On Tuesday, just before the Senate recesses for its summer vacation, an abridged version of the Senate Judiciary Committee held a hearing on the proposed sound recording performance royalty for over-the-air radio. Internet radio royalties were also encompassed in this discussion, principally concerning the issue of "platform parity", i.e. whether all music services subject to the sound recording performance royalty should pay a royalty determined by the same standard, or perhaps even the same royalty. We've already written this week about some of the issues surrounding the broadcast performance royalty (why it's still being considered given that a majority of the House of Representatives has already signed a resolution against the royalty, here, and discussing the likely amount of the royalty were it to be adopted, here). Neither of these issues was discussed in depth at the hearing. But a multitude of other issues were raised in the hearing. and we'll address many of them over the next few days. But first, today, a summary of the issues raised.

First, it should be made clear that there was not a full committee in attendance. While a few Senators came and went without saying a word, questions were asked or comments made by only 5 Senators of the 19 on the Committee. So judging how the full committee feels about the issues raised when only 5 Senators (4 of them Democrats) asked questions may not be a fair assessment of how the committee as a whole feels about the issues raised. But, broadcasters should take warning that all of the Democratic Senators in attendance seemed to be sympathetic to the idea of adopting a broadcast performance royalty. However, it must be noted that all also seemed somewhat sympathetic to the concerns about the financial impact of the royalty on broadcasters. Just as members of the House have cautioned broadcasters to negotiate on a royalty before one is imposed on them, Senator Leahy of Vermont, the Chairman of the Committee, echoed those sentiments, promising that "legislation will move" on this issue - meaning that the issue will not simply fade away, despite the signatures on the NAB petition opposing the performance royalty.

In the actual discussions of the royalty, several issues were repeatedly raised, which we try to deal with in more detail in subsequent posts. These include the following:

  • Supporters of the royalty contended that fears of the royalty's impact on small broadcasters and noncommercial operators were dealt with by the House of Representatives' version of the legislation by imposing a small, flat yearly fee as low as $500 per year on these stations. Senator Leahy made the point that this royalty was probably less than most stations were paying for their NAB dues to lobby against the royalty. Steve Newberry, Chair of the NAB Joint Board and the owner of a group of small market radio stations, submitted that, while $500 today seemed like a small amount, these numbers have a way of going up. After all, 10 years ago when the sound recording performance royalty for digital operators was first adopted by Congress, radio was supposed to be totally exempt - yet here we are, arguing for a change in that exemption.
  • Supporters of the royalty constantly made the argument that broadcasters were using their "property" without compensation, or agreement. Newberry argued that they were getting fair compensation through the promotion of their work by broadcast stations - a partnership that has produced the most significant music industry in the world. Senator Durbin of Illinois suggested that there was no longer any agreement to the partnership between broadcasters and artists, as the artists were no longer agreeing to allow their music to be used without compensation. Yet the system being proposed by Congress - a statutory royalty - would still deprive artists of choice - a choice to opt out of the royalty and allow their music to be played for free to promote airplay, especially if broadcasters have to pay a percentage of revenue for the royalty (if the percentage is not reduced by playing music where the royalty is waived, broadcasters will have no incentive to play that royalty free music, so artists do not have the choice to try to increase airplay through a royalty waiver)
  • Supporters of the royalty argued that most industrialized nations had the royalty, and that US artists were not getting their share of royalties when US music was played in overseas markets. Performing rights organizations in those countries do not pay US artists for the performance of their works since the US will not pay foreign artists for the performance of their works on over-the-air radio. Newberry pointed to the differing copyright standards in other countries (such as a 50 year protection for copyrighted works, rather than the 99 year copyright in the US). His written testimony also pointed to efforts in several countries to reform their royalty system, as the system inhibited the playing of new music. The written testimony also made the point that, as the US will still have not adopted a full performance royalty (as performances in bars and restaurants, stadiums and concert halls, and other public venues still will not be covered), there still will be no full performance royalty, so foreign countries may still withhold their payments to US artists.

An interesting suggestion was raised by Texas Senator Cornyn that has perhaps been dismissed by too many parties too quickly. Cornyn suggested that, rather than compelling a performance royalty, Congress should set up a "Do Not Play" list, similar to a do not call list. The list would be made up of those artists who do not give their consent to radio stations playing their music without the payment of a royalty. Thus, radio stations would have to negotiate with artists on this list to get the rights to play their music. Stations could play the music of all other artists without a royalty. This proposal was dismissed by some in attendance at the hearing for a number of reasons. It was argued that small market radio stations might have a problem negotiating for carriage of major stars and, as suggested by Senator Durbin, that it would set artists and composers against each other, as the composer might want the song played, while the artist might not. Finally, Ralph Oman, the former registrar of Copyrights, suggested that it would harm small artists that felt that they needed to give up their rights to get airplay. We will address these arguments in a subsequent post. But the idea is interesting in that many Internet radio operators have discussed the potential for getting artist waivers to reduce their SoundExchange fees (see our post here). Issues with setting up a pool of royalty-free music include concerns over assuring that artists who waive fees have the right to do so, and also the simple logistics of contacting enough artists to make such a waiver system worthwhile. If the government were to set it up, with appropriate safeguards, these issues might be eliminated.

The issue of platform parity for the standards used to determine the royalties paid by various users of music was also raised at the hearing. Bob Kimball, from Real Networks, argued that any bill addressing a performance royalty should also address the disparity in royalty rates and standards used in setting the sound recording performance royalty. In this discussion, issues that were raised include:

  • Whether it was fair that small broadcasters, with up to $1.25 million in revenue, would pay $5000 or less in sound recording performance royalties, while Internet radio companies with $1.25 million in revenue would pay $150,000 in royalties. While some suggested that FCC licensees have greater costs imposed by FCC obligations that justified a lower fee, Kimball asked how that cost disparity could possibly justify royalties 30 times as high as proposed for small broadcasters.
  • The question of whether the 801(b) standard (about which we wrote earlier this week) or some other standard was appropriate. Shelia E, testifying for the MusicFirst coalition, seemed to agree that a modified 801(b) standard, as proposed in the House of Representatives bill on the broadcast performance royalty, made sense for all music users.
  • Kimball also raised the question of whether it was fair that some settlements on Internet radio royalties reached under the Webcasters Settlement Act were considered to be precedential for purposes of the next CRB proceeding, while other settlements were considered nonprecedential - seemingly at the choice of SoundExchange. Kimball suggested that all should be precedential, or all should be excluded, but that private parties should not get to choose which settlements should be considered in setting future rates.

Finally, a question was raised as to the precedent that any sound recording royalty would set for the public performance royalty for the musical work - the right to the song's composition as paid to ASCAP, BMI and SESAC. The ASCAP and BMI royalties, if they cannot be negotiated, are set by a rate court which acts somewhat like the Copyright Royalty Board in making a determination of what a fair rate for the royalty should be (see our story on one such decision, here). At the hearing, Mr. Kimball suggested that there was language in the House version of the Performance Royalty bill that suggested that sound recording performance royalties could set a precedent for ASCAP and BMI to raise rates, but that they could not be used by music services to argue that the ASCAP and BMI rates be lowered. This might be an important issue not just for digital music services, but also for broadcasters who are currently in negotiations about the ASCAP and BMI rates for periods after the end of this year.

Nothing was resolved at the hearing, though much was discussed. The Committee, like the Judiciary Committee in the House, seems ready to move on the legislation. But whether the full Senate will act is perhaps as big of a question as whether the House will. This issue is not over (as we wrote here), so keep watching and see what develops.