CommLawBlog : Broadcast & Communications Lawyers & Attorneys : Fletcher Heald & Hildreth Law Firm : Telecommunications, FCC Regulation, Communications Act

First, the White Paper urges Congress to “clarify that infringement by streaming . . . is a felony in appropriate circumstances.” (We can hear it now – “Book ‘em, Dan-O. Streaming in the first degree”.) The brief discussion accompanying this recommendation isn’t entirely clear, but the appearance of the word “streaming” got our attention. 

At first glance, one could take “streaming” here to mean “webcasting” in the broadest sense. In that case it would be a good idea to heed our frequent admonitions about jumping through all of SoundExchange’s various hoops. But our gut instinct is that this isn’t the “streaming” that the Administration is worried about. Rather, the White Paper refers to “the illegal streaming of content” – so we’re guessing that its real target is something along the lines of the illegal file sharing we’ve discussed in the past, or maybe the live streaming of broadcast content – often sporting events – by some users of services like UStream.com or Justin.Tv.  That more limited interpretation makes more sense in terms of the actual economic damage involved. But given the plain language meaning of “streaming”, we can’t rule out the possibility that the Administration may indeed want to criminalize any unauthorized streaming of music. Such a get-tough approach would arguably be consistent with the Administration’s recommendation (described below) concerning performance rights.

The second item of interest appears in the very last section of the White Paper, which recommends that “Congress create a right of public performance for sound recordings transmitted by over-the-air broadcast stations." That's right – the White House is now on record as officially endorsing the Performance Rights Act (PRA). According to the White Paper, the fact that the U.S. has no performance right for recordings “disadvantages” U.S. copyright owners overseas, since “[t]hey are not permitted to collect overseas royalties because they are not granted rights in the U.S.” The White Paper contains no extensive discussion (much less specific support) for this assertion. Indeed, the entire section on this point is a total of five sentences long.

We don't know how much effect this endorsement will have. The PRA has yet to be reintroduced in either the Senate or the House in the 112th Congress, and the last time it was introduced (in the 111th) it clearly didn’t have the votes to pass.  But, as endorsements go, this is a pretty big one. If nothing else, it might lead to the introduction of a bill, thus starting the legislative process yet again. Or it could resurrect the currently dormant discussions between the NAB and the RIAA regarding an accord on this issue. (The success of any legislation will likely depend on those two parties reaching an agreement that both can live with.) But the White House could play a role here, especially if it follows up on the White Paper by using its “bully pulpit” to bring the parties to the negotiating table.  Let’s just say the gauntlet has been thrown down and we think the PRA can fairly be described as “in play” at this point. 

Of course, despite the fact that these recommendations come from the White House, they are nothing more than recommendations. It is up to Congress to act on them or not, as it sees fit. And it remains to be seen whether Congress will do so.  We’ll just say that, if it does, we hope that Congress will consider all points of view and move cautiously, with clarity and precision, to ensure that legitimate rights, including First Amendment rights, are not infringed.

• 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.

• The PRA (HR 848 and S 379) was introduced in Congress over 18 months ago. While HR 848 passed the House Judiciary Committee soon after introduction, neither bill has moved forward since. This is largely because there are more than 260 House Members on record as opposing a performance right applicable to over-the-air broadcasts. That’s a strong level of opposition – a factor which can be ascribed at least in part to a substantial lobbying effort by the NAB and broadcasters generally. Basically, despite years-long, high-profile efforts by the recording industry to secure some form of legislative relief on the performance rights front – efforts which have gained support from a number of influential legislators – the bill has been stalemated. That may be viewed as a success story for broadcasters.
• But now the NAB appears at least to be considering compromise on the issue. Note that the NAB has not, to my knowledge, said that it will compromise on this issue, now or in the future. To the contrary, an NAB spokesperson told RBR that the NAB has “reiterated its strong opposition to the pending bill in Congress”. But – and here’s a big “but” – the NAB has acknowledged “an ongoing dialogue with the Board and NAB membership on possible alternatives to pending legislation that would be devastating to the future of free and local radio . . . while agreeing that it is appropriate for NAB representatives to continue discussions with musicFirst.”
• According to published reports, those discussions have centered on:

a permanent, tiered royalty rate which would not exceed one percent of net revenue for any broadcastpermanent removal of Copyright Royalty Board jurisdiction over terrestrial and streaming royalty rates;

a reduction in those streaming rates;

the possibility of requiring radio chips to be installed on all new mobile phones; and

resolution of all ongoing issues regarding insertion of commercials into webcast.

Here’s at least some of the stuff we don’t know: 

• Would the tiered rate in the proposed agreement apply to royalties for over-the-air performances only or to over-the-air and internet/digital performances?
• If the tiered rate were to apply only to over-the-air, how would the adjustment of internet/digital royalty rates occur? Would the reduction in streaming rates also be permanent?
• If the CRB were to end up with no jurisdiction over terrestrial or streaming operations, but there was still some statutory license applicable to performances, who would oversee and implement it, especially if the rates aren’t permanent?
• Would performance to a mobile phone with a radio chip be considered an over-the-air performance or a digital transmission (webcast)?

Obviously, these are all factors which could dramatically affect the extent to which any compromise might work to the ultimate benefit of broadcasters in the long run. It would therefore help to have a better handle on them – and many others – before we all start debating the wisdom of the NAB’s approach here.

