Sounds and cents

Today, Hanson and Rosenthal discuss the distinctions between online and broadcast radio play. Yesterday they debated whether webcasting should be open to hobbyists. Later this week they’ll discuss the promotional value, economic challenges and shifting categories of airplay.

Make the playing field level
By Jay Rosenthal

Kurt,

Webcasters should pay recording artists and labels because all digital broadcast of music requires and deserves compensation. The injustice is not that webcasters have to pay royalties; it is that the terrestrial radio broadcasters do not have to pay. If the radio broadcasters were legally obligated to pay, then the webcasters would be playing on a level playing field with the radio broadcasters—and both the webcasters and the artists and labels would benefit.

The U.S. is one of the only developed nations in the world that does not require terrestrial radio broadcasters to pay public performance royalties to artists and labels. This is a double injustice—not only are U.S. artists and labels deprived of royalties they legally and morally deserve, the European countries withhold public performance money otherwise owed to U.S. artists and labels for sound recordings recorded in the United States.

There are a number of reasons for this injustice, but arguably the most significant is the opposition by the National Association of Broadcasters (NAB). In Washington, D.C., money and lobbying power rule; the NAB has always been incredibly well endowed financially and has no qualms about flexing their lobbying muscle.

The NAB has always argued that radio airplay is promotion for artists and labels, and therefore the exemption is warranted. While there is some truth that radio airplay offers some promotional bump, the reality is that the radio broadcasters have built their radio networks by using music. The public does not listen to radio for the commercials; they listen for music. So there is really no reason—other than political arm-twisting—for the continuation of such an onerous practice.

Now to the question of what share of the revenues from online station should go to the copyright owners:

As you know, Kurt, the U.S. Copyright Royalty Board (CRB) rejected a “percentage of revenue” formula. It had good reasons for doing so. But the case has been appealed to the D.C. Circuit Court, and if the court determines that the CRB abused its discretion by applying the wrong formula or ignored key factors and arguments, then the case may go back to the CRB with instructions to re-evaluate and perhaps change its decision to include a percentage of revenue formula.

Even though I fully support the CRB decision and the CRB process, and I believe the ruling was fair, I also recognize that a percentage-of-revenue approach has a lot of appeal to small webcasters and nonprofits, and perhaps even to some of the major webcasters. The problem, however, is that for some of the major webcasters like Yahoo, there has been a great deal of disagreement not just about the percentage of revenue, but what the percentage is applied against. Artists and labels would like the percentage to be applied against all revenue earned by the company, and not just revenue earned by the so-called “music services.”

Now there is no clear answer to this question. The services argue that the artists and labels should only receive revenue generated solely from the music divisions—not from other parts of the website offering non-music entertainment or information, like travel or sports services. There is some logic to this, but not much because many of the major webcasters use music to draw users to their websites; the users then go to other parts of the service not using music. Perhaps the answer is a form of negative premium—something that would take into consideration the entire revenue base of a webcaster, but perhaps discount the revenue from non-music divisions of the service.

Obviously, small webcasters and non-profits would like a percentage-of-revenue formula applied to their services. The CRB did not provide for that option for many reasons—the most obvious being that the presentation of evidence by the smaller webcasters—some participating and most not participating—in the proceeding either failed to make the case or was just absent from the proceeding. A private negotiation with Soundexchange for the smaller webcasters may be the only real option left.

But one totally misguided option is to consider a legislative fix. The CRB as an institution and a process must be respected. Allowing Congress to fix a royalty rate or formula based solely on politics is an abhorrent idea. Congress created the CRB to set the rates, and to take politics out of the equation. The Small Webcaster Relief Act of 2002 was passed before the creation of the CRB. Congress clearly intended for the rates and formulas to be set by the CRB and not Congress. Congress punted, and going back to Congress just because the webcasters essentially lost the case is a major mistake. Not only will the webcasters lose in a political fight for the imposition of a percentage-of-revenue formula, taking an absolutist position with Congress may prevent a negotiated deal as well.

Jay Rosenthal is a partner with the Washington DC law firm Berliner, Corcoran & Rowe, LLP; co-legal counsel to the Recording Artists’ Coalition; and a SoundExchange board member. He also represents numerous recording artists, independent record companies, producers, songwriters and independent film companies and is an adjunct professor of entertainment law at the George Washington University School of Law and at the Washington College of Law of the American University.

The system is broken
By Kurt Hanson

Let’s start out today, Jay, by stepping back talk about the purpose of copyright law. As I understand it, the primary beneficiary of copyright law is not supposed to be the copyright owner but rather the general public. In other words, the purpose of granting creators some rights to their works is to ensure the continued production of new creative works; the purpose of granting only certain limited rights is to ensure the vibrant use of those works by others and thus maximize the availability of those works to the public.

