A hard bargain: Proposal would accept new performance right burden for broadcast while easing burden on non-broadcast side.

The NAB has endorsed a “Term Sheet” which, IF fully adopted and implemented by all concerned (note the big “if”), would establish the existence of a “performance right” requiring radio licensees to pay royalties to musical artists (in addition to composers). 

And from that I think it’s safe to conclude that, while we have a ways to go before this becomes reality, there will one day be a performance right adopted into copyright law.  Despite the NAB’s continued insistence that it opposes the concept of a performance right – and despite the fact that the Term Sheet is, at least for the time being, still just a unilateral proposal and not a universally-embraced agreement – I’m convinced that a performance right will happen. This isn’t an endorsement or repudiation of the concept. It’s just a gut feeling of inevitability. My real questions involve “when” and “how much”.

The NAB’s Term Sheet, issued and delivered to the musicFirst Coalition on October 25, 2010, is couched as a “take it or leave it” offer to jointly move the Performance Rights Act (PRA) through Congress. As I’ve said before, taking affirmative steps to resolve the long-running/long-rancorous PRA issue in Congress may not be a bad thing. That’s especially true as long as the NAB (a) continues to hold the upper hand on the Hill vis-à-vis the PRA, and (b) takes care to ensure that all of its members, big and small, are satisfied that their interests are being adequately protected.

For now, the NAB must feel it does have that upper hand: the Performance Rights Act is not likely to pass in 2010, so if the music industry wants some performance right sooner rather than later, it will have to work with, not against, the NAB.  But is the NAB’s offer a show of strength or a retreat in the face of inevitability? 

Let’s take a look at the major provisions of the Term Sheet, which amounts to an outline of performance rights legislation that the NAB (and, if it signs on, musicFirst) would seek to push through Congress.

  • Revenue-based royalty payment structure for over-the-air performance of music

The NAB proposes that the performance right royalty be calculated as 1% of a station’s revenue for commercial stations with at least $1.25 million in revenue. The following tiers would apply to smaller and/or noncommercial radio stations:

  • Annual revenues                                                                    Payment

< $50,000 (commercial or nonprofit)                           Lesser of $100/year or 1% of revenue

$50,000-$100,000 (commercial or nonprofit)       $500/year

> $100,000 (nonprofit only)                                           $1000/year

$100,000-$500,000 (commercial only)                     Lesser of $2,500/year or 1% of revenue

$500,000-$1.25 million (commercial only)              $5,000/year

> $1.25 million (commercial only)                                   1% of revenue

Stations making only incidental use of music (e.g., news, talk or sports stations) would not pay at all for use of copyrighted music. Similarly, no payment obligation would arise from music used in religious services broadcast on the radio, although religious music stations would still be subject to the rate structure above.

Note that these royalty levels would be phased in subject to the extent of inclusion and activation of radio chips in mobile devices (see below).

  • Broadcasters would receive a break on royalties arising from their webcasting/streaming or other non-terrestrial transmissions.  Those non-broadcast rates would be tied to the “pureplay” webcasting rates, resulting in a reduction in current streaming rates. This new calculation approach would be effective until December 31, 2016, with rates to be adjusted for six years terms thereafter.
  • The NAB and MusicFirst would push for legislation requiring the inclusion and activation of radio chips in mobile devices, with an acceptable phase-in period and inclusion of HD when feasible. Because the electronics manufacturers would likely oppose such a requirement, the Term Sheet specifies a “market-based phase-in” approach to the royalty rates listed above. That phase-in would apply if the NAB and musicFirst “determine that legislation mandating the inclusion of radio chips on mobile devices is unattainable”, and would apply as follows:

    • The percentage rate would be “tied to (mirror) the market percentage of mobile devices that include an enable radio chip”, although a 0.25% floor would apply regardless of penetration. In other words, even if no mobile devices included chips, large commercial stations would be on the performance royalty hook for 0.25% of their revenues; they would then increase in a way that mirrors the market percentage of mobile devices until 75% of all mobile devices have a radio chip, at which point the full rates kick in.
    • The phase-in approach would apply to small, noncommercial, religious and/or non-music stations as well.
    • The discounted rates for webcasting/streaming/non-terrestrial transmission would not take effect until 50% of all mobile devices have a radio chip.  But if that 50% threshold is not reached by 2016, any existing streaming rates will continue to apply.
  • Broadcasters would report their data using the sample reporting methodology currently used by ASCAP/BMI rather than the more intensive “census” reporting currently submitted to SoundExchange for the webcasting statutory license
  • The NAB and musicFirst would agree to the following “policy” considerations:

    • The Copyright Royalty Board (CRB) would have absolutely no involvement in setting terrestrial or streaming rates.
    • The agreed-to royalty structure would be predicated on the express acknowledgement by AFTRA that broadcasters have a right to fully simulcast their terrestrial broadcasts on the Internet. In other words, the ongoing dispute regarding the requirement to remove some broadcast commercials from streamed content will be resolved.
    • The text of any eventual bill would explicitly acknowledge the “value to artists and record labels of promotion on free, over-the-air terrestrial radio”. 

From a practical perspective, we should also note that, by including the radio chip as an essential element of the deal, the NAB has roped the electronics manufacturers into the process. Ditto for AFTRA, with respect to the provision about streaming commercials. Of course, the presence of these particular additional players is technically not necessary for the resolution of the essential question of whether or not any performance royalty obligation exists. But by increasing the number of parties at the negotiating table, the NAB has almost certainly assured that the negotiation will take considerably longer than would otherwise be the case.

But now that we know what the Term Sheet looks like, the real question is: does it make sense for broadcasters?

Hard to say for sure, because different stations will be affected in different ways. Even the smallest station might have trouble paying $100 per year if it’s barely meeting expenses anyway. But that same station might find – maybe now, maybe in the relative near-term – that the reductions in streaming royalties more than offset the new royalties for over-the-air broadcasts in the long term. Locking in reduced streaming royalty rates now may pay handsome rewards down the line, particularly if, absent some such legislation, the CRB continues its exponential increase of webcasting royalties.

For that reason, you might want to run some numbers yourself.  Figure out how much you’d be paying this year, and for the next five years, under the NAB’s proposal. (We’re happy to help you work through this – though, as lawyers, we can’t vouch for the math.) Compare that to what you’re paying now.   If your overall royalty obligation would go up, would the increase be completely untenable under your current budget (or your anticipated budgets for future years)?

But before you answer, consider a couple of other factors. The NAB’s approach would remove the CRB from the rate-setting process, and would ideally substitute a more rational, and predictable, rate-setting mechanism going forward. Nothing wrong with that. Moreover, the NAB Term Sheet would also streamline reporting requirements for webcasting – which could relieve broadcasters of a significant headache and thereby encourage them to stake out a more substantial web presence.

And while the question of performance royalties – or anything relating to your pocketbook – is among the most important issues facing any radio broadcaster, it’s not the only issue. It’s just one of many legislative and policy matters facing the industry. NAB members expect, and need, the NAB to represent them before Congress and the agencies on all these issues. And for itself to survive, the NAB has to be sure that it’s doing precisely that. As I noted in an earlier post, the siege effort that the NAB has waged for years against the PRA has been successful, but costly. And unless something happens – like a negotiated settlement – it’s likely to continue to be costly for years more, sapping the NAB’s, and broadcasters’, political capital.

Of course, if you’re an unhappy NAB member, speak up about it – especially if your unhappiness derives from a lack of communication from between leadership and membership. That’s one of your rights as a member and the only way any final deal will be the best deal for the majority of radio broadcasters.