United States: Webcaster Music Royalty Rates— In Flux And On The Rise

Laws surrounding music licensing and royalty rates for Webcasters are changing, and the final outcome, so far, is uncertain. In March, 2007, the Copyright Royalty Board ("CRB") issued an Initial Determination with a new payment scheme whereby royalty rates for Webcasters would be based on a "per performance" calculation instead of having the option to use an "aggregate tuning hours" basis, with royalty rates starting at $.0008 per performance in 2006 and increasing to $.0019 per performance by 2010.¹ Although this decision was met with outrage, the CRB issued an Order in April denying all requests for reconsideration and rehearing. In that same Order, however, the CRB made some changes to its Initial Determination by creating an optional transition period during 2006 and 2007 during which Webcasters may make limited use of the "aggregate tuning hours" option that has been more commonly used in the past. As the July 15th deadline for the first payment of royalties under this new scheme approaches, both opposition to the CRB edicts and the need for compromise are growing. The outcome of renewed appeals and litigation in Court, pending legislation, and ongoing settlement negotiations, however, are still uncertain.

The Digital Millennium Copyright Act ("DMCA") gave copyright owners and performers of a "sound recording," (the particular recorded version of a song) a performance right when a song is publicly performed by means of a digital transmission. Digital transmissions that conform to certain specifications qualify for a "compulsory license," which allows use of sound recordings without seeking permission directly from the copyright owner.² SoundExchange, whose role as the "Collective" for the 2006-2010 royalty period was affirmed in the CRB’s March decision, administers the compulsory licenses for performances of sound recordings via digital transmission, collects the royalties from such licenses and pays the collected royalties to copyright owners and performers. The CRB sets the royalty rate for compulsory licenses.

Before the CRB’s decision in March, all commercial Webcasters (who did not qualify as "small commercial Webcasters") could calculate royalties for compulsory licenses in one of two ways. A "per performance" option allowed Webcasters to pay per song per listener. The difficulty of tracking listeners in this way led the vast majority of Webcasters to use an "aggregate tuning hours" ("ATH") method whereby one listener who listens for one hour would constitute one aggregate tuning hour, two listeners who each listen for a half an hour would also be one aggregate tuning hour, and so on. When the initial Webcaster royalty rates were first adopted, strong protest from small commercial entities led to the Small Webcasters Settlement Act which created a special royalty option allowing such an entity (Webcasters with less than $1.2 million in revenue) to pay the higher of (1) 10% of its revenue on the first $250,000 of its revenue and 12% thereafter, or (2) 7% of the entity’s expenses.

Additionally, other categories of Webcasters, such as noncommercial and non-music Webcasters, paid different rates from commercial Webcasters. Noncommercial Webcasters paid a minimum rate of $500 a year, allowing them to stream to an average of 200 simultaneous listeners or 146,000 aggregate monthly tuning hours. If a noncommercial Webcaster exceeded those amounts, it would pay royalties on the excess either on a per performance basis ($.0002176 per performance) or on the basis of aggregate tuning hours ($.00251 per ATH). Furthermore, non-music Webcasters (such as those who primarily broadcast news, talk and/or sports) paid a reduced rate of $.000762 per performance or per ATH under the scheme prior to the March decision of the CRB.

The CRB’s March 2nd decision, however, changed the royalty rates and calculation methodology for the 2006-2010 period. In contrast to the old system, all commercial Webcasters (including those previously categorized as "small commercial Webcasters" or "non-music Webcasters") must now calculate royalties on a "per performance" basis, and all at the same uniform rate. The new rates for commercial Webcasters are $.0008 per performance in 2006 (applied retroactively), $.0011 per performance in 2007, $.0014 per performance in 2008, $.0018 per performance in 2009, and $.0019 per performance in 2010. The decision also sets a minimum fee of $500 per "channel" per year. Webcasters, however, still need clarification as to what constitutes a "channel."

Noncommercial Webcasters are still treated as a separate category under the new scheme instituted by the CRB but the basis on which they pay royalties has changed. Noncommercial Webcasters must pay a minimum annual fee of $500 per channel or station. With full payment of the minimum yearly fee, noncommercial Webcasters may conduct digital audio transmissions of up to 159,140 ATH per month. If, in any month, a noncommercial Webcaster exceeds this limit, the Webcaster must pay additional royalties for digital audio transmissions in excess of the cap at the same rate as that paid by commercial Webcasters.

