An Open letter to SoundExchange from Live365

An Open Reply to SoundExchange

On March 23, 2007, SoundExchange Executive Director, John Simson, released a blanket email to SoundExchange members defending the CRB decision. In the interest of fairness we feel that while there are many points on which we wholeheartedly agree, there are several others that must be directly and openly addressed. You’ll find the  letter below  with our comments inserted.
The letter reads as follows:

Dear SoundExchange Members and Friends:

I’m writing to tell you about the webcasting decision from the Copyright Royalty Board (CRB). Some people in the webcasting community have mischaracterized the decision and its potential impact on the internet and in the press, resulting in hyperbolic claims of the demise of internet radio. To combat this misinformation campaign I am asking for your active support through letter writing, contacting Congress, blogging and speaking out.

We say:
It is not just “some people in the webcasting community,” but rather, everybody in the entire Internet radio industry that the new CRB royalty determination threatens with demise. Internet radio services – large and small, public and private, mainstream and niche – have been alarmed by this decision, including the Digital Media Association (Yahoo, AOL, Live365, RealNetworks, Pandora), Small Webcasters (AccuRadio, Digitally Imported, Radioio), National Public Radio, Intercollegiate Broadcasting System, and other radio broadcasters with an Internet establishment (ClearChannel, Bonneville, National Religious Broadcasters).

The CRB panelists mandated a minimum fee of $500 per station per year, which was intended to cover SoundExchange’s administrative costs. To the extent that this minimum fee is uncapped and indiscriminately extends to all Internet radio services, it will greatly exceed the total royalties that most services would otherwise owe. Since Live365 aggregates all of the performances streamed through our service into a single report, we would be paying millions of dollars to SoundExchange to ‘administer’ our four quarterly reports when we actually do all the work. On top of that, the new minimum fee would more than triple Live365’s royalty obligation for 2007 and, retroactively, 2006. Yahoo!, RealNetworks and Pandora will each have minimum fees that exceed $50 million, although their combined 2007 Internet radio revenues will not approach even $100 million.

Should this $500 per station minimum stand, Live365 and other aggregators of niche content will be forced to reduce the breadth and depth of content available to listeners. Artists in niche genres will be the worst-hit victims, because Internet radio provides the only access to such music for listeners who cannot get on the homogenized AM/FM and satellite radio. These stations are the only place thousands of artists are currently getting exposure and getting paid on royalties.

On Friday, March 3rd, the CRB issued its ruling regarding rates for webcasting and simulcasting for the period 2006-2010. The three judge panel considered testimony from 66 live witnesses and reviewed thousands of pages of documents relating to the economics of internet radio and online simulcasts. After considering arguments and proposals from everyone who had an interest in these proceedings, the judges issued a highly detailed, 115 page decision. The CRB determined that the per stream rate will be raised by roughly 5 percent from the 2005 level for 2006. The CRB then increased the rate going forward each year through 2010.

We say:
Let’s be honest: the firestorm of public backlash against this decision is not over the 5% retroactive raise in rates for 2006. The new yearly rates represent an increase over the 2005 rate of 5%, 44%, 84%, 136%, and 149%, from 2006 to 2010, respectively. Let’s call a spade a spade – the new CRB rate in 2010 is two-and-a-half times what it was from 1999-2005.

The panelists also heard the expert testimony presented by SoundExchange witness Michael Pelcovits and based its royalty rate determination entirely on his testimony. The validity of his testimony should be seriously questioned. Mr. Pelcovits suggested that the right way to price non-interactive radio royalties is to calculate downward from the royalties paid by fully-interactive on-demand music services, like Rhapsody. In a concurrent case, regarding royalties to be paid by XM and Sirius, another SoundExchange witness proposed an entirely different methodology for calculating non-interactive radio royalties. If the second expert’s theory had been applied in the Internet radio proceeding, the conclusions would have led to far lower royalties being set for Internet radio. This gamesmanship by SoundExchange suggests that the CRB’s reliance on SoundExchange’s expert to set Internet radio royalties led to an erroneous royalty decision.

Indeed, we feel that the closest analogue to non-interactive Internet radio is non-interactive terrestrial radio which pays NO royalty to SoundExchange at all.

The CRB’s decision was validation of three basic principles:

1. The music industry is changing, dramatically. What was once a CD-only business has evolved into a multi-platform consumer offering – from streaming to cell phones to mp3 players and more. With these changes come new challenges to assure a fair and competitive marketplace.

