The Strangely Tilted Playing Field of Music Copyright Royalties

To say that copyright law is complex would be an understatement. At the most basic level, however, it is underpinned by a simple premise: that “authors” (including songwriters and recording artists) deserve to be compensated for the use of their creative works, and that society benefits if those works are broadly available. As the Supreme Court explained in a 1975 ruling:

The immediate effect of our copyright law is to secure a fair return for an “author’s” creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good.

The struggle to achieve this balance in the world of digital music has led to much debate, legislation, and litigation over the past 15 years, and the first half of 2012 has been no exception.

Since the mid-2000s, royalty rates for certain noninteractive digital audio streaming services – e.g. music delivered via satellite, the Internet, or digital cable – have generally been set by the Copyright Royalty Board (CRB), a panel of three Copyright Royalty Judges appointed by the Librarian of Congress.

The resulting royalties are paid to and distributed by SoundExchange, a non-profit performance rights organization spun off from the Recording Industry Association of America in 2003. As an alternative to paying the CRB rates under statutory licenses created by Congress, digital music service providers can, in theory, negotiate rates directly with record companies and pay the royalties directly to the record companies, bypassing SoundExchange. Whether they can do so in practice is the subject of a March 2012 federal antitrust complaint filed by Sirius XM against SoundExchange and A2IM, a record industry trade association for independent record labels.

Another potential fly in the ointment is the very constitutionality of the CRB itself, which has been repeatedly questioned over the years. That issue was argued before the DC Court of Appeals in February; a ruling is expected shortly. As David Oxenford wrote at Broadcast Law Blog, the case “could have important ramifications for many segments of the digital music industry and for Copyright law more generally.”

The antitrust and constitutional concerns related to the establishment of royalty rates for the use of sound recordings by digital music services are important.   However, it’s also worth taking a step back and considering a more fundamental question: whether some of the policy objectives enshrined in copyright laws of the United States may stifle innovation and impede new business opportunities. The answer is yes.

The standard to be applied by the CRB in setting statutory royalty rates for digital music depends on the type of service offered. The standard used for certain “preexisting” satellite and digital cable radio subscription services (e.g. Sirius XM, Music Choice, and Muzak) that predate the Digital Millennium Copyright Act of 1998 (DMCA) requires the Copyright Royalty Judges to set rates that not only “maximize the availability of creative works to the public” and “afford the copyright owner a fair return for his or her creative work,” but also – and this is certainly not a call to innovation – to “minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.”

A different statutory rate setting standard is used for determining rates for certain other services, including Internet radio, broadcast simulcasters, and “new” (i.e., post-DMCA) subscription-based transmission services. It requires the Copyright Royalty Judges to establish rates that most clearly represent the rates that “would have been negotiated in the marketplace between a willing buyer and a willing seller,” but, in doing so, to also consider “competitive” information, including whether a service “may interfere with or may enhance the sound recording copyright owner’s other streams of revenue from its sound recordings.” This language, which preferentially protects the traditional business models and revenue streams of one class of participants in the ecosystem, reflects what Andrew Stockment [pdf] described in a 2010 Virginia Law Review paper as “the recording industry‘s argument that Internet radio is a threat.”

The “willing buyer, willing seller” framework has not worked ideally. According to Gary Greenstein, a copyright attorney with Wilson, Sonsini, Goodrich & Rosati, who previously served as general counsel for SoundExchange, “the willing buyer/willing seller standard, as it has been applied by the CRB, has resulted in rates that would likely drive many nonsubscription, Internet-based digital music services out of business.”

Mr. Greenstein explains that this is why Congress had to intervene in 2008, and again in 2009, and temporarily grant SoundExchange, a non-government entity, with the extraordinary power to negotiate lower rates than those established by the CRB that were binding on all copyright owners. That authority was critical in enabling webcasters such as music streaming company Pandora to obtain lower rates than those set by the CRB.

Those “lower” rates can still be very high when measured with respect to revenue. For example, for the fiscal quarter ending January 31, 2012, Pandora reported revenue of $81 million and content acquisition costs of $48 million. “If Congress hadn’t recognized that the CRB rates weren’t appropriate for Internet radio,” says Pandora Founder Tim Westergren, “there would be no Pandora. We wouldn’t have survived.”

The rates negotiated in 2009 will expire in 2015, raising the important question of whether, absent a negotiated agreement on royalty rates between SoundExchange and online streaming services for the years 2016 – 2020, Congress will need to step in again following another decision by the Copyright Royalty Judges applying the willing buyer/willing seller standard.

So where does all of this leave things? The short answer: in need of repair. America’s status as a global technology leader is due in large part to disruptive advances that upend prevailing industry practices, and in doing so, often interfere with streams of revenue flowing to less innovative incumbents. Yet this is precisely the sort of progress that is impeded by the current copyright system as it applies to certain digital music services.

Songwriters, recording artists, and record labels should be fairly paid for their work, and deserve the protections of a well-designed copyright royalty framework. But it’s also important not to lose sight of the public’s interest in having access, under reasonable terms, to copyrighted material. And that interest is no less valid if it happens to be served using non-traditional business models such as Internet radio.

According to a survey conducted by Arbitron and Edison Research in early 2012, an estimated 103 million Americans had listened to Internet radio in the month preceding the study. Internet radio has become an important mechanism to provide the public with access to music – a point worth keeping in mind when rethinking how to best set digital music royalty rates.