CRB

Oxenford reports CRB gave some consideration to SiriusXM marketplace deals in determining rates

Monday, January 7, 2013 - 11:15am

The recent CRB royalty decision for satellite and cable radio "for the first time, gives at least some weight to direct licensing deals," and "seems to reject some premises that had long been used to justify royalty rates in other proceedings – and thus may give some insights on approaches to be used in the webcasting royalty proceeding."

We're quoting industry legal expert David Oxenford, who has published some preliminary analysis of the Copyright Royalty Board's full determination of royalty rates to be paid to SoundExchange by Sirius XM and Music Choice from 2013 through 2017.

Last week the CRB released its full decision (actually, two separate decisions, resulting in the same determination, here and here). We reported the actual rates last month in RAIN (here).

We also reported (here) that in the proceedings, satellite radio provider SiriusXM revealed more than 60 direct licensing deals it had secured with record labels, which it argued should be used as benchmarks as the market value of digital sound recordings for noninteractive performance. The service says its direct deals are for 5%-7% of revenues.

Logically, the CRB agreed that directly-licensed sound recordings should be excluded from SiriusXM's royalty obligation to SoundExchange (services need pay SoundExchange only for copyright music for which they have not secured direct deals), Oxenford reports.

And while the CRB rejected SiriusXM's proposal to lower rates from 8% of revenue to 5%, it also rejected SoundExchange's proposal to raise rates -- starting at 12% of revenue in 2013 and ending at 20% in 2017. The Board decision -- 10% of revenue this year, rising to 11% next year, and 12% for each of the next three years -- might indeed indicate it took SiriusXM's market deals into consideration, as Oxenford suggests.

This is important to note as we approach CRB proceedings on Internet radio royalties. Broadcasters like Clear Channel and Entercom have struck streaming royalty deals with certain copyright owners. If the CRB is willing to consider marketplace deals in royalty determinations for satellite and cable radio, they may also be willing to do so in the upcoming webcasting proceedings.

The fact that webcasting royalty proceedings are governed by the controversial "willing buyer willing seller" standard, which by design attempts to replicate an "open market" value for copyright material, may be even more reason for royalty judges to consider these direct deals as benchmarks.

[Satellite radio and cable radio royalty proceedings are governed by the more traditional 801(b) standard. The main goal of the Internet Radio Fairness Act is to have Internet radio royalties to be moved to this same standard.]

The next royalty proceeding for noninteractive webcasting services begins in 2014 and should conclude in 2015.

Oxenford also reports that "the Board also explicitly agreed, for the first time in any decision of which we are aware, that pre-1972 sound recordings also are not to be included in the revenue base, as the Federal sound recording copyright only applies to songs created in 1972 and after (with certain exceptions...)." It will be interesting to see if webcasters are given a similar "pre-1972 carve-out."

Oxenford plans to follow up with more detailed analysis. Read his initial thoughts here.

SiriusXM direct licensing deals may make it harder for SoundEx to claim CRB is "below market"

Tuesday, December 18, 2012 - 1:30pm

During testimony in the recent royalty determinations (see yesterday's RAIN here), SiriusXM reportedly revealed it has secured "direct content licenses" with more than 60 labels, giving them even broader use rights at rates below those set by the Copyright Royalty Board.

Digital Music News reports SiriusXM will pay 5%-7% of its gross revenues for these licenses, covering more than 7,000 artists, 9,000 albums, and 110,000 songs (there were no reported details of how specifically the use of the licensed music is broader than is allowed by the statutory license).

These agreements are actual, real-world settlements between active players in the music rights market. As such, these deals (both the rates and expanded allowable uses of the music) will likely be cited in arguments against music industry interests who claim the CRB-determined rates for satellite radio (and webcasting, for that matter) are "below market value." It isn't clear whether the more favorable terms of these direct deals tempered the CRB's decision

As we reported yesterday, the CRB set sound recording royalties for satellite radio at 9% of gross revenue in 2013, increasing 0.5% each year (to 11% in 2017). Billboard estimates SiriusXM will pay between $1.02 billion and $1.22 billion in statutory royalties to SoundExchange from 2013 to 2017.

Hypebot reports SoundExchange pressed the CRB for satellite radio royalties that increased to 20% of gross revenue by 2017 (DMN says "one resident expert" pushed for 30%), calling the CRB rates "below market."

Last month industry attorney David Oxenford reported that much of the discussion in the rate-setting's oral arguments phase "focused on the value of music in a marketplace -– essentially the 'willing buyer, willing seller' question." Currently, the law mandates that the rate-setting for royalties for these media is to be governed by the "801(b)" standard (which the record industry has argued does not reflect fair market value) (RAIN coverage here).

In March Sirius XM filed a lawsuit against SoundExchange and the American Association of Independent Music (A2IM), accusing the record industry organziations of interfering with its efforts to directly license sound recordings. The complaint accuses SoundExchange and A2IM of being in violation of federal antitrust law, and New York state law (RAIN coverage here).

Digital Music News coverage is here. Read Hypebot here. Read Billboard coverage here.

As a percentage of revenue, new satellite and cable radio royalties still wildly below webcast rates

Monday, December 17, 2012 - 12:40pm

Sound recording royalties for satellite radio service SiriusXM will rise from 8% of gross revenue to 9% in 2013, and continue to grow 0.5% each year (to 11% in 2017). The Copyright Royalty Board also set the new statutory rates for cable television music services. Those rates will rise from 8% of gross revenue now to 8.5% for 2014 through 2017.

