williams: public performance royalty-rate disparity

371

Public Performance Royalty-Rate Disparity: Should Congress Pamper

Pandoras Pandering?

BY ROBERT J. WILLIAMS, JR.

ABSTRACT

As technological advancements create new mediums for music consumption, the increased availability of this music allows for a larger listenership and more diverse listening experiences. But beyond this basic understanding lies a complex system of copyright protection. Without continued profitability for all platforms, the number of methods by which the everyday listener can consume his or her daily dose of music will stop expanding and most likely shrink. Internet radio is at the core of this predicament. Internet radio exposes listeners to artists they may not hear elsewhere, and this promotional benefit likely leads to greater profitability for copyright holders. Yet, while this exposure element is recognized and rewarded when it comes to traditional radio, the current copyright royalty scheme overlooks the same effect for digital broadcasters. Due to the disproportionality of the current scheme, there have been several attempts to amend. This Note examines two of these: The Internet Radio Fairness Act of 2012 and the Performance Rights Act. The only way to discontinue the seemingly endless legislative battle is by adopting a royalty payment structure that most parties would accept as fair. Part I of this Note provides background information about the current copyright royalty-rate system. Part II analyzes the dual standard that the Copyright Royalty Board uses to determine digital-radio royalties. Part III examines the IRFA and PRA. Lastly, Part IV of this Note argues that the issues facing the current royalty-rate system must be addressed in a fashion that garners more support from each side.

Candidate for Juris Doctor, New England Law | Boston 2014. B.A. Political Science, cum

laude, Kent State University 2011. I would like to thank my family and friends for always being

there when I needed them. Furthermore, I would like to thank the earth for letting me live on

it.

372 New England Law Review v. 48 | 371

INTRODUCTION

For most Americans, music is a part of everyday life.1 The ease at which music is currently available is a major factor in why music is a part of everyday life.2 As technological advancements create new mediums for music consumption, its increased availability allows for a larger listenership and more diverse listening experience.3 Beyond this basic understanding, however, lies a complex system of copyright protection.4 This system attempts to regulate how and how much copyright owners are compensated for their creations and performances5 and who may present these musical creations to the public for just compensation.6 Complex may be an understatement.7 One thing is for certain: without continued profitability for all platforms, the number of methods by which the everyday listener can consume his or her daily dose of music will stop expanding and likely shrink.8

Internet radio is at the core of this predicament.9 Since its advent, Internet radio has broken barriers that confined traditional terrestrial radio (AM/FM) broadcasters.10 Terrestrial broadcasters, bound to the confines of a single listenership for the duration of a program, must attract listeners by playing similar enough music to keep the audience engaged.11

1 See Laura Houston Santhanam et al., Audio: By the Numbers, STATE OF THE MEDIA,

http://stateofthemedia.org/2012/audio-how-far-will-digital-go/audio-by-the-numbers/ (last

visited Jan. 6, 2014) (stating that over one million Americans are registered users of Pandora,

which is still growing, while traditional broadcast radio dominates the market with an even

larger group of Americans listening in). 2 Id. The way in which we get our music is changing, and with this change Americans

expect the availability of music and other media to continue to adapt. Id. 3 See About The Music Genome Project, PANDORA, http://www.pandora.com/about/mgp (last

visited Jan. 6, 2014). The Music Genome Project is a process that Pandora uses to classify each

song in its catalogue. Id. Trained music analysts categorize each song in Pandoras database

allowing the program to recognize[] and respond to a listeners selection and adapt the

listener's own radio station to create a much more personalized radio experience. Id.

4 See generally 17 U.S.C. 106, 801 (2012); 37 C.F.R. 260.2 (2002). 5 See 17 U.S.C. 106, 801; 37 C.F.R. 260.2. 6 See 17 U.S.C. 106, 801; 37 C.F.R. 260.2. 7 See generally 17 U.S.C. 106, 801; 37 C.F.R. 260.2. 8 Cf. Support the Internet Radio Fairness Act, PANDORA (Nov. 24, 2012),

http://web.archive.org/web/20121124063021/http://www.pandora.com/static/ads/irfa/irfa.html

(A more reasonable rate standard will drive greater investment and growth in internet radio,

which is the one medium that truly plays a broad catalogue and can enable a vibrant middle

class in the music industry.) (click on Visit the FAQ for more information) . 9 See id. 10 See id. 11 See About Radio Advertising, STRATEGICMEDIA, http://www.strategicmediainc.com/radio

2014 Publ ic Per f ormance Royal ty -Rate Disp ar i ty 373

In contrast, Internet radio broadcasting allows listeners to select from a list of genreswithout changing the channelthus giving rise to more diverse content and a more connected listenership.12 Internet radio exposes listeners to artists they may not hear elsewhere and this promotional benefit most likely leads to greater profitability for copyright holders.13 Yet this exposure element is part of all the available platforms today.14 While promotion is recognized and rewarded when it comes to traditional radio stations, the current copyright royalty scheme overlooks the same effect for digital broadcasters.15

Both traditional broadcast radio and Internet radio stations pay royalties for playing a public performance of a musical composition.16 These royalties are paid to performing rights organizations (PROs), such as the American Society of Composers, Authors, and Publishers (ASCAP),17 Broadcast Music, Inc. (BMI),18 and SESAC, Inc. (formerly the Society of European Stage Authors and Composers).19 However, digital-radio providers, including digital cable radio, satellite radio, and Internet radio, also pay royalties to the owner of a sound recording for the public performance of a song.20 Originally created by the Digital Performance Right In Sound

-advertising.php (last visited Jan. 6, 2014) (An advertising medium must reach your target

customers or it provides no benefit.). 12 E.g., SLACKER, www.slacker.com (last visited Jan. 6, 2014). Directly from Slacker

Radios homepage a user can search by entering any artist, song, album or preferred station in

the search bar. Id. 13 Support the Internet Radio Fairness Act, supra note 8. 14 Cf. WILLIAM W. FISHER III, PROMISES TO KEEP: TECHNOLOGY, LAW, AND THE FUTURE OF

ENTERTAINMENT 5859 (2004) (discussing payola, a now-illegal practice that involved paying

terrestrial broadcasters to play particular recordings for exposure); Andrew Stockment, Internet

Radio: The Case for a Technology Neutral Royalty Standard, 95 VA. L. REV. 2129, 214143 (2009)

(Just as the recording industry has long recognized for broadcast radio, Internet radio also has

a promotional value.). 15 See 17 U.S.C. 106(6) (2012); see also David Nimmer, Ignoring the Public Part I: On the

Absurd Complexity of the Digital Audio Transmission Right, 7 UCLA ENT. L. REV. 189, 18992 (2000). 16 17 U.S.C. 106(4). The holder of a copyright in a musical compositionnot the holder of

a copyright in a sound recordingenjoys the exclusive right of public performance. Id. This is

the basis for compensation to songwriters, composers, and music publishers from traditional

radio play. See David v. Showtime/Movie Channel, Inc., 697 F. Supp. 752, 758 (S.D.N.Y. 1988)

(citing 17 U.S.C. 106(4)) (noting that under the Copyright Act, plaintiffs are entitled to

compensation if a defendant publicly performed the relevant works). 17 ASCAP, www.ascap.com (last visited Jan. 6, 2014). 18 About, BMI, www.bmi.com/about (last visited Jan. 6, 2014). 19 About SESAC, SESAC, www.sesac.com/about/about.aspx (last visited Jan. 6, 2014). 20 17 U.S.C. 106(6); see David v. Showtime/The Movie Channel, Inc., 697 F. Supp. 752, 758

(S.D.N.Y. 1988) (noting that under the Copyright Act musicians are entitled to compensation

where a broadcast company publicly performs their work).


