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Is It Lights Out for Webcasters?

The new Webcasting royalty rates scheduled to go into effect on July 15 are already having an impact — both online and in Washington.

(click thumbnail)The new Webcasting royalty rates scheduled to go into effect on July 15 are already having an impact — both online and in Washington.

In our final look at this subject (for the time being), we’ll consider the alternatives to the new rates and other approaches that Webcasters might consider.

It has now become clear as the math has been worked out that large royalty increases would be levied on all Webcasters, large and small, commercial and non-commercial. Numerous players have projected that their royalty payments would skyrocket from single-digit percentages of their revenues to over 50 percent, and many Webcasters have stated they would be forced to cease operations under these conditions. (Included among the latter are some large, well-established entities.)

As a result, much public protest has been seen on the Net, and many Webcasters have added messages to their sites and streams soliciting support from listeners or calling them to action in various campaigns.

Concurrently, the industry is examining its alternatives.

The non-statutory route

One approach that may not be widely understood is that the statutory licensing of sound recording rights at issue here is not a mandatory requirement for Webcasters, but is offered as a convenience to avoid the need to obtain clearances from every song’s sound recording copyright holder individually before broadcasting its content.

Clearly the latter approach would be a massive and inefficient effort, and excessively labor-intensive for all parties. So while rights holders generally do not favor any such compulsory licensing regime (since it limits their ability to negotiate terms), the statutory license for sound recordings’ Webcast rights is a concession to expediency. Ideally its convenience induces usage levels that outweigh any loss of licensing leverage for rights holders.

If a Webcaster or group of Webcasters wanted to, however, it could make its own alternative arrangements with Sound Exchange, or go directly to individual rights holders of content it wanted to broadcast, to obtain Webcasting rights for the sound recordings.

This approach potentially could provide a more favorable rate to the Webcaster, just as public radio (CPB stations) collectively arranged for their music Webcasting during the period 2002–05.

At present there are apparently a few Webcasters exploring or having already achieved such an arrangement for the current rate period (2006–10). One would expect that this could be limiting to the range of material aired, but that may not be a problem for some narrowly formatted services that can serve their audiences with material coming from only a few rights holders (certain ethnic music, emerging artist or other narrowcast streams, for example).

It is also possible that the Webcaster could make such direct arrangements with rights holders for some of the content it broadcasts, and work under the statutory license for the remainder. The latter could then be prorated by an appropriate percentage representing the amount of content on the stream that was not directly licensed.

A potential downside of the direct-licensing approach affects the musicians themselves. The statutory royalties collected by Sound Exchange are distributed in an even split between the performance rights holder (typically the record label) and the musicians that performed on the recording. If a Webcaster negotiates with the rights holder directly, the musicians could be cut out of the deal, while the labels would lose nothing but the Webcaster cuts his/her fees in half, for example.

Other options

Additional venues for relief remain open.

After the CRB rejected all requests for rehearing of its decision, its final ruling could be published in the Federal Register. Subsequent appellate action then moves to the U.S. Court of Appeals, where an appeal is expected, which must be filed within 30 days of the ruling’s publication date. That appeal process could then extend for a year or more before a final decision is made.

Meanwhile, absent any other emergency ruling by the courts, the new rates (retroactive to Jan. 1, 2006) will remain in effect.

At any point in this process, Sound Exchange could also pursue a private, out-of-court settlement with some or all parties, which could differ significantly from the CRB ruling, but this seems unlikely at this time.

Finally, there is a legislative route: Congress could pass a law that overrides or alters the CRB rates for some or all Webcasters, as it did with the Small Webcaster Settlement Act’s adjustments to the 2002 ruling. (The SWSA has no impact on rates after 2005, and its rate relief was explicitly non-precedential, so it cannot be cited as a basis for future rates.)

To date, one such bill has been introduced in the U.S. House of Representatives: H.R. 2060, the Internet Radio Equality Act, sponsored by Rep. Jay Inslee, D-Wash., and Don Manzullo, R-Ill.

This bill would vacate the CRB ruling, and fix the new royalties for the entire 2006–10 period at either 7.5 percent of a Webcaster’s revenues or 0.33 cents per listener hour (at the Webcaster’s option), along with several other adjustments providing current and potential future relief to Webcasters. Among the latter is a return to the annual minimum royalty of $500 per Webcaster, not $500 per stream as the CRB had ruled.

If none of these alternatives bear fruit, the new rates are likely to have some short- and long-term effects on Webcasting, although they may not be quite as dire as some have predicted.

Rather than wholesale darkness settling over the Webcasting space, the actual impact may be more subtle, as Webcasters work their way around the new rules. Some streams may disappear, while others reduce the variety of their content, block access from certain regions, play fewer songs per hour (i.e., more talk, more commercials), or set limits on the number of simultaneous streams served. Many of these results could proceed in gradually increasing measure over the next five years, further decreasing their obvious linkage to the effect of new rates.

Another indirect impact of the current discussion is the notice that has been drawn to the disparity between performance royalty rates across different radio platforms — terrestrial, satellite and Internet — in particular, the fact that terrestrial radio remains exempt from sound recording royalties.

Thus the coattails of this debate may extend beyond the Internet radio space, stimulating subsequent consideration of levying sound recording royalties on terrestrial radio broadcasting.

Meanwhile, broadcasters would be well advised to seek counsel and study how they might most cost-effectively achieve their Webcasting goals during the new rules period, while observing closely (and perhaps participating in) the ongoing actions toward relief.

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