Before someone may play or perform an artist’s music in public, generally that music must be licensed. A radio station, TV station, a concert hall etc. each need a performance license in order to publicly perform music. The performance of music can imply two sets of associated copyrights: 1) the copyright in the underlying composition or song, and 2) the copyright in the sound recording. A song writer’s performance right for the composition has been around for a long time and the Performance Rights Organizations (PROs) ASCAP, BMI and SESAC have been successfully licensing these rights. A performer or record label’s public performance right for the sound recording is relatively new. Certain amendments to the law in 1995 created a limited performance right for the digital transmission of sound recordings and set up a very complex licensing structure that treats different entities transmitting music differently. The result is a system that has proven difficult to navigate for all parties involved.
The Digital Performance Right in Sound Recordings Act of 1995 amended copyright law to provide a new performance right specifically for when songs are transmitted digitally. The new right was provided in section 106 of the Copyright Act and limitations were codified in section 114.
Section 114 adopts a three-pronged approach. First, it completely exempts over-the-air radio transmissions from any license obligations, effectively “grandfathering-in” radio broadcasters since the performance right in sound recordings themselves did not exist until well after radio broadcasts. Second, Internet radio, and satellite radio are subjected to a compulsory license. A compulsory license provides a license to use a work without the copyright owner’s permission but is subject to payment of a set compensation. Although a compulsory license acts as a limitation on a copyright owner’s right, copyright law uses it in many instances where business models need to license large amounts of copyrighted works but licensing from individual owners would be near impossible, or in cases where one of the parties to the transaction has disproportionate market power. The section 114 compulsory license extends to radio-style digital transmissions from satellite radio such as XM and Sirius satellite radio and Internet radio stations such as Live365 and Yahoo! Music. Third, interactive services that give the listener choice in the music that is delivered, like Last.fm are denied the benefit of the compulsory license and are required to seek permission directly from the copyright owner in order to transmit their music.
All services that are eligible for the compulsory license must meet several conditions. They have to display information identifying the artist, title, lyricist, and composer of the track being transmitted. They must also abide by what is called the “sound recording performance complement” which restricts the number of songs that can be played from the same album or same artists within a three-hour period. This condition is apparently designed to prevent consumers from recording their favorite artists or albums thereby displacing CD sales. Services are prohibited from evading this condition by causing channels to switch automatically. In addition, services that started after 1998, chiefly Internet radio, must not induce or encourage copying and must use technology to prevent copying, called Technological Protection Measures (TPMs), also known as Digital Rights Management (DRM) if the technology permits using them.
If music services and rights owners fail to agree upon a license fee, section 114 sets up different standards for setting fees for pre and post 1998 services. The body responsible for setting these fees is called the Copyright Royalty Board (CRB). The CRB consists of three administrative judges who determine rates and terms for various compulsory licenses under the copyright act and receive and distribute royalties collected by the Copyright Office. For pre-1998 services, such as satellite radio and Music Choice, the CRB is required to set a fee that ensures the most creative works are available to the public. The CRB also must consider the relative roles of the service transmitting the music and the record label in making the work available and to afford both a fair return. By contrast, for the post-1998 services, the CRB is directed to consider whether the service would diminish record sales and other sources of revenue for copyright owners and also the relative contributions of the service and the label in making the work available. The standard for post-1998 services is clearly titled in favor of the labels.
Section 114 requires copyright owners to “designate common agents” to distribute the statutory fee. SoundExchange and Royalty Logic have emerged as the designated agents. The fees are distributed evenly among performing artists and record labels.
The term “platform parity” refers to the idea that there should be equal treatment under the law for all types of services that transmit music, regardless of the medium used, whether analog or digital, or when the service was established. As we have already pointed out, the current law distinguishes between over-the-air radio, satellite radio, Internet radio and other types of transmission services in terms of the licensing rates and the conditions imposed in order to be eligible for the statutory license. At one end of the spectrum, over-the-air radio is completely exempt from any conditions or from the obligation to pay a royalty. On the other end of the spectrum, Internet radio services have been saddled with the highest rates and the most onerous conditions. The companies that market these services are currently leading the charge for parity. The recording industry has supported these calls for parity as well.
The broadcasters, on the other hand, argue for a continuation of the status quo. They claim that Congress has thus far exempted over-the-air radio from a performance fee in recognition of the fact that radio play promotes record sales. However, the Copyright Office has rebuffed these claims. Register of Copyrights Marybeth Peters explained in her testimony before the House of Representatives that broadcasting is no longer the only promotional tool because consumers are exposed to music from numerous other sources. She pointed out that the Copyright Arbitration Royalty Panel (CARP) (the panel that set webcasting rates for the period 1998- 2002) had observed that webcasting was just as promotional as broadcasting. Additionally, the Office has also suggested that a rollout of HD radio and satellite radio devices would threaten to displace record sales. Therefore, the Office has urged Congress to require radio broadcasters to pay a sound recording performance license.
As we mentioned before, if record labels and music services fail to agree upon a royalty rate, the Copyright Royalty Board will determine the cost of these royalties. So far, there have been two such proceedings, and Internet radio services have claimed that both have resulted in rates so high that most small webcasters would be driven out of business. These proceedings are referred to as “Webcaster I” and “Webcaster II.” Webcasters have complained that in both proceedings a standard that was wrong to begin with was misapplied.
