Chapman Law Review
INTERNET RADIO DISPARITY: THE NEED FOR GREATER EQUITY IN THE COPYRIGHT ROYALTY PAYMENT STRUCTURE
Copyright (c) 2010 Chapman Law Review; Jessica L. Bagdanov
When Radiohead released the album “In Rainbows” in 2007, they provided a downloadable version on the band’s website for which buyers could pay whatever price they wanted, even zero. Commentators noted, “[f]or the beleaguered recording business Radiohead has put in motion the most audacious experiment in years.” Although some fans downloaded the album for free, many paid money for it, and the album made more money than the band’s two previous albums combined, which were never offered for free. Not many musical artists could get away with the creative antics of Radiohead, but this novel marketing strategy demonstrates the changing nature of the recording industry and illustrates that record labels may need to change their business models in order to stay afloat in an industry driven by Internet streaming and advertising. Thom Yorke, lead singer of Radiohead, said to Time Magazine, “I like the people at our record company, but the time is at hand when you have to ask why anyone needs one. And, yes, it probably would give us some perverse pleasure to say ‘F___ you’ to this decaying business model.”
The introduction of the Internet brought new ways for music lovers to listen to their favorite artists without having to purchase full albums. New methods of broadcasting music, such as Internet and satellite radio, changed the face of radio and broadcast licensing. Musical recordings began to stream online “by transmissions that are akin to radio broadcasts over the Internet, whether to the public at large or directly to individuals upon request, called webcasting.” Many record companies and other musical copyright holders became concerned that copyright laws could not sufficiently protect their copyrighted content and that such entities and individuals would lose large percentages of revenue due to Internet radio and piracy. Indeed, the recording industry has suffered financially due to the digital age. It has been noted, however, that if properly managed, Internet radio may also be a significant way for record companies to increase record sales. Kurt Hanson, founder and CEO of AccuRadio (a small online radio site), explained, “Internet radio is one of the few bright spots in the music industry, giving airplay to dozens of genres and thousands of artists that never received airplay before.” Although not a perfect substitute for purchasing music, webcasting makes it easier for listeners to buy music from artists they like than other forms of radio do.
The major issue in the statutory regulation of Internet radio has been the performance right: who has one, who should get one and how much it should cost. Those who own a “performance right” are entitled to receive royalties whenever someone else–like a webcaster–broadcasts the copyrighted material. Throughout recent history, copyright law related to performance rights has changed dramatically. Although the current system has continued to achieve significant improvements, is still unfair to webcasters. While terrestrial broadcast radio stations pay minimal royalties for the music they play, webcasters often must pay at least twenty-five percent of their yearly revenue in royalties. This Comment advocates for a more balanced structure, where Internet radio is less-heavily burdened, especially considering the significant advertisement advantages it has over other forms of broadcast radio.
In order to fully understand the problems associated with the current structure of broadcast copyright laws, particularly as applied to Internet radio, one must appreciate the history of the law and its evolution over time. Part I of this Comment provides an overview of current copyright law applicable to webcasting and Internet radio. Part II discusses current royalty rate structures that apply to different webcasting business models. Part III notes the unfairness of the current rate structure and discusses new issues it must face because of the continued advancement of technology. Finally, Part IV proposes that to create a more balanced system, Congress should pass the Performance Rights Act, which would amend current copyright law to require terrestrial broadcast stations to compensate artists, just like all other mediums of radio broadcasting. The Act should require that SoundExchange create an opt-out database where artists can waive royalty payments. Hence, while actually raising royalty revenue coming to artists with the Performance Rights Act, broadcasters could enjoy an efficient way to reduce royalty payments.
I. Current Copyright Law Applicable to Webcasting and Internet Radio
Regulation of Internet radio, like other copyright issues, derives from the Copyright Act of 1976 (Copyright Act). Two amendments to the Copyright Act significantly determined the future of Internet radio and webcasting: the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998. This statutory framework, set in place long before webcasting existed, determines the methods used to calculate royalty rates and licensing schemes for the new business models of the twenty-first century.
