SoundExchange: Show us your numbers

Fred Wilhelms, an entertainment attorney based in Nashville, Tennessee, calling out SoundExchange:

You see, SoundExchange is a private, not-for-profit, organization. Other than some very fundamental and general numbers that they have to give the IRS every year to maintain their tax-free status, they don't have to tell anyone outside their boardroom *anything* about their finances.

• They don't have to tell anyone how much money really comes in.
  
• They don't have to tell anyone how much money they pay out to labels and artists, or how they decide who gets what.
  
• They don't have to tell anyone how many labels and artists are registered with them. This is actually funny, because the numbers keep shifting.
  
• They don't have to tell anyone what their operational budget is, or how that money gets spent.
  
  

That's just a little part of the article. The whole piece points out that the rhetoric from SoundExchange is unfounded, and the numbers they're throwing around aren't even consistent.

Give it a read.

Bill Number

The bill number for the "Internet Radio Equality Act" is H.R.2060, and you can track it online.

H.R.2060

Title: To nullify the March 2, 2007, determination of the Copyright Royalty Judges with respect to webcasting, to modify the basis for making such a determination, and for other purposes.

Sponsor: Rep Inslee, Jay [WA-1] (introduced 4/26/2007) Cosponsors (None)

Latest Major Action: 4/26/2007 Referred to House committee. Status: Referred to the Committee on the Judiciary, and in addition to the Committee on Energy and Commerce, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned.

Inslee introduces "Internet Radio Equality Act"

A bill has been introduced that will save independent internet radio by setting these royalties at the same level paid by satellite radio services, a reasonable amount (7.5% of gross revenues) which will benefit the artists as well as not bankrupt net radio stations. Call your Representative right now and ask to cosponsor the "Internet Radio Equality Act", just introduced by Representative Jay Inslee (D-WA) and Donald Manzullo (R-IL). This bill will set royalty rates that internet radio pays to the same reasonable level that satellite radio pays. Please call the House switchboard at (202) 224-3121 and ask to speak to your representative.  (find your representative).

From the press release from SaveNetRadio.org:

The Internet Radio Equality Act would vacate the CRB’s decision and set a 2006-2010 royalty rate at the same level currently paid by satellite radio services (7.5% of revenue.) The bill would also change the royalty rate-setting standard used in royalty arbitrations, so that the standards applying to webcasters would align with the standard that applies to satellite radio royalty arbitrations.
“The illogical and unrealistic royalty rates set by the CRB have placed the future of an entire industry in jeopardy,” stated Jake Ward [spokesman for SaveNetRadio.org]. “This bill is a critical step to preserve this vibrant and growing medium, and to develop a truly level playing field where webcasters can compete with satellite radio.

The crisis facing internet radio

There is a crisis facing internet radio: new mandatory royalty rates are so high that they will force most or all independent internet radio stations off the air.

Since the passage of the DPRA and its successor, the DMCA, internet radio has been required to pay high royalties for internet music broadcasts. Higher than satellite radio pays, and much much higher than over-the-air broadcasters pay (which is nothing, since they're legally exempted by copyright law).

You would think that royalties would be set based on the types of "music transmissions" - for example, a subscription on-demand music service would pay more than a traditional radio service that plays the same music programming to a group of listeners.

I mean, you would think that AM/FM, Satellite and Internet radio stations would all pay the same kinds of royalties, right? But no! Due to DPRA and DMCA, digital transmission services (e.g. over the internet or digital satellite) are treated very differently. This is because back in the 90s, when the DMCA was passed, people equated "digital" with perfect, and the record labels were freaking out. After all, the labels thought that home taping was killing music... and that was just cassettes. Imagine, they though, what will happen when people can make unlimited perfect digital copies of our music!

So the RIAA successfully lobbied for legislation in the DPRA that said any digital transmissions of sound recordings (i.e. music) would require royalty payments to be made.

Yet the DPRA is based on a fundamentally flawed assumption -- the assumption that "digital transmission" allows unlimited perfect digital copies of the original work.

Internet radio stations do not distribute perfect digital copies of the original copyrighted performance; instead, they use formats such as MP3 and WMA. Such broadcasts are drastically "compressed" and (I'm sure you know) nowhere near a perfect digital copy. Most broadcasters also segue songs together, and make announcements over the beginnings and ends of songs. It's just like over-the-air radio, and in many cases, the audio quality of the internet broadcast is slightly inferior to an analog FM broadcast!

