Villasenor

The Brookings Institution's John Villasenor, who's written extensively in support of a fairer standard for Internet radio royalties, calls satellite radio's royalty "too low by several percentage points."

Interestingly, Villasenor points to 801(b) itself at the root of the problem -- but it seems he blames the Copyright Royalty Board's interpretation of the standard more than the standard itself.

Villasenor may be familiar to RAIN readers (we've covered his writing several times here) for his calls for a change in the law that would have Internet radio royalties determined using the legal standard known as 801(b). This is the standard used to for satellite radio and cable radio royalties, as well as for the royalties recording labels pay composers and publishers to publish recordings.

[Currently, Internet radio royalties are determined using a different standard, known as "willing buyer / willing seller." Legislation known as the Internet Radio Fairness Act, now in both houses of Congress, would enact the standard change called for by Villasenor. More from RAIN on the IRFA is here.]

The 801(b) standard (among other criteria) requires the CRB to "minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices."

The CRB decided the most appropriate rate for satellite radio for the 2013-2017 term would actually be 11% of gross revenue. But in its effort to minimize potential disruptive impact on SiriusXM, it decided to phase in the rate over the four years, beginning at 9% for 2013.

This is despite SiriusXM's 2009-2012 revenue growth, from less than $2.5 billion to over $3.4 billion.

Villasenor, who's also a UCLA electrical engineering professor, writes, "In fact, under the 9% rate that will apply for 2013, there’s a good argument that artists will suffer more disruption from their unfairly low income than SiriusXM will avoid thanks to its discounted payment obligations."

Read his article in Billboard 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.