A. The Copyright Act of 1976
Section 102 of the Copyright Act grants copyright protection to works that are categorized as, among other things, “musical works” and “sound recordings.” A “musical work” refers to the notes and lyrics of a song, whereas a “sound recording” results from “the fixation of a series of musical, spoken, or other sounds.” A song that is sung and performed by an artist constitutes a sound recording, whereas the person who wrote the song is the creator of a musical work. While the holder of a musical work copyright retains a right of performance–meaning the person will be paid in royalties whenever that composition is performed–the holder of a sound recording right will not. As a consequence of this lack of protection, other artists may perform their own versions of a musical work and thereby produce their own sound recording. Often a record label owns the copyright in a sound recording, and the composer of the piece assigns his interest in the musical work to a music publisher in exchange for a continued interest in royalties drawn from it.
Under section 102 today, licensing revenues for both musical works and sound recordings flow whenever such items are sold as compact discs (CDs) or Internet downloads, or when they are used in television and Internet commercials. Revenues also accrue for a musical work when it is “performed publicly through radio, television, and Internet broadcasting . . . and venues of every kind where music is played.” However, no similar performance right generated licensing revenues for holders of sound recording rights under the Copyright Act until 1995. Essentially, if a song was broadcasted over the radio, the composer enjoyed copyright compensation, but the artist performing the song and the record label did not. The commencement of the digital age, specifically the ability to stream music over the Internet, posed a serious financial threat to record labels by offering consumers a replacement for purchasing compact discs. In response, copyright holders–specifically artists holding sound recording rights–looked to Congress for more protection of their ownership rights.
In 1995, Congress granted sound recording copyright owners a limited right of public performance in the Digital Performance Right in Sound Recordings Act (DPRA). Congress finally recognized that the then-current state of the Copyright Act did not sufficiently protect such copyright holders from commercial exploitation. The congressional committee in charge intended to “control the distribution of [copyright holders’] product by digital transmissions . . . without imposing new and unreasonable burdens on radio and television broadcasters, which often promote, and appear to pose no threat to, the distribution of sound recordings.” The statute provides in pertinent part:
Subject to sections 107 through 122, the owner of a copyright under [Title 17 of the United States Code] has the exclusive rights to do and to authorize any of the following . . . in the case of sound recordings, to perform the copyrighted work publicly by means of a digital audio transmission.
The purpose of the DPRA was to ensure that performing artists, record companies and others “whose livelihood depends upon effective copyright protection for sound recordings, [would] be protected as new technologies affect the ways in which their creative works are used.”
The DPRA created a limited right, rather than an exclusive right, to transmissions in order to balance various “industry interests.” It also created a compulsory license for certain transmissions, depending on the type of service provided. Although it gave the exclusive right of performance to sound recording copyright holders, the DPRA created a complex “three-tiered system,” categorizing license requirements into separate rates for: (1) interactive services, (2) non-interactive subscription transmissions, and (3) non-subscription digital audio transmissions of sound recordings. The DPRA tailored licensing requirements to these different types of service providers, depending on the likelihood of an effect on record sales or on the likelihood that “infringing reproductions” would be created.
Owners of interactive services are responsible for the most stringent level of copyright licensing requirements and cannot receive a compulsory license. The DPRA defined an interactive service as “one that enables a member of the public to receive . . . on request . . . a transmission of a particular sound recording . . . selected by or on behalf of the recipient.” Interactive services do not qualify for the simple statutory license structure “because of the ability of listeners to select specific music that will be included in the stream . . . .” Instead, they must negotiate performance licenses with both the owners of the copyrights in the transmitted musical compositions and also the owners of the sound recordings.
Non-interactive transmissions are subject to compulsory licensing only if they conform to specific statutory requirements; otherwise, they must negotiate privately with sound recording copyright holders just like interactive services are required to do. If private negotiations fail between these entities, an arbitration panel organized by the Copyright Office determines the royalty rate for the compulsory license. It is this compulsory license that allows Internet services to use legally recorded sound recordings in their webcasts without seeking permission directly from the copyright owners.
Non-subscription digital audio transmissions of sound recordings are those not controlled or limited to certain recipients and are totally exempt from the sound recording performance right. This third type of transmission constitutes the most important exemption in the DPRA and includes radio and television broadcasts that are “available free of charge” to the public. Non-subscription transmissions include “any trans-mission that is not a subscription transmission.”
