingly on the verge of going under without relief from the CRB-determined royalty rates (which appeared to be out-of-whack compared with what the industry could afford at the time).

If Congress does not intervene prior to Webcasting IV (and there’s no indication so far that it will), statutory webcasters need to choose: Either (1) start ramping up for Webcasting IV; (2) undertake the enormous effort of obtaining direct licensing deals from the myriad of record labels (as Apple is doing with its soon-to-be-launched iTunes Radio); or (3) stand nervously on the sidelines as other webcasters (i.e., competitors) try to litigate for the best rates.

The Copyright Royalty Board: The CRB is the three-judge panel of the Library of Congress, tasked with determining a statutory rate it recommends to the Librarian.

There will be an entirely new cast of CRB judges in the upcoming proceeding than was in Webcasting III. (The Webcasting III judges were the same judges in Webcasting II, which ended in 2007.) Among other items, it will be interesting to see how much deference the current CRB judges will give to the findings of the previous panel of judges.

Pandora: Among all the webcasters, Pandora has the most significant interest in Webcasting IV.

As I reported several months ago (in RAIN here), Pandora paid 56% of its total revenues to SoundExchange for the fiscal year that ended January 31, 2013. (See p. 22 of Pandora’s 10-K here). That amounted to $238.7 million in royalties paid by Pandora solely to SoundExchange in just one year. Given Pandora’s growth over the last few years, it’s easy to expect it to pay SoundExchange close to a half-billion dollars by 2015 or 2016, even if its growth slows somewhat over the next few years. (These royalties do not even include the rapidly-increasing royalties Pandora pays publishers and the Performing Rights Organizations that control the copyrights to musical works.)

More on Pandora in the next installment of this article.

SoundExchange: In Webcasting IV, SoundExchange (on behalf of the record labels) will undoubtedly push for a substantial increase of the current rates webcasters pay for digital performances of sound recordings.

Consider that in Webcasting III, SoundExchange argued for rates that were more than two times higher than the eventual Pureplay settlement rates -– rates which clearly would have bankrupted Pandora could it not avail itself of the Pureplay rate. Though SoundExchange did not get the rate it proposed in Webcasting III, the current statutory rates (as determined by the CRB) are relatively close.

And SoundExchange is reaping the rewards. As recently reported (here), SoundExchange's recent $149 million second quarter 2013 royalty distribution was its highest quarterly payment ever.

The NAB: Unless it can obtain another approved settlement (which seems unlikely unless Congress intervenes), the National Association of Broadcasters will certainly be involved in the upcoming proceeding. As more and more terrestrial radio companies come to rely on their Internet transmissions -– including straight simulcasting -– to connect with growing online audiences, the NAB and its members will have a greater interest in streaming royalty rates and keeping them affordable.

One arduous alternative for NAB members is to enter a vast array of deals negotiated directly with numerous record labels, as Clear Channel has started to do with independent record label groups like Big Machine, Glassnote and others (in RAIN here). But, as it’s unlikely NAB members can secure a critical amount of direct deals before the CRB proceeding gets underway, it’s safe to expect the NAB to be an active voice in Webcasting IV.

SiriusXM: Though primarily associated with satellite broadcasting, SiriusXM is also one of the largest webcasters, and pays significant royalties to both SoundExchange and record labels directly for its Internet radio transmissions. Through its "Internet radio-only" and "All Access" subscription packages, SiriusXM allows customers to listen to over 150 channels online (instead of via a satellite radio receiver).

SiriusXM's growing audience -- it recently surpassed 25 million subscribers (more here) -– will mean higher royalty payments, so it seems likely it will be a key player in Webcasting IV.

And, as its ongoing antitrust lawsuit against SoundExchange shows, Sirius is not afraid of tussling in court with SoundExchange and the recording industry to get better rates.

With this cast of characters (and many others not mentioned in his article), Webcasting IV is shaping up to be a veritable battle royale. In the folow-up to this piece, we'll take a closer look at a few of the "hot button" issues and other interesting legal wrinkles surrounding Webcasting IV.

Angus M. MacDonald is a copyright and digital media attorney. The views expressed in this article are solely Mr. MacDonald’s and should not be attributed to his employer.

Librarian of Congress appoints two new Copyright Royalty Judges

Wednesday, May 8, 2013 - 1:00pm

The U.S. Librarian of Congress James H. Billington has appointed two new judges for the Copyright Royalty Board.

David R. Strickler, one of the new judges, will serve as CRB economics expert. He'll complete the term vacated by Stanley C. Wisniewski, which ends in January 2016. He's an experienced lawyer and trained in theoretical economics and the application of economics to legal issues.

