CRB

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.

"In setting (webcast royalty) rates, the (Copyright Royalty Board) looks to establish rates that reflect what a willing buyer and a willing seller pay in the marketplace. In past royalty proceedings, that willing-buyer, willing-seller price had to be estimated, as there were no real deals to use as a benchmark. And the estimates all went against webcasters. With a deal like that with Big Machine... the pro-record company outcome of the CRB proceedings may well be changed if these deals can be shown to be representative of the real value of the public performance of the sound recording."

That's industry attorney David Oxenford's take-away from recent "direct deals" between broadcasters and record label for both terrestrial and digital sound recording royalties (the latest of which involved Clear Channel and Glassnote Entertainment, covered in RAIN here).

Copyright Royalty Board judges, per the 1998 DMCA, don't set royalties considering the fairness and "mimimal disruption" of their decision (as is called for in the Copyright Act's "801(b)" standard, which is used in royalty determinations for other forms of digital radio). They are mandated to set a rate at what they think a "willing buyer" would pay and what a "willing seller" would accept. Critics point to this different and unpredictable standard as the reason Internet royalty has been saddled with sound recording royalties that, as a percentage of revenue, are many multiples of those paid by satellite and cable radio. It's also the impetus behind the recent Internet Radio Fairness Act, introduced to both chambers of Congress (in RAIN here).

Oxenford is suggesting that should deals like Clear Channel's and Entercom's (both groups have reached agreeements with Big Machine Records) start to spread to other companies, they could very well represent the "marketplace" agreements with willing buyers and willing sellers that could set "a precedent for lower royalties in future proceedings."

The next round of proceedings to set webcasting royalties starts in 2014 (to set the rates for 2016-2020).

Read Oxenford, a D.C.-based partner at Wilkinson Barker Knauer, in Broadcast Law Blog here.

UCLA professor John Villasenor has penned columns for Forbes, and a white paper for the Brookings Institution (where he's a nonresident senior fellow) that bring clarity to the matter of Internet radio royalties, calling for fairness in how actual rates are determined (we've covered these in RAIN here).

The idea Villasenor advocates, by the way, is the central goal of legislation introduced last week by Reps. Jason Chaffetz (pictured) and Jared Polis, and Sen. Ron Wyden, called the Internet Radio Fairness Act of 2012. That is, to instruct Copyright Royalty Board judges to base their determinations for Internet radio royalties on the same standard that is used for satellite and cable radio royalties -- known as 801(b).

This week Villasenor has an excellent and easy-to-understand piece advocating IRFA, published by Future Tense, a collaboration among Arizona State University, the New America Foundation, and Slate (read it here).

The 801(b) standard is a set of four criteria the U.S. Copyright Office has historically used to determine royalty rates for various uses of copyright, including all prevalent forms of digital radio except Internet radio. They are:

• Maximize the availability of creative works to the public;
• Insure a fair return for copyright owners and a fair income for copyright users;
• Reflect relative roles of capital investment, cost, and risk, and;
• Minimize disruptive impact on the industries involved.

Read 801(b) of the Copyright Act here.

By the late nineties, "the music industry, traditional broadcasters, and Congress were struggling to come to grips with the growth of then-new communications technologies enabling the delivery of perfect digital copies of songs to consumers," Villasenor explains. "But as so often happens when policy decisions are motivated more by fear of new technology than by recognition of the opportunities it creates, the resulting legislation ended up impeding growth rather than fostering it."

At the time, what was to become the Internet radio industry had little to no representation in Washington, certainly not like that of the music industry. Incumbent broadcasters, at the same time, while owning an even louder voice in Washington than the music industry, paid little attention to upstart digital technologies. So, not surprisingly, law crafted to manage music and digital technology was heavily influenced by the wants and needs of music labels, who saw the digital delivery of music as dangerous to their traditional business model.

The result was 1998's Digital Millennium Copyright Act, which put noninteractive digital audio services (Internet, cable, and satellite) "into two categories based on, among other things, a snapshot of the digital music broadcasting industry taken on July 31, 1998."

Services like Sirius and XM (now Sirius XM), Muzak, and Music Choice that existed by that time were "grandfathered in and given access to the 801(b) standard." The music industry, however, convinced lawmakers to abandon 801(b)'s aims to maximize the availability of works to the public, fairness to both sides, and minimum disruption, and change the standard for the new Internet radio medium. Thus, royalty judges were to decide royalties using a new standard, called "willing buyer/willing seller."

Villansenor explains, "Despite the innocuous-sounding name, willing buyer/willing seller requires identifying 'market' rates in the absence of a true competitive market. Unsurprisingly, this has produced skewed results."

