Dueling bills to modify calculation method for some royalties could level the playing field among music media . . . or not.

Most people don’t think about how copyright royalties are calculated – they just think that whatever they’re paying (or receiving) is too high (or too low). That’s true regardless of who you are or what you pay.

The recording industry thinks that recording artists don’t get enough compensation for their copyrighted works – especially from broadcasters who have always enjoyed a full exemption from paying royalties for over-the-air performance of sound recordings (i.e., the version of a song you’re actually hearing at that particular moment). 

Each of the various services that provide recorded music to the public – broadcasters , stand-alone Internet radio operators and even Sirius XM – seems to believe that they’re getting a raw deal compared to the way the other such services are treated. For instance, Sirius XM doesn’t like that they have to pay for all their transmissions – both via satellite and the Internet – while broadcasters get that over-the-air exemption. Broadcasters think the per-performance rate for online streaming is too high, especially given online advertising hasn’t increased at a similar rate, which means that increased listenership increases costs but not revenues. And Pandora feels as though it’s at a disadvantage to both, because it, too, pays a rate higher than Sirius XM and doesn’t enjoy any exemption like broadcasters do.  

The disparity in the royalties each of the services get tapped for is the fault of Congress, which has established distinct approaches to royalty calculation for each.

So it should be no surprise that one major player – Pandora – has chosen to attack the problem at its root cause.

The result? The Internet Radio Fairness Act, introduced last month simultaneously in the House as HR 6480 by Rep. Jason Chaffetz (R-UT) and Rep. Jared Polis (R-CO) and the Senate as S 3609 by Sen. Ron Wyden (D-OR). 

The good news is that Pandora’s push for fundamental legislative change on the copyright front could have a positive effect on broadcasters, whose webcasting royalty rates could be reduced as a result. But don’t crack the champagne yet, because a counter-measure, championed by Rep. Jerrold Nadler (D-NY), could force compromise on the key issue of performance rights for over-the-air sound recordings.

So exactly why is there a disparity, how big is it and what would the two bills do about it? 

As noted above, the disparity is Congress’s fault. It has instructed the Copyright Royalty Board (CRB) ultimately sets the royalty rate for performance of copyrighted works, the CRB is told to set the royalty rate for the performance of copyrighted works differently according to the type of media involved. 

Historically, copyright royalties for most non-Internet-related uses have been calculated using four criteria set out in Section 801(b) of the Copyright Act. The resulting royalties apply to satellite services like Sirius XM, cable music services (the music-only channels available on your cable system) and even broadcasters’ payments to ASCAP, BMI and SESAC for performance of the underlying musical works (the music and lyrics or composition) in each song.  The four criteria set out by Congress in Section 801(b) are:

  • A need to maximize the availability of creative works to the public;
  • A desire to insure a fair return for copyright owners and fair income for copyright users;
  • A reflection of the relative roles of capital investment, cost, and risk; and
  • A need to minimize the disruptive impact on the industries involved.

But webcasting – which includes broadcasters simulcasting one or more signals over the Internet – is subject to a different standard enacted as part of the Digital Millennium Copyright Act in 1998: the “willing buyer/willing seller” standard. Despite its name, this standard is more theoretical than practical, as it doesn’t even allow the CRB to consider the real world effort of the final royalty rate; instead, it relies on theoretical market rates. 

Why the difference? There are plenty of reasons but the easiest explanation (and I acknowledge that some will quibble with this) is that the recording industry was the loudest voice at the table in 1998. Back then, the broadcasting industry didn’t seem to appreciate yet just how big this whole webcasting thing would get, and the stand-alone Internet radio industry wasn’t really a thing. The recording industry stepped up to the plate, took a big swing, made contact and hit a home run.  (To use an extremely timely phrase: they showed some #Natitude – Go Nats!)