This complex method for determining licensing requirements and royalty rates became even more difficult for new companies to navigate after the rising popularity and sophistication of the Internet in and after 1998, and copyright holders again called for greater copyright protection–as well as clarification–from Congress.
C. The Digital Millennium Copyright Act
The Digital Millennium Copyright Act (DMCA) was enacted in October of 1998 in response to claims that the DPRA did not adequately respond to the application of royalty rates to Internet radio. Record companies and the Recording Industry of America Association (RIAA) expressed concerns that labels were not sufficiently protected from Internet piracy under the DPRA. Since webcasters were not included in the DPRA provisions, “webcasters and the recording industry fought over whether webcasters should qualify for the limited public performance right or be treated as an interactive service” and be required to negotiate privately with copyright holders. Specifically, the recording industry and the RIAA complained that webcasting services of the non-subscription nature diminished record sales, cut into profits, and hindered growth of the recording industry. Convinced, Congress enacted the DMCA in line with its historical policy of “preventing the diminution in record sales through outright piracy of music or new digital media that offered listeners the ability to select music in such a way that they would forego purchasing records.” The DMCA expanded the class of transmissions that are subject to compulsory licenses, namely the non-interactive subscription services. Although “Congress did not alter the section 114(d)(1)(A) exemption for ‘nonsubscription broadcast transmission[s],”’ the newly expanded category subject to compulsory licenses included services previously categorized as non-subscription broadcasts. Some webcasts were no longer considered part of the third category exempt from statutory licenses. With this expansion, Congress was merely trying to “clarify that webcasters are subject to the sound recording performance right.” Indeed, the DMCA left webcasters “clearly subject to royalty payments.”
The DMCA amended the Copyright Act to broaden the sound performance right to include a more expansive definition of an “interactive service” as it pertains to individual licensing. As webcasting continued to gain popularity, the DPRA’s definition of “interactive service” began to break down. Section 114 of the DMCA addressed the perceived deficiency in the DPRA, providing:
An ‘interactive service’ is one that enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording, whether or not as part of a program, which is selected by or on behalf of the recipient.
This definition altered what the DPRA considered “interactive” because it no longer required a user to have a personal choice in what songs are played throughout a webcast. As long as “the user has influenced the program in such way that the ‘recipient might identify certain artists that become the basis of the personal program,”’ the service would be considered interactive within the meaning of the statute. Internet radio webcasts, however, do not typically fall under the DMCA definition of “interactive service” and are either subject to the compulsory licensing scheme determined by the Copyright Arbitration Royalty Panel (CARP), or must privately negotiate with copyright holders. CARP was supposed to “establish rates and terms that most clearly represent[ed] the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” The DMCA requires Internet webcasters to obtain licenses and pay royalties to both the performance rights organizations as well as to the owners of the copyrights of sound recordings and musical works, because each of these entities has an ownership right in a given song or other musical work.
II. Current Royalty Rate Structure
As we have seen, Internet webcasters–just like other broadcasters–must pay royalties for the musical recordings performed on their online stations or channels. This section considers the most current protections afforded to performance rights holders by the federal government and explores what webcasters must pay in royalties to keep their businesses running. The Copyright Royalty Board (CRB) set highly controversial royalty rates in 2007, and experienced intense backlash from webcasters as a result. More recent attempts to balance the rate structure for webcasting companies have been seen as an improvement over the 2007 rates, but are still questionable and continue to favor other forms of broadcast radio, such as terrestrial broadcasting stations.
