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Net Radio & Royalty Rates

Net Radio and Royalty Rates
The sounds, perhaps, of silence.

By Anthony L. Soudatt and Natalie Sulimani
February 4, 2008

Is internet radio destined to be silenced by royalty rates, despite its ever increasing popularity and growth? According to many proponents of webcasting, the March 2, 2007, decision of the Copyright Royalty Board (CRB) to dramatically increase the royalty rate, by as much as 300 to 1,200 percent, will do exactly that. The decision highlights what many consider to be a flawed licensing structure that is neither technology neutral nor fair, in that it calculates royalties depending on how music is delivered, not based on the music itself.

Traditionally, over the air (OTA) or terrestrial radio stations were required to pay a publishing royalty to songwriters and publishers for music the stations played. The stations were exempted from paying a performance royalty because the promotional value of the airplay was deemed an adequate tradeoff for the compensation due to the performing artist.

That royalty structure changed in 1995 for Internet stations when the recording industry persuaded Congress that the new digital broadcasts as streamed over the Internet were an “exact” copy and therefore would discourage the sale of music rather that promote it.1 Never mind that in 1995, the technology, both hardware and software, was not as accessible to the average listener to capture and store music as it was streamed over the Internet. In fact, it was easier to record music broadcast over the air since tape recorders were commonplace.

The Digital Performance in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998 mandated payment of performance royalties for digital broadcasts. It is important to note that analog broadcasts by terrestrial stations are still not subject to performance royalties.

The Players and Their Interests

There are a number of participants in the controversy that has arisen around Internet radio and royalty rates. The principal ones are the Copyright Royalty Board, SoundExchange, the coalition of net radio webcasters, both large and small, and to a lesser extent, the record companies and performance artists, and the U.S. Congress.

The Copyright Royalty Board is comprised of three permanent, administrative judges who determine copyright royalty rates and terms for statutory licenses. The judges were appointed pursuant to the Copyright Royalty and Distribution Reform Act of 2004.

SoundExchange originated as a division of the Recording Industry Association of America (RIAA) and was spun off in 2000 as a separate entity. It is now a non-profit performance rights organization that is designated by the U.S. Copyright Office to collect and distribute digital performance royalties for copyright owners and recording artists.

SoundExchange acts as the principal administrator of the statutory licenses under §§112 and 114 of the Copyright Act and participates in royalty rate hearings before the CRB. It also represents over 3,500 record companies and more than 6,000 labels and their artists. SoundExchange has not strayed too far from its origins, as its board of directors is comprised of record companies, artists’ representatives and others from the RIAA.

The Internet radio webcasters include entities of varying sizes, from the large, well funded broadcasters like Yahoo, AOL and RealNetworks to very small, one-person operated stations. Some of the large webcasters are founding members of the Digital Media Association (DiMA), a national trade organization that represents the online audio and video industries.

In response to the CRB’s March 2 decision, a coalition called SaveNetRadio formed in April 2007 with a primary purpose of overturning the decision. SaveNetRadio is comprised of artists, smaller record labels, listeners and webcasters. The coalition exemplifies how competing interests have blurred the lines for and against the rate increases.

While the larger record companies are firm proponents of higher royalties, and minimize the promotional value of Internet radio, the smaller companies and independent artists welcome the airplay that Internet radio affords them and are willing to accept lower royalties in exchange for the wider reach that webcasting allows. One study by Webcaster Live365 showed that 56 percent of the music it streams comes from independent record labels, while the major labels provide 87 percent of the music played on terrestrial radio.2

Further, playlists on terrestrial radio are very limited and offer new and independent artists few opportunities for radio play. Such playlists cater to the larger record label artists and it is not unusual to hear the same songs played several times.

