Royalties for Internet Streaming Rights
By Kathy Merritt

You’ve probably seen the articles and e-mails in recent weeks concerning the latest round of rulings on Internet music rights. At the same time, your station may have signed on with CPB to be covered under agreements negotiated for CPB-supported stations. SRG has been watching these developments as well. This memo provides some background on the fee structure recently put in place for commercial webcasters and reviews some of the key points of the CPB agreements. If your station’s web site has a simultaneous stream of your broadcast signal or operates a side channel, then we hope this will clarify some of the issues at hand.

This report will provide an overview of recent developments, background on the royalty proceedings, and reminders on key provisions in the agreements that cover public broadcasting stations.

OVERVIEW
A decision on June 21, 2002, by the Librarian of Congress on royalties for Internet music broadcasts dramatically changed the landscape of webcasting. While CPB-supported radio and television stations that are streaming music over the Internet are not directly covered by the ruling, the context in which public stations stream on the web is clearly affected. Commercial stations that stream their audio broadcast signals on the Internet and companies that broadcast Internet-only music streams will now have to pay royalties for copyrighted material. The new fees have already put some commercial webcasters out of business, while others are deciding whether to fight the ruling in Congress or the courts.

CPB, NPR and PBS have negotiated separate agreements with Broadcast Music, Inc. (BMI), the American Society of Composers, Authors and Publishers (ASCAP), the Recording Industry Association of America (RIAA) and SESAC, Inc. for Internet music rights.  Stations must register with CPB to sign on to the agreements.  Once stations have registered, they will be allowed to simultaneously stream their audio broadcast signals, to stream archival programming and to stream "side channels" (Internet-only programming) on Web sites they own or control – subject to certain restrictions. Under the agreements, stations bear no financial responsibility for the fees; CPB is paying the cost of the licenses and, under the agreements, the fee costs are confidential. Funds for the license fees come from the portion of the CPB appropriation earmarked for system support. This so-called “6%” pool also provides funding for broadcast copyright licenses, system research and public television’s interconnection.

Because of the CPB agreements, public radio stations that stream now have a slight competitive advantage over commercial webcasters, but other challenges remain. Internet streams – whether commercial or affiliated with public stations – are still struggling to find an economic model that allows for sustainable growth. Costs for streaming are coming down but continue to be based on the number of users, creating the “paradox of popularity,” as one observer put it, where the addition of each new listener increases costs. For public stations there is still not a clear relationship between the Internet services they provide and growth in membership revenue. Until that connection is measurable, web sites and streams will be vulnerable to budget cuts in times of financial stress.

Public stations are competing with tens of thousands of webcasters (Live 365, which bills itself as “the world’s largest Internet radio network” boasts of more than 40,000 sites; in contrast the CPB agreements cover a maximum of 410 stations), and it’s unclear whether the demise of many of the commercial streams currently offered would mean a migration of listeners to public radio streams. Public stations have to develop niches for their programming to attract listeners in the Internet world just as they have in the radio domain.

While the CPB agreements allow public radio stations a wide playing field in webcasting, they don’t cover everything stations might want to do on the Internet. Subscription-based services and on-demand services that require users to pay a fee – two areas that are possible sources of revenue for stations – are not authorized under the agreements,. Playlists cannot be published in advance, and there are limitations on the number of tracks that can be played from a CD, album or cassette or by a particular artist. Also, stations have to meet reporting requirements of the agreements: quarterly reports that include playlists and logs of visitors to the site. The CPB web site (www.stations.cpb.org/musicrights/) has details on all provisions of the agreements.

The audience for Internet music streams is growing, although slowly. The latest Public Radio Internet Study from Walrus Research, "Making Money from Internet Radio," shows that the percentage of Americans who have ever listened to Internet radio doubled from 13 percent in January 1999 to 25 percent in January 2002. But the same study cautions that the percentage of public radio listeners who used Internet radio in a given week has stayed virtually flat over the past year at five percent. The monthly reach among public radio listeners was also flat, at 11 percent. The full study is available from Walrus Research.

The implementation of royalty fees causes a shift that muddies the outlook for commercial webcasters in the next three to five years. Some of the larger webcasters may decide to negotiate their own deals with the music industry, while some smaller Internet radio services may band together to lobby Congress for changes in the fees.

Public stations that are already making the commitment to extend their public service on the Internet have the opportunity to strengthen their positions. The first of the CPB rights agreements expires at the end of 2002, while the last expires in 2004. CPB is prepared to negotiate the next rounds of agreements and will continue to pay the license fees as long as funding is available and the system makes it clear that license fees are a priority in the way CPB allocates its funds.

