The Copyright Royalty Board Controversy

SUBJECT: Response to the March 2nd CRB Determination of Streaming Rates
BY: David Freedman, General Manager, WWOZ-FM, New Orleans, LA

June, 2007

On March 2, 2007, the Copyright Royalty Board of the Library of Congress issued a determination of rates regarding the streaming of recorded music performances. The CRB Judges raised royalty fees for webcasters high enough for some to predict the demise of Internet radio. The Judges were told to establish rates "that would have been negotiated between a willing buyer and a willing seller." For commercial and for larger non-commercial webcasters, the Judges set a pay-per-play rate of $.0008 for 2006, $.0011 for 2007, $.0014 for 2008, $.0018 for 2009 and $.0019 for 2010. This rate is to be paid for each song played for each individual stream that is being listened to. Thus, for one song heard by 1,000 people using 1,000 streams, the royalty for that one song, alone, would be $1.10 in 2007 and $1.90 in 2010. Multiply that number by the number of songs played in a year (at an average of 12 songs per hour) and the "fee" would mount to $115,632. It is, in fact, quite unclear whether one could offset a rate of $1.10 per song per listener (not to mention $1.90) with income from a constant listener base of only 1,000 people. Of course, when you throw in the retroactive charge of .0008 per song per listener for 2006 (total = $84,096),a large number of webcasters will be ready to throw in the towel.

Fact: Broadcast radio, an industry with $20 billion in annual revenue, is exempt and pays no performance royalties to record companies or recording artists. Satellite radio, which has approximately $2 billion in annual revenue pays between 3% and 7% of revenue in recording performance royalties. 2008 combined Internet revenues will total only $73.6 million, but royalties will devour 58% of that amount, or $42.4 million. Small Internet radio services are essentially bankrupted by the CRB ruling, with most anticipating royalty obligations equaling or exceeding total revenue.

Fact: Internet radio is a relatively new industry with advertising models still developing. Some services rely on banner ads; others are selling traditional audio ads; and still others rely on sponsorships. The vast majority of Webcasters will not be able to generate enough advertising revenue to pay their new, higher royalty fees.

Fact: Prior to this decision all small webcasters and some large webcasters had the choice of paying royalties based on a percentage of their revenue that typically equaled 10-12%. But the CRB decision did not offer a revenue-based royalty option for any webcasters.

Fact: The CRB decision is retroactive as of January 2006, so if it actually becomes effective for only one day its impact will be immediate as the past due royalties alone will be enough to bankrupt virtually all small and mid-sized webcasters.

Fact: The CRB piled on even more, by imposing a $500 per channel minimum royalty that for many services will far exceed the annual royalties that would otherwise be due even after the CRB decision. One advantage of Internet radio is that it is not limited by spectrum capacity or bandwidth capacity, which enables several services literally to offer 10,000 or 100,000 stations and more. By penalizing this innovation and creativity the CRB further ensures that Internet radio will become less creative, less dynamic, less of an opportunity for non-mainstream artists and genres, and will look more like broadcast radio in the future.

As the manager of WWOZ-FM, a community radio station that has been simulcasting our over-the-air programming on the web since 1995, I have more than a passing interest in the recent "deter-mination" by the Copyright Royalty Board that seeks to raise the rates we pay by 300% to 1200% (!) for the right to continue streaming our programming. In fact, it is much more than a passing interest, since a dozen years’ work in developing an international audience for the authentic roots music of New Orleans may be wiped out in one fell swoop. This incredibly aggressive "fee" structure threatens to dismantle our ability to reach beyond our broadcast signal. And this, at a particularly poignant moment, given that 22 months after Katrina, as many as half of our city’s former residents are still unable to return to New Orleans.

But beyond WWOZ, we are talking about the disruption of a myriad of services such as our own—services that fill rather modest niches invariably passed over by mass-media because of the marginal economic opportunities associated with our smaller audiences. Who will serve these needs should these excessive rates shut down the vast network of niche-casters?