Digital Performance Royalties

In 2002, the Copyright Office established a royalty rate of 0.07 cents per song per listener. Not unlike the current situation, many small webcasters protested that the rate would put them out of business. In response, the House and Senate enacted the Small Webcaster Settlement Act of 2002, which suspended the payments of fees until Dec. 15, 2002, so that the webcasters could negotiate lower rates.

A new rate plan was also introduced, that calculated royalties based on a webcaster’s revenues or expenses. For small webcasters with revenue less than $1.2 million, the new plan called for payments of 7 percent of expenses, or 10 percent of revenues, which ever was higher, up to the first $250,000 of revenues. Beyond $250,000 in revenues, the royalty rate increased to 12 percent of revenues or 7 percent of expenses.3 For webcasters that had less than $50,000 in revenues, the minimum royalty was $2,000, while for those with more than $50,000 the minimum was $5,000.

This plan stayed in effect until 2005 but was adhered to until it was supplanted by the March 2, 2007 CRB royalty increase. Although that new rate increase became effective July 15, 2007, it was retroactive to 2006, following the expiration of the Webcaster Settlement Act rate plan.

Non-profits, government agencies and educational institutions were entitled to pay a special rate of $500 annually, which allowed the non-profit to stream recordings to as many as 200 simultaneous listeners, the equivalent of 146,000 aggregate monthly tuning hours (ATH is defined as one listener who listens for one hour.). Above that amount the non-profit could elect to pay a royalty of 0.02176 cents per performance or 0.251 cents per aggregate tuning hour.

That these royalty rates were based on revenues or expenses meant the payments would never exceed the stations’ revenues and put them at risk of going out of business. The new rate formula the CRB decreed in its March 2 ruling effectively removes that safe harbor.

The New Rates

Under its March 2 ruling, the CRB opted to eliminate royalty payments based on a share of revenues, and instead mandated that stations would pay royalties based strictly on performance each time a listener heard a streamed recording. In reaching its ruling, the Board rejected the arguments put forth by the International Webcasting Association and other webcasters and instead accepted the rate proposal advanced by one of SoundExchange’s expert witnesses.4

The new royalty rates imposed are as follows:

2006: $.0008 per performance

2007: $.0011 per performance

2008: $.0014 per performance

2009: $.0018 per performance

2010: $.0019 per performance

In setting these rates, the CRB considered what a willing seller and willing buyer would agree to in a marketplace transaction. According to the Board’s reasoning, the new rates more closely mirror those paid by interactive Web services, while still accounting for the reduced value to listeners who cannot pre-select which songs will be streamed to them. Unlike earlier rate decisions, the CRB gave no consideration to policy considerations that would lessen the fee burden on non-commercial or small commercial webcasters.

The CRB’s ruling also imposed a $500 minimum fee on each station or channel but did not define exactly what a channel or station is. Many of the large webcasters, such as Pandora (www.pandora.com) allow listeners to create individual stations with customized music genres; such stations would appear to be subject to the $500 minimum fee. Given that Pandora allows listeners to create as many as 100 stations, it is easy to see how that minimum fee per station can quickly add up.

These new rates will also have an immediate administrative impact on webcasters. Since the rate is calculated on a performance per listener basis, each webcaster will have to track performances for each individual listener to determine its royalty payments.

Response to the CRB Decision

Immediately following the release of the CRB decision, webcasters, listeners and even some recording artists informally protested the ruling.

Formally, National Public Radio (NPR) and others joined with Digital Media Association to file motions for a rehearing.5 It should be noted that NPR had been previously covered by a private, confidential deal that the Corporation for Public Broadcasting (CPB) negotiated with the recording industry.6 Under that arrangement, member stations of the CPB were not subject to royalty fees. That deal has now expired and so, absent a new arrangement, the CRB rate decision now applies to NPR and other like stations.

In its motion, NPR argued that under the new fee structure, the minimum fee of $500 would cause it a substantial financial burden since NPR has multiple channels. NPR also argued that the decision was an abuse of discretion and unsupported by sufficient evidence. NPR further argued that most stations are unable to track the aggregate tuning hours (ATH) to determine whether they meet the threshold and that even the method used to calculate the ATH was questionable.

