United States: Royalty Uncertainty: How Should Webcasters Proceed?

The July 15th reporting and payment deadline for retroactive music webcasting royalties has come and gone, but many webcasters are still unclear as to how they should handle their copyright obligations. Ultimately, any webcaster’s decision as to how to proceed will have to be guided by both consultation with legal counsel and by the economic realities of their business.

Since our June 14th client alert, there has been a great deal of activity, but there have only been two decisive developments. First, the U.S. Court of Appeals for the District of Columbia denied webcasters’ motion to stay the Copyright Royalty Board’s ("CRB") decision until all appeals have been heard. Thus, the new royalty rates did, in fact, become effective on July 15th. Second, as we reported yesterday, SoundExchange reached an agreement with public radio that allows public broadcasters to continue their music streaming operations for the next three months (until October 15th) while negotiations concerning royalty rates for that sector continue. (SoundExchange was criticized yesterday by the National Association of Broadcasters for failing to make further progress, in a statement where the NAB also announced its support for the federal Internet Radio Equality Act.) To date, those webcasters who are not in public radio have been left with little guidance as to how to navigate these complicated and continually changing issues.

Large commercial webcasters have the clearest path ahead of them. Retroactive royalty payments for 2006 and 2007 became due on July 15th, with interest accruing for unpaid royalties as of that date. Of all webcaster categories, SoundExchange is most reluctant to negotiate with large webcasters such as Yahoo! and AOL because the increased rates are primarily directed towards them. Thus, large commercial webcasters should be paying royalties at the new CRB rates for 2006 and 2007. These webcasters, however, do have temporary options with respect to the methodology used to calculate royalties.

The CRB created a transitional period, through the end of 2007, during which webcasters may pay royalties based on aggregate tuning hours ("ATH") at the rate $.0169 per ATH rather than on a per performance basis (per song, per listener) at the rate $.0011 per performance. Previously, these webcasters paid at rates of either $.0117 per ATH or $.000762 per performance. The new rates are an increase of approximately 40% over the prior rates for large commercial webcasters. The biggest change for these webcasters will occur after 2007, when they will have to discard their use of ATH and calculate royalties solely on a per performance basis. The difficulty of tracking users in this way may remain a significant hurdle for many webcasters.

Another important concern for this group of webcasters is minimum fee liabilities. In our June 14th client alert, we noted that the new CRB scheme imposes a minimum annual fee of $500 per "channel" of webcasting. Webcasters, however, need clarification as to what constitutes a channel. They fear that each individualized stream of music to a user could be construed as a channel, potentially increasing royalties by millions of dollars in minimum fees.

This issue has been the source of much debate on appeal and during settlement negotiations. In a closeddoor congressional meeting on July 12 between SoundExchange and various webcaster groups, SoundExchange informally proposed a $50,000 cap on minimum annual fees if a webcaster reports everything that is played and adopts technology that limits the ability of listeners to record those broadcasts and engage in what is popularly known as "stream-ripping."

SoundExchange formally announced this offer in a press release on July 13. The Digital Media Association ("DiMA"), a lobbying group representing large webcasters such as Yahoo, RealNetworks, and AOL, accepted SoundExchange’s offer, promising to improve reporting and to "research, identify, review and evaluate" the prevalence of stream-ripping and potential technologies to limit it. Thereafter, however, Sound- Exchange denied making the offer as DiMA understood it and accused DiMA of mischaracterizing their negotiations.

In response, DiMA criticized SoundExchange for allegedly reneging on its offer and demanding technology mandates that are unreasonable. As these discussions become more contentious, the possibility of a negotiated solution in the near future looks unlikely.

Furthermore, any settlement agreement that is reached would not be legally binding until it has been finalized with the groups representing the webcasters involved, approved by the SoundExchange Board, and then ratified by the CRB or through some other form of government action. As of this writing, none of this has happened, and the new CRB scheme is still the law.

Small commercial webcasters and non-commercial webcasters may have to make difficult choices because their situation is even less clear. These webcasters assert that it will be much more difficult for them to pay the new higher royalties. As we reported in June, however, SoundExchange is in active negotiations with both of these groups.

For small commercial webcasters, SoundExchange has offered to extend the terms of the Small Webcasters Settlement Act of 2002 for the 2006 to 2010 period, but groups such as the SaveNetRadio coalition, representing webcasters, listeners and artists, expressly rejected the proposal as an inhibition of Internet radio. For non-commercial webcasters, SoundExchange has also suggested a settlement to preserve old rates, with some changes in reporting requirements. This offer, though, was only made informally to a small group of non-commercial webcasters.

Thus, both of these categories of webcasters must pay, for now, at the same rates as large commercial webcasters rather than at the reduced rates previously in force. Many of these webcasters assert that they could owe significantly more than 100 percent of their revenues in royalties under these new rates.

Some webcasters, however, question SoundExchange’s resoluteness in enforcing the new rates. At the July 12th congressional meeting, a SoundExchange executive announced that the organization would allow small and non-commercial webcasters to continue streaming music while negotiations continue. News sources quickly reported that SoundExchange had offered these webcasters a reprieve, but SoundExchange clarified in subsequent statements that it expects timely payment from all webcasters. Thus, royalty payments at the new rates have been due and interest has been accruing on those due payments since July 15th. The organization also emphasized that all overdue payments would accrue interest, which the CRB increased in its March decision from .75% to 1.5% per month. Webcasters who continue paying at older royalty rates, or who do not pay at all, will also have to pay late fees at the newly increased rate.

This leaves small commercial webcasters and non-commercial webcasters in a difficult situation. Although payments under the new rates are due, most of these webcasters claim to be unable to pay royalties at these rates. Many may choose to stop webcasting altogether after considering the financial feasibility of continuing under the new scheme. Even if a webcaster ceases webcasting, however, it would still need to pay the retroactive royalties dating back to January 1, 2006. Thus, even entities who cease webcasting may still choose to negotiate with SoundExchange to reduce the amount of retroactive royalties due.

Other entities may choose to continue webcasting and hope that SoundExchange exercises restraint in enforcing these new rates until negotiations are successfully concluded or some other outcome, such as litigation or legislation, succeeds in changing the CRB’s decision. Webcasters must remember, however, that the royalty payments are now due, and, until the issues are resolved, copyright holders could take legal action against those who have not satisfied their royalty and reporting obligations. Thus, any decision on this issue should be made only after consultation with legal counsel.

Webcasters must consider all of their options and reassess the economics of their operations before deciding how to proceed in the face of these changing circumstances. Large commercial webcasters are unlikely to receive a reprieve and should plan to pay royalties at the new rates set by the CRB. Small commercial webcasters and non-commercial webcasters, however, must take a closer look at their options and decide whether to pay royalties under the new scheme now or to continue to pay at the old rates and take the risk of incurring substantial late fees or other penalties if no reprieve results. While making these assessments, webcasters should watch closely for new developments during the next several weeks that could affect these important business decisions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.