The NAB Radio Board today voted to adopt a Terms Sheet to offer to the musicFirst Coalition which, if agreed to by musicFirst and adopted by Congress, will settle the contentious issue of whether to impose a sound recording performance royalty (the "performance tax") on over-the-air broadcasters. If adopted, that will mean that broadcasters in the United States, for the first time, will pay a royalty to artists and record labels, in addition to the royalties paid to ASCAP, BMI and SESAC that go to the composers of the music. What does the Term Sheet provide, and what will this mean for broadcasters, webcasters and others who pay music royalties?

The Term Sheet sets out a number of points, including the following:

  • A 1% of gross revenue sound recording royalty to be paid to SoundExchange
  • A phase-in period for the 1% royalty, that will be tied to the number of mobile phones that contain an FM chip. A royalty of one-quarter of one percent would take effect immediately upon the effective date of the legislation adopting it. The royalty would rise in proportion to the number of mobile phones with enabled FM chips. Once the percentage of phones with FM chips reached 75%, the full royalty would take effect.
  • The 1% royalty could only be changed by Congressional action.
  • The royalty would be lower for noncommercial stations and stations with less than $1.25 million in revenue - from a flat $5000 for stations making between $500,000 and $1.25 million in revenue down to $100 for those making less than $50,000 per year.
  • Broadcasters would also get a reduction in their streaming rates - but only when FM chips in mobile phones exceed 50% penetration. The reduction would be tied to the rates paid by "pureplay webcasters" (see our summary of the Pureplay webcasters deal here), but would be set at a level significantly higher than pureplay webcasters, rising from $.001775 in 2011 (if FM chips were quickly deployed) to $.0021575.
  • Future streaming royalties would not be set by the Copyright Royalty Board but by a legislatively ordered rate court - presumably a US District Court similar to that which hears royalty disputes for ASCAP and BMI.
  • An acknowledgment by AFTRA that broadcasters can stream their signal on the Internet in their entirety - apparently agreeing to relieve broadcasters from any liability for the additional amounts due to union artists when commercials featuring union talent are streamed
  • An agreement that broadcasters can directly license music from artists and reduce their liability for the new royalty by the percentage of music that the broadcasters is able to directly license
  • Agreements to "fix" issues in Sections 112 and 114 of the Copyright Act in making the provisions of these laws regarding ephemeral copies and the performance complement consistent with the waivers that major record labels gave to broadcasters when the NAB reached its settlement with SoundExchange on streaming royalties last year. See our post here on the provisions of those waivers.
  • musicFirst would need to acknowledge the promotional effect of radio in promoting new music, and would need to work with radio in attempting to secure legislation mandating the FM chip in mobile phones.

[Clarification - 10/26/2010 - Upon a close reading of the Terms Sheet, it looks like the phase in of the 1% royalty and the delay in the streaming discount only kick in if Congress does not mandate active FM chips in cell phones. If the mandate is enacted, then the full 1% royalty and streaming discount is effective immediately. Given the opposition of much of the wireless industry to a mandated FM chip, this may represent a recognition that the legislation requiring the active FM chip will not be enacted in the near future]

What does this all mean?

First, this is but an offer to musicFirst, which has to be accepted. Today, musicFirst issued a cautious statement, saying that they were still studying the proposal, but expressing disappointment that the NAB did not accept the proposal that "both parties agreed upon in July." That in itself is an interesting statement, as the NAB has been very clear to state that it has never agreed to anything in July - but that it instead needed to vet the musicFirst proposal with its members before agreeing to anything. Presumably, musicFirst itself had to seek approval for any deal. As any deal would need the blessing of Congress to become effective and binding on broadcasters and copyright holders, each party would need broad approval for any deal from all affected parties. So how could the NAB member involved in the discussions and those representing musicFirst have "agreed" to any proposal back in July, when no such broad approval had been received for a deal that was not yet public?

And what has really changed in this Term Sheet from what was discussed in July? Seemingly, very little. While this Terms Sheet proposes a phase in of the 1% royalty depending on how many phones are FM enabled, the July proposal made the whole deal contingent on mandated FM chips in cellphones. In effect, this proposal is more favorable to copyright holders than was the proposal on the table in July, as at least some royalty would be paid even without that mandate. So how could the labels complain about that provision?

The only other substantive change appears to be the provision that allows direct licensing of music to reduce the liability of broadcasters. But this too seems to be noncontroversial. How can musicFirst, which claims to be standing up for the rights of copyright holders and musicians to be compensated for the use of their work, turn around and say that those copyright holders that want to exercize their rights by waiving the royalty be denied that right?

Other changes from the proposals set out in July seem cosmetic and insubstantial.

So what comes next? Obviously, musicFirst must formally respond. Then the details of a deal must be worked out. While the Terms Sheet may, at first glance, seem detailed and thorough, in fact it is but an outline of a deal. Any deal will need to be written into statutory language and offered to Congress. And this will not be easy, as each term will need to be defined, and the language will need to be carefully reviewed to make sure that there are no unintended consequences. Many questions will need to be fleshed out. How are the percentages of FM-enabled cell phone penetration measued? What standard would a rate court use to determine the streaming royalty if that royalty is not set by the CRB? How is gross revenue defined? How are stations that are part talk and part music treated? Issues that will need resolution.

Then, any agreement must be presented to Congress. Adoption of the deal as proposed may not be all that simple, as there may well be attempts by other interested groups to latch on to any bill to attempt to remedy other problems with the royalty process. Why should Internet radio pay royalties that are a minimum of 25% of gross revenues for large pureplay webcasters like Pandora, if radio is paying but 1%. Why should smaller webcasters with revenues between $500,000 and $1.25 million be paying 12 or 14% of revenues, when a small radio station pays only $5000, less than a tenth of what the webcaster with the same revenues would pay? Expect that others will attempt to use the process to raise issues such as these, so the Congressional process will not necessarily be quick and easy.

All in all, while this may seem like the beginning of the end of the performance royalty dispute, we will no doubt hear much more about these issues in the weeks to come. We will write more about the issues in the days to come, especially as reactions to this proposal are made public by various parties either involved in the discussions, or from those that are affected by their outcome. A no doubt very interesting debate is sure to play out in the coming days and weeks.