BACKGROUND
The latest debate over royalties began when Congress passed the Digital Millennium Copyright Act (DMCA) in 1998. Radio stations have historically had to pay royalties to composers but not to the record companies or artists, because lawmakers believed that those parties benefited from the promotional value of radio airplay. The DMCA required Internet radio stations to pay royalties to composers and to pay royalties to performers. The rationale for the new "sound recording performance rights" was twofold – first, that digital copies are "perfect" copies and thus the sales of CDs might be at risk in this new digital millennium, and second, that the audience for Internet streams was so small that Internet broadcasts provided little promotional value.

The DMCA did not set the amount of the royalty fees but assigned that task to the U.S. Copyright Office, which reports to the Librarian of Congress. The Copyright Office gave webcasters and the music industry the opportunity to negotiate the fees, but they could not come to terms. The Librarian of Congress then convened a Copyright Arbitration Royalty Panel (CARP) to recommend rates. The CARP held six months of hearings last summer and fall to determine the appropriate royalty rate.

In February, the CARP recommended that companies providing Internet-only music services should pay a royalty of 0.14¢ for each performance that they transmit, and that a service retransmitting a radio broadcast should pay a royalty of 0.07¢ for each performance. Noncommercial broadcasters that were not part of the CPB agreement would pay a royalty of 0.02¢ for each retransmission of an AM or FM broadcast, 0.05¢ for other Internet retransmissions, including up to two side channels of programming consistent with the station’s public broadcasting mission, and 0.14¢ for transmissions on any other side channels. (The CARP followed the precedent that non-commercial stations, because of their funding structure, should pay lower rates for copyrighted work.)

The Librarian of Congress, James Billington, rejected the fees recommended by the CARP, arguing that portions of the proposed fee structure were arbitrary. On June 21, the Librarian made his recommendations, saying that commercial webcasters must pay record companies and performers 0.07¢ cents per song per listener for simultaneous transmission of broadcast signals and for Internet-only transmissions. Non-commercial broadcasters must pay 0.02¢ for simultaneous transmission of broadcast signals, archived programming transmitted over the Internet and up to two side channels. Non-commercial stations must pay 0.005¢ for transmission on additional side channels. The first royalty payments are due in November. The fees are retroactive to Oct. 28, 1998.

Under this fee structure, a commercial webcaster streaming one hour of programming (15 songs) to 1,000 listeners would owe royalties for that hour of broadcasting of $10.50. Royalties for one day would total $252, for one week $1,764 and for one year $91,728. Three years of back payments would total $275,184.

Neither the music industry nor webcasters are happy with the decision. Either side can appeal the decision in court, although there is more talk about taking the issue to Congress rather than engaging in a lengthy legal battle. Some small community webcasters have already announced that they will shut down their sites.

CPB/NPR/PBS AGREEMENTS
The agreements brokered by CPB, NPR and PBS give public broadcasters a short term competitive advantage over commercial broadcasters who will have to pay the royalties set by the Librarian of Congress. There are, however, a number of issues associated with the agreement that public stations should note:

Expiration of agreements – The BMI and SESAC agreements expire on December 31, 2002. The ASCAP agreement expires on December 31, 2003. The RIAA agreement expires on December 31, 2004.

Reporting requirements – The agreements require stations to provide quarterly playlists and listener logs. In addition, stations must provide information to CPB about their sites, which CPB must periodically report to BMI, ASCAP, SESAC and RIAA. Stations should read the agreements carefully to make sure all reporting requirements are being met. Some stations are investigating what software could assist in meeting these requirements.  

Restrictions on musical content – The RIAA has restrictions on how many tracks can be played from a particular CD or by a particular artist. These restrictions are mandated in the DCMA and are not part of the negotiated terms in the CPB agreement with RIAA. Stations must comply or be considered in violation of the license agreement. If the agreement is violated, stations would be considered as operating without a license and could be fined. If a station plays a program that violates the restrictions, the station is liable for that violation. Stations should have agreements with producers that indemnify the stations in the case of any violations. It’s likely, though, that the holders of the copyright would go after the primary distributor of the program and not the station streaming it.

Subscriptions/On-demand – The agreements do not authorize subscription-based services or on-demand services that charge a fee. (Stations can still conduct voluntary fundraising.) Some stations are examining whether the agreements allow them to offer their own non-music archival material on a subscription basis, however. For example, could a station offer access to a special series of interviews for a fee? The license agreements are based in part on public broadcasting’s special status as non-profit organizations operating within the FCC’s definition of non-commercial. Subscription and on-demand services are seen by the music industry as commercial activities. Stations should seek legal advice if they are going to pursue any activities that charge a fee for access to material.

Going it Alone – CPB tells stations that even if they choose to be covered by the licenses now, they can later exclude their web sites from the agreements. Stations can also negotiate their own agreements and bypass the CPB agreements. Rates for the CPB agreements are confidential, but observers say they are “attractive.” Stations can also choose to pay the fees established for commercial broadcasters and then not have to face some of the restrictions in the CPB agreements.



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