SoundExchange

We recently announced that the webcasting industry's foremost expert on legal and royalty issues David Oxenford would moderate the RAIN Summit West panel "The Song Plays On" (in RAIN here). Oxenford and his panel will discuss current issues regarding Internet radio royalties -- from the viewpoints of services, copyright owners, and creators alike.

Joining David will be Ted Cohen (top right), Managing Partner, TAG Strategic, a digital consulting firm for the entertainment, technology, and mobile industries whose clients include the UK's Amazing Radio and Canadian Music Week. Cohen helped craft the licensing agreements that made the Rhapsody subscription service and the iTunes Music Store possible. He formerly served as SVP/Digital Development & Distribution for EMI Music and EVP of Digital Music Network Inc.

Like Ted, SomaFM GM & Program Director Rusty Hodge (left) is familiar to many RAIN readers and RAIN Summit attendees. Rusty first worked in radio in the Los Angeles area, but was soon developing software for broadcasters, multimedia, and founding Hodge Interactive to put radio and TV stations on the web. He first experimented with online radio in 1995, then officially launched SomaFM.com in February, 2000. The listener-supported service boasts over 20 expertly-curated channels of music, and streams over 5.8 million listener-hours a month. SomaFM also offers podcasts -- one recent podcast that may be of industry interest is a discussion on the new financial realities of the digital streaming music business and how to improve indie artists' situation (in two segments, here and here).

Also joining the discussion will be Brad Prendergast (bottom right), who is Senior Counsel for Licensing & Enforcement with SoundExchange. SoundExchange is the recording industry body that collects and distributes most royalties webcasters (and others that make digital performances of copyright sound recordings) pay. Prendergast works to ensure licensees are in compliance with the terms of their licenses. He's a gradutate of the University of Virginia School of Law and Notre Dame.

RAIN Summit West is Sunday, April 7 in Las Vegas. The annual full-day Internet radio conference is a co-located education program of the NAB Show. Now in its 12th year, the Summit focuses on the intersection of radio and the Internet. Keynoting the even will be RAB president and CEO Erica Farber (more in RAIN here) and Rhapsody International president Jon Irwin (more here). Register today, while flights and hotels are still readily available, via the RAIN Summit West page.

SoundExchange -- the record industry body that collects and distributes royalties for the digital use of copyright sound recordings -- passed along $462 million to labels and performers last year. That's 58% higher than 2011 ($292 million).

When Internet radio, satellite radio, or cable television radio in the U.S. plays copyright sound recordings, they pay a royalty for the use of that music. Not only to the songwriters and publishers (as broadcasters do), but also to the recording copyright owners (labels) and performers on the recordings. SoundExchange is the group that administers the latter.

Billboard explains, "The growth of this revenue stream underscores the importance of services such as Pandora -- and other webcasters -- and Sirius XM Satellite Radio in today's digital marketplace. Pandora, which supported the Internet Radio Fairness Act that could have led to a change in webcasters' statutory royalty rates, finished 2012 with 67.1 million active listeners, up 41% from 2011. Sirius XM added 2 million subscribers to finish the year with 23.9 million."

Pandora and SiriusXM pay the lion's share of SoundExchange royalties (some say as much as 90%).

Read more in Billboard here.

Jennifer Lane, in her Audio4Cast blog, takes the record industry to task for its treatment of webcasters on its WhyMusicMatters.com website.

The music industry site serves as a directory for consumers to find legitimate, licensed music services. Lane describes the site's presentation of various services offering "downloads/mp3s," "streaming," and more.

But while on-demand and music subscription services (as well as services in a category called "Premium Internet Radio") are given bold-face "headline" names, brief text descriptions, and thumbnail images, most webcasters are relegated to a "statutory services" page "where the listener has to click through hundreds of alphabetized radio stations (no logos, no descriptions, no links) to find one," according to Lane.

"I’m disappointed in the site," she writes. "Unfortunately, this site is a glaring in-your-face example of a bad business partnership. Internet radio services, Pandora in particular, are paying a lot of money in royalties to SoundExchange, the royalty collection arm of the RIAA, and in return they get a listing buried deep in the site with no logo or link."

