Copyright Board begrudgingly adopts revenue-based streaming royalties

With explanatory language that made it clear its judges didn't particularly favor anyone at all involved in this whole process, the CRB announced this week it will apply royalties to streaming net services based on revenue.

Though the royalty schemes themselves may not be exactly what streaming broadcasters asked for, especially with regard to its phraseology and methodology -- which makes corporate tax law look like an episode of "Sesame Street" by comparison -- the US Copyright Royalty Board published in its weekly news bulletin (dated Monday but released today) its revenue-based royalties schedules for online services that provide streaming music, online music stores that provide downloads, and ringtone services.

Along the way, citing passages from over two years of testimony from members of the recording industry as well as representatives of Internet radio, CRB Judge James Scott Sledge went out of his way to shame apparently everyone for not being much of a help. For example, representatives of the Digital Music Association (DiMA) were chided for, at one point, not being able to provide a clear definition of "streaming."

Last February, the judges had already concluded that the definition of "streaming" was a matter of fact, not law. So when asked to provide facts in testimony the following May, Rhapsody America general manager Alexander Kirk stated it could really mean lots of things: "I mean, one of the wonderful things about computers on the internet is they offer you a number of different ways to do things," reads the CRB's citation of Kirk's testimony. "And streaming can encompass a whole range of behaviors."

DiMA had been concerned that there was no basis in copyright law to define what "streaming" is, so if the medium were to evolve, would the same royalty scheme apply? It had filed a motion to get that term defined in the Copyright Register; apparently because of Kirk's testimony, among others', the motion was denied.

As it stands now, the Federal Register will define interactive streaming as the delivery of a type of stream that is not exempt from copyright. But then, surprisingly, the new additions to the Register actually do define "stream," at length, whether DiMA's motion was denied or not:

Stream means the digital transmission of a sound recording of a musical work to an end user - (1) To allow the end user to listen to the sound recording, while maintaining a live network connection to the transmitting service, substantially at the time of transmission, except to the extent that the sound recording remains accessible for future listening from a streaming cache reproduction; (2) Using technology that is designed such that the sound recording does not remain accessible for future listening, except to the extent that the sound recording remains accessible for future listening from a streaming cache reproduction; and (3) That is also subject to licensing as a public performance of the musical work.

But the CRB judges also threw cold water at the Recording Industry Association of America, which had offered an expert to help establish what it called a "benchmark" from which a reasonable royalty scheme could be determined through adjustment. The idea, RIAA expert Dr. Steven Wildman suggested, was that you have to start somewhere, and that this "somewhere" had to meet three logical criteria. In his own testimony, he attempted to show how a competing standard failed to meet those criteria; but then under questioning, Judge Sledge wrote, Dr. Wildman then "also appeared to indicate that his own evidence failed to meet these three criteria."

Then in a later footnote, Sledge hung one of the RIAA's leading executives, British Phonographic Industry CEO Geoffrey Taylor, with his own testimony in which he tried to fudge a description of how tax tables work in a royalties system as being too complex for anyone to truly understand, including the judges themselves. In response to a direct question form Judge Sledge about a 17.5% tax, in which he asked essentially, "17-and-a-half-percent of what," Taylor said, "I'm not a tax expert, Your Honor, but it's actually more complicated than being charged on the retail price. I think you have to do some complicated calculation of 117.5 percent of something. I'm sorry. I can't explain it very well, but essentially it's 17 1/2 percent of the retail price, but it's calculated not by taking 17 1/2 percent of the retail price and adding it. It's slightly more complicated than that."

All that was by way of preparation for a system which not everyone may embrace with open arms, although it does indeed appear to be an effort to overcome a royalties scheme the recording industry had earlier supported, in which some streamers' rates actually exceeded their annual incomes.

The new system does set a floor that represents the least that a streamer, such as Last.fm or Pandora, could possibly pay. In the case of subscription-based streaming services limited to one PC, that floor will be 15 cents per subscriber per month. If the content of those streams can be converted into downloads and heard over other devices, that rate rises to 30 cents per subscriber per month. If the subscription itself is transferrable to other devices, that rate becomes 50 cents. If the listener isn't charged a subscription rate, then there is no floor, and that includes for services that are ad-supported.

Now, if you think about this the way you might figure your taxable income for your annual 1040 form, you might get a clue about how it works from here: To determine what a streamer pays, it first ascertains its service revenue as a base. This typically means what it collects from subscribers and what it collects from advertisers, if anything. (There's a whole page full of exemptions and exceptions.) For royalties for the year 2008 on (remember, we're working backwards to 2006), the streamer then multiplies that service revenue by 10.5%. The greater of the product or the minimum floor is the base rate.

Then, you subtract what the streamer already paid in performance royalties. This part alone is a big victory for Internet radio, whose representatives argued that since the record industry essentially collects for copyright and the record industry collects for performers, it shouldn't have to pay the same entities twice. The remainder is then trimmed again, to account for such factors as whether a download is permanent or time-limited (the latter of which would require a lesser payment). The result there is called the royalty pool.

And from there, things get very confusing, with apologies to folks like Mr. Taylor. A streamer will need to determine how much it owes in royalties for each and every song it plays -- not the individual performance, but the actual work itself. To do this, it has to divide the royalty pool amount by the total number of all songs it played during an accounting period, then multiply that quotient by the number of times it played the work, to determine what it owes for that work.

That's a lot of...well, work. But it may be much more cost-effective in the end than the scheme streamers had been faced with, where they had to simply take the total number of songs they played, multiply that by a fixed number, and sign away their livelihoods.