Recordings Act of 1995 (DPRA),21 and further amended by the Digital Millennium Copyright Act of 1998 (DMCA),22 the purpose of this additional payment is to ensure [the] protection for sound recordings . . . as new technologies affect the ways in which their creative works are used.23 However, the royalty imposed by 114 and 112 of the Copyright Act creates an unfair system that is contested by almost all parties involvedexcept the exempt traditional radio broadcasters.24

Due to the current schemes disproportionality, there have been several attempts at reform.25 The most recent, the Internet Radio Fairness Act of 2012 (IRFA), attempts to lower rates for Internet radio services but lacks the support of copyright holders because it fails to address the overarching issues within the current rate setting system.26 The only chance to end continuous litigation between the differing radio providers and copyright holders lies in adaptation.27 This Note will examine the IRFA and the Performance Rights Act (PRA).28 Each Act represents proposed changes to the current copyright royalty scheme and has both support and opposition.29 The only way to discontinue the seemingly endless legislative battle is through adopting a royalty payment structure that most parties accept as fair.30 This Note argues that the only viable option for lawmakers is to create a new technologically unbiased standard that no longer exempts traditional

21 Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39, 23,

109 Stat. 336, 340 (1995) (codified as amended at 17 U.S.C. 106, 114). 22 Digital Millennium Copyright Act, Pub. L. No. 105-304, 114, 112 Stat. 2860, 2890902

(1998) (codified as amended at 17 U.S.C. 114). 23 S. REP. NO. 104-128, at 10 (1995). 24 See, e.g., Damon Krukowski, Making Cents, PITCHFORK (Nov. 14, 2012) http://pitchfork.

com/features/articles/8993-the-cloud/ (discussing frustration with the current digital royalty

regime from a musicians point of view noting that the regime does not allow for musicians to

earn wages through their recordings); NO MORE Internet Radio?! What?, GODSHOMIES,

http://godshomies.wordpress.com/controversial-issues/no-more/no-more-internet-radio-

what/ (last visited Jan. 6, 2014) (A more reasonable rate standard will drive greater investment

and growth in internet radio, which is the one medium that truly plays a broad catalogue and

can enable a vibrant middle class in the music industry.). 25 See Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. (2012); Performance

Rights Act, H.R. 848, 111th Cong. (2009); Congressman Jerrold Nadler, Interim Fairness in Radio

Starting Today Act of 2012: Discussion Draft, NADLER.HOUSE.GOV (Aug. 7, 2012, 3:36 PM),

http://www.nadler.house.gov/sites/nadler.house.gov/files/documents/NADLER_153_xml.pdf. 26 H.R. 6480; see infra notes 133, 142 and accompanying text. 27 See Vanessa Van Cleaf, A Broken Record: The Digital Millennium Copyright Acts Statutory

Royalty Rate-Setting Process Does Not Work for Internet Radio, 40 STETSON L. REV. 341, 34445

(2010). 28 H.R. 848; see infra Part III. 29 See supra notes 2425 and accompanying text. 30 See Stockment, supra note 14, at 216567.


radio.31

Part I of this Note provides background information about the current copyright royalty-rate system. Part II analyzes the dual standard that the Copyright Royalty Board uses to determine digital-radio royalties. Part III examines the IRFA and PRA. Lastly, Part IV of this Note argues that the issues with the current royalty-rate system must be addressed in a fashion that garners more support from each side. A technologically unbiased standard that uses the 801(b)(1) factors embodies the necessary changes.

I. The Public Performance Right and Congresss Digital Distinction

A. The Important Distinction Between Musical Compositions and Sound Recordings

When an author creates a song, federal copyright law recognizes two separate copyrightable works: a musical composition and a sound recording.32 The musical composition is the arrangement of notes and lyrics put together by the composer or songwriter.33 The sound recording is the recorded performance of the musical composition by the artist.34 This performance is what listeners hear on the radio.35 An easier way to understand this distinction is in the realm of cover songs.36 When you hear the song Hurt by Nine Inch Nails there are two separate copyrights: (1) ownership of the musical composition by Trent Reznor because he wrote the music and lyrics; and (2) ownership of the sound recording, which most likely goes to Reznors record company.37 When you hear Hurt by Johnny Casha cover of Reznors musical compositionthere are still two copyrights: (1) Reznor still owns the musical composition; and (2) Universal

31 See Nimmer, supra note 15, at 18991; infra Part IV.C. 32 See Copyright Act, 17 U.S.C. 102 (2012). 33 See FISHER III, supra note 14, at 39. 34 See 17 U.S.C. 101; Recording Indus. Assn of Am. v. Librarian of Cong., 608 F.3d 861,

863 (D.C. Cir. 2010); LAWYERS FOR THE CREATIVE ARTS, LEGAL ISSUES INVOLVED IN THE MUSIC

INDUSTRY (Peter J. Strand, et al. eds., 2005), available at http://law-arts.org/pdf/Legal_Issues_in_

the_Music_Industry.pdf. 35 See 17 U.S.C. 101; LIBRARY OF CONGRESS, COLLECTIONS OF POLICY STATEMENTS, 1 (rev.

2008), available at http://www.loc.gov/acq/devpol/soundrec.pdf. The sound recording is the

fixation of sounds, including a recording of someone playing or singing a musical composition.

17 U.S.C. 101. Usually, a publisher owns the copyright for a musical composition and a record

label owns the copyright for a sound recording. Brief of Petitioner-Appellant at 2, Digital Media

Assn v. Copyright Royalty Bd., No. 07-1172 (D.C. Cir. June 4, 2007) , 2007 WL 1724183. 36 See, e.g., Casey Lynn, Music Royalties for Dummies, GEEKSARESEXY (July 21, 2009),

http://www.geeksaresexy.net/2009/07/21/music-royalties-for-dummies-or-ascap-is-not-the-

riaa/ (explaining the mechanics of music royalties). 37 Id.


Music Group, Cashs record label, owns the sound recording.38 Universal owns only the sound recording because Cash sang the lyrics and performed the music Reznor originally created.39 In most cases, the artist (author) owns the copyright for a musical composition while his or her then-current record label owns the copyright for the sound recording.40 The digital transmission of a sound recording over the Internet involves the performance of both the sound recording and underlying musical composition.41

B. History of the Copyright Owners Exclusive Rights and Introduction to the DPRAs and DMCAs Digital Distinction

1. Section 106s Exclusive Rights

To put the exclusive rights into perspective and understand the current royalty-rate dispute, we turn to 106 of the Copyright Act of 1976 (1976 Act).42 Section 106 grants a holder of certain copyrights six exclusive rights.43 A work subject to 106 gives the copyright owner the sole ability to: reproduce the work,44 make derivative works,45 distribute copies of a sound recording of a musical work,46 publicly display or perform a musical composition,47 and perform a copyrighted work publicly by means of a digital audio transmission.48 Two rights, however, are particularly relevant.49 Traditionally, only the copyright holder of a musical compositionand not copyright holder of a sound recordingheld the right to demand permission (payment) for the public display and

38 Id. 39 Id. 40 Id. 41 Copyright Act, 17 U.S.C. 101, 106(4), (6) (2012). 42 106. 43 Id. 44 106(1). This means only the copyright holder shall record, publish, or otherwise copy

the song without the copyright holders permission. Id. 45 106(2). 46 106(3). No one may distribute copies or phonorecords, defined by 101 as a sound

recording of a musical work to the public by sale or other transfer of ownership, or by rental

lease or lending [without permission]. Id. This right is limited by the first-sale doctrine, which

says that [o]nce a person has lawfully acquired [a] copy of a song (including a sound

recording) that person may dispose of the copy as he or she pleases. FISHER III, supra note 14, at

40. However, the owner of a phonorecord (owner of sound recording) may not rent it to the

public for commercial advantage without permission from the holder of the copyright in the

musical composition. Id.; 17 U.S.C. 109. 47 106(4)(5). 48 106(6). 49 114(a), 106(4)(5).


performance of his or her work.50 This meant that the owner of the sound recording did not receive royalties when songs were played over traditional broadcast radio.51

2. Congresss Digital Distinction

With the advent of digital radio, the DPRA added (and the DMCA amended) the sixth right: the right to perform a copyrighted work publicly by means of a digital audio transmission.52 While traditional radio is exempt from paying the owners of sound recordings under this addition to 106, satellite radio and digital cable radio must pay royalties to the owners of sound recordings.53 Congress intended, and the statute expresses, that royalties payable to copyright owners of musical works for the public performance of their works shall not be diminished in any respect as a result of the rights granted by the creation of the digital audio transmission right.54 Therefore, these rights are wholly separate, and payment for either does not affect cost or payment of the other.55

