It looks like large webcasters might just catch a break from higher licensing fees. Last month two major sides – SoundExchange representing the record labels and the Digital Media Association (DiMA) representing the large webcasters – came to a preliminary agreement about one of the most decisive issues in the rate-setting debate. A single webcaster will not have to pay more than $50,000 to SoundExchange, no matter how many stations or listeners it may have.
It is not hard to see why this was such a major sticking point for the large webcasters. The rate-setting decision that was handed down in March set a $500 per-station per-year minimum payment from internet radio stations to SoundExchange. Broadcasters that offer custom streams to individual listeners (for example Pandora) were concerned that each listener would count as a separate station. With hundreds of thousands or even millions of users, they claimed that the $500 minimum per-listener fee would result in a multi-billion dollar bill that would quickly bankrupt them.
This new agreement helps to allay those fears. A single service can be confident that it will pay a maximum initial royalty of $50,000, no matter how many listeners it has. However, this agreement is only a first step. Now that the two sides have agreed on the best way to handle the minimum fee issue, they have to move on to the more complicated issue – what the actual royalty rates will be.
In fact, this agreement does not even completely settle the minimum fee issue. Large webcasters are happy that they will not have to pay more than $50,000, but small webcasters are concerned that they may have to pay $500 no matter how low their royalty bill actually is. Many small webcasters do not generate $500 worth of royalties in a year. For them, the $500 minimum will actually increase the amount of money paid to SoundExchange. Since the small webcasters will still be playing the same amount of music, that increase goes directly to SoundExchange, not to musicians. SoundExchange insists that this additional money will help defer the cost of tracking the smaller stations.
The agreement also begins to address industry concerns about streamripping technology. So far, this issue has been more smoke than fire. No one has ever made a convincing argument that streamripping is a problem for the music industry. Proposed technical solutions to this “problem” do little more than lock up content in unwieldy DRM and infringe on legitimate rights of consumers. We will keep an eye on this, but don't be surprised if the only time you hear about the streamripping threat is when negotiation time rolls around.
The final element of the agreement involves the implementation of a more precise accounting of what songs are actually being played on web radio. Currently, most royalties are calculated based on estimates of how many times a song has been played. This new accounting should help artists better account for the royalties due to them.
As I mentioned above, the agreement does not begin to deal with the per-song royalty rate that internet radio will pay. Per-song royalty rates are complicated because there are actually two of them. First, there is the royalty rate that is established by the Copyright Office. In order to take advantage of this “official” rate, webcasters (and broadcasters in general) are required to comply with a number of onerous reporting requirements. Because these requirements are so onerous very few webcasters actually use the official rate. Instead, webcasters and copyright holders agree on a second royalty rate between themselves. The mechanics of complying with this rate are much simpler, so almost all webcasters will ultimately rely on the second, private rate instead of the first official rate.
The same decision that imposed the $500 minimum on webcasters also imposed a relatively high official royalty rate on them. As a result, when webcasters and SoundExchange sit down to negotiate the private rate SoundExchange will have the advantage (as the negotiations will start with the relatively high official rate). All webcasters will have to work hard to convince SoundExchange to accept rates significantly lower than the official Copyright Office rate that will allow them to broadcast without losing money.