The other new judge, Jesse Feder, will be the copyright specialist, and will complete William Roberts' term, ending this coming January. He was recently director of International Trade and Intellectual Property for the Business Software Alliance, and also served as acting associate register in the U.S. Copyright Office and as legal adviser in the Office of the General Counsel for the Library of Congress.

CRB judges are those who determine the statutory royalty rates webcasters pay for the use of copyright sound recordings (actually, they "recommend" a rate to the Librarian, who pretty much "rubber-stamps" it). Copyright royalty judges are appointed by the Librarian of Congress in consultation with Register of Copyrights Maria A. Pallante (The Copyright Office being part of the Library of Congress).

You may remember the Intercollegiate Broadcasting System (IBS) challenged the constitutionality of the CRB, saying its appointments violated the Appointments Clause of the U.S. Constitution. A U.S. Appeals Court sided with IBS, and determined that the CRB appointments were in fact principal officers, and should have been appointed by the President. But to fix it, the Court simply struck those portions of the law that limit the power of the Librarian of Congress to remove the Copyright Royalty Judges without cause (read more from legal expert David Oxenford here).

Read this week's full statement from the Librarian of Congress on the new appointments here.

Clear Channel and Wind-Up Records strike royalties deal

Tuesday, April 9, 2013 - 2:15pm

There's now yet another "marketplace" deal between Clear Channel and a record label -- this time, Wind-Up Records -- that will have the broadcaster pay a share of ad revenue for its broadcast of the label's music. In exchange, Clear Channel gets a discount on its royalty obligation when it streams the same music.

One reason deals like this are significant is broadcasters in the U.S. are not compelled to pay copyright owners or performers for the broadcast use of copyright sound recordings. The Digital Millennium Copyright Act of 1998, however, requires payment for the digital use (e.g. webcasting, satellite radio, cable radio) of this material. While the music industry has long bemoaned broadcasters' free over-the-air use of its intellectual property, Internet radio and other digital services have chafed under royalty obligations that can amount to half (or more) of revenues.

Such agreements could be a sign that broadcasters like Clear Channel understand the broadcast royalty exemption may not last forever, and what's more, online delivery of content is becoming more and more vital to radio. On the other side, labels like Wind-Up perhaps see that webcasting in their future too.

Industry legal expert and authority on royalties David Oxenford has written that these deals could be pivotal in upcoming government deliberations on setting a statutory U.S. webcasting royalty rate. Without actual marketplace royalty agreements, Copyright Royalty Board judges have so far been compelled to use the "willing buyer willing seller" standard and set royalties where they think a hypothetical market players would settle. And so far, all of those determinations have been wildly in the record companies' favor.

When Clear Channel's "royalty swap" agreement with the Big Machine Label Group was announced, Oxenford wrote, "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." (Read more in RAIN here.)

Oxenford moderated "The Song Plays On," a panel discussion concerning webcast royalties, Sunday at RAIN Summit West.

Clear Channel has struck similar deals with Glassnote Entertainment Group, Dualtone, DashGo, rpm Entertainment, Robbins Entertainment, and Naxos.

Wind-up Records launched a number of multi-platinum rock artists, including Evanescence, Creed, Finger Eleven, and Seether, and has brought on Five for Fighting, O.A.R. and The Darkness, among others.

IBS wants Supreme Court to take up issue of CRB appointments

Wednesday, February 13, 2013 - 12:25pm

Intercollegiate Broadcasting System Inc. (IBS) late last month filed a "petition for writ of certiorari" with the U.S. Supreme Court, arguing it should have been Congress, and not an appeals court, that restructured the law to make CRB judges' appointments constitutional.

The Copyright Royalty Board is the panel of judges that (among other duties) determines the industry "statutory" royalty rate webcasters must pay the owners of copyright sound recordings to peform them publicly.

As news source Law360 reports, IBS is accusing the D.C. Circuit of overstepping its authority when it revised the law to fix issues of the constitutionality of the CRB.

The appeals court in July ruled the Librarian of Congress' appointment of CRB judges violated the U.S. Constitution's appointments clause (see RAIN here), as the law required the judges to be appointed by the president with Senate confirmation. To fix that, the court simply changed language in the law (the Copyright Royalty and Distribution Reform Act) to make CRB judges "inferior officers," which don't require presidential appointment, thus making the Librarian's appointment of the judges constitutional.

IBS, which represents educational and noncommerical broadcasters and webcasters, says the court overstepped its authority by changing the law. The petition also asks the Supreme Court to determine if the newly-revised law is itself constitutional.

Read more in Law360 here.

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