Too late. That debate has already started.

Many broadcasters and their allies are expressing serious concern about anything that might be interpreted as a retreat on performance rights issues, and certainly NAB discussions with musicFirst (or any other recording reps) could be seen as a retreat. After all, broadcasters have incredibly strong arguments here, arguments which they have brandished effectively. The mere contemplation of “alternatives” to the PRA suggests that the notion of any performance rights might be valid – and broadcasters (including the NAB) have argued convincingly that that notion is not valid.

Moreover, the argument goes, since when does it make sense to run up the white flag when you’re winning?   If anything, the broadcast industry’s track record on the PRA front in Congress has been remarkably good. If you’ve got the enemy on the run, why try to negotiate a truce?

And finally, even if the NAB is on the right track here, some broadcasters question why the NAB hasn’t been a bit more forthright – “transparent”, to invoke a favorite FCC descriptive – with its them. Having faithfully followed the NAB in its staunch resistance to the PRA, many feel seduced and abandoned upon hearing that the NAB may be getting in bed with the bad guys. This is especially so in view of the fact that many small radio licensees, in particular, may legitimately fear that any performance rights royalties could have a devastating effect on their bottom lines. Why shouldn’t they feel bitter and resentful if it looks like the NAB is now helping those fears become a reality?

While these broadcasters' views are understandable and while I agree with their calls for transparency, let’s not lose sight of the fact that there may be some method to the NAB’s seeming madness. In particular, at the risk of appearing to defend the PRA (or any other performance rights claim) – and let me stress here that I am NOT defending or endorsing anything of the kind – I think a couple of things should be considered.

Are broadcasters’ arguments against performance rights claims valid? Of course they are. Will they stay that way forever? That’s impossible to say. Historically – up to and including today – performers and radio broadcasters have enjoyed a quasi-symbiotic relationship which has benefited both sides, thus eliminating any need for the strict debit-and-credit accounting called for by the PRA. But like it or not, technology and demographics and society all change. Let’s not forget that the FCC is pushing more and more insistently on the expansion of Internet capacity to serve as a common medium. 

Suppose over-the-air radio listenership decreases and online listenership continues to increase (in part because people are listening via Internet in their cars or on their phones). And suppose that, in response, broadcasters shift their focus to more Internet-centric operations. And finally, suppose that a compromise is struck providing that performances to a mobile phone are to be considered digital transmissions (a/k/a “streaming”), rather than over-the-air broadcasting.  

If the NAB were able – today, in advance of those changes – to reach an agreement with the recording industry that, in exchange for, say, 1% of net revenues for over-the-air performance royalties, royalties for streaming would be reduced significantly, that could be a boon for broadcasters in the foreseeable future. And if that decrease in streaming royalties were locked in for the long term, during which time over-the-air listenership continues to decrease and online listenership continues to increase – well, I’m not an economist, but I can envision that situation actually leading to an overall decrease in royalty rates over the long term.

What about calling a truce when the enemy’s on the run? The critics are right: it normally does not make sense to do that. But that’s not necessarily the situation we have here. What we have is more like a siege. Neither side is on the run; rather, both are deeply dug in for the long haul. Can broadcasters sustain the siege? Probably. Can the recording industry? Probably.

And that’s precisely the problem.

A siege is expensive in many ways. It chews up resources and creates distractions that may impede progress in other arenas. And it goes on and on and on. In this case, the broadcast industry as a whole has spent, and continues to spend, an enormous amount of “political capital” in rallying legislators to its anti-PRA cause. In so doing, however, the industry has almost certainly lessened its ability to convince those same legislators to back other pro-broadcast measures. And that political capital is being spent not in a way which puts a permanent end to the threat, but rather in a way which merely tends to perpetuate the stalemate.

In these circumstances, it might make sense for broadcasters to take advantage of the leverage that their current superior position gives them to try to devise an endgame strategy that looks to the future. After all, there’s no doubt that the more than 262 co-sponsors of the Local Radio Freedom Act give the NAB a strong bargaining position.

To be sure, the NAB’s less-than-inclusive approach leading up to its initial talks with the recording industry has alienated a number of its erstwhile supporters. That alienation is regrettable. However, negotiations have to start somewhere, and often they require initiative from one or two players to get the ball rolling. Perhaps that’s what’s going on here. But the NAB disserves its members when it consults only with a select group on an issue of this magnitude, as it appears to have done to this point. If momentum builds, the NAB must, voluntarily or otherwise, find ways to include a more representative universe in the discussions (if you take one thing away from this particular blogger's take on the subject, I hope it is my call for increased transparency in the process and inclusion of “the little guys” that might be the most affected by these changes).

So yes, there’s a lot of buzz about the possibility of a brokered resolution of the PRA impasse. And yes, it’s easy to see why many broadcasters may view that possibility with considerable alarm. And yes, very few of us currently know exactly what has been done, said or offered – by either the NAB or the recording industry – much less how any such discussions will ultimately shake out. 

Two things that we do know for sure are that (a) we don’t know very much of what is actually happening here, and (2) none of us can be sure of precisely what the future holds for any communications operation in this era of dramatic technological change. Because of that, it may be best to keep an open mind for the time being, with eyes fixed firmly, if warily, on the future in the broadest sense.