The Order of the Copyright Royalty Board in April

Despite the objections that ensued, the CRB issued an Order on April 16, 2007, denying all requests for rehearing, finding that no new evidence or clear error warranted reconsideration of the decision. In that same Order, however, the Copyright Royalty Board made changes to its own Initial Determination. Two alterations were particularly important. First, the CRB amended its Initial Determination to allow a transitional option for the years 2006 and 2007, during which Webcasters can continue to use "aggregate tuning hours" as a basis for calculation and payment of the royalties. This transition period was allowed in order to ease the shift in methodology and to facilitate the timely payment of royalties. Despite this temporary leniency, the CRB expressly rejected the continued availability of this method as a permanent part of the royalty structure.

For commercial Webcasters (including "small commercial Webcasters"), the ATH and per performance rates for the 2006 and 2007 transition period, as well as the rest of the per performance royalty rates until 2010, are as follows:

The second significant change made by the CRB was to set a July 15th deadline for the payment of retroactive royalties for 2006 (45 days from the last day of the month of the Final Determination of the CRB.) The Board refused to stay implementation of the rates and terms established in the Initial Determination until all administrative appeals and judicial review were complete.

The decision by the CRB to deny all requests for rehearing and proceed with a July 15th deadline has not settled litigation over the new royalties scheme. Instead, all parties to the case, in addition to the National Association of Broadcasters (not previously a part of the suit), have filed appeals with US Court of Appeals for the District of Columbia. This alone, however, does not affect the July 15th payment deadline. It only gives notice to the Court that the parties dispute the determination. To postpone that deadline, the parties have also filed a Motion to stay and suspend the CRB decision until all appeals have been heard. SoundExchange will now need to respond to that Motion, and it should be considered on the merits before the July 15th deadline.

The Internet Radio Equality Act

Opposition to the Initial Determination of the CRB has also come in the form of proposed legislation. The Internet Radio Equality Act, currently before both the House of Representatives and the Senate, would invalidate the new royalties scheme created by the CRB. The proposed bill gives Webcasters the choice of paying royalties amounting to either (1) $.33 per hour of sound recordings transmitted to a single listener or (2) 7.5% of revenues received by the Webcaster during that year "that are directly related to the provider’s digital transmissions of sound recordings." The Act would also abolish the $500 minimum fee for each "channel" of Webcasting. Senators and Representatives, alike, support the bill out of concern that the new royalty rates and reporting methodology from the CRB will stifle creative Webcasters and a thriving internet business model which, according to Nielsen Media Research, allows more than 70 million Americans access to music over the Internet each month. The legislation is gaining popularity, but its passage is still uncertain.

Although large Webcasters will be significantly affected by the CRB decision (with potential rate increases estimated at between 40% and 70% of revenues), small Webcasters will be most affected. It is estimated that the royalty increase for small Webcasters could reach as high as 1200% of revenues, forcing most, if not all, small Webcasters out of business. As a result, small Webcasters have met the CRB decision with fierce opposition. In response to this opposition, on May 21st SoundExchange offered to reinstate the terms of the Small Webcasters Settlement Act, which expired in 2005, for the 2006-2010 period. A coalition of small Webcasters, however, rejected the offer citing it as only a temporary solution and also as a limit on the amount of revenue small Webcasters could earn ($1.2 million) without being penalized for success. Instead, the coalition of small Webcasters seeks changes to the CRB’s proposed royalty rates and methodology, and supports a scheme that mimics the rates proposed by the Internet Radio Equality Act.

SoundExchange has also recently suggested a settlement to noncommercial Webcasters, whereby their prior arrangement for royalty rates would be preserved but with some small alterations. This proposed settlement would maintain the $500 annual minimum fee for 146,000 ATH and would cap the royalty rate for additional listeners at $.0002176 per performance or $.00251 per ATH. However, the offer includes a new requirement that noncommercial Webcasters provide records of use of sound recordings on a monthly basis. SoundExchange has only discussed this offer with some noncommercial Webcasters, and no final agreement has been reached.

The future of royalties for use of music on the Internet is in flux. No one knows whether the Court of Appeals will postpone the July 15th deadline, whether legislation will be enacted to change the CRB-set royalty rates and methodology or whether a settlement will be reached between SoundExchange and small Webcasters. As the July 15th payment deadline approaches, however, the consequences of that lack of clarity continue to mount. Small Webcasters face an uncertain future and even large radio broadcasters who are simulcasting their programming on the Internet are rethinking the economic viability of Webcasting. The bottom line is that unless and until the Court suspends the CRB decision, or legislation is enacted, or a settlement is reached and finalized, all Webcasters must plan to calculate royalties using the per performance basis methodology after 2007 and to pay royalties at the new CRB-set rates.

Internet Radio Royalty Costs to Increase Significantly, Client Alert, Pillsbury Winthrop Shaw Pittman LLP, 07-Mar-2007

Licensing and Royalty Basics for "Broadcasting" Music over the Internet, Communications Advisory, Pillsbury Winthrop Shaw Pittman LLP, December 2006

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