As reported on Pandora's blog on July 7, 2009, "the royalty crisis is over!" After two years of negotiation, three internet webcasters, AccuRadio, radioIO, and Digitally Imported, reached an "experimental" settlement with SoundExchange, the group which collects royalties on behalf of artists and labels. The Settlement affects royalty rates to be paid for the streaming of sound recordings online, and gives "pureplay webcasters" (those that generate a predominant portion of their revenue from the online streaming of sound recordings under a statutory license) an alternative to paying the fees directed in May 2007 by the Copyright Royalty Board ("CRB"). Webcasters had immediately protested the rates set by the CRB, the three judge panel which sets rates for statutory copyright licenses. They argued that the costs would run them out of business. Under the Settlement, artists are essentially providing pureplay webcasters a discount from streaming rates set by the CRB in exchange for a share of the revenue generated by the internet webcasters. Other pureplay webcasters, such as the popular Pandora, are also opting-in to the Settlement's terms.
Previous CRB Decision
The Settlement came just days before a July 10, 2009 decision of the US Court of Appeals for the District of Columbia upholding the royalty rates established by the CRB back in May 2007. The rates were established to comply with the Digital Millennium Copyright Act (DMCA), passed by Congress in 1998, which requires performance royalties to be paid for satellite radio and internet radio broadcasts in addition to publishing royalties. In contrast, traditional radio broadcasters pay only publishing royalties and no performance royalties. Under the Copyright Act, the CRB judges were required to set rates that "most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller." The CRB set the per-play rates for 2006-2010 at $.0008 per play for 2006, set to increase to $.0019 by 2010; also requiring webcasters to pay a minimum fee of $500 for each channel broadcast (though SoundExchange later settled on an annual cap of $50,000). When a group of webcasters, led by the Digital Media Association (DiMA), sought review of the rates, SoundExchange defended the rates by providing expert testimony.
Webcasters argued that the "willing buyer-willing seller" standard used by the CRB was unfair as it did not take into account the potential impact of the royalties on the stability of the businesses that would be subject to them (in this case, webcasters). By contrast, the standard used to calculate rates for satellite radio in a separate decision by the CRB, based on section 801(b) of the Copyright Act, did, assessing not only the economic value of the sound recording, but also the public interest in the wide dissemination of the copyrighted material and the impact of the royalty on the service using the music. This standard resulted in a rate for satellite radio companies of 6-8% of annual revenues, which is much lower than what SoundExchange wanted, and significantly lower than the rate of 40-70% of annual revenue the CRB set for internet radio.
Since the CRB set the internet radio rates back in 2007, webcasters have expressed their opposition, arguing that they could not stay afloat and also pay the rates. Pandora, for example, publicly criticized the rates, pointing out that the fees would take up approximately 70% of its $25 million in revenue, and likely run the company into the ground. Before the 2007 decision by the CRB, internet and satellite radio companies were treated the same as terrestrial radio broadcasters. They were only required to pay composers of songs by purchasing blanket public performance licenses from ASCAP and BMI. The 2007 change was meant, in part, to account for the argument by the recording industry that internet play is a "substitute" for purchase of the actual recording, diminishing the amount of income an artist might otherwise receive.
The Settlement
The July 2009 Settlement between pureplay webcasters and SoundExchange was reached under the authority of the Webcaster Settlement Act of 2009, which granted webcasters an additional thirty days after enactment to negotiate an alternative royalty structure to the criticized rates set by the CRB.
The Settlement applies to all commercially-released sound recordings licensed under Sections 112 and 144 of the Copyright Act, and not just recordings released by members of SoundExchange. It provides an alternative rate structure for pureplay webcasters who elect not to pay the rates set by the CRB. The Settlement is retroactive to 2006 and set to be in effect until 2015 for large pureplay webcasters, and 2014 for smaller pureplay webcasters. The terms of the Settlement were officially entered into the Federal Register on July 17, 2009 (74 Fed. Reg. 34796, July 17, 2009), beginning the 30-day period within which eligible webcasters wishing to join must file a Notice of Election with SoundExchange. Any pureplay webcasters not signing on to the Settlement must continue to pay CRB rates.
