Small webcaster statutory royalty rate

Overview
The U.S. Copyright Act allows one who wishes to use copyrighted material, in certain instances, to obtain a statutory license to do so. Ordinarily, royalties and licenses for the use of protected material are the product of direct negotiations between copyright owners and users. When a statutory, or compulsory, license is available, a permitted user need only adhere to statutory requirements, including payment of established royalty rates, to use the work.

In 1998, in the Digital Millennium Copyright Act (DMCA),1 Congress amended several statutory licensing statutes to provide for and clarify the treatment of different types of webcasting. Some transmissions of sound recordings are exempt from the public performance right, for example, a nonsubscription broadcast transmission;2 a retransmission of a radio station’s broadcast within 150 miles of its transmitter; and a transmission to a business establishment for use in the ordinary course of its business.3

In contrast, a digital transmission by an “interactive service” is not exempt from the public performance right, nor does it qualify for a compulsory license. The owner of an interactive service &mdash; one that enables a member of the public to request or customize the music that he or she receives &mdash; must negotiate a license, including royalty rates, directly with copyright owners.

But, a category of webcasting that does qualify for a compulsory license is “an eligible nonsubscription transmission.” A subscription service is one that is limited to paying customers. Hence, webcasters who transmit music over the Internet on a nonsubscription, noninteractive basis may qualify for the statutory license under 17 U.S.C. §114(d).

A licensee under Section 114 may also qualify for a statutory license under 17 U.S.C. §112(e) to make multiple “ephemeral” &mdash; or temporary &mdash; copies of sound recordings solely for the purpose of transmitting the work by an entity legally entitled to publicly perform it.4

Background
The initial ratemaking proceeding for statutory royalty rates for webcasters for the period 1998 through 2005 proved to be controversial, perhaps reflecting in some degree the relative newness of both the DMCA and webcasting activity. A Copyright Arbitration Royalty Panel (CARP) issued a recommendation for the initial statutory royalty rate for eligible nonsubscription webcasters on February 20, 2002.5 Small-scale webcasters objected to the proposed rates.

In accordance with then-existing procedures, the Librarian of Congress, on the recommendation of the U.S. Copyright Office, rejected the CARP’s recommendation and revised rates downward. Congress interceded as well with enactment of the Small Webcasters Settlement Act of 2002 (SWSA), P.L. 107-321. Although very complex, the law permitted more options than the royalty rates established by the Librarian’s order. Qualifying small webcasters, for example, could elect to pay royalties based on a percentage of revenue or expenses rather than on a per song per listener basis. The rate agreement made pursuant to SWSA was published in the Federal Register6 but not codified in the Code of Federal Regulations. However, by SWSA’s own terms, its provisions were not to be considered in subsequent ratemaking proceedings.7

Subsequent to passage of the SWSA and the initial ratemaking proceeding, Congress substantially revised the underlying adjudicative process. Enactment of the Copyright Royalty and Distribution Reform Act of 2004, P.L. 108-419, abolished the CARP system and substituted a Copyright Royalty Board composed of three standing Copyright Royalty Judges.8 Rates established pursuant to the original ratemaking determination and SWSA were to remain in effect through 2005. As required by law, the Copyright Royalty Board announced royalty rates for the period that commences (retroactively) from January 1, 2006, through December 31, 2010.9

Copyright Royalty Board Rates for Small Webcasters
The general process for statutory license ratemaking factors in a three-month period, during which interested parties are encouraged to negotiate a settlement agreement. In the absence of an agreement, written statements and testimony are gathered, discovery takes place, hearings are held, and the Copyright Royalty Board issues a ruling.10

