David Oxenford

By David Oxenford, Wilkinson Barker Knauer

Last week, the Senate Judiciary Committee held a hearing on the American Music Fairness Act bill which proposes to adopt a new music royalty to be paid by over-the-air radio stations.  The royalty would be payable to SoundExchange for the public performance of sound recordings.  This means that the money collected would be paid to performing artists and record labels for the use of their recording of a song.  This new royalty would be in addition to the royalties paid by radio stations to composers and publishing companies through ASCAP, BMI, SESAC and GMR, which are paid for the performance of the musical composition – the words and music to a song. This legislation is very similar to a bill introduced in the last Congress (see our article here), and is another in a string of similar bills proposing to establish a broadcast performance royalty that have been introduced in Congress over the last decade.  See, for instance, our articles here, here, here and here on previous attempts to impose such a royalty.

This past week’s hearing featured three witnesses.  A broadcast station owner from eastern North Carolina, Henry Hinton, spoke on behalf of broadcasters warning of the impact that such a royalty would have on the economics of broadcasting and the public service that broadcast radio stations provide.  His written statement is here, and a podcast where he further explained his testimony is here.  Michael Huppe, the CEO of SoundExchange, testified in support of the royalty arguing, among other things, that the US was an outlier in not imposing this royalty on broadcasters, and that the broadcast industry should not be able to make its tens of billions of dollars off of artist’s work without compensating them (that revenue figure must have been meant as a historical one, as even he admitted that total revenue for the radio industry was only $14 billion – and some of that comes from talk radio that presumably would not be affected by this royalty).  His statement is here.  Also testifying was Gene Simmons, the frontman of the legendary band Kiss, who argued that this legislation was needed to compensate the next generation of artists so that they get paid for radio play.  His statement is here.  The hearing was contentious at times as most of the committee members in attendance were supporters of the royalty (though at least 25 Senators and close to a majority of the House have signed on to an NAB resolution opposing the royalty).  The entire hearing can be viewed on the Committee’s webpage here.

We looked at this bill when it was introduced earlier this year, and thought that, with the publicity that followed the hearing, we thought that we should revisit the provisions of this legislation.  In an attempt to rebut arguments that this royalty would impose an unreasonable financial burden on small broadcasters, the legislation proposes relatively low flat fees on small commercial and noncommercial radio stations, while the rates applicable to all other broadcasters would be determined by the Copyright Royalty Board – the same judges who set internet radio royalties payable to SoundExchange by webcasters, including broadcasters for their internet simulcasts.  See our article here on how the rates for those internet simulcasts will be increasing next year as a result of the readjustment process before the CRB that happens every five years.  Under the bill, the CRB would also review these proposed new over-the-air royalty rates every 5 years.

The reduced fees would be just $10 per year for radio stations with less than $100,000 in revenue, $100 per year for noncommercial stations with revenues of between $100,000 and $1.5 million per year, and $500 for commercial stations with revenues of between $100,000 and $1.5 million.  But these discounts – for both commercial and noncommercial stations – would disappear if the stations are co-owned or otherwise affiliated with other stations that cumulatively have revenues of $10 million or more (so those stations would be subject to royalties established in the CRB rate-setting process).  Revenues would include all revenues earned by a station, whether or not related to the use of sound recordings.

What kind of fees would be likely for larger broadcasters were this proposal to be adopted?  A decade ago, when these fees were first proposed, a Congressional Budget Office (CBO) review of the cost to broadcasters of the proposed performance royalty concluded that the cost of such royalties would likely be “substantial.”  That can be seen in the royalties that SoundExchange has been able to receive from other services who pay for the digital performance of sound recordings.

The recent ratemaking decision for webcasters is difficult to translate to a broadcast context, as webcasting royalties are paid on a per performance rate (per song, per listener).  Obviously, there is no precise way to count “performances” for over-the-air broadcasting, so a percentage of revenue royalty would be more likely for any broadcast sound recording performance royalty.  But analogies can be drawn to other services where the CRB has set sound recording performance royalties based on a percentage of revenue metric when performances were similarly impossible to determine.

For instance, in 2017, the CRB decided that Sirius XM would pay sound recording royalties of 15.5% of its revenues (these rates remain in effect through 2027 because of a provision in the Music Modernization Act in 2018 that extends their usual 5-year term for another 5 years).  Note that this 2017 decision was based on a different standard than that which now applies to most rate-setting proceedings (the so-called 801(b) standard that factored in public interest factors into determining royalty rates in addition to the theoretically market-driven “willing-buyer, willing-seller” royalty standard now used for all services following the Music Modernization Act – see our articles here and here on the difference between the standards).  The satellite radio rate was also based on subscription revenues received by Sirius XM, which are at least partially attributable to many channels offered by the service that contain sports, talk and other non-music content.  Thus, a rate for a single music-oriented radio station could be higher than that set for satellite radio.  Imagine what a royalty of 20% or more of radio revenue would do to the radio industry.