A. The 2007 Royalty Rates Set by the Copyright Royalty Board
When the DPRA was enacted in 1995, CARP–and subsequently the CRB — designated SoundExchange as the administrative agency responsible for collecting and distributing compulsory performance royalties for sound recording copyright holders. In March 2007, the CRB, together with Sound-Exchange, established a new royalty rate system under the authority of section 114 based on a “per performance” calculation. The system set forth royalty rates for commercial webcasters, small commercial webcasters (less than $1.2 million in revenue per year), and noncommercial webcasters. The new rates for commercial webcasters and small commercial webcasters were set as follows: $0.0008 per performance for 2006, $0.0011 per performance for 2007, $0.0014 per performance for 2008, $0.0018 per performance for 2009, and $0.0019 per performance for 2010. The CRB also set a $500 minimum fee per channel for broadcasters. Under this structure, small webcasters did not pay different royalty rates than larger companies. In contrast, noncommercial webcasters were subject to a minimum annual fee of $500 per channel or station. The high rates established for commercial and small commercial webcasters upset many and resulted in numerous attempts to negotiate different agreements with Sound-Exchange. Complaints were not heard, however, because the CRB quickly rejected all rehearing proposals in April 2007.
The rate schedule established in 2007 was the product of two years of litigation between SoundExchange and parties representing all types of webcasting and broadcasting services, where the parties appeared and argued before the CRB in order to determine a fair royalty structure. The CRB adopted significant rate increases on the advice of SoundExchange, over opposition by numerous digital broadcasters who argued that the proper structure should calculate royalties due based on a percentage of revenue, rather than the “per performance” structure advocated by SoundExchange. Webcasters argued that this effort by SoundExchange was nothing more than a “major label money grab–an attempt to revive a dying business model through exorbitant fee increases at the expense of technological developments and consumer interests.” The fees set by SoundExchange would exceed the total annual revenues for many Internet radio stations, and although large companies “like AOL may [have been] able to afford the new rates, many smaller Internet radio stations [would have had] to shut down. The new rates could [have] actually reduce[d] the flow of royalties to musicians.” For example, after the adoption of these rates, Radio Paradise, a smaller Internet radio site, faced royalty costs of over 125% of its yearly revenue. Even Pandora–considered to be an Internet radio giant–was on the verge of shutting down, with royalty fees constituting seventy percent of its projected revenue of twenty-five million dollars for 2008. The uproar over the royalty rates set by SoundExchange even sparked a “day of silence” for Internet radio stations and channels on June 26, 2007, which was designed to draw attention to what webcasters envisioned to be the government’s attempt to kill Internet radio.
In the ensuing months, webcasters united behind various legislative proposals to curb the effects of the SoundExchange rates. These efforts included the Internet Radio Equality Act and the Performance Rights Act, both of which, however, currently seem to have been abandoned somewhere in the dusty corners of Congress. However, the idea behind the Performance Rights Act–that terrestrial radio should also be responsible for royalty payments to copyright holders–is still being considered in Congress and may become a reality in the months to come. Webcasters have not given up, and since 2007, SoundExchange has continued to entertain other proposals and negotiations. One such negotiation, the Webcaster Settlement Acts of 2008 and 2009, provided certain webcasters relief from the exorbitant rates set by the CRB in 2007.
B. SoundExchange 2006-2015 Royalty Agreement Under the Webcaster Settlement Act
Near the end of 2008, webcasters enjoyed renewed hope that royalty conflicts would soon dissipate, or at least come to a reasonable compromise. Congress passed the Webcaster Settlement Act in October 2008, which gave SoundExchange and webcasters the opportunity to establish royalty rates for the performance of sound recordings over the Internet in lieu of compulsory license rates determined by the CRB. Under this Act, SoundExchange had until February 15, 2009 to reach agreements with webcasters or groups of webcasters, and webcasters were required to expressly opt out of the CRB royalty rates set in 2007. Although questions arose as to the likelihood of such settlements actually happening, webcasters were mostly optimistic about this progress. However, SoundExchange encountered logistical problems in meeting the February 15 deadline, and webcasters quickly appealed to Congress for an extension. The Webcaster Settlement Act of 2009 amended the Webcaster Settlement Act of 2008 and gave SoundExchange thirty additional days to “enter into settlement agreements with webcasters that would be legally binding on all sound recording copyright owners.”
The thirty-day extension seemed to provide just enough time for successful negotiations to take place. Under the Webcaster Settlement Act of 2009, SoundExchange and certain “pureplay” webcasters reached an alternative agreement for royalty rates in July 2009, for the period of 2006-2015 (2014 for small pureplay webcasters). Webcasters that run online music for larger providers are not included. This agreement splits pureplay webcasters into three categories: (1) large, (2) small (defined as those that earn $1.25 million or less), and (3) others that offer bundled, syndicated, or subscription services.