While there is a long history of protecting or attempting to protect the intellectual property rights of our artists and creators—one simply must come to terms with the fact that the context of those efforts is changing radically. To enforce the principle of rights protection as if the distribution channels were as controllable as they have been historically, or as limited in access as they have been, is to refuse to engage the situation fully and honestly.

For example, broadcast and satellite radio has operated in an environment of limited spectrum. In the U.S. there are approximately 12,500 radio outlets and 2 satellite companies that need to be monitored in order to enforce rates and regulations. The mere fact that there are so few outlets to serve 300,000,000 Americans insures that (with some rare exceptions) the business interests of broadcasters will naturally be driven by a commodity mentality where the quantity of audience-ears delivered to advertisers becomes the common currency.

For the most part, any arrangements regarding surcharges for the rights of various parties just becomes the cost of doing business and is sustainable as long as the economic model prevails that relatively few outlets serve an enormous mass audience with very limited options. In such an environment, broadcasters can easily absorb additional fees into their enormous profit margins. Or, as in this case, they can use their economic power to ward off the kind of fees being imposed on smaller, less powerful program distributors.

But now we are talking about an uncountable number of streaming services (RealNetworks alone serves up 400,000 unique channels!) the vast majority of which have relatively small audience bases and uncertain, unproven revenue models as they invent themselves into the future. Advertisers and advertising agencies readily fund access to large numbers of ears. This model transfers to Internet streaming only among the largest providers— such as Yahoo, AOL, Live 365 and Clear Channel. Most of the smaller streamers are still struggling to secure their economic base. Given the rate structure, developing webcasters simply cannot afford to succeed. The effect will be to shut down these minor channels as a desperate attempt is made to replicate the model of limited distribution of content by large corporations serving up the same commodity-based mass-appeal programming we hear on over-the-air broadcasting.

In the past there was a rationale for limited over-the-air broadcast outlets because there is a finite amount of broadcast spectrum available. This is not the case with webcasting, however, and it is questionable whether the record industry or its supporters can ever enforce a model of rights control based on the old paradigm in this new media environment. For example, if WWOZ were forced to shut down its streaming operations, would that prevent a webcaster in the Cayman Islands or Venezuela, say, from originating the same program service? What benefit would there be in forcing American cultural programming to migrate offshore?

Intuitively, I think of the Soviet Union's futile attempts to limit the distribution of information after the introduction of copy machines, or the attempts today of the Chinese to prevent the flow of information through the Internet. Fundamentalist militants are reduced to bombing wi-fi coffee houses in Gaza. The CRB determination, as it stands, will assuredly restrict the flow of recorded music through the imposition of fees that only the largest webcasters can afford. In the long run, none of these attempts can overcome the fact that controlling information flow is not the same proposition when the means of originating content distribution are universally accessible. Maintaining the status quo in the face of a sea change in communications unparalleled since the introduction of the Gutenberg Press is highly unlikely, at best. As sales decline, it is understandable that record companies are seeking any and every means to maintain their control over the market place which the old, limited broadcast spectrum/product distribution universe favored. A sign that this approach is in trouble is the abandonment by EMI of "Digital Rights Management" encryption in the recordings it sells on i-tunes. The lawsuits resulting from Sony BMG’s defective (and deceptive) DRM software also come to mind.

The notion of intellectual property rights is a noble one. And our copyright laws originating in the 18th century, while perhaps imperfect, served their purpose in the distribution environment in which they were developed and which they addressed.

But today, wisdom (and justice) may not reside in the easy solution of one size fits all. As the paradigm shifts from commodity and quantity-based commerce to narrow, targeted marketing, we may require a more considered, nuanced approach to intellectual property rights. At present, 70% of the world's recorded music is sold by one of the 4 major record labels—Universal Music Group, Sony BMG, EMI and Warner Music. The "Big 4" media conglomerates have multiple record labels. Their approach to intellectual property rights reminds one of the old adage: "To a man with a hammer, everything looks like a nail."

