SoundExchange

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.

Last week we covered (here) Business Insider's report that on-demand music Spotify had become major music labels' second-largest source of revenue, behind the iTunes Music Store. Following up, Billboard.biz says (paraphrasing here): "Nuh-uh."

While "Spotify may be the second-largest digital account for major labels," (not paraphrasing), "Walmart can generate more music sales in one country than Spotify can generate around the world." Billboard.biz estimates Walmart had about $525 million in 2011 music revenue. Spotify total revenue was reportedly about $250 million, and probably less than $175 million went back to record companies.

Looking solely at the U.S. market, Spotify (or all on-demand streaming, for that matter) isn't even close to second-place. For instance, SoundExchange paid labels $292 million from the performance royalties it collected from satellite and Internet radio. "Subscription services as a whole returned only $132.7 million in 2011. Subscription services were also less valuable to labels than synchronization royalties ($196.5 million) and mobile platforms ($277.4 million)," the news source wrote.

Read Billboard.biz for more here.

There's so much news to cover today! We wanted to make it quick and easy for you to catch up with some of the great coverage from our colleagues, so here are some important news items in brief:

-- Yahoo, Spotify team up: Yahoo and Spotify have announced a global deal, that will have the leading on-demand music service replacing Rhapsody as Yahoo's music partner, and is perhaps the net portal's biggest music move since it shuttered its own on-demand service Yahoo Music Unlimited in 2008. Read more in the Los Angeles Times here and TechCrunch here.

-- TuneIn, Adam Carolla partner: Streaming aggregator and tuning service TuneIn and Carolla Digital have partnered to make the latter's shows (The Adam Carolla Show, ACE On The House, This Week With Larry Miller, Penn's Sunday School with Penn Jillette, and more) available on the TuneIn service. Read the press release here.

-- Slacker, ABC Radio launch lifestyle stations: Webcaster Slacker Radio and ABC Radio have launched "Men's Life" and "Women's Life," gender-targeted online talk radio stations. Read more in PCMag here.

-- Howard on Google TV: Reuters reports SiriusXM will make all of its programming available on Google TV, including Howard Stern's shows, plus live sports. A new app will allow listeners to pause live content and play back up to five hours. Google's I/O developer conference starts today in San Francisco. Read more here.

-- Radio One and a former employee battle over website, Facebook URL: Read Tom Taylor for more on the new "Streetz 94.5" in Atlanta, launched by former Radio One programmer Steve Hegwood, and the battle over the Streets94.5.com and www.facebook.com/Streetz 94.5. Taylor on Radio-Info coverage is here.

-- Leykis, Lionel on Talk Radio online: At the 2012 Talkers New Media Seminar, talk radio legend Tom Leykis appeared with LionelMedia's Lionel on a panel to talk streaming and podcasting strategy. Watch video (by Art Vuolo) from Talkers.com here.

-- ASCAP, BMI, SoundExchange obsolete, says economist: Stanford economist Roger Noll, at the recent recently asked a group of attorneys at a recent American Antitrust Institute conference, suggests we now have the information technology which has "eliminated the reason for (royalty-collection organizations) existing in the first place. Digital Music News reports here.

Weeks later, Clear Channel's groundbreaking royalty deal with Big Machine is still sending tremors through the industry (RAIN coverage here). Two experts recently shared what they see as the takeaway from the new partnership.

Music industry attorney Steve Gordon writes in Digital Music News (here) that Clear Channel's deal is good news for Pandora and anyone else looking for more equitable streaming royalty rates. Clear Channel doesn't want to pay the "ridiculous" royalty bills that Pandora has now, argues Gordon, "Which means that instead of screaming bloody murder into the wind, Pandora now has the biggest ally imaginable."

Meanwhile, co-founder and Chief Operating Office of Triton Digital Mike Agovino writes in TechCrunch (here) that he sees Clear Channel "[leading] the way for traditional radio providers looking to go digital."

Agovino hopes more broadcasters will -- like Clear Channel -- start seeing digital as an opportunity, not a threat. "The key to making it online is working with the music industry to make that digital future a reality –- sooner rather than later."

SoundExchange today announced it has made $1 billion in royalty distributions to copyright owners since its inception in 2000 (read the press release here). What's more, this year SoundExchnage's quarterly payments have topped $100 million.

Today's New York Times suggests the story is good news for the organization, which "has been criticized for being slow to pay everyone who is owed royalties. At the end of 2010, the last date for which audited accounts are available, SoundExchange was holding $132 million..." for performers it couldn't reach and performances that couldn't be accounted for.

The paper also suggests SoundExchange is now challenged by "direct deals" between major content licensees like SiriusXM (which is suing SoundExchange for allegedly interfering in such deals) and Clear Channel (with its well-publicized Big Machine Records deal) and copyright owners.

Read more in The New York Times here. Also, SoundExchange's 2011 annual report is here. 

Editor's note: RAIN will return on Tuesday, May 29. Have a great Memorial Day weekend!

"To say that copyright law is complex would be an understatement," writes Forbes contributor John Villasenor. Few RAIN readers likely need to be told that. Nor should they be surprised by Villasenor's comment that the Copyright Royalty Board's "willing buyer/willing seller" model for setting Internet radio royalty rates "has not worked ideally." 

Former SoundExchange general counsel Gary Greenstein, now a copyright attorney with Wilson, Sonsini, Goodrich & Rosati, tells Forbes that "the willing buyer/willing seller standard, as it has been applied by the CRB, has resulted in rates that would likely drive many nonsubscription, Internet-based digital music services out of business."

Congress had to pass two Webcaster Settlement Acts (in 2008 and 2009, RAIN coverage here, here and here) to "temporarily grant SoundExchange, a non-government entity, with the extraordinary power to negotiate lower rates." You can read more about those negotiated rates in RAIN here. And, as Villasenor writes, even "those 'lower' rates can still be very high when measured with respect to revenue."

For example, Pandora paid nearly 70% of revenues to content acquisition costs -- which include royalties -- according to their Q1 2013 fiscal results (RAIN coverage here).

"So where does all of this leave things?" ponders Villasenor. "The short answer: in need of repair."

He argues that "some of the policy objectives enshrined in copyright laws of the United States may stifle innovation and impede new business opportunities… America’s status as a global technology leader is due in large part to disruptive advances that upend prevailing industry practices, and in doing so, often interfere with streams of revenue flowing to less innovative incumbents. Yet this is precisely the sort of progress that is impeded by the current copyright system as it applies to certain digital music services."

Rightsholders -- songwriters, recording artists, record labels -- are absolutely entitled to "be fairly paid for their work, and deserve the protections of a well-designed copyright royalty framework," writes Villasenor.

"But it’s also important not to lose sight of the public’s interest in having access, under reasonable terms, to copyrighted material." Villasenor quotes the Supreme Court from a 1975 ruling: "The immediate effect of our copyright law is to secure a fair return for an 'author's' creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good."

"That [public] interest is no less valid if it happens to be served using non-traditional business models such as Internet radio," concludes Villasenor. You can find his article in Forbes here.

Do you agree with Villasenor's argument? Disagree? Let us know in the comment section!