Internet Royalties Explained

April 10, 2007 at 8:26 am Leave a comment

David Byrne has a great explanation of internet radio royalties and their cost at his blog. I read his posts regularly, and occasionally listen to his stream, which is really good by the way; the guy is really smart and funny.

David Byrne Journal: 4.1.07: Your Government Working for You

Your Government Working for You
The Copyright Royalty Board is proposing a large increase in the performance royalty rates for “non-interactive streaming services”. This means web radio, cable radio and satellite radio will pay more to SoundExchange in royalties. Presumably those royalties eventually dribble down to the artists getting “played”, but it’s never that simple. It’s a little complex and difficult to understand but let me see if I can describe what is in the offing. (My own streaming web radio would be affected, and since I derive no income from it, that, among other things, makes this an issue of personal interest.)

Web radio is different than broadcast radio in that the hosting costs increase precisely as the listenership increases. With streaming web radio, information on the exact number of listeners accessing the stream at any given moment or period is available, and easy to obtain, unlike broadcast radio which is just out there and no one knows how many people are listening (so how do they determine ad rates?) The more listeners you have the more you pay in hard costs — some server’s gotta
host the stream. Of course stations like mine and the network of NPR stations that have no commercial revenue eventually run into a financial wall once that audience figure reaches a certain amount.

With royalties it gets more complicated. 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.) Web radio, however, along with satellite and cable services, does pay performance royalties — these are the rates that are being raised now. (If this discrepancy sounds illogical, it’s because it is.) Now, broadcasters are eligible for statutory licenses for these new performance royalties. These statutory licenses set royalty rates so that each station doesn’t have to license each song individually. Until now, if a webcaster’s profit was below a certain amount, they have been eligible to pay a set yearly fee, and if they met certain criteria they have been able to pay royalties as a percentage of their profits, not as a per-song fee. Registered 501(c)(3) non-profits have been eligible for reduced rates regardless of their stream traffic.

With the proposed changes the royalties can no longer be based on a percentage of revenue, but on a fee for each listening hour — how many folks are listening and for how long — and there will be a minimum fee per radio “channel”. Also, above a certain aggregate listening hour amount, non-profits have to pay the same per-listening hour rates as commercial broadcasters. So now there will be no distinction between a large-scale non-profit station (like KCRW or WXPN) and Z100. The threshold for non-profits is proposed to be 159,140 listening hours per month. Where did this bizarre number come from?

For perspective, on my web radio I get an average of about 40,000 listener hours per month. At present I pay small mechanical royalty fees that go to ASCAP, BMI and SESAC (presumably these dribble down to the artists whose songs I stream); performance royalties that get dispersed via a company called SoundExchange, and a fee to Live 365 for
hosting and doing all the paperwork. I pay about $2,000 a month, based on the above listening hours. That’s rent for an apartment for many people (at least in some cities.) I can afford it, I enjoy doing it, and people seem to like it, so it’s OK for me that I’m out of pocket. I do however realize that I am in a special position — not just anyone can afford to start a streaming web radio service if it has this many listeners. If this ruling goes through it’s likely that my costs would go up about 20%, which is not crippling, yet. But one can see where this road leads — the door will have been wedged open. It’s estimated that the per-play rates will put many webcasters out of business, all but the largest and most commercially successful.

For NPR stations it is a different story as they have wider listenership than I and would pay the same royalty rates as commercial broadcasters. KCRW estimates roughly that as this ruling is retroactive they would owe $130,000 in additional fees for 2006 and $237,000 for 2007. WXPN in Philly estimates $1,000,000. In some worlds this is not a big deal but as one can imagine many of these stations barely eek by as it is, so this could very likely shut down the
webcasting side of many of them. That would be a shame, as these stations are the only source of, well, good music, alternative sounds and innovative and informative programming in the U.S. It would be a loss for, well, democracy, as democracy depends on availability of many points of view untainted by commercial concerns and pressures. A truly
informed populace, in other words. It points to another victory for the oligarchs — the big 5 record companies and the media companies that own them. Count one more for the big guys. The reasoning that it’s for the
benefit of the artists rings a little hollow as most artists heard this argument re: cracking down on file sharing, and most never see money from their record companies anyway — so the line about “we’re doing it for you” is pretty suspect.

