BY: ELLIOT WEISS
On September 24, 2012 The New York Times issued an article entitled, “Proposed Internet Radio Royalty Bill Would Change Rate-Setting Standard,” which discussed the federal judicial standard as a basis for how royalty rates are set for Internet radio services. Recently, tension has been building on Capital Hill as the House of Representatives introduced a new Congressional bill entitled, The Internet Radio Fairness Act, which seeks to move so-called non-interactive online radio services like Pandora and Clear Channel Communications’ iHeart Radio app from the willing buyer, willing seller standard to the one used to determine rates for cable and satellite radio services such as Sirius XM radio.
The Digital Millennium Copyright Act (“DMCA”) of 1998 significantly amended the digital performance right under §114 of the Copyright Act of 1976.[1. Amy P. Bunk, J.D., Annotation, Validity, Construction, and Application of Digital Millennium Copyright Act (Pub. L. No. 105-304, 112 Stat. 2860 (1998)), 179 A.L.R. Fed. 319 (2002).] Under the DMCA, Congress clarified the nature of the webcasters’ relationship to the §114 compulsory license by amending §114(d)(1)(A), making non-interactive, Internet-only webcasting explicitly subject to the statutory licensing scheme.[2. Scope of Exclusive Rights in Sound Recordings 17 U.S.C. §§114(d)(2)-114(f)(2).] The “willing buyer, willing seller standard” is a standard for nonexempt transmission licenses set by the Copyright Royalty Board under 17 USC §114 of the Copyright Act of 1976.[3. 17 U.S.C. § 114(f)(B) (2010).] Under the Digital Performance Right in Sound Recordings Act of 1995, Congress provided exemptions from the new statutory licensing in §114(d)(1)(A), stating “that non-interactive, non-subscription broadcast transmissions were exempt from paying digital performance royalties.[4. 17 U.S.C. §114(d)(1)(A) (2010).] The policy behind this was to preserve radio and television broadcasters who were not posing a threat, but helping to promote the sale of recorded music.
Under the current statutory licensing, and under the DMCA, simulcasting radio stations and terrestrial radio stations like Sirius XM Radio have been permitted to use a different royalty standard, the “fair market value model” covered under 801(b) of the Copyright Act. This standard has been used for all other forms of statutory royalty rate settings, and has provided cable and satellite radio services a different standard to calculate royalties paid to the recording industry, music publishers and songwriters since 1976. In 1999, Congress enacted the Satellite Home Viewer Improvements Act, which resulted in a 30-45% rate reduction on the “fair market standard.”
The differing rates have generated a disproportionate cost structure for businesses in the music radio business depending on their radio platform. While companies like Pandora and Sirius XM pay a substantial amount of their annual revenue in licensing costs, it has been argued and lobbied that the Internet radio platform for Pandora is more expensive under the “willing buyer/willing seller” standard than for Sirius XM, who pays statutory licensing under the “fair market value” model. Lobbying on Capital Hill from Internet radio services such as Pandora has been built on complaints of “public fairness,” and quite possibly “public sympathy,” for companies operating in an industry that has been criticized for lacking a functioning business model. In August 2011, I published an article entitled Big Money Music Finance for The Music Business Journal,[5. Elliot Weiss, Big Money Music Finance, Berklee College of Music Music Business Journal, Aug. 2011, http://www.thembj.org/2011/08/big-money-music-finance.html.] which discussed Pandora’s bold decision to go public despite the fact that the company has never actually turned an annual profit. Without addressing the issue of “industry fairness,” and from a standpoint of corporate sustainability, I question whether the efforts and money of Internet radio service providers, such as Pandora, would be better utilized in generating sustainable revenue streams for the company, than on Capital Hill lobbying for reduced licensing costs.