We say:
Indeed, it remains a new challenge for SoundExchange to assure a fair and competitive marketplace in the music industry, without killing the very industry that represents the future of music promotion.

What we do not understand is why Internet radio is saddled with the highest rates. Satellite services, such as Sirius or XM, and cable TV music providers, such as Music Choice, pay substantially less for their sound recording royalties. All broadcasters pay similar composition royalties to ASCAP, BMI, and SESAC, but AM & FM stations pay ZERO sound recording royalties at all.

It’s high time to create a level playing field for all radio formats if CD-only times are gone and artists need to get paid another way. Ironically, major record labels and AM/FM radio conglomerates have paid over $40 million to the FCC and the New York State Attorney General to settle charges of payments made illegally to get artists played on the radio. At the same time RIAA and Sound Exchange argue there is little or no promotional value in Internet radio. They want it both ways and that is NOT promoting a fair and competitive marketplace.

I (Mark Lam, CEO of Live365) testified in front of the Senate Judiciary Committee on “Parity, Platforms, and Protection: The Future of the Music Industry in the Digital Radio Revolution” and believe that parity is essential to the future of the music industry. The CRB decision is antithetical to the existence of a fair and competitive marketplace.

2. Webcasters and simulcasters are in the business of providing a product – music – to consumers. The people who create the product – the artists and labels – should be fairly compensated in a manner that reflects the value of their work.

We say:
It has always been Live365’s mission to support artists and pay our fair share of royalties, but not the unfair, ex post facto royalty rates that are based upon questionable testimony and assumptions provided by SoundExchange and wrongly relied upon by the CRB judges.

Since 1999, Live365 has always paid both composer performance royalties (to ASCAP, BMI and SESAC) and sound recording performance royalties (to SoundExchange). Over the last few years, we’ve paid millions to SoundExchange alone on behalf of our broadcasters and listeners.

It’s all about supporting artists who write and perform the songs we enjoy. This is a core mission behind Live365. Some of this support comes from promotion and airtime, so artists’ works can be heard. Some comes from cash in the form of ROYALTIES. In 2006, Live365 paid SoundExchange more than $1 million. We would like to know how much of the royalties paid by Live365 has actually gone to the artists and the labels. Let’s make this transparent and for all to see.

Live365 has created and provided for our stations a sophisticated data management system that tracks exactly which songs were played on which channels to how many persons. We provide SoundExchange with a single, compiled report and payment covering thousands of Internet stations. And Live365 and its broadcasters do the same reporting and paying for the songwriters and composers through contracts with ASCAP, BMI and SESAC.

3. All the participants in these proceedings are interdependent. We are all in this business together. One can’t succeed without the other. Assuring fair treatment for all stakeholders in this dynamic landscape is critical.

We say:
If SoundExchange believes this, then the CRB rate decision could NOT have reached a more adverse result. Indeed, many small, non-profit and public service stations with little or no revenue will be stopped from broadcasting on the Internet under these new rates which will eliminate many of the music you can’t find on AM, FM, satellite, or cable radio. If these rates are not reversed, we’d expect 80% of Live365 stations, specifically those in niche genres with unique content unavailable elsewhere, will have no choice but to shut down. Our 260 genres would probably be reduced to the same meager list available on AM/FM radio today.

As an example, the 2007 “pay for performance per listener” rate of $0.0011 may seem tiny, but one Internet radio station that broadcasts 15 songs an hour to 500 listeners would pay SoundExchange $72,270 a year, not to mention their other costs for composition royalties, hosting, bandwidth, music content and their programming staff. Compare that to the current under $600 average price of broadcasting on Live365 and you can get some idea of how the niche market might adjust should these new rates hold.

After the consolidation in the terrestrial radio market in the 1990s, Internet radio, such as Live365, is the primary source many listeners have for hearing jazz, classical, folk and many other types of music in niche genres – and the only source for airplay and promotion for artists in these categories.

It is disconcerting to see some of the mischaracterizations that have been floated around the internet and the press in the wake of the decision. These initial stories, promoted by a disgruntled minority, misrepresent the nature and economics of CRB’s decision. Fanning the flames of this misperception are people and organizations that participated in the hearings before the CRB. They provided witnesses and economic analyses as well as their own testimony.

We say:
We can’t help but to ask to please tell us who are the “gruntled majority” of webcasters that are apparently very happy with this decision. The only ones happy are the RIAA lawyers, maybe Sirius/XM who want to merge into a monopoly and limit substitute distribution technologies, and terrestrial radio who wants to maintain their dominant position by eliminating competition and forcing homogenized programming on listeners.