Who is this agency that is proposing making this change? They are not an elected body — the Copyright Royalty Board is made up of a few people appointed by the Library of Congress Copyright Office. They used to be a group of arbitrators but since 2004 they are a group of judges. (I wonder if Gonzales, Cheney etc. have any pals in there?)

The new rates are supposed to have been based on the model of the so-called willing buyer and willing seller in the marketplace — this according to the wording of the Digital Millenium Copyright Act of 1996. But where does this “market value” come from? Does it mean that if I play more popular music on my streaming radio I should pay more? I’m confused. (I think I’m supposed to be confused.) Who is determining this value? In this case the CRB seems to be looking towards agreements made between the major record labels and the largest commercial webcasters, but this is hardly a free market model. It also seems to ignore the fact that the “value” of a song would change depending on the context — if I’m listening to a web radio stream I can’t control what I hear, which is different from purchasing the track.

The new rates are being appealed — to join a petition (against the rate changes) or learn more about this, go to SaveTheStreams.org.

—DB/DS

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And some further notes, for those who are really interested:

Commercial broadcast mediums in the U.S. mostly derive their income from advertisers. Nielsen systems — boxes attached to a random sampling of viewers’ TV sets — are supposed to determine what shows are being watched, and the more popular shows can therefore demand more money from the advertisers as they are “delivering” a larger audience to view
their ads and presumably buy their products. I suspect it’s a more complicated algorithm than that, as some shows will have a wealthier viewership than others, and presumably one could market more expensive items to this crowd than to Super Bowl fans even though their numbers might be smaller. You might charge more to deliver potential buyers of jewelry and designer clothes than drinkers of Bud Lite. And with cable it might be possible to determine more accurately who is watching what.

From an audience perspective we are used to receiving radio and TV more or less for free. We see it as a God-given right, and our perception is that the stuff is simply “in the air” and there for the taking. Of course the fact that we “pay” by being forced to listen or watch lots of ads is somewhat ignored. Subscription services that reduce ads like Tivo, cable, and commercial-free satellite radio are increasingly popular, but I would argue that ads are not consciously viewed by the public as a cost. To some extent free programming is simply an elaborate means of getting us to sit still and tune in to the ads. With cable we pay a blanket fee, which helps fund the channels —and we still feel we can and should have complete access to the cornucopia of programs, some with ads and some without. NPR and PBS stations are funded by viewers like you, as we are often reminded, and by miniscule government grants. They don’t solicit ads. Though they pay a fee for their license and pay royalties for playing music, these amounts are not too high. And being non-profits they get a tax break.(I do not.) Broadcast radio has been traditionally viewed as a kind of free promotion of the artists and record labels’ products, and
therefore the idea that the stations should be paying performance royalties was waived. The same “promotional” logic was applied to MTV in the past; the videos, for a certain period, were provided free and seen as publicity vehicles for CDs. After a while the big record companies extracted fees from MTV — which they didn’t share with the artists — and now there are hardly any videos shown at all. (Since, in the past, TV had no “product” to sell, this “promotional” reasoning was not possible in that medium. For example, Seinfeld or American Idol are not broadcast without ads under an assumption that folks will rush out an buy a video or DVD…it’s also true that, unlike music, TV shows are not quite as endlessly repeatable.) With web radio that logic seems to be partially being left behind.

—DB

The “promotional” rationale for not collecting performance royalties from terrestrial radio is more of a reflection of the radio industry’s powerful lobby in the 1940s than an ideological decision. The RIAA calls it “an historical accident”, and the U.S. copyright office has acknowledged the asymmetry of collecting publishing royalties but not mechanical royalties. We are one of the few industrialized countries that doesn’t collect these royalties. The EU nations do collect performance royalties for terrestrial radio, but because we don’t collect them here, they don’t distribute those revenues to U.S.
artists.

There are of course many examples of broadcast mediums that are essentially promotional as far as the copyright holder is concerned and don’t earn direct royalty revenues. However, the songwriter/publisher royalty income from terrestrial radio is more than token. As for web radio, the “promotional” logic was never applied, dating back to the initial decision to charge performance royalties in 1995 with the DPRA (Digital Performance Right in Sound Recordings Act). The performance royalty rates have always been significant for webcasters (12% of profit for commercial broadcasters above a modest profit threshold) even before these proposed rate increases, despite the fact that the revenues don’t amount to much for the artists.

—DS

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