She continues: "Is there any other business you can think of where the vendors treat their retailers so badly? Because that’s what this is, it’s streaming services buying the rights to content and offering it to consumers. And clearly the RIAA and NARM are bad business partners for Internet radio."

Read her blog here. 

The recent CRB royalty decision for satellite and cable radio "for the first time, gives at least some weight to direct licensing deals," and "seems to reject some premises that had long been used to justify royalty rates in other proceedings – and thus may give some insights on approaches to be used in the webcasting royalty proceeding."

We're quoting industry legal expert David Oxenford, who has published some preliminary analysis of the Copyright Royalty Board's full determination of royalty rates to be paid to SoundExchange by Sirius XM and Music Choice from 2013 through 2017.

Last week the CRB released its full decision (actually, two separate decisions, resulting in the same determination, here and here). We reported the actual rates last month in RAIN (here).

We also reported (here) that in the proceedings, satellite radio provider SiriusXM revealed more than 60 direct licensing deals it had secured with record labels, which it argued should be used as benchmarks as the market value of digital sound recordings for noninteractive performance. The service says its direct deals are for 5%-7% of revenues.

Logically, the CRB agreed that directly-licensed sound recordings should be excluded from SiriusXM's royalty obligation to SoundExchange (services need pay SoundExchange only for copyright music for which they have not secured direct deals), Oxenford reports.

And while the CRB rejected SiriusXM's proposal to lower rates from 8% of revenue to 5%, it also rejected SoundExchange's proposal to raise rates -- starting at 12% of revenue in 2013 and ending at 20% in 2017. The Board decision -- 10% of revenue this year, rising to 11% next year, and 12% for each of the next three years -- might indeed indicate it took SiriusXM's market deals into consideration, as Oxenford suggests.

This is important to note as we approach CRB proceedings on Internet radio royalties. Broadcasters like Clear Channel and Entercom have struck streaming royalty deals with certain copyright owners. If the CRB is willing to consider marketplace deals in royalty determinations for satellite and cable radio, they may also be willing to do so in the upcoming webcasting proceedings.

The fact that webcasting royalty proceedings are governed by the controversial "willing buyer willing seller" standard, which by design attempts to replicate an "open market" value for copyright material, may be even more reason for royalty judges to consider these direct deals as benchmarks.

[Satellite radio and cable radio royalty proceedings are governed by the more traditional 801(b) standard. The main goal of the Internet Radio Fairness Act is to have Internet radio royalties to be moved to this same standard.]

The next royalty proceeding for noninteractive webcasting services begins in 2014 and should conclude in 2015.

Oxenford also reports that "the Board also explicitly agreed, for the first time in any decision of which we are aware, that pre-1972 sound recordings also are not to be included in the revenue base, as the Federal sound recording copyright only applies to songs created in 1972 and after (with certain exceptions...)." It will be interesting to see if webcasters are given a similar "pre-1972 carve-out."

Oxenford plans to follow up with more detailed analysis. Read his initial thoughts here.

During testimony in the recent royalty determinations (see yesterday's RAIN here), SiriusXM reportedly revealed it has secured "direct content licenses" with more than 60 labels, giving them even broader use rights at rates below those set by the Copyright Royalty Board.

Digital Music News reports SiriusXM will pay 5%-7% of its gross revenues for these licenses, covering more than 7,000 artists, 9,000 albums, and 110,000 songs (there were no reported details of how specifically the use of the licensed music is broader than is allowed by the statutory license).

These agreements are actual, real-world settlements between active players in the music rights market. As such, these deals (both the rates and expanded allowable uses of the music) will likely be cited in arguments against music industry interests who claim the CRB-determined rates for satellite radio (and webcasting, for that matter) are "below market value." It isn't clear whether the more favorable terms of these direct deals tempered the CRB's decision. 

As we reported yesterday, the CRB set sound recording royalties for satellite radio at 9% of gross revenue in 2013, increasing 0.5% each year (to 11% in 2017). Billboard estimates SiriusXM will pay between $1.02 billion and $1.22 billion in statutory royalties to SoundExchange from 2013 to 2017.

Hypebot reports SoundExchange pressed the CRB for satellite radio royalties that increased to 20% of gross revenue by 2017 (DMN says "one resident expert" pushed for 30%), calling the CRB rates "below market."