C. Licensing: Paying Your Way to Public Play

1. Paying for It: Music Licensing for Musical Compositions

For a traditional radio station to play a song that it would otherwise be barred from performing publicly, it must obtain a license for the musical composition.56 A compulsory license is one type of exception to the exclusive rights that copyright holders enjoy.57 This license permits people to engage in activity that would otherwise violate one of the exclusive rights.58 The DPRA and the Digital Millennium Copyright Act of 1998 (DMCA) created a compulsory license regime for digital audio transmissions.59 In contrast,

50 114(a), 106(4)(5); FISHER III, supra note 14, at 4041. 51 Nimmer, supra note 15, at 190. 52 Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39, 23,

109 Stat. 336 (codified as amended at 17 U.S.C. 106, 114 (2012)). 53 See id. 54 17 U.S.C. 114(i) (License fees payable for the public performance of sound recordings

under section 106(6) shall not be taken into account in any administrative, judicial, or other

governmental proceeding to set or adjust the royalties payable to copyright owners of musical

works for the public performance of their works.). 55 Id. 56 See id. 101, 115(a)(1), 115(c)(3)(J)(i). 57 FISHER III, supra note 14, at 41, 4346 (discussing some of the exceptions, including the fair-

use doctrine). 58 See 17 U.S.C. 112(a)(1), 112(e)(1)(A)(D), 114(f), 115(a)(c). 59 Digital Millennium Copyright Act, Pub. L. No. 105-304, 405, 112 Stat. 2860 (1998)

(codified as amended at 17 U.S.C. 114); Digital Performance Right in Sound Recordings Act


broadcasting (performing) a song through digital audio transmission requires three licenses: a license for the public performance of the musical composition60 (typically obtained from a Performing Rights Organization or PRO61); a license for the public performance of the sound recording via digital audio transmission;62 and a license to create ephemeral copies of the sound recording used in the transmission process.63 Digital broadcasters, unlike traditional radio stations, pay for licenses to publicly perform the musical composition and pay for the right to digitally transmit the audio sound recording.64

In the United States, three PROs facilitate licensing and collecting royalties for the public performance of musical compositions: ASCAP, BMI, and SESAC.65 The primary function of the PROs is to issue blanket performance licenses for all of the songs in [the PROs] catalogues to radio and television stations, which are obtained by paying a single fee to each organization.66 Broadcast radio stations typically pay a flat percentage of their gross revenue, about two percent each, for ASCAP, BMI, and SESAC.67

In addition to the rates developed for broadcast radio, the PROs establish rates for the performance of musical compositions through digital transmissions over the Internet.68 ASCAP requires licensees to pay the greater of 1.85% of revenue, or $0.0006 multiplied by the total number of sessions, with a minimum annual fee of at least $288.69 In 2012, ASCAP negotiated a fee agreement with the Radio Music Licensing Committee, which represents large broadcasters like Clear Channel, under which they will pay 1.7% of gross revenue minus deductions based on advertising commissions.70 BMI offers two licensing options for a digital broadcaster

of 1995, Pub. L. No. 104-39, 23, 109 Stat. 336 (1995) (codified as amended at 17 U.S.C. 106,

114). 60 17 U.S.C. 115(a)(1), (c)(3)(J)(i). 61 FISHER III, supra note 14, at 50. 62 17 U.S.C. 114(d)(2). 63 17 U.S.C. 112(e)(1). 64 Digital Performance Right in Sound Recordings Act of 1995, 3(d)(1)(B)(g)(2). 65 FISHER III, supra note 14, at 50. 66 Id. Licensees do not need to obtain blanket licenses from all three PROs but typically do

anyways. See id. 67 Id. 68 See, e.g., ASCAP Experimental License Agreement for Non-interactive ServicesRelease 5.2,

ASCAP, http://www.ascap.com/~/media/Files/Pdf/licensing/digital/Non-InteractiveLicense

AgreementR5_2.pdf (last visited Jan. 6, 2014) [hereinafter ASCAP Release 5.2]. 69 Id. 70 Don Jeffrey, Pandora Media Sues ASCAP Seeking Lower Songwriter Fees, BLOOMBERG (Nov.

5, 2012, 5:30 PM), http://www.bloomberg.com/news/2012-11-05/pandora-media-sues-ascap-

seeking-lower-songwriter-fees.html.


whose revenue from music exceeds $2,000: (1) a License Fee which equals 1.75% of gross revenue; or (2) a Music Revenue Calculation based off of the revenue generated from the copyrighted music (not gross revenue) or $0.12 per every 1,000 visits to the pages that include copyrighted music (Music Page Impressions).71 Both BMI options carry a $342 minimum annual fee.72 The SESAC license rate is $0.0057 multiplied by the amount of distribution, advertising, and other revenue created by the music, with a minimum semi-annual fee of $225.73 Aggregate annual royalty payments for ASCAP, BMI, and SESAC total approximately $2 billion.74 These payment structures may seem confusing now, but as will be explained, the rates which the PROs set for the digitally transmitted public performance of musical compositions are substantially lower than the rates currently paid for the digital audio transmissions of sound recordings.75

2. Paying for It: Licensing 114s Digital Audio Transmission Royalty

Beyond licensing the rights of musical compositions to digital broadcasters, the DPRA and the DMCA created 114 and 112 of the Act.76 In turn, Congress created compulsory licensing schemes for the public performance of sound recordings via digital audio transmissions77 and the creation of ephemeral copies of sound recordings used in digital audio transmissions.78 Section 114 divides digital-radio services into four

71 BMI Web Site Music Performance Agreement, BMI, http://www.bmi.com/forms/licensing/

newmedia/internet.pdf (last visited Jan. 6, 2014). 72 Id. 73 SESAC Internet Performance License, SESAC, http://www.sesac.com/pdf/Internet_2012a.

pdf (last visited Nov. 13, 2013). 74 John Villasenor, Digital Music Broadcast Royalties: The Case for a Level Playing Field, 19 ISSUES

IN TECH. INNOVATION 1, 2 (2012), available at http://www.brookings.edu/~/media/

research/files/papers/2012/8/07%20music%20royalties%20technology%20villasenor/cti_19_vill

asenor. 75 See infra Part II. 76 See 17 U.S.C. 112, 114 (2012). 77 114(d)(2). 78 112(e). Section 112(e) entitles a transmitting organization (broadcaster for our

purposes) to make a phonorecord of a sound recording for certain uses in the ordinary course

of its business, such as background music played in offices, retail stores, and restaurants, so

long as the business recipient does not retransmit the transmission outside of its premises or

the immediately surrounding vicinity . . . . 112(e), 114(d)(1)(C). The other permitted usage

allows a broadcaster to transmit the public performance of a sound recording under a statutory

license in accordance with section 114(f). 112(e)(1). Coupled with 114(f), this scheme allows

a broadcaster to create copies of a phonorecord for transmittal purposes (copies transmitted to

each user) with authorization from the copyright owner. See id.


categories: (1) preexisting subscription services (digital cable radio); (2) preexisting satellite digital audio radio services (satellite radio); (3) eligible nonsubscription transmissions (Internet radio); and (4) new subscription services (digital radio by satellite TV).79

The Copyright Royalty Board (CRB) is the permanent legal body responsible for determining and adjusting the rates and terms of these statutory licenses.80 The CRB also distributes royalties from the royalty pools that the Library of Congress administers.81 Comprised of three Copyright Royalty Judges (CRJs) that serve staggered six year terms, the CRB not only determines the rates for compulsory licenses, but also oversees and certifies any rates agreed upon through voluntary negotiations between the PROs and broadcasters.82 The CRB holds hearings every five years to determine rates for the next five year period.83 Most recently, the CRJs announced their final determination for the rates and terms for statutory licenses under 114 and 112, for the period beginning January 1, 2011, and ending on December 31, 2015.84 The CRB currently uses two standards to determine 114 performance royalties: (1) the 801(b)(1)85 standard for digital cable radio and satellite radio; and (2) the willing buyer, willing seller standard for Internet radio and digital radio by satellite TV.86 Royalties for Internet radio determined under the willing buyer, willing seller standard are much higher than royalties determined for other forms of digital radio determined under the 801(b)(1) standard.87 Additionally, the CRB determines 112 royalties using the willing buyer, willing seller standard.88 The 112 royalty has always been significantly lower priced than the 114 license, and both licenses are usually determined together in a single rate.89

79 114(d), (f), (j).

