In the music streaming industry, the U.S. government assists open-market negotiations by arbitrating music royalty rates. The process is structured in five-year royalty periods, preceded by argument and litigation that starts two years before each period. The current statutory rate system lasts through 2015. The Copyright Review Board (CRB), a three-judge rate-setting panel, is now accepting petitions of participation, the deadline for which is one week from today, February 3.
We spoke with David Oxenford, partner of D.C. law firm Wilkinson Barker Knauer. Oxenford is a leading expert in broadcast and webcast law who has represented webcasters in previous CRB proceedings, and was counsel for webcasters in both the Small Webcasters Agreement of 2002 and the Pureplay Webcasters Agreement of 2008.
We wanted to find out what was special about this royalty cycle, and whether the seven-year process can keep pace with a fast-changing streaming market.
RAIN: Who are the likely participants who will file petitions?
D.O.: I imagine there will be a fair number of participants this time around. All the big streaming companies with non-interactive streams are likely participants. The Webcaster Settlement Act ends in 2015. People have to figure out what the rates are going forward, and don’t want to leave it to SoundExchange as the only one to propose rates.
RAIN: So it shapes up as online services on one side of the argument, and SoundExchange on the other? [NOTE: SoundExchange is a performing rights organization that collects royalty revenue and distributes it to music owners. This infographic illuminates the process.]
D.O.: Exactly.
RAIN: In the call for petitions, the CRB preliminarily asked participants to consider new royalty structures that have not been adopted in the past. That seems unusual.
D.O.: The chief judge was around for the satellite radio case, but was not around for any of the past webcast cases. The other two judges are brand new. They have no track record at all.
Usually the request for participation is, “Here’s the deadline; tell us what your interest is in participating.” This time, they asked that that parties [additionally] consider a number of issues. That includes some fundamental questions that many people thought were unlikely to be reconsidered, or at least unlikely to be posed initially.
One of these questions is whether to bring a percentage-of-revenue royalty. Another is having multiple rates structures rather than a single one. In the last couple of proceedings there were two rate structures set by the board: one for commercial entities, and one for non-commercial entities. That was it. Here, the board is suggesting that maybe there should be multiple rates — as there typically have been through [non-CRB] settlement agreements. There have been different rates for pureplays, small webcasters, regular webcasters. There have been different rate structures for small and large pureplays, and small and large broadcast streams.
So, effectively we have ended up with price discrimination, but it has never come from the CRB. Now the CRB is asking whether that should be a consideration in their decision-making. This may be nothing more than the board wanting information about how we got to where we are.
RAIN: Don’t some of the big pureplays were paying on the basis of revenue percentage, like Pandora?
D.O.: Pandora pays on a per-song / per-listener basis. There is a minimum that they must pay at least 25% of their revenues. Per-song payments have always been higher the 25% of revenue.
RAIN: So when we hear statistics that they pay half of revenue to labels, and 4.3% of revenue to songwriters, those numbers are backed into after per-stream accounting?
D.O.: Those numbers come from their balance sheet or financial statement. The royalties are paid on a per-stream basis, then computed as a revenue percentage.
RAIN: So the panel of copyright judges is taking a fresh look at everything. That seems positive, to re-boot the thinking process. In your view, is the start-from-scratch approach refreshing?
D.O.: Certainly. But again, we don’t know that they’re ready to re-boot. We just know that they’re asking the parties to consider these issues.
RAIN: What happens after the petitions are filed and the royalty board knows who the participants are. What’s the next step, and when does it happen?
D.O.: The board will put out a public notice listen who filed, and give the parties 90 days to try to reach a settlement. Then they will set the dates for filing direct case exhibits — written statements setting out what the parties believe are appropriate royalties, backed by expert witness statements.
RAIN: Is it universally assumed that a settlement agreement will not be reached in that 90-day period, and that the time is really spent firming up arguments?
D.O.: It has rarely happened that settlements are reached in that period. It happened a couple of times as a carry-over from the prior proceeding. In the very first proceeding, back in 2000, there was a settlement by Yahoo reached prior to litigation. But in most cases there have not been major settlements before litigation.
RAIN: So any single participant can reach a settlement, then back out of the remaining process while the others go forward?
D.O.: Right. But the settlement has to applicable to any other similarly situated webcaster. Any settlement must be approved by the board.
RAIN: These royalty periods are five years, and the decision process is two years long. This amounts to a seven-year “development cycle” for statutory royalty rates. Can law keep up with the marketplace?
D.O.: Originally it was every two years … but then you were in a constant state of litigation. A lot of people might prefer that the rates be set for longer periods, to give the industry more stability.
RAIN: Pandora has been a public-facing service for only eight years — just a bit longer than one entire royalty cycle. In your view, is a seven-year rate-setting period problematic for the industry?
D.O.: I don’t know how you could get it done any quicker.