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Nevada Broadcasters Association

Last week, Congressmen Ted Deutch (D-FL) and Darrell Issa (R-CA) introduced the American Music Fairness Act ( see their Press Release for more details) which would impose a new music royalty on over-the-air radio stations.  The royalty would be payable to SoundExchange for the public performance of sound recordings.  This means that the money collected would be paid to performing artists and record labels for the use of their recording of a song.  This new royalty would be in addition to the royalties paid by radio stations to composers and publishing companies through ASCAP, BMI, SESAC and GMR, which are paid for the performance of the musical composition – the words and music to a song. The new legislation is another in a string of similar bills introduced in Congress over the last decade.  See, for instance, our articles here, here, here and here on previous attempts to impose such a royalty.

Each time this idea is introduced, it has a slightly different angle.  In an attempt to rebut arguments that this royalty would impose an unreasonable financial burden on small broadcasters, the new bill proposes relatively low flat fees on small commercial and noncommercial radio stations, while the rates applicable to all other broadcasters would be determined by the Copyright Royalty Board – the same judges who recently released their decision to increase the royalties payable to SoundExchange by webcasters, including broadcasters for their internet simulcasts.  Under the bill, the CRB would review rates every 5 years, just as they do for webcasting royalty rates.

The reduced fees would be just $10 per year for noncommercial stations with less than $100,000 in revenue, $100 per year for larger noncommercial stations with revenues of less than $1.5 million per year, and $500 for commercial stations with less than $1.5 million in revenue.  But these discounts – for both commercial and non-commercial stations – would disappear if the stations are co-owned or otherwise affiliated with other stations that cumulatively have revenues of $10 million or more (so those stations would be subject to royalties established in the CRB rate-setting process).  Revenues would include all revenues earned by a station, whether or not related to the use of sound recordings.

What kind of fees would be likely for larger broadcasters were this proposal to be adopted?  A decade ago, when these fees were first proposed, a Congressional Budget Office (CBO) review of the cost to broadcasters of the proposed performance royalty concluded that the cost of such royalties would likely be “substantial.”  That can be seen in the royalties that SoundExchange has been able to receive from other services who pay for the digital performance of sound recordings.

The recent ratemaking decision for webcasters is difficult to translate to a broadcast context, as webcasting royalties are paid on a per performance rate (per song, per listener).  Obviously, there is no precise way to count performances for over-the-air broadcasting, so a percentage of revenue royalty would be more likely for any broadcast sound recording performance royalty.  But there are analogs in other services where the CRB has set sound recording performance royalties based on a percentage of revenue metric when performances were similarly impossible to determine.

For instance, in 2017, the CRB decided that Sirius XM would pay sound recording royalties of 15.5% of its revenues.  Note that this decision was based on a different standard than that which now applies to most rate-setting proceedings (the so-called 801(b) standard that factored in public interest factors into determining royalty rates in addition to the theoretically market-driven “willing-buyer, willing-seller” royalty rate now to be used for all services following the Music Modernization Act).  The satellite radio rate was also based on subscription revenues received by Sirius XM, which are at least partially attributable to many channels offered by the service that contain sports, talk and other non-music content.  Thus, a rate for a single music-oriented radio station would seemingly be substantially higher than that set for satellite radio.  Imagine what a royalty of 20% or more of radio revenue would do to the radio industry.

In connection with Business Establishment Services (music services that digitally transmit music to retail and other business – what some would call “background music services”), which by law do not pay for the public performance of music but only for the ephemeral copies made in the digital transmission process (the least significant part of the webcaster royalty – assumed to be only 8%-10% of the royalty payment in other contexts), the parties to a proceeding to set their rates for 2019 through 2024 agreed to pay 12.5% of a service’s gross revenues as royalties to SoundExchange, increasing to 13.5% over the 5-year royalty term (see our article here). That is more than twice what the broadcast industry pays to ASCAP, BMI, SESAC and GMR for rights to the musical compositions.

Thus, the CBO’s conclusion a decade ago that the broadcast performance royalty would be substantial seems right on target.   Royalty levels that could be over 20% of revenue, particularly in today’s economic climate, would virtually drain the radio industry of its profit margins.  Obviously, the NAB immediately condemned the proposal and continues to push its own anti-royalty bill.  So the proposed Deutch/Issa legislation will no doubt be vigorously contested.  From time to time over the last decade, there have been discussions of a voluntary resolution of the question of a broadcast royalty – perhaps a lower webcasting royalty in exchange for a share in over-the-air revenues, as some big broadcast companies have, from time to time (see, e.g. our article here and here), negotiated with various record labels.  But, until there is such an agreement, this will be a battle to which radio broadcasters must pay close attention.

Courtesy Broadcast Law Blog