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Inside The CRB Decision With Kurt Hanson

While discussing copyright royalty rates with AccuRadio founder/CEO and RAIN publisher Kurt Hanson, he recalls a story from the ’30s when artists like Bing Crosby tried to prevent radio from playing their records by stamping the label with “Not licensed or authorized for radio airplay.” It seems artists at that time felt sales would be hurt by radio airplay.  When the courts nixed the labeling, radio stations started playing Bing Crosby records and it turns out he benefited rather than suffered from airplay as sales went through the roof.
     That story is just one in a myriad of battles for the control of music commerce. The latest front in this ongoing saga is being fought by webcasters after the Copyright Royalty Board (CRB) proposed higher royalty rates paid to musicians and record labels for streaming songs online. The rates are set to increase to $.0008 per-play for 2006 (retroactively), $.0011 for 2007, $.0014 in 2008, $.0018 in 2009 and $.0019 for 2010. These rates could shutter the majority of webcasting operations, including Internet-only broadcasters and commercial and public radio station streams alike.
     After petitions and pressure from NPR and other broadcasting organizations, the CRB agreed to grant motions for a possible rehearing over the new royalty rates. Those motions were turned in earlier this week (4/2) and the interested parties await the CRB’s next move, which carries no guarantee that a rehearing will be held.
     For insight into the CRB’s decision,
FMQB turned to Hanson and his deep expertise with webcasting.

What are the basic implications of the CRB’s proposed royalty rates for radio?
The implications of this are possibly fatal for Internet radio as an industry. For the independent, commercial operators like Pandora or even my own AccuRadio.com we were eligible during 2005 to pay a royalty based on a percentage of revenue.  We paid about five-percent of our revenue in the composer royalty and about twelve-percent of our revenues to Sound Exchange for the sound recordings royalty. So on $400,000 in revenues, we paid Sound Exchange about $48,000.  Under the judges’ decision four weeks ago, we owe $600,000 for 2006, so it absolutely bankrupts us and will force us to shut down.  And that’s true for almost everyone who’s a standalone webcaster and may also be true for terrestrial streams. It will be tough, if not impossible, to get enough money from advertisers to hit the necessary numbers anytime this decade, which means [terrestrial] broadcasters may pull their streams out as well. 

What about public radio and non-commercial broadcasters?
Those broadcasters had special terms negotiated for a five-year period, but the CRB ruled if they had more than 200 listeners on average, they would have to pay commercial rates for every extra listener, which means all of them will probably find it impossible to continue.  Any popular public or non-commercial station will find it impossible to make a breakeven business operate.  So the implications, if the ruling stands, is it probably will shut down almost all ad-supported Internet radio through the end of the decade.

Using a local example for Philadelphia, when we lost Y100 as a Modern Rock station, Jim McGuinn started Y100Rocks.com to fill the local void. Would something like that have a chance of surviving if this decision sticks?
No.  I am almost certain he is not bringing in $.0008 per song, per listener.  My guess is that he didn’t do that last year, and he’s not doing .0011 per listener this year, which means this royalty would eat up more than all of his revenue combined.

Define the $.0008 per song, per listener. For example, in the course of a day, if a webcaster averages 12 songs an hour, you would take that rate, times it by 12, times 24, times the amount of listeners and that’s his rate for one day?
Right.

Do you feel the CRB miscalculated the implications of this decision and what it would do to a lot of webcasters?
Either they misunderstood, or they didn’t think it was any of their business.  They were just following Congress’ instructions, which said: pick the price at which a willing buyer and a willing seller would agree.  Perhaps they felt they didn’t have to think of the implications. There is an existing piece of the Copyright Act called the 801(b)(1).  That section of the Copyright Act had four criteria, which kind of balance and make sure that both the copyright owner and copyright user benefits, and maximizes the availability of the work to the public as long as it doesn’t disrupt the industries. Part D – minimize disruption within the existing industries – was removed in the willing buyer, willing seller standard, so they may not have thought they had to look at that.  And I think they paid more attention to the willing seller half of the equation. They may have just felt that wasn’t their assignment from Congress to not worry about whether 90 percent of webcasters are going to go out of business.

Who will survive if this ruling stands?
If these rates stand – and I don’t think they will – but if they do, the primary thing we’ll see is a virtual shutdown all of U.S. webcasting.  But that won’t stop listeners. They would simply find alternatives to listen to in Europe, Asia, Australia or Canada. 

Is there a way for the U.S. to block people from doing that?
Yes, if there were aggressive collection efforts.  That is starting to happen right now. Singapore has a dozen or so really great FM channels that are popular around the world. Most of them are playing Western hit music.  They have blocked U.S. listeners because I believe they’re getting pressure from the copyright organizations in the U.S. to pay royalties.  So they said, “Fine, we’ll block you; we’ll block your country.” And that could start happening around the world.  So, initially, legitimate U.S. webcasting could go dark, and then second, consumers switch to opportunities elsewhere in the world and then those will start going dark. Consumers would then have to switch to purely illicit operations or, the subscription services, which will likely survive.  These rates probably make subscriptions services viable, but the vast majority of consumers are going to prefer to find an illicit, free alternative to a paid subscription version.

There’s a group of public stations that have protested the CRB decision. What has commercial terrestrial radio’s response been? 
The response has been disappointingly tepid. The NAB said it was a disappointing decision, but not that they were necessarily intending to do anything about it. Broadcasters are conflicted and think maybe it’s good if Pandora, LAUNCHcast and the like are shutdown, and then maybe that will send people to HD Radio.

Is that just speculation on your part?
No, I’ve actually heard broadcasters say this and it’s kind of thinking that the Internet’s going to go away.  But if legal U.S. webcasting goes away, it doesn’t mean that illicit webcasting is going to go away.  Listeners will find music on the Internet one way or another. The point terrestrial broadcast groups are missing, is they can compete in this space.  What consumers are embracing on the Internet is largely national brands of multi-channel radio, with lots of different kinds of music and some personalization elements.  There is no reason why CBS, Cumulus or Citadel couldn’t create an Internet brand of radio and reflect what consumers are looking for on the Internet when they’re looking for radio.  They could compete and possibly trump the Internet-only players because they have more expertise in music and in consumer tastes. But if this ruling stands, they won’t be able to compete either.  They won’t be able to make any money either, and as a result, the beneficiaries will be foreign webcasters – legal ones in the short run and illegal ones in the long run.

Let’s talk about the motions filed with the CRB for a rehearing. There’s misconception that a rehearing is definitely going to happen. Does the CRB have to hold a rehearing?
No.  They could read all the filings and decide that some good points were made, but their ruling stands. Or they could issue a modification of their decision to clarify some points of their original decision. 

What do you think is going to happen?
I don’t have much experience with the behavior of copyright royalty tribunals, but my guess is they’ll realize the $500 minimum was a mistake.  As for the rest of it, there are too many ways it can go. If they do a rehearing, that could take weeks or months, in which they could suspend the decision until then.  If they don’t have a rehearing, they have 60 days to publish their decision in the Federal Register, and then there’s a 30-day window in which the parties to this proceeding can appeal in the U.S. Court of Appeals. During the appeals process, new players can’t enter.  They have to be people who have already been engaged in the process the whole time.

** QB Content by Michael Parrish ** 
 


FMQB NOW

Jon Zellner
SVPP, iHeartMedia

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