80 17 U.S.C. 801. 81 United States Copyright Royalty Board, LIBR. OF CONGRESS, http://www.loc.gov/crb/back

ground/ (last visited Jan. 6, 2014). 82 Id.; 17 U.S.C. 805. 83 17 U.S.C. 801(b)(2), 804(b)(1); see, e.g., Digital Performance Right in Sound

Recordings and Ephemeral Recordings, 76 Fed. Reg. 13,026 (Mar. 9, 2011) (to be codified at 37

C.F.R. pt. 380). 84 Digital Performance Right in Sound Recordings and Ephemeral Recordings, 76 Fed. Reg.

at 13,026. 85 114(f)(1)(B). 86 114(f)(2)(B). 87 Cf. Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. (2012) (attempting to

replace the current willing buyer, willing seller standard for the 801(b)(1) standard used for

satellite radio and digital cable services to achieve significantly lower rates). 88 17 U.S.C. 112(e)(4). 89 Stockment, supra note 14, at 2139.


3. SoundExchange

In 2003, the Librarian of Congress and the CRB appointed SoundExchange as the sole collector and distributor of the sound recording performance royalties established by the CRB.90 Furthermore, SoundExchange is responsible for negotiating on behalf of copyright owners in royalty-rate setting proceedings.91 SoundExchange is an independent, non-profit organization created by the Recording Industry Association of America (RIAA) that originally functioned as a division of the company before turning non-profit.92 As of September 2013, SoundExchange represents 28,000 registered copyright holder accounts and 90,000 registered performer accounts.93 Its representation includes signed and unsigned artists from record companies of all sizes (as well as unsigned musicians) and it is responsible for paying out over $1.5 billion in royalties through 2012.94 Under the Act, sound recording performance royalties collected under statutory licenses are distributed as follows: 50% to the copyright holder of the sound recording (usually the record label); 45% to the featured recording artist; and 5% to any nonfeatured artists (2.5% to nonfeatured musicians and vocalists).95

ANALYSIS

II. The Current Royalty-Rate System for the Digital Public Performance of Sound Recordings Is Unsatisfactory for Willing Buyer, Willing Seller Digital Broadcasters

A. The Double Standard

The main source of debate, litigation, and frustration in the current copyright royalty scheme lies within the DMCA: extending the digital audio transmission right to cover webcasting and creating the willing buyer, willing seller standard now found in 114.96 When the DPRA originally

90 Notice of Designation as Collective Under Statutory License, U.S. COPYRIGHT OFFICE,

http://www.copyright.gov/carp/notice-designation-collective.pdf (last visited Jan. 6, 2014);

About, SOUNDEXCHANGE, http://www.soundexchange.com/about (last visited Jan. 6, 2014)

[hereinafter About SoundExchange]. 91 Stockment, supra note 14, at 213940. 92 Id. 93 Our Work, SOUNDEXCHANGE, http://www.soundexchange.com/about/our-work/

(last visited Jan. 6, 2014). 94 About SoundExchange, supra note 90. 95 17 U.S.C. 114(g)(2)(A)(D) (2012). 96 See Digital Millennium Copyright Act, Pub. L. No. 105-304, 405, 112 Stat. 2860, 2896

(codified as amended at 17 U.S.C. 114); 17 U.S.C. 114(f)(2)(B) (directing the Copyright Board


extended the new exclusive right of digital audio transmission in sound recordings to copyright owners, it directed the Library of Congress to determine the rates under the longstanding 801(b)(1) standard.97 While the roots of the 801(b)(1) standard extend back to the 1976 Act, the legislative history provides little explanation for why Congress developed the new willing buyer, willing seller standard for Internet radio.98 While all of these services perform the same functionproviding digital radio to consumersthe royalty rates imposed by the CRB are dramatically different across technologies.99 Satellite and cable providers pay between 6% and 15% of annual revenue while Internet radio providers pay 60% or more of their annual revenue.100

1. The 801(b)(1) Standard

Section 801(b)(1) directs the CRB to calculate royalties to achieve four objectives: (1) [t]o maximize the availability of creative works to the public; (2) [t]o afford the copyright owner a fair return for his or her creative work and . . . a fair income under existing economic conditions; (3) [t]o reflect the relative roles of the copyright owner and copyright user in making the product available to the public, including each partys respective creative and technological contribution, their ability to open new markets, and the costs and risks; and (4) [t]o minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.101 This standard attempts to strike a balance for the public, copyright owners, and copyright users.102

Section 801(b)(1) adopts copyright policy favoring the availability of creative works in public and explicitly directs the CRB to consider the value of allowing use.103 It also explicitly directs the CRB to avoid setting royalty

to establish rates similar in a marketplace between a willing buyer and a willing seller); see

also Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. (2012) (attempting to rid Internet

radio of the willing buyer, willing seller standard). 97 405, 112 Stat. at 2895. 98 Internet Streaming of Radio Broadcasts: Balancing the Interests of Sound Recording Copyright

Owners with those of Broadcasters Before the H. Subcomm. on Courts, the Internet and Intellectual Prop.

and the H. Comm. on the Judiciary, 108th Cong. (2004) (testimony of Jonathon Potter,

Executive Director, Digital Media Association), available at http://www.judiciary.house.gov/

legacy/94917.pdf [hereinafter Potter Hearing]. 99 See infra notes 121122 and accompanying text. 100 See infra notes 121122 and accompanying text. 101 17 U.S.C. 801(b)(1). 102 See id.; see Stockment, supra note 14, at 2163; Support the Internet Radio Fairness Act, supra

note 8. 103 801(b)(1).


rates that threaten to shut down the industry using the copyrighted works.104 As stated, the 801(b)(1) standard originated in the 1976 Act.105 This standard has consistently been used to determine licensing royalties for copyright owners.106 Most importantly, it is used for 115s compulsory license that allows artists to make covers of another artists song.107 Once a recording of a musical composition has been distributed to the public, 115 provides that anyone else may make and distribute another recording of the composition upon paying a royalty determined by the CRB using the 801(b)(1) standard.108 The current rate is the greater of either 9.1 per play or 1.75 per minute of playing time for each physical phonorecord or permanent digital download.109 This is somewhat troublesome for Internet radio because the 115 royalty is the rate that other artists pay to use composers songs.110 In turn, Internet radio providers argue that the recording industry pays lower rates to artists under the 801(b)(1) standard, but collects (as the primary holder of sound recording rights) from Internet broadcasters using the more favorable (and costly) willing buyer, willing seller standard.111

2. The Willing Buyer, Willing Seller Standard

Section 114(f)(2)(B) directs the CRB to establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.112 Furthermore, the CRB is to base its decision on the economic, competitive, and programming information presented by the parties, including: (1) whether the use of the service could substitute for or promote sales of the phonorecord, or interfere with the sound recording owners revenue;113 and (2) the relative roles of the sound recording owner and the broadcaster of the work, including the creative and technological contribution, investment,

104 801(b)(1)(d). 105 Determination of Rates and Terms for Preexisting Subscription Services and Satellite

Digital Audio Radio Services, 73 Fed. Reg. 4080, 408182 (2008) (to be codified at 37 C.F.R. pt.

