Thursday, November 1, 2012 - 1:30pm
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.