Digital Performing Rights in Sound Recordings: The U.S. Experience

15 Jul Digital Performing Rights in Sound Recordings: The U.S. Experience

Posted at 16:19h in Uncategorized by Gerald Stern

By Marc Jacobson, Esq., Greenberg Traurig, New York Office

July 2002

The U.S. Librarian of Congress, James H. Billington, waved his proverbial wand and settled the hotly-debated issue of what the rates and terms for webcasting and ephemeral recordings should be in the United States. On May 31, ninety days after the initial February 20^th determination on the rates by the Copyright Arbitration Royalty Panel (the “CARP”), the Librarian rejected the CARP’s rate schedule. On June 20, the Librarian made his own determination which now constitutes the final rates, subject to litigation. In light of the new schedule of rates set forth by the Librarian, one is forced to ask, how settled is this debate really?

Summary Conclusion of the Proceedings

The Librarian’s determinations revised the CARP findings as follows:

Internet only transmission rate was changed from 0.14 cents to 0.07 cents per performance, and each listener creates a separate performance*
In the case of Non-CPB, Non-Commercial Broadcasters:
- Archived programming subsequently transmitted over the Internet, substituted programming and up to two side channels was reduced from 0.05 cents to 0.02 cents.
- Transmissions on any other side channels were reduced from 0.14 cents to 0.07 cents.
The ephemeral license fee was reduced from 9% of performance fees due to 8.8% of performance fees due.
Business Establishment Services went from being statutorily exempt to now owing 10% of gross proceeds
The minimum fee for Business Establishment Services was increased dramatically from $500 to $10,000.1

The CARP based its rate for webcasting largely on an agreement reached by the Recording Industry Association of America (“RIAA”) and Yahoo!, Inc. in the year 2000. The CARP contended that the RIAA/Yahoo! agreement represented the best evidence of what rates would have been negotiated in the marketplace between a “willing buyer and willing seller” for a license to engage in webcasting of radio retransmissions and Internet-only transmissions.2

In the agreement, Yahoo! made an initial payment to the RIAA of $1.25 million for the first 1.5 billion transmissions. The CARP calculated a “blended” per performance rate of 0.083¢ per performance by dividing the amount of the lump sum payment by the number of performances for which it was made.3 After the first 1.5 billion transmissions, Yahoo! would pay a rate of 0.14 cents for Internet-only performances and a rate of 0.07 cents for radio retransmissions. The CARP adopted this two-tiered system in their initial February 20^th determination. The justification for the disparity in rates was based on the alleged promotional value found in radio retransmissions but not in Internet-only transmissions.4 The Librarian rejected this two-tiered royalty structure as arbitrary.

Calculating the average of (1) the blended rate 0.083¢ for the first 1.5 billion transmissions, and (2) the blended rate of 0.065¢ that the CARP found Yahoo! had perceived it was paying for all subsequent transmissions, the Register of Copyrights calculated that the effective (or blended) RIAA/Yahoo! royalty rate was 0.074¢ for each performance transmitted by Yahoo! to each individual recipient.5

Webcasters and broadcasters asked that the Librarian reject the CARP’s approach and provide them with an option to pay a rate based on a percentage of their revenues, rather than a per-performance rate. However, the Panel concluded that a percentage of revenue approach was less desirable for a number of reasons including:

a per-performance rate is directly tied to the right being licensed (i.e., the right of public performance).
due to varying business models among webcasters, some of which offer features unrelated to music, identifying the relevant revenue base against which a percentage should be applied consistently would be “complex and difficult.”
many webcasters are currently generating very little revenue, so a percentage of revenue rate would require copyright owners to allow extensive use of their property with little or no compensation.6

The Librarian found these conclusions reasonable and adopted them.

Was the RIAA/Yahoo! Agreement truly “arms-length” between a willing seller and a willing buyer?

