Copyright Royalty Board Releases Music Royalties for Internet Radio Streaming for 2006-2010—Clarifying the Confusion

By David D. Oxenford
[Updated June 20, 2007]

On Friday, March 2, the Copyright Royalty Board (CRB or the “Board”) released its decision on 2006-2010 royalties for the use of sound recordings when streaming music on the Internet by Internet radio stations and other non-interactive steaming services operating under the statutory license. That decision can be found on the CRB website at http://www.loc.gov/crb/proceedings/2005-1/rates-terms2005-1.pdf, and we have written about it extensively on our blog (www.broadcastlawblog.com) under the topic heading Internet Radio . As set forth below, unless there is a subsequent settlement or a successful appeal, royalty rates are going to rise significantly over the next few years. More importantly, especially for smaller entities, under the new decision there are no royalty rates based on a percentage of revenue as were previously in place under the Small Webcasters Settlement Act (SWSA). Instead, all royalties are set as a per performance payment, i.e. a payment for each song as heard by each listener. The new rates are effective immediately, even though they could be overturned on appeal, with the first payments due on July 15 for streaming which took place in May.

Many questions have been raised about the decision. This advisory bulletin tries to answer those questions that can be answered, and to at least identify many of the issues to which the answers are, at present, unclear.

Background

The CRB decision follows a proceeding that started in 2005 to set the rates for the five year period that began on Jan. 1, 2006. During the last two years, SoundExchange and parties representing large commercial webcasters, small commercial webcasters, broadcasters, and several noncommercial broadcasting entities, litigated the case, engaging in discovery and several months of trial, all leading to the recent decision.

In a 100-page decision, the Board essentially adopted a royalty rate advanced in the litigation by SoundExchange (the collective that receives the royalties and distributes the money to copyright holders and performers). The Board denied all proposals for royalties based on a percentage of revenue (including a proposal that SoundExchange itself advanced). The Board also rejected any premium for streams received by a wireless service, as SoundExchange had suggested.

This was the first proceeding held by the CRB, a new government board created by Congress in 2004 to make decisions on issues arising under the statutory copyright royalties established by the Copyright Act. The Board was created to replace arbitrators who were previously charged with decisions regarding such royalties. Many parties had complained about the arbitration system, as there was no institutional knowledge given that arbitrators could change for each royalty proceeding, and because the process was costly for participants, as the costs of the arbitrators had to be paid by the participants in the proceeding. While the new system eliminated arbitrator costs, it did add discovery (document production, interrogatories and depositions) to the process. Even with the addition of discovery and elimination of arbitrators, the result was eerily reminiscent to that which occurred in 2002, the last time the royalties were established. In 2002, most small webcasters and noncommercial groups felt that the royalties would put them out of business, and they probably would have if not for the Small Webcaster Settlement Act. Now, in 2007, it is not only those groups, but virtually all of the webcasters involved in the proceeding who believe the royalties have been set too high, and that many Internet radio stations will be put out of business if they remain in place.

The Rates

Commercial Webcasters

The rates set by the CRB for commercial webcasters, including broadcasters retransmitting their over-the-air signals on the Internet , are as follows:

• 2006: $.0008 per performance
• 2007: $.0011 per performance
• 2008: $.0014 per performance
• 2009: $.0018 per performance
• 2010: $.0019 per performance

A performance is defined as a single song, heard by a single listener. Thus, if a webcaster streams 10 songs in an hour to a single listener, there have been 10 performances during that period. If there were two listeners to those 10 songs, there would have been 20 performances.

The CRB decision also establishes a minimum fee of $500 per “station” or “channel” per year. The CRB’s decision states that a payment is made for each individual channel transmitted by a webcaster. The Board’s only example given of what is meant by a channel is a “side channel” transmitted by a broadcaster on their website – a programming stream different from their over-the-air-signal. There is no clear definition of a "channel" for services that make up individualized playlists for listeners. For these webcasters who originate a unique stream every time a listener logs into the site, the potential liability is huge if each stream is treated as a unique channel. This issue was raised in rehearing motions, but the Board did not choose to address the matter when those motions were denied on April 16.

To put these numbers in perspective, a streaming service that operates 24 hours a day and averages 10 songs per hour would pay a royalty of about $8 per month if it averages one listener during every hour of operation, based on the rates for 2007. If the service is playing 15 songs per hour, the monthly royalty would be in the range of $12 per average listener. By 2010, the monthly payments would rise to approximately $13.75 per average listener for the service streaming 10 songs an hour, and to $20.50 per average listener for a service which averages 15 songs per hour.

