Intellectual property attorney Angus MacDonald has written guest columns for RAIN News, and was the first to calculate that Pandora paid more than half of all SoundExchange collections of royalties to record labels. In that article he spoke of implications for the Webcasting IV process which ended this week with new webcaster rates for 2016. We asked MacDonald for his thoughts about the ruling, and he sent us the following analysis. (Bold typeface emphasis added by RAIN News.)
This week’s summary determination by the Copyright Royalty Board (CRB) is a split-the-baby result. But, despite some early press suggesting bad news for Pandora and similar “pureplay” webcasters facing a 20% rate increase next year, today’s rate determination is definitely a net victory for webcasting services – especially Pandora – for many reasons, including:
(1) The non-subscription statutory rate of $0.0017 per performance for the next five years (subject to CPI) is actually much lower than the current (i.e., 2015) non-subscription statutory rate of $.0023 per performance, which has been the statutory rate since Jan. 1, 2014. Undoubtedly, the new non-subscription rate for 2016 definitely reflects an increase over what Pandora asked for (starting at $.0011 per performance and increasing annually) and what it is paying in 2015 ($.0014 per performance) pursuant to the Webcaster Settlement Act. However, even Pandora had proposed a rate of $.0018 per performance by 2020. It’s possible that, in 2020, the rate it pays will be $.0018 per performance or even less (depending on CPI)! Moreover, the $0.0017 rate is significantly less than what SoundExchange has requested for the next five years (an average rate of $0.0027 per performance).
(2) Pandora clearly prevailed in obtaining a subscription rate of $0.0022 per performance. This is completely in line with what Pandora had requested from the CRB – i.e., $.00215 per performance for 2016 and increasing annually to $.00230 for 2020. This subscription rate of $0.0022 per performance is even lower than the current non-subscription statutory rate of $.0023 per performance. (Usually, subscription rates are much higher than non-subscription rates, as is the case with what Pandora is currently paying.) Moreover, the subscription rate of $0.0022 per performance is actually lower than its current subscription rate of $.0025 per performance, which it obtained under special circumstances pursuant to the Webcaster Settlement Act of 2009.
(3) These rates are lower than what radio broadcasters have been paying for their simulcasts and other webcasts. The radio broadcasters’ rate has been $.0025 per performance in 2015. (It had been $.0023 per performance in 2014.) Now, for 2016 and beyond, the rate will be significantly lower than these previous rates – i.e., at or around $0.0017 per performance for the foreseeable future. Having said that, these new rates are still substantially higher than the rate that broadcasters (such as iHeartRadio) had indicated would be appropriate – i.e., $.0005 per performance for all five years.
(4) Previously, the CRB judges always had issued statutory webcasting rates with an annual (or every two years) upward adjustment. The recent determination announces a flat-rate structure over the next five years (subject to CPI), which is a major victory for webcasting services and provides a high level of certainty for the next five years. In fact, these rates might even go down if CPI decreases!
1. Interestingly, the CRB lumped together (1) commercial webcasters (e.g., “pureplay” services), (2) radio broadcasters who webcast, and (3) most noncommercial webcasters. Now, they all will be paying same rate starting in 2016. In contrast, for the previous five or more years, pureplay webcasters, radio broadcasters, and other commercial webcasters who did not fall within one of the agreements under the Webcaster Settlement Acts had been paying three different rates.
2. Given the relatively low rate for subscription performances ($0.0022 per performance), I expect Pandora and similar services to re-double their efforts to push listeners to their subscription offerings, especially since subscription listeners usually yield higher margins for webcasting services. These efforts may include more ads for the non-subscription listeners in order to entice them to go ad-free via a subscription (e.g., “Pandora One”). As mentioned above, Pandora must certainly be pleased with this subscription rate.
3. The CRB decided not to establish a percentage-of-revenue royalty component. There had been some discussion that – like on-demand interactive services (e.g., Spotify) – the CRB’s rate structure might include a percentage-of-revenue component in addition to a per-performance royalty rate. For example, through 2015, Pandora had been obligated to pay at least 25% of its annual revenue under its pureplay deal if its annual per-performance royalty fee was less than 25% of revenue.
4. Today’s rate determination reflects, to some extent, an indictment of the CRB’s previous determination (for 2010-2015), which was done by a completely different set of judges. The previous statutory webcasting rates for 2010-2015 were simply set too high and did not reflect the economic realities of webcasting services. If Pandora had been paying those statutory webcasting rates (as opposed to the pureplay rates in was able to secure under the unique, non-precedential circumstances presented by the Webcaster Settlement Act), Pandora and other webcasting services likely would not be around today. The current panel of CRB judges essentially reset the statutory rates and established rates that make it more viable for the continued growth of non-interactive webcasting services, which will pay billions of dollars in royalties over the next few years.
5. Regardless of the above factors, there is a victory for all webcasting services that are eligible to pay the rates announced by the CRB: certainty. As Pandora’s CFO, Mike Herring, recently stated, services “will know what the rates are for the next five years,” which is key to running a business like Pandora, in which its largest cost is now known – and relatively flat – for the next five years.