Large webcasters are required to pay either a per-performance rate or twenty-five percent of their total revenue, whichever is higher. However, larger webcasters are more likely to pay royalties on a per-performance basis than a percentage of revenue, since large webcasters have significantly higher numbers of users than smaller webcasters. Also, large webcasters must pay a minimum royalty per year of $25,000. The deal offers a discounted royalty rate–a nearly fifty percent discount–compared with the CRB rates of 2007, with the maximum per-performance rate reaching only $0.0014 by 2015. In exchange for this discounted rate, the agreement requires more stringent reporting requirements as well as revenue sharing.
Small pureplay webcasters pay the greater of either a percentage of revenues or a percentage of expenses, ranging between ten and fourteen percent for the period from 2006 to 2014, and “in certain circumstances have less stringent play list reporting requirements in return for payment of an additional ‘proxy fee.”’ Although the Executive Director of SoundExchange, John Simson, still considers the CRB royalty rates fair and reasonable, he expressed hope that this experimental revenue sharing model would benefit artists, rights holders, and webcasters simultaneously. Pureplay webcasters seem satisfied as well and consider this royalty agreement to be a significant milestone as the first “reasonably viable [deal which] . . . extends for a reasonably-long period of time.” However, the new system still contains elements of fundamental unfairness toward Internet radio that must be addressed before Internet radio will be able to flourish.
III. Different Standards for Different Mediums: A Continuing Problem
Although the Webcaster Settlement Act of 2009 gave relief to many webcasters and represents one of the first positive settlements between SoundExchange and pureplay webcasters, terrestrial radio still pays nothing in sound recording performance royalties. Internet radio continues to rise in popularity and will soon infiltrate every aspect of everyday life, including vehicles and homes. An exemption in royalty payments for terrestrial radio is unfair when one considers the current state of Internet radio and its future. Because terrestrial radio is a continued presence in the transmission of performances, it should not be treated more favorably than Internet transmissions.
A. Looking Into the Future
According to Bridge Ratings, the number of Internet radio listeners accessing wirelessly–using a personal computer or cell phone–will increase to seventy-seven million by 2010. Pandora claims to already have thirty percent of its users connected via broadband cell phones, and the number of broadband subscribers continues to grow. Pandora and other webcasters provide Internet radio applications (apps) for broadband phones that are so advanced that they replace listening to customized radio stations at a computer. The Apple iPad also provides a free, downloadable Pandora app, which provides extensive information and advertising for a musical artist with the touch of a finger.
Similarly, new vehicles will soon be equipped with digital and HD radio, which will include Internet radio options. New cars will have Pandora–or other webcasting companies–built into the car and “bundled with either the price of the car or services associated with the car.” Even if a vehicle does not have digital or HD radio, an iPhone or other broadband phone with Internet radio apps can hook into the vehicle’s stereo system, and the user can listen to Pandora while driving. The adoption of in-car Internet radio seemingly would threaten traditional, terrestrial radio as well as satellite radio as stable competition in the years to come.
However, statistics also show that terrestrial radio listening has actually increased since 2008, and according to Bridge Ratings, such growth will continue into 2012. Since 2006, traditional terrestrial radio has been considered the most influential media source for consumers. It is clear that Internet radio is driving the future of the radio broadcasting industry, and although terrestrial radio will face new challenges in competitive technology, it is certainly surviving as an industry. If the purpose of copyright regulation is to encourage innovation and “promote the Progress of Science and useful Arts,” Internet radio is disproportionately burdened with royalty payments, and other broadcasting forms pay minimal royalties for the music they play. Traditional terrestrial radio has never and will never, in this author’s view, be sophisticated enough to provide musical artists with any advertising perks able to compete with the advanced advertising capabilities of webcasting, and yet Internet radio continues to pay astronomical royalty rates that are completely disproportionate to what terrestrial broadcasters pay.
