Streaming Music Providers Unite to Combat Proposed Royalties

Attorneys for National Public Radio filed a motion in federal court yesterday for a re-hearing concerning the Copyright Royalty Board's decision to impose significantly higher "per-performance" royalty fees upon Internet streaming music providers, which include the online services of public radio stations.

But the hearing itself would be just the first step, NPR's motion itself states, as the broadcaster intends to appeal the CRB's proposal to the D.C. Circuit Court of Appeals, on the grounds that the decision of the CRB's judges "was arbitrary and capricious, an abuse of discretion and/or unsupported by sufficient evidence." Just the minimum fee alone, NPR contends, would be quintupled to $500 per channel; and from there, the inflation rate for performance royalties would rise by an even higher factor, rendering the whole business of Internet streaming unsustainable.

NPR's challenge is thus far the largest, though possibly not the last, to emerge from a growing coalition of established terrestrial broadcasters with Internet interests and streaming media providers who provide outlets for musicians and hobbyists. This coalition - which has just set up a Web site at savethestreams.org - is contesting a plan approved by the CRB to allow an organization called SoundExchange, representing the recording industry, to receive as much as $505 million in royalties retroactive to last year, by BetaNews estimates, from US-based streaming music providers. That revenue could rise to $2.3 billion by 2010.

But one way or the other, the recording industry won't receive those fees, streaming providers have told BetaNews since our first stories on this subject two weeks ago. If the rates are left standing, they predict a majority of streaming providers both large and small will simply exit the business, perhaps as soon as this spring.

Performance royalty organizations (PROs) such as ASCAP, BMI, and SESAC already collect fees from terrestrial radio broadcasters - fees which supposedly represent the artists' cut for songs played on the air. As streaming media provider Pandora's CTO Tom Conrad told BetaNews a few weeks ago, his company and others in his market space pay both the PROs and SoundExchange, whose fees represent the cut reserved for the performers who may not necessarily be the songwriters, as well as the "labels" - the companies which produce the music.

Few dispute that performers and recording studios deserve a fair share of the benefits from digital performances - Pandora makes such a concession. What's in dispute is whether a fair formula was used for assessing what that share should be. NPR's contention is that the SoundExchange group used as its basis for its formula a survey of webcasting activity produced by NPR, which itself states that certain figures for the survey are mere estimates.

"In determining rates for public radio, the Judges appear to have relied on...a rough survey conducted by NPR to investigate the webcasting activities of NPR and [Corporation for Public Broadcasting]-funded stations." Since public radio stations are often omitted from ratings services reports - since they're not selling spot advertising, they don't need to be counted - the key metric which SoundExchange proposes for determining a flat-fee base rate for smaller stations doesn't actually exist for public stations - which constitute a huge chunk of these smaller stations.

So although SoundExchange didn't exactly make up a figure, it used some fairly suspect math which NPR says the CRB judges simply went along with. NPR's survey estimated each member station may have an average of 218 simultaneous connections at any given time. NPR alleges SoundExchange took 218, multiplied it by 24 hours in a day, times 365 days in a year, and divided by 12 (for some reason) to arrive at the 159,140 minimum aggregate tuning hours (ATH) we reported on in our original story. Providers that stream that number of hours or less to all its listeners per month would pay only the $500 minimum monthly fee.

But 79% of stations surveyed said they have no way to determine their ATH with the tools they have on-hand presently. So they'd have no way of proving whether their actual listening hours were below the 159,140 "threshold."

Furthermore, though, NPR says the proposed royalty schedule overlooks the obvious fact: Public radio stations don't play popular music, at least not continually. Many stations play news for entire hours, while some at night play symphonies - not songs - which can consume an entire hour.

While NPR's filing objects to how the proposed rates would specifically impact NPR and not the rest of the industry, its allegations point to the possibility that SoundExchange used a very fragile mathematical framework, at best, to substantiate its proposed royalty schedule. If that framework is legally discredited, for whatever reason, the streaming industry at large would have reason to celebrate.

CORRECTION 12:30 pm March 21, 2007 - Two reports yesterday appeared to state that SoundExchange CEO John Simson appeared before Congress last week to defend his proposed royalty scheme. We said we'd provide a full report when the transcripts were made available. So imagine our surprise when the video of last week's session of the House Telecommunications Subcommittee was released, and Simson wasn't there. As it turned out, those reports quoted Simson's public statements from several weeks earlier, as though they were in direct response to testimony from RealNetworks' vice president and general counsel Robert Kimball - who actually appeared before Congress two weeks ago, not last week. We apologize for the confusion, though we remain a little baffled by the reports which triggered the confusion in the first place.