SiriusXM

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.

Radio and webcasting organizations like Clear Channel, Pandora, and Salem, along with other industry parties like the Consumer Electronics Association, have today announced the formation of the Internet Radio Fairness Coalition.

The group formed to lobby Congress to pass the IRFA, or Internet Radio Fairness Act of 2012, which (among other measures) would require the same legal standard be used for determining sound recording royalty rates for all non-interactive digital music services.

The IRFA is a bill in both houses of Congress, H.R.6480 and S.3609. The bills were introduced by Reps. Jason Chaffetz (R-UT), Jared Polis (D-CO), Darrell Issa (R-CA), and Zoe Lofgren (D-CA) in the House and Sen. Ron Wyden (D-OR) in the Senate.

"We believe that market-based solutions are the way to go," said Bob Pittman (left), CEO of Clear Channel. "But in the absence of these agreements, the CRB needs to have and consider more relevant information so they are better able to develop a rate structure that will lead to a healthy, sustainable Internet radio marketplace. This will enable artists to earn more and connect more with their fans, consumers to have more choices, and entrepreneurs to invent and invest in new services."

Currently, government arbitrators base royalty rates for satellite and cable radio using a legal standard called 801(b). It requires the judges to consider how their decision would affect the industry and the public's access to copyright, as well as take into account the investment made by both copyright owners and licensees. Internet radio's royalties are based on the controversial "willing buyer / willing seller" standard, which does not take into account the concerns of 801(b). Rather, judges are instructed to set a rate they think a hypothetical "willing buyer" and "willing seller" would agree to in the marketplace.

The existence of different standards for different forms of radio has led to a situation in which satellite radio operator SiriusXM pays about 8% of its revenues for the use of copyright sound recordings, while webcasters are faced with obligations of 50% to more than 100% of their revenues. As an example, leading webcaster Pandora will pay nearly 70% of its revenue (based on Q1 FY 2013) for sound recording royalties.

"Legislation that establishes a fair royalty rate setting-standard for Internet radio will drive investment in webcasting, which ultimately offers greater opportunities and more revenue for working artists," said Pandora Founder and Chief Strategy Officer, Tim Westergren (right). "Internet radio has been shown to help decrease music piracy and increase music sales. When the digital music sector is allowed to grow and innovate, everybody wins."

Other founding members of the Coalition include 977 Music, AccuRadio, the Computer and Communications Industry Association (CCIA), Digital Media Association (DiMA), Digitally Imported, Engine Advocacy, National Religious Broadcasters Music License Committee (NRBMLC), Radio Paradise, and the Small Webcaster Alliance (SWA).

The Internet Radio Fairness Coalition has launched a website at InternetRadioFairness.com.

The webcasting industry-backed Internet Radio Fairness Act, introduced to both chambers of Congress on Friday (see RAIN here), made The New York Times this morning, and journalist Ben Sisario presented the complicated manner in as clear and straightforward a way as we've seen.

"Willing buyer, willing seller. Those four words would seem innocuous, but in the world of Internet radio nothing is more contentious," read the opening paragraph.

As we reported, the bill would move noninteractive webcast services from the "willing buyer, willing seller" standard to the one used to determine rates for SiriusXM Radio and cable radio like Music Choice (known as 801(b), which is also the standard that record labels are happy is used when the rates for royalty rates they pay to songwriters and publishers are determined).

"That model would let the panel of federal judges that set the rates consider evidence both on the value of the music and on the effect the royalty rate would have on the industry overall. Pandora and its supporters believe that standard would yield lower rates," according to The Times. "Record labels and artists... believe that the existing rates are fair and accuse Pandora and others of wanting to deprive copyright holders of the income they deserve."

Congress will likely wait to deliberate the issue until after the national elections in November ("and probably into the spring," wrote Sisario).

We highly recommend Sisario's concise and even-handed treatment of the matter, and recommend you share it with listeners and clients. You can see it in The New York Times here. Finally, for a clear and entertaining analogy that demonstrates why "willing buyer, willing seller" can't work, please see RAIN publisher Kurt Hanson's "State of the Industry Address" from last week's RAIN Summit Dallas here (you can also launch the audio from the box in the right-hand margin of RAIN) -- scroll ahead, it's near the end (about 20 minutes in) of the speech.

