Monday, April 23, 2007

Copyright Royalty Board Decision

Today we have another post by Matthew Drake, our General Counsel at Broadclip. Thanks Matt!

You may have heard about the March 2, 2007 decision by the Copyright Royalty Board, known as the CRB, a previously obscure government panel, to almost triple the royalty rates for US based Internet radio stations. What’s going on here?

The Copyright Royalty and Distribution Reform Act of 2004 gave the CRB the responsibility of revising the license fees paid by Internet radio stations. As with terrestrial radio, individual stations do not negotiate their own licenses, rather the federal government sets mandatory license fees.

The old royalty structure was scheduled to expire January 1, 2006, and the CRB was given the task of setting the new rates. The CRB started gathering evidence in early 2005, heard testimony from dozens of witnesses and experts, and issued its decision in March of 2007. (The final rules will probably be applied retroactively.)

Like terrestrial radio stations, Internet radio companies already pay the music industry for the right to play music. Small stations pay a percentage of their revenue, while larger stations pay by the song. The CRB had to decide whether the rates should change, and if so, by how much. The CRB imposed a fee structure that will drastically increase the license fees that Internet radio stations must pay. The fees are on a “per play” basis, meaning that the station must pay for every listener, for every song. The “per play” rates adopted by the CRB increase rapidly over the next several years:

2005 $0.000762 (the present rate for large stations)
2006 $0.0008
2007 $0.0011
2008 $0.0014
2009 $0.0018
2010 $0.0019

While almost tripling the rates is bad, it’s not even the most damaging part of the decision. Under the old rate structure, small broadcasters paid a royalty fee of about 12% of their revenues. The CRB’s ruling would end that practice and force them to pay the same rates as the larger stations, driving small broadcasters out of business. Additionally, the decision imposes a new $500 “per channel” minimum fee. The exact definition of a channel is somewhat vague, but, for instance, if a station creates a new stream every time a user logs on, every stream might be counted as a separate channel.

The decision could be a disaster for Internet radio, if it stands. But first, the ruling will surely be appealed. The first step was a formal request for rehearing. Several motions were filed, but on April 16, 2007, the DRB denied them. (In its April 16 decision, the CRB did offer a “clarification” to its earlier ruling, deciding that for 2006 and 2007 only, payment may be based on Aggregate Tuning Hours (ATH), measuring cumulative hours of reception by all listeners, to ensure a “smooth transition” to the new regime.)

Since the CRB refused to rehear its decision, the next step is an appeal to the United States Court of Appeals for the District of Columbia, which often hears appeals related to the federal government. How long will it take? Probably around one year, give or take. What will the outcome be? Your guess is as good as anyone else’s.

What should happen? Congress should step in and do what it did last time government bureaucrats threatened Internet radio. In 2002, the Librarian of Congress (who had the power to set Internet radio royalty rates at the time) decided that Internet radio stations should pay 0.07 cents per song per listener. However Congress stepped in and passed the Small Webcaster Settlement Act of 2002, which said that small stations could instead pay a percentage of their revenue.

Rep. Edward Markey (D. Mass) has already voiced his concern with the CRB’s decision, saying, “This represents a body blow to many nascent Internet radio broadcasters and further exacerbates the marketplace imbalance between what different industries pay.” Congress should pass a similar law today to ensure the continued growth of Internet radio.

You should tell your Congressional representative that Internet radio is too important to be shipped overseas. You can email them directly or you can visit here to find your Representative's contact information.

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