382) [hereinafter CRB Satellite Decision 1]. 106 See id. 107 See Joshua Keesan, Let It Be? The Challenges of Using Old Definitions for Online Music

Practices, 23 BERKELEY TECH. L.J. 353, 35455 (2008) (stating that a cover is to create a new

version of a pre-existing musical composition, not the sound recording). 108 17 U.S.C. 115(a), 115(c)(3)(D), 801(b)(1). 109 See 37 C.F.R. 385.3 (2009). 110 See 17 U.S.C. 115(a). 111 See Potter Hearing, supra note 98. 112 114(f)(2)(B). 113 Id.


cost, and risk.114 Section 114(f)(2)(B) also states the that CRB [i]n establishing such rates and terms . . . may consider the rates and terms for comparable types of digital audio transmission services and comparable circumstances under voluntary license agreements.115

Thus, the willing buyer, willing seller standard encompasses only half of the considerations of the 801(b)(1) standard.116 Additionally, in applying this standard, the CRB tends to disregard the portion of the test it is supposed to apply concerning the rates and terms that a willing buyer would pay in negotiating a license with the sound recording owner (seller).117 This is because the rates paid by Internet radio stations are much higher than those paid under the 801(b)(1) standard, even though all providers essentially offer the same servicemusic by radio.118 Furthermore, not only are the rates higher for Internet radio providers, but traditional broadcast radio is also completely exempt from compensating sound recording rights holders.119

The CRBs interpretation of these two different standards yields disparate results.120 When the CRB determines royalties using the 801(b)(1) standard, it assigns rates around 6% to 8% of revenues.121 Conversely, when the CRB uses the willing buyer, willing seller standard, focusing on the interests of the recording industry, it assigns rates ranging from 15% for digital radio via satellite to 60% or more for Internet radio providers.122

III. The Possible Future of Sound Recordings Compensation: The Internet Radio Fairness Act of 2012 and the Performance Rights Act

A. The Internet Radio Fairness Act of 2012

In September 2012, House lawmakers introduced a bill aimed at

114 Id. 115 Id. 116 114(f)(2)(B), 801(b)(1)(B)(C). The CRB only considers the fair return of the copyright

owner for his creative work and the contributions, investment, cost, risk, and ability to open

new markets for the willing buyer, willing seller standard, which is only half of the 801(b)(1)

test. See id. 117 See Stockment, supra note 14, at 214143. 118 Cf. Nimmer, supra note 15, at 18990. 119 See Matt Jackson, From Broadcast to Webcast: Copyright Law and Streaming Media, 11 TEX.

INTELL. PROP. L.J. 447, 454 (2003). 120 See Villasenor, supra note 74, at 1, 12. 121 Id. at 8. 122 Id. at 1, 12. John Villasenor of the Brookings Institute states: Internet radio companies

can be compelled to pay over 60% of their revenue in sound recording performance royalties.

By contrast, Sirius XM satellite radio currently pays only 8% of gross revenue. Id. at 1.


lowering fees paid by Internet radio services.123 The bill, which would affect online providers including services like Pandora,124 proposes to change the way that the CRB calculates the rates that Internet radio services must pay for sound recordings.125 Named the Internet Radio Fairness Act of 2012,126 the bill would amend the DMCA with respect to the standards that the CRJs are to apply.127 Also referred to as the Pandora Bill,128 the IRFA substitutes the willing buyer, willing seller standard with the 801(b)(1) standard.129 The IRFA sets forth the same rate-setting methodology for the compulsory licenses of ephemeral recordings.130

In erasing the willing buyer, willing seller standard, the IRFA aims to replace the current test used for Internet service providers with the four objectives used to determine royalties for digital cable radio and digital satellite radio.131 In addition, the IRFA adds a definition for competitive market circumstances to the DMCA: circumstances in which a licensee enters into a license for the noninteractive performance of sound recordings with a licensor that does not possess market power resulting from the aggregation of copyrights, either by a licensing collective or individual copyright owners.132 Lastly, the IRFA requires the CRJs to establish license fee structures that foster competition among the licensors of sound recordings and prohibits the CRJs from disfavoring percentage-of-revenue-based fees.133 Substituting the Internet radio rates for the 801(b)(1) rate would substantially lower Internet radios royalty costs.134

Supporters of the bill are primarily Internet radio broadcasters, including Pandora radio, one of the most successful independent Internet

123 See Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. 3(a)(1)(B) (2012). 124 See id. 1. 125 See id. 3(a)(1)(B). 126 Id. 1. 127 See id. 128 Paul Gallant, A Potential Radio Royalty Pain: Guggenheim Says the Internet Radio Fairness

Act has a 30% Chance of Passing, BARRONS (July 26, 2013), http://online.barrons.com/article/

SB50001424052748704755304578629912036102002.html. 129 See Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. (2012). 130 See id. 131 Id. 132 Id. 133 Id. Currently, under the willing buyer, willing seller standard, Internet radio

providers pay a per-stream rate, which is not connected to the amount of revenue generated by

a provider and is based off of the number of people who listen to the music. See Stockment,

supra note 14, at 214550. This disconnection causes higher rates for Internet radio providers

without taking into account the revenue generated at all. See id. at 2147. 134 See Support the Internet Radio Fairness Act, supra note 8.


radio providers and primary lobbyists behind the IRFA.135 That isnt all thoughsome artists have expressed support for the IRFA.136 Internet radio broadcasters support the bill for obvious reasons including, but not limited to, the bills potential to lower the current royalty rates they pay by staggering amountssometimes upwards of 40% or more.137 Independent artists support the IRFA because of the exposure that digital play generates.138 Patrick Laird, one of three cellists in the instrumental rock group Break of Reality explains, in the first twelve months of being included in Pandoras music library, our digital album sales increased by 290 percent from the year prior. In the subsequent 12 months, sales rose 406 percent from our pre-Pandora days.139 Laird also said that after personally polling his fans on Facebook, 44% admitted to discovering the bands music through Internet radio, 31% through live performance, 15% from a friend, and 9% through YouTube and other Internet outlets.140 Importantly, traditional broadcast radio is not even mentioned.141 It is clear that the effectiveness of internet (sic) radio with regard to both product sales and promotional power is overwhelming, and the success and expansion of these companies are of the utmost importance for the future . . . .142

This is not to say that the music industry widely accepts the IRFA.143 In fact, supporters of the proposed act face strong opposition.144 And, since its referral to the Subcommittee on Intellectual Property, Competition and Internet, little has happened to suggest that the bill is making a charge towards enactment.145 Opposition to the IRFA includes the American Association of Independent Music, American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), the Recording

135 See Ethan Smith & John Letzing, At Pandora, Each Sale Drives Up Its Losses, WALL ST. J.,

Dec. 6, 2012, at B1 (Pandora has aggressively lobbied Congress for a law that would

significantly cut those royalties. The [IRFA] as the proposed legislation is known, may be the

companys only chance at robust profits.). 136 Patrick Laird, Why I Support the Internet Radio Fairness Act, THE HILLS CONGRESS BLOG

(Nov. 28, 2012), http://thehill.com/blogs/congress-blog/technology/269837-why-i-support-the-

internet-radio-fairness-act. 137 See Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. 3 (2012). 138 Laird, supra note 136. 139 Id. 140 Id. 141 See id. 142 Id. 143 See Stop IRFA, MUSICFIRST, http://www.musicfirstcoalition.org/stop_irfa (last visited

Jan. 6, 2014). 144 See id. 145 See Major Actions: H.R. 6480112th Congress (2011-2012), CONGRESS.GOV, http://beta.

congress.gov/bill/112th-congress/house-bill/6480/actions (last visited Jan. 6, 2014).


Academy, NAACP, Screen Actors Guild American Federation of Television and Radio Artists (SAG-AFTRA), SoundExchange, RIAA, and countless artists.146

B. The Performance Rights Act

The Performance Rights Act (PRA) is another bill with its sights set on overhauling royalties calculations for sound recordings.147 The PRA, introduced to the House of Representatives in February 2009, attempts to address the issue of nonpayment of sound recording royalties by terrestrial broadcasters.148 The bill proposed to amend the 106(6) exclusive right to publicly perform by means of a digital audio transmission by deleting the words a digital and replacing them with an.149 This simple substitution would have caused 106(6) to read: in the case of sound recordings, to perform the copyrighted work publicly by means of an audio transmission.150 If the PRA had succeeded, traditional broadcast, as well as any future broadcasting technologies151 performing a sound recording, would have been subject to pay royalties to sound recordings rights holders.152 In attempting to integrate traditional radio and Internet radio for sound recording compensation purposes, the PRAs royalty setting standard allows the CRJs to determine both rates according to the willing buyer, willing seller standard.153 Currently, however, the PRA has been shelved.154

In stark contrast, most IRFA opponents support the PRA.155 This includes most musicians and all of the aforementioned organizations they support.156 This is mainly because, unlike the IRFA, the PRAs framework could exponentially increase compensation for sound recordings.157 Not

