SoundExchange filed its rebuttal document with the Copyright Royalty Board (CRB), part of the “Webcasting IV” proceeding which will set music licensing rates that govern online radio royalty payments to artists and labels for the 2016-2020 period. Pandora filed its rebuttal document earlier this week — click here for RAIN News analysis.
SoundExchange, the collection and distribution agency for rights-holders of recorded music, represents record labels generally. As such, the new rebuttal argument brief is targeted to webcasters generally, which it sometimes calls “Services” in the quotes below. By contrast, Pandora’s rebuttal was addressed to SoundExchange specifically, as the banner-holder for labels.
The rebuttal phase gives participants in the Webcaster IV proceeding an opportunity to argue against so-called Direct Statements” — opening arguments which were filed in October.
Key Rebuttal Arguments
SoundExchange’s key points:
Benchmarks: SoundExchange asserts that interactive services (on-demand services like Spotify) should serve as royalty-setting benchmarks for the CRB. Non-interactive services (like Pandora and iHeartRadio, both referenced by SoundExchange) want the existing statutory rates to serve as benchmarks for new statutory rates. The SoundExchange argument hinges on a concept of convergence — that online radio and on-demand platforms are increasingly similar in function, should not be separated, and that privately negotiated licensing between on-demand services and labels represent real-world supply-and-demand examples for the CRB.
Promotional value: Do statutory services (non-interactive services like Pandora) promote music sales? SoundExchange rebuts that they do not.
Webcasters can afford higher rates: Contradicting webcaster complaints that they cannot operate profitable businesses at current or higher music licensing rates, SoundExchange asserts that the online radio industry is robust, and that (some) webcasters intentionally and artificially delay profitability.
Deservedness: SoundExchange argues for the deservedness or musicians, and also that record labels spend more money, and bear more risk, than webcasters do.
The benchmark issue is key to the Webcasting IV debate. Everyone involved — litigants and the CRB — is seeking to define a rate level which can serve as the most intelligent benchmark for setting new rates. The challenge of previous proceedings has been lack of free-market negotiations which might establish what recorded music is worth in a natural supply-and-demand setting framed by willing buyers and willing sellers.
Both Pandora and iHeartMedia have created those example during the past few years. SoundExchange argues on two points. First, that most of those deals are with independent labels or label groups, and second, that the legal and conceptual difference between non-interactive (Pandora et al) and interactive (Spotify et al) services is no longer true and should be erased.
The following rebuttal quote addresses the second point, with an interesting use of the word “previously” to describe terms which are still current:
“Services previously categorized as ‘interactive’ and ‘non-interactive’ are now rapidly converging: the functionality of each type is moving quickly to take on features and attributes of the other. Non-interactive services with a substantial degree of customization and personalization come close today to replicating the experience of on-demand services. Streaming services of both types are commonly available on the same platforms, including most notably mobile. As a result of this convergence, statutory and non-statutory services compete more than eve before for the same audience. That convergence will only continue to grow over the next term.”
Regarding the negotiating examples provided by Pandora and iHeartRadio, SoundExchange argues to invalidate them as derivative of a system that is no longer valid: “The focus must be on what willing sellers and buyers agree to in a market without a statutory license, not market derived from the statutory license.” SoundExchange refers to “the shadow of statutory licenses.”
One other key point here: SoundExchange harks back to steering, which is part of recent negotiated agreements from Pandora and iHeart. Steering means playing more of a favored label’s music in exchange for lower per-stream payments. SoundExchange asserts that steering cannot possibly be applied to the market as a whole: “Simply put, Pandora and iHeart cannot agree to play everyone’s music more than anyone else’s music.”
To the extent that online radio services argue that webcasting promotes record sales, similar to broadcast radio’s historic role, SoundExchange jabs back:
“Statutory webcasting does not whet the consumers’ appetite in sound recordings; it serves the meal.”
Here again, the distinction between non-interactive Internet radio and interactive on-demand services is marginalized:
“Statutory services offer a highly personalized experience and the ability to create individual ‘stations’ that provide the user with the ability to narrow the webcast to the specific songs individual users want to hear.”
SoundExchange argues that all streaming audio services should be regarded as places where music is consumed, not merely promoted: “Simply put, statutory services as well as direct-licensed streaming services are a consumption platform in and of themselves, and record labels treat them accordingly as a source of direct revenue — not as an opportunity to promote other streams of revenue.”
As mentioned above, SoundExchange doesn’t believe that the business environment, and the cost of music, are stacked against webcasters. The document takes a high-altitude view of the streaming audio industry.
“Statutory webcasters continue to enter the market at high rates. Unprofitable, failing industries do not see entry growth.”
SoundExchange also asserts that unprofitable webcaster balance sheets (Pandora’s, anyway, as the rebuttal cites recent P earnings calls) are artificial, the result of business plans that defer profitability to grow audience. SoundExchange targets David Pakman, who was an expert witness for both Pandora and iHeartMedia: “Mr. Pakman essentially expects copyright owners to subsidize these strategic business decisions of webcasters to defer profitability in favor of short-term growth.”
Comparing Investment and Risk
SoundExchange rebuts any argument that claims running a webcasting business is too expensive, aside from music licensing rates — for example, capital expenses for technology. the rebuttal refers to Pandora’s years-long development of the Music Genome, its music intelligence software, and generally argues on behalf of higher investment and risk tolerated by record labels:
“The investments the Services describe pale in comparison to the hundreds of millions of dollars the record labels have invested in developing new music, and to the risk that is inherent in finding the next big thing. That is an investment and a risk the Services need not take — they only need play what has already become successful.”