B. Terrestrial Radio Exemption: Unfair and Illogical
The current royalty rate system favors satellite and terrestrial radio to the detriment of Internet radio. Although in theory the structure is efficient and fair when considering the differing levels of user interaction, “the standards used to derive the royalties differ among classes of broadcasters, creating ongoing controversy.” Webcasters pay royalties set according to the willing buyer/willing seller standard, while satellite radio services pay rates determined under a multifactor test set forth in section 801(b) of the Copyright Act, and terrestrial radio stations pay no sound recording performance right at all. In fact, terrestrial broadcasters only pay about 3.5% of revenue to the American Society of Composers, Authors and Publishers. And, as of 2008, terrestrial radio still constituted a sixteen billion dollar market. Scholars and webcasters have supported platform parity, which is the notion that “all music services subject to the sound recording performance royalty should pay a royalty determined by the same standard, or perhaps even the same royalty.” SoundExchange established the musicFIRST Coalition in 2007, which has strongly advocated for broader performance rights in the form of platform parity. Both the House of Representatives and the Senate are considering current versions of the original Performance Rights Act to establish platform parity between radio broadcasters.
An exemption for terrestrial broadcast radio to the detriment of Internet radio no longer makes sense, especially when Internet radio advances the interests of musical artists in ways that terrestrial radio cannot. Although the exposure of new artists and public access to music should never trump proper compensation for copyright holders, “Internet radio is not the old Napster.” File sharing constitutes the major cause for the recent decline in CD sales, not Internet radio. In fact, Internet radio has helped to increase artist’s revenues from digital downloads in ways that terrestrial radio cannot. In 2006, RadioParadise generated over $260,000 in sales of CDs and other music through Amazon and $28,000 in iTunes downloads. In part, these sales can be attributed to the fact that on most webcasting stations, the artist’s name, song name, and album name are displayed next to a purchase option, a feature not available on terrestrial radio stations. In addition, Internet radio gives airtime to lesser-known artists that are not played on AM/FM radio, and therefore incentivizes artists to create more music. With the numerous benefits Internet radio provides to both the public and to musical artists, the unbalanced royalty structure should be improved to include platform parity. To compensate broadcasters for increased royalty payments resulting from platform parity, it should be balanced with options to reduce royalty fees.
IV. Proposed Solution: The Performance Rights Act with an Opt-Out Database Provision
To address the unfairness of the current royalty structure, which continues to favor terrestrial and satellite radio over Internet radio, Congress should pass the new and revised Performance Rights Act. However, the Act should be amended to include an option for artists to opt-out of royalty payments by registering with a government-run database. This way, artists will be compensated no matter how their music is broadcasted, and broadcasters can enjoy an efficient and streamlined way to reduce royalty payments owed to owners of sound recording copyrights.
A. The Full Performance Right Revisited
On February 4, 2009, a revived version of the original Performance Rights Act was introduced into the Senate by Senator Patrick Leahy. Known as “S. 379,” or the “Performance Rights Act,” it would amend the Copyright Act to grant performers of sound recordings rights to compensation from terrestrial broadcasters, but would establish a flat annual fee in lieu of royalty payments for terrestrial broadcast stations making less than $1.25 million in yearly revenue, a similar standard to the Webcaster Settlement Act of 2009. Because the economy is currently in a downturn, the legislation will not impose royalty payments until three years after enactment. On May 13, 2009, the House of Representatives Judiciary Committee approved the bill, and the Senate Judiciary Committee approved the same legislation in October of 2009. Next, the Senate must consider and vote on the legislation.
This new Performance Rights Act enjoys a considerable amount of support, and should be adopted into law by Congress. Although both Internet radio and terrestrial radio are free to the consumer, Internet radio compensates performing artists in the form of advertising in ways terrestrial radio does not. These individuals should be compensated for their work, regardless of the medium in which it is performed. Not surprisingly, the National Association of Broadcasters (NAB) has vehemently opposed this legislation, calling it a “tax” on local radio stations. The NAB claims that this tax would reduce the variety that music radio stations play, but when one considers the imminent rise of in-car Internet radio, these concerns may not be so terrifying. Although terrestrial radio provides artists with exposure to new audiences, this alone should not justify an exemption when Internet radio gives similar–even better–exposure.