The law requires that rates be set based on the what a willing buyer, in the position of an Internet radio company, would have paid a willing seller, in the position of the record label. In applying this standard the CRB may look at other licensing transactions as benchmarks. In both rate determination proceedings, the webcasters claimed that the wrong benchmarks were used. In Webcaster I, the CRB’s predecessor, the Copyright Arbitration Royalty Panel used the agreement between the RIAA and Yahoo! as a benchmark. Webcasters claimed that this agreement was based on a monopolistic market where the RIAA adopted a take-it-or-leave it approach to license sound recordings. In Webcaster II, the CRB set rates based on an agreement between interactive music services and record companies.
Webcasters have also claimed that the per-performance metric used to calculate royalties was wrong. Webcaster I, imposed a royalty rate based on one listener listening for one hour. Webcaster II set the rate based on one song streamed per listener. The Radio and Internet NewsletterRAIN gives the following example: 500 listeners listening to one song would result in 500 listener hours and the station would have to pay a royalty for each listener hour. It explains that the rate based on this metric would result in the webcaster paying more per song transmitted than the revenue they made per song.
As it did in the past, Congress continues to address problems surrounding performance licensing in a piecemeal fashion. Bills have been introduced in both houses to rectify the perceived injustices of the webcaster rate proceedings, introduce platform parity and require over-the-air radio to pay a performance license. While most of these bills would go some way in improving the current morass, they do not go far enough. In addition, one of them threatens to erode consumer rights in the name of introducing platform parity.
Pursuant to calls by small commercial webcasters to set aside the Webcaster I ruling, Congress passed the Small Commercial Webcasters Settlement Act of 2002 (SWSA). The SWSA allowed SoundExchange to negotiate licenses directly with small webcasters. However, the SWSA specified that rates negotiated under the Act were a compromise that did not represent an actual market place transaction. As a result they were not to be regarded as benchmarks in any future CRB proceedings.
On December 12, 2002, SoundExchange and a coalition of small commercial webcasters called the Voice of Webcasters notified the Copyright Office that they had negotiated an agreement under the SWSA. The Office published the terms of this agreement, which became the alternate rates available to small commercial webcasters.
The agreement significantly lowered the rates for small webcasters. For 1998-2000, it allowed webcasters to pay either 8% of gross revenues or 5% of their total expenses—whichever was higher. For 2003 and 2004, these rates were set at 10% of gross revenue for the first $125,000 and 12% of revenue for any amount exceeding that figure.
Two companion bills, both named the “Internet Radio Equality Act” (IREA) were introduced in the House and Senate in 2007. Both bills aimed to nullify the May 1, 2007, royalty determination of the Copyright Royalty Board – Webcaster II.
Both bills proposed to replace the controversial willing buyer/willing seller standard for determination of royalties with current standards that apply to other digital music services such as satellite radio. Also, both bills would replace the rates set by Webcaster II. Under the bills’, all webcasters would have the option of paying either 0.33 cents per hour of transmission to one listener or 7.5% of revenues received by the provider.
A coalition of webcasters, calling itself the SaveNetRadio Coalition, has come out in support of the House bill. Because the bills are so similar, one can infer the coalition is likely to support the Senate bill as well. SoundExhcange and MusicFirst oppose the bills and contend that these rates would serve as a windfall for large webcasters. As of the publishing date of this website, both bills are pending before Congress.
The Perform Act was introduced in the Senate on Jan 11, 2007. The bill seeks to reform rate-setting procedures and introduce platform parity. Like the IREA, this bill would change the controversial willing buyer/willing seller standard to one based on fair market value. It would also require uniform rate setting standards for webcasters, satellite radio providers and cable radio services. However, the bill would not apply to analog broadcasters, who could continue to transmit music without paying performers and record companies.
While the bill’s proposals to establish platform parity and reform rate-setting standards and procedures would bring about much needed reform, the bill also contains several provisions that are unfair to consumers. First, the bill would severely restrict home recording rights and require services to install DRM to achieve these restrictions. Consumers would be allowed to record only based on blocks of time and not on specific songs, albums or artists. In addition, the devices would have to be designed so that consumers could only listen to the recordings in the same order they were recorded. What does this mean in practical terms? It means that users would be allowed to record a random block of songs—say 5 minutes worth of songs from their favorite radio station—but would not be allowed to split that recording into separate songs or to attempt to record only specific songs played on the station.
The DRM provisions of the Perform Act are based on the reasoning that modern devices that allow consumers to record songs, create their own playlists and listen to music in whatever order they wish would amount to a distribution of music and displace record sales. Thus, any digital broadcast of an audio recording must be protected using technological protection measures. The reasoning seems to be specifically targeted at XM’s portable receiver called the inno.
The Performance Rights Act of 2007 was introduced in the House and Senate on December 18, 2007. Both bills would require over-the-air broadcasters to pay a performance license to labels and performers, as is the case for satellite, cable and Internet radio services. They would subject broadcasters to the same statutory license as webcasters and satellite radio services. However, the bills would still treat traditional broadcasters more favorably than satellite or Internet radio service providers by not requiring them to abide by all the conditions that the other services have to abide by in order to be eligible for the statutory license. The bills seek to alleviate any burden the license may cause on non-commercial and small radio stations by giving them a flat fee option.
The bills are a good first step towards achieving parity. However, they would fail to level the playing field among all providers of music services by not addressing the disparities in rate setting procedures. Also, they would not ensure that an artist’s share of the revenues is not used by record labels to “recoup” their advances—a remnant of the music industry’s archaic contract structure. The Perform Act has passed the House Subcommittee on Courts, the Internet and Intellectual Property.