The RIAA/Yahoo! agreement takes on new meaning in light of a recent statement by Mark Cuban, NBA owner and Broadcast.com. founder. (Broadcast.com was sold to Yahoo!) Cuban said in a letter to KurtHanson.com, also known as RAIN: Radio And Internet Newsletter: “The Yahoo! deal I worked on . . . was designed so that there would be less competition, and so that small Webcasters who needed to live off of a ‘percentage-of-revenue’ to survive couldn’t.”7

“Whereas Congress instructed the Librarian and the CARP to set a rate based on what a willing buyer and willing seller would pay, taking into account several different criteria, both the CARP and Billington set a rate based almost exclusively on what one grudging seller and one atypical buyer did pay, taking almost none of the other criteria into account,” said radio industry expert Kurt Hanson after Cuban’s comments were made public.8

Statutory Underpinnings

1976 Copyright Act:

Section 114 of the US Copyright Act historically provided that “[t]he exclusive rights of the owner of copyright in a sound recording are limited to the rights specified by clauses (1), (2), (3) and (6) of section 106, and do not include any right of performance under section 106(4).”9 Thus in traditional radio, only the owners of the copyright to the musical composition are compensated for the use of their copyrighted work. While songwriters and music publishers receive performance royalties from airplay on radio and television, radio stations perform copyrighted sound recordings for free. That is, historically the only consideration provided to owners of the sound recording copyright, a group into which record labels fall, is promotional.

Digital Performance Right in Sound Recordings Act of 1995:

The Digital Performance Right in Sound Recordings Act of 1995 (the “DPRA”)10, essentially gave record labels and other sound recording copyright owners a second chance to collect performance royalties from the exploitation of those recordings. The DPRA gave to sound recording copyright owners the right to perform their works publicly by means of certain digital audio transmissions, subject to certain limitations and exemptions.11 However, the DPRA placed a limit on this performance right by creating a new statutory license that allows nonexempt, non-interactive subscription digital audio transmission services to publicly perform those recordings through digital audio transmission.12 In order to operate under the license however, eligible digital audio services must comply with certain conditions such as providing payment for the use of the license and adherence to notice and record keeping requirements.13

Digital Millennium Copyright Act:

In 1998, Congress enacted the Digital Millennium Copyright Act (the “DMCA”)14, which amended section 114 by renaming the subscription services covered by the DPRA as “preexisting subscription Services.”15 The DMCA also expanded the statutory license in Section 114 to include new categories of digital audio services that may operate under the license. The three categories created by the DMCA are: (1) preexisting satellite digital audio radio Services, (2) new subscription Services and (3) eligible non-subscription transmission Services. The DMCA also amended 17 U.S.C. §112 by adding a new license that permits digital audio services to make ephemeral recordings of a sound recording to facilitate the transmission permitted under Section 114.

Non-Interactive Performance Requirement and Soundexchange:

In order to qualify for the compulsory license, an Internet transmission must fit the following five criteria:

it is non-interactive
it doesn’t exceed the sound recording performance complement
it doesn’t publish a program schedule or specify the songs to be transmitted
it doesn’t automatically switch from one program channel to another, and
it is accompanied by certain information, such as song title and recording artist.16

To be non-interactive, a site cannot allow a user to request songs to be played particularly for that user.17 A site can, however, permit people to request songs, which are then played to the public at large.18 To satisfy the sound recording performance complement, a site can play, within any three-hour period, three cuts from a CD, but no more than two cuts consecutively.19 Or, a site can play four songs from any singer or from a boxed CD-set, but no more than three cuts consecutively.20

A new organization called Soundexchange, formed under the RIAA, will collect performance royalties for sound recording copyright owners, feature and non-featured artists.21 The organization will perform the function of licensing those who wish to engage in the public performance by digital transmission of music, and collect the license fees and distributes royalties to those whose music was performed.