146 Stop IRFA, supra note 142. 147 Performance Rights Act, H.R. 848, 111th Cong. (2009). 148 See id. 2(b)(c). 149 Id. 2(b)(1). 150 Id. 2(a). 151 See id. 3(a)(1). The PRA included an amendment to 17 U.S.C. 114(f)(2) that would have

struck the current subparagraph and created a procedure that would allow a sound recording

owner to petition for royalty rates to be imposed on any new type of music service. Id. 152 17 U.S.C. 114 3(a)(1). 153 See H.R. 848, 3(a)(1). 154 See Major Actions: H.R.848111th Congress (2009-2010), CONGRESS.GOV, http://beta.

congress.gov/bill/111th-congress/house-bill/848/actions (last visited Jan. 6, 2014). 155 See The Performance Rights Act: The Facts Every Artist Needs to Know, MUSICFIRST, http://

www.musicfirstcoalition.org/performancerights (last visited Jan. 6, 2014) [hereinafter The Facts

Every Artist Needs to Know]. 156 See id. 157 Id.; A Race to the Bottom: The Proposed Internet Radio Fairness Act Makes the Digital Music

Market Less Fair and Is a Step Backwards for Music Creators, MUSICFIRST, http://www.musicfirst


only would Internet broadcasters pay using the willing buyer, willing seller standard, so too would traditional broadcasters.158 With an estimated weekly listenership of 241.6 million, traditional radio listenership far overshadows that of Internet radiofor now.159

Lastly, it is worth mentioning that compensation is what most artists and record companies are seeking.160 Whether by defending the current system for Internet radio or lobbying to change traditional radios exemption, ensuring an increase to revenue streams is the only way to attract the recording industry.161

IV. The Current Royalty-Rate System Must Be Addressed and the New Regime Requires Support from Most Parties

A. Combating Royalty-Rate Disparity Through a Less Complex System and Gaining the Support of Internet Radio Providers

1. Replacing the 801(b)(1) and Willing Buyer, Willing Seller Distinction With a Single Rate Calculation Would Create Less Rate Disparity

The current use of the double standard creates royalty-rate disparity and therefore must be addressed to create a fair royalties scheme.162 After acknowledging that all providers that pay for the performance of a sound recording provide essentially the same servicedigital radio to consumersit is difficult to discern legitimate reasons for using separate standards for the same service.163 Furthermore, the standard is only the initial test used to determine the rate.164 In developing the willing buyer, willing seller standard, Congress created a different set of criteria to determine rates under the new standard.165 This differing criterion creates the dramatic uptick in Internet radio providers rates.166 If Internet radio broadcasters were subject to the 801(b)(1) standard instead of the willing buyer, willing

coalition.org/irfa (last visited Jan. 6, 2014) [hereinafter A Race to the Bottom]. 158 Performance Rights Act, S. 379, 111th Cong. 7 (2009), available at http://www.gpo.gov/

fdsys/pkg/CRPT-111hrpt680/pdf/CRPT-111hrpt680.pdf. 159 See Radio Attracts Another 2.1 Million Weekly Listeners According to Radar 108, ALL ACCESS

(Mar. 16, 2011, 9:03 AM), http://www.allaccess.com/net-news/archive/story/88738/radio-

attracts-another-2-1-million-weekly-listener; see also Santhanam, supra note 1. 160 Cf. The Facts Every Artist Needs to Know, supra note 155. 161 Cf. id.; A Race to the Bottom, supra note 157. 162 See infra Part IV.A.1. 163 See generally Stockment, supra note 14. 164 17 U.S.C. 801 (2012). 165 114(f)(2)(B). 166 See supra Part II.


seller standard, the same rates would not necessarily apply.167 The CRB would still use the four factors outlined in 801(b)(1) to calculate the appropriate rates for Internet radio and new subscription services.168

In fact, the CRB already determines multiple rates using the 801(b)(1) factors: (1) maximizing the availability of creative works; (2) affording a fair return to copyright owners under existing market conditions; (3) weighing the relative roles of copyright owners and copyright users; and (4) minimizing the disruptive impact on generally prevailing industry practices.169 The CRBs most recent decision in Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services is evidence that the CRJs are able to competently apply the 801(b)(1) factors and identify each factors importance for each distinct type of provider.170 In the CRBs determination, the CRJs set the sound recording royalty rates for digital cable radio providers and Sirius XM (digital satellite radio) for 20142017.171 Using the 801(b)(1) factors, the CRJs set sound recording royalties for Sirius XM at 9% of Gross Revenues172 for 2013, 9.5% for 2014, 10% for 2015, 10.5% for 2016, and 11% for 2017.173 Using the same factors, the CRJs concurrently set sound recording royalties for digital cable radio providers at 8% of Gross Revenues for 2013 and 8.5% for 20142017.174

In arguing against the willing buyer, willing seller standard, Internet service providers are asking the CRJs to evaluate sound recording licenses for all digital-radio providers using these same factors.175 As previously mentioned, royalties determined using the 801(b)(1) standard range from 8% to 15% of gross revenue, while Internet service providers pay rates as high as 60%.176 Until the willing buyer, willing seller standard is eliminated, Internet providers will continue to blame this seemingly arbitrary distinction between digital providers as the reason for higher

167 See Determination of Rates and Terms for Preexisting Subscription Services and

Satellite Digital Audio Radio Services, 78 Fed. Reg. 23054, 23054 (2013) (to be codified at 37

C.F.R. pt. 382), available at http://www.loc.gov/crb/proceedings/2011-1/rates/Public-Majority-

Final-Determination.pdf [hereinafter CRB Satellite Decision II]. 168 Id. at 23055. 169 Id. 170 See id. 171 Id. 172 Id. The CRB defines Gross Revenues for 801(b) purposes as all monies derived from

the operation of the programming service of the Licensee and includes monies derived from

all advertising and sales in connection with the use of the sound recording license. 37 C.F.R.

382.2 (2013). 173 CRB Satellite Decision II, supra note 167. 174 Id. 175 See Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. 3(a) (2012). 176 See Villasenor, supra note 74, at 1.


rates.177 Therefore, in eliminating the willing buyer, willing seller standard, Congress would dispose of Internet radios argument that it is treated unfairly.178 If the CRJs then analyze Internet radio providers under the 801(b)(1) standard and determine that the current rates are sufficiently justified, it would be easier for all parties to understand their justifications.179 Right now, there is little to compare to the willing buyer, willing seller standard because it was created solely to determine royalties under the 801(b) standard.180 If all digital providers were evaluated under the same standard, each interested party could more readily compare the CRJs reasoning for the rate determinations.181

The recording industry argues that Internet radio poses a unique threat because it reduces music sales and therefore requires a different rate.182 Record companies and artists opposing the IRFA distinguish digital radio from traditional broadcast radio by the scarcity of broadcast-radio frequencies, which limit the number and variety of songs played.183 In contrast, the number of Internet radio stations is unlimited and allows consumers to listen to very specific programs that feature a narrow range of artists and recordings.184 The recording industry argues that Internet radio is therefore more likely to substitute for purchasing music.185 For some listeners, Internet radio probably does serve as a substitute for purchasing music, but other forms of digital radio and traditional broadcast radio likely do the same to some degree.186

177 See Music and Radio in the 21st Century: Assuring Fair Rates and Rules Across Platforms

Before the S. Comm. on the Judiciary, 110th Cong. (2008) (testimony of Joe Kennedy, President &

CEO of Pandora Media, Inc.), available at http://www.judiciary.senate.gov/hearings/testimony.

cfm?id=e655f9e2809e5476862f735da13f186a&wit_id=e655f9e2809e5476862f735da13f186a-2-4. 178 See id. 179 See id. 180 See Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39,

23, 109 Stat. 336, 336, 34041 (1995) (codified as amended at 17 U.S.C. 106, 114 (2006)). 181 Stockment, supra note 14, at 2168. 182 Jackson, supra note 118, at 45051. 183 Id. 184 Id. at 451. 185 Id. at 45051; Douglas MacMillan, The Music Industrys New Internet Problem,

BLOOMBERG BUSINESSWEEK (Mar. 6, 2009), http://www.businessweek.com/stories/2009-03-

06/the-music-industrys-new-Internet-problembusinessweek-business-news-stock-market-and-

financial-advice (stating that researchers and industry consultants say online music sites are

being used by a growing number of listeners as a substitute for purchasing music, rather than

serving as a catalyst for more purchases). 186 See MacMillan, supra note 184; see Alex Mindlin, Drilling Down: Radio Listeners Seem to Buy

Less Music, NYTIMES (July 23, 2007), http://www.nytimes.com/2007/07/23/business/media/

23drill.html?pagewanted=print.


