webcasting iv

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.

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