Noncommercial Webcasters

Noncommercial webcasters are given a two-tiered royalty rate under the CRB decision. To qualify, the webcaster must either be a tax exempt organization under Section 501 of the Internal Revenue Code or a governmental unit. For these webcasters, the fee will be $500 per channel, covering up to 159,140 Aggregate Tuning Hours (ATH) - one listener listening for an hour or two listeners listening for half an hour each, or six listeners listening for 10 minutes each, etc.) of streaming per month. Noncommercial webcasters who exceed that level pay at the commercial rate for all listening in excess of that limit.

How do the rates compare to those previously in effect?

For most Internet radio companies, the rate for periods prior to 2006 was $.00076 per performance. However, Internet radio companies had the option of paying on the alternative basis of Aggregate Tuning Hours. The Board’s decision did not initially offer an ATH option to webcasters for 2006-2010. This was a matter raised in motions for rehearing of the decision, as many parties claim that they have no technological way to track individual performances. In addressing those Motions, the Board provided an ATH option for 2006 and 2007, as a “transition period.” The rates for the transition period are as follows:

These rates seem to assume approximately 15.5 songs per hour for a music webcaster, 11.5 songs per hour for a broadcaster retransmitting its music programming onto the Internet, and one song per hour for a news/talk or sports station making only incidental use of music. However, the rates are paid on the basis of hours of programming streamed in 2006 and 2007, and the webcaster need not analyze the actual number of performances made.

Small webcasters, after the 2002 decision, petitioned Congress for relief, fearing the per performance royalty would far exceed their revenues and put them out of business. As a result, Congress enacted the Small Webcaster Settlement Act, which allowed small entities and the recording companies to negotiate a special royalty. This royalty, which applied to entities with less than $1.2 million in annual revenue, was based on a percentage of revenue (10-12 percent of revenues). To insure that something was paid even if there was little or no revenue, a percentage of expenses (7 percent) would be paid as a minimum fee if that figure exceeded the applicable percentage of revenues. No such percentage of revenue alternative was offered in the recent CRB decision. In fact, the Board specifically rejected a percentage of revenue royalty for reasons including the difficulty of determining what revenues would be covered by such a royalty.

Noncommercial entities were also covered under the SWSA. Noncommercial entities paid a flat fee of between $250 and $500 per year. If these entities streamed more than 146,000 Aggregate Tuning Hours in any month, they paid for the amount of streaming above that threshold at a rate that was one-third of the commercial rate. In the Board’s new decision, streaming in excess of the threshold would be paid at full commercial rates. Thus, by 2010, the royalties will be approximately nine times as high as they were in 2005 for these large noncommercial webcasters.

How did the Board reach its decision?

The Board is charged with determining the royalty rates that would be determined by a “willing buyer and a willing seller” in a marketplace transaction. The Board was clear in the decision that it would look simply for economic evidence of what such a deal would be – it would not look at policy reasons why certain groups of webcasters (including small commercial webcasters or noncommercial webcasters) should get some special rate.

So, in setting the rate, the Board looked to proposed benchmarks by which it could determine what a hypothetical buyer and seller would agree to in the marketplace. It rejected the proposals advanced by the webcasters that the appropriate benchmark was what was paid by the services for the underlying composition (i.e. the fees paid to ASCAP, BMI and SESAC). It rejected the composition benchmark finding that it was not analogous, as the royalties at issue in this case are for the sound recording, a different kind of right. The Board also found that, in connection with other uses of music where rights to both the sound recording and the composition were necessary, and where these rates were negotiated in marketplace transactions, the two rates were not valued equally.

Instead, the Board adopted a benchmark rate derived by one of SoundExchange’s expert witnesses. The benchmark was set by taking the rate paid by certain interactive webcast services (ones which do not qualify for the statutory license because of the ability of listeners to select specific music that will be included in the stream, and which thus must negotiate private deals with the record labels for use of their music), and adjusting those rates to take into account the differences in the statutory services (including the lesser value to consumers as they do not have the ability to select songs when using a service subject to the statutory license). This benchmark was selected because it is for a similar right (the use of sound recordings) by similar services (many of the same companies involved in this proceeding). The Board concluded that the rapidly escalating rate was justified as it would bring the statutory services closer to the interactive services as the advertising market grows over the next few years. The Board rejected arguments that this benchmark was invalid because it relied on services that were inherently different (virtually all interactive services were subscription based, while most of the webcasters are primarily free advertising supported companies). The Board found that the expert had applied an appropriate “adjustment factor” to take into account the differences in value between a consumer-influenced interactive subscription service where audiences can direct what songs can be played in a stream and an ad-supported service that, by law, can not be interactive – rejecting arguments that these two services were too different to be used as an appropriate benchmark.