It is quite understandable that a successful musician with a wide following and high market value would be vigilant in guarding against the exploitation of her economic potential by others. For such a successful artist, compensation would be understandable. Even high compensation.

But this is not universally the case. At WWOZ, we work with emerging artists. We provide the first media exposure to musicians who go on to win Grammy's and sell platinum. We revive the careers of once-successful musicians through the re-introduction of recordings long unheard since their glory days. In a world of international reach the interests of emerging musicians is quite different from that of "stars" with wide-name recognition. Many young bands have long since realized that a successful strategy can be fashioned by offering "free" recordings of their performances, primarily through the Internet, until they have developed a large enough following to make a living through touring, the sale of merchandise and CD’s or sound files not otherwise available.

In the digital domain, creating a user base may well be more important than deriving a big percentage of a tiny "intellectual rights" pie. One is reminded of the fate of Word Star— one of the first DOS-based word processing software programs to dominate the emerging personal computer market. It was a superb product that was soon replaced by another superb word processor – Word Perfect. Not because Word Perfect was that much better, but because Word Star had taken the trouble to “protect” its interests with one of the very best copy protection programs around. The more easily copied Word Perfect spread virally through the PC environment, with the result that its enormous user-base provided Word Perfect economic opportunities to which the well-defended island of Word Star never had access.

If we really want to get this right, the very first thing we ought to do is look at the payouts made to musicians since the enactment of the Millennium Digital Copyrights Act to see if the compensation received by the lesser-known (and played) artists fighting for recognition warrants the devastating disruption to the development of web streaming being proposed by the CRB and its backers. I, for one, would like to see for myself the list of artists who have benefited from being streamed on WWOZ during the last five or six years. I think that if fees have been collected as a result of WWOZ's streaming, we have a right to an accounting of their distribution.

Of course, there are other considerations which are not necessarily addressed by focusing on the single issue of intellectual property rights. There is, for example, the balance that must be struck between these considerations and the right we have to access our own cultural heritage. Taken to its logical conclusion, we could not even sing "Happy Birthday" without paying someone who has publishing or songwriting rights to its creation.

A related concern is the trend of consolidated ownership of our culture. This trend first emerged in the 50's with the franchising of our foodways by such innovators as McDonalds. In the last quarter of the 20th century we witnessed the centralization of our music in the hands of an ever narrowing group of record companies. And with deregulation, companies such as Clear Channel managed to consolidate and control a hugely significant percentage of radio outlets across America.

Webcasting offers the chance to return the distribution of our music to its source through the disintermediation of the "gatekeepers" (read "toll takers") who have procured disproportionate control of our cultural channels. These are the same corporations that fund the army of lobbyists proposing the laws which make such one-sided determinations by the CRB possible.

There was a time in the history of America when the notion of the "public commons" and "green space" was valued as essential to the overall health and wellbeing of society. In the past 30 years, we have witnessed the steady displacement of public-interest notions by the ideology of "deregulation," which is just another way of saying laissez-faire. Anti-trust and fair labor practices laws, the creation of safety codes in agriculture and industry, the develop- ment of public works and national parks and the creation of national transportation networks and non-commercial communication channels are all examples of "public interest, convenience and necessity" (to quote the 1934 Communications Act). Why are we now allowing our common interests to be eroded once more? Why, for example, is there no Carnegie commission to assure public service “green space” on the web, as there was to create public broadcasting?

Anyone who has examined how the Millennium Digital Copyright Act of 1998 came into existence and how the determination of the Copyright Royalty Board was made, will find that the process was not only questionable, but even more importantly, it was short-sighted and flawed in its assumptions and scope of concern.

At this late date, we are imploring Congress to halt the retroactive imposition of this crippling economic fee structure. Please take the time to reflect, deliberate and consider the wise and just path, one that is realistic and that looks at the larger interests of society. Please pause long enough to consider the implications of the radical change in our media environment and the disruptive and destructive outcomes which await us July 15th should we continue along the path "determined" by the Copyright Royalty Board.