Who'll win the webcasting war?
A report from the battlefield
Column On March 20, 2007, The Copyright Royalty Board (CRB), a three judge panel appointed by the Librarian of Congress whose mission it is to determine rates and terms for copyright statutory licenses, shocked the webcasting community by announcing dramatically higher rates for use of recorded music by large commercial and small webcasters alike.
The rate increase was so steep that, if enforced, many webcasters felt they would no longer be able to continue in business.
Under the newly proposed rates, annual fees for all station owners would be projected to reach $2.3bn by 2008. The outcry was so strong, members of the US Congress proposed legislation, The Internet Radio Equality Act, that would completely countermand the CRB's decision, and subject rates to a cap of 7.5 per cent of each station's revenues.
In the meantime, Congress has urged Sound Exchange, the independent body that represents both artists and labels, to negotiate a compromise with the webcasters. To date, the parties have not announced any significant progress; in fact, the debate is veering off-track, more demands are being made, and tension between the two is rising to the point of collapse.
As a result, Congress is threatening to take action by moving the Internet Radio Equality Act to the floor if a compromise cannot be completed by Labor Day. All the while, the fate of internet radio, including such innovative services as Pandora and Live 365, lies at stake.
What must a webcaster pay?
Webcasts of songs (as opposed to the music recordings embodying those songs) are subject to blanket licenses provided by authors' collection societies. In the US, these societies are ASCAP, BMI, and SESAC.
Each requires payment of only a small fraction of revenues from individual webcasters in return for granting the right to play any song in their repertoire.
Collectively, these three PROs, which represent virtually all commercially popular songs still protected by copyright, charge about six per cent of each webcaster's advertising and/or subscription income. The situation is a bit different for masters - that is, the recordings in which the songs are embodied.
The Digital Millenium Copyright Act (DMCA) provides a compulsory license under which qualifying webcasters can use any recorded music for fees to be determined pursuant to the statute. And it's these rates that lie at the heart of the webcasting controversy.
How the new rates compared with the old
The old rates made a clear distinction between large commercial webcasters, such as AOL and Yahoo!, small "mom and pop" webcasters, and innovative services such as Live365 and Pandora (separate rates were set forth for non-commercial and educational webcasters).
"Large" commercial webcasters will end up paying almost 300 per cent more in per-performance, per-listener royalty rates by 2010. Under the old schedule, if for example 10,000 people listened to 100 songs each day the fee would equal $762 - or a yearly fee of approximately $278,000.
The CRB judges raised this per-play, per-listener royalty schedule so that in our example the webcaster would pay $401,500 in 2007, increasing to $693,000 in 2010.
Under the old schedule, large webcasters were required to pay upfront a minimum per-channel fee of $500, capped at $2,500, notwithstanding the number of channels. Under the new schedule, the cap has been completely removed, so a webcaster with 200 channels would have to pay $100,000 upfront.
"Small" webcasters, that is those with gross revenues of less than $1.25m, were previously required to pay a proportion of gross revenues. This was deemed fair by Congress when it passed the Small Webcasters Settlement Act back in 2002, because small webcasters make much less money from advertising and subscription revenues. The CRB's recent announcement would make small webcasters responsible for paying the same rates as large webcasters. Moreover, the rates would be higher. Many webcasters could never afford to pay these rates.
In the words of Radio Paradise's Bill Goldsmith: "This royalty structure would wipe out an entire class of business: Small independent webcasters such as myself and my wife, who operate Radio Paradise. Our obligation under this rate structure would be equal to over 125 per cent of our total income. There is no practical way for us to increase our income so dramatically as to render that affordable."
A month after the CRB's shattering announcement, Congress responded by introducing the Internet Radio Equality Act (HR 2060). The Act would toss out the board's decision entirely and return the webcasting industry to a percentage-of-revenue model.
In this case, the percentage would be set at the same rate paid by satellite radio, which is 7.5 per cent. Webcasters could also choose to pay 0.33 cents per hour of sound recordings transmitted to a single listener.
In the meantime, Congress has urged Sound Exchange to negotiate directly with such organisations as the Digital Media Association (DiMA), which represents both small and large webcasters alike. To date, the parties have not announced any significant progress. In fact, promising discussions have given way to combative written exchanges.
The two parties have not even gotten to the issue of rates as they are still stuck on the issue of minimum per channel fees and whether those fees should be capped. As discussed, the CRB's overhaul included removing the cap associated with minimum per-channel fees.
Without a cap services like Pandora, which generates an almost unlimited number of stations, would have to pay hundreds of thousands of dollars in fees.
Sound Exchange claims these fees are necessary administrative royalties without which it will be unable to distribute monies to artists and songwriters. But DiMA rightfully claims that these fees are outlandish, since they would total $1bn annually and Sound Exchange only distributes a mere $20m to artists and labels.
Sound Exchange is also making the cap on minimum per-channel fees contingent on webcasters' guarantee that they will a) offer more detailed reporting regarding the music they play, and b) implement technology to prevent streamripping.
Jonathan Potter of DiMA denounced these demands as "unreasonable, unworkable and way off-topic". Although Sound Exchange's attempt to protect the artists and record labels by making such demands may in fact be justified, the question is whether it's the appropriate context in which to make such demands?
Sound Exchange argues that it is the appropriate context since there is no point in discussing updating royalty rates if webcasters won't agree to update royalty report procedures. Currently, webcasters are only obliged to give Sound Exchange sample reporting, that is to say, one day each month. They provide a list of songs played and how many listeners tuned in to hear each one. It is Sound Exchange's opinion that: "Part of being accurate and fair is distributing on a per performance or pay-per-play basis instead of sampling".
Perhaps the more volatile issue though is the second of the two demands regarding technology to prevent streamripping. After DiMA agreed to "research, identify, review and evaluate the prevalence of stream-ripping", Sound Exchange retorted that it had "mischaracterised" the group's offer and must absolutely agree to implement the technology or else negotiations regarding minimum per channel fees are off.
DiMA claims Sound Exchange is leveraging the fee to impose mandates it's been unable to secure elsewhere. And the battle wages on.
What's next? It seems unlikely that Sound Exchange and DiMA will be able to agree on minimum per channel fees and caps, let alone bargain the actual rates, until they are able to resume a peaceful negotiation that is divorced from such complex issues as reporting procedure and DRM on streaming.
What's more likely is that the current deadline for negotiation will pass and Congress will have to step in in an effort to move the Internet Radio Equality Act to the floor.
US Senators Ron Wyden and Sam Brownback support the Act in recognition of the significance of internet radio which, as they explain in a press release, "is crucial to many segments of business and culture - to small and large webcasters building sustainable businesses; to independent artists trying to make it in a crowded industry; and to million of music fans searching for new diverse music that corporate radio generally does not offer. Innovation and creativity are the winners if internation radio flourishes, and are the losers if internet radio stagnates." ®
Steve Gordon is an entertainment attorney and consultant in New York, and the author of The Future Of The Music Business. He was Director of Business Affairs, TV and Video at Sony Music for ten years. His website is at www.stevegordonlaw.com.