Regardless of whether Internet radio substitutes for purchasing music, three of the four 801(b)(1) factors already adequately address this concern for digital cable radio and digital satellite radio providers by: affording a fair return to copyright owners under existing market conditions; weighing the relative roles of copyright owners and copyright users; and minimizing the disruptive impact on generally prevailing industry practices.187 If these factors adequately address the concerns of copyright owners concerning digital satellite radiowhich unlike traditional broadcast radio is unbound in many of the same ways as Internet radioit is unsurprising that Internet radio challenges the willing buyer, willing seller standard.188

B. The 801(b)(1) Factors Accurately Achieve the Primary Purpose of U.S. Copyright Law and Should Be Applied Universally

1. The Primary Purpose of Copyright Protection

In the United States, the basis of copyright protection is the promotion of progress of knowledge, learning, and the creation of new works.189 The underlying principle of all U.S. copyright policy is found in the intellectual property clause of the U.S. Constitution, which authorizes Congress [t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.190 At the time the Constitution was written, science was synonymous with knowledge and learning.191 The U.S. Supreme Court has further interpreted this clause to limit Congresss authority, holding that the Copyright Act must be construed in light of its basic purpose of promoting broad public availability of literature, music, and the other arts.192

If the basis of copyright protection lies in promoting knowledge and

187 17 U.S.C. 801(b)(1) (2012). 188 See Brian Flavin, A Digital Cry for Help: Internet Radios Struggle to Survive a Second

Royalty Rate Determination Under the Willing Buyer/Willing Seller Standard, 27 ST. LOUIS U. PUB. L.

REV. 427, 45253 (2008). Much like Internet radio, satellite radio is not bound by the same

narrow listenership and content issues that traditional broadcast radio faces. See, e.g., Channel

Lineup, SIRIUSXM, http://www.siriusxm.com/channellineup (last visited Jan. 6, 2014). Sirius

Radio offers hundreds of radio stations including music stations of all genres. Id. 189 Lydia Pallas Loren, The Popes Copyright? Aligning Incentives with Reality by Using

Creative Motivation to Shape Copyright Protection, 69 LA. L. REV. 1, 6 (2008). 190 U.S. CONST. art. I, 8, cl. 8. 191 Edward C. Walterscheid, To Promote the Progress of Science and Useful Arts: The

Background and Origin of the Intellectual Property Clause of the United States Constitution, 2 J. INTELL.

PROP. L. 1, 51 (1994); see also MELVILLE B. NIMMER & DAVID NIMMER, NIMMER ON COPYRIGHT

1.03A (2012). 192 Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975).


learning, Congress should have focused on creating a technologically neutral standard.193 Disfavoring one technology over another can hardly promote the progress of science and useful arts.194 Copyright policy should not discriminate on the basis of technology by imposing higher royalties for digital radio delivered by the Internet when the same music is delivered by a satellite transmission.195 But this is exactly what has happened.196 Therefore, because the 801(b)(1) factors accurately represent the founding principles of copyright law in the United States, the 801(b)(1) standard should replace the willing buyer, willing seller standard.197

2. Maximizing the Availability of Creative Works to the Public198

Under this 801(b)(1) factor, licensees provide evidence that their services offer further exposure and increased availability to the copyrighted works.199 The CRJs consider this evidence, along with any other promotional efforts, and determine the weight given to support an adjustment to the current royalty rate.200 Even when applying this factor, the CRJs analyze whether the output of music from record labels has been impacted negatively as a result of the . . . rate.201 This consideration is completely absent in the willing buyer, willing seller standard.202 Although the Constitution directs Congress to provide copyright protection, it clearly emphasizes the importance of the availability of the creative work.203 Without such consideration, rates for Internet radio services greatly exceed their digital counterparts evaluated under the 801(b)(1) standard.204

3. Affording Fair Return/Fair Income Under Existing Market

193 Stockment, supra note 14, at 2167. 194 Id. (quoting U.S. CONST. art. I, 8, cl. 8). 195 Id. 196 See id. at 213839, 214144. 197 See id. at 213839, 216266. 198 17 U.S.C. 801(b)(1)(A) (2012). 199 See, e.g., CRB Satellite Decision II, supra note 167, at 2022. 200 Id. 201 Id. 202 17 U.S.C. 114(f)(2)(B), 801(b)(1)(A) (2012). 203 See U.S. CONST. art. I, 8, cl. 8. 204 See supra Part II.A.2.


Conditions205

Another factor absent from the willing buyer, willing seller standard is afford[ing] the copyright owner a fair return for his or her creative work and a fair income under existing economic conditions.206 With respect to fair return to copyright owners under the 801(b)(1) standard, the CRJs examine the services planned or possible expansion and the potential increased revenue resulting from this expansion.207 In determining a fair rate for current 801(b)(1) digital providers, the CRJs take into consideration the maturity of the market.208 While the recording industry argues that Internet radio is a unique threat to record sales, this element focuses on whether copyright owners will be compensated for increased usage of their works.209 It is widely accepted that, at the moment, copyright owners see dismal returns from all digital providers licensing proceeds.210 But holding select digital providers to a different royalties-rate-setting standard only complicates the issue.211

This further supports that a technologically unbiased standard does not necessarily mean equal royalty rates for all digital services.212 Instead, the constitutional basis for copyright policy (and similarity in services) calls for a neutral royalty-rate across all technologies.213 Even in applying the same standard, different royalty rates may be appropriate for different types of technology.214 Furthermore, the willing buyer, willing seller standard completely overlooks the promotional value of Internet radio.215 Section 801(b)(1) captures the constitutional purpose of copyright law better than

205 17 U.S.C. 801(b)(1)(B) (2012). 206 801(b)(1)(B); see 114(f)(2)(B). 207 CRB Satellite Decision II, supra note 167, at 23. 208 Id. at 24. 209 Jackson, supra note 119, at 45052; CRB Satellite Decision II, supra note 167, at 2324

(Dramatically expanded usage without a corresponding expectation of increased

compensation suggests an upward adjustment to the existing statutory rate . . . .). 210 See, e.g., Krukowski, supra note 24 (discussing frustration with the current digital

royalty regime from a musicians point of view). 211 Cf. Jeff Price, The State of the Music Industry & the Delegitimization of Artists, TUNECORE

BLOG (Oct. 14, 2010), http://blog.tunecore.com/2010/10/music-purchases-and-net-revenue-for-

artists-are-up-gross-revenue-for-labels-is-down.html (The reality is . . . [m]ore musicians are

making money off their music now then (sic) at any point in history. The cost of buying music

has gotten lower but the amount of money going into the artists pocket has increased.). 212 See, e.g., CRB Satellite Decision II, supra note 167, at 1. 213 See id. 214 See, e.g., id. 215 See 17 U.S.C. 114(f)(2)(B) (2012) (lacking the maximizing the availability of creative

works factor).


the willing buyer, willing seller standard.216 The former balances the interests of copyright owners, copyright users, and the public.217 The latter focuses primarily on maximizing the copyright owners (recording industrys) stream of revenue.218 This standard directs the CRB to consider the streams of revenue of the copyright owner (willing seller) without any regard for the copyright users income (willing buyer).219 In incorporating the maximization of availability and fair return factors, the 801(b)(1) standard directs the CRB to calculate a rate that affords both the copyright owner and copyright user a level playing field.220

C. The New Royalty-Rate System Should Incorporate Terrestrial Broadcasters

1. A Truly Unbiased Standard Should Incorporate Terrestrial Broadcasters in Order to Garner Support from Artists and the Recording Industry