Under the Settlement, webcasters opting into the deal are divided into three classes based on the size and characteristics of their business: 1) large pureplay webcasters; 2) small pureplay webcasters, and 3) pureplay webcasters that provide bundled, syndicated, or subscription services. All payments are made by the webcasters directly to SoundExchange, which collects on behalf of the artists and labels.
Large pureplay webcasters, those earning more than $1.25 million in annual revenue, are given the option of paying either 25% of total revenue or a per stream rate significantly discounted from that set by the CRB increasing from $.0008 for retroactive 2006 payments to $.0014 by 2015.
Small pureplay webcasters, those earning $1.25 million or less, have the choice of paying a percentage of revenue or a percentage of expenses. For 2009-2014, the percentage is set at 12% of the first $250,000 in gross revenue and 14% for earnings beyond that. For 2006-2008, retroactive payments of 10% of the first $250,000 and 12% after that are required to be paid. At all times, for small webcasters electing to instead pay a percentage of expenses, the rate is 7%. The Settlement also provides a transitional rate for small webcasters who exceed the $1.25 million revenue cap.
Webcasters providing bundled, syndicated, or subscription services, such as Rhapsody, will pay a set fee per performance equivalent to that set by an agreement previously reached between SoundExchange and the National Association of Broadcasters, discussed below, set at $.0008 in 2006 increasing to $.0025 in 2015.
All pureplay webcasters opting into the Settlement must pay a minimum $25,000 fee annually which can then be applied to their royalties owed, and also must provide SoundExchange with census reports accounting the actual recordings played and total listenership, and retain server logs for at least four years. Small webcasters can opt for less stringent reporting in exchange for a "proxy fee".
Conclusion
The Settlement comes with a sigh of relief in light of the pending doom felt by most pureplay webcasters after passage of the 2007 CRB rates. Although the Settlement was negotiated by only three webcasters, AccuRadio, radioIO, and Digitally Imported, Pandora has already confirmed its intention to sign on, and others are expected to follow. Pandora announced on its blog that it will begin limiting listening to 40 hours per month on the free version of its service. Listeners who use the service for 40 hours per month or more can then opt for unlimited listening for the remainder of that month for a $0.99 fee.
As a result of this Settlement, royalty rates for almost every member of the webcasting community are now shielded from the CRB rates by negotiated deals with SoundExchange. Most public radio stations have now elected to abide by the terms of an agreement between SoundExchange and the Corporation for Public Broadcasting ("CPB") which has introduced reduced rates for those noncommercial stations with a large web audience which were before required to pay at commercial rates anytime their internet audience exceeded 159,140. In addition, eligible commercial broadcasters simulcasting on the internet can now elect the terms under the deal negotiated between SoundExchange and the National Association for Broadcasters, under which new "per performance" rates are slightly lower than those set by the CRB.
Full CRB rates still apply to various religious and educational webcasters that have not reached agreement with SoundExchange. These remaining webcasters have 30 days from enactment of the Webcaster Settlement Act of 2009, which was signed by President Obama on June 30, 2009, to negotiate deals with SoundExchange.
As for other traditional radio companies, the music industry is pushing to create a level playing field for all forms of radio, by requiring all over-the-air radio to pay the performance royalties as well via a new bill called the Performance Rights Act (H.R. 848), introduced in February 2009. Webcasters support the idea, viewing the non-payment by terrestrial radio companies as both unfair to webcasters currently paying the fees, and to the artists left uncompensated when their works are played on traditional radio. The National Association of Broadcasters, however, has launched a campaign to avoid having to pay performance royalties, airing advertisements suggesting that over-the air radio is the life-line for artists, generating substantially more revenue than online webcasters, considering the size of audience, and arguing that any performance fees paid would ultimately end up in the hands of major record labels. Lawmakers in support of this view introduced in February 2009 the Local Radio Freedom Act, a resolution declaring opposition to "any new performance fee, tax, royalty or other charge on radio for music airplay" (House Resolution 49).
Vol. 53, June 2010