The Board denied all the motions, finding that there was no error in its underlying decision and that the motions did not introduce any new evidence that could not have been presented at the initial hearing. The Board did not even consider the issue presented by the webcasters that SoundExchange had offered an expert witness in another proceeding (relating to satellite radio) who contradicted SoundExchange’s own expert witness offered in this case and on whose testimony the CRB decision was based.

However, the Board did allow rates for 2006 and 2007 to be determined based on an aggregate tuning hour, to facilitate the transition to the new rates. The Board also determined, per a request by SoundExchange, that the new rates would also apply to streams received by mobile phones, thereby adding to the webcasters’ financial and administrative obligations.

SoundExchange’s executive director John Simson called the ruling a victory for all artists and record labels.

“Our artists and labels look forward to working with the Internet Radio industry – large and small, commercial and noncommercial – so that together we can ensure that it succeeds as a place where great music is available to music lovers of all genres.”7

The Board’s denial of the rehearing motions cleared the way for the webcasters to file an appeal before the U.S. Court of Appeals for the District of Columbia Circuit, which they eventually did.

Congressional Involvement

At the urging of webcasters and other interested parties, Congressmen Jay Inslee (D, Wash.) and Donald Manzullo (R, Ill.) introduced a bill, the Internet Radio Equality Act, to overturn the CRB’s rate decision. The bill, if enacted, would:

(1) replace the “willing buyer, willing seller” standard the Board used with the Copyright Act’s 801(b) standard to determine rates. The 801(b) standard is used for satellite radio and digital cable radio and considers such factors as disruption to the industry of royalties, the maximization of the distribution of the copyrighted work to the public, the relative value of the contributions of the copyright holder and the service, and the determination of a fair rate of return to the copyright holder;

(2) establish an interim royalty rate for 2006-2010 of (at the choice of the webcaster) either .33 cents per Aggregate Tuning Hour of listening or 7.5 percent of the service’s revenues directly related to Internet radio;

(3) apply §118 of the Copyright Act to the determination of royalty rates for noncommercial webcasters;

(4) establish a royalty for 2006-2010 for noncommercial webcasters of 150 percent of the fee that the service paid for the sound recording royalty during 2004; and

(5) require three studies to be conducted after the initiation of the next royalty proceeding, which will be submitted to the Copyright Royalty Board for its consideration in that case.

Senators Ron Wyden (D, Ore.) and Sam Brownback (R, Kan.) introduced a version of the Internet Radio Equality Act in the Senate; the Senate version includes broader relief for large noncommercial webcasters that were not specifically included in the House version.

In May 2007, with the July 15 rate effective date approaching, and perhaps feeling the pressure of the protests and congressional action, SoundExchange made an offer to extend the Small Webcasters Settlement Act and allow small webcasters to determine royalties based on a percentage of revenues. Under the offer, revenues would be limited to $1.2 million. Once a webcaster’s revenues exceeded that amount, even by a dollar, the percentage of revenue rate would be replaced, retroactively for the entire year in which they exceeded the limit, by the CRB mandated per performance royalty rate. Such an arrangement would effectively limit the growth of any webcaster that accepted the offer.

SoundExchange’s offer did not apply to larger webcasters or noncommercial webcasters, which would still be subject to the CRB rates or would have to strike their own deal with SoundExchange.

A Day of Silence

On June 26, 2007, as a further protest to dramatically demonstrate to its listeners and other concerned parties the likely effects of the increased royalty rates, and to encourage support for the pending legislation, webcasters held a day of silence.

Not all webcasters supported it, though. CBS, a major terrestrial radio entity, opted not to lend its support to the action. Even Clear Channel, the largest webcaster, was silent on its commitment to the action prior to the day of the event.