The Performance Rights Act may have some negative impacts on musicians and record companies, but it would at least level the playing field of who pays royalties and create a more balanced royalty structure. Moreover, “the proposed act would result in additional revenue for record companies, musicians, and performers . . . [who] would receive an additional income stream. . . . [R]ecord companies could use the additional revenue to invest more heavily in the creative process of music. The Act itself, however, does not address the issue of high royalty rates. Therefore, the Performance Rights Act should carry with it a simple way for webcasters and radio stations alike to reduce their royalty payments.
B. An Opt-Out Database for SoundExchange
Since the CRB determination of royalty rates in 2007, it has been assumed that artists could waive the collection of royalties if they felt it would be in their best interest to allow webcasters to play their music. SoundExchange currently allows sound recording copyright owners to negotiate directly with webcasters, provided they give proper notice to the CRB and to SoundExchange. Also, if an artist does not collect the royalties owed to him after three years, SoundExchange keeps the money and adds it back into the general revenue pool. SoundExchange needs its own streamlined system for efficient use of royalty payments without requiring cumbersome individual negotiations between webcasters and copyright holders.
At a recent Senate Judiciary Committee hearing concerning performance royalties for radio, Texas Senator Cornyn suggested that, “rather than compelling a performance royalty, Congress should set up a ‘Do Not Play’ list, similar to a do not call list.” Such a list would be kept by SoundExchange–which already has a list of most copyright holders — and would consist of those artists who do not consent to their music being played without the payment of a royalty. If webcasters and radio stations wanted to play music from artists on the Do Not Play list, they would have to negotiate individually, but stations could play music from any other artists without a royalty. This idea, however, was dismissed quickly during the hearing for legitimate fears that such a system would tend to force less well-known musical artists and groups into a race to the bottom–giving up their copyrights in order to be heard–and that it would simultaneously prove difficult for smaller radio stations to carry major music stars, thus infringing on smaller sites’ ability to compete with larger ones.
However, the idea of creating a pool of royalty-free music is interesting and might prove a successful method for lowering royalty payments, which continue to cripple online radio stations. Instead of the system allowing royalty-free music by default, as Senator Comyn suggested, SoundExchange should create its own “Please Play” or “opt out” list, where artists could waive the payment of royalties and consent to webcasters and radio broadcasters playing their music for free. This opt-out provision could easily be attached to the Performance Rights Act as an amendment and simply provide a method for broadcasters to mitigate the impact of platform parity. Such a system, operated by SoundExchange, would provide more artists with more security and discretion in choosing how to market themselves, and it would also create more revenue as users are prompted with a “Purchase” option next to the song played. Instead of requiring individual negotiations, artists could simply join the opt-out list, which would allow radio stations of all types to play the music without paying royalties.
Some artist communities, like the Polka America Corporation (PAC), have already given Internet radio stations the right to play their music without royalties. However, PAC had to create its own artist database without the help of SoundExchange. Requiring webcasters to negotiate indi-vidually with music and recording organizations is as inefficient as requiring them to negotiate with individual music artists. With the right governmental protections in place, a system, operated by SoundExchange, would streamline negotiations between webcasters and sound recording copyright holders, as well as create an efficient way for webcasters to play free music to lessen their royalty obligations under the Copyright Act. This, coupled with a full performance right granted to holders of sound recording copyrights in the Performance Rights Act, seems to produce a fairer and more balanced structure that equally considers the interests of all parties involved: musical artists, the recording industry, webcasters, and terrestrial broadcasters.
The radio industry has changed dramatically over the past decade, and continued adaptation and flexibility will be needed to address future technological advances and evolving consumer habits. As the actions of Radiohead demonstrated in 2007, the market is changing, and everyone–musicians, music publishers, performers, etc.–will need to get creative to stay in business. Internet radio represents the innovative forefront of the broadcasting industry. Therefore, a royalty regulation system that hinders technological advancement and ignores current consumer values is detrimental to the health of the music industry as a whole. It is not appropriate to allow terrestrial radio stations to pay nothing in royalties while webcasters must pay at least twenty-five percent in revenue. Indeed, “[c]opyright may be property, but like all property, it is also a form of regulation. It is a regulation that benefits some and harms others. When done right, it benefits creators and harms leeches. When done wrong, it is regulation the powerful use to defeat competitors.” Congress should pass the Performance Rights Act, but should amend it slightly so that it includes an opt-out database requirement for SoundExchange in order to balance the interests of all parties.