The PRA proposes a technologically neutral standard that would incorporate traditional broadcast radio, causing terrestrial broadcasters to pay royalties to sound recording owners and eliminating the digital distinction.221 Therefore, royalty payments would have been applicable to analog sound recording copyright owners as well as digital sound recording owners.222 Proponents of the PRA and the incorporation of traditional broadcasters argue that it is only equitable for performers to be paid royalties for the use of their work.223 In addition, broadcast radio audiences still greatly outnumber those of Internet radio.224 Radio stations make billions of dollars each year in advertising, which is based on a number of factors, including genre and number of listeners.225 These factors are directly

216 See supra notes 19096 and accompanying text. 217 See 17 U.S.C. 801(b)(1)(B). 218 See 114(f)(2)(B). 219 See id. While the willing buyer, willing seller standard directs the CRJs to establish

rates and terms that most clearly represent the rates and terms that would have been negotiated

in the marketplace between a willing buyer and a willing seller, the rates are nowhere near the

rates determined under the 801(b)(1) standard. See supra notes 12632 and accompanying text. 220 See supra note 122 and accompanying text. 221 Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. 3(a) (2012); Performance

Rights Act, H.R. 848, 111th Cong. 2 (2009). 222 Internet Radio Fairness Act of 2012, H.R. 6480, 112th Cong. 3(a) (2012); Performance

Rights Act, H.R. 848, 111th Cong. 2 (2009). 223 Musicians Want Radio Stations to Pay to Play Tunes, L.A. TIMES (Feb. 25, 2009),

http://articles.latimes.com/2009/feb/25/business/fi-music25. 224 See The Facts Every Artist Needs to Know, supra note 155. 225 See Santhanam, supra note 1, at 1, 35, 89.


related to the music that the stations play.226 But opponents argue that artists and record labels must take into consideration the benefit radio play has on record sales.227 Furthermore, broadcasters argue that the promotional value radio stations provide to new music fairly compensates performers.228 Congress even noted this exposure value, stating, [T]he sale of many sound recordings and the careers of many performers have benefitted considerably from airplay and other promotional activities provided by . . . free over-the-air broadcasting.229 Congress further lamented this notion by stating that the DPRA should do nothing to change or jeopardize the mutually beneficial economic relationship between the recording and traditional broadcasting industries.230

Inadvertently, Congress cherishes the promotional value broadcast radio provides and seems to punish new digital technologies for creating another outlet for authors.231 Not only do satellite and Internet radio provide exposure for musiciansbut to a large extent they also furnish exposure for different owners of sound recordings.232 This is because broadcast radio must play music that will attract the targeted audience while Internet radio does not (and satellite radio to a lesser extent than broadcast radio).233 Artists that may otherwise have never gained notoriety develop fan bases through purely online sources.234 Therefore, Congress may be correct to recognize that broadcast radio promotes copyright owners interests, but in doing so, they punish digital broadcasters.235 If copyright law is to be fair, all sound recording users should be treated equally.236 Because the 801(b)(1) standard contemplates the maximization of the availability of works to the public, it is the correctand fairstandard that should apply to all sound recording

226 Christopher Knab, How Record Labels and Radio Stations Work Together, MUSIC BIZ

ACADEMY (Mar. 2010), http://www.musicbizacademy.com/knab/articles/radiostations.htm. 227 See Marc Fisher, Listener: Musicians Vs. Radio in Big Money Fight, WASH. POST (Sept. 1,

2007, 8:45 AM), http://voices.washingtonpost.com/rawfisher/2007/09/listener_musicians_vs_

radio_in.html. 228 See id. 229 S. REP. NO. 104-128, at 1415 (1995). 230 Id. at 15. 231 See Digital Performance Right in Sound Recordings Act of 1995, Pub. L. No. 104-39,

23, 109 Stat. 336 (codified as amended at 17 U.S.C. 106, 114 (2012)); S. REP. NO. 104-128, at

15 (1995). 232 Cf. Laird, supra note 136; Channel Lineup, supra note 188. 233 See About Radio Advertising, supra note 11. 234 Laird, supra note 136. 235 See S. REP. NO. 104-128, at 1415 (1995). The Senate notes the promotional value of

broadcast radio and, at the same time, imposes a new royalty on digital radio that provides a

very similar service through a different medium. Id. 236 See Nimmer, supra note 15, at 18992.


users.237

Lastly, to attract record companies and most artists, any new standard must result in an overall monetary gain.238 The sheer size of broadcast radio has the potential to fill this requirement.239 And again, applying the same 801(b)(1) standard does not mean that broadcast radio will pay the same rate as other types of radio.240 It only means that the CRJs will apply the same factors to determine the appropriate rate for traditional broadcasters.241 In 2011, total radio revenues increased by around 1%, reaching $17.4 billion.242 Spot advertising, which is primarily broadcast radio revenue dominated, accounted for 81% of the total revenue.243 But this comes with a grain of saltthe rate for spot advertising was stagnant.244 In 2012, overall radio revenue grew again, but the digital sector saw a yearly gain of 8% while spot advertising revenue gained only 1%.245 Under the 801(b)(1) standard, broadcast radio is in a mature market and is potentially providing the maximum availability possible for creative works.246 This calls for a lower, more stable rate.247 A low, stable rate would be sustainable for traditional broadcasters and, because of its large market share, acceptable for record companies and artists.248 In contrast, digital radio is in a young market and the extent of availability of creative works it will provide is still in the making.249 Similar to digital satellite radio, Internet radio would most likely see a higher rate (but still lower than the almost-all-consuming current rates), increasing incrementally each year.250

237 Cf. Support the Internet Radio Fairness Act, supra note 8. 238 Cf. The Facts Every Artist Needs to Know, supra note 155. 239 See Santhanam, supra note 1. 240 See CRB Satellite Decision II, supra note 167, at 1. 241 Cf. id. 242 Santhanam, supra note 1. 243 See id. 244 See id. 245 RADIO RECORDS 3RD STRAIGHT YEAR OF UPWARD MOMENTUM: Q4 SURGE REPRESENTS

HIGHEST QUARTERLY GAIN IN 2 YEARS, RADIO ADVERTISING BUREAU 1 (2013), available at

http://www.rab.com/public/pr/RevenueReportQ42012Final.pdf. 246 Supra Part IV.B.2; see CRB Satellite Decision II, supra note 167, at 2024. 247 See CRB Satellite Decision II, supra note 167, at 2024. Because terrestrial broadcasters

have seen slim to no gains and a constant yearly market value, the CRJs would probably

determine a rate similar to Music Choice (digital cable radio). See id.; Santhanam, supra note 1.

Accordingly, the CRJs set the rate at 8% of Gross Revenues with only a .5% increase through

2017much less than satellite digital radio. See CRB Satellite Decision II, supra note 167, at 20

24. 248 See Musicians Want Radio Stations to Pay to Play Tunes, supra note 222. 249 See Santhanam, supra note 1. 250 See CRB Satellite Decision II, supra note 167. The state of Internet radio is more like


CONCLUSION

Every type of music service plays its own vital role in providing content to listeners and creating profitable avenues for authors and artists. But the current royalty-rate setting system overlooks this. Instead, it opts for a categorical approach that evaluates payment to the creators and copyright owners by different standards depending on the means of delivery. Until Congress adopts a standard that is technologically unbiased and incorporates traditional broadcast radio, widespread disparity between royalty rates will continue. The only way to garner enough support for comprehensive restructuring is to incorporate changes that benefit most parties. To gain support from Internet radio, Congress must include the changes suggested in the IRFAincluding the universal application of the 801(b)(1) standard. To bring in the record companies and artists, the traditional broadcasters exemption from sound recording payment must be replaced with the 801(b)(1) standard as suggested by the PRAnot the willing buyer, willing seller standard. This compromise requires broadcast radio to pay for the use of sound recordings. But in applying the 801(b)(1) standard to broadcast radio, the CRJs be required to perform the necessary analysis and issue an appropriate rate. A technologically unbiased standard that uses the 801(b)(1) factors stands as Congresss best chance for reformation.

digital satellite radio and the CRJs set sound recording royalties for Sirius XM (digital satellite

radio) at 9% of Gross Revenues for 2013, 9.5% for 2014, 10% for 2015, 10.5% for 2016, and 11%

for 2017. See id.; Santhanam, supra note 1.

williams: public performance royalty-rate disparity

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