The effect? Looking simply at Pandora vs. Sirius XM, it’s pretty big. Pandora (using rates set by the CRB under the willing buyer/willing seller standard, with certain adjustments) claims it paid approximately 50% of its gross revenues in royalties last year and could pay up to 70% in the first quarter of fiscal year 2013. That’s a boatload more than the percentage paid by Sirius XM (i.e., 6% in 2008, 7% in 2010 and 8% in 2012). While Sirius XM is very concerned that its rates will sharply increase to 13% or more as a result of the CRB proceeding now in process, that would still put its royalties well under Pandora’s.

Enter the Chaffetz/Polis/Wyden Internet Radio Fairness Act, which would remove the distinction between the services. Everyone, including Pandora and broadcasters webcasting online, would have their rates set through CRB proceedings subject to the Section 801(b) standard. 

This can only be a good thing for broadcasters, right? Well, probably but not definitely. 

While the 801(b) standard could bring broadcasters’ webcasting rates down , there’s no guarantee. The CRB, even applying the 801(b) standard, could produce a royalty rate that is markedly different in calculation or amount than broadcasters “enjoy” now. Soundexchange, representing the recording industry, has basically had its way in these CRB proceedings – would that necessarily change?

And then there’s the  proposed Nadler bill. Like the Internet Radio Fairness, Nadler’s Interim FIRST Act would not address the broadcasters’ traditional exemption from paying over-the-air royalties as it standardizes the way in which the rates are set. But it is essentially the opposite direction of the Internet Radio Fairness Act in virtually every other way. The biggest difference is that the Nadler proposal would apply the “willing buyer/willing seller” standard across the board (so everyone can be upset about everything?).  

Moreover, the Interim FIRST Act would take a direct shot at broadcasters. Nadler feels that the broadcasters’ exemption from paying for over-the-air performances is unfair. His proposal would address this supposed unfairness not by removing the exemption (because we know the NAB would rise up against that), but by directing the CRB to take the value of those over-the-air performances into account when applying the willing buyer/willing seller standard. The result, according to some reports, could be a doubling or even tripling of the webcasting royalty rates that most broadcasters already feel are too high. 

And even if Nadler’s proposal doesn’t pass, it could still adversely affect broadcasters. With two competing copyright bills on the table – i.e., Nadler’s Interim FIRST Act and the Internet Radio Fairness Act – it’s not hard to imagine the sponsors of each coming up with some compromise measure. One such compromise might, for instance, impose the 801(b) standard for royalty calculation across the board, but also require that broadcasters start paying royalties for over-the-air performances of sound recordings under that standard. (Alternatively, a compromise could include Nadler’s suggestion that over-the-air performance be factored into webcasting royalties.) That would obviously muddy the waters.

Though Congress will probably not take up either bill until early 2013 (addressing this in the post-election “Lame Duck” session is possible but unlikely), interested parties are already throwing their support behind the Internet Radio Fairness Act. Those parties include Pandora (obviously), the Consumer Electronics Association, the Computer and Communications Industry Association (with members including Google, Microsoft, Yahoo! EBay and Pandora) and the Digital Media Association (DiMa).   The Radio and Internet Newsletter (RAIN) reports that the NAB, as well as broadcast companies Salem and Clear Channel, also support the bill.

The last of those – Clear Channel – comes as no surprise and should give broadcasters food for thought. Under the existing sytem, Clear Channel has already reached a direct licensing agreement with one major record label (Big Machine) under which Clear Channel will voluntarily pay royalties for over-the-air performance of sound recordings by Big Machine recording artists in exchange for a set (presumably lower) rate for their webcasting of those same sound recordings. In some regard, given that webcasting listenership – and therefore royalties – are only going to grow in coming years, it makes sense to focus on making sure those royalties are as low as possible.

The Clear Channel example reflects that broadcasters are in a position to take advantage of the devil they know, i.e., the current system. It’s far from clear whether the same would be true in a system forged from some compromise involving the Nadler proposal.

Broadcasters, therefore, might want to think about throwing their full support behind the Internet Radio Fairness Act in the hopes that is quickly enacted. That would, ideally, keep the Nadler Interim FIRST Act from gaining any momentum that could force a compromise, thereby making the devil they don’t know a devil they really don’t want to know.