The proposals for the royalty rates to be paid by webcasters to SoundExchange for the public performance of sound recordings for 2016-2020 are now on file with the Copyright Royalty Board, and they represent two differing perspectives on the state of the industry and how much Internet radio companies can and should pay to record companies and recording artists.  As we wrote many months ago, the CRB initiated its proceeding to set these royalties back in January, and earlier this month, participating parties, including internet music services and SoundExchange, were required to file their “direct case exhibits” – written witness statements setting out the arguments to justify the proposals of each side, and their proposed royalty rates.  These direct cases (with certain confidential information redacted) are now available on the CRB website. So what are the parties proposing?

SoundExchange provided expert testimony and exhibits from record company executives to contend that there are many new entrants into the streaming industry and that the industry is healthy and growing.  Looking at deals that have been done in the marketplace, including deals for “interactive streaming” (deals negotiated directly between services and copyright holders, and not subject to CRB oversight and review – see our article here), SoundExchange suggests that the royalties should increase from their current rate of $.0023 per performance (e.g. per song per listener).  Their rate proposal is to go from $.0025 in 2016 to $.0029 in 2020. But, in a new wrinkle, they propose that the CRB should adopt a new “greater of” formulation, suggesting that all commercial Internet radio services should pay the greater of the suggested per performance royalty or 55% of revenue related to their streaming.  This greater of formulation is partially justified by SoundExchange based on their witnesses claim that such “greater of’ formulations are common in interactive streaming agreements.SoundExchange’s proposed royalties are thus the greater of 55% of a service’s revenue, or the per performance royalties set forth below:

Click here to view table.

In contrast, the music services suggest that a royalty “reset” is in order.  Virtually all argue that even the biggest name in streaming, Pandora, has not been profitable at the rates that they are paying, and those rates are only about half the rates that are paid under current CRB requirements and on which SoundExchange bases its proposal (as Pandora has availed itself of rates set under one of many Webcaster Settlement Act agreements that provided for royalties different and usually less than those set by the CRB – see our summary of all of the current rates effective through the end of 2015 here). 

The services also look at deals that have been reached in the marketplace, including direct deals cut by iHeart Media (formerly Clear Channel – see our article here about some of these direct deals) and, recently, by Pandora with Merlin, an association that represents many independent record labels.  The services provide their own economic experts to back their proposals, and fact witnesses who talk about the business issues involved in streaming.

The services advance different proposed rates.  Pandora, like SoundExchange, proposes a “greater of” formulation with the per performance royalties for ad-supported streams starting at $.0010 (slightly less than what they are paying now under the “Pureplay” WSA agreement), and modestly increasing over the 5 year term.  They propose the greater of the per performance rate or 25% of revenue (again, a number included in the WSA deal but one at which they have not been paying as the per performance rate has to date been a significantly higher than 25% of their revenues).  The specifics of Pandora’s per performance proposal is set out below:

Click here to view table.

Broadcasters, both iHeart and the NAB, suggest a royalty of $.0005 per performance for all five years.  These proposals are supported by expert testimony analyzing the marketplace, as well as testimony from broadcasters about their business, programming, and experiences with streaming.  NAB offered evidence as to how simulcasting their over-the-air programming on the Internet is different from other webcasters – providing significant value to the public beyond that provided by most Internet radio music services.  Radio stations simulcasting their broadcasts include public interest programming, other elements of talk and information, and programming that is directed to primarily local audiences.  The NAB also asks for a flat fee royalty of $500 a year for broadcasters who do not exceed 876,000 aggregate tuning hours in a year – which essentially means up to 100 average listeners.

Sirius XM (which has to pay royalties for their streaming separately from the payments for their satellite radio service – see our article on the current satellite radio royalty rates here) suggests $.0016, but notes that they have not seen many of the direct deals and may revise their proposals lower after seeing those deals in the discovery that will take place in the proceeding. Accuradio and RAIN News founder Kurt Hanson suggests a lower rates, $.000125, similar to the rate recently set by the Canadian tribunal that was considering the royalties to be paid for the public performance of sound recordings in that country.

This range of royalty rates demonstrates a fundamental difference of opinion as to the state of the industry and just what the “willing buyer, willing seller” rate for royalties, the rate that needs to be set by the CRB, should be.  The Board and the parties will have to sort out the hundreds of pages of testimony before a final decision on the royalties for 2016-2020 is made.  Now that these direct cases are on file, the parties will engage in discovery (depositions, document requests and interrogatories, similar to those in any civil litigation) through December, then they will have time to refine their cases based on the discovery and to submit rebuttal testimony to refute the contentions of the other side. A trial, with witnesses and cross-examination, will take place in Washington in April and May. Final briefing and arguments about the case will follow in June and July, with a decision to be reached by the Board by the end of 2015.