The “great irony” of the debates among these groups–webcasters, the recording industry, musical artists, etc.–is that “most new devices only become popular because buyers really want them, which means they open whole new markets that can then be monetized by rightsholders.” Copyright holders have been forced to accept industry-altering technology before, and have successfully met the challenge. Consider the gramophone, the VCR, and analog cassette tapes. Each time these technologies were introduced into the market, copyright holders feared that it would be the death of music. Each time the industry survived. The recording industry will survive into the digital age, but only if it accepts change once again and adapts with new business and finance models.
A noninteractive nonsubscription digital audio transmission not exempt under subsection (d)(1) that is made as part of a service that provides audio programming consisting, in whole or in part, or performances of sound recordings, including retransmissions of broadcast transmissions, if the primary purpose of the service is to provide to the public such audio or other entertainment programming, and the primary purpose of the service is not to sell, advertise, or promote particular products or services other than sound recordings, live concerts, or other music-related events.
17 U.S.C. §114(j)(6) (2006). This definition is synonymous with the definition of “commercial webcaster” provided by SoundExchange. See Commercial Webcaster, SoundExchange, http://soundexchange.com/service-provider/service-category/im-not-sure-help-me-figure-it-out/quiz-commercial-webcaster/ (last visited Oct. 1, 2010).
allowed a small number of individuals to request that sound recordings be performed in a program specially created for that group and not available to any individuals outside of that group. In contrast, a service would not be interactive if it merely transmitted to a large number of recipients of the service’s transmissions a program consisting of sound recordings requested by a small number of those listeners.
H.R. Conf. Rep. 105-796, at 87-88, reprinted in 1998 U.S.C.C.A.N. 639 (1998). Compare this explanation with that of the U.S. Court of Appeals for the Second Circuit in Arista Records, 578 F.3d at 162-64.
The ability of individuals to request that particular sound recordings be performed for reception by the public at large…does not make a service interactive, if the programming on each channel of the service does not substantially consist of sound recordings that are performed within 1 hour of the request.
17 U.S.C. §114(j)(7). See also Duvall, supra note 67, at n.182. Pandora, for example, does not allow a user to choose the next song on his current channel, but the user may skip songs or approve of songs to “shape future listening.” Id.
(1)[P]er performance rates are directly tied to what is being licensed, (2)ease of measurement, (3)difficulties in tying revenue fees to the value of the licensed rights, (4)complexities in determining revenue from mixed format webcasters, and (5)the basic notion that the more that licensed rights are used, the more payments should increase in relation to use.
Duvall, supra note 67, at 279.
[B]ased on a webcaster playing an average of 16 songs per hour, royalties are 1.28 cents per listener-hour (based on 2006 rates). A well-run webcaster might have sold two radio advertising spots at a profit of 0.6 cents per listener-hour. In addition to video gateway ads, banner ads, and other web-based advertising, the total revenue for a well-run webcaster is still only between 1.0 and 1.2 cents per listener-hour. Thus, if a webcaster (and this is a well-run webcaster) must pay 1.28 cents per listener-hour, it is likely to go out of business.
Duvall, supra note 67, at 281; Daniel McSwain, Webcast Royalty Rate Decision Announced, Radio and Internet Newsl. (Mar. 2, 2007), http://www.kurthanson.com/archive/news/030207/index.shtml.
(A)To maximize the availability of creative works to the public;
(B)to afford the copyright owner a fair return for his or her creative work and the copyright user a fair income under existing economic conditions;
(C)to reflect the relative roles of the copyright owner and the copyright user in the product made available to the public with respect to relative creative contribution, technological contribution, capital investment, cost, risk, and contribution to the opening of new markets for creative expression and media for their communication;
(D)to minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.
17 U.S.C. §801(b)(1) (2006). Additionally, the rates set may be adjusted to reflect monetary inflation and other rate changes. §801(b)(2).