What are the next steps?

Requests for rehearing of this decision were filed at the CRB on March 19, raising a number of arguments. Questions were raised about the minimum fee, and how that fee could be applied on a per-channel basis without a much clearer definition of a “channel.” Issues were also raised about whether parties have readily available technology that can compute the number of performances delivered by a service. Parties also asked how they were to determine that value for streaming done before the decision was released, as many webcasters were not tracking their performances as they were paying royalties on a percentage of revenue or Aggregate Tuning Hour basis. Questions about the rejection of a small webcaster percentage of revenue rate, and a challenge to the SoundExchange benchmark based on seemingly contradictory evidence presented to the Board by one of SoundExchange’s own witnesses in another proceeding currently underway to decide music royalties for satellite radio, have also been raised.

On April 16, the Board rejected the Motions for Rehearing finding that the issues should have been raised earlier in the proceeding or were not of such a magnitude to warrant a rehearing. The Board did offer the ATH metric summarized above for the transition period as a technical correction to the decision, and also made clear that the decision applied to transmissions to mobile phones as well as to computers, a clarification requested by SoundExchange. The Librarian of Congress published the decision in the Federal Register on May 1. Appeals were filed with the U.S. Court of Appeals in Washington, D.C. in early June. As this decision significantly impacts webcasters, large and small, there is no doubt that more will be heard on this decision in coming months. Information concerning these further proceedings is posted on our blog; www.broadcastlawblog.com.

The filing of a Notice of Appeal of the CRB’s decision merely starts the appellate process. The Court will establish a schedule for the case – setting dates for the filing of full legal briefs and responses to those briefs. The Court will then have an oral argument after the briefs are filed. A decision will follow. In appellate cases, this process can easily take a year or more to complete.

However, there are other ways in which this decision could be changed, or ways by which webcasters could work around its effects. SoundExchange and some or all of the parties could reach a voluntary settlement, agreeing to rates different than what the Board assigned.

In addition, a number of parties have already started to speak to Congress about the decision. Given that we have had two decisions in the last five years on these royalties, and both times the decisions have been such that smaller entities feel that they have been disenfranchised – even when they were part of the process as they were this year – the whole “willing buyer, willing seller” standard used in this case might need to be reevaluated. In this case, it seems that the standard was evaluated in terms of the largest, most successful webcasters, who tend to be parts of larger companies, rather than the pure webcasters that the statute was meant to protect. These larger entities are ones that could deal with the record labels – in fact in many cases have dealt with the record labels to work out interactive and other nonstatutory licenses. The statute, which was supposed to help smaller entities who do not have the bargaining power to deal with the labels, instead seems to have foreclosed these entities from continuing their operations every time that a decision has been made.

There is currently a disparity in standards used for different digital music services operating under the statutory license. For example, “pre-existing subscription services” (i.e. digital cable and satellite radio) have a standard that relies on a number of factors in reaching a fair royalty, including the relative contributions of the parties to the dissemination of the music and the benefits that the public receives from the existence of the particular music service involved. It is not the strict “willing buyer, willing seller” economic analysis that applies to the Internet radio operators. While there is currently pending in Congress a bill (the PERFORM Act) that proposes some reform of the standard, it is not generally perceived to be a reform that would resolve this issue. Instead, that bill proposes that all services use a standard more like the “willing buyer, willing seller” standard. In other words, all of the services might end up subject to the standard, which is worse for the music user. Congressional reform – both short term to resolve the problems with the CRB royalties, and longer term to resolve the issues that seem to plague the entire system – may be a remedy.

Finally, if none of these efforts work, services can try to negotiate private deals for the use of certain music by artists who believe that the promotional value of Internet radio exposure helps them sell recordings, concert tickets, and other merchandise. An Internet radio service can get waivers of the fees from copyright owners. If they get waivers from some of the artists that they play, it can reduce the amount of the royalty owed. If they only play artists from whom they have waivers, then they can eliminate their statutory royalties entirely. There have been some discussions in various forums about independent artists who might make their music available to Internet radio. The decision could lead to a boom for independent music – perhaps to the detriment of traditional major label releases.