Ironically it was the webcasters and simulcasters who argued back in 2002 that they didn’t have enough access to the original rate setting proceedings (known as the “CARP”) and therefore requested a new system to set future rates. It’s a little disingenuous to cry foul when they asked for a new system, welcomed it and participated fully in its proceedings. When they got the increased discovery procedures they asked for some webcaster participants promptly used it to harass any artist willing to step forward and ask for fair royalty rates. For instance, some of our artist witnesses were asked to provide 7 years of tax returns and every single record deal they had ever entered into. There are some who might view such actions as a flagrant attempt to intimidate our artists.

We say:
Ask any artist where he/she wants his music played … one answer will ring true 99% of the time … RADIO. Why? Because fans get to know artists and ultimately buy music and concert tickets from that discovery. We believe there are very few artists that are unhappy with the promotion and public awareness that Internet radio brings to their songs and careers. And the thousands of artists that send free CDs to our Live365 DJs every month to be played over Internet radio don’t seem intimidated a bit.

Last month, Live365 stations played the songs of, and paid performance royalties to SoundExchange on behalf of, over 100,000 different artists. We challenge any radio or satellite network to prove they have a greater positive impact on more artists than Live365.

ClearChannel, AOL, Yahoo! and other large webcasters claimed the 2002 rates would put them out of business. That internet radio would stop. But that’s not what happened. Over the past five years we have seen an explosion of broadcasters bringing their stations online, expansion by the large webcast services and in increase in advertising revenues from 50 Million to 500 Million Dollars.

We say:
A detailed analysis of this estimated $500 million advertising revenue reveals that the vast majority of it includes revenues generated by Internet on-demand video services, not non-interactive audio services like Live365. Indeed, the CRB’s reliance on this one figure brings the validity of SoundExchange’s justification of the higher royalty rates into serious question. By that criteria, should we include all broadcast TV’s advertising revenues into the terrestrial radio industry?

We are big fans of internet radio. We love the breadth of the music, the niche channels and the spirit created by some of these services. We don’t want to see them go away but we do want them to pay fairly when they use your recordings.

We feel the CRB decision objectively assures balance between the creators and users of music. The decision affirms the importance of both, as well as their interdependence. It is our hope that we can put this behind us and grow and prosper together.

We say:
Unfortunately, new royalty rates may bring an end to Small Webcasters who bring listeners, including the fans at SoundExchange, music in niche genres that are unavailable elsewhere. This is a particularly bitter outcome given that SoundExchange offered on its website and signed the SWSA (Small Webcaster Settlement Act) agreements with these same broadcasters in 2006 and 2007. These agreements allowed small webcasters to pay a flat 10 percent-of-revenue royalty with a minimum of $2000 per year under the SWSA which the CRB declared invalid retroactively dating back to January 2006. So now some of these small webcasters owe SoundExchange as much as $100,000, rather than $2000, for 2006 alone. And many Small Webcasters generate far less than even $2000/year revenue from their broadcasts.

Internet radio, particularly Live365, has been paying its fair share of royalties to composers, performers, publishers, artists, and record labels since day one. We’d like a call for parity in royalty treatment for all radio formats, including Internet, terrestrial (AM/FM), satellite, and cable.

If you agree with me, I would ask that you take the time to contact your Representative in Congress. More often than not Members of Congress hear from constituents when they want something or when something goes wrong. But it would be nice for Members to hear from you that the system they put in place worked as Congress intended, and that the CRB did a commendable job in assuring a fair, open and comprehensive process. To contact your member of Congress, click http://www.capwiz.com/soundexchange/home. Additionally, voicing your opinion in music trades and on blogs would also be quite helpful.

As always, we remain committed in our goal to better the lives and livelihoods of artists and copyright owners.

We say:
Yes, indeed. Please contact your Members of Congress immediately and let them hear your opinion on this important topic! If you are a musician and you think terrestrial and satellite radio is doing a great job of promoting and paying for your work, you will be very happy to see the CRB ruling stand. If, however, you are concerned that these new rates will end up hurting the exact artists that are being locked out of terrestrial and satellite radio today, please consider writing a letter on our behalf today. Details are at http://www.live365.com/choice.

Please feel free to contact me or my staff if you have any questions regarding these matters.

Sincerely,

John Simson
Executive Director
SoundExchange

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