So over the years, internet radio broadcasters have had to pay royalties to playback music that they don't otherwise have explicit permission from the copyright owner to play. This is called the "compulsory license", and it's paid to an organization that was spun out of the RIAA called SoundExchange. SoundExchange collects royalties and is supposed to distribute them to artists.

So far, so good. We've been paying 10% of our gross revenues. (10% for first $250,000; 12% in excess of that.) We feel a bit cheated because the over-the-air guys don't have to pay at all, and the satellite guys only pay about 7.5%. Still, we can work with it. Some smaller stations can't handle the minimum annual fee of $2000, so they join aggregators like LoudCity or Live365 to reduce their royalty costs.

But every 5 years, the royalties get adjusted. And for the 2006-2010 period, it was quite an adjustment.

In March of 2007, the CRB (Copyright Royalty Board) released the rates for 2006-2010. Not only have they have gone up drastically - by 2010, the rates will be 150% higher than the 2005 rates.  In addition, and more problematic for independent web radio stations: the way royalties are computed has changed: stations can no longer pay based on our gross revenue but have to pay based "aggregate tuning hours".  For SomaFM, this means our royalties for 2006 will be increased retroactively from about $20,000 to about $600,000. That's more than 3 times what we made in 2006. And our royalties for 2007, based on our current audience size, will be over $1 million dollars, and over $1.5 million by 2009. That's if our audience size stays the same.

Now SoundExchange says these rates are fair. Since the hearings were closed to the public, we don't know everything that was presented to come up with these supposed fair rates. But we have heard that the rates were based on mis-information, including the fact that the numbers were based on on-demand music subscription services. The bottom line is that the new rates are so high that US-based internet radio as we know it will go away. Even big players like Pandora have said they don't have a viable business plan with these new increases in royalties.

So a coalition of net broadcasters have gotten together, started a site called SaveNetRadio.org and working together with the trade association DiMA, the Digital Media Association and a DC lobbying firm and have succeeded today in getting a bill introduced in the house that would legislate the royalties paid by interent broadcasters are on par with those paid by other services, like satellite radio. The bill is called the "Internet Radio Equality Act", it was introduced on April 26th by Representatives Jay Inslee (D-WA) and Donald Manzullo (R-IL).

The Internet Radio Equality Act would:

1.       Annul the CRB decision and set royalty rates at 7.5% of revenues – the same rate that satellite radio pays – for 2006-2010; and
2.       Change the rate-setting standard currently used by the CRB to determine Internet radio royalties, and substitute the standard that applies to most other statutory licenses, including satellite radio, jukeboxes and sound recordings.

So now it is up to you, and up to Congress to pass this bill. Get on the phone, call your congressman/woman and ask them to support the "Internet Radio Equality Act" introduced by Representatives Inslee and Manzullo.

It doesn't take long to call. If your representative is already aware of it, they'll just want to take your name and address (to verify you are a constituent) and will tally your call for support. If they're not aware of it, you might need to explain it to them. But SaveNetRadio.org has some basic "talking points" to help you out with that.

We are at a critical juncture for internet radio. If this bill doesn't get passed, independent net radio will be forced off the air; and the only net broadcasters will be those who can afford to treat their internet radio operations as a "loss leader"- and that means the same big companies that run all the AM and FM stations out there. Is that what you want to see happen to net radio?

Senator Dianne Feinstein has the wrong numbers

Senator Dianne Feinstein is responding to letters asking her to support legislation helping internet radio, but her response sounds like it came right out of a SoundExchange press release:

Under the Copyright Royalty and Distribution Reform Act of 2004, Congress - at the behest of webcasters - created the Copyright Royalty Board which consists of three judges. By law, the judges are a venue of last resort and are required to periodically set rates for various statutory copyright licenses in the event that webcasters and copyright owners are unable to reach voluntary agreements. In the absence of an agreement, the judges set a rate designed to approximate the fair-market value that webcasters should pay to artists and performers for streaming their music for the years 2006-2010. The new rate that was established is less than a 5 percent increase of the rate in effect from 1998-2005.

Wow, talk about dancing around the numbers. For large webcasters which had revenues in excess of $5 million, or otherwise chose not to work under the percentage of revenue option in the Small Webcasters Amendment, the rates per song per listener increased only 5% from 2005 to 2006. But they go up 38% from 2006 to 2007. And more each year, until finally in 2010, they will be 150% higher (or 2.5 times more) than they were in 2005.