Alternatively, these private negotiations could harm the artists. Under the statutory royalty scheme, half of the money collected goes to the copyright holder in the sound recording (usually the record company) and half to the performers on the recording (45 percent to the featured performer and 5 percent to other backing musicians). If a private deal is negotiated with a record company for use of its recordings, no royalty needs to be paid to the musicians. Thus, a webcaster could negotiate a private deal with a record company at just over half the statutory royalty, and the record company would actually receive more money than it would through the statutory royalty. Only the musicians would suffer from such deals.

Some of the more concerned webcasters have talked about moving their operations off shore. That may not be a viable long-term option for a company that has a U.S. presence, however, as royalties apply to music streamed to U.S. residents. Over the last few years, we have seen many foreign webcasters cutting off U.S. streams to avoid paying U.S. royalties, just as many large U.S. webcasters have cut off foreign listeners to avoid liability to foreign performing rights organizations. You may remember, a few years ago, the recording industry put pressure on U.S. ISPs to cut off access to a Chinese website that was offering downloads at a fraction of the usual price to U.S. listeners. That same thing could happen to a successful webcasters who, while located off shore, was targeting U.S. listeners and advertisers.

Questions about the decision

There are many questions and misconceptions about the applicability of this ruling. Here are answers to some of those questions.

• To whom does the decision apply? The Board’s decision covers only non-interactive webcasters operating pursuant to the statutory license. Essentially, a webcaster covered by this decision is one that operates like a radio station – where no listener can dictate which artists or songs he or she will hear (some limited degree of consumer influence is permitted, but a webcaster must comply with the restrictions set out in the Copyright statute). These restrictions forbid prior notification to the listeners of when any specific song will play, and restrict the number of songs by a specific artist that can be played. For more information on these restrictions, see our advisory on Internet Radio – The Basics of Music Royalty Obligations, available at http://www.dwt.com/practc/broadcast/bulletins/08-06_InternetRadio.htm.
• Does the decision cover broadcasters who stream on the Internet? Yes, the decision does cover the Internet transmissions of the over-the-air content of broadcast stations.
• Do the fees apply to broadcasters for their over-the-air signals? No. The royalties are paid only by digital services.
• Do HD radio stations pay the fee? No, the law that adopted these fees specifically exempted over-the-air digital transmissions by radio stations.
• Do I need to rely on the statutory license if I stream music on the Internet? You do not need to use the statutory license. However, if you do not rely on the statutory license, you need to obtain permission to stream the music you play from each and every copyright holder for every sound recording you play. If you are playing music exclusively from one label, that may be easy. But if you are playing a diverse collection of music from many different record labels, you would have to receive permission from each label for the use of its music – which may be a very large undertaking.
• Do webcasters in other countries pay these fees? A royalty that compensates the owner of a sound recording is in effect in many other countries – both for digital services and for over-the-air radio. However, in most countries, the amount of the royalty that is paid to the performers is much closer to that paid to the composers.
• I pay ASCAP, BMI and SESAC royalties? Do I have to pay these fees too? Yes. ASCAP, BMI and SESAC fees go to the copyright holders of the composition – the songwriters and their publishing companies. The SoundExchange fees go to copyright holders in the performance of the music – usually the record companies – and to the actual performers of the music.
• Does the decision cover subscription as well as nonsubscription streams? Yes. As long as the service is not interactive and otherwise meets the requirements of the statute, whether the service is subscription or ad supported, the royalties will be paid.
• Is satellite radio covered by this decision? No, there is a separate proceeding to determine the SoundExchange royalties that will be paid by satellite radio. That case is currently being heard by the CRB.
• Do other digital services pay these fees? Yes. The CRB has just initiated a proceeding to determine the rates for Business Establishment Services (e.g. digital background music providers). Radio delivered by digital cable also is subject to SoundExchange fees – also to be decided in a different proceeding. Digital music services provided over a digital cell phone would also be subject to the royalty – and services similar to Internet radio delivered by cell phone are probably subject to the royalty established by the current proceeding.
• Who receives these fees? The royalties are paid to SoundExchange – a nonprofit corporation with a Board made up of representatives of artists and the record companies. The royalties go to the copyright holders in sound recordings and the performers on those recordings. The copyright holder is usually the record label. Royalties are split 50/50 between the copyright hold and the performers – and the artist royalties are further divided 45 percent to the featured artist and 5 percent to any background musicians featured on the recording.
• Can I avoid the fees by moving my operation off shore? The royalties cover transmissions made to U.S. residents. So an off-shore service streaming to U.S. residents would technically be liable for the royalties. SoundExchange is negotiating with local performing rights associations in other countries to set up reciprocal collection arrangements – though only a few such arrangements are currently in place. However, when the royalties were first established in 2002, many off shore webcasters cut off their stream to U.S. audiences for fear of incurring royalty obligations. Similarly, as these royalties only cover transmissions to U.S. residents, some U.S. webcasters have cut off their service to overseas listeners.
• Will I get a bill from SoundExchange? No. A webcasting service needs to compute the royalties and file a monthly report of use with the necessary fees. The reports are due 45 days after the end of each calendar month. Services also need to register with the Copyright Office to notify the Office that the service is relying on the statutory license. More details can be found in our advisory on The Basics of Music Royalty Obligations (http://www.dwt.com/practc/broadcast/bulletins/08-06_InternetRadio.htm).
• When do the payments become effective? The ruling is effective immediately, even though there may be an appeal. Thus, while the statute is not completely clear, it appears that services need to start paying the rates on a going forward basis starting with the royalties due for May, which are paid 45 days after the end of the month (July 15). However, it appears that any “true-up” for royalties due for the period from Jan. 1, 2006 through May 1, 2007 will be paid when any appeal is finally resolved. This interpretation about the due date for the “true-up” should be discussed with your attorney, as there are some ambiguities in the statute, and incorrect interpretations can bring about significant liability.