The result can be seen in today's royalty landscape. The CRB-determined rates for SiriusXM using the 801(b) standard require 8% of the company's gross revenues for royalties in 2012 (up from 6% in 2008 and 7% in 2010). Pandora's 2012 royalty obligation, on the other hand, is almost 50% of its revenues. "And that is after a 2009 agreement provided a substantial discount to CRB willing buyer/willing seller rates that risked driving Pandora and other webcasters out of business."

Villasenor concludes, "For these reasons and more, the Internet Radio Fairness Act of 2012, which would move to a uniform 801(b) standard, is the far better path forward... Setting music royalty rates too low is unfair to recording artists, and lowers the incentive to create music. But if royalty rates are too high, as has occurred with Internet radio, companies providing broadcasting services will continually struggle to turn a profit, impeding market—and ultimately royalty—growth."

Again, read the entire article here.

A new paper from a Washington, D.C. think tank clearly recounts how entrenched interests crafted copyright law to establish copyright royalty obligations that put webcasters at a severe disadvantage to other forms of radio -- and calls on Congress to fix it.

The highly-regarded Brookings Institution last week published "Digital Music Broadcast Royalties: The Case for a Level Playing Field" in which it calls for Congress to enact legislation requiring the use of a consistent legal standard for royalties when it comes to "all non-interactive digital audio broadcasting."

We've often discussed (such as here) -- as have leading experts in the field, such as attorney David Oxenford -- the fact that sound recording performance royalties for Internet radio are determined using a significantly different (and, as it's been demonstrated, dramatically unfavorable) legal standard than those for other forms of radio. 

The bottom-line result of the different legal standard can be seen in recent Copyright Royalty Board determinations. For instance, the CRB, based on the widely-used "801(b)(1)" standard in copyright law, "concluded in a December 2007 ruling that the satellite radio royalty rates should start at 6% of gross revenue for 2006, rising gradually to 8% in 2012." The same group of judges, using the significantly different "willing buyer/willing seller" standard (instead of 801(b)(1)), determined a royalty rate for Internet radio of $.0021 "per performance" (songs x listeners) for 2012. Pandora, had it been paying this rate instead of its special discounted agreement rate with SoundExchange, "its payments to SoundExchange for sound recording performance licenses would likely have... approach(ed) or exceed(ed) its revenue of $80.1 million."

The Brookings paper is an excellent primer on the differences between U.S. Copyright Law's "801(b)(1)" standard (used for rate-setting for satellite radio and services like Music Choice) and the "willing buyer/willing seller" standard that 1998's Digital Millennium Copyright Act mandated for webcasting. It also very nicely recounts the history of webcasting royalties, CARP and CRB, the DMCA, and more. The author, Brookings nonresident senior fellow John Villasenor, has published articles in Forbes (covered in RAIN here and here) on this very topic.

Brookings has at least one ally in Congress already. In July we reported (here) that Utah Republican Congressman Jason Chaffetz has begun crafting a bill that would indeed replace the "willing buyer/willing seller" standard in webcast royalty determinations with the 801(b)(1) standard.

Download the Brookings paper here. Billboard.biz has also covered this story here.

Utah Republican Congressman Jason Chaffetz has reportedly begun crafting a bill aimed at bringing Internet radio royalty rates more in line with those of other radio platforms. The bill's key feature is a change from the controversial "willing buyer/willing seller" standard in webcast royalty determinations to the more prevalent "801(b)" standard.

Chaffetz says his Internet Radio Fairness Act of 2012 is still in draft form and isn't yet ready to be introduced. But he plans to determine his next steps by the end of this month.

When Copyright Royalty Board (CRB) judges determine the royalty rate at which webcasters pay copyright owners and performers for the use of sound recordings, they do so based on the standard -- mandated by the DMCA -- of what a "willing buyer" and a "willing seller" would agree to in a hypothetical marketplace. The judges do not (and in fact, are instructed to not) consider the "real world" ramifications of their determination, only the perceived economic value of the right. The Internet radio royalty process is unique in this way, as royalties for satellite and cable radio are based on the Copyright Act's more well-known 801(b) standard. Royalty determinations for what labels pay music publishers and songwriters are also based on 801(b).

"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," explains attorney David Oxenford (here). Among other objectives, judges using 801(b) are instructed to set rates that "minimize any disruptive impact on the... industries involved." (Read 801(b)(1) of the Copyright Act here.)

How much of a difference does this standard make? Consider that satellite radio operator SiriusXM pays around 8% of its revenues for the right to use copyright sound recordings in its broadcasts, based on a determination using the 801(b) standard. Pandora, on the other hand, says nearly 70% of its total revenue (based on its Q1 FY 2013) will go to royalty payments (and that's based on on a deal Pandora struck that actually decreased its obligation from the CRB decision -- a decision based on "willing buyer/willing seller").