As usual when conventions roll 'round, there's a steadily-building flood of news pouring from all sides of the industry. Here's a run-through of some of that news, served up in convenient bite-size chunks:

• SiriusXM has updated its Android app with the on-demand and offline playback features it introduced back in early August. You can find more from Engadget here and our original coverage of SiriusXM's new interactive features here.
   
• A new forecast from BIA/Kelsey pins U.S. spending on web daily deals at $3.6 billion for 2012. That's a 86.9% jump over 2011. BIA/Kelsey expects a further 23% growth next year. Find out more from BIA/Kelsey here.
   
• TuneIn has announced new partnerships with more than 20 broadcasters, including Public Radio International (PRI), C-SPAN Radio, ABC Australia, mvyradio, WFMU, the Hearst Corporation and others.
   
• Crowdsourced radio service Jelli names Pollack Media Group chairman/CEO Jeff Pollack to its strategic advisory board. Pollack says Jelli's potential to "drive ratings, share and revenue growth is impressive." All Access has more coverage here.
   
• Marketron has relaunched its online client portal MyMarketron, which it originally debuted in May 2011. Marketron says more than 3,500 members are using the service, which now includes an extensive support knowledgebase. You can find Marketron's press release here.

Stock and financial analysis site Seeking Alpha is reporting that, for its upcoming royalty renewal, satellite radio outlet SiriusXM is offering to pay 5%-7% of its gross revenues to use copyright sound recordings, while SoundExchange is asking for 13% -- rising to 20% -- over the 2013-2017 term.

The Copyright Royalty Board set satellite's 2007 royalty rate at 6% of gross revenues, rising each year to 8% this year. 

Note that the CRB's determination (a) concerns SiriusXM's satellite transmissions, not its streams, for which it pays a separate royalty at a dramatically higher rate; and (b) this rate, in stark contrast to online streaming rates, is determined using the 801(b)(1) standard.

"With the survival of (SiriusXM) no longer at stake (as it was during the last determination) and lower capital expenditures required during the next license period, future rates that could be set by the CRB could easily be higher and much closer to, or even above, the 13% rate," predicts Seeking Alpha. Read more here.

While we're on the topic, Internet radio royalty determinations are currently based not on 801(b)(1) standards, but solely on the controversial, DMCA-mandated "willing buyer willing seller standard," which many industry experts agree is the key reason streaming royalties are so much higher than those for satellite and cable radio in the U.S. Congressman Jason Chaffetz in July announced he hopes to introduce to Congress the Internet Radio Fairness Act that would move Internet radio royalty determinations to use the 801(b)(1) standard that's used for most other royalty decisions (see coverage here). Industry legal expert David Oxenford explains the importance of 801(b)(1) here. Oxenford, a D.C.-base partner at Wilkinson, Barker, Knauer will moderate the "Music Licensing Roundtable" panel at RAIN Summit Dallas on Tuesday.

SiriusXM has launched a new streaming on-demand feature, offering around 200 programs for instant online listening. That includes recent talk, comedy, sports and music shows, "selections from [SiriusXM's] vast audio archive," and "exclusive, never-aired content."

Though the on-demand catalog doesn't include every show offered by SiriusXM, the company promises it will be updated regularly with new content. 

The new on-demand functionality is available via SiriusXM's web media player and via its iOS mobile apps. (Android support is coming "soon.") Mobile users will be able to download to on-demand programs for offline listening. Users must subscribe to SiriusXM's Internet service (around $15 per month) to stream on-demand programming.

If this new feature sounds familiar, that's because SiriusXM has been teasing on-demand functionality for months (see our coverage from August 2011 here and October 2011 here).

SiriusXM added more than 622,000 net subscribers in Q2, the company recently announced, up 38% year-over-year. Revenue was up too, beating estimates. SiriusXM now boasts 22.9 million subscribers and expects to reach 24.5 million by the end of the year.

You can find more about SiriusXM's on-demand features from its website here. Reuters has more coverage of SiriusXM's Q2 results here.