The impact of the decision – intended and unintended

Clearly, if the rates go up, fewer will stream. But who will the decision hit the hardest? The group most impacted appears to be smaller, independent webcasters who run businesses built around streaming. These entities have been paying a royalty under the Small Webcasters Settlement Act which is based on a percentage of revenue – between 10 and 12 percent. Under this decision, they will retroactively have to pay based on usage which, in most cases, will far exceed their total revenue in this nascent industry.

The second group of webcasters who will be hard hit are large noncommercial entities. Currently, they have been paying a flat fee of $500 a year for up to 146,000 Aggregate Tuning Hours of streaming per month. If the webcaster exceeded that amount of streaming, they paid for the additional streaming at a rate that was one-third that of the commercial webcaster. Now, when they exceed the threshold, they will pay at commercial rates which, by the end of the five year period, will be over nine times the amount that they currently pay.

But with higher royalties, all webcasters will be affected. While portal sites and broadcasters may have the ability in some cases to subsidize their streams, will they do so if they are not making money from streaming? Broadcasters were initially very reluctant to stream under the old royalties, and the new rates may make some, particularly smaller broadcasters, rethink their streaming operations.

As mentioned above, there are alternatives to paying the rates. Services that can get waivers of the fees from certain labels or artists, may concentrate on those artists. You could imagine that the music on Internet radio may become less dependant on major label releases, and feature more independent music. Five years ago, when the old rates were first announced, some of the larger webcasters and broadcasters considered the formation of their own record labels featuring royalty-friendly music. These ideas may well be revived.

And, of course, there are always pirates and others who try to avoid the law. Just as the recording industry has had difficulty stamping out file sharing, there are bound to be webcasters who will look to ignore or avoid the system. And there are also others who will look to establish overseas locations in royalty-friendly locations, and who will minimize their U.S. connections. Music always seems to find ways to become available in the digital world, just not in ways that those who try to restrict it sometimes intend.

Thus, effectively, this decision may have as big an impact on the record labels as it does on the webcasters – though it may take more time to be felt by these companies, while the pain to webcasters will be more immediate. We will have to wait to see if the various parties recognize the impact of the decision and work to discover a way to avoid its harsh results. Follow the developments on our blog.

For more information, please contact:

David D. Oxenford Washington, D.C. (202) 973-4256 davidoxenford@dwt.com

Please note our new D.C. address as of April 2: 1919 Pennsylvania Avenue, N.W. Suite 200 Washington, D.C. 20006-3402

This advisory is a publication of the Broadcast Group of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent developments in the broadcasting industry. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Copyright © 2007, Davis Wright Tremaine LLP.

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