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AG News: 3/8/2007

When the Internet Radio Copyright Dust Settles...

I received over a dozen calls yesterday from webcasters and writers wanting my take on what the Copyright Royalty Board ruling means. Today's assessment is that this horse is at fast gallop, and it looks like only a few riders have their feet in the stirrups. If you've ridden a horse you know having those feet in the stirrup is required when you try to pull back on the reins.

Want to slow this doomsday scene down? Take a few hours to read through the 115-page CRB ruling. As reading it is more a cure for insomnia, maybe the Rip Van Winkle effect will take hold and when you wake up this copyright issue will be history - or, at the very least, still on appeal.

Though radio industry trade magazines are lacking in coverage about the implications of this ruling, you will find stories on it in nearly every major publication. Each is covering this rate increase as if it's the end of internet radio; while the ruling is damaging, I'm not inclined to believe this true. The silver lining in this cloud could be an elevation of online radio advertising rates to those that are equitable with the radio industry in general.

The royalty rates (on page 105 of the ruling) read as follows: Commercial Webcasters: For all Internet transmissions, including simultaneous Internet retransmissions of over-the-air AM or FM radio broadcasts, a Commercial Webcaster will pay a performance royalty of: $.0008 per performance for 2006, $.0011 per performance for 2007, $.0014 per performance for 2008, $.0018 per performance for 2009, and $.0019 per performance for 2010.

Millions of dollars are expected to change hands, and many webcasters are expected to close their streams. If these rates hold, there's a shakeup under way that will leave the industry in better shape.

Before you start clicking the "feedback" button, remember that these are the thoughts of the Copyright Royalty Board. You see, the Board's feeling is that it has not convened to save an industry, but to decide equitable rates for the publishers, writers, artists, copyright holders, and musicians when their work is used online. The Board wasn't considering whether small webcasters will live or die. (Someone professed hearing a Board member mutter "It's not my job, man!", but that's only hearsay.)

Its job was to put forth how people should be paid by businesses using their creative work. And (this is where it gets hairy), depending on which side of the fence you sit, that payment should be based on either a percentage of revenue generated by the business (the webcaster's side), or payment should be relative to the amount of use of the "creative work"; i.e., what that creative work is worth (SoundExchange's view). The CRB's ruling sides with SoundExchange. Here are a few reasons why the Board has taken this view:

1) A number of parties gave testimoney to the Board. One such group was a small band of webcasters whose position was not well received by CRB, as is evident from this part of its ruling (page 18): In short, among the parties on both sides who have proposed rates covering Commercial Webcasters, only Small Commercial Webcasters propose a fee structure based solely on revenue[my bold]. However, in making their proposal, this group of five webcasters clearly is unconcerned with the actual structure of the fee, except to the extent that a revenue-based fee structure–especially one in which the percent of revenue fee is a single digit number (i.e., 5%)– can protect them against the possibility that their costs would ever exceed their revenues.7

That "7," which ends the statement, is in reference to a footnote reading: It must be emphasized that, in reaching a determination, the Copyright Royalty Judges cannot guarantee a profitable business to every market entrant. Indeed, the normal free market processes typically weed out those entities that have poor business models or are inefficient. To allow inefficient market participants to continue to use as much music as they want and for as long a time period as they want without compensating copyright owners on the same basis as more efficient market participants trivializes the property rights of copyright owners. Furthermore, it would involve the Copyright Royalty Judges in making a policy decision rather than applying the willing buyer/willing seller standard of the Copyright Act.

So, this argument that higher rates will put many webcasters out of business was not considered. The Copyright Royalty Board doesn't care if a business survives. (To quote Bill Murray, from whichever comedy it was that made me burst out with this line: "That's the fact, Jack!")

2) An even more decisive negative was laid out in the CRB ruling on page 23. It reads: ...the way that the contending parties, in particular SoundExchange and DiMA, suggest using a revenue-based metric in their rate proposals does not square with the basic notion agreed to by their respective experts (Dr. Brynjolfsson for Sound Exchange and Dr. Jaffe for DiMA) that the more the rights being licensed are used, the more payments should increase in direct proportion to usage. Ouch! The radio station group's own expert agrees that the more you use the more you should pay.

