A Look At the Internet Radio Fairness Act… and the Royal Mess That is the Copyright Royalties System That It Attempts to Address

On September 21, 2012 Rep. Jason Chaffetz (R-UT) introduced the Internet Radio Fairness Act of 2012 which would alter 17 U.S.C. §801, the statute which establishes the Copyright Royalty Board composed of Copyright Royalty Judges. Under the statute, the Librarian of Congress, as head of a freestanding entity, appoints this panel of judges who set default royalty rates and terms for webcasting digitally recorded music. While the Act enjoys five cosponsors, its senate counterpart has none thus far.

The Act proposes to make the appointment of Copyright Royalty Judges the province of the President with the advice and consent of the Senate, rather than that of the Librarian of Congress as is currently the case. The D.C. Circuit in 2011 held that the since the Librarian is restricted in the ability to remove Copyright Royalty Judges, Congress’s vesting appointment in the Librarian as head of a Department rather than the President makes limiting language of §802(i) unconstitutional as a violation of the Appointments Clause.

The Act would put the burden of proof on the party requesting a royalty to show that such royalty is reasonable. It would change the way rate proceedings are conducted by, for instance, removing the precedential effect of past royalty proceedings. Currently, rates for noninteractive broadcasting are based on interactive broadcasting rates. Much of these are based on extrapolations by expert witnesses testifying about which rates should be adjusted, using regression analysis to remove the effect of interactivity of broadcasting on precedent deals in the interactive market to guide rates to be set in non-interactive broadcasting—as in webcasting services like Pandora. Proponents argue this is problematic as a highly subjective and speculative analysis. Someone will be paying a rate based on fundamentally different market conditions from their own because of the inherent difficulty in trying to project what the non-interactive market actually is (See broadcastlawblog).

Currently, Sirius XM Satellite Radio pays about 8% of its revenue in sound recording royalties under the 801(b) standard while Pandora Internet Radio pays about 50% of its revenue in such royalties under the willing buyer/willing seller standard.

Are the uses that satellite radio makes of artists’ and producers’ copyrighted content so different from the uses used by internet radio services like Pandora as to justify such a large discrepancy in the royalties each one is to pay? SoundExchange is a non-profit tasked with collecting and distributing royalties on behalf of recording artists and master rights owners, that is, owners of recorded works. Its president is among the chorus against the Pandora-backed Act for its potential to reduce record label and musicians’ royalties. Analysts have said the bill seeks to create parity in royalties among internet, satellite, and cable TV services as a share of revenue instead of a flat rate per recording, currently at $.0011 per performance (each play of a song) per listener for an internet radio service.

Proponents of the bill argue that it would establish a fairer approach by using the 801(b) approach for all of these platforms. In theory this would close the gap between internet radio and satellite radio. It would also not allow standard AM/FM radio to pay much lower royalties than internet and satellite counterparts.

Opponents of the bill side with the willing buyer/willing seller approach. Among them is Congressman Jerry Nadler (D-NY) who has circulated a discussion draft of the Interim FIRST Act, touted as a promoting fair compensation for artists. MusicFIRST, a coalition of organizations representing musicians, performers, and producers, whose founding members include the Recording Industry Association of America (RIAA), criticizes Pandora’s lobbying against fair pay for playing authors’ works and seeking to raise profits since going public in mid-2011 when it was valued at over $3 billion at $16 per share. It is currently at $9.44 a share and has made $103 million in the second quarter of its fiscal 2013. Pandora’s opponents have suggested that it could generate more revenue with more ads on its site rather than trimming royalties on content it streams. Recording artists and musicians endorsing MusicFirst range from Jay-Z to Bonnie Raitt to Tom Waits. Which serves to better level the playing field here? Are these platforms even similarly situated? What is actually equitable here?

Proponents of the willing buyer/willing seller approach argue its approach makes an attempt to mirror the marketplace itself, while the 801(b) standard allows Copyright Royalty Judges the discretion to set rates that minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices. It is unclear which approach ultimately provides a more equitable balance of the royalties to authors and master rights owners and revenues generated by companies using their content. The Internet Radio Fairness Act does appear to take a subtler approach to updating the current royalty system, which its proponents argue will promote greater innovation and growth in the industry by extending 801(b)’s benefits to all non-interactive broadcasters rather than a select few. The outcome will likely be more based on whose lobbying efforts prove stronger on Capitol Hill.