"It seems screwy that royalty rates change so dramatically based on the platform," Chaffetz explained. "When you’re listening to music in your house or in your car, you may be listening to it on your iPhone, you may be listening on the satellite radio or the FM radio. Does that mean the royalties should be so vastly different? It doesn’t seem to make sense to me. We need to play catch-up here."

A summary of the bill (according to news source The Hill) says the legislation also aims to "improve the proceedings process for rate-making cases and ensure judges on the Copyright Royalty Board have the same legal background and expertise as federal court judges who consider copyright cases."

Chaffetz says he expects push-back from the recording industry, and remains open to labels' input. "We’ll flesh all that out. I have no doubt we’ll have a good, lively discussion on that. There’s plenty of money to be made by all the various interests, it’s just I think moving toward parity is an important principle," he said.

The "801(b) vs. 'willing buyer/willing seller'" issue has come up multiple times in the history of Internet radio. The Performance Rights Act, which would have imposed a sound recording performance royalty on broadcast radio, would have moved webcast rate determinations to 801(b) (see our coverage here). Attorney David Oxenford wrote about the inherent unfairness of using different standards by platform in early 2008 (see RAIN coverage here). That same year Senators Ron Wyden (D-OR) and Sam Brownback (R-KS) introduced their Internet Radio Equality Act, which would have, like the PRA and Chaffetz's new bill, given Internet radio the 801(b) standard. That effort stalled by July (see RAIN coverage here). We have tons more coverage and analysis about 801(b), here.

Read more from The Hill online here.

On Friday RAIN reported (here) on the U.S. Appeals Court finding that the appointments of judges to the Copyright Royalty Board were unconstitutional. We have follow-up today from industry attorney David Oxenford:

This case involved the last webcasting case, which set royalties for the period 2011-2015. Every party had settled out of the case, but for the Intercollegiate Broadcasting System (IBS), which represents certain small webcasters associated with colleges and high schools. It challenged the constitutionality of the Copyright Royalty Board (taking up the argument that Live365 made earlier in the case, before itself settling out of the case -– note that I was counsel for Live365), that the Board’s structure was impermissible under the Appointments Clause of the U.S. Constitution (see RAIN's coverage here). The Court ruled that the CRB was in fact unconstitutional, but the ruling will likely have little practical effect. The constitutional issue was whether the Board was properly appointed by the Librarian of Congress. Under the constitution, "principal officers" of the U.S. have to be appointed by the President. The Court determined that the CRB, as originally set up, had enough power so that its Judges were principal officers and should have been appointed by the President. But rather than striking down the whole scheme and sending it back to Congress to straighten out, the Court took it upon itself to remedy the problem: simply by striking the portions of the statute that limit the power of the Librarian of Congress to remove the Copyright Royalty Judges without cause. By determining that this single provision was the provision that gave the CRB too much power, the Court decided that it was this section that was unconstitutional. So while the Judges were improperly appointed, by striking that section of the law, the Court determined that it could remedy the constitutional issues. Going forward, it seems like the Board can function as it has -– the only difference being that, theoretically, the Judges can now be removed by the Librarian at any time. All in all, it appears to have been much controversy with little practical effect. IBS will get a remand, as their case was decided by a Board that was unconstitutional. But it looks like other cases can go forward in the normal course, including the next webcasting royalty proceeding that will begin in 2014, and the satellite radio royalty case that is currently under consideration. Many webcasters had thought that this case might force Congress to take another look at the CRB process. The CRB not only sets webcasting royalties, but also the royalties paid by background music services, satellite radio, and others. It also distributes the royalties collected by the Copyright Office by cable and satellite television distributors (which are paid to copyright owners of programs on TV stations distributed by these systems). If the Court had found the Board to be unconstitutional, and had not applied the "fix," Congress would have had to act so that these matters could be resolved. Many had hoped that Congress would look at many of the other issues that parties have had with the CRB and the rates that it has set. But, by applying the "fix," that impetus for Congress to act immediately has been removed. This decision can be appealed -– through a request for a rehearing by all of the judges on the D.C. Circuit of the Court of Appeals, or to the Supreme Court. If not appealed, the issue of the CRB’s constitutionality may have finally been settled.

Finally, IBS CEO/COO Fritz Katz said after the decision, "This is another big win for IBS and the second time the D.C. Circuit has vacated the $500 minimum fee for IBS noncommercial webcasters... IBS will also be moving to remove the CRB requirement for 'census' (100%) reporting of use, which is uneconomic for the artist as it costs more to process the data than the now vacated $500 minimum, and certainly much more than the actual use of the statutory license by IBS Members which is about $20 a year."

David Oxenford is a Washington, D.C.-based partner at Wilkinson, Barker, Knauer, LLP.