Readers of the L.A. Times know that copyright law is being twisted for other purposes nowadays—for example, we have all read about Disney using its political influence to extend the copyright protection period for its most-valuable properties to more than 70 years. That’s using copyright law not to ensure the continued creation of new works, but rather to protect corporate profits! (Does anyone truly think that there are animators or animation studios who are dissuaded from producing new works in 2007 because the potential revenue stream for those works might expire in 2078?)

My point is that copyright law is always determined by legislators—in a political process characterized by lobbying from both sides—with the legislators trying to find a balance such that the needs of the general public are best satisfied.

Regarding radio and music: Historically, in the United States, Congress has concluded that the balance that best benefits the public is to permit more radio stations per city than in almost any other developed nation, which is bad for broadcasters (more competitors), but without requiring those broadcasters to pay a performance royalty for sound recordings, which is good for broadcasters (slightly lower expenses), good for consumer access to music (lots of different genres available), and also good for labels and recording artists (more exposure of their works, leading to increased sales of those works, plus increased sales of concert tickets and ancillary products).

Jay, you’re right that the United States is a unique country to have settled on this particular balance. But you’re ignoring the fact that, at least partially as a happy result of this particular balance, our nation developed the largest and most successful recording industry in the world! So perhaps Congress knows what it’s doing.

(As a footnote, you’ve blamed the lack of a sound-recordings performance royalty on high-powered and expensive NAB lobbying efforts. But you must admit it’s hard for labels to argue to Congress that airplay is not good for them when they’re spending hundreds of millions of dollars a year on promotional efforts to get radio airplay!)

So, now let’s talk about webcasters for a moment:

In an example of a true high-powered and expensive lobbying effort, the Recording Industry Association of America (RIAA) in 1998 helped persuade Congress to pass the Digital Millennium Copyright Act (DMCA), provisions of which included the granting to copyright owners of a sound-recordings performance right for Internet radio airplay.

But the rationale that the RIAA used in support of that new right was disingenuous. The RIAA argued that digitally-delivered radio meant that consumers were going to be able to grab a “perfect digital copy” of the music being played, thus hurting CD sales.

This is of course not the case. First, there is no “perfect copy” involved. (Webcasters like AccuRadio stream at bitrates as low as 32 kbps; virtually none stream at higher bitrates than 128 kbps. We are not talking about streams that are anywhere near CD quality, much less “perfect,” as Congress was led to believe.) Second, no consumers are grabbing those streams as a substitute for CD purchases. It’s technically possible, but virtually unheard of in the real world. For one thing, they’re low-bitrate. For another, there are much easier ways to get copies of music files, such as peer-to-peer file-sharing networks. In the real world of 2007, as it turns out, Internet radio is one of the few cultural factors out there that is actually helping CD sales. (Again, see here.)

Thus, I would argue that the imposition of a sound recordings performance royalty on webcasters might have been a mistake made by Congress in 1998 due to a misunderstanding—encouraged, intentionally or not, by RIAA lobbyists—of how Internet radio was going to work.

But, for now at least, the royalty is there. And webcasters are trying to build into their business models the provision for a reasonable payment to the copyright owners and the musicians for this royalty.

So now we get to the second question: If there is in fact going to be a royalty paid by webcasters, what’s the appropriate rate?

Historically, around the world, radio stations have paid a performance royalty to the composers of the music they play—typically, around 4% to 5% of their revenues. Similarly, as you correctly pointed out, in many countries radio stations pay a performance royalty to the owners of the sound recordings copyright—typically, around 3% to 4% of their revenues. (By the way, satellite radio in the U.S., another form of digitally-delivered radio, apparently pays approximately these percentages as well.)

But here’s an indication that the Copyright Royalty Board process fell off the rails: The rates set by the CRB judges equate to roughly 50% of revenues for large webcasters like Yahoo! LAUNCHcast, from 150% to more than 300% of revenues for small webcasters like AccuRadio and Digitally Imported, and well more than 1,000% of revenues for webcasters with large numbers of channels like Rhapsody and Pandora!

Jay, you wrote, “One totally misguided option is to consider a legislative fix. The CRB as an institution and a process must be respected.” Looking at the numbers in the previous two paragraphs, I can’t believe you’re serious. The process didn’t work.