Seeking Solutions

While waiting for the appeal to be heard before the D.C. Circuit, and prior to the July 15 effective date of the new rates, the parties continued discussions.

The U.S. House of Representatives’ Small Business Committee held a hearing to consider the issue. The Committee, mindful of the pending appeal, and hopeful of a settlement between the parties, did not produce any meaningful results.

Without a compromise in place before the July 15 deadline, the webcasters filed an emergency motion for a stay of the imposition of the royalty rates. A three judge panel of the D.C. Circuit denied the motion, stating that the moving parties had not met the high legal burden necessary for the court to impose a stay.

In the interim, SoundExchange, perhaps looking to remove one of the more contentious issues from the appeal, offered to cap the $500 minimum annual fee per station at $2,500 but limited the offer to last only through 2008; the Digital Media Association rejected the offer.

DiMA, representing the larger webcasters, and SoundExchange have since reached a settlement to cap the maximum due at $50,000; a webcaster like Pandora that allows its users to create as many as 100 stations would pay that much per user under the CRB rates.

As part of its proposal to small webcasters to cap the per channel fees, SoundExchange required that they provide detailed listener information and that they incorporate digital rights management technology to prevent listeners from copying the digital streams. Senators Brownback and Wyden objected and issued a statement warning SoundExchange to keep DRM requirements out of their negotiations with webcasters:8

“We sponsored the Internet Radio Equality Act because the Copyright Royalty Board’s decision to dramatically increase royalties and apply what we see as unfounded minimum rates threatens to devastate the Internet radio industry,” stated the release. “Now we are hearing that the recording industry is attempting to use this aspect of the CRB decision to force webcasters to adopt recording restrictions far in excess of the controls that have governed broadcast content for decades. While we strongly support a negotiated solution, we will not allow the minimum fee issue to be used to force an agreement that mandates DRM technology and fails to respect the established principles of fair use and consumer rights.”

On Sept. 18, 2007, SoundExchange announced that it had entered into agreements with 24 small commercial webcasters but declined to name them. The SoundExchange offer is essentially the same one it made in May to the Small Commercial Webcasters (SCW) that limited revenues to $1.2 million before rates reverted to a per performance basis. Apparently none of the 24 webcasters is a member of the SCW and is not concerned with revenue growth surpassing $1.2 million.

More significantly, the agreement applies only to music owned by SoundExchange members, but excludes the independent music that makes up the majority of webcasters’ playlists. Under the agreement, the webcaster still has to pay the higher CRB royalty rate for the non-member music.

Conclusion

According to the timeline currently in place, the briefs of the various webcasters are due on Feb. 25.

The brief of the CRB, represented by the Department of Justice, is due on April 25, and SoundExchange’s brief is due on May 15. The reply briefs are due on June 12, but oral arguments have not yet been scheduled. Such a calendar suggests that the appeal will be decided at the end of 2008, at the earliest.

Until then, the parties may continue to negotiate and reach agreement outside of court, as has already occurred. SoundExchange, representing the music industry, has shown a desire to achieve separate agreements among the parties, rather than a comprehensive settlement that covers all parties. That approach may reflect a reality that a single rate agreement is not possible although, under the prior revenue based model, a single rate structure applied to the majority of webcasters.

The royalty rate legislation that is before Congress, if enacted, may ultimately nullify the Court of Appeals’ decision and any agreements SoundExchange has entered.

Still, what is needed is a rate structure that is technology-neutral, which allows for an adequate performance royalty for musicians, while still recognizing the promotional value that little known musicians acquire from the play of their music.

The current rate structure is technology biased. The royalty rates for terrestrial have long recognized the promotional value of traditional radio airplay to musicians and therefore provide an exemption to terrestrial radio for the payment of a performance royalty. In reality, the Internet provides far greater promotion for aspiring musicians because of its greater geographic reach, as compared to over the air radio. It is easier for unknown musicians to have their music played on an Internet station, and when it is played, the reach of that music extends well beyond the local city of the terrestrial radio station.