If a digital broadcaster does not fall under the non-interactive compulsory license, it must procure a performance license from each recording artist whose song it desires to play. Since most artists have assigned these rights to their respective record labels, the digital broadcasters must acquire agreements from scores of separate corporations, a dynamic that gives rise to the concern that each record label could refuse a request for a performance license, or make the digital broadcaster pay a prohibitive price. Soundexchange only handles the collection of royalties from compulsory licenses to non-interactive streaming services that use satellite, cable or Internet methods of distribution, and thus does not aid in resolving potential issues that may arise for interactive streaming services.22

The Present State of Affairs

After the Librarian announced his determination on June 20, it seems that both sides of the royalty-rate debate are unhappy with the outcome. On the Soundexchange website, John L. Simson, Executive Director of Soundexchange stated:

“Today’s 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. There is a reason why we have the expression, “I can get it for a song”. It is because we, as a culture, devalue artistic creation. This is just another example of that cultural discrimination.23

On the other side, webcasters argue that the proposed royalty rates are too high, and will effectively drive most existing sites that stream audio out of business. On the SaveInternetRadio website, a news flash alarmingly reads: “Industry in Crisis! Librarian of Congress sets a royalty rate for Internet radio that will bankrupt most webcasters!”24 Under the new rate schedule, existing digital broadcasters fear that they cannot possibly make enough money to break even, much less turn a profit.

Furthermore, under the reporting standards, webcasters are required to report to the Copyright office with extensive information about every streamed program in a specific data file format. Audio-streaming stations are required to provided the date and time of the transmission, the numeric designation of the place of the sound recording within the program, the IRSC code of the recording, and the UPC code of the retail album, among other data.25 Broadcasters argue that they simply do not have access to the information needed to comply with these requirements, and will be forced out of business as a result. However, Soundexchange holds that it will provide detailed reports to copyright owners so that they may process their royalties, and handle subsequent distributions. These reports will include a summary of performances and financial information.26

This decision represents an attempt – and in many people’s opinions, a feeble one – to balance the interests of both sides of the webcasting debate. The good news is that a decision was reached, and stability may ensue in the marketplace, at least until the end of this year at which point a new CARP will be assigned and there may be further attempts to amend the rate determination. The risk in the decision is that these attempts to challenge the rate structure are successful, especially in light of Mr. Cuban’s public statements regarding his strategy in negotiating the RIAA/Yahoo! deal, which played an integral role in the present outcome. Since the fees must be paid retroactive to October 28, 1998, the effective date of the DMCA, these vicissitudes in arriving at a final workable webcasting royalty structure work against creating stability in the market. And because these fees must be paid by October 20 of this year, many webcasting companies may not be around next year to enjoy any stability that may result from a settled structure.

My own view is that a royalty calculated on a percentage of revenue, subject to an annual minimum rate would have been more preferable. The CARP’s argument and the Librarian’s acceptance of the argument that it is “difficult” to separately analyze income from webcasting as distinguished from other sources of income is hardly persuasive. National television networks have multiple sources of revenue, but royalties to the other performing rights societies are calculated regularly. Surely, with the ability to track and provide more information than is usually necessary, webcasters, and their content suppliers can find a way to provide meaningful information about the usage and listeners of their sound recordings. The hurdles that webcasters would face in extracting this information, while presenting accounting problems, would be much preferred to the impending wave of company shut-downs that the statutory rate structure threatens to impose. So, it seems to me that the debate over the royalty structure for webcasting is far from settled. The only thing that will bring resolution and stability to this infant industry is a re-examination and re-working of Billington’s determination in order to devise a system with teeth that doesn’t threaten to bite the heads off of most of the webcasters out there.

*Please remember this is seven-hundredths of one cent, not seven cents. Some media reports used the higher, erroneous figure.

© 2002 Marc Jacobson All Rights Reserved. The extraordinary assistance of Ananda Sen, Stanford University Law School, Class of 2003 is gratefully acknowledged, as is that of Brenda Chavez, Columbia University Law School, Class of 2003.

Footnotes

1 Summary of the Determination of the Librarian of Congress on Rates and Terms for Webcasting and Ephemeral Recordings, at http://www.copyright.gov/carp/webcasting_rates_final.html.

2 See Id.

3 See Id.

4 See Id.

5 See Id.

6 See Id.

7 Ben Silverman, Controversy over Net Royalty Rates, NYPOST.com.

8 Id.

9 17 U.S.C. §114(a)

10 Pub. L. No. 104-39, 109 Stat. 336 (1995)

11 17 U.S.C. § 106(6).

12 17 U.S.C. § 114(d)(2).

13 17 U.S.C. § 114 (f)(4)(A).