And here’s why: The set-up of the CRB (or, technically, its predecessor, the Copyright Arbitration Royalty Panel) was clearly a political process, driven by the lobbying power of the RIAA at a time, back in 1998, when there was virtually no music-based webcasting industry to argue for the other side. (You say it’s “abhorrent” that “politics” get involved? I smiled when I read that.) Congress’ instructions to the judges, as successfully inserted into law by the RIAA, are ambiguously written gibberish (“the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller”). Those instructions have led to an untenable decision that, if it stands, will shut down virtually an entire industry.

Clearly, the law needs its language to be cleaned up so that future panels of CRB judges arrive at more reasonable outcomes—decisions that balance the needs of copyright owners, copyright users, and the general public. That’s the primary purpose of the Internet Radio Equality Act (IREA) that’s now up to 111 co-sponsors in the House and gathering support in the Senate.

But during this current 2006-2010 period, how do we keep the industry alive? I agree with you that the arbitrary imposition of an arbitrary rate by Congress is a bad idea. Thus, the Solomonic idea behind the IREA: Since the dynamics of Internet radio are very similar to satellite radio, and since there was a negotiated rate settlement between copyright owners and satellite radio operators (the rate being confidential but which is clearly, based on the companies’ financial statements, to be less than 7.5% of revenues), let’s apply that rate (7.5%) for the interim period. In this approach, Congress is not arbitrarily setting a rate.

Jay, in a world where virtually all other forms of radio are paying approximately 5% of their revenues for this royalty, if Internet radio properties are forced to pay between 50% and more than 1,000% of their revenues for the same royalty, it’s almost certain that Internet radio will shut down.

And that’s not in the best interest of webcasters (obviously)...or musicians...or record labels...or, most importantly, the intended beneficiaries of copyright law—the public.

Kurt Hanson is Publisher of RAIN: Radio And Internet Newsletter, the leading trade publication for the field of Internet radio, and CEO of AccuRadio.com, a popular multichannel Internet radio property that reaches almost half a million unique listeners per month. He previously worked at WLS/Chicago and WLUP/Chicago.

What is the ultimate goal of copyright?

Kurt,

Article I, Section 8 of the U.S. Constitution gives Congress the power “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

It is somewhat of a myth to contend that copyright law was created to promote the interest of the “General Public.” The words don’t appear in the constitutional grant of power to Congress. The key word that does appear is “progress.” This word has been used by some—especially those on the Copyleft—to promote a balancing of interests between the public’s right to access, and the artist’s exclusive rights under copyright law. I believe that part of the grant addresses indirectly the concept of a “public good”—but I believe it is minimal in comparison to the ultimate goal of copyright as envisioned by the Founding Fathers—to wit, providing “incentive” to artists to create. This is the ultimate embodiment of what the public needs—artists who are paid enough that they will create more and more art. The means of distribution must then work within those parameters—and then all parties, including the public, will be well served.

You are right that Copyright is a political animal—it is what Congress wants it to be. But you are seeking and promoting a compulsory license regime. The only way a compulsory license regime of any kind can work is if there is an independent judicial means to determine the rate, and an appeal process. If we accept your contention that going to Congress is appropriate every time someone does not like the outcome of the litigation, then the 10 million or so dollars spent on the webcasting litigation will simply be flushed down the drain, as will all other monies spent on litigations in the future. This is an awful precedent. Parties will not take the rate proceedings seriously, and there is no incentive to even participate. Congress has passed laws creating the rate making body, and has provided that body with enough guidance that its decisions are judicious. The correct response to a judgment you do not like is to appeal, not to run to Congress seeking a political solution.

Clear Channel is in the district of the last Republican chairman of the House Judiciary Committee. Microsoft is in the district of the sponsor of the legislation you support. This is no way to determine the fair value of music—this is the recipe for making sausage.

Jay

Nobody is helped by radio silence

Jay,

I’m just a layman, but it seems to me that the beneficiaries of the “[promotion] of the Progress of Science and useful Arts” would in fact be the general public (if not in those exact words). This is as opposed to the idea that primary beneficiaries of copyright law were intended to be the authors and inventors.

To support my point, here are the criteria used in most Copyright Office proceedings for setting a royalty rate (including for satellite radio). Note which point is point (A):

In my opinion, that’s the standard that the CRB judges should have been told by Congress to use for the Internet radio proceedings—not the “willing buyer / willing seller” gibberish that the RIAA got inserted into the DMCA. Using the RIAA-proposed language as the standard was clearly a mistake; Congress did not mean for Internet radio to be silenced for 3½ years beginning July 15th. (That’s not maximizing the availability of creative works to the public!)

You’re right that an appeal to the courts would be appropriate in most situations. However, the courts can only interpret the law that Congress passed. Since the error here is in the law; the change required is there.

Kurt