However, that exemption for terrestrial radio may be coming to an end. Senators Patrick Leahy (D, Vt.) and Orrin Hatch (R, Utah) and Representatives Howard Berman (D, Calif.) and Darrell Issa (R, Calif.) have introduced legislation to end the exemption of terrestrial radio stations from current copyright law which requires satellite radio, cable radio channels, and Internet webcasts to pay a royalty for the use of sound recordings.

Further, whereas the Copyright Royalty Board used the “willing buyer, willing seller” standard to determine the royalty rate for webcasters, and set a rate based on a per performance basis, the CRB instead used the 801(b) standard of the Copyright Act to set a revenue based royalty for digital transmissions for satellite radio. As a consequence, with royalties between 6 and 8 percent of revenues, satellite radio pays much lower rate than does Internet radio. Satellite radio, XM and Sirius, are subscription based services that have much deeper pockets than do the majority of Internet webcasters. It is hard to reconcile such disparate rate structures that the Board has imposed.

The Board’s new rate structure has already had an impact on even the larger, better funded webcasters. In response to the substantial rate hikes, Yahoo and AOL have stated that they will consider shutting down their Internet radio services and instead focus on selling music downloads. Yahoo reportedly stopped directing users to its Launchcast, the Internet’s largest radio site.

And Pandora, the Internet’s largest privately owned streaming service, has blocked users outside of the United States and Canada from receiving its music streams. Pandora took that action since it also has to pay royalties to the various collection authorities in international markets and the CRB’s hike forced it to cut back on international payments.

Webcasters, especially the smaller independent ones, provide an ideal arena for artists to promote their work. Internet radio tends to attract more loyal audiences looking for specific genres that they cannot necessarily find on broadcast radio. These audiences tend to discover new talent and will later go and buy the artists’ music. The high royalty rates would be an end to this medium.

“Internet radio is unbounded and unconstrained – it’s like an explosion of musical diversity,” says Pandora’s founder Tim Westergren. “I’m a musician myself. I spent 10 years playing in rock bands, and my band is on Pandora. It’s the only radio I’ve ever been played on and that is true for 35,000 of the 37,000 artists that we do play. I think it’s a godsend for musicians, especially the independent artists who don’t participate in the mainstream broadcast structure that exists right now.” These are artists that are ” . . . not buying radio time or placement in records stores – and are building enough audience to make a living.”

Internet radio is too great a resource, for all concerned parties – musicians, listeners, legislators, and even record companies – to allow it to fail under the weight of a royalty fee structure that is considerably higher and inconsistent with those that apply to the more established, and the better funded broadcast entities.

Anthony L. Soudatt is a solo practitioner and technology consultant in New York City, and Natalie Sulimani is a partner in the New York City firm of Sulimani & Nahoum.

Endnotes:

  1. See “Save Our Internet Radio FAQ,” (last visited Jan. 21, 2008).
  2. See “Indies Need Royalties Too: Webcasters Favor Indie Music Over Major Labels,” (last visited Jan. 21, 2008).
  3. See “Internet Radio – The Basics of Music Royalty Obligations,” (last visited Jan. 21, 2008).
  4. See “More on the Copyright Royalty Board Decision on Internet Radio Music Royalties,” (last visited Jan. 21, 2008).
  5. In the Matter of Digital Performance Right in Sound Recordings and Ephemeral Recordings, Docket No. 2005-1 CRB DTRA (2007).
  6. See “Internet Radio – The Basics of Music Royalty Obligations,” (last visited Jan. 21, 2008).
  7. See “Internet Radio Dealt a Severe Blow as Copyright Board Rejects Appeal,” (last visited Jan. 21, 2008).
  8. See “Senate Warns SoundExchange on Net Radio Negotiations,” (last visited Jan. 21, 2008).

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