Update On Webcasting Royalty Rates
Part II of II

Entertainment Law & Finance, September 2004.
By Steve Gordon

Part One covered statutory licenses for sound recordings and performing rights licensing for musical compositions for webcasting purposes.

Originally a division of the RIAA, SoundExchange is now an independent, nonprofit performance-rights entity jointly controlled by artists and sound-recording copyright owners through an 18-member board of directors with nine artist representatives and nine copyright owner representatives. Artists receive 50% of royalties earned for each performance. The featured artist receives 45% of the total artist share. Non-featured artists receive a 5% compulsory rate established by law. The recording copyright owner, which may or may not be the actual label, receives the other 50%.

SoundExchange pays these shares out directly to the featured artists, labels and unions (AFTRA and AFM). All SoundExchange royalty distributions include payment of the 5% share for nonfeatured musicians and vocalists to AFTRA and AFM's Intellectual Property Rights Distribution Fund that collects and distributes this money on their behalf. Inquiries about royalties that may be due to nonfeatured musicians or nonfeatured vocalists can be directed to the AFM and AFTRA Intellectual Property Rights Distribution Fund at www.raroyalties.org.

SoundExchange recently distributed $3 million in streaming royalty payments to artists and labels, bringing the total payout to $16 million since 2001. The recent payments include royalties earned on XM and Sirius satellite radio transmissions, adding to revenue streams already in place from services like Music Choice, Muzak and DMX. Per a recent press release, "SoundExchange expects that its next distribution will include royalties from webcasters, foreign countries as well as these satellite services."

Following are the basic rules pertaining to new rates. For additional details, visit the SoundExchange website at SoundExchange.com.

Commercial Webcasters/ Broadcast Simulcasters

Commercial rates apply to nonsubscription webcasters that do not qualify for the Small Webcasting Settlement Act rates. The following rates were announced in the Federal Register on Feb. 6, 2004. These rates apply retroactively to performances made beginning on Jan. 1, 2003. All services must have made an initial payment covering the period Jan. 1, 2003 through Feb. 29, 2004, on or before April 14, 2004. Thereafter, services must make payments on a monthly basis on or before the 45th day following the end of each month (eg, the payment for March 2004 is due on or before May 15, 2004).

Licensees shall, at their election, pay one of the rates listed in Table 1, below.

For purposes of these rates, the term "performance" means each instance in which any portion of a non-public domain musical recording is transmitted to a listener. The term "aggregate tuning hour" means the total hours of programming that the service has transmitted during a month to all listeners in the U.S. from all channels and stations, less actual running time of sound. The SoundExchange Web site gives the following example of how the rates work: if a service transmitted one hour of programming to 10 simultaneous listeners, the service's aggregate tuning hours would equal 10. As an additional example, if one listener listened to a service for 10 hours (and none of the recordings transmitted during that time was directly licensed), the service's aggregate tuning hours would equal 10.

Noncommercial Webcasters/Broadcast Simulcasters

A "noncommercial webcaster/ broadcast simulcaster" is:

any webcaster/simulcaster, other than an educational entity or a National Public Radio/Corporation for Public Broadcasting member station, that is exempt from taxation under Sec. 501 of the Internal Revenue Code of 1986, 26 U.S.C. Sec. 501; has applied in good faith to the Internal Revenue Service for exemption from taxation under Sec. 501; and has a commercially reasonable expectation that such exemption shall be granted. The definition also includes a webcaster/simulcaster operated by a state or possession or any governmental entity or subordinate thereof, or by the U.S. or District of Columbia, for exclusively public purposes.

Noncommercial webcasters are entitled to pay the rates set forth by Librarian of Congress for non-Corporation-for-Public-Broadcasting (CPB), non-commercial broadcasters. Those rates are $ 0.02 cents per performance, plus an additional 8.8% for any temporary or "ephemeral" phonorecords that are made, with an annual minimum fee of $500. Those rates cover a simulcast of the station's over-the-air signal, plus up to two Internet-only side channels. Transmissions on additional side channels are subject to a per-performance rate of $0.0007 ($0.07 cents), plus an additional 8.8% for any ephemeral phonorecords.

The Librarian also abandoned the CARP's two-tiered rate structure of $.0002 (2/100 of once cent) for noncommercial broadcasters (excluding stations not affiliated with the 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 temporary or "ephemeral" recordings needed to facilitate the transmission of performances of sound recordings was reduced from 9% of performance fees to 8.8%.

Services that satisfy the definition of a "noncommercial webcaster" are entitled to choose to pay the rates set forth in Table 2, below, for the 1998-2004 license period in lieu of the rates set by the Librarian of Congress for non-CPB, noncommercial broadcasters.

Non-Commercial Educational Entities

A "noncommercial educational entity" (NEE) is a noncommercial webcaster that is operated by or affiliated with an officially sanctioned school, college or university. NEEs have the option of paying the minimum annual fees set forth below or the rates adopted by the Librarian of Congress for non-CPB, noncommercial broadcasters.

NEEs transmitting only one channel may elect to pay the rates in Table 3, below.

In addition to the rates in Table 3, there are also new rates just for business-establishment services that must operate under a broadcast-style model whereby all files are stored on central servers that transmit non-interactive audio programs to individual business establishments for real-time performance, new subscription services and pre-existing subscription services (eg, Music Choice, Muzak and DMX Music). Rates pertaining to these can be found at SoundExchange.com.

There are certain rates that continue to be confidential. The terms are not open to public scrutiny. These include deals with commercial services such as XM Satellite Radio and SIRIUS Satellite Radio, and non-commercial webcasters such as NPR stations and public stations that are qualified to receive funding from the CPB. Some webcasters complain that these rates should be made public and that the reason they are not may be that they contain rates that are more favorable than the rates being offered to them.

Steve Gordon is an entertainment attorney and consultant based in New York City who specializes in music, television and digital media. In addition, the author's Internet radio program on these topics can be heard at MyRealBroadcast.com. Web site: www.stevegordonlaw.com. The author expresses his appreciation to Reuben Atlas, his intern, for assistance in preparing this article.