Examining Arguments in Controversy
Over Webcasting Royalty Rates

Entertainment Law & Finance, September 2002.
By Steve Gordon

Both webcasters and copyright owners have expressed strong dissatisfaction with the decision by the Librarian of Congress this summer on the webcasting royalty rates for the use of sound recordings. (See sidebar below for details on the rates.) The first payments are due in October, but legislation has been proposed to revise it, and webcasters are challenging the Librarian's decision in court.

The most important quality of webcasting-also known as Internet radio-to listeners of music and the music business in general is the enormous variety of programming it can offer. Broadcast radio is profoundly constricted, compared with the Internet, by the limited broadcast spectrum. Therefore, the number of channels available on standard AM/FM radio is limited in most locations to a couple of dozen choices. Those choices are further limited by the domination of commercial radio by a handful of corporate conglomerates.

Internet radio, as opposed to traditional radio, could potentially offer listeners an indefinite number of choices including music. Hundreds if not thousands of Internet radio stations are already available to listeners. And the music is as diverse as the not-for-profit and commercial operators running the stations. In addition, a listener is not limited by geography-he or she can listen to a favorite station anywhere in the world with an Internet connection. However, at present many listeners don't have the equipment needed for good reception because of limited bandwidth, slow Internet connections and/or computers not connected to home entertainment systems. But many experts agree that as the technology becomes more sophisticated and consumers upgrade their home entertainment systems, the potential for Internet radio and webcasting are unlimited, unless, as the webcasting community argues, una! ffordable royalty rates stamp them out before they have a chance to succeed.

The Law
In 1995, Congress established a sound-recording performance right for digital transmissions by enacting the Digital Performance Right in Sound Recordings Act (DPRA). In 1998, Congress further amended the Copy-right Act with the Digital Millennium Copyright Act (DMCA) to provide that eligible nonsubscription services may secure a statutory license for the use of sound recordings instead of having to negotiate with individual artists and labels. Transmissions eligible for the statutory license must be noninteractive and the primary purpose of the service must be to provide audio or other entertainment programming to the public. A number of additional requirements are set forth in the DMCA, including that a service cannot play during a three-hour period more than three songs from a particular album, including no more than two consecutively, or four songs by a particular artist or from a boxed set,! including no more than three consecutively.

The DMCA also stipulated that rates for the statutory licenses for webcasting and Internet radio must be the rates that most clearly represent the rates that would have been negotiated in the marketplace between a willing buyer and a willing seller. The DMCA additionally stipulated that if the services using the statutory license and the copyright owners (usually record companies) of the sound recordings could not agree on the royalty rates for the license, the rates and some of the terms of the license were to be established by the Librarian of Congress, who would be required to convene a copyright arbitration royalty panel (CARP) composed of three independent arbitrators. During the initial negotiations, the record companies asked for more than many webcasters wanted to pay.

In 2001, the U.S. Copyright Office established a CARP to resolve the issue. This particular CARP (one of many that the Copyright Office has empowered, each ruling on a different issue in a different industry) held hearings, reviewed testimony and evidence from copyright owners and webcasters and delivered a report to the Librarian with recommended rates and terms. The Register of Copyrights reviewed that report and recommended to the Librarian the revised rate and terms reported in the sidebar on this page.

Webcasters' and Internet Radio Stations' Position
The webcasters argue that the rates adopted by the Librarian of Congress are still much too high and may put many of them, especially the small and startup webcasters, out of business. Many of them would prefer a percentage-of-revenue model similar to that required by the performing-rights societies. To give some idea of the costs involved, assume that 20,000 people "tuned in" to listen to a commercial webcaster transmit 50 songs each day. That would amount to $700 (20,000 x 50 x .0007) per day and about $250,000 dollars per year. In addition, there would be the extra charge of 8.8 percent for a license to make "ephemeral" recordings. If the service were a non-Corporation for Public Broadcasting (CPB), noncommercial broadcaster (which includes most college radio stations), the amount due would be about $70,000 (plus 8.8 percent for the ephemeral reproduction license).

More than 200 Internet-based stations reportedly have shut down already because of the new rates. In addition, according to many webcasters, even the lower rates applicable to non-CPB, noncommercial webcasters are, still too high given their limited budgets. For instance, NYU and UCLA both have closed down their web stations in the wake of the announcement of the new rates.

Finally, the webcasters argue that the record companies are trying to stamp out a new form of delivering music that will offer the consumer many more choices. Ultimately, the webcasters contend, the labels are just hurting themselves, as there are so few places on traditional radio (or TV) that will play any new music.

The webcasters claim that Internet radio-which, similar to regular broadcast radio, does not pay royalties for uses of sound recordings-promotes sales of records. They point to the fact that most web radio outlets list title and artist information onscreen while songs are playing, along with a link to online retailers, like Amazon or CDNow, where consumers can purchase records.