Last month industry attorney David Oxenford reported that much of the discussion in the rate-setting's oral arguments phase "focused on the value of music in a marketplace -– essentially the 'willing buyer, willing seller' question." Currently, the law mandates that the rate-setting for royalties for these media is to be governed by the "801(b)" standard (which the record industry has argued does not reflect fair market value) (RAIN coverage here).

In March Sirius XM filed a lawsuit against SoundExchange and the American Association of Independent Music (A2IM), accusing the record industry organziations of interfering with its efforts to directly license sound recordings. The complaint accuses SoundExchange and A2IM of being in violation of federal antitrust law, and New York state law (RAIN coverage here).

Digital Music News coverage is here. Read Hypebot here. Read Billboard coverage here.

A group of 125 of the recording industry's biggest names are throwing their star power behind major record label efforts to oppose Net radio royalty reform.

"That's not fair and that's not how partners work together," reads the two-page "open letter" to leading webcaster Pandora in this weekend's Billboard magazine, signed by stars like Sheryl Crow, Pink Floyd, Billy Joel, and Katy Perry. The ad was placed by recording industry lobby musicFIRST and digital royalty group and industry advocate SoundExchange (below, click the image to read it).

Pandora supports the "Internet Radio Fairness Act" -- proposed legislation that would require copyright judges who determine the royalties webcasters pay for the use copyright sound recordings to use the same legal standard they use when determining the same royalties of satellite and cable radio (we have lots of coverage here). Major recording labels have come out in staunch opposition to the bill.

The ad accuses Pandora of enjoying "phenomenal success as a Wall Street company" yet of asking Congress to "gut the royalties thousands of musicians rely upon." A musicFIRST/SoundExchange joint press release from Wednesday calls the Internet Radio Fairness Act a "subsidy," which "could slash by 85% royalties paid to musicians and artists when their songs are played over Internet radio." 

Speaking in support of the bill on Tuesday (RAIN coverage here), Sen. Ron Wyden (D-OR) said, "Music is still dominated and controlled by a couple of multi-national corporations (which) act like a duopoly to maximize their profits, and not maximize the compensation of artists and not maximize musical choice... They are the people that made 'payola' a household word." Wyden himself introduced the Internet Radio Fairness Act in the Senate in September.

Last month, Pandora founder Tim Westergren (in RAIN here) revealed that in 2012 alone his service will pay nearly $3 million each in royalties to play the music of performers Drake and Lil Wayne -- half of which goes directly to the songs' performers. The music of Coldplay, Adele, Wiz Khalifa, and Jason Aldean will generate from Pandora more than a million dollars each this year.

The musicFIRST/SoundExchange press release is here.

RAIN Analysis: It’s ironic that the organizations are making an appeal for "fairness" when, in fact, what they’re fighting for is specifically to keep the concept of "fairness" out of the rate-setting standard for Internet radio.

The "801(b) standard" is the set of four criteria that Congress has historically typically instructed the U.S. Copyright Office to use to determine a royalty rate: (1) Maximize the availability of creative works to the public. (2) Insure a fair return for copyright owners and a fair income for copyright users. (3) Reflect relative roles of capital investment, cost, and risk. (4) Minimize disruptive impact on the industries involved.

801(b) is the standard used in other forms of digital radio, like satellite radio and cable radio, and it accurately reflects the public policy goal of copyright law, which is to maximize the availability of creative works to the public, using the concept of "fairness" for both creators and distributors.

By prevailing upon Congress in 1998 to change the rate-setting standard for Internet radio to the rate "which a willing buyer and a willing seller would agree to," the music industry has introduced confusion that has hamstrung the growth of Internet radio ever since. Because of the difficulty of applying this standard – since this is a marketplace in which a "willing buyer/willing seller" rate has never been determined – the judges in both rate-setting cases so far (2002 and 2009) ended up setting rates that were, for the majority of webcasters, greater than 100% of their revenues. Such a rate is far higher than the 7% to 15% rates that other forms of digital radio pay under the 801(b) standard, and it’s far higher than any "willing buyer" could actually afford to pay. -- KH