Notice announcing commencement of the subject proceedings was published on February 16, 2005.11 On March 9, 2007, the Copyright Royalty Board issued its decision.12 The decision establishes rates for commercial and noncommercial webcasters.13 Rates are as follows: per performance for 2007, $.0014 per performance for 2008, $.0018 per performance for 2009, and $.0019 per performance for 2010. This includes fees for making an ephemeral recording under 17 U.S.C. §112. less than 159,140 Aggregate Tuning Hours (ATH) a month, an annual per channel or per station performance royalty of $500 in 2006, 2007, 2008, 2009, and 2010. (ii) For Internet transmissions totaling more than 159,140 Aggregate Tuning Hours (ATH) a month,14 a performance royalty of $.0008 per performance for 2006, $.0011 per performance for 2007, $.0014 per performance for 2008, $.0018 per performance for 2009, and $.0019 per performance for 2010. These rates include fees for making an ephemeral recording under 17 U.S.C. §112.
 * For commercial webcasters: $.0008 per performance for 2006, $.0011
 * For noncommercial webcasters: (i) For Internet transmissions totaling
 * Minimum fee. Commercial webcasters and Noncommercial webcasters will pay an annual, nonrefundable minimum fee of $500 for each calendar year or part thereof.15

This rate structure does not make special provision for “small” webcasters, who were addressed in the SWSA by reference to revenues.

Rationale
The standard for establishing rates, set forth by statute, is known as the “willing buyer/willing seller” standard.16 The Board’s rationale is laid out in a 115-page decision. Its determination is informed by the initial royalty proceedings of the CARP, which it refers to as “Webcaster I.” In essence, both the previous CARP and the current Copyright Royalty Board attempt to implement the statutorily mandated standard to reach a royalty rate. Explaining its interpretation of the governing language, the CRB wrote:


 * Webcaster I clarified the relationship of the statutory factors to the willing buyer/willing seller standard. The standard requires a determination of the rates that a willing buyer and willing seller would agree upon in the marketplace. In making this determination, the two factors in section 114(f)(2)(B)(i) and (ii) must be considered, but neither factor defines the standard. They do not constitute additional standards, nor should they be used to adjust the rates determined by the willing buyer/willing seller standard. The statutory factors are merely to be considered, along with other relevant factors, to determine the rates under the willing buyer/willing seller standard.17

The Board considered the proposals of representatives for “small” webcasters that rates be structured as a percentage of revenue, but ultimately rejected them:


 * In short, among the parties on both sides who have proposed rates covering Commercial Webcasters, only Small Commercial Webcasters propose a fee structure based solely on revenue. However, in making their proposal, this group of five webcasters clearly is unconcerned with the actual structure of the fee, except to the extent that a revenue-based fee structure &mdash; especially one in which the percent of revenue fee is a single digit number (i.e., 5%) &mdash; can protect them against the possibility that their costs would ever exceed their revenues. . . . Small Commercial Webcasters’ focus on the amount of the fee, rather than how it should be structured, is further underlined by the absence of evidence submitted by this group to identify a basis for applying a pure revenue-based structure to them. While, at times, they suggest that their situation as small commercial webcasters requires this type of structure, there is no evidence in the record about how the Copyright Royalty Judges

would delineate between small webcasters and large webcasters.18

And, in a substantive footnote, the Board expressed its view that it lacks statutory authority to carve out royalty rate niches for the emergent business models promoted by small commercial webcasters:


 * It must be emphasized that, in reaching a determination, the Copyright Royalty Judges cannot guarantee a profitable business to every market entrant. Indeed, the normal free market processes typically weed out those entities that have poor business models or are inefficient. To allow inefficient market participants to continue to use as much music as they want and for as long a time period as they want without compensating

copyright owners on the same basis as more efficient market participants trivializes the property rights of copyright owners. Furthermore, it would involve the Copyright Royalty Judges in making a policy decision rather than applying the willing buyer/willing seller standard of the Copyright Act.19

In setting the rates, the Board looked to proposed “benchmark” agreements to determine what a hypothetical buyer and seller would agree to in the marketplace. It rejected the proposals advanced by the radio broadcasters and small commercial webcasters that the appropriate benchmark was the fee paid to performing rights organizations (PROs), such as ASCAP, BMI and SESAC, for the digital public performance of the underlying musical composition. It also rejected a proposal that analog over-the-air broadcast music radio be used as a benchmark, with reference to musical composition royalties paid by such broadcasters to the PROs. Based on the evidence before it, the Copyright Royalty Board found that the most appropriate benchmark agreements are those in the market for interactive webcasting covering the digital performance of sound recordings, with appropriate adjustments.20

In summary, the Copyright Royalty Board’s decision, like that of its predecessor, the CARP, declines to delineate a separate class or to integrate a separate market analysis on behalf of “small” webcasters.