Then there are Business Establishment Services, which aremusic services that digitally transmit music to retail and other business – what some would call “background music services”, which by law do not pay for the public performance of music but only for the ephemeral copies made in the digital transmission process (the least significant part of the webcaster royalty – assumed to be only 8%-10% of the royalty payment in other contexts).  For Business Establishment Services, the parties to a proceeding to set rates for 2024 through 2028 agreed to pay 14% of a service’s gross revenues as royalties to SoundExchange, increasing to 15% over the 5-year royalty term (see the Federal Register notice of the final rules for those services, here). That is more than twice the percentage that the broadcast industry pays annually to ASCAP, BMI, SESAC and GMR for rights to the musical compositions.

Thus, the CBO’s conclusion a decade ago that the broadcast performance royalty would be substantial seems right on target.   Royalty levels that could be over 20% of revenue, particularly in today’s economic climate, would virtually drain the radio industry of its profit margins.  From time to time over the last decade, there have been discussions of a voluntary resolution of the question of a broadcast royalty – perhaps a lower webcasting royalty in exchange for a share in over-the-air revenues, as some big broadcast companies have, from time to time, negotiated with various record labels (see, e.g., our article here and here).  In last week’s hearing, SoundExchange’s Mr. Huppe rejected this kind of settlement, stating that he rejected any royalty negotiation where broadcasters get a reduction in any other payment to the music industry. Yet already the streaming royalties are such that broadcasters generally consider that cost a substantial promotional cost – necessary to reach listeners where they listen to other audio entertainment but adding little or no incremental revenue.  In other areas, music royalty costs have forced dedicated streaming services to feature non-music programming like podcasts, for which they may pay substantial sums, because it is still cheaper than the cost of music royalties in the US (see our article here).

Plus, broadcasters do already pay for music – not only when they stream, but also to the music composers and publishers with the payments that they make to the Performing Rights Organizations – ASCAP, BMI, SESAC, and GMR.  And, as we explained here, those rates are increasing as well – substantially.  In an era of declining broadcast revenue due to digital competition for audio audiences and advertisers (see our article here), how can broadcasters ever agree to a new royalty cost, unless there is some moderation in the music payments in some other area?  Most broadcasters are not averse to paying for their use of music but, as with any other cost of their operations, the costs must be reasonable.  Ever-increasing music royalties, in a time of generally declining broadcast revenue, simply does not add up.

We’ve suggested in the past that any review of sound recording royalties should be coupled with a review of music royalties more generally.  Already, the Copyright Office is reviewing the ever-increasing costs for PRO payments – and the growth of new PROs (see our article here).  With all segments of the music industry demanding more money from a shrinking broadcast pie, we suggested here, that it makes more sense for broadcasters to pay one set amount for all music use.  That payment would be made to the CRB or some other agency, and the various music collection societies could argue about how that fee should be divided – rather than each of those societies continually claiming that they deserve more from broadcasters.  That is similar to the way that cable systems pay the copyright holders of broadcast programming that they air – Congress set a fee that cable systems pay to the CRB, and the CRB has a proceeding where all copyright holders (e.g., sports claimants, religious broadcasters, syndicated program producers, local TV stations for their news and other local programming, music rights holders) litigate over how much of the royalty pot they deserve. This would seem to be a much fairer system than the one we have now, where all music copyright holders argue in separate proceedings that what they get from broadcasters is constantly worth more than what they are now receiving – and the broadcaster is forced to litigate against each of the music industry claimants individually in forums where the total cost to broadcasters of all music royalties is never considered.

Radio broadcasters must pay close attention to action on this proposed legislation.  Especially at the end of any year, or when big budget bills are being considered, lobbyists try to get their favorite legislation that might not pass otherwise stuck into some other massive must-pass legislation that Congress is considering.  Broadcasters need to be talking to their legislators about what this royalty would mean.  TV broadcasters, and other music users (retail locations, stadiums and concert venues, etc.) who don’t pay a sound recording royalty will also need to pay attention as, if the royalty is imposed on radio, you can be sure that other users will be next.  This is certain to be an ongoing battle in which all music users must be engaged.