CRB notice suggests possible shift in royalty rate calculation method, replacing per-performance mechanism with percentage-of-revenue approach.

The Copyright Royalty Board (CRB) has started on its quinquennial chore of establishing copyright royalty rates applicable to various non-interactive webcasters.  While the to-be-determined rates won’t kick in for another two years – they will apply to the period January 1, 2016-December 31, 2020 – the CRB is required by Congress to get the ball rolling by January 5, 2014, and the CRB has gotten itself in under the wire with a notice in the January 3 Federal Register inviting public participation in a new proceeding (dubbed “Web IV” by the CRB).

Web IV will set the rates for eligible nonsubscription and new subscription services (most of our readers, including just about all broadcasters engaged in webcasting, fall into the former).  And while the rate structure currently in place for the 2011-2015 term has been relatively complaint- and controversy-free, the CRB’s notice suggests that the CRB may be looking to take rate calculations in a different direction.  Rather than simply hit “repeat” and stick with the per-performance basis for rates all players have lived with for more than five years already, the CRB appears to have a percentage-of-revenue model in mind. At least that’s one possible reading of the questions laid out for comment by the CRB.

It seems like just yesterday that I was writing about the issuance of a Copyright Royalty Board decision on March 2, 2007 (commonly referred to as the Web II decision), which significantly increased the royalty rates applicable to various non-interactive webcasters.  Web II was a messy affair, leading to multiple court challenges. Ultimately, matters were resolved through several webcaster settlement agreements in which webcasters and SoundExchange crafted their own royalty arrangements in lieu of the CRB’s Web II construct.  Those agreements created subcategories among the various classifications of non-interactive nonsubscription webcasters, including eligible subscription and non-subscription services, and further sub-subcategories, including pureplay webcasters, commercial webcasters, commercial broadcasters and noncommercial webcasters.  Perhaps more importantly, they were all based on an elaborate per-performance calculation method.

When Web III time rolled around in 2009 (looking ahead to the 2011-2015 term), the CRB took the path of least resistance and effectively adopted the terms set out in the various private deals that had been struck in connection with Web II. Foreshadowing that approach, in its 2009 invitation for participation in Web III the CRB gave no indication of any interest in upsetting the status quo.

That’s clearly not the case this time around.

In its latest invitation for participation, the CRB lays out a series of questions seemingly pointing in a new direction:

What is the importance, if any, of the presence of economic variations among buyers and sellers?

Should royalty rates embody any form of economic “price discrimination” in order to reflect the statutory hypothetical marketplace?

What are the potential disadvantages of establishing a statutory royalty rate not based on a per performance royalty rate?

And if that third question doesn’t make it clear that a shift from “per performance” to “percentage of royalties” is on the table, consider the following sub-questions posed by the CRB:

Is it prohibitively difficult to identify webcaster revenues for the purpose of calculating a percentage-of-revenue based royalty rate?

Is there an “intrinsic” value to a performance of a sound recording that is omitted if a percentage of revenue royalty rate were to be adopted?

Would a royalty rate calculated as a percentage of webcasters’ revenue be “disproportionate” to webcasters’ use of sound recordings?

Of course, just because the CRB is asking these questions does not necessarily mean that anything has already been decided.  Sorting through the relevant factors is what Web IV is all about. And the actual method by which a webcaster calculates its rates – whether per performance, percentage of revenues, a combination thereof, or something else – must still be reasonable within the Congressionally-imposed “willing buyer/willing seller” standard used to determine these webcasting rates. So the resolution of Web IV is far from a foregone conclusion.

But the CRB’s invitation clearly signals a potential major shift.

Further complicating matters, as regular readers will know, is the possibility of further Congressional direction, perhaps in the form of the Internet Radio Fairness Act. That could impose a new standard by which royalty rates are determined.

So there’s a lot to watch for here. But you can do more than watch. As noted above, the CRB’s notice invites public participation in Web IV.  For the low, low price of $150, sent with the proper paperwork (a Petition to Participate) in the proper format (a hard copy original with five paper copies and an electronic copy in PDF format) to the proper place (which will vary depending on whether you file via hand delivery, hand delivery using a courier service, US mail, or overnight delivery), you can have your say in the matter!

We would, however, expect that major trade associations such as the National Association of Broadcasters, the National Religious Broadcasters Music License Committee, the Intercollegiate Broadcast System and others that participated in Webcasting III will do so again, so you might find it easier and cheaper to express your concerns directly to those likely to represent your interests.  If you’re not satisfied that your views will be satisfactorily repped in Web IV, you’ve got until February 3, 2014 to get your paperwork (and $150) into the CRB.

We’ll definitely keep you posted as the Web IV proceeding moves along.