The Copyright Owners' Position
The Recording Industry Association of America (RIAA), on the other hand, complains that the rates are far too low, that the CARP's recommendations were already too low and that the Librarian of Congress made matters worse. The record companies argue that if the rates seem high, webcasters must understand that more and more music will be "consumed" through the Internet, including through webcasting, and thus will have the effect of decreasing already faltering record sales. Record companies claim that if the recording industry is to survive, future income must come more from licensing than from sales of traditional CDs. They also point out that the income they are demanding would be shared with artists, background musicians and music unions.

The RIAA also argues that to exempt Internet radio from paying for recorded music just maintains business models that have not proved themselves able to succeed in the free marketplace. The government shouldn't be cutting small-time webcasters breaks just because they don't make much money. The labels also argue that because many webcasters are currently generating little revenue, a percentage-of-revenue rate would require copyright owners to allow extensive use of their property with little or no compensation.

As noted by John L. Simson, the executive director of SoundExchange (an organization comprised of the five major record companies, plus smaller labels and artist representatives, which licenses, collects and distributes public performance revenue for sound-recording copyright holders within such digital channels as cable, satellite and webcast transmissions), the "decision by the Librarian of Congress, which disregarded voluminous economic and business evidence supporting a significantly higher rate, means that once again artists and record companies will not receive fair value for their labors . . . . Recording artists and sound recording copyright owners should not be forced to subsidize the growth of webcasting as we've been forced to subsidize the radio industry for the past 70 years. Fair and equitable royalties and nothing less should be paid when recordings are used to build these new businesses."

What Happens Next?
More than two dozen Internet radio stations announced that they would be appealing the decision of the Librarian of Congress by filing notices of appeal with the federal appeals court in Washington, D.C. The RIAA also filed a notice of appeal on behalf of its constituents, the major record labels and many independent labels. Jonathan Potter, executive director of the Digital Media Association, said, "I am hopeful that a negotiated resolution will enable our industry to withdraw this appeal, but there has been no indication that the RIAA or SoundExchange are seriously interested in royalty rates that will enable thousands of small webcasters to survive, or that will enable music lovers to continue enjoying the diverse Internet radio experience that promotes myriad artists whose music is never performed on traditional radio."

Legislative Proposal
On July 26, Reps. Jay Inslee, D-Wash., George Nethercutt, R-Wash., and Rick Boucher, D-Va., introduced the Internet Radio Fairness Act (H.R. 5285) in the U.S. House of Representatives. The new bill would exempt small-time Web-based radio stations (companies with less than $6 million in annual revenue) from paying the full royalty. This bill would thereby protect a large number of Internet radio stations that claim they would otherwise be forced out of business by the Librarian's rates. This bipartisan effort is supported by several important members of the House, including Rep. Donald Manzullo, R-Ill., chairman of the House Committee on Small Business. To date, however, only 20 co-sponsors have signed on, and no hearings are currently scheduled. A spokesman for webcasters observed: "It seems like the heavy-hitters are on the RIAA's side."

A Look at the Librarian of Congress' Decision on Terms and Rates for Webcasting Royalties
Last June, the Librarian of Congress accepted the recommendation of the Register of Copyrights to reject some of the terms and rates recommended by a copyright arbitration royalty panel (CARP) in connection with the statutory license for eligible nonsubscription services to perform sound recordings publicly by means of digital audio transmissions (aka webcasting). The most significant difference between the CARP's determination and the Librarian's decision was that the Librarian abandoned the CARP's two-tiered rate structure of $.0014 (14/100 of 1 cent) per performance for "Internet-only" transmissions and $.0007 (7/100 of one cent) for each Internet retransmission of a performance in an AM/FM radio broadcast. Instead, the Librarian decided that the rate of $.0007 should apply to both types of transmission (or $0.07 for every 100 listeners to a given song).

The Librarian also abandoned the CARP's two-tiered rate structure of $.0002 for noncommercial broadcasters (excluding stations not affiliated with the Corporation for Public Broadcasting (CPB), which made a special deal with copyright owners) who simulcast their AM or FM stations on the Internet and $.0005 for noncommercial stations that transmit archived programming. The Librarian determined that the rate of $.0002 should apply to both types of transmissions. Also, the fee that webcasters must pay for the making of ephemeral recordings needed to facilitate the transmission of performances of sound recordings was reduced from 9 percent of performance fees to 8.8 percent. (For a comprehensive comparison of the rates recommended by the register with the CARP's recommendations, see "Webcasting Rates" at www.loc.gov/copyright.)

The Librarian established Sept. 1, 2002, as the effective date of the rates. In addition, webcasters and Internet radio stations using the statutory licenses will have to pay royalties for all their activities under the licenses since Oct. 28, 1998. Full payment of royalties for all pre-Sept. 1 licensed activities must be made by Oct. 20, 2002. Payments for the month of September are due on or before Nov. 14, 2002, and payments for subsequent months will be due the 45th day after the end of each month for which royalties are owed.

Steve Gordon is an entertainment attorney and consultant based in New York. Telephone: (917) 912-3400; e-mail: steve@stevegordonlaw.com. He formerly served as director of business affairs for Sony Music Entertainment.