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

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Issue Date: 
Jul 18 2013 - 7:00am

From Issue:

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

BY ANGUS M. MACDONALD
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Congress: In the last go-around, the vast majority of webcasters settled prior to Webcasting III, due to the non-precedential royalty agreements between SoundExchange and various groups of webcasters.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.

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Good overview

Angus:

Thanks for the excellent overview - looks like the Webcasting IV battle will be better than Game of Thrones!

Dan

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