Year	Rate	Year to Year Increase	Increase since 2005
2005	0.000762
2006	0.0008	5%	5%
2007	0.0011	38%	44%
2008	0.0014	27%	84%
2009	0.0018	29%	136%
2010	0.0019	6%	149%

The other thing she doesn't take into consideration is that the fact that small webcasters pay royalties based on a percentage of revenue, not per song per listener, but are no longer allowed to pay based on a percentage of revenue. These small webcasters (like us) are facing royalty payments that are several times our annual gross revenues! She goes on to say:

Although a few webcasters have recently claimed that the process was unfair, it was not arbitrary and allowed representatives from all sides to make their cases. The judges began the proceedings in 2005, and heard testimony from dozens of witnesses and conducted a comprehensive review of tens of thousands of pages of evidence submitted by all interested parties over an 18-month period.

Unfortunately, the hearings were largely in secret, and the " tens of thousands of pages of evidence" were not released. We have been told from parties to the negotiations that many of these pages of evidence included numbers from music download services, on demand streaming services, and other non-radio music services. Since radio is completely different than these on-demand and download stores, why should those numbers be used to set the rates for webcasters?

Why don't you want to pay artists?

Some people have asked me why I don't think artists deserve royalties for the use of their creations. The reality is that I don't feel this way. We support reasonable royalties to copyright holders. But I don't think it's fair that internet radio should have to pay so much more than satellite radio (which pays aprox 7% of their revenues in sound recording royalties). I just want to make that clear: SomaFM supports reasonable royalties for the sound recording performance. But it must be tied to a percentage of revenues (or expenses) just like ASCAP and BMI do.

CMJ: Webcast ruling will reduce exposure of independent artists

Jake Ward, a spokesperson for the SaveNetRadio coalition: "It is not an overstatement to say that the death of Internet radio will decimate the amount of play time and exposure independent artists have today,"



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First payola, now Dark Payola

``You know all about payola, the Big 4 record label way of making sure they get air-time for what they want, when they want. It's routine. Here comes Dark Payola, thanks to the Copyright Royalty Board.`` I have some quotes in this article, and it's worth reading to understand some of the more sinister reasons that the RIAA is pushing for such high royalty rates - it's a way they can exert more control over what music gets airplay and what doesn't.



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SoundExchange Lawyers Gratified

Via Royalty Week:

Michael Huppe, General Counsel of SoundExchange, in noting that SoundExchange is now looking forward to the next steps in the wake of the CRB ruling, said, "We are gratified that the CRB has upheld its decision.
With the resolution of these motions, it is now time to move forward with business. It's in everyone's best interest to ensure a vibrant and thriving marketplace for Internet Radio and we intend to work with webcasters towards achieving that goal."

Be assured that when they say a "vibrant and thriving marketplace for Internet Radio", they mean one as overrun with commercials, boring and payola-ladden as over the air AM and FM radio today.

Can't you play just non-RIAA music?

Kevin writes in and asks:

So my question is: many of the artists that are played on SOMA FM are independent or self-managed, not big-label and often no-label. Do you have to pay royalties for their music regardless of whether or not the artists say so?

The law in the US doesn't make a difference between small labels and the big RIAA-supporting labels. While the RIAA has a huge influence on law (they are a lobbying organization after all!) it doesn't just apply to RIAA labels.

As stated in Section 114 of US copyright law, the owner of the "sound recording" copyright must be paid royalties when their recording is played over internet radio. (Over the air broadcasters are exempt from this royalty). In almost all cases, if it's been released on a CD, someone other than the artist owns the copyright to the sound recording. Even the little labels. And often, an independent artist will release some of their music through a larger label (either on a compilation or through a licensing deal). The bottom line is that the little labels hope to make money on their CD releases (no one should deny them that!) and often that means making a deal with a larger label.

These deals are what make getting waivers from the copyright owners hard and often impossible. If a label were to grant us and many other internet stations an unlimited right to use their recordings over the internet, it would make their licensing deals with larger labels more complex. So the little labels aren't going to do anything that could ruin their chances of making a deal with the bigger label. That's just common business sense, and I think they're completely within their rights to do that. But it makes it very hard for use to get blanket waivers from indie labels and artists for airplay on SomaFM.

It also means that we would be spending all our time working out licensing deals and the music we play would be contingent on who we could make deals with. We would no longer be able to independently play the music we want to play for our listeners. In some ways it would be like another form of payola - there would be economic decisions affecting the music we play, not just artistic ones. Our mission is to be extremely independent and only play what we think is the very best music on SomaFM. Adding economic factors into our decision making process compromises our artistic integrity. (OK, that last sentence sounded pompous but I think you get what I mean.)

This is why internet broadcasters need a statutory license at a reasonable rate. Or better yet, have the exemption that AM/FM radio broadcasters get for their over-the-air transmissions extended to internet radio.

