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.

IRFA critics accuse Pandora of asking for an "unfair subsidy"

Thursday, November 15, 2012 - 12:25pm

A group of 125 of the recording industry's biggest names are throwing their star power behind major record label efforts to oppose Net radio royalty reform.

"That's not fair and that's not how partners work together," reads the two-page "open letter" to leading webcaster Pandora in this weekend's Billboard magazine, signed by stars like Sheryl Crow, Pink Floyd, Billy Joel, and Katy Perry. The ad was placed by recording industry lobby musicFIRST and digital royalty group and industry advocate SoundExchange (below, click the image to read it).

Pandora supports the "Internet Radio Fairness Act" -- proposed legislation that would require copyright judges who determine the royalties webcasters pay for the use copyright sound recordings to use the same legal standard they use when determining the same royalties of satellite and cable radio (we have lots of coverage here). Major recording labels have come out in staunch opposition to the bill.

The ad accuses Pandora of enjoying "phenomenal success as a Wall Street company" yet of asking Congress to "gut the royalties thousands of musicians rely upon." A musicFIRST/SoundExchange joint press release from Wednesday calls the Internet Radio Fairness Act a "subsidy," which "could slash by 85% royalties paid to musicians and artists when their songs are played over Internet radio." 

Speaking in support of the bill on Tuesday (RAIN coverage here), Sen. Ron Wyden (D-OR) said, "Music is still dominated and controlled by a couple of multi-national corporations (which) act like a duopoly to maximize their profits, and not maximize the compensation of artists and not maximize musical choice... They are the people that made 'payola' a household word." Wyden himself introduced the Internet Radio Fairness Act in the Senate in September.

Last month, Pandora founder Tim Westergren (in RAIN here) revealed that in 2012 alone his service will pay nearly $3 million each in royalties to play the music of performers Drake and Lil Wayne -- half of which goes directly to the songs' performers. The music of Coldplay, Adele, Wiz Khalifa, and Jason Aldean will generate from Pandora more than a million dollars each this year.

The musicFIRST/SoundExchange press release is here.

RAIN Analysis: It’s ironic that the organizations are making an appeal for "fairness" when, in fact, what they’re fighting for is specifically to keep the concept of "fairness" out of the rate-setting standard for Internet radio.

The "801(b) standard" is the set of four criteria that Congress has historically typically instructed the U.S. Copyright Office to use to determine a royalty rate: (1) Maximize the availability of creative works to the public. (2) Insure a fair return for copyright owners and a fair income for copyright users. (3) Reflect relative roles of capital investment, cost, and risk. (4) Minimize disruptive impact on the industries involved.

801(b) is the standard used in other forms of digital radio, like satellite radio and cable radio, and it accurately reflects the public policy goal of copyright law, which is to maximize the availability of creative works to the public, using the concept of "fairness" for both creators and distributors.

By prevailing upon Congress in 1998 to change the rate-setting standard for Internet radio to the rate "which a willing buyer and a willing seller would agree to," the music industry has introduced confusion that has hamstrung the growth of Internet radio ever since. Because of the difficulty of applying this standard – since this is a marketplace in which a "willing buyer/willing seller" rate has never been determined – the judges in both rate-setting cases so far (2002 and 2009) ended up setting rates that were, for the majority of webcasters, greater than 100% of their revenues. Such a rate is far higher than the 7% to 15% rates that other forms of digital radio pay under the 801(b) standard, and it’s far higher than any "willing buyer" could actually afford to pay. -- KH

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 arrives in Dallas for tomorrow's RAIN Summit event

Monday, September 17, 2012 - 9:00am

We're expecting our largest crowd ever for a RAIN Summit fall event (nearly the size of our spring Vegas gathering), and we're very excited for what tomorrow has in store.

On the eve of the Summit (and, of course, the RAB NAB Radio Show), one topic in particular that's buzzing in Internet radio is (once again!) royalties.

For its Radio Show issue, Inside Radio spoke with Clear Channel CEO Bob Pittman, and touched upon the royalty topic. He told the news source that the existing rate-setting structure for online radio royalties simply will not allow streaming to succeed, "and that’s not good for the music business either." Since Clear Channel's historic deal with Big Machine Records (which pays the label royalties for streaming and on-air, see RAIN here) Pittman says his company continues to have discussions with music business interests, "because I think we're all interested in a long-term sustainable relationship." Read more in Inside Radio here

Illustrative of the challenge that'll likely be, SoundExchange this month (here) took positions on two proposed federal bills that won't likely do much for Pittman's mood. SoundExchange criticizes Congressman Jason Chaffetz's (R-UT) "Internet Radio Fairness Act" (here), instead supporting Rep. Jerrold Nadler's (D-NY) "Interim FIRST Act" (read more here).

Even the blockbuster news of the possibility of Apple becoming on online radio player (which we'll certainly be discussing tomorrow) has a royalty facet. Billboard reports (here) that while Apple's reported talks with labels don't yet concern special rates and waivers to content restrictions, bargaining along those lines isn't far off. "Sources say the labels are willing to accommodate some compulsory license waivers... but they want to make sure that whatever waivers Apple receives can also be rolled out to other custom Web radio operators," says Billboard. "Also, they want to ensure that the deals aren't viewed by the Copyright Royalty Board as a market deal to be incorporated into the next set of CRB rate settings."

There's so much interesting ground to cover, we hope you'll join us!

There's so much interesting ground to cover tomorrow afternoon, and we certainly hope you're able to join us. All the info you need is on our RAIN Summit Dallas page here. We'll get underway just past noon with introductory comments from Sabo Media CEO Walter Sabo. RAIN publisher Kurt Hanson will give his "State of the Industry" address at 2:20. At 4:30 our keynote speaker, Clear Channel President of National Sales, Marketing and Partnerships Tim Castelli takes the podium. At 5:35 we'll present the Triton RAINmaker and RAIN Internet Radio Awards, and then head to the Verandah Shelbourne Room for the RAIN Reader Cocktail Party.

Our plan is to publish an issue early tomorrow, then follow up with brief Summit coverage on Wednesday, and full coverage of the event in the following days. We also plan to make recorded audio of RAIN Summit panels available online in the coming days. If you'd like to follow along (whether you'll be in the room or not), use the Twitter hashtag #RAINSummit, and follow us @RAINTwitter and @RAINSummits.

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.

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.

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