The CRB announced its determinations late Friday.

This royalty is only for copyright sound recordings (i.e. not compositions), and only for satellite transmissions or cable TV (not webcasting). Most webcasters (including satellite radio and cable television radio when they stream online) pay royalties on sound recordings at a "per-performance" rate. For even the most successful webcasters, this royalty can amount to more than 50% of a company's gross revenue.

Read the brief CRB announcement of rates 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.

CC deals with labels might provide marketplace benchmark for more equitable CRB royalty rates

Monday, October 1, 2012 - 4:55pm

"In setting (webcast royalty) rates, the (Copyright Royalty Board) 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... 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."

That's industry attorney David Oxenford's take-away from recent "direct deals" between broadcasters and record label for both terrestrial and digital sound recording royalties (the latest of which involved Clear Channel and Glassnote Entertainment, covered in RAIN here).

Copyright Royalty Board judges, per the 1998 DMCA, don't set royalties considering the fairness and "mimimal disruption" of their decision (as is called for in the Copyright Act's "801(b)" standard, which is used in royalty determinations for other forms of digital radio). They are mandated to set a rate at what they think a "willing buyer" would pay and what a "willing seller" would accept. Critics point to this different and unpredictable standard as the reason Internet royalty has been saddled with sound recording royalties that, as a percentage of revenue, are many multiples of those paid by satellite and cable radio. It's also the impetus behind the recent Internet Radio Fairness Act, introduced to both chambers of Congress (in RAIN here).

Oxenford is suggesting that should deals like Clear Channel's and Entercom's (both groups have reached agreeements with Big Machine Records) start to spread to other companies, they could very well represent the "marketplace" agreements with willing buyers and willing sellers that could set "a precedent for lower royalties in future proceedings."

The next round of proceedings to set webcasting royalties starts in 2014 (to set the rates for 2016-2020).

Read Oxenford, a D.C.-based partner at Wilkinson Barker Knauer, in Broadcast Law Blog here.

Professor says Internet Radio Fairness Act is better path to growth for webcasters and artist royalties

Thursday, September 27, 2012 - 6:55pm

UCLA professor John Villasenor has penned columns for Forbes, and a white paper for the Brookings Institution (where he's a nonresident senior fellow) that bring clarity to the matter of Internet radio royalties, calling for fairness in how actual rates are determined (we've covered these in RAIN here).

The idea Villasenor advocates, by the way, is the central goal of legislation introduced last week by Reps. Jason Chaffetz (pictured) and Jared Polis, and Sen. Ron Wyden, called the Internet Radio Fairness Act of 2012. That is, to instruct Copyright Royalty Board judges to base their determinations for Internet radio royalties on the same standard that is used for satellite and cable radio royalties -- known as 801(b).

This week Villasenor has an excellent and easy-to-understand piece advocating IRFA, published by Future Tense, a collaboration among Arizona State University, the New America Foundation, and Slate (read it here).

The 801(b) standard is a set of four criteria the U.S. Copyright Office has historically used to determine royalty rates for various uses of copyright, including all prevalent forms of digital radio except Internet radio. 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.

By the late nineties, "the music industry, traditional broadcasters, and Congress were struggling to come to grips with the growth of then-new communications technologies enabling the delivery of perfect digital copies of songs to consumers," Villasenor explains. "But as so often happens when policy decisions are motivated more by fear of new technology than by recognition of the opportunities it creates, the resulting legislation ended up impeding growth rather than fostering it."

At the time, what was to become the Internet radio industry had little to no representation in Washington, certainly not like that of the music industry. Incumbent broadcasters, at the same time, while owning an even louder voice in Washington than the music industry, paid little attention to upstart digital technologies. So, not surprisingly, law crafted to manage music and digital technology was heavily influenced by the wants and needs of music labels, who saw the digital delivery of music as dangerous to their traditional business model.

The result was 1998's Digital Millennium Copyright Act, which put noninteractive digital audio services (Internet, cable, and satellite) "into two categories based on, among other things, a snapshot of the digital music broadcasting industry taken on July 31, 1998."

Services like Sirius and XM (now Sirius XM), Muzak, and Music Choice that existed by that time were "grandfathered in and given access to the 801(b) standard." The music industry, however, convinced lawmakers to abandon 801(b)'s aims to maximize the availability of works to the public, fairness to both sides, and minimum disruption, and change the standard for the new Internet radio medium. Thus, royalty judges were to decide royalties using a new standard, called "willing buyer/willing seller."

Villansenor explains, "Despite the innocuous-sounding name, willing buyer/willing seller requires identifying 'market' rates in the absence of a true competitive market. Unsurprisingly, this has produced skewed results."

The result can be seen in today's royalty landscape. The CRB-determined rates for SiriusXM using the 801(b) standard require 8% of the company's gross revenues for royalties in 2012 (up from 6% in 2008 and 7% in 2010). Pandora's 2012 royalty obligation, on the other hand, is almost 50% of its revenues. "And that is after a 2009 agreement provided a substantial discount to CRB willing buyer/willing seller rates that risked driving Pandora and other webcasters out of business."

Villasenor concludes, "For these reasons and more, the Internet Radio Fairness Act of 2012, which would move to a uniform 801(b) standard, is the far better path forward... Setting music royalty rates too low is unfair to recording artists, and lowers the incentive to create music. But if royalty rates are too high, as has occurred with Internet radio, companies providing broadcasting services will continually struggle to turn a profit, impeding market—and ultimately royalty—growth."

Again, read the entire article here.

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