Net radio operators lose a round

CNET: ``In a potential blow to Internet radio services, a federal copyright panel on Monday largely upheld a contentious decision that would elevate royalty fees Webcasters must pay to record labels.``

This is not the end of the road. This just means that we need to get "legislative relief" - that is, we need to get congress to act ASAP to propose legislation to change the way that internet radio is legislated.



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Copyright Royalty Board rejects rehearing

The Copyright Royalty Board, a three judge panel responsible for the March 2nd ruling that set webcast royalties at their new increased rate, has denied all parties' motion for rehearing of the ruling on procedural grounds. The Board claimed that the motions introduced no new evidence and were therefore legally insufficient. At this point, getting legislation passed is the only solution to keping independent webcasters (as well as most other US-based webcasters) on the air. As of May 15th, SomaFM will owe $600,000 to SoundExchange for our 2006 royalties (which were formerly about $22,000). More details soon... I'm posting from the Internet Radio Summit at NAB in Las Vegas right now where lots of webcasters are meting to plan on how to best deal with this issue.

David Byrne on Net Radio

David Byrne and Danielle Spencer wrote a good article on the importance of internet radio.

I do want to clarify something that Danielle Spencer wrote:

While traditional terrestrial radio does pay songwriter/publishing royalties for the musical work itself, in the U.S. they don’t pay performance royalties for the sound recording under the rationale that airplay promotes the songs, which benefits the copyright holders. (This determination was mostly due to the radio industry lobbying congress not to collect these royalties.)

This is not historically accurate - this is the version of history that the RIAA likes to propagate! When the original copyright laws were written, Congress realized it was granting a legal monopoly to the copyright holder. So in order to balance out that government-given monopoly it also added provisions for fair use and public rights, such as copying for personal use, exemptions for libraries, and exemptions for radio broadcasters. Fair Use is These public rights are an important part of the American way. We are one of the few countries in the world that have it fair use and other public rights defined in our law. Like freedom of the speech, it is a foundation of our culture. But the RIAA wants to change this, and they're doing it by chipping away at the law.

Can you imaging the outrage if over-the-air radio suddenly was forced to pay huge amounts of money to play music? Music radio would go away, and become all talk radio. Payola would return in a new form: the only music you would hear on the radio is music that the record labels granted permission for broadcasters to play. The labels would then control the music that got played over the air to the public - which is something they have always wanted to do anyway.

Many people, including myself, think that this is all about control and not money. The labels want to control what music the public hear- they want radio to only be an extension of their marketing efforts. So if they can't bribe stations to play the music they want them to play, they went for legislation that says stations have to pay for everything other than the music the labels want them to play.

Can't you just move your servers to another country?

Many people ask us, why can't you just move your servers to another country?

Gary Greenstein, former general counsel for SoundExchange recently said:

The RIAA and the major labels have take the position that the law in the territory of destination of a transmission will govern and that off-shore webcasters streaming into the US will still have liability for transmissions (i.e., public performances) that terminate in the US. Therefore, moving a webcaster's facilities off shore will not immunize them from liability or the reach of US courts, particularly if the owner/operator still has sufficient business in the US.

We would have to move our entire business operations, not just our servers. So this isn't really a tactic that will work, especially for the long term. It's not practical for SomaFM to move our entire operations overseas; and if we retained ownership of a foreign company that was broadcasting to the USA, we would likely be the target of a lawsuit.

But, the good news is that we're not going to have to pay SoundExchange for our audience that's outside the USA. The bad news is that soon we'll likely have to pay royalty collection agencies in other countries:

David Oxenford, a broadcast law Attorney, says:

In the first CARP (I believe) there was a specific statement that a "performance" was a play to a US listener. So webcasters have excluded performances to non-US IP addresses when computing their royalties. After the first CARP, a number of large UK streamers cut off their service to US listeners, worried that they would have to pay the royalty.``

``In the last year or so, the performing rights organization from the UK has been in contact with some US streamers looking for royalties for performances that are heard in the UK. I understand that both Yahoo and Clear Channel block streams to IP addresses that are clearly not in the US, possibly to avoid this issue. ``

Really, the only solution is to fix the problems with the royalty rates in the USA. Running away from them won't solve the problem for the long term.

the motive for killing webcasting

Lucas Gonze:: To the major labels, revenues from webcasting royalties are not significant in comparison to revenues from the iTunes store and comparable online distributors. The iTunes store, mainly. If the webcasting industry disappears from the face of the internet, that is an acceptable level of collateral damage as long as revenues from premium services like iTunes rise enough.