3) This ruling also refers to "Webcaster I," the first round of talks about royalty payments that were held in 2002. Webcaster I made clear that the willing buyers are the services which may operate under the webcasting license (DMCA-compliant services), the willing sellers are record companies and the product consists of a blanket license for each record company which allows use of that record company’s complete repertoire of sound recordings.” 67 FR 45244 (July 8, 2002) (emphasis added). None of the parties has adduced persuasive evidence that this definition of sellers has been altered in the marketplace as a result of greater or lesser competition between these sellers since Webcaster I was issued. For example, [during hearing that produced these words] no party provided any empirical evidence on the elasticity of the demand curve facing these firms in the market or, more importantly, whether it has changed since Webcaster I. Similarly, no party produced persuasive evidence that market share had changed substantially among the record companies in the hypothetical marketplace since Webcaster I.19.

IMHO, here's the underlying thread that holds the CRB's decision together: During the hearings that preceded the CRB ruling, there was little to no "evidence" presented on many fronts covered by the webcasters (or users of the music). There were pleas made on emotional levels, scenes painted using "what if" scenarios, and threats that "...a hiking of rates would deprive the public of a new industry." All of which can be categorized under the heading of objective arguments with bias.

There are a number of other items that can easily be pulled from the ruling; and, if you keep an objective eye, they will indicate this is not as much a doomsday scenario as is being speculated. I'll put one here. You can read the rest. This appears on page 102: By way of example, if a service transmitted one hour of programming to 10 simultaneous Listeners, the service’s Aggregate Tuning Hours would equal 10. If 3 minutes of that hour consisted of transmission of a directly licensed recording, the service’s Aggregate Tuning Hours would equal 9 hours and 30 minutes.

Translated: The more internet radio plays unsigned artists who have given a waiver for their music to be played, the less that station owes to SoundExchange. This was a point that didn't hold during Webcaster I, where the blanket license prevented such an approach.

In short, after such a long-winded refrain, the sky is not falling for the internet radio industry. But it will come down on many individual stations who can't afford current or past amounts due SoundExchange. At some point, balance will be brought to radio online - where the public will listen more, where advertising rates will increase, and where online radio stations will make enough revenue to pay all their bills. You just will no longer have tens of thousands of stations to choose from. (Do you really need that many?)

There are many, many, very intelligent people working behind the scenes trying to rectify this "injustice." DiMA is in full court press. Individual webcasters are circulating petitions, like this one from Bill Goldsmith's vastly popular "Radio Paradise." And, there will be many politicians who see this as a wagon they should jump on.

It's important to note that though radio industry publications are not giving this issue adequate coverage, the radio industry as a whole is just as affected by what CRB's put out as the smallest online broadcaster. Anything it streams online is subjected to the same heavy-handed rates. You can bet that with broadcasting finding the internet more intriguing lately, its executives are also realigning their defense, because these rates are going to be challenged on appeal.

Personally, I believe these rates an injustice. But, removing my bias and reading what the Copyright Royalty Board has to say through its ruling, I'm not surprised that they came up with this decision.

On the next go-around (the appeal, that is), evidence needs to be presented that shows the amount paid to artists is too high based on the value of their work, and not on whether the users of that work can pay.

Here's one point that was not mentioned in the pages of the report that I read, yet it is a significant issue: What is a song worth, and why should a popular song be worth the same as one that's only so-so? That's the value that should be in question.

From: Ethan B - San Francisco, CA

Thanks for a level headed analysis. The fundamental problem with this
ruling is that it will result in over 60% of the total revenues generated
by Internet radio to go straight to SoundExchange. (You can check out
the math at
60% of revenue seems high for a stream that the consumer neither selects
nor keeps. By comparison, Apple pays about 70% of revenue to the labels
for a song the consumer selects and keeps. In fact, subscription services
like Rhapsody pay a $3.50 revenue guarantee on a $9.99 subscription,
meaning that revenue guarantees for on-demand streams around 35%
of revenue. By both these proxies, 60% of the market is way out of